Budgeting practices that satisfy cash requirements may not promote interperiod equity.The Burnet County Road Authority was established as a separate government to maintain county highways. The road authority was granted statutory power to impose property taxes on county residents to cover its costs, but it is required to balance its budget, which must be prepared on a cash basis. In its first year of operations, it engaged in the following transactions, all of which were consistent with its legally adopted cash‐based budget:Purchased $10 million of equipment, all of which had an anticipated useful life of 10 years. To finance the acquisition, the authority issued $10 million in 10‐year term bonds (i.e., bonds that mature in 10 years)Incurred wages, salaries, and other operating costs, all paid in cash, of $6 millionPaid interest of $0.5 million on the bondsPurchased $0.9 million of additional equipment, paying for it in cash; this equipment had a useful life of only three yearsThe authority's governing board levies property taxes at rates that will be just sufficient to balance the authority's budget. What amount of tax revenue will it be required to collect?Assume that in the authority's second year of operations, it incurs the same costs, except that it purchases no new equipment. What amount of tax revenue will it be required to collect?Make the same assumption as to the tenth year, when it will have to repay the bonds. What amount of tax revenue will it be required to collect?Comment on the extent to which the authority's budgeting and taxing policies promote interperiod equity. What changes would you recommend?

Given information, Purchased $10 million of equipment wages, salaries, and other operating costs =…

Answered: The Burnet County Road Authority was…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Budgeting practices that satisfy cash requirements may not promote interperiod equity.

The Burnet County Road Authority was established as a separate government to maintain county highways. The road authority was granted statutory power to impose property taxes on county residents to cover its costs, but it is required to balance its budget, which must be prepared on a cash basis. In its first year of operations, it engaged in the following transactions, all of which were consistent with its legally adopted cash‐based budget:

Purchased $10 million of equipment, all of which had an anticipated useful life of 10 years. To finance the acquisition, the authority issued $10 million in 10‐year term bonds (i.e., bonds that mature in 10 years)
Incurred wages, salaries, and other operating costs, all paid in cash, of $6 million
Paid interest of $0.5 million on the bonds
Purchased $0.9 million of additional equipment, paying for it in cash; this equipment had a useful life of only three years
1. The authority's governing board levies property taxes at rates that will be just sufficient to balance the authority's budget. What amount of tax revenue will it be required to collect?
2. Assume that in the authority's second year of operations, it incurs the same costs, except that it purchases no new equipment. What amount of tax revenue will it be required to collect?
3. Make the same assumption as to the tenth year, when it will have to repay the bonds. What amount of tax revenue will it be required to collect?
4. Comment on the extent to which the authority's budgeting and taxing policies promote interperiod equity. What changes would you recommend?

Definition Definition Estimate of an organization's cash flow for a future period. A cash budget forecasts future cash receipts and payments from various sources for a fiscal year. A cash budget can be created once a month or once a week to determine the organization's cash position and ensure its performance in relation to the budget. It aids in determining whether the company has enough cash and cash equivalents to meet its operational needs in the future.

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