Question

Pursuant to law, a city imposes a hotel occupancy tax for the sole purpose of beautifying the downtown area. The city corporation counsel advises the finance commissioner that the taxes must be used solely as stipulated in the law. During the year the city collects hotel occupancy taxes of $800,000, deposits that amount in a Downtown Redevelopment Special Revenue Fund and spends $450,000 of it. How should the remaining $350,000 of net assets be classified in the Special Revenue Fund's balance sheet?

a. As Restricted fund balance
b. As Unassigned fund balance
c. As Assigned fund balance
d. As Reserved fund balance

Answer 1

The unspent hotel occupancy tax collected, amounting to $350,000, should be classified as a) 'Restricted fund balance' since the funds are legally constrained to be used only for downtown beautification purposes.

Step-by-step explanation:

In the scenario outlined, the remaining $350,000 of net assets should be classified in the Special Revenue Fund's balance sheet as a. As Restricted fund balance. This is because the collected hotel occupancy tax is imposed by law for the specific purpose of beautifying the downtown area, which places legal constraints on how these funds can be used. Thus, until such time as the funds are spent for their designated purpose, they remain restricted. Other classifications like unassigned, assigned, or reserved do not apply in this case due to the existence of restrictions mandated by law. It's important to properly categorize these funds to ensure transparency and compliance with legal requirements.