Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 1 Governmental and Nonprofit Accounting—Environment and Characteristics
1. Which of the following would not be considered a government or nonprofit organization? A. A software company that sells software exclusively to state and local governments. B. A public elementary school. C. A church. D. A private trust organized for charitable purposes. Answer: A Objective: LO 1.1 Describe the key unique characteristics and major types of government and nonprofit (G&NP) organizations. Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 2. Which of the following activities would most likely be accounted for as a business-type activity? A. Fire protection. B. Recreation. C. Water operations. D. Street maintenance. Answer: C Objective: LO 1.1 Describe the key unique characteristics and major types of government and nonprofit (G&NP) organizations. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 3. Prior to the creation of the Governmental Accounting Standards Board in 1984, which of the following organizations had the greatest influence over accounting concepts, principles, and standards for state and local governments? A. The National Council on Governmental Accounting (NCGA) B. The National Association of College and University Business Officers (NACUBO). C. The American Institute of Certified Public Accountants (AICPA). D. The Comptroller General of the United States. Answer: A Objective: LO 1.1 Describe the key unique characteristics and major types of government and nonprofit (G&NP) organizations. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 4. Which of the following is considered a health and welfare organization? A. Secondary schools. B. Young Men’s Christian Association (YMCA). C. Nongovernment child protection agencies. D. United Way. 1 Copyright © 2018 Pearson Education, Inc.
Answer: C Objective: LO 1.1 Describe the key unique characteristics and major types of government and nonprofit (G&NP) organizations. Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 5. Which of the following characteristics best distinguishes a government entity from a business entity? A. Governments operate in a very small section of the economy while businesses operate globally. B. Cost analysis and other control and evaluation techniques are essential to ensure that resources are used economically and efficiently. C. Those contributing resources to the entity do not necessarily receive a direct or proportionate share the services. D. Businesses must acquire and convert scarce resources while governments can demand whatever they need. Answer: C Objective: LO 1.1 Describe the key unique characteristics and major types of government and nonprofit (G&NP) organizations. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical thinking 6. Which source of financial resources is unique to governments? A. Borrowings. B. Gifts and grants. C. Charges for services provided. D. Taxation. Answer: D Objective: LO 1.1 Describe the key unique characteristics and major types of government and nonprofit (G&NP) organizations. Difficulty Level: Easy Classification: Concept AACSB Category: Analytical thinking 7. Which of the following is not an operational accountability measure for a government? A. Economic cost of providing services. B. Net income. C. Assessment whether a government raised sufficient revenues each period to cover the cost of providing services. D. Assessment whether services are being provided economically and efficiently. Answer: B Objective: LO 1.1 Describe the key unique characteristics and major types of government and nonprofit (G&NP) organizations. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 2 Copyright © 2018 Pearson Education, Inc.
8. Which of the following is not a primary financial reporting objective of state and local government (SLG) reporting? A. Provide information necessary to assess the level of SLG services and its ability to continue to finance its activities and meet its obligations. B. Provide information necessary for investment and credit decisions. C. Provide a means of demonstrating the SLG’s accountability that enables users to assess that accountability. D. Provide information necessary to evaluate the SLG’s operating results for the period. Answer: B Objective: LO 1.4 Summarize the key distinguishing characteristics, concepts, and objectives of G&NP accounting and financial reporting. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 9. The primary purpose of a fund is A. To provide expenditure authority for a government or not-for-profit organization. B. To segregate an organization's resources according to the purpose(s) for which they are to be used. C. To keep an organization's constituency from demanding that the organization utilize resources that it wants to save for a specific future objective. D. To confuse and confound the legislative body as to the use and purpose of government resources. Answer: B Objective: LO 1.5 Explain the key characteristics of state and local government financial reporting. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 10. Which of the following is not a characteristic of a fund? A. Fiscal entity. B. Separate legal entity. C. Accounting entity. D. Contains self-balancing set of accounts. Answer: B Objective: LO 1.5 Explain the key characteristics of state and local government financial reporting. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 11. Fixed-dollar budgets and appropriations are most often found in A. All funds of a government. B. Expendable funds. C. Nonexpendable funds. D. In not-for-profit organizations, but not governments. Answer: B Objective: LO 1.5 Explain the key characteristics of state and local government financial reporting. Difficulty Level: Moderate 3 Copyright © 2018 Pearson Education, Inc.
Classification: Application AACSB Category: Analytical thinking 12. Expenditures in a governmental (expendable) fund would not include A. Salaries and wages. B. Capital outlay. C. Long-term debt principal retirement. D. Depreciation. Answer: D Objective: LO 1.5 Explain the key characteristics of state and local government financial reporting. Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 13. Expenses in a proprietary (nonexpendable) fund would not include A. Salaries and wages. B. Long-term debt interest payments. C. Long-term debt principal retirement. D. Depreciation. Answer: C Objective: LO 1.5 Explain the key characteristics of state and local government financial reporting. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 14. Expenses and expenditures are least likely to differ in amount for which type of transaction? A. Salaries. B. Capital asset purchases. C. Debt principal retirements. D. Depreciation on capital assets. Answer: A Objective: LO 1.5 Explain the key characteristics of state and local government financial reporting. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 15. The primary users of external financial reports, as identified by the GASB, include all of the following except A. Investors and creditors. B. Other governments. C. Citizens. D. Legislative and oversight bodies. Answer: B Objective: LO 1.4 Summarize the key distinguishing characteristics, concepts, and objectives of G&NP accounting and financial reporting. Difficulty Level: Moderate Classification: Application 4 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Analytical thinking 16. Which of the following organizations has had the least impact on the development of GAAP for state and local governments? A. American Hospital Association. B. Federal Accounting Standards Advisory Board C. National Association of College and University Business Officers. D. National Council on Governmental Accounting. Answer: B Objective: LO 1.3 Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 17. The Financial Accounting Foundation does not have oversight responsibilities over A. The Financial Accounting Standards Board (FASB). B. The Federal Accounting Standards Advisory Board (FASAB). C. The Governmental Accounting Standards Board (GASB). D. Both B & C are correct. Answer: B Objective: LO 1.3 Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 18. What best describes the relationship of the FASB and the GASB? A. They are co-equal bodies with different areas of responsibility for standards setting. B. The FASB standards are authoritative for governments. However, the GASB can establish additional standards that do not conflict with FASB standards. C. GASB standards are authoritative for all government operations except those that are similar to business operations. D. Governments are not permitted to apply any FASB standard under any circumstances for any government operations. Answer: A Objective: LO 1.3 Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 19. Which organization has the highest level of authority for setting GAAP for nongovernment, not-forprofit organizations? A. Financial Accounting Standards Board (FASB). B. Governmental Accounting Standards Board (GASB). C. American Institute of Certified Public Accountants (AICPA). 5 Copyright © 2018 Pearson Education, Inc.
D. National Council on Governmental Accounting (NCGA). Answer: A Objective: LO 1.3 Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 20. All not-for-profit organizations that do not meet the definition of governments must apply A. FASB standards. B. GASB standards. C. FASAB standards. D. AICPA Audit and Accounting Guide, Not-for-Profit Organizations. Answer: A Objective: LO 1.3 Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 21. Each of the following would be defined as a governmental entity based on the definition of a government that was jointly developed by the GASB and FASB except A. A Historic Preservation District created by the governing board of the municipal government. B. A Charter School incorporated in accordance with state law and accountable to the state oversight agency, which has the power to dissolve it. C. A hospital formerly owned by a local government entity that was sold to and is now owned by a private, for-profit health care management corporation. D. A financing authority that is legally separate from the municipal government, but provides financing for the government's major capital projects. The governing board of the financing authority is appointed by the municipal government's board. Answer: C Objective: LO 1.3 Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical thinking 22. Which of the following is considered to be an authoritative source of GAAP for a nongovernmental not-for-profit organization? A. GASB standards. B. AICPA AcSEC Practice Bulletins. C. FASB Accounting Standards Codification. D. AICPA Audit and Accounting Guide, Not-for-Profit Organizations. Answer: C Objective: LO 1.3 Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides. Difficulty Level: Difficult 6 Copyright © 2018 Pearson Education, Inc.
Classification: Concept AACSB Category: Application of knowledge 23. Which of the following is not a characteristic used to determine if an organization is a government? A. The majority of governing board members are appointed by government entities. B. An entity that has the power to enact and enforce a property tax levy. C. An entity receives over half of its resources from other governmental entities. D. The potential for unilateral dissolution with the net assets reverting to a government upon dissolution. Answer: C Objective: LO 1.3 Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 24. The governmental GAAP hierarchy was established by A. The Governmental Accounting Standards Board (GASB). B. The Financial Accounting Standards Board (FASB). C. The American Institute of Certified Public Accountants (AICPA). D. The Government Accountability Office (GAO). Answer: A Objective: LO 1.3 Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 25. Which of the following publications is specifically identified in the GAAP hierarchy for state and local governments as authoritative? A. FASB Accounting Standards Codification. B. GASB Implementation Guides. C. GAO Yellow Book. D. GASB Concepts Statements. Answer: B Objective: LO 1.3 Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 26. Which of the following has the highest level of authority for a government under GAAP? A. A FASB standard. B. A Federal Accounting Standards Advisory Board standard. C. AICPA Industry Audit and Accounting Guide for local governments cleared by the GASB. D. An article in the Journal of Accountancy. Answer: C 7 Copyright © 2018 Pearson Education, Inc.
Objective: LO 1.3 Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 27. Which of the following has the highest level of authority for a government in the governmental GAAP hierarchy? A. A FASB standard on pension accounting. B. A GASB standard on pension accounting. C. AICPA state and local government audit guide coverage of pensions. D. The coverage of pensions in a Journal of Accountancy article. Answer: B Objective: LO 1.3 Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 28. Which of the following has the highest level of authority for a government in the governmental GAAP hierarchy? A. GASB Codification of Governmental Accounting and Financial Reporting Standards. B. GASB Concepts Statement. C. GASB Technical Bulletin. D. AICPA Industry Audit and Accounting Guide. Answer: A Objective: LO 1.3 Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 29. Rank the following documents in the proper order in the governmental GAAP hierarchy: I. GASB Concepts Statement. II. GASB Statement of Governmental Accounting Standards. III. GASB Technical Bulletin. A. I; II; III. B. II; I; III. C. II; III; I. D. III; II; I. Answer: C Objective: LO 1.3 Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 8 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 2 State and Local Government Accounting and Financial Reporting Model—The Foundation
1. If a government is obligated to legally report information in a manner that differs from GAAP A. GAAP take precedence over the legal requirements. B. Legal requirements take precedence over GAAP. C. Both GAAP requirements and legal requirements must be met. D. Information should be presented that meets as many legal requirements as possible without violating GAAP in a material manner. Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Difficult Classification: Synthesis AACSB Category: Analytical thinking 2. Which of the following is not a fund category used by state and local governments? A. Fiduciary funds. B. Plant and Equipment funds. C. Governmental funds. D. Proprietary funds. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 1 Copyright © 2018 Pearson Education, Inc.
3. Which of the following is an official fund category used by state and local governments? A. Current funds. B. Expendable funds. C. Governmental funds. D. General capital asset funds. Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 4. Which of the following is considered a proprietary fund? A. General Fund. B. Special Revenue Fund. C. Permanent Fund. D. Internal Service Fund. Answer: D Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 5. The operations of a city bus line receiving all its funding from user charges would be accounted for in A. A General Fund. B. An Enterprise Fund. C. An Internal Service Fund. 2 Copyright © 2018 Pearson Education, Inc.
D. A Special Revenue Fund. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Application AACSB Category: Analytical thinking 6. Which of the following is not considered a fiduciary fund? A. Agency Fund B. Investment Trust Fund C. Permanent Fund D. Private-purpose Trust Fund Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 7. Activities of a central motor pool that provides and services vehicles for the use of municipal employees on official business should be accounted for in A. General Fund. B. Enterprise Fund. C. Internal Service Fund. D. Special Revenue Fund. Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: 3 Copyright © 2018 Pearson Education, Inc.
• Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 8. A government can only have one A. Capital Projects Fund. B. General Fund. C. Private-Purpose Trust Fund. D. Special Revenue Fund. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 9. Which of the following is not considered a governmental fund? A. General Fund. B. Debt Service Fund. C. Permanent Fund. D. Internal Service Fund. Answer: D Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and 4 Copyright © 2018 Pearson Education, Inc.
on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 10. Which of the following is the basic proprietary fund accounting equation? A. Assets + Deferred Outflows – Liabilities – Deferred Inflows = Fund Balance. B. Financial Assets – Related Liabilities = Net Position. C. Financial Assets + Deferred Outflows – Related Liabilities – Deferred Inflows = Fund Balance. D. Assets + Deferred Outflows – Liabilities – Deferred Inflows = Net Position. Answer: D Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 11. Which of the following uses the flow of economic resources measurement focus? A. General Fund. B. Debt Service Fund. C. Special Revenue Fund. D. Internal Service Fund. Answer: D Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy 5 Copyright © 2018 Pearson Education, Inc.
Classification: Concept AACSB Category: Application of knowledge 12. Proprietary funds recognize A. Expenditures when the fund incurs a liability for goods or services. B. Expenditures when the fund uses goods or services. C. Expenses when the fund incurs a liability for goods or services. D. Expenses when the fund uses goods or services. Answer: D Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 13. Which of the following is the basic governmental fund accounting equation? A. Assets – Liabilities = Net Assets. B. Financial Assets – Related Liabilities = Fund Balance. C. Financial Assets + Deferred Outflows – Related Liabilities – Deferred Inflows = Fund Balance. D. Assets + Deferred Inflows – Liabilities – Deferred Outflows = Net Position Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 14. Which of the following uses the flow of current financial resources measurement focus? A. Agency Fund. 6 Copyright © 2018 Pearson Education, Inc.
B. Enterprise Fund. C. Special Revenue Fund. D. Internal Service Fund. Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 15. In which of the following financial statements should a government not report depreciation expense? A. Fiduciary fund financial statements. B. Governmental fund financial statements. C. Proprietary fund financial statements. D. Government-wide financial statements. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 16. The availability criterion for recognizing revenues applies to all of the following funds except A. Capital Projects Funds. B. Debt Service Funds. C. Enterprise Funds. D. Special Revenue Funds. Answer: C 7 Copyright © 2018 Pearson Education, Inc.
Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 17. Governmental funds recognize A. Expenses when the governmental unit uses goods or services. B. Expenditures when the governmental unit incurs a liability for goods or services. C. Expenditures when the fund incurs a liability. D. Expenses when the fund assets are consumed. Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 18. Which of the following would not be classified as an expenditure? A. Salaries and wages. B. Depreciation. C. Capital outlay. D. Debt service — principal and interest. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category 8 Copyright © 2018 Pearson Education, Inc.
of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 19. Assume that Kelly County issues $3,000,000 in general obligation bonds to build a new fire station and $7,000,000 in revenue bonds to finance the upgrade of their Water Department’s water treatment facility. How will these transactions affect the funds of the county? A. Financial assets of the Capital Projects Fund will increase by $10,000,000, as will the related fund liabilities. B. Financial assets and related fund liabilities of the Capital Projects Fund will increase by $3,000,000; current assets and long-term liabilities will increase by $7,000,000 in the Water Enterprise Fund. C. Financial assets, but not the related fund liabilities, will increase in the General Fund by $10,000,000. D. Financial assets, but not the related fund liabilities, will increase in the Capital Projects Fund by $3,000,000; current assets and the long-term liabilities will increase by $7,000,000 in the Water Enterprise Fund. Answer: D Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 20. Ashley Woods Village issued $4,000,000 in general obligation bonds to finance the widening of a local thoroughfare. This transaction will most likely A. Increase fund balance in the General Fund by $4,000,000. B. Decrease fund balance in the General Fund by $4,000,000. C. Increase fund balance in the Capital Projects Fund by $4,000,000. D. Decrease fund balance in the Capital Projects Fund by $4,000,000. Answer: C 9 Copyright © 2018 Pearson Education, Inc.
Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 21. Ashley Woods Village paid $1,000,000 principal and $200,000 interest on its general obligation bonds that it issued in a prior year to finance widening of a local thoroughfare. This transaction will most likely A. Decrease fund balance in the Capital Projects Fund by $1,000,000. B. Decrease fund balance in the Capital Projects Fund by $1,200,000. C. Decrease fund balance in the Debt Service Fund by $1,000,000. D. Decrease fund balance in the Debt Service Fund by $1,200,000. Answer: D Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 22. The police department of the city of Newport purchased 10 new patrol cars at the beginning of the new budget year at a total cash price of $250,000. This purchase will A. Increase capital assets reported in the General Fund by $250,000. B. Have no effect on capital assets in the General Fund, but will decrease fund balance in the General Fund by $250,000. C. Increase capital assets reported in the General Fund by $250,000, as well as decrease fund balance in the General Fund by the same amount. D. Increase both capital assets and fund balance in the General Fund by $250,000. Answer: B 10 Copyright © 2018 Pearson Education, Inc.
Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 23. The City of Ruth owns and operates an electric utility. The utility purchases new electric transmission lines for $6,000,000 so that it can provide electricity to new customers. This purchase will most likely A. Increase expenditures reported in the General Fund by $6,000,000. B. Increase capital assets reported in the Capital Projects Fund by $6,000,000. C. Increase capital assets reported in the Enterprise Fund by $6,000,000. D. Increase expenses reported in the Enterprise Fund by $6,000,000. Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 24. A transaction in which a government issues general obligation bonds to finance the construction of a new police station would A. Increase liabilities in a Debt Service Fund. B. Increase liabilities in a Capital Projects Fund. C. Decrease fund balance in a Debt Service Fund. D. Increase fund balance in a Capital Projects Fund. Answer: D Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: 11 Copyright © 2018 Pearson Education, Inc.
• Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 25. Incurring construction costs on a major general government capital project would A. Decrease fund balance in a Capital Projects Fund. B. Decrease cash in the General Capital Assets accounts. C. Increase capital assets in a Capital Projects Fund. D. Increase capital assets in the General Fund. Answer: A Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 26. Which one of the following accounts is not found in the General Capital Assets and General LongTerm Liabilities accounts? A. Bonds Payable. B. Long-Term Claims and Judgments Payable. C. Investments. D. Land. Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. 12 Copyright © 2018 Pearson Education, Inc.
• Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 27. Which one of the following accounts is not found in the General Capital Assets and General LongTerm Liabilities accounts? A. Cash (Restricted for capital asset purchases). B. Buildings. C. Equipment. D. Textbooks and library books (of a city school). Answer: A Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 28. A computer was purchased from unrestricted resources for a general government department. The government paid cash for the computer at the purchase date. Which of the following is not an effect of this transaction in the General Fund? A. Current assets decrease. B. Capital assets increase. C. Current liabilities do not change. D. Fund balance decreases. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. 13 Copyright © 2018 Pearson Education, Inc.
• Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 29. All of the following transactions decrease the fund balance of a governmental fund except A. Purchase of equipment. B. Retirement of the principal of a short-term note. C. Payment of salaries and wages. D. Purchase and use of supplies. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 30. Capital outlay expenditures would be least likely in a A. General Fund. B. Debt Service Fund. C. Capital Projects Fund. D. Special Revenue Fund. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Application 14 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Analytical thinking 31. All of the following financial statements should be presented for a General Fund except a A. Balance sheet. B. Statement of revenues, expenditures, and changes in fund balance. C. Statement of cash flows. D. Statement of revenues, expenditures, and changes in fund balance: budget and actual. Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 32. In which accounting entity may a government report capital assets? A. Capital Projects Fund. B. Enterprise Fund. C. General Fund. D. Agency Fund. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 33. A city adds a new door to its downtown fire station. This is considered a relatively minor addition. Which fund would most likely be used to account for the construction expenditures associated with the door? 15 Copyright © 2018 Pearson Education, Inc.
A. Enterprise Fund. B. General Fund. C. Capital Projects Fund. D. General Capital Assets accounts. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Difficult Classification: Synthesis AACSB Category: Analytical thinking 34. Which of the following funds is reported as a governmental fund even though it is not considered to be expendable in nature? A. Special Revenue Fund B. Capital Projects Fund C. Permanent Fund D. Pension Trust Fund Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 35. General government financial resources that are required to be used to pay principal and interest on general government long-term debt are accounted for in A. A Capital Projects Fund. B. A Debt Service Fund. C. The General Fund. 16 Copyright © 2018 Pearson Education, Inc.
D. A Special Revenue Fund. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 36. General government financial resources to be used to finance construction of a general government construction project typically should be accounted for in A. A Capital Projects Fund. B. A Debt Service Fund. C. The General Fund. D. A Special Revenue Fund. Answer: A Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 37. The fund used to account for the acquisition or construction of major capital facilities and other capital assets is the A. General Fund. B. Special Revenue Fund. C. Capital Projects Fund. D. General Capital Assets accounts. Answer: C 17 Copyright © 2018 Pearson Education, Inc.
Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 38. The receipts of a special tax levy to retire principal and pay interest on general obligation bonds issued to finance the construction of a new fire hall should be accounted for in the A. General Fund. B. Special Revenue Fund. C. Debt Service Fund. D. General Long-Term Liabilities accounts. Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 39. General government financial resources that are required to be used to pay teacher salaries for a special education program are typically accounted for in a A. Capital Projects Fund. B. Debt Service Fund. C. Permanent Fund. D. Special Revenue Fund. Answer: D Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— 18 Copyright © 2018 Pearson Education, Inc.
and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 40. Receipts from a special fishing tax committed to maintain the (no-charge) public fishing pier should be accounted for in A. A Special Revenue Fund. B. The General Fund. C. An Enterprise Fund. D. General Capital Assets accounts. Answer: A Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 41. Incurring construction costs on a major general government capital project should require entries in a A. Capital Projects Fund. B. Debt Service Fund. C. General Long-Term Liabilities account. D. Permanent Fund. Answer: A Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and 19 Copyright © 2018 Pearson Education, Inc.
on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 42. A city levies a special property tax that is legally restricted to pay off the principal and interest on bonds issued to build the city's new police headquarters. Which fund should be used to account for the proceeds from the tax levy? A. Debt Service Fund. B. General Fund. C. Capital Projects Fund. D. General Long-Term Liabilities Fund. Answer: A Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 43. A state enacts a gasoline tax that is restricted for new highway construction. Which fund should be used to account for the proceeds from the tax? A. Debt Service Fund. B. General Fund. C. Capital Projects Fund. D. General Long-Term Liabilities Fund. Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. 20 Copyright © 2018 Pearson Education, Inc.
• Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 44. The General Capital Assets and General Long-Term Liabilities nonfund accounts would be used to account for A. All capital assets acquired by a government entity regardless of the fund purchasing the asset. B. Capital assets acquired with governmental fund resources that will be used in governmental fund activities. C. Capital assets acquired with debt proceeds only. D. Capital assets that are used by a variety of governmental and proprietary funds. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 45. A government issues 10-year bonds to finance construction of an addition to city hall. The bonds payable should be reported in the A. General Fund. B. Capital Projects Fund. C. General Capital Asset accounts. D. General Long-Term Liabilities accounts. Answer: D Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. 21 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 46. To account for amounts owed to general government bondholders that must be paid in the future, a government should use A. A Debt Service Fund. B. The General Long-Term Liabilities accounts. C. The General Fund D. A Private-Purpose Trust Fund. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 47. Assume that the City of Wakefield purchased a tract of land to be used as a public park. The purchase was financed with proceeds from a five-year note issued by a local lending institution. Because of the time required for facilities construction and land improvements, the park itself will not be ready for public use for at least two years. At the date of purchase, the city would most likely account for the transaction in A. The General Fund and General Capital Assets and General Long-Term Liabilities accounts. B. The Capital Projects Fund and the General Capital Assets and General Long-Term Liabilities accounts. C. The Enterprise Fund. D. The General Fund and the General Capital Assets and General Long-Term Liabilities accounts. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. 22 Copyright © 2018 Pearson Education, Inc.
• Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 48. The operation of a municipality's recreation facilities and sites such as ball fields, gymnasiums, and tracks are most likely to be accounted for in a/an A. General Fund. B. Enterprise Fund. C. Capital Projects Fund. D. Internal Service Fund. Answer: A Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Application AACSB Category: Analytical thinking 49. To account for a donation to the City where the principal is to remain intact forever and the earnings are to be used to benefit the Boy Scout and Girl Scout organizations in the City, the government should use what fund type? A. Permanent Fund. B. Special Revenue Fund. C. General Fund. D. Private-Purpose Trust Fund. Answer: D Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. 23 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 50. Caraway County financed its new $6,000,000 courthouse by issuing general obligation bonds. In the year financing was secured and construction began, the fund(s) and/or nonfund fund accounts that would most likely be affected would be A. The General Fund only. B. The Capital Projects Fund only. C. The General Fund and the General Capital Assets and General Long-Term Liabilities accounts. D. The Capital Projects Fund and the General Capital Assets and General Long-Term Liabilities accounts. Answer: D Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 51. The minimum general purpose external financial reports required for state and local government entities do not include which of the following? A. Government-wide financial statements. B. Management's discussion and analysis. C. Fund financial statements. D. Transmittal Letter. Answer: D Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate 24 Copyright © 2018 Pearson Education, Inc.
Classification: Synthesis AACSB Category: Application of knowledge 52. The Basic Financial Statements include all of the following except A. Government-wide financial statements. B. Fund financial statements. C. Combining financial statements. D. Notes to the financial statements. Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 53. GAAP requirements for external financial reporting include A. A comprehensive annual financial report. B. Note disclosures. C. Transmittal letter. D. Statistical Section. Answer: B Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 54. Basic financial statements exclude A. Management's discussion and analysis. 25 Copyright © 2018 Pearson Education, Inc.
B. Government-wide financial statements. C. Fund financial statements. D. Notes to the financial statements. Answer: A Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 55. Which of the following accounts is not included in a balance sheet of a governmental fund? A. Cash. B. Investments. C. Equipment. D. Salaries Payable. Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 56. Government-wide financial statements include A. A statement of net position. B. A budget-to-actual schedule. C. A statement of cash flows. D. A statement of revenues, expenses, and changes in net position. Answer: A 26 Copyright © 2018 Pearson Education, Inc.
Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 57. A statement of revenues, expenditures, and changes in fund balance is required for each A. Special Revenue Fund. B. Internal Service Fund. C. Private-purpose Trust Fund. D. Enterprise Fund. Answer: A Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 58. Which of the following would not be considered a fund financial statement? A. Balance sheet B. Statement of cash flows C. Statement of activities D. Statement of changes in fiduciary net position Answer: C Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category 27 Copyright © 2018 Pearson Education, Inc.
of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 59. All of the following financial statements should be presented for an Internal Service Fund except for a A. Statement of net position. B. Statement of revenues, expenses, and changes in fund net position. C. Statement of cash flows. D. Statement of revenues, expenses, and changes in fund net position: budget and actual. Answer: D Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. • Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 60. A statement of cash flows is required for which of the following? A. Enterprise Fund. B. General Fund. C. Investment Trust Fund. D. Agency Fund. Answer: A Objective: LO 2.2 Explain the fundamental features of the state and local government accounting and financial reporting model, including: • Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary— and the specific types of funds in each fund category. • Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category. • Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts. • Identifying typical budgetary accounting and reporting requirements. 28 Copyright © 2018 Pearson Education, Inc.
• Explaining the financial reporting requirements for a government’s basic financial statements and its comprehensive annual financial report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge
29 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems—Chapter 2
The material in Chapter 2 is best suited for two types of problems: 1. Matching funds to fund types or fund definitions; and 2. Transaction analysis. Since transactions are an essential part of Chapters 3 through 12 and 16 through 18, we recommend using the transaction analysis with journal entries in those chapters. To that end, transaction analysis will be further demonstrated in those chapters.
1 Copyright © 2018 Pearson Education, Inc.
Problem 1—Matching funds types to fund categories. Indicate how the following funds types would be classified as to category: (G) governmental, (P) proprietary, or as (F) fiduciary. 1. Internal Service 2. Agency 3. General 4. Special Revenue 5. Investment Trust 6. Capital Projects 7. Debt Service 8. Pension Trust 9. Permanent 10. Enterprise 11. Private-Purpose Trust
2 Copyright © 2018 Pearson Education, Inc.
Answers: 1. P 2. F 3. G 4. G 5. F 6. G 7. G 8. F 9. G 10. P 11. F
3 Copyright © 2018 Pearson Education, Inc.
Problem 2—Fund and Nonfund Accounts identification Match the following situations with the fund or nonfund account best suited to account for it. A fund or nonfund account may be used more than once. The funds and nonfunds accounts are: A B C D E F
Agency Fund Capital Projects Fund Debt Service Fund Enterprise Fund General Capital Asset accounts General Fund
G H I J K L
General Long-Term Liability Accounts Internal Service Fund Pension Trust Fund Permanent Fund Private Purpose Trust Fund Special Revenue Fund
1. The operations of a city bus line receiving all its funding from user charges. 2. Receipts from a special fishing tax restricted to maintain the (no-charge) public fishing pier. 3. Collects taxes withheld from employees throughout the government and makes payments to the appropriate government for these withholdings. 4. Donation to the city to be invested in perpetuity with the earnings from that investment to help maintain city parks. 5. The activities of a central motor pool that provides and services vehicles for the use of municipal employees on official business. 6. The segregation of resources accumulated to pay principal and interest on long-term debt of the general government. 7. The levy and collection of property taxes for general operations of a city. 8. Used to account for acquisition of major capital assets. 9. Accounts for contributions by the government and employees to be invested and paid to employees after retirement. 10. Amounts owed to general government bondholders that must be paid in the future. 11. Used to account for land, buildings, and equipment owned by the government. 12. Activities whose management requires a periodic measurement of revenues and expenses, and whose customers are the general public. 13. Receipts from a special tax levy to retire and pay interest on general obligation bonds issued to finance the construction of a new city hall. 14. Donation to the city where the principal is to remain intact forever and the earnings are to be used to benefit the Boy Scout and Girl Scout organizations in the city.
4 Copyright © 2018 Pearson Education, Inc.
Answers: 1. D 2. L 3. A 4. J 5. H 6. C 7. F 8. B 9. I 10. G 11. E 12. D 13. C 14. K
5 Copyright © 2018 Pearson Education, Inc.
Problem 3—Fund and Nonfund Accounts identification Match the following situations with the fund or nonfund account best suited to account for it. A fund or nonfund account may be used more than once. The funds and nonfunds accounts are: Situations
Funds and Non-Funds
1. Federal grant proceeds received for construction of a new elementary school building 2. Municipal electric utility bonds to be repaid from customer charges 3. General obligation bonds issued to finance construction of a new elementary school building 4. Activities of a central print shop that provides custom printing services to all campus departments
A. General Fund B. Special Revenue Fund C. Capital Projects Fund D. Debt Service Fund E. Permanent Fund F. Enterprise Fund G. Internal Service Fund H. Trust Fund I. Agency Fund J. General Capital Assets K. General Long-Term Liabilities
5. Financial resources set aside to service the principal and interest on general obligation debt 6. A special hotel occupancy sales tax that can only be used for city economic development promotional activities 7. Financial resources legally restricted to the extent that only earnings, and not the principal, may be used to benefit the government or its citizenry 8. Monthly payroll deductions from employees to be remitted to an insurance company to pay for medical insurance premiums
6 Copyright © 2018 Pearson Education, Inc.
Answers: 1. 2. 3. 4. 5. 6. 7. 8.
C F K G D B E I
7 Copyright © 2018 Pearson Education, Inc.
Problem 4—Transaction Analysis Use the formatted answer sheet provided to analyze the effects of each of transaction on the accounting equations of each fund or nonfund account affected by the transaction. Indicate increases by positive amounts; indicate decreases by putting the amount in parentheses. 1. Beverly County issued at par $20 million of general obligation, 10%, 10-year bonds. The resources are to be used to construct a new civic center downtown. 2. The county paid $100,000 to Fancy Dan Construction Company for work completed during the year. 3. During the year the county transferred $250,000 of general fund cash to the fund from which the bonds are to be repaid. The purpose of shifting the resources was to provide for the principal and interest payments to be made during the fiscal year. 4. $200,000 of the bonds and $20,000 of interest matured and were paid. Fund Affected
GCA and GLTL Nonfund Accounts
Governmental Funds CA
− CL
= FB
GCA
− GLTL
1.
2.
3.
4.
8 Copyright © 2018 Pearson Education, Inc.
= NP
Answers: Fund Affected
GCA and GLTL Nonfund Accounts
Governmental Funds − CL
CA
= FB
1.
CPF
$20 mil
$20 mil
2.
CPF
(100,000)
(100,000)
3a.
GF
(250,000)
(250,000)
3b.
DSF
250,000
250,000
4.
DSF
(220,000)
(220,000)
GCA
− GLTL
= NP
$20 mil
($20 mil)
100,000
9 Copyright © 2018 Pearson Education, Inc.
100,000
(200,000)
200,000
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 3 Budgeting, Budgetary Accounting, and Budgetary Reporting
1. What general ledger account is not needed for an expenditures subsidiary ledger? A. Appropriations. B. Expenditures. C. Encumbrances. D. Encumbrances Outstanding. Answer: D Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 2. A city's General Fund general ledger includes accounts called Estimated Revenues, Appropriations, and Encumbrances. This indicates that the city A. Formally integrates its budget into its accounts. B. Uses a cash plus encumbrances basis of accounting. C. Maintains its accounts on an accrual basis. D. Erroneously reports encumbrances as expenditures. Answer: A Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 3. Under an encumbrance system, which account is debited when a purchase order is issued? A. Expenditures. B. Appropriations. C. Encumbrances. D. Encumbrances Outstanding. Answer: C Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 1 Copyright © 2018 Pearson Education, Inc.
