Second project: P. 2-7: Is fund accounting less appropriate for businesses than for not-for-profits?

Second project: P. 2-7: Is fund accounting less appropriate for businesses than for not-for-profits? (80 Points) Scenario 1:
A newly formed not-for-profit advocacy organization, the Center for
Participatory Democracy, requests your advice on setting up its
financial accounting and reporting system. Meeting with the director,
you learn the following: Member dues can be expected to account for approximately 80 percent of the organization’s revenues.
The organization plans to seek grants from private foundations to carry
out research projects pertaining to various political causes. The
center has already received a gift of $100,000. The donor specified that
the funds are to be placed in investment-grade securities and that only
the income is to be used to support center activities. The center
leases office space but owns its furniture, fixtures, and office
equipment. The center has taken out a five-year term loan of $100,000.
Although the loan is not due until its term expires, the organization
intends to set aside $17,740 each year with the prospect that, properly
invested, and these payments will provide the necessary $100,000. Instructions: Do you believe that the center should establish its accounting system on a fund basis? If so, why? Assume you answered ‘‘yes’’ to question 1. What specific fund types do you think the center should set up? Explain.
Alternatively, suppose the center was a privately owned,
profit-oriented consulting firm that provided political advice to its
clients. The firm would charge its clients a fixed fee each month in
return for which they would receive periodic newsletters and the
opportunity to meet with the firms’ partners. In addition, the ?rm
expects to enter into contracts to carry out specific research projects
for its clients. Would you now recommend that the firm establish its
accounting system on a fund basis (assuming, of course, that it would
prepare its external financial reports in accordance with generally
accepted accounting principles applicable to businesses)? Explain. P. 5-5: Can a government sell assets to itself to generate revenue? (80 points) Scenario 2:
A city is having fiscal problems in 2015. It expects to report a
deficit in its general fund, the only fund that is statutorily required
to be balanced. To eliminate the anticipated defecate the city opts to
‘‘sell’’ its city hall—to itself—for $5 million. The city establishes a
‘‘capital asset financing agency.’’ The agency is a separate legal
entity but will have to be reported as a component unit. As such it will
be accounted for in a fund other than the general fund. The city
structures the transaction as follows: The financing agency pays
the city $5 million in 2015 in exchange for ‘‘ownership’’ of city hall.
The city hall has been carried as general capital asset. The agency
acquires the necessary cash by issuing 20-year, 6 percent notes. The
notes will be repaid in twenty annual installments of $435,920. The
notes are guaranteed by the city at large. Hence, they are ultimately a
liability payable from the general fund. The agency leases the city hall back to the city at large. Lease payments are to be paid out of general fund resources. Instructions:
Prepare journal entries in the general fund to record the sale and
concurrent lease-back of the city hall. The lease-back satisfies the
criteria of a capital lease transaction. Prepare journal entries in the general fund to record the first lease payment, which was made in 2015.
Will the transaction, in fact, reduce the 2015 anticipated fund
deficit? Briefly justify the accounting principles that underlie this
type of accounting. EX. 10-7: Nonexpendable fiduciary funds should be accounted for on a full accrual basis. (70 points) Scenario 3:
The Nebraska Institute of Science (NIS) pools all of its endowment
funds so that it can obtain the benefits of a large and diverse
investment portfolio. The institute recently acquired a commercial
office building as an investment property. The cost was $12 million and
its economic life was expected to be 15 years. Upon acquiring the
building, NIS signed a 15-year lease with a tenant. The annual rent was
$1.3 million, with the tenant responsible for all maintenance and other
operating costs. Instructions: Suppose that the NIS did
not charge depreciation and distributed to expendable funds the entire
‘‘income’’ earned on the office building. What would be the total amount distributed over the 15-year life of the building?
Assuming that NIS’s estimate of economic life was correct, what would
likely be the market value of the building when the lease expired? Would
NIS have had available any cash for the acquisition of other assets
that would compensate for the decline in value of the building? Suppose NIS charged depreciation and distributed to expendable funds the entire ‘‘income’’ earned on the office building. What would be the total amount distributed over the 15-year life of the building?
Assuming that NIS’s estimate of economic life was correct, what would
likely be the market value of the building when the lease expired?
Would NIS have had available any cash for the acquisition of other
assets that would compensate for the decline in value of the building? Suppose NIS charged depreciation and distributed to expendable funds the entire ‘‘income’’ earned on the office building. What would be the total amount distributed over the 15-year life of the building?
Assuming that NIS’s estimate of economic life was correct, what would
likely be the market value of the building when the lease expired? Would
NIS have had available any cash for the acquisition of other assets to
compensate for the decline in value of the building? Requirements:
Include a cover page denoting the paper title, your name, the course
number and name, your instructor’s name, and the date you are making the
submission.