Question

P.1-1 Badgeting practices that satisfy cash requirements may not pro- ate interperiod equity. The Burnet County Road Authority was established a separate government to maintain county highways. The road authority was granted statutory power to impose Foperty taxes on county residents to cover its costs but it s required to balance its budget, which must be prepared on a cash basis. In its first year of operations it engaged n the following transactions, all of which were consistent th its legally adopted cash-based budget: 1 Parchased S10 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) 2. Incurred wages, salaries, and other operating costs, all paid in cash, of $6 million 3. Paid interest of $0.5 million on the bonds Purchased S0.9 million of additional equipment, paying for it in cash; this equipment had a useful life of only three years 2 The authority's governing board levies property taxes at rates that will be just sufficient to balance the authority's budget. What is the amount of tax revenue that it will be required to collect? b. Assume that in the authority's second year of opera- tions, it incurs the same costs, except that it purchases

Answer 1

The Burnet County Road authority
Computation of tax revenue that required to collect: Year 1
Expenses	Amount($)
Wages, Salaries and other operating costs	6000000
Interest expense	500000
Amount spent for Equipment- $0.9 million in cash	900000
	7400000
For the purchase of equipment the $ 10 million paid by way
of issue of bonds. So no cash outflow. Here the Burnet Count
road authority is following cash basis, no need to consider now.
Computation of tax revenue that required to collect: Year 2
Expenses	Amount($)
Wages, Salaries and other operating costs	6000000
Interest expense	500000
	6500000
Computation of tax revenue that required to collect: Year 10
Expenses	Amount($)
Wages, Salaries and other operating costs	6000000
Interest expense	500000
Payment of Bonds	10000000
	16500000
I recommend to follow accrual basis instead of cash basis
Because of following the cash basis tax policies increasing the taxes drastically
when the payment of bonds and equipments payment made and
the tax payers also suffer to pay the inconsist amounts year by year.
While preparing the budget the amounts need to purchase the equipment
to be funded in the form of equity of $0.9 million in the year 1 and
the amount of $10 million collected from the tax payers evenly for 10 years.