4. Which of the statements regarding the accounting for encumbrances is false? A. The budgetary entry to record an encumbrance would be a debit to Encumbrances Outstanding and a credit to Encumbrances. B. The budgetary entry to record an encumbrance would be a debit to Encumbrances and a credit to Encumbrances Outstanding. C. If the actual cost of a purchase exceeds the amount of the original encumbrance, the original encumbrance is still reversed at the original amount. D. The recording of an encumbrance is considered to be a budgetary entry. Answer: A Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 5. When goods that have already been approved for purchase are received but have not yet been paid for, which of the following local government accounts should be increased? Encumbrances Expenditures A. Yes Yes B. Yes No C. No No D. No Yes Answer: D Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 6. The basis of accounting for a governmental fund budget should be? A. Cash basis. B. Accrual basis. C. Modified accrual basis. D. Determined by the entity’s governing body or by law or regulation. Answer: D Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 2 Copyright © 2018 Pearson Education, Inc.
7. Which of the following amounts are included in a governmental fund’s encumbrances account? A. Outstanding vouchers payable amounts. B. Excess amounts of purchase orders over actual expenditures. C. Outstanding purchase order amounts. D. Actual expenditure amounts. Answer: C Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 8. As part of the state and local government accounting and reporting model, a budgetary comparison statement or schedule for the General Fund should be presented as A. A basic financial statement or required supplementary information. B. In the other information section of the CAFR. C. A note to the financial statements. D. Budgetary reporting is optional for governments. Answer: A Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 9. A budgetary comparison schedule is required to include all of the following columns except A. The original budget. B. Actual on the GAAP basis. C. Final revised budget. D. Actual on the budgetary basis. Answer: B Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 10. The purpose of encumbrance accounting is to A. Manage a government's cash flows. B. Avoid expenditures exceeding appropriations. C. Replace expense accounting in governments. 3 Copyright © 2018 Pearson Education, Inc.
D. Prevent government waste. Answer: B Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 11. The encumbrances method of budgetary reporting A. Is never allowed by GAAP. B. Never results in an outstanding encumbrance. C. Is where outstanding encumbrances are considered to be budgetary expenditures. D. Is always required by GAAP. Answer: C Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 12. As part of a government's basic financial statements and required supplementary information, a budgetary comparison schedule is required for which funds? A. All governmental funds. B. All governmental funds with legally adopted annual budgets. C. General Fund only. D. General Fund and each major Special Revenue Fund that has a legally adopted annual budget. Answer: D Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 13. Legal authority to expend resources is adopted by a city council in the budgeting process. These legal authorizations are called A. Appropriations. B. Authorizations. C. Encumbrances. D. Expenditures. Answer: A 4 Copyright © 2018 Pearson Education, Inc.
Objective: LO 3.2 Explain the role of the budget in governmental fund planning, budgetary control, budgetary accounting, and budgetary reporting. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 14. Which of the following does not represent a common approach to budgeting expenditures? A. Zero-base budgeting. B. Object-of-expenditure budgeting. C. Program budgeting. D. Marginal increase budgeting. Answer: D Objective: LO 3.4 Discuss the basic procedures involved in preparing and adopting a budget. Difficulty Level: Easy Classification: Application AACSB Category: Analytical thinking 15. A general budget is often a term used to describe a budget for all of the following except A. A General Fund. B. A Special Revenue Fund. C. An Enterprise Fund. D. A Debt Service Fund. Answer: C Objective: LO 3.3 Discuss commonly used budgeting terminology, approaches, and recommended practices. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 16. The most widely used approach to budgeting operating expenditures is A. Zero-base. B. Performance approach. C. Object-of-expenditure. D. Program and planning-programming-budgeting. Answer: C Objective: LO 3.4 Discuss the basic procedures involved in preparing and adopting a budget. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 17. Which of the following statements regarding revenue subsidiary ledgers is false? A. The number of revenue subsidiary ledger accounts necessary is at the discretion of management. B. The number of revenue subsidiary ledger accounts used is limited by the number of broad revenue categories (e.g., taxes, licenses and permits, intergovernmental) that a governmental entity reports. C. Entries to revenue subsidiary ledger accounts may be made at any time during a fiscal period. D. Revenue subsidiary ledgers are never required. 5 Copyright © 2018 Pearson Education, Inc.
Answer: B Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 18. The "Unencumbered Balance" in an expenditure subsidiary ledger represents A. Appropriations less expenditures. B. Appropriations less encumbrances. C. Appropriations less expenditures and encumbrances. D. Estimated revenues less appropriations. Answer: C Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 19. Common functional categories of expenditures in governmental funds include all of the following except A. Public Safety. B. Health and Sanitation. C. Highways and Streets. D. Utilities. Answer: D Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Easy Classification: Application AACSB Category: Analytical thinking 20. Managers may ration expenditure authority into either monthly or quarterly expenditure ceilings. This would be an example of A. An allotment. B. An allocation. C. A ration. D. An appropriation. Answer: A Objective: LO 3.2 Explain the role of the budget in governmental fund planning, budgetary control, budgetary accounting, and budgetary reporting. 6 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 21. During the year, Nathan Township amended their General Fund budget to reflect an increase in appropriations of $50,000 to be funded by an appropriation of existing fund balance. What would the necessary budgetary entry be to reflect this amendment?
A. B. C. D.
Debit $50,000
Appropriations Revenues Appropriations Budgetary Fund Balance Revenues Appropriations Budgetary Fund Balance Appropriations
Credit 50,000
$50,000 50,000 $50,000 50,000 $50,000 50,000
Answer: D Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 22. Which of the following budgetary entries would the town of Geneva make upon adoption of its Special Revenue Fund Budget for the year? Assume the following: Estimated Revenues Appropriations A.
B.
C.
D.
$6,400,000 6,080,000
Appropriations Budgetary Fund Balance Estimated Revenues Estimated Revenues Appropriations Budgetary Fund Balance Expenditures Budgetary Fund Balance Revenues Appropriations Estimated Revenues
7 Copyright © 2018 Pearson Education, Inc.
Debit $6,080,000 320,000
Credit
$6,400,000 $6,400,000 $6,080,000 320,000 $6,080,000 320,000 $6,400,000 $6,400,000 $6,400,000
Answer: B Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 23. Which of the following budgetary entries would the township of Brussels make upon adoption of its General Fund budget for the year? Assume the following: Estimated Revenues $10,365,000 Appropriations 10,500,000 Estimated Other Financing Sources (OFS) 200,000 Estimated Other Financing Uses (OFU) 15,000
A.
B.
C.
D.
Appropriations Estimated OFU Budgetary Fund Balance Estimated Revenues Estimated OFS Appropriations Budgetary Fund Balance Estimated Revenues Estimated OFS/OFU, net Estimated Revenues Estimated OFS Appropriations Estimated OFU Budgetary Fund Balance Estimated Revenues Estimated OFS/OFU, net Appropriations Excess
Debit $10,500,000 15,000 50,000
Credit
$10,365,000 200,000 $10,500,000 50,000 $10,365,000 185,000 $10,365,000 200,000 $10,500,000 15,000 50,000 $10,365,000 185,000 $10,500,000 50,000
Answer: C Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Difficult 8 Copyright © 2018 Pearson Education, Inc.
Classification: Application AACSB Category: Application of knowledge 24. A city ordered uniforms with an expected cost of $6,000 for policemen. The credit required to record this transaction is A. Appropriations. B. Encumbrances. C. Vouchers payable. D. Encumbrances Outstanding. Answer: D Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 25. A city ordered uniforms with an expected cost of $6,000 for policemen. This amount is encumbered. The uniforms are received with an invoice of $5,900. The entries to record the receipt of the uniforms should include a debit to A. Encumbrances of $6,000. B. Encumbrances Outstanding of $5,900. C. Encumbrances Outstanding of $6,000. D. Appropriations of $100. Answer: C Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 26. A city ordered uniforms with an expected cost of $6,000 for policemen. This amount is encumbered. The uniforms are received with an invoice of $5,900. The entries to record the receipt of the uniforms should include a credit to A. Encumbrances of $6,000. B. Encumbrances Outstanding of $6,000. C. Encumbrances of $5,900. D. Appropriations of $100. Answer: A Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate 9 Copyright © 2018 Pearson Education, Inc.
Classification: Application AACSB Category: Analytical thinking 27. The Town of Red Herring issued $60,000 of purchase orders. Assume that when all orders were received, the actual cost was $59,000. How much would be recorded as expenditures when the purchase orders were issued? A. $60,000 B. $59,000 C. $1,000 D. $0 Answer: D Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 28. The presentation of a governmental fund budgetary comparison statement or schedule may be part of the A. Basic financial statements and include the General Fund and certain Special Revenue Funds. B. Basic financial statements and include the General Fund only. C. Required supplementary information and include all governmental funds with a legally adopted budget. D. Required supplementary information and include the General Fund only. Answer: A Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 29. A governmental fund budgetary comparison statement or schedule should A. Be prepared on the same basis the budget was enacted. B. Always be prepared on a GAAP basis. C. Always be prepared on a cash basis. D. Be prepared only for the General Fund. Answer: A Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Concept 10 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of knowledge 30. When preparing a budgetary comparison statement for a General Fund, which column is optional? A. Final amended budget. B. Original budget. C. Variance comparing the final budget to the actual amounts on a budgetary basis. D. Actual amounts on a budgetary basis. Answer: C Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 31. The Town of Red Herring issued $60,000 of purchase orders. Assume that when all orders were received, the actual cost was $59,000. How much would be recorded as expenditures when the goods are received? A. $60,000. B. $59,000. C. $1,000. D. $0. Answer: B Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 32. Which of the following is not a common revenue source in a governmental fund budget? A. Property taxes. B. Other financing sources. C. Charges for services. D. Investment income or interest. Answer: B Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge
11 Copyright © 2018 Pearson Education, Inc.
33. The Town of Red Herring issued $60,000 of purchase orders and recorded the encumbrance. Assume that when all orders were received, the actual cost was $59,000. What would be the net change in the unencumbered balance when the goods are received? A. $60,000 increase. B. $1,000 increase. C. $1,000 decrease. D. $59,000 decrease. Answer: B Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 34. The following information pertains to the Scott County General Fund: Appropriations Estimated Revenues Expenditures Revenues
$15,000,000 14,000,000 14,800,000 14,200,000
The change in Scott County's General Fund fund balance for the year is a A. $1,600,000 decrease. B. $1,000,000 decrease. C. $600,000 decrease. D. $400,000 increase. Answer: C Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking
12 Copyright © 2018 Pearson Education, Inc.
35. The following information pertains to the Richardson County General Fund: Appropriations Estimated Revenues Expenditures Revenues Long-term note issue proceeds Short-term note principal retirements Operating transfers to other funds
$10,000,000 12,000,000 12,800,000 9,200,000 1,000,000 250,000 75,000
The change in Richardson County's General Fund fund balance for the year is a A. $2,600,000 decrease. B. $2,675,000 decrease. C. $2,925,000 decrease. D. $3,600,000 decrease. Answer: B Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 36. If a government uses a Budgetary Fund Balance account, the account balance A. Will equal the difference between actual expenditures and appropriations at any point in time. B. Will be the planned increase or decrease in fund balance at any point in time. C. Will equal the difference between actual revenues and budgeted revenues at any point in time. D. Will equal the difference between actual revenues and actual expenditures and encumbrances for the year. Answer: B Objective: LO 3.1 Explain basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.” Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge
13 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 4 The General Fund and Special Revenue Funds
1. Which of the following is not a characteristic of the General Fund? A. Is used to account for all financial resources that are not restricted, committed, or assigned to a specific purpose and consequently accounted for in another fund. B. Is used by all governments that report governmental fund activities. C. Requires a combining statement at year end for governments that have more than one General Fund. D. Is established at inception of a government and exists throughout its life. Answer: C Objective: LO 4.1 Discuss differences and similarities between the General Fund and Special Revenue Funds and explain their measurement focus and basis of accounting. Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 2. A Special Revenue Fund A. Is used to account for resources restricted or committed to expenditures for capital outlay or debt service purposes. B. Must be used to account for all expendable restricted or committed resources. C. Must include resources from a revenue source that is restricted or committed to expenditures for specific purposes other than debt service or capital outlay. D. Must be used to account for all nonexpendable, restricted or committed resources. Answer: C Objective: LO 4.1 Discuss differences and similarities between the General Fund and Special Revenue Funds and explain their measurement focus and basis of accounting. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 3. A school district receives a federal grant of $200,000 that is restricted to support a program designed to teach elementary school students a foreign language. The grant pays for only about five percent of the program costs. The remaining funds for the program come from a special tax levy made for this purpose. The program is accounted for in one fund. Which of the following funds could be used for this activity? A. Special Revenue Fund. B. Enterprise Fund. C. General Fund. D. Agency Fund. Answer: A Objective: LO 4.1 Discuss differences and similarities between the General Fund and Special Revenue Funds and explain their measurement focus and basis of accounting. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 1 Copyright © 2018 Pearson Education, Inc.
4. The accounting equation for a special revenue fund is A. Assets – Liabilities = Net Position. B. Financial Assets + Deferred Outflows – Related Liabilities – Deferred Inflows = Fund Balance. C. General Capital Assets – Unmatured General Long-Term Liabilities = Net Position. D. Current Assets = Current Liabilities. Answer: B Objective: LO 4.1 Discuss differences and similarities between the General Fund and Special Revenue Funds and explain their measurement focus and basis of accounting. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 5. Each of the following transactions would decrease fund balance in the General Fund except A. The purchase of capital assets. B. The principal repayment of long-term debt. C. Depreciation. D. Salaries and wages. Answer: C Objective: LO 4.1 Discuss differences and similarities between the General Fund and Special Revenue Funds and explain their measurement focus and basis of accounting. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 6. Employees of the City of Calderwood are paid from the General Fund. These employees are paid for amounts earned over a two-week period. The amount due the employees is disbursed one week later. The last payroll period in December ended December 27, 20X2. The fiscal year ended December 31, 20X2. The employees were paid January 3, 20X3. The salaries earned for the last payroll period of 20X2 should be reported as expenditures of A. 20X2. B. 20X2 if paid within the first 60 days of the next year. C. 20X3. D. Either 20X2 or 20X3 depending upon the government's policy, which must be applied consistently. Answer: A Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 7. The city of Brittainville's Special Revenue Fund levied $350,000 in taxes, during the current year. (1% is expected to be uncollectible.) Also during the year, the fund collected $7,500 of interest revenue and $50,000 was transferred from the General Fund. As a result of these transactions fund balance will increase by 2 Copyright © 2018 Pearson Education, Inc.
A. $407,500. B. $404,000. C. $357,500. D. $354,000. Answer: B Objective: 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 8. Ledford County levied property taxes of $10,000,000, 2% of which is expected to be uncollectible. Prior to this new levy, the county still had $ 350,000 of uncollected taxes from previous years. How much should be reported as Taxes Receivable after the new levy has been recorded? A. $10,000,000. B. $9,800,000. C. $10,350,000. D. $10,150,000. Answer: C Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 9. General Fund expenditures for uncollectible accounts receivable should be reported in the period that the receivable is A. Established. B. Written off as uncollectible. C. Legally due and payable. D. There are no expenditures for uncollectible accounts receivable. Answer: D Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 10. A new computer, which had been estimated to cost $28,000, was received for an activity of a special revenue fund. The actual cost of the computer was $29,400. To record this in the special revenue fund, A. Capital assets should be debited for $29,400. B. Expenditures should be debited for $28,000. C. Expenditures should be debited for $29,400. D. There is no entry in the special revenue fund. The General Capital Assets account should be debited for $28,000. 3 Copyright © 2018 Pearson Education, Inc.
Answer: C Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical Thinking 11. If a General Fund purchases capital assets with cash, what effect will this transaction have on the assets and fund balance, respectively, of the fund? A. Neither assets nor fund balance will change (the increase in capital assets will offset the decrease in cash). B. Both assets and fund balance will increase. C. Both assets and fund balance will decrease. D. No effect since the purchase is recorded only in the General Capital Assets account. Answer: C Objective: LO 4.1 Discuss differences and similarities between the General Fund and Special Revenue Funds and explain their measurement focus and basis of accounting. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical Thinking 12. An interfund transfer is A. a reciprocal transaction. B. a nonreciprocal transaction. C. a short-term interfund loan. D. a long-term interfund loan. Answer: B Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Easy Classification: Concept AACSB Category: Application of Knowledge 13. Which of the following interfund activities is classified as a reciprocal transaction? A. Reimbursing one fund from another for expenditures or expenses that were previously recorded in error. B. Moving assets (e.g., cash and inventory) from one fund to another without receiving resources or services in return. C. Transferring Enterprise Fund resources to the General Fund or other funds to subsidize their operations. D. Selling and purchasing goods or services between funds at approximately market value. Answer: D Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 4 Copyright © 2018 Pearson Education, Inc.
