Provide analysis for the following scenarios:
(a) The newly elected mayor of the town of Dewey, a well-respected businessman, is perplexed because the town’s finance director has given him an interim financial statement that reports repayment of a 10year note through the General Fund as an expenditure. The mayor is aware that several short-term notes were repaid during the interim period as well, and these are not reported as expenditures. “Two things puzzle me,” says the mayor. “First, why should repayment of a note be reported as an expenditure? We decreased our assets and liabilities by equal amounts; therefore, the city’s equity did not change. Second, if such a practice is appropriate, why is only part of the principal retirement reported as expenditures?” Respond to the mayor.
(b) An accountant for the Town of Don’s Grove previously worked for the City of Victorville. Don’s Grove records purchases of materials and supplies as expenditures and reports any change in the inventory of materials and supplies in its Statement of Revenues, Expenditures, and Changes in Fund Balance. The accountant recalls, however, that the City of Victorville recorded expenditures for materials and supplies when they were used, not when they were purchased. Also, Victorville did not report changes in inventory in its Statement of Revenues, Expenditures, and Changes in Fund Balance unless there were shortages or overages. The accountant asks his supervisors which way is correct. Respond.
(c) Why does the GASB require employers to recognize sick leave liabilities only to the extent they will be paid upon employee termination or retirement, but require vacation leave liabilities to be recognized as earned—regardless of whether the employees will receive paid time off or be paid for the leave upon retirement or other termination?