Chapter 7, Problem 20EP

Central Garage Internal Service Fund. (LO7-2) The City of Ashville operates an internal service fund to provide garage space and repairs for all city-owned-and-operated vehicles. The Central Garage Fund’s preclosing trial balance for the current Fiscal year is as follows:

The following information, not yet reflected in the preclosing figures above, applies to the current Fiscal year:

1. 1. Supplies were purchased on account for $92,000; the perpetual inventory method is used.
2. 2. The cost of supplies used during the year was $110,000. A physical count taken as of that date showed materials and supplies on hand totaled $72,000 at cost.
3. 3. Salaries and wages paid to employees totaled $235,000, including related costs.
4. 4. Billings totaling $30,000 were received from the enterprise fund for utility charges. The Central Garage Fund paid $27,000 of the amount owed. (At the government-wide level, record the payable amount as Internal Balances.)
5. 5. Depreciation of the building was recorded in the amount of $10,000; depreciation of the machinery and equipment amounted to $9,000.
6. 6. Billings to other departments for services provided to them were as follows:

1. 7. Unpaid interfund receivable balances were as follows:

1. 8. Vouchers payable at year-end were $16,000.
2. 9. Closing entries were prepared for the Central Garage Fund (ignore government-wide closing entry).

Required

1. a.      Prepare journal entries to record all of the transactions for this period in the Central Garage Fund accounts and in the governmental activities accounts. Assume all expenses at the government-wide level are charged to the General Government function.
2. b.      Prepare a statement of revenues, expenses, and changes in fund net position for the Central Garage Fund for the period.
3. c.       Prepare a statement of net position for the Central Garage Fund as of year-end.
4. d.      Explain what the Central Garage Fund would need to report at the governmental activities level, and where the information would be reported.

To determine

Prepare journal entries to record all the transactions in Central Garage Fund accounts and governmental activities accounts.

Explanation of Solution

Internal service funds record the activities that are related to purchase and distribution within the departments of the government. Internal service fund accounts for the internal financial transactions.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

The purchase of inventory is recorded as below in Central Garage Fund accounts and governmental activities accounts:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Inventory of supplies		92,000
	Vouchers payable			92,000
	(To record the purchase of inventory)

Table (1)

The value of supplies used is recorded as below in Central Garage Fund accounts:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cost of supplies used		110,000
	Inventory of supplies			110,000
	(To record the cost of supplies used)

Table (2)

The value of supplies used is recorded as below in Governmental activities accounts:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Expenses-General government		110,000
	Inventory of supplies			110,000
	(To record the cost of supplies used)

Table (3)

The payment of salaries and wages is recorded as below in Central Garage Fund accounts:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Salaries and Wages Expense		235,000
	Cash			235,000
	(To record the payment of salaries and wages)

Table (4)

The payment of salaries and wages is recorded as below in Governmental activities accounts:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Expenses-General government		235,000
	Cash			235,000
	(To record the payment of salaries and wages)

Table (5)

The accrual and payment of utilities expense is recorded as below in Central Garage Fund accounts:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Utilities expense		30,000
	Due to other funds			3,000
	Cash			27,000
	(To record the payment of utilities expense to the utility fund and the accrual of remaining bills)

Table (6)

The accrual and payment of utilities expense is recorded as below in Governmental activities accounts:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Expenses-General government		30,000
	Internal balances			3,000
	Cash			27,000
	(To record the payment of utilities expense to the utility fund and the accrual of remaining bills)

Table (7)

The depreciation expense is recorded is recorded as below in Central Garage Fund accounts:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Depreciation expense - Building		10,000
	Depreciation expense – Machinery and Equipment		9,000
	Allowance for depreciation - Building			10,000
	Allowance for depreciation - Machinery and Equipment			9,000
	(To record the allowance for depreciation on building and machinery and equipment)

Table (8)

The depreciation expense is recorded as below in Governmental activities accounts:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Expenses-General government		19,000
	Allowance for depreciation - Building			10,000
	Allowance for depreciation - Machinery and Equipment			9,000
	(To record the allowance for depreciation on building and machinery and equipment)

Table (9)

The due from other funds is recorded is recorded as below in Central Garage Fund accounts:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Due to other funds		397,000
	Billings to other departments			397,000
	(To record the accrual of revenue from general fund and special revenue fund)

Table (10)

Working Note: It is given that the “central garage fund” is billed $270,000 to general fund and $127,000 to special revenue fund. Hence, the total due to other funds is $397,000$\left(\$270,000+\$127,000\right)$.

Note: As the “central garage fund” has dues from the other governmental funds like general fund and special revenue fund, there is no need for an entry in the governmental activities. The reason is that both the “internal service funds” and “governmental funds” will be recorded in the same column of the governmental activities.