14. $40,000 of General Fund expenditures had been paid for from and recorded in a Special Revenue Fund. Upon discovery of this situation, $40,000 was paid from the General Fund to the Special Revenue Fund. This transaction is recorded in the Special Revenue Fund by debiting Cash and crediting A. Expenditures. B. Other financing sources in. C. Transfer in. D. Revenues. Answer: A Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 15. A bill that should have been paid by a Special Revenue Fund was erroneously paid by the General Fund. The General Fund refunds the amount to the Special Revenue Fund. This transaction is an example of an interfund A. Transfer. B. Services provided and used transaction. C. Reimbursement transaction. D. Loan. Answer: C Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 16. $1,000,000 of General Fund cash was contributed to provide permanent capital for a newly established municipal landfill Enterprise Fund. This transaction is an example of an interfund A. Transfer. B. Services provided and used transaction. C. Reimbursement transaction. D. Loan. Answer: A Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 17. General Fund resources of $500,000 were contributed to a Capital Projects Fund to finance a portion of the cost of a major capital project. This transaction is an example of an interfund A. Transfer. B. Services provided and used transaction. 5 Copyright © 2018 Pearson Education, Inc.
C. Reimbursement transaction. D. Loan. Answer: A Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 18. General Fund resources are provided to a Capital Projects Fund to finance a portion of a major capital project. The Capital Projects Fund is required to repay the resources that it received from the General Fund. This transaction is an example of an interfund A. Transfer. B. Services provided and used transaction. C. Reimbursement transaction. D. Loan. Answer: D Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 19. A government's General Fund departments purchased electric services from the government's own Electric Utility Enterprise Fund. This transaction is an example of an interfund A. Transfer. B. Services provided and used transaction. C. Reimbursement transaction. D. Loan. Answer: B Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 20. If an Enterprise Fund transfers $10,000 to the General Fund and the General Fund loans $15,000 to an Internal Service Fund, the effect on the fund balance of the General Fund would be A. An increase of $10,000. B. A net decrease of $5,000. C. A decrease of $15,000. D. A net increase of $5,000. Answer: A Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate 6 Copyright © 2018 Pearson Education, Inc.
Classification: Application AACSB Category: Analytical thinking 21. The city's central garage, which is accounted for as an Internal Service Fund, repairs and maintains all of the city's vehicles. The fire department is accounted for in the General Fund. The Central Garage Internal Service Fund sends a bill to the fire department for $18,000, which represents the cost of maintaining fire trucks for the month. The Central Garage Internal Service Fund should record A. Debit Due from General Fund and credit Revenues. B. Debit Due from General Fund and credit Expenses. C. Debit Expenses and credit Due to General Fund. D. Debit Revenues and credit Due to General Fund. Answer: A Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 22. A city's police department receives goods from an Internal Service Fund for which it has not yet paid the ISF. To record this transaction the city should record a credit to what account in the General Fund? A. Due to the Internal Service Fund. B. Advance from the Internal Service Fund. C. Vouchers payable. D. Assigned fund balance. Answer: A Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 23. Assume the General Fund borrows $50,000 from the Enterprise Fund. The interfund loan is scheduled to be paid back in five years. Which of the following statements properly characterizes the reporting effects of this transaction? A. General Fund Assets increase; General Capital Assets account increase. B. General Fund Assets and Fund Balance increase. C. General Fund Assets and Liabilities increase. D. General Fund Assets and General Long-Term Liabilities account increase. Answer: C Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 7 Copyright © 2018 Pearson Education, Inc.
24. A city's General Fund provides a two-year loan to the Internal Service Fund. To record this transaction the city should record a debit to what account in the General Fund? A. Due from the Internal Service Fund. B. Advance to the Internal Service Fund. C. Advance from the Internal Service Fund. D. Transfer to the Internal Service Fund. Answer: B Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 25. A local school district issued a short-term note payable to purchase $500,000 of recreation equipment. The note will be repaid with General Fund resources. The General Fund would record A. Debit Expenditures – Capital Outlay and credit Due to Bank, for $500,000. B. Debit Capital Assets and credit Notes Payable, for $500,000. C. Debit Capital Assets and credit Revenues, for $500,000. D. Debit Expenditures – Capital Outlay and credit Note Payable, for $500,000. Answer: D Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 26. Taxes receivable of $80,000, which have a related allowance for uncollectible taxes of $8,000, become delinquent. The entry to record this includes a debit to A. Taxes Receivable – Current. B. Allowance for Uncollectible Current Taxes. C. Allowance for Uncollectible Delinquent Taxes. D. Revenues – Property Taxes. Answer: B Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 27. Accounts receivables are determined to be uncollectible and are written off. The following account should be debited: A. Bad Debt Expense. B. Revenue. C. Allowance for Uncollectible Accounts Receivable. D. Accounts Receivable. Answer: C 8 Copyright © 2018 Pearson Education, Inc.
Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 28. In governmental funds, governments must accrue interest on A. General long-term debt. B. General long-term debt, but only if the interest is paid in the first 60 days after year end. C. Short-term debt of the fund. D. Short-term debt of the fund, but only if the interest is paid in the first 60 days after year end. Answer: C Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 29. Which of the following should not be accrued as expenditures in a governmental fund at year end? A. Salaries earned by employees but not paid. B. Repair work performed by contractors, but not completed. C. Interest incurred on short-term debt, but not yet due. D. Interest incurred on long-term debt, but not yet due. Answer: D Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 30. Assume the General Fund has two outstanding investments as of its 6/30/X5 year end, as follows: $100,000 Certificate of Deposit, 6 month original maturity, 3% annual interest rate, purchased 4/30/X5 $500,000 Commercial Paper, 8 month original maturity, 3% annual interest rate, purchased 1/31/X5 The interest revenue that would be recorded in the GAAP-based external financial statements for the General Fund under the fair value method as of 6/30/X5 assuming a 3% interest rate still applies to such investments would be A. $500. B. $6,250. C. $6,750. D. $11,500. Answer: C 9 Copyright © 2018 Pearson Education, Inc.
Objective: LO 4.4 Prepare governmental fund operating statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 31. The Special Revenue Fund of the city of Wakefield ended its fiscal year with revenues of $750,000, other financing sources of $50,000, and expenditures of $725,000. The closing entry in the Special Revenue Fund would be
A.
B.
C.
D.
Expenditures................................................................... Net profit ........................................................................ Revenues ................................................................... Other Financing Sources ........................................... Expenditures................................................................... Other Financing Uses ..................................................... Revenues ................................................................... Other Financing Sources ................................................ Revenues ........................................................................ Other Financing Sources ................................................ Expenditures.............................................................. Other Financing Uses ..................................................... Revenues ........................................................................ Other Financing Sources ................................................ Expenditures.............................................................. Fund Balance.............................................................
Debit $725,000 75,000
Credit
$750,000 50,000 $725,000 75,000 $750,000 50,000 $750,000 50,000 $725,000 75,000 $750,000 50,000 $725,000 75,000
Answer: D Objective: LO 4.2 Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 32. For a transaction to be classified as an extraordinary item it must be A. Unusual in nature and infrequent in occurrence. B. Unusual in nature or infrequent in occurrence but not under the control of management. C. Unusual in nature or infrequent in occurrence and under the control of management. D. Unusual in nature or infrequent in occurrence. Answer: A Objective: LO 4.4 Prepare governmental fund operating statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 33. For a transaction to be classified as a special item it must be 10 Copyright © 2018 Pearson Education, Inc.
A. Unusual in nature or infrequent in occurrence but not under the control of management. B. Unusual in nature and infrequent in occurrence. C. Unusual in nature or infrequent in occurrence and under the control of management. D. Unusual in nature or infrequent in occurrence. Answer: C Objective: LO 4.4 Prepare governmental fund operating statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 34. Which of the following events could potentially qualify for reporting as an extraordinary item? A. A city government sells city hall. B. City Hall is hit by lightning and is significantly damaged by fire. C. The city offers employees an early retirement incentive package and 15 employees accept the offer. D. City has unexpected loss on sale of an investment in AT&T stock. Answer: B Objective: LO 4.4 Prepare governmental fund operating statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 35. The City of Trixie reports in their General Fund a $505,000 special item (an inflow) and a $1,750,000 extraordinary item (an outflow) in the same year. Which of the following statements would be false? A. Fund balance would decrease $1,245,000. B. The extraordinary item and the special item should be reported separately on the face of the Statement of Revenues, Expenditures, and Changes in Fund Balance. C. Fund balance would increase by only $505,000. D. Of extraordinary items and special items, only special items are under the control of management. Answer: C Objective: LO 4.4 Prepare governmental fund operating statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 36. Which of the following would not result in a portion of fund balance being classified as nonspendable? A. Advances to other funds. B. Inventory of materials and supplies. C. A city council passing enabling legislation that requires proceeds from a newly authorized sales tax be spent on a downtown revitalization project. D. Prepaid insurance. Answer: C Objective: LO 4.3 Prepare governmental fund balance sheets. 11 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 37. Which of the following fund balance classifications is not for GAAP financial statement reporting? A. Nonspendable Fund Balance. B. Budgetary Fund Balance. C. Committed Fund Balance. D. Unassigned Fund Balance. Answer: B Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 38. When total fund balance of a Special Revenue Fund is a negative amount, which fund balance category must be zero? A. Assigned. B. Restricted. C. Unassigned. D. Committed. Answer: A Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 39. Which fund balance account may contain a negative balance? A. Assigned. B. Restricted C. Unassigned D. Committed. Answer: C Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 40. Restricted fund balance in the General Fund can be the result of A. A city budget director setting aside funds to be spent for city street improvement. B. Donors giving monies to a city if only the earnings on investment of the gift can be spent for park beautification and the original gift principal must be maintained intact. C. A city council passing enabling legislation that requires proceeds from a newly authorized sales tax be spent on a downtown revitalization project. D. A city council taking a formal action to set aside money for a future contract. Answer: C 12 Copyright © 2018 Pearson Education, Inc.
Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 41. Unassigned fund balance cannot be described as A. The residual fund balance that remains after accounting for nonspendable fund balance, restricted fund balance, committed fund balance, and assigned fund balance. B. A fund balance category that is used to report positive and negative balances in any governmental fund. C. The amount of governmental fund net assets with no constraints on their use. D. A fund balance category that is used to report positive and negative balances in the General Fund, but only negative balances in other governmental funds. Answer: B Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical thinking 42. Assume a city's General Fund has $75,000 of inventory, $600,000 of long-term loans receivable (not constrained to any particular use), $250,000 long-term loans due from other funds (not constrained to a particular use), and $1,900,000 of investments. Based solely on this information, the city's nonspendable fund balance would be A. $925,000. B. $850,000. C. $675,000. D. $600,000. Answer: A Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 43. Which of the following could never be considered part of assigned fund balance? A. The finance director sets aside a substantial amount of resources for a special project. B. Unassigned amounts loaned to another fund for more than one year. C. Program manager – with blessing of city council – sets aside funds for multi-year project. D. Fund balances remaining in a Special Revenue Fund after determining the appropriate balances for nonspendable fund balance, restricted fund balance, and committed fund balance. Answer: B Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Difficult Classification: Concept AACSB Category: Analytical thinking 44. Which of the following is an appropriate use of a fund balance restriction? 13 Copyright © 2018 Pearson Education, Inc.
A. To report the amount of capital assets acquired during the year. B. To indicate that the finance director is setting aside a substantial amount of resources for a special project. C. To report the amount of long-term debt that will mature in the next 12 months. D. To report amounts that can only be used for specific purposes due to debt covenant constraints. Answer: D Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 45. Fund balance may be assigned when A. Management determines that a portion of unassigned fund balance should be set aside for the construction of a new fire station. B. The city council passes an ordinance to set aside a portion of unassigned fund balance for construction of a new fire station. C. Management believes that a portion of restricted fund balance should be set aside for the construction of a new fire station. D. Management determines it needs a predetermined amount of materials and supplies inventory at the end of each year. Answer: A Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 46. Hannah County has a total fund balance in the General Fund as of the end of the year of $1,565,000. Assume the following: The budget officer decided to set aside $405,000 for new road maintenance. The county's governing board had previously given her this authority. Unspent restricted drug enforcement grant proceeds of $75,000. The county's governing board passed a resolution to commit $500,000 to use for construction of a fleet maintenance facility. In the year-end financial statements, Hannah County would report unassigned fund balance and assigned fund balance, respectively, in the General Fund as A. $1,085,000 unassigned fund balance; $405,000 assigned fund balance. B. $660,000 unassigned fund balance; $905,000 assigned fund balance. C. $585,000 unassigned fund balance; $405,000 assigned fund balance. D. $495,000 unassigned fund balance; $480,000 assigned fund balance. Answer: C Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Difficult Classification: Synthesis AACSB Category: Analytical thinking
14 Copyright © 2018 Pearson Education, Inc.
47. Hannah County has a total fund balance in the General Fund as of the end of the year of $1,565,000. Assume the following: The budget officer decided to commit $405,000 for new road maintenance. (The county's governing board had previously given her this authority.) Unspent restricted drug enforcement grant proceeds of $75,000 The county's governing board passed a resolution to commit $500,000 to for construction of a fleet maintenance facility In the year-end financial statements, Hannah County would report committed fund balance in the General Fund as A. $75,000. B. $500,000. C. $575,000. D. $905,000. Answer: B Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 48. The following information pertains to the Scott County General Fund: Expenditures $14,800,000 Revenues $14,200,000 The change in fund balance Scott County's General Fund for the year is a A. $1,600,000 decrease. B. $1,000,000 decrease. C. $600,000 decrease. D. $400,000 increase. Answer: C Objective: LO 4.4 Prepare governmental fund operating statements. Difficulty Level: Easy Classification: Application AACSB Category: Analytical thinking 49. The following information pertains to the Richardson County General Fund: Expenditures $ 12,800 Revenues 9,200 Long-term bond issue proceeds 1,000 Short-term note principal retirements 250 Operating transfers to other funds 75 The change in fund balance for Richardson County's General Fund for the year is a A. $2,600 decrease. B. $2,675 decrease. C. $2,925 decrease. D. $3,600 decrease. Answer: B Objective: LO 4.4 Prepare governmental fund operating statements. Difficulty Level: Moderate 15 Copyright © 2018 Pearson Education, Inc.
Classification: Application AACSB Category: Analytical thinking 50. A government levies property taxes of $2,500,000, 1% of which are expected to prove uncollectible. The property taxes should be reported in the General Fund statement of revenues, expenditures, and changes in fund balances as A. Revenues of $2,500,000 and expenditures of $25,000. B. Revenues of $2,500,000 and other financing uses of $25,000. C. Revenues of $2,475,000 and no expenditures or other financing uses. D. Other financing sources of $2,500,000 and expenditures of $25,000. Answer: C Objective: LO 4.4 Prepare governmental fund operating statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 51. Which of the following does not affect the "Excess of Revenues over Expenditures"? A. Purchase of capital assets. B. Incurring and paying salaries. C. Property taxes levied and collected in the year. D. Transfers from Enterprise Funds. Answer: D Objective: LO 4.4 Prepare governmental fund operating statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 52. A city acquired a dump truck for general government usage. The government paid nothing down and signed a 10%, short-term note payable for the price of the truck, $80,000. The note will mature in the next fiscal year. What items should appear in the statement of revenues, expenditures, and changes in fund balance for the General Fund in the year the truck was purchased? A. Capital outlay expenditures of $80,000, but no interest. B. Interest expenditures on the note, but no capital outlay expenditures since nothing was paid. C. Capital outlay expenditures of $80,000 and interest expenditures on the note. D. Depreciation expense (depending on the estimated useful life of the truck) and interest expenditures on the note. Answer: C Objective: LO 4.4 Prepare governmental fund operating statements. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 53. The General Fund had the following transactions during the month of June: (1) took delivery of 10 new patrol cars that had been ordered and encumbered the previous month — the total costs were $270,000; (2) issued purchase orders totaling $25,000 for various supplies; (3) 16 Copyright © 2018 Pearson Education, Inc.
issued payroll checks in the amount of $110,000; and (4) various other short term liabilities were incurred in the amount of $1,500. Expenditures in the General Fund for the month of June would be A. $381,500. B. $136,500. C. $111,150. D. $25,000. Answer: A Objective: LO 4.4 Prepare governmental fund operating statements. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 54. Which of the following should be reported in the statement of revenues, expenditures, and changes in fund balance of a General Fund? A. A short-term loan to another governmental fund. B. A long-term loan to another governmental fund. C. Repayment of a short-term loan from a bank. D. Repayment of a long-term loan from a bank. Answer: D Objective: LO 4.4 Prepare governmental fund operating statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 55. Which of the following would be classified as Other Financing Sources (Uses)? A. Purchase of capital assets. B. Proceeds from the issuance of 6-month notes payable. C. Transfers from an Internal Service Fund. D. Special item. Answer: C Objective: LO 4.4 Prepare governmental fund operating statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 56. Which of the following is not a General Fund financial statement? A. Balance Sheet. B. Statement of Revenues, Expenditures, and Changes in Fund Balance. C. Statement of Revenues, Expenditures, and Changes in Fund Balance—Budget and Actual. D. Statement of Cash Flows. Answer: D Objective: LO 4.1 Discuss differences and similarities between the General Fund and Special Revenue Funds and explain their measurement focus and basis of accounting. Difficulty Level: Easy Classification: Concept 17 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of knowledge 57. Which General Fund financial statement may be reported using a basis of accounting other than GAAP? A. Balance Sheet. B. Statement of Revenues, Expenditures, and Changes in Fund Balance. C. Statement of Revenues, Expenditures, and Changes in Fund Balance—Budget and Actual. D. Statement of Revenues, Expenses, and Changes in Fund Net Position. Answer: C Objective: LO 4.5 Prepare governmental fund budgetary comparison statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge
Supplemental Questions The following questions include outstanding orders at year end as part of the situation. 58. Which of the following could never be considered part of assigned fund balance? A. The finance director sets aside a substantial amount of resources for a special project. B. Unassigned amounts loaned to another fund for more than one year. C. Expected costs of orders outstanding at year end that are to be filled in the next fiscal year. D. Fund balances remaining in a Special Revenue Fund after determining the appropriate balances for nonspendable fund balance, restricted fund balance, and committed fund balance. Answer: B Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Difficult Classification: Concept AACSB Category: Analytical thinking 59. Which of the following is an appropriate use of a fund balance restriction? A. To report the amount of capital assets acquired during the year. B. To indicate that the finance director is setting aside a substantial amount of resources for a special project. C. To report the expected costs of orders outstanding at year end that are to be filled in the next fiscal year. D. To report amounts that can only be used for specific purposes due to debt covenant constraints. Answer: D Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 18 Copyright © 2018 Pearson Education, Inc.
