A city is having fiscal problems in 2015

Scenario 1: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.Scenario 2: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:Answer both scenarios in APA format using citations and a reference page when appropriate