The receipt of dues from other funds is recorded as below in Central Garage Fund accounts:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		394,000
	Due to other funds			394,000
	(To record the receipt of due from general fund and special revenue fund)

Table (11)

Working note: The opening balance of general fund is $2,500 and the special revenue fund is $6,500. Hence, the opening balance of dues from other funds would be $9,000$\left(\$6,500+\$2,500\right)$. The closing balance of general fund is $3,000 and the special revenue fund is $9,000. Hence, the closing balance of dues from other funds would be $12,000$\left(\$3,000+\$9,000\right)$. The current year’s “dues from other funds” is $397,000. The opening balance is $9,000. Hence, the cash receipt of dues is $394,000$\left(\$9,000+\$397,000-\$12,000\right)$.

Note: As the “central garage fund” has dues from the other governmental funds like general fund and special revenue fund, there is no need for an entry in the governmental activities. The reason is that both the “internal service funds” and “governmental funds” will be recorded in the same column of the governmental activities.

The payment of vouchers payable is recorded as below in Central Garage Fund accounts and governmental activities accounts:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Vouchers payable		107,000
	Cash			107,000
	(To record the vouchers paid)

Table (12)

The closing entry is recorded as below in Central Garage Fund accounts:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Billings to departments		397,000
	Cost of supplies issued			110,000
	Salaries and wages expense			235,000
	Utilities expense			30,000
	Depreciation expense-building			10,000
	Depreciation expense- machinery and equipment			9,000
	Excess of net billings over cost			3,000
	(To record closing of nominal accounts)

Table (13)

The journal entry to transfer the excess of net billing over cost to the unrestricted net position is recorded as below:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Excess of net billings over cost		3,000
	Net position-unrestricted			3,000
	(To transfer the excess of net billings over cost to the “unrestricted net position”)

Table (14)

The journal entry to allocate the decrease in “net investment in capital assets” to the “unrestricted net position” is recorded as below:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Net position-net investments in capital assets		19,000
	Net position-unrestricted			19,000
	(To charge he decrease in the “net position-net investment in capital assets” to the “unrestricted net position”)

Table (15)

To determine

Prepare a “statement of revenues, expenses, and changes in fund net position” for Central Garage Fund.

Explanation of Solution

Statement of revenues, expenses and changes in net position: Statement of activities is the operating statement that reports revenues, expenses, and changes in net position during the year.

Prepare a “statement of revenues, expenses, and changes in fund net position” for Central Garage Fund.

Table (16)

Working note: Determine the opening net position.

Before the fiscal year adjustments, the net position of “net investment is capital assets” is $333,000 and the unrestricted net position is $178,000. Hence, the total opening net position is $511,000$\left(\$333,000+\$178,000\right)$.

To determine

Prepare a “statement of net position” for Central Garage Fund.

Explanation of Solution

Statement of net position: Statement of financial position is a balance sheet that reports the assets, deferred outflow of resources, liabilities, deferred inflow of resources and the residual amount or net position of the government at the end of the fiscal year.

Prepare a “statement of net position” for Central Garage Fund.

Table (17)

Working notes:

• Determine the closing balance of cash.

Table (18)

• Determine the closing balance of due from other funds.

Table (19)

• Determine the closing balance of inventory of supplies.

Table (20)

• Determine the accumulated depreciation for building.

The accumulated depreciation on building is the sum of current year depreciation ($10,000) and the previous year accumulated depreciation (20,000). Hence, the accumulated depreciation for current year is $30,000$\left(\$20,000+\$10,000\right)$.

• Determine the accumulated depreciation for machinery and equipment.

The accumulated depreciation on machinery is the sum of current year depreciation ($9,000) and the previous year accumulated depreciation (12,000). Hence, the accumulated depreciation for current year is $21,000$\left(\$9,000+\$12,000\right)$.

• Determine the closing balance of vouchers payable.

Table (21)

• Determine the net position of “net investment in capital assets”.

The opening balance of “net investment in capital assets” is $333,000. The current year’s depreciation is $19,000. Hence, the closing balance of “net investment in capital assets” is $314,000$\left(\$333,000-\$19,000\right)$.

• Determine the unrestricted net position as on June 30.

$\begin{array}{c}\text{Unrestricted net position}=\text{Total net position}-\left(\begin{array}{l}\text{net position of "net investment}\\ \text{in capital assets"}\end{array}\right)\\ =\$514,000-\$314,000\\ =\$200,000\end{array}$

To determine

Discuss about the information that the “central garage fund” has to report in the governmental activities.

Explanation of Solution

Since, the “Central Garage Fund” is an internal service fund; it has to report its activities and net assets in the “governmental activities” statements. It has to merge the “garage fund” with the “governmental funds” and report it in the “governmental activities column”.