60. Hannah County has a total fund balance in the General Fund as of the end of the year of $1,565,000. Assume the following: The budget officer decided to set aside $405,000 for new road maintenance. The county's governing board had previously given her this authority. Purchase orders of $41,000, which were not related to restricted or committed resources, were outstanding at year end. Unspent restricted drug enforcement grant proceeds of $75,000. The county's governing board passed an ordinance to use $500,000 for construction of a fleet maintenance facility. In the year-end financial statements, Hannah County would report unassigned fund balance and assigned fund balance, respectively, in the General Fund as A. $949,000 unassigned fund balance; $41,000 assigned fund balance. B. $544,000 unassigned fund balance; $405,000 assigned fund balance. C. $544,000 unassigned fund balance; $446,000 assigned fund balance. D. $1,044,000 unassigned fund balance; $446,000 assigned fund balance. Answer: C Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Difficult Classification: Synthesis AACSB Category: Analytical thinking
61. Hannah County has a total fund balance in the General Fund as of the end of the year of $1,565,000. Assume the following: The budget officer decided to set aside $405,000 for new road maintenance. (The county's governing board had previously given her this authority.) Unspent restricted drug enforcement grant proceeds of $75,000 Purchase orders of $41,000, which were not related to restricted or committed resources, were outstanding at year end, The county's governing board passed an ordinance to use $500,000 for construction of a fleet maintenance facility In the year-end financial statements, Hannah County would report committed fund balance in the General Fund as A. $41,000. B. $75,000. C. $500,000. D. $541,000. Answer: C Objective: LO 4.3 Prepare governmental fund balance sheets. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge
19 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 4
Problem 1 – Matching events with types of interfund transactions Transactions in governmental accounting may be classified as being either:
External – transactions between the governmental unit and its citizens, employees, suppliers, creditors, or other governments. Internal – transactions between funds
A listing of all possible transactions would then look like this: A. External transactions B. Long-term loans C. Transfers D. Interfund services provided and used E. Reimbursements F. Short-term loans G. Other transactions between funds that do not meet the criteria B to F Identify the type of transaction that best fits each of the following events: 1. A government-owned and operated electric utility billed its industrial and commercial users $2,000,000 for electric usage. 2. The same government-owned and operated electric utility billed the local government $150,000 for electric usage. The entire bill was sent to the General Fund. 3. Some General Fund money was advanced to a Capital Projects Fund to allow construction on a project to begin before related bonds were to be issued. The amount is to be repaid in 6 months. 4. A vehicle used by the Parks and Recreation Activity, which is accounted for in the General Fund, was reassigned to the Golf course, which is accounted for in an Enterprise Fund. 5. Property taxes were levied by the General Fund on the property owners of the City. 6. The annual payment from the General Fund to a Debt Service Fund for the annual longterm debt principal and interest payment on some serial bonds issued five years earlier by the General Fund. 7. An invoice that should have been paid by Special Revenue Fund #1 was erroneously paid by Special Revenue Fund #2. Money was paid by SRF #1 to SRF #2 to correct the error. 8. Computer support for government functions is provided centrally by an Automated Data Processing Internal Service Fund which bills each department monthly based on CPU time. The bill for November was sent to the General Fund for payment. 9. Special Revenue Fund cash was contributed to establish an Enterprise Fund. 10. A payment from an Enterprise Fund to the General Fund for utilities paid for with General Fund cash and recorded as expenditures in the General Fund in the current year (See entry 2). 1 Copyright © 2018 Pearson Education, Inc.
11. The remaining assets of a Debt Service Fund were transferred to the General Fund for use in operations. 12. The General Fund provided money to an Enterprise Fund to purchase capital assets. This payment is to be repaid in 5 years without interest.
2 Copyright © 2018 Pearson Education, Inc.
Answers: 1. A 2. D 3. F 4. G 5. A 6. C 7. E 8. D 9. C 10. E 11. C 12. B
3 Copyright © 2018 Pearson Education, Inc.
Problem 2 – Matching: Financial Statement Preparation Listed below are the sections of the Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balance that would be prepared for the General Fund: Balance Sheet
Statement of Revenues, Expenditures, and Changes in Fund Balance
A Assets B Liabilities C Fund Balance
D Revenues E Expenditures F Other Financing Sources and Uses, including transfers G Special and Extraordinary Items H Fund Balance Certain accounts from the general ledger or other transactions of the City of Six Mile are listed below. For each account or transaction identify the section of the appropriate financial statement where each account would be reported. If an account is not reported on either statement, indicate that by using a X. A section may be used more than once. 1. Services rendered to the City by employees 2. Allowance for Uncollectible Taxes 3. Advance to Enterprise Fund 4. Sale of park land (considered unusual in nature but under the control of management) 5. Property taxes levied and collected 6. Fund Balance – Nonspendable – Inventory 7. Vouchers Payable 8. Transfer to the Special Revenue Fund 9. Correction of Prior Year Error 10. Due to Internal Service Fund 11. Purchase of a capital asset 12. Building inspection services provided to contractors 13. Receipt of materials ordered 14. Payment from Fund A to Fund B for transaction erroneously recorded in Fund B 15. Insurance recovery from a tornado (tornado was considered unusual and infrequent) 16. Investments 17. Interest earned on investments 18. Short-term borrowing from a bank 19. Interest paid on short-term loan 20. Due from Special Revenue Fund
4 Copyright © 2018 Pearson Education, Inc.
Answers: 1. E 2. A 3. A 4. G (Special item) 5. D 6. C 7. B 8. F 9. H 10. B 11. E 12. D 13. E 14. X (Reimbursement) 15. G (Extraordinary item) 16. A 17. D 18. B 19. E 20. A
5 Copyright © 2018 Pearson Education, Inc.
Problem 3 – Journal Entries and Transaction Analysis Selected transactions of the City of Miser Station General Fund for the 20X1 fiscal year are presented on the following page. All amounts are in thousands of dollars. General instructions: a. Dates and formal explanations may be omitted, but number your entries appropriately. b. All interest rates are annual percentage rates (APRs). c. Record your entries on the lined paper provided with your answer pages. Sufficient space has been provided to allow you to skip lines between entries. d. When recording Revenues, classify them as Revenues–Property Taxes or Revenues– Other. When recording expenditures, classify them as Expenditures–Operating, Expenditures–Debt Service, or Expenditures–Capital Outlay. e. Show all work for any amount required in an entry that is not given in the exam (except when recording the amount necessary to balance the journal entry). Requirements: 1. Prepare the General Fund general ledger journal entries for the transactions. If no entry is required, do not leave it blank. State "No Entry Required" and briefly explain why. 2. For any transaction affecting the General Capital Assets or General Long-Term Liabilities accounts, indicate the amount of effect on each element of the accounting equation for those accounts. If a transaction has no effect on a particular element, use “NE.” Transactions: 1. The City Council approved the following budget for the fiscal year: Estimated Revenues ................................................................................. $20,000 Appropriations ......................................................................................... 18,900 Of these amounts, $15,000 is for operating expenditures and $12,000 is for property tax revenues. 2. The property tax levy was recorded, $12,000, of which $600 will probably prove uncollectible. 3. Purchase orders were approved and issued for the following: Non-inventory supplies ............................................................................ $150 Police vehicle ........................................................................................... 20 4. All of the non-inventory supplies on order from entry 3 were received. The actual cost was $155 and payment will be made at a later date.
6 Copyright © 2018 Pearson Education, Inc.
5. Cash receipts were (see entry 2): Property Taxes ................................................................................... $10,500 License and Permits ........................................................................... 70 Fines and Forfeits ............................................................................... 25 Investment Earnings........................................................................... 5 Total Receipts .................................................................................... $10,600 6. Current taxes receivable (entries 2 and 5) and the related allowance (entry 2) were reclassified as delinquent after the due date. 7. A loan of $50 was made from the General Fund to the City Gasoline Tax Fund (CGTF), which is accounted for as a Special Revenue Fund. The loan will be repaid in five years. 8. The $10 of remaining assets (cash) from a terminated Capital Projects Fund (CPF) were received. 9. A pickup truck purchased seven years ago for $30 with General Fund money was sold for $5. The City's proprietary funds usually depreciate this type of asset over a 10-year period using straight-line depreciation with zero (0) salvage value and disposes of assets at the end of its useful life. 10. Paid $25 to City employees. 11. Sold land for $300, which had been used many years ago as a public park. The land had been purchased for $140. 12. General Fund resources of $250 were paid to a newly established Capital Projects Fund. The resources will not be repaid to the General Fund. 13. The City paid $140 from its General Fund to the fund that services the City’s long-term debt. 14. The police vehicle (entry 3) was received and $19 in cash was paid to the vendor. 15. Paid $500 to the Debt Service Fund to provide for upcoming principal and interest payments. 16. Paid $5,000 to the City Airport Enterprise Fund to provide financing for a major expansion project; $2,000 is not required to be repaid, but $3,000 is to be repaid at the end of five years. 17. Loaned $320 to the Capital Projects Fund—to be repaid in 90 days. 18. Paid $12 to the Special Revenue Fund to repay it for General Fund employee salaries that were inadvertently recorded as expenditures of that fund. 19. Received a bill from the Utility Enterprise Fund for electricity usage charged to General Fund departments and agencies, $300. This bill will be paid at a later date. 20. Instructed the Library Special Revenue Fund to pay its portion of the utility bill (entry 19), $25; the cash was not immediately received. 21. The Library Special Revenue Fund paid the amount owed (entry 20). 22. Taxes receivable of $100 were determined to be uncollectible and were written off.
7 Copyright © 2018 Pearson Education, Inc.
Answers: Requirement #1 #
Accounts 1 Estimated Revenues Appropriations Budgetary Fund Balance 2 Taxes Receivable—Current Revenues – Property Taxes Allowance for Uncollectible Taxes—Current
Debit 20,000
18,900 1,100 12,000 11,400 600
3 Encumbrances Encumbrances Outstanding
170
4 Encumbrances Outstanding Expenditures – Operating Encumbrances Vouchers Payable
150 155
170
150 155
5 Cash Taxes Receivable—Current Revenues – Other
10,600
6 Taxes Receivable—Delinquent Allowance for Uncollectible Taxes—Current Taxes Receivable—Current Allowance for Uncollectible Taxes—Delinquent
1,500 600
10,500 100
1,500 600
7 Advance to CGTF Cash
50
8 Cash OFS – Transfer from CPF
10
9 Cash OFS – Proceeds from sale of vehicle
5
10 Expenditures – Operating Cash
25
# 11 Cash
Credit
50
Accounts
10
5
25 Debit
Credit 300
8 Copyright © 2018 Pearson Education, Inc.
Special Item – Sale of land
300
12 OFU – Transfer to CPF Cash
250
13 OFU – Transfer to DSF Cash
140
14 Encumbrances Outstanding Expenditures – Capital Outlay Encumbrances Cash
20 19
15 OFU – Transfer to DSF Cash
500
16 Advance to Airport Enterprise Fund OFU – Transfer to Airport Enterprise Fund Cash
250
140
20 19
500 3,000 2,000 5,000
17 Due from CPF Cash
320
18 Expenditures – Operating Cash
12
19 Expenditures – Operating Due to Utility Enterprise Fund
300
20 Due from Library Special Revenue Fund Expenditures – Operating
25
21 Cash Due from Library Special Revenue Fund
25
22 Allowance for Uncollectible Taxes—Delinquent Taxes Receivable—Delinquent
100
320
9 Copyright © 2018 Pearson Education, Inc.
12
300
25
25
100
Answers: Requirement #2 Trans # 9 11 14
GCA (30)* (140) 19
GLTL NE NE NE
Net Position (30)* (140) 19
*There are several possible answers to this question, all of them correct at this stage of the book: The decrease of $30 indicates removing the historical cost of the vehicle. A decrease of $30 and an increase of $21 in the GCA and Net Position columns would indicate removing the historical cost of the asset and its accumulated depreciation. A decrease of $9 in the GCA and Net Position columns would indicate removing the net book value of the asset from the books.
10 Copyright © 2018 Pearson Education, Inc.
Problem 4 – Journal Entries and Transaction Analysis Selected transactions of the City of Miser Station General Fund for the 20X1 fiscal year are presented on the following page. All amounts are in thousands of dollars. General instructions: a. Dates and formal explanations may be omitted, but number your entries appropriately. b. All interest rates are annual percentage rates (APRs). c. Record your entries on the lined paper provided with your answer pages. Sufficient space has been provided to allow you to skip lines between entries. d. When recording Revenues, classify them as Revenues–Property Taxes or Revenues– Other. When recording expenditures, classify them as Expenditures–Operating, Expenditures–Debt Service, or Expenditures–Capital Outlay. Additional detail for budgetary entries is not required. e. Show all work for any amount required in an entry that is not given in the exam (except when recording the amount necessary to balance the journal entry). Requirements: 1. Prepare the general ledger journal entries for the transactions. If no entry is required, do not leave it blank. State "No Entry Required" and briefly explain why. 2. For any transaction affecting the General Capital Assets or General Long-Term Liabilities accounts, indicate the amount of effect on each element of the accounting equation for those accounts. If a transaction has no effect on a particular element, use “NE.” Transactions: 1. The City Council approved the following budget for the fiscal year: Appropriations ......................................................................................... $14,000 Estimated Revenues ................................................................................. 12,000 Of these amounts, $8,000 is for operating expenditures and $10,000 is for property tax revenues. 2. The property tax levy was recorded, $10,000, of which 3% will probably prove uncollectible. 3. The city ordered $200 in supplies. 4. The City borrowed $500 from the Blount National Bank on a two-month, 6% note. 5. Cash receipts were (see entry #2):
11 Copyright © 2018 Pearson Education, Inc.
Property Taxes ......................................................................................... $8,500 License and Permits ................................................................................. 150 Total Receipts .................................................................................... $8,650 6. The City Council revised the budget (see entry #1). Appropriations were reduced $3,000 and Estimated Revenues were reduced $2,000 (Appropriations for Expenditures – Operating were reduced $1,000; property tax revenues were not affected). 7. Of the previous supplies order (Entry #3), 75% of the order was received. The actual cost of the goods received was $135. The amount due the vendor will be paid at a later date. 8. City employees were paid, $25. 9. The city ordered a new police car. The estimated cost is $21. 10. The City repaid the short-term note (see entry #4) when due. 11. Wrote off $100 of taxes receivable as uncollectible (see entry #2). 12. Paid $12 to the Special Revenue Fund to repay it for General Fund employee salaries that were inadvertently recorded as expenditures of that fund. 13. The city received the police car (see entry #9). The actual cost was $22. The vendor will be paid at a later date. 14. The city collected $50 for licenses. 15. The city paid $157 on account.
