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16. (Discussion problem on entity and GAAP hierarchy)

A large private bus company in Empire City went bankrupt. At Empire City's request, the state legislature established a legally separate public benefit corporation named Metro City Bus. In the law establishing Metro City Bus, Empire City was authorized to appoint Metro's entire governing body, and Metro was authorized to issue tax-exempt debt to assume the assets of the private bus company.

When Metro City Bus went to prepare its financial statements, two questions were raised. Was Metro City Bus a government? And if it were a government, how should it prepare its cash flow statement? Research showed that, when the bus company was a private organization, it followed FASB Statement No. 95, which required cash flow statements to be prepared using a particular format. However, GASB Statement No. 9 did not approve the use of FASB Statement No. 95, and instead required governmental enterprises to prepare cash flow statements using a different format. An article published in the Journal of Accountancy suggested that all business-type activities, private or governmental, ought to adopt FASB Statement No. 95.

Required: a. Discuss whether Metro City Bus is or is not a governmental entity. What are the specific factors in this situation that cause Metro to be one or the other? b. Discuss whether Metro City Bus should prepare its cash flow statements using the FASB format or the GASB format. What are the factors that affect your conclusion?

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