12 Copyright © 2018 Pearson Education, Inc.
Answers: Requirement #1 # Accounts 1 Estimated Revenues Budgetary Fund Balance Appropriations 2 Taxes Receivable Allowance for Uncollectible Taxes—Current ($10,000 × 3%) Revenues – Property Taxes
Debit 12,000 2,000
Credit
14,000 10,000 300 9,700
3 Encumbrances Encumbrances Outstanding
200
4 Cash Note Payable
500
200
500
13 Copyright © 2018 Pearson Education, Inc.
Requirement #1 (continued) # Accounts 5 Cash Taxes Receivable Revenues – Other
Debit 8,650
8,500 150
6 Appropriations Budgetary Fund Balance Estimated Revenues
3,000
7 Encumbrances Outstanding Encumbrances
150
Expenditures – Operating Vouchers Payable
135
8 Expenditures – Operating Cash
25
9 Encumbrances Encumbrances Outstanding
21
10 Note Payable Expenditures – Debt Service – Interest (500 × 6% × 2/12) Cash
500 5
11 Allowance for Uncollectible Taxes—Current Taxes Receivable
100
12 Expenditures – Operating Cash
12
13 Encumbrances Outstanding Encumbrances
21
Expenditures – Capital Outlay Vouchers Payable
Credit
1,000 2,000
150
135
25
21
505
100
12
21 22 22
14 Cash Revenues – Other
50
15 Vouchers Payable Cash
157
50
157
14 Copyright © 2018 Pearson Education, Inc.
Requirement #2 Trans # 13b
GCA 22
GLTL NE
Net Position 22
15 Copyright © 2018 Pearson Education, Inc.
Problem 5 – Financial Statement Preparation/Presentation (A) Prepare, using good form, a skeleton General Fund Statement of Revenues, Expenditures, and Changes in Fund Balances. (B) Next, insert the number representing each of the following items in the appropriate location in the statement. If any item is not reported in the statement, explain why not. 1. Property taxes levied for and collected in the current year 2. Estimated cost of goods ordered but not received by year end 3. Transfer to another fund 4. Salary costs incurred during the year 5. Payment to retire long-term note principal 6. Payment of interest on long-term note 7. Accrued interest on long-term note 8. Receipt of proceeds of short-term note 9. Payment of interest on short-term note 10. Accrued interest on short-term note 11. Payment to retire principal of short-term note 12. Payment to establish an Enterprise Fund activity; no repayment expected 13. Long-term loan from the General Fund to an Internal Service Fund 14. Short-term loan from the General Fund to a Capital Projects Fund 15. Purchase of equipment 16. Purchase of temporary investment in securities 17. Receipt of proceeds from sale of fixed asset 18. Property taxes collected in advance on next year's tax levy 19. Depreciation of equipment 20. Purchase of electricity from the Electric Enterprise Fund
16 Copyright © 2018 Pearson Education, Inc.
Answers: Name of Government General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year Ended … Revenues (By Source) 1 Expenditures (By Function or Program) 4, 5, 6, 9, 10, 15, 20 Excess of Revenues over (under) Expenditures Other Financing Sources (Uses) 3, 12, 17 Net change in Fund Balance Fund Balance, beginning of fiscal year Fund Balance, end of year Not reported: 2—This is an encumbrance, not an expenditure. Encumbrances do not change total fund balance. 7—Interest on general long-term debt is recognized as expenditures in the period that it matures. It is not accrued except in very restrictive circumstances. 8 and 11—Short-term borrowings and repayments thereof do not affect the fund balance of a governmental fund. Fund assets and fund liabilities increase or decrease by equal amounts. 13 and 14—Interfund borrowings create interfund payables and receivables. They do not affect fund balance. Indeed, to allow them to do so, even if long-term, would make manipulation of fund balances quite easy. 16—This transaction does not change the net assets of a fund or its fund balance. 18—These taxes do not meet the availability criterion. A deferred inflow of resources, called taxes collected in advance, will be reported in the balance sheet. 19—Capital assets are not assets of governmental funds. The funds are essentially working capital entities. Depreciation is not a use of working capital and does not affect the fund. Depreciation of general capital assets is reported only in the government-wide financial statements.
17 Copyright © 2018 Pearson Education, Inc.
Problem 6 – Financial Statement Preparation/Presentation, Closing Entries Listed below (in alphabetical order) are the general ledger and budgetary accounts for the City of Walland. All balances are year end, unless otherwise noted. All accounts have a normal balance. At the end of the year, the City Council passed an ordinance that all outstanding orders would be honored in the following fiscal year. Also, the Finance Officer set aside $40 for equipment replacement. Requirements: 1. Prepare the Statement of Revenues, Expenditures, and Changes in Fund Balance for the year ended June 30, 20X4. 2. Prepare the Balance Sheet for the year ended June 30, 20X4. 3. Prepare all necessary closing entries.
18 Copyright © 2018 Pearson Education, Inc.
City of Walland Preclosing Trial Balance For the Year Ended June 30, 20X4 Advance to Enterprise Fund................................................................................. Allowance for Uncollectible Taxes ..................................................................... Appropriations ..................................................................................................... Budgetary Fund Balance ...................................................................................... Cash...................................................................................................................... Due from Special Revenue Fund ......................................................................... Encumbrances Outstanding ................................................................................. Encumbrances ...................................................................................................... Estimated Revenues ............................................................................................. Expenditures – Capital Outlay ............................................................................. Expenditures – Operating .................................................................................... Fund Balance (July 1, 20X3) ............................................................................... Investments .......................................................................................................... OFS – Proceeds from Sale of Vehicle ................................................................. OFS – Transfer from Capital Projects Fund ........................................................ OFU – Transfer to Debt Service Fund ................................................................. OFU – Transfer to Enterprise Fund ..................................................................... Revenues – Other ................................................................................................. Revenues – Property Taxes .................................................................................. Salaries Payable ................................................................................................... Special Item – Proceeds from Sale of Land ......................................................... Supplies ................................................................................................................ Taxes Receivable ................................................................................................. Vouchers Payable.................................................................................................
19 Copyright © 2018 Pearson Education, Inc.
1,000 300 8,850 150 $5,000 100 60 60 9,000 2,500 6,340 9,505 2,500 50 60 100 200 1,250 7,500 50 350 175 1,500 350
Requirement #1 City of Walland General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For the Fiscal Year Ended June 30, 20X4 Revenues Property Taxes Other Expenditures Operating Capital Outlay Deficiency of Revenues Under Expenditures Other Financing Sources and (Uses) Transfer from CPF Proceeds from Sale of Vehicle Transfer to DSF Transfer to EF Special Item – Proceeds from Sale of Land Net Change in Fund Balance Fund Balance, July 1, 20X3 Fund Balance, June 30, 20X4
20 Copyright © 2018 Pearson Education, Inc.
$7,500 1,250 6,340 2,500
60 50 (100) (200)
$8,750
8,840 (90)
(190) 350 70 9,505 $9,575
Requirement #2 City of Walland General Fund Balance Sheet June 30, 20X4 Assets Cash Investments Taxes Receivable Less Allowance for Uncollectible Taxes Due from SRF Supplies Advance to Enterprise Fund Total Assets Liabilities and Fund Balance Liabilities Vouchers Payable Salaries Payable Fund Balance Nonspendable Assigned for Outstanding Orders Assigned for Equipment Replacement Unassigned Total Liabilities and Fund Balance
21 Copyright © 2018 Pearson Education, Inc.
$5,000 2,500 $1,500 (300)
$350 50
$1,175 60 40 8,300
1,200 100 175 1,000 $9,975
$400
9,575 $9,975
Requirement #3 # Accounts 1 Appropriations Budgetary Fund Balance Estimated Revenues 2 Encumbrances Outstanding Encumbrances 3 Revenues – Property Taxes Revenues – Other Fund Balance Expenditures – Operating Expenditures – Capital Outlay 4 OFS – Proceeds from Sale of Vehicle OFS – Transfer from Capital Projects Fund Special Item – Proceeds from Sale of Land Fund Balance OFU – Transfer to Debt Service Fund OFU – Transfer to Enterprise Fund
22 Copyright © 2018 Pearson Education, Inc.
Debit 8,850 150
Credit
9,000 60 60 7,500 1,250 90 6,340 2,500 50 60 350 160 100 200
Problem 7 – Property Tax Entries Selected transactions for the Jackson Independent School District are presented below. All amounts are in thousands of dollars. 1. On January 1, the school district levied property taxes of $8,000. The due date for the taxes is March 31. The school district expects to collect all except $200 either by the end of the fiscal year or within 60 days thereafter. The other $200 is expected to be uncollectible. 2. During the first quarter (ending March 31) the school district collected $6,800 of its current year's property taxes. The rest of the taxes are past due. 3. On June 12, the school district wrote off $88 of property taxes as uncollectible. 4. From March 31 to December 31 the school district collected $700 of the property taxes that were levied on January 1. The school district expects to collect an additional $300 of these taxes during the first two months of the next fiscal year. Instructions: Prepare the necessary journal entries. Dates and explanations may be omitted. If a transaction requires no entry, do not leave it blank: state “No Entry Required” and explain why.
23 Copyright © 2018 Pearson Education, Inc.
Answers: # Accounts 1 Taxes Receivable—Current Allowance for Uncollectible Taxes—Current Revenues 2 Cash Taxes Receivable—Current Taxes Receivable—Delinquent Allowance for Uncollectible Taxes—Current Taxes Receivable—Current Allowance for Uncollectible Taxes—Delinquent
Debit 8,000
200 7,800 6,800 6,800 1,200 200 1,200 200
3 Allowance for Uncollectible Taxes— Delinquent Taxes Receivable—Delinquent
88
4 Cash Taxes Receivable—Delinquent
700
24 Copyright © 2018 Pearson Education, Inc.
Credit
88
700
Problem 8 – Fund Balance Calculations The City of Armona had the following assets and liabilities at June 30, 20X3, the end of its fiscal year (all amounts are in thousands): Assets Cash Investments Taxes Receivable Allowance for Uncollectible Taxes Due from Special Revenue Fund Inventory Advance to Enterprise Fund Total Assets Liabilities Vouchers Payable Short-Term Note Payable Accrued Wages Payable Due to Internal Service Fund Total Liabilities
5,250 250 1,300 (200) 150 200 150 7,100 750 1,000 200 50 2,000
Additional information: 1. The city received a state grant of $300 stipulating that it could be spent at any time on equipment. To date, none of the money has been spent. 2. The city council, in a formal vote, adopted a binding resolution to set aside another $500 for equipment purchases. Requirement: Calculate the five components of Fund Balance.
25 Copyright © 2018 Pearson Education, Inc.
Answer: Total Fund Balance = Assets – Liabilities = 7,100 – 2,000 = 5,100 Fund Balance Components Nonspendable: Inventory Advance to Enterprise Fund Restricted (by state) Committed (by city council) Assigned (could be left out as amount is zero) Unassigned Total Fund Balance
200 150
350 300 500 3,950 5,100
26 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 5 Revenue Accounting—Governmental Funds
1. According to GAAP, the primary classification of governmental fund revenues is by A. Fund. B. Fund and source. C. Fund and organizational unit. D. Fund and function (or program). Answer: B Objective: LO 5.4 Identify and classify the most common sources of governmental fund revenues. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 2. Under the modified accrual basis of accounting for a governmental unit, revenues should be recognized in the accounting period in which they are A. Collected. B. Earned and measurable. C. Earned or levied, measurable, and available. D. Budgeted, earned, and measurable. Answer: C Objective: LO 5.1 Explain the broad revenue recognition guidance for governmental fund revenues. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 3. Under the modified accrual basis, revenues are considered susceptible to accrual if A. Available to finance current period expenditures. B. Objectively measurable. C. Collected during the current period. D. Both available to finance current period expenditures and objectively measurable. Answer: D Objective: LO 5.1 Explain the broad revenue recognition guidance for governmental fund revenues. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 4. Under the modified accrual basis, revenues are considered available to finance current period expenditures if they are legally usable to finance expenditures of the period and A. Earned. B. Collected during the current period. C. Collected in the current period or soon enough thereafter to be used to pay liabilities of 1 Copyright © 2018 Pearson Education, Inc.
the current period. D. Objective measureable. Answer: C Objective: LO 5.1 Explain the broad revenue recognition guidance for governmental fund revenues. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 5. Property taxes are an example of which category of nonexchange transactions? A. Derived tax revenue. B. Imposed tax revenue. C. Government mandated nonexchange revenue. D. Voluntary nonexchange revenue. Answer: B Objective: LO 5.2 Identify the four categories of nonexchange transactions and when to recognize the related assets and revenues. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 6. Sale taxes are an example of which category of nonexchange transactions? A. Derived tax revenue. B. Imposed tax revenue. C. Government mandated nonexchange revenue. D. Voluntary nonexchange revenue. Answer: A Objective: LO 5.2 Identify the four categories of nonexchange transactions and when to recognize the related assets and revenues. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 7. State reimbursement to schools for a portion of any special education costs incurred is an example of which category of nonexchange transactions? A. Derived tax revenue. B. Imposed tax revenue. C. Government mandated nonexchange revenue. D. Voluntary nonexchange revenue. Answer: C Objective: LO 5.2 Identify the four categories of nonexchange transactions and when to recognize the related assets and revenues. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 2 Copyright © 2018 Pearson Education, Inc.
8. How should taxes collected in advance in fiscal year 20X3 be reported in the fiscal year 20X3 General Fund financial statements? A. As a liability on the balance sheet. B. As a deferred inflow on the balance sheet. C. As revenue on the statement of revenues, expenditures, and changes in fund balance. D. As an other financing source on the statement of revenues, expenditures, and changes in fund balance. Answer: B Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 9. Which of the following should be included in tax revenues for the current year? A. Taxes collected this year that have been levied for next year. B. Prior year taxes collected during the first 60 days of this year. C. Taxes levied this year but not collected until the middle of the next year. D. Taxes levied 2 years ago and collected in first 60 days after the end of the current year. Answer: D Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 10. A government has a fiscal year end of June 30, 20X6. Tax bills for each fiscal year are prepared and mailed in June prior to the beginning of the fiscal year for which they apply. Tax revenue for the fiscal year ending June 30, 20X6, would include A. Taxes levied in June 20X5 which came available in either June 20X5, between July 1, 20X5, and June 30, 20X6, or within 60 days following June 30, 20X6. B. Only the levy as of June 20X6. C. Only the levy as of June 20X5. D. Taxes levied in June 20X5 which came available in either June 20X5, between July 1, 20X5, and June 30, 20X6, or within 60 days after June 30, 20X6 as well as any taxes levied in June 20X6 that are collected within 60 days following June 30, 20X6. Answer: A Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 11. Which of the following statements regarding tax revenue recognition in the General Fund is 3 Copyright © 2018 Pearson Education, Inc.
false? A. Tax revenues may be reported when the tax is levied if the taxes are both available and legally usable to finance expenditures of the fiscal period. B. Revenue recognition is deferred for taxes levied in one year to finance the next year’s budget. C. Tax revenues are generally reported at gross amounts of the levy, regardless of expected collections. D. Tax revenues are generally reported net of the allowance for uncollectibles. Answer: C Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 12. A government levies property taxes and awards discounts for timely payment. How should the government report discounts that it expects will be taken? A. Report as expenditures in the year the taxes are levied. B. Report as expenditures in the year the discounts are awarded for early payments received. C. Report as other financing uses. D. Deduct from the amount of taxes levied to determine amounts to be reported as property tax revenues and/or deferred inflows of resources. Answer: D Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 13. Which of the following governmental fund revenue sources are typically recorded as revenues only as they are actually received in cash? A. Property taxes. B. Interest. C. Building permit fees. D. Reimbursement grants. Answer: C Objective: LO 5.6 Account for licenses and permits revenues. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 14. The City of Jonesboro awards discounts on taxes for timely payment. Specifically, taxpayers get a 1% discount on the total tax if it is paid within one month of the initial levy. What would the journal entry be to record the levy of $700,000 if the government anticipates there will be a 2% uncollectible rate and it is anticipated that the discounts will be $5,000? Record 4 Copyright © 2018 Pearson Education, Inc.
as if all taxes are expected to be collected during the year. Debit $700,000
A.
Credit
Taxes Receivable—Current ....................................... Allowance for Uncollectible Taxes—Current ...... $14,000 Allowance for Discounts ...................................... 5,000 Revenues—Taxes ................................................. 681,000 B. Taxes Receivable—Current ....................................... $700,000 Revenues—Taxes ................................................. $700,000 C. Taxes Receivable—Current ....................................... $695,000 Expenditures ............................................................... 5,000 Allowance for Uncollectible Taxes—Current ...... $14,000 Revenues—Taxes ................................................. 686,000 D. Taxes Receivable—Current ....................................... $700,000 Allowance for Uncollectible Taxes—Current ...... $14,000 Revenues—Taxes ................................................. 686,000 Answer: A Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 15. The Town of Lily Branch anticipated that discount opportunities of up to $3,000 would be taken by their taxpayers. Which of the following statements accurately reflects the accounting for the anticipated discounts when the taxes are levied? A. Revenues are initially recorded at the entire levy amount. Discounts taken are recorded as expenditures when they are actually taken. B. Taxes receivable are reduced by the amount of discounts anticipated. The discounts anticipated are recorded as expenditures at the time of the levy. C. Revenues are recorded at the time of levy net of anticipated discounts. Taxes receivable are recorded at the full levy amount. D. Revenues are recorded at gross at the time of levy. At collection, taxes receivable are reduced by the gross amount, the discount is recognized as a miscellaneous revenue, and cash is recorded at net. Answer: C Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 16. A government allows discounts on taxes if payments are made within two months of the levy date. How does the government account for the discounts as they are being taken? A. Allowance for discounts is debited for the amount of the discounts taken. 5 Copyright © 2018 Pearson Education, Inc.
B. Expenditures are debited for the amount of the discounts taken. C. Revenue is debited for the amount of the discounts taken. D. Allowance is credited for the discount and is recorded at the time the discount is taken. Answer: A Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 17. A county anticipated that $6,500 of discounts would be taken on their initial tax levy. Which of the following statements is true if discounts were less than anticipated? A. Revenues would be increased from the amount recorded at the levy. B. Revenues would be decreased from the amount recorded at the levy. C. Expenditures would be decreased from the amount recorded at the levy. D. Expenditures would be increased from the amount recorded at the levy. Answer: A Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 18. When a tax lien is formalized, a government must record an allowance for uncollectible tax liens A. In every possible situation. B. Only if the expected salable value of the property against which the lien was established is less than the fair value of the property. C. Only if the expected salable value of the property against which the lien was established is less than the total amount of the liens receivable against that property. D. Only if the lien is contested in court. Answer: C Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 19. A city levies $200,000 of property taxes for its current fiscal year. One percent of the tax levy is expected to be uncollectible. The city collects $170,000 of its taxes during the year and another $25,000 during the first two months of the following year. What amount of property tax revenues should the city report in the General Fund financial statements for the current fiscal year? A. $200,000 B. $198,000 6 Copyright © 2018 Pearson Education, Inc.
C. $195,000 D. $170,000. Answer: C Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Moderate Classification: Application AACSB Category: application of knowledge 20. A city levies $200,000 of property taxes for its current fiscal year. One percent of the tax levy is expected to be uncollectible. The city collects $170,000 of its taxes during the year and another $25,000 during the first two months of the following year. In addition, the city collected $3,000 of prior year taxes during the first two months of the current fiscal year and another $2,000 during the remainder of the current fiscal year. What amount of property tax revenues should the city report in the General Fund financial statements for the current fiscal year? A. $200,000. B. $198,000. C. $197,000. D. $195,000. Answer: C Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 21. A city collected $750,000 of taxes levied during the current fiscal year (the total levy was $780,000), $50,000 of past due taxes levied in a previous year, and $25,000 of prepayments for next year’s taxes. The city should report tax revenue in the General Fund of A. $750,000. B. $800,000. C. $825,000. D. $855,000. Answer: B Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 22. In Year 1, a county levied $1,500,000 of property taxes and collected $1,400,000 of that levy; in Year 2, the levy was $1,550,000 and the related collections totaled $1,495,000; in Year 3, the levy was $1,670,000 and the related collections totaled $1,530,000. Also, collections of past due taxes in Years 1, 2, and 3 were $15,000, $14,000, and $19,000, 7 Copyright © 2018 Pearson Education, Inc.
respectively. At the end of Year 3, the allowance for uncollectible property taxes was $95,000. Assuming that the General Fund’s deferred revenue at the beginning of Year 1 was $410,000, what would deferred revenue be as of the end of Year 3? A. $362,000. B. $562,000. C. $610,000. D. $658,000. Answer: B Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 23. GASB Statement No.72 requires the following investments to be recorded at fair value except A. Participating interest-earning investment contracts. B. Equity securities with readily determinable fair values. C. Debt securities. D. Nonparticipating interest-earning investment contracts. Answer: D Objective: LO 5.10 Account for and report governmental fund investment income in accordance with GASB Statements No. 31 and 72. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 24. When a governmental entity is decreasing the fair market value of an investment, the appropriate debit would be to A. Investments. B. Investment income. C. Cash. D. Realized loss on investments. Answer: B Objective: LO 5.10 Account for and report governmental fund investment income in accordance with GASB Statements No. 31 and 72. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 25. Which of the following statements regarding the accounting for investments in governmental funds is false? A. Interest receivable should be accrued as it is earned. B. Interest revenue should be recognized on a cash basis. C. Interest revenue is recognized no later than when it meets the availability criteria. D. Decreases in the fair market value of equity securities with readily determinable fair 8 Copyright © 2018 Pearson Education, Inc.
values result in a decrease in investment income. Answer: B Objective: LO 5.10 Account for and report governmental fund investment income in accordance with GASB Statements No. 31 and 72. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 26. A government received $30,000 of interest on investments of its General Fund during the year. The fair value of its investments increased by $3,500 during the year. In its General Fund statement of revenues, expenditures, and changes in fund balance the government should report A. Investment income of $30,000 as revenues and the increase in the fair value of investments of $3,500 as an other financing source. B. Investment income of $33,500 as revenues. C. Investment income of $33,500 as an other financing source. D. Investment income of $30,000 as revenues and disclose the increase in the fair value of investments in the notes to the financial statements. Answer: B Objective: LO 5.10 Account for and report governmental fund investment income in accordance with GASB Statements No. 31 and 72. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 27. All of the following are examples of intergovernmental revenues except A. Amounts to which a government is entitled as determined by the federal government pursuant to an allocation formula contained in a federal statute. B. Revenues levied by a state government but shared on a predetermined basis with other governments. C. Interest earned on investments in bonds issued by other governments. D. Cash contributions received from another government to be used for a specified purpose. Answer: C Objective: LO 5.7 Distinguish and account for the various types of intergovernmental revenues, including pass-through grants and other grants, entitlements, shared revenues, and payments in lieu of taxes. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 28. Pass-through grants are accounted for A. Only in Agency Funds. B. By increasing or decreasing governmental fund assets and liabilities to reflect the agency relationship–no revenues are reported in the governmental fund. C. As revenues and expenditures or expenses in the appropriate fund of the pass-through 9 Copyright © 2018 Pearson Education, Inc.
entity (primary recipient). D. As other financing sources and other financing uses in the appropriate fund of the passthrough entity (primary recipient). Answer: C Objective: LO 5.7 Distinguish and account for the various types of intergovernmental revenues, including pass-through grants and other grants, entitlements, shared revenues, and payments in lieu of taxes. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 29. The county received a $1,500,000 restricted grant from the state government to be used to improve its public safety department's communication systems. The county has met all eligibility requirements of the grant. In the current year, the General Fund should report this grant as A. Other financing sources. B. Deferred revenues. C. Revenues. D. Unearned revenues. Answer: C Objective: LO 5.7 Distinguish and account for the various types of intergovernmental revenues, including pass-through grants and other grants, entitlements, shared revenues, and payments in lieu of taxes. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 30. If a city receives notification of an expenditure-driven grant award and the actual proceeds sixty days prior to the start of the grant period, the entry to record the grant in the Special Revenue Fund would be A. A debit to grants receivable and a credit to grants revenue. B. A debit to cash and a credit to grants revenue. C. A debit to grants receivable and a credit to unearned revenue. D. A debit to cash and a credit to unearned revenue. Answer: D Objective: LO 5.7 Distinguish and account for the various types of intergovernmental revenues, including pass-through grants and other grants, entitlements, shared revenues, and payments in lieu of taxes. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 31. The county received a $1,500,000 restricted grant from the state government to be used to improve its public safety department's communication systems. The county will not meet all eligibility requirements of the grant until next fiscal year, when the county plans to begin 10 Copyright © 2018 Pearson Education, Inc.
incurring expenditures for this purpose. In the current year, the General Fund should report this grant as A. Other financing sources. B. Deferred revenues. C. Revenues. D. Unearned revenues. Answer: D Objective: LO 5.7 Distinguish and account for the various types of intergovernmental revenues, including pass-through grants and other grants, entitlements, shared revenues, and payments in lieu of taxes. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 32. The City of Ruth has been awarded a $1,000,000 federal expenditure-driven grant to improve bike trails. The federal government advanced the city $600,000 when the grant was awarded on January 10, 20X8. The city incurred $418,000 of qualifying expenditures during 20X8. How much should the city of Ruth recognize as unearned revenue for its fiscal year ending December 31, 20X8? A. $182,000. B. $418,000. C. $582,000. D. $600,000. Answer: A Objective: LO 5.7 Distinguish and account for the various types of intergovernmental revenues, including pass-through grants and other grants, entitlements, shared revenues, and payments in lieu of taxes. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 33. The City of Ruth has been awarded a $1,000,000 federal reimbursement grant to improve bike trails. The city has incurred $418,000 of qualifying expenditures during the current year, for which the federal government has reimbursed the city $180,000. Assuming the grant receivable is considered available, how much should the city of Ruth recognize as revenue for the current year? A. $1,000,000 B. $598,000. C. $418,000. D. $180,000. Answer: C Objective: LO 5.7 Distinguish and account for the various types of intergovernmental revenues, including pass-through grants and other grants, entitlements, shared revenues, and payments in lieu of taxes. Difficulty Level: Moderate 11 Copyright © 2018 Pearson Education, Inc.
Classification: Application AACSB Category: Application of knowledge 34. The City of Ruth has been awarded a $1,000,000 federal reimbursement grant to improve bike trails. The city has incurred $418,000 of qualifying expenditures to date, for which the federal government has reimbursed the city $180,000. How much should the city of Ruth show as due from the federal government? A. $820,000. B. $582,000. C. $418,000. D. $238,000. Answer: D Objective: LO 5.7 Distinguish and account for the various types of intergovernmental revenues, including pass-through grants and other grants, entitlements, shared revenues, and payments in lieu of taxes. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 35. Clark County was hired by Catlett City, the largest city in the county, to maintain some of its roads. Clark County billed Catlett City for its cost of maintaining the roads. The amount of the billing was $60,000. Clark County should report the $60,000 as A. An other financing source. B. A revenue. C. A reduction of expenditures. D. A gain on work performed for other governments. Answer: B Objective: LO 5.8 Account for charges for services. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 36. The Ruby Falls Independent School District receives significant payments in lieu of taxes from the federal government to reimburse the district for lost revenues because a military base, which is not subject to property tax, is within the district's boundaries. These payments should be reported as A. Other financing sources — transfer. B. Revenue. C. An extraordinary item. D. A special item. Answer: B Objective: LO 5.12 Describe and account for other (nonrevenue) financing sources. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 12 Copyright © 2018 Pearson Education, Inc.
37. Inactive bank accounts that revert to the state after a period of time should be A. Reported at their full fair value as liabilities of the government. B. Recognized as revenue—net of any amounts expected to be claimed by heirs. C. Reported as unearned revenue. D. Reported in a special revenue fund. Answer: B Objective: LO 5.11 Describe classification of and accounting for various other types of governmental fund revenues. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 38. The county received $75,000 from the annual sale of surplus general government property. The proceeds are deposited in the General Fund. The General Fund should report the proceeds as A. Other financing sources. B. Due to other funds. C. Revenues. D. Special item. Answer: A Objective: LO 5.12 Describe and account for other (nonrevenue) financing sources. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 39. The county received a $75,000 payment in lieu of taxes from the water Enterprise Fund. The Enterprise Fund receives no services from the county for this payment. The General Fund should report the payment as A. Other financing sources — transfer. B. Interfund charges. C. Revenues. D. Special item. Answer: A Objective: LO 5.12 Describe and account for other (nonrevenue) financing sources. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 40. Assume that a general capital asset was sold for $2,500. The asset was originally purchased for $10,000 and has been in use for 3 years. It has an estimated life of 5 years. What entry would be made in the General Fund to reflect this sale?
13 Copyright © 2018 Pearson Education, Inc.
Debit $2,500
A.
Cash ........................................................................... General Capital Assets ........................................ B. Cash ........................................................................... $2,500 Accumulated Depreciation ........................................ 6,000 Loss on Sale of Capital Assets .................................. 1,500 General Capital Assets ........................................ C. Cash ........................................................................... $2,500 Other Financing Sources ..................................... D. Cash ........................................................................... $2,500 Loss on Sale of Capital Assets .................................. 1,500 General Capital Assets, net.................................. Answer: C Objective: LO 5.12 Describe and account for other (nonrevenue) financing sources. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge
Credit $2,500
10,000 $2,500
$4,000
41. If an expenditure was inadvertently charged to the General Fund instead of the appropriate Special Revenue Fund, what effect would the correction of this error later in the same fiscal year have on the General Fund? A. An entry would be made directly to the General Fund's fund balance to correct the error. B. Revenues would be increased. C. Expenditures would be decreased. D. Transfers in would be increased. Answer: C Objective: LO 5.14 Account for and report changes in revenue accounting principles and error corrections. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 42. Assume the following transactions occurred in a school district General Fund during the year: Charges for services collected - $25,000 Taxes levied - $2,450,000 Taxes collected from current year levy and prior year tax levies - $2,320,000 Tax prepayments received - $10,000 Grants earned and received during the year - $300,000 Grants awarded but not yet available - $250,000 The amount of revenues recorded in the General Fund for the year would be A. $2,895,000. B. $2,655,000. C. $2,645,000. D. $2,450,000. 14 Copyright © 2018 Pearson Education, Inc.
Answer: C Objectives: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. LO 5.7 Distinguish and account for the various types of intergovernmental revenues, including pass-through grants and other grants, entitlements, shared revenues, and payments in lieu of taxes. LO 5.8 Account for charges for services. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 43. At year end, the McClelland County General Fund had the following account balances. Restricted state grant proceeds Unavailable property taxes
$1,000,000 $ 200,000
The county received the grant funds from the state just before year-end. This expendituredriven grant is for next year’s “Don’t text and drive!” state public safety campaign, and the county has not incurred any qualifying expenditures for this campaign. All unavailable property taxes are related to current year property taxes and are deferred only because of the “availability” criterion. How should these amounts be reported in McClelland County’s General Fund balance sheet? Deferred Inflows Liability of Resources A. $200,000 $1,000,000 B. $1,200,000 $0 C. $0 $1,200,000 D. $1,000,000 $200,000 Answer: D Objectives: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. LO 5.7 Distinguish and account for the various types of intergovernmental revenues, including pass-through grants and other grants, entitlements, shared revenues, and payments in lieu of taxes. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 44. In which situation(s) are property taxes due to a governmental unit reported as deferred inflows of resources in the fund financial statements? I. Property taxes are collected in advance of the year for which they are levied. 15 Copyright © 2018 Pearson Education, Inc.
II. Property taxes will not be collected soon enough in the next year to finance currentyear expenditures. A. I only. B. II only. C. Both I and II. D. Neither I nor II. Answer: C Objective: LO 5.5 Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge
16 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 5
Problem 1 – Matching: Match the Resource Flow with the Type of Revenue Listed below in the left column are some events that may or may not be revenues for the General Fund. Listed in the right column are the classifications of revenues for governmental funds. Correctly match each event with the appropriate revenue classification. Unless specifically stated otherwise, assume all amounts are earned, measurable, and available. If the event is not a revenue, state how the event would be reported in the current year General Fund financial statements. Each type of revenue may be used once, more than once, or not at all.
1. 2. 3.
4. 5. 6. 7.
8.
9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.
Resource Flow Sales taxes collected locally. Ad valorem taxes for which the levy has been made but are due and payable in the following fiscal year. Billing for garbage services provided to the Enterprise Fund by the Sanitation Department (accounted for in the General Fund). Realized gain from the sale of an investment. Gas taxes collected by the state and allocated based on a predetermined formula. Cash received from the issuance of long-term debt. Property taxes levied, due, and payable in the prior fiscal year and collected in the first 60 days of the current fiscal year. Payment from the Library Special Revenue Fund to the General Fund for a utility bill originally paid from General Fund resources for the entire government. Payments made by the local university to the City in lieu of paying property taxes on university-owned land. Property taxes levied for the current year and collected in the first 60 days of the following fiscal year. Cash collections from speeding tickets enforced in municipal court. Unrealized loss on an investment at the end of the current fiscal year. Cash received from an operating grant where the time restriction has not been met. Cash collected for electrical inspections made in new home construction. Interest earned on investments. Pass through grant for which the City has administrative responsibility. Quarterly federal income tax payments from taxpayers. Receipt of cash for a capital grant for which the qualifying expenditures have not yet been made. Cash received on next year’s property taxes. Cash received from a short-term borrowing.
Type of Revenue A. Taxes B. Licenses and Permits C. Intergovernmental Revenues D. Charges for Services E. Fines and Forfeits F. Investment Income G. Not a revenue
1 Copyright © 2018 Pearson Education, Inc.
Answers: 1. A 2. G – Deferred Revenue 3. D 4. F 5. C 6. G – Other Financing Source 7. G – Not reported (revenue of previous year) 8. G – Not separate reported (reimbursement) 9. C 10. A 11. E 12. F (but a negative revenue) 13. G – Deferred Revenue 14. D 15. F 16. C 17. G – Liability to the federal government (may be accounted for in an Agency Fund 18. G – Unearned Revenue 19. G – Deferred inflows—Taxes collected in advance 20. G – Fund liability
2 Copyright © 2018 Pearson Education, Inc.
Problem 2 – Matching: Match the Revenue Source with the Type of Nonexchange Transaction Listed below in the left column are some revenue sources for the General Fund. Listed in the right column are the classes of nonexchange transactions delineated in GASB Statement No. 33, “Accounting and Financial Reporting for Nonexchange Transactions.” Correctly match each revenue source with the appropriate class of nonexchange transaction. Each class of nonexchange transaction may be used once, more than once, or not at all.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Revenue Source Sales taxes. Ad valorem taxes. Gas taxes. State grants to help comply with state requirements. Property taxes. State reimbursements for education technology. Income taxes. Federal road improvement grants. Cash collections from speeding tickets. Forfeited bail money.
Class of Nonexchange Transaction A. Derived Tax Revenues B. Imposed Tax Revenues C. Government Mandated D. Voluntary
Answers: 1. A 2. B 3. A 4. C 5. B 6. D 7. A 8. D 9. B 10. B
3 Copyright © 2018 Pearson Education, Inc.
Problem 3 – Property Tax Entries (enhanced) The Jackson Independent School District began the year with the following accounts on its Balance Sheet related to property taxes (all amounts are in thousands of dollars). All accounts have normal balances: Taxes Receivable – Delinquent............................................................................................. Allowance for Uncollectible Taxes – Delinquent ................................................................. Penalties and Interest Receivable.......................................................................................... Allowance for Uncollectible Penalties and Interest .............................................................. Deferred Revenues ($300 Taxes, $55 Penalties and Interest)...............................................
$2,000 400 200 15 355
Selected transactions for the Jackson Independent School District are presented below. 1. On January 1, the school district levied property taxes of $8,000. The due date for the taxes is March 31. Taxes are considered delinquent after that date. The school district expects to collect all but 4% of the levy. In addition the district offers a 2% discount if the taxes are paid by February 28. The district expects 40% of the tax to qualify for the discount. 2. Between January 2 and February 28, the district collected $4,800 of the taxes due. Of this amount, $1,300 was due in the preceding fiscal year. The district also collected $130 of penalties and interest during the same time period. 3. During March, an additional $3,500 of receivables were collected. Of this amount, $200 were for the preceding fiscal year. Also during March, $7 of penalties and interest were collected. 4. On April 1, the balance of the current year taxes is past due. A 10% penalty and 2% in interest was immediately assessed on the delinquent debt. It is estimated that $30 of the total interest and penalties will prove uncollectible. 5. On June 12, the school district wrote off $100 of property taxes, $10 in penalties, and $2 in interest as uncollectible. 6. From March 31 to December 31, the school district collected $300 of the property taxes that were levied on January 1, $5 in penalties, and $1 in interest. The school district expects to collect an additional $200 of property taxes and $100 of penalties and interest during the first two months of the next fiscal year. Requirements: 1. Prepare the necessary journal entries. Dates and explanations may be omitted. If a transaction requires no entry, do not leave it blank: state “No Entry Required” and explain why. 2. What was the total Revenues – Property Taxes and total Revenues – Penalties and Interest earned in the current fiscal year?
4 Copyright © 2018 Pearson Education, Inc.
Answers: Requirement #1 #
Accounts 1 Taxes Receivable – Current Allowance for Uncollectible Taxes – Current Allowance for Discounts on Taxes Revenues – Property Taxes
Debit 8,000
320 64 7,616
2 Cash Allowance for Discounts on Taxes Revenues – Property Taxes Taxes Receivable – Current Taxes Receivable – Delinquent Penalties and Interest Receivable
4,860 64 6
3 Cash Taxes Receivable – Current Taxes Receivable – Delinquent Penalties and Interest Receivable
3,507
4 Taxes Receivable – Delinquent Allowance for Uncollectible Taxes – Current Taxes Receivable – Current Allowance for Uncollectible Taxes – Delinquent
1,200 320
Penalties and Interest Receivable Allowance for Uncollectible Penalties and Interest Revenues – Penalties and Interest
3,500 1,300 130
3,300 200 7
1,200 320 144 30 114
5 Allowance for Uncollectible Taxes – Delinquent Allowance for Uncollectible Penalties and Interest Taxes Receivable – Delinquent Penalties and Interest Receivable
100 12
6 Cash Taxes Receivable – Delinquent Penalties and Interest Receivable
306
Revenues – Property Taxes Revenues – Penalties and Interest Deferred Inflows of Resources—Deferred Revenues
5 Copyright © 2018 Pearson Education, Inc.
Credit
100 12
300 6 180 1 181
Requirement #2 Property Taxes: Revenues deferred from previous year ................................................................................. Revenues recognized in current year .................................................................................... Revenues reduced for excess discount .................................................................................. Revenues reduced for deferral to next year........................................................................... Revenues recognized for current fiscal year .........................................................................
$ 300 7,616 (6) (480) $7,430
Alternative calculation: Cash collected in current year attributable to current fiscal year Transaction #2 (4,730 – 1,300) ................................................................................ Transaction #3.......................................................................................................... Transaction #6.......................................................................................................... Cash to be collected in first 60 days of next fiscal year ........................................................ Cash collected = Revenues Earned .......................................................................................
$3,430 3,500 300 200 $7,430
Penalties and Interest: Revenues deferred from previous year ................................................................................. Revenues recognized in current year .................................................................................... Revenues reduced for deferral to next year........................................................................... Revenues recognized for current fiscal year .........................................................................
$ 55 114 (56) $113
Alternative calculation: Cash collected in current year attributable to current fiscal year Transaction #3.......................................................................................................... Transaction #6.......................................................................................................... Cash to be collected in first 60 days of next fiscal year ........................................................ Cash collected = Revenues Earned .......................................................................................
6 Copyright © 2018 Pearson Education, Inc.
$
7 6 100 $113
Problem 4 – Investment Accounting The City of Mimosa reports most types of investments at fair value, except those exempted by GASB Statement No. 72. The following transactions occurred in the City of Mimosa during fiscal year 20X4 (all amounts are in thousands of dollars): 1. 2. 3. 4. 5. 6.
Purchased investments in long-term, participating, interest-bearing securities, $3,000. Collected interest on its investments of $200. Sold 10% of the investments for $304. Purchased 6-month U.S. Treasury Bills for $100. Accrued interest on at year end amounted to $15. The fair value of the investments in long-term participating, interest-bearing securities at year end was $2,620. The fair value of the investments in U.S. Treasury Bills at year end was $99.
Requirements: 1. Prepare the journal entries for each of these transactions. 2. What is the total interest revenue to be reported for FY 20X4?
7 Copyright © 2018 Pearson Education, Inc.
Requirement #1
# 1 Investments Cash
Accounts
Debit 3,000
Credit 3,000
2 Cash Revenue – Interest
200
3 Cash Investments Revenue – Realized gain on sale of investments
304
4 Investments Cash
100
5 Interest Receivable Revenue – Interest
15
6 Revenue – Net decrease in fair value of investments Investments (2,700 – 2,620)
80
200
300 4
100
15
8 Copyright © 2018 Pearson Education, Inc.
80
Requirement #2 Transaction #2 – Interest ....................................................................................................... Transaction #3 – Realized gain on sale of investments (realized) ........................................ Transaction #5 – Interest ....................................................................................................... Transaction #6 – Net decrease in fair value of investments (unrealized) ............................. Interest Income for FY 20X4 ...................................................................................
9 Copyright © 2018 Pearson Education, Inc.
$200 4 15 (80) $139
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 6 Expenditure Accounting—Governmental Funds
1. Expenditures are defined as A. Costs expired. B. Uses of current financial resources other than for capital asset purchases and transfers. C. Decreases in net current financial resources other than from specified transactions. D. Changes in liabilities and deferred inflows. Answer: C Objective: LO 6.1 Define expenditures as used in governmental fund accounting and reporting, and interpret and apply governmental fund expenditure recognition guidance. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 2. Which of the following is not a typical governmental fund liability, and thus not an expenditure that is recognized when the liability is incurred? A. Accounts payable. B. Long-term note payable. C. Salaries payable. D. Rent payable. Answer: B Objective: LO 6.1 Define expenditures as used in governmental fund accounting and reporting, and interpret and apply governmental fund expenditure recognition guidance. Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 3. The minimum amount of detail permitted by GAAP for governmental fund expenditure classifications in the basic financial statements is by A. Fund. B. Function (or program). C. Fund and function (or program). D. Fund, function (or program), organizational unit, and activity. Answer: C Objective: LO 6.1 Define expenditures as used in governmental fund accounting and reporting, and interpret and apply governmental fund expenditure recognition guidance. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 4. A city government purchased a new fire truck in Year 1 for $270,000. The city incurred an additional $30,000 in transportation and calibration costs to ready it for use. It has an estimated useful life of 20 years, though it is being financed over a 15 year period. The 1 Copyright © 2018 Pearson Education, Inc.
amount of depreciation that will be reported each year in the General Fund will be A. $0. B. $13,500. C. $15,000. D. $18,000. Answer: A Objective: LO 6.1 Define expenditures as used in governmental fund accounting and reporting, and interpret and apply governmental fund expenditure recognition guidance. Difficulty Level: Easy Classification: Synthesis AACSB Category: Application of knowledge 5. Assume that General Fund employees accrued $125,000 of compensated absences liability during the year. Compensated absences liability, which is considered to be a long-term liability, decreased $30,000 from the beginning of the year to the end of the year. The fund also actually paid $550,000 in salaries and wages during the year. At the end of the fiscal year, salaries and wages payable was $12,000. The General Fund would report salaries and wages expenditures for the year of A. $532,000. B. $550,000. C. $562,000. D. $592,000. Answer: A Objective: LO 6.1 Define expenditures as used in governmental fund accounting and reporting, and interpret and apply governmental fund expenditure recognition guidance. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Application of knowledge 6. Which of the following governmental fund expenditures would not be considered a current operating expenditure? A. Capital outlay. B. Rent. C. Salaries and wages. D. Employee benefits. Answer: A Objective: LO 6.1 Define expenditures as used in governmental fund accounting and reporting, and interpret and apply governmental fund expenditure recognition guidance. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 7. The village of Bear Creek uses General Fund resources to pay debt service payments for its sole outstanding general obligation bonds, which were issued to finance the new Village Hall. Which of the following statements is false? 2 Copyright © 2018 Pearson Education, Inc.
A. GAAP require the village to use a Debt Service Fund to account for the payment of principal and interest on the long-term debt if the debt covenant calls for it. B. GAAP permit but do not require the village to use a Debt Service Fund to account for the payment of principal and interest on the long-term debt. C. The General Fund would record an expenditure for both the principal and interest portions of the debt service payment. D. The General Fund may record an expenditure for only the interest portion of the debt service payment. Answer: D Objective: LO 6.1 Describe the key unique characteristics and major types of government and nonprofit (G&NP) organizations. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 8. Expenditures in a governmental fund are recognized when due for A. Interest on general long-term debt. B. Salaries and wages. C. Capital outlay. D. Rent. Answer: A Objective: LO 7.1 Define expenditures as used in governmental fund accounting and reporting, and interpret and apply governmental fund expenditure recognition guidance. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 9. Which of the following is not a managerial problem associated with expenditures? A. Misapplication of assets. B. Overspending of appropriations. C. Misapplication of the availability criterion. D. Misallocation or poor allotments of appropriations. Answer: C Objective: LO 7.1 Define expenditures as used in governmental fund accounting and reporting, and interpret and apply governmental fund expenditure recognition guidance. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 10. The purchases method of accounting is permitted for A. Materials and supplies, but not for prepaid insurance. B. Prepaid insurance, but not for materials and supplies. C. Neither prepaid insurance nor materials and supplies. D. Both prepaid insurance and materials and supplies. Answer: D 3 Copyright © 2018 Pearson Education, Inc.
Objective: LO 6.2 Account for personal services costs, materials and supplies (purchases and consumption methods), prepayments, and capital leases in governmental funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 11. Assume that the Village of Hannah uses the purchases method of inventory accounting. At the end of the year, the inventory levels have increased. What entry would be made to reflect the inventory increase? A. Debit Expenditures, Credit Inventory of Supplies. B. Debit Inventory of Supplies, Credit Other Financing Sources. C. Debit Expenditures, Credit Other Financing Sources. D. Debit Inventory of Supplies, Credit Expenditures. Answer: B Objective: LO 6.2 Account for personal services costs, materials and supplies (purchases and consumption methods), prepayments, and capital leases in governmental funds. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 12. Assume that a government purchases $85,000 of inventory for the General Fund during the year. The General Fund began the year with an inventory balance of $15,000 and ended the year with a balance of $35,000. The General Fund uses the consumption method of inventory accounting and a perpetual inventory system. The General Fund should report A. Expenditures of $85,000 for the year. B. Expenditures of $65,000 for the year. C. Other financing source of $20,000 for the year. D. Other financing use of $20,000 for the year. Answer: B Objective: LO 6.2 Account for personal services costs, materials and supplies (purchases and consumption methods), prepayments, and capital leases in governmental funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 13. If a government uses a perpetual inventory system for its General Fund and there is an inventory overage at the end of the year, the inventory asset account should A. Be increased and the expenditure account decreased. B. Be decreased and the expenditure account increased. C. Remain the same. The expenditure account will be decreased, offset by an allowance for inventory overage account. D. Remain the same. The expenditure account will be increased, offset by an allowance for inventory overage account. Answer: A 4 Copyright © 2018 Pearson Education, Inc.
Objective: LO 6.2 Account for personal services costs, materials and supplies (purchases and consumption methods), prepayments, and capital leases in governmental funds. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 14. Rutherford County uses the consumption method to account for General Fund materials and supplies. The beginning inventory of materials and supplies was $122,000. The ending inventory was $150,000. The beginning balance of reserve for encumbrances (for supplies ordered but not received at the beginning of the year) was $50,000; the ending balance was $20,000. Supplies purchased during the year totaled $750,000. The county General Fund should report expenditures for materials and supplies for the year of A. $722,000. B. $750,000. C. $752,000. D. $780,000. Answer: A Objective: LO 6.2 Account for personal services costs, materials and supplies (purchases and consumption methods), prepayments, and capital leases in governmental funds. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 15. The General Fund reported a beginning balance of inventory of materials and supplies of $122,000. The ending balance was $150,000. Supplies purchased during the year totaled $600,000. The county uses the consumption method. The General Fund should report expenditures for materials and supplies for the year of A. $450,000. B. $572,000. C. $600,000. D. $628,000. Answer: B Objective: LO 6.2 Account for personal services costs, materials and supplies (purchases and consumption methods), prepayments, and capital leases in governmental funds. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 16. The General Fund reported a beginning balance of inventory of materials and supplies of $122,000. The ending balance was $150,000. Supplies received during the year (purchases) totaled $600,000. The county uses the purchases method. The General Fund should report expenditures for materials and supplies for the year of A. $450,000. B. $572,000. C. $600,000. 5 Copyright © 2018 Pearson Education, Inc.
D. $628,000. Answer: C Objective: LO 6.2 Account for personal services costs, materials and supplies (purchases and consumption methods), prepayments, and capital leases in governmental funds. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 17. A county uses the consumption method in accounting for insurance premium prepayments. At the beginning of the fiscal year, the county paid a $24,000 insurance premium to cover the current year and the subsequent fiscal year. At the end of the current year, the county will report in its General Fund A. Expenditures of $24,000. B. Expenditures of $12,000 and a $12,000 prepaid asset. C. A $24,000 prepaid asset. D. Other financing use of $24,000. Answer: B Objective: LO 6.2 Account for personal services costs, materials and supplies (purchases and consumption methods), prepayments, and capital leases in governmental funds. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 18. In the year a city enters into a capital lease to finance a new sanitation truck, the General Fund will report A. An increase in capital assets. B. A decrease in fund balance equal to the cost of the new sanitation truck. C. An other financing use. D. A decrease in fund balance equal to the amount of any down payment required. Answer: D Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 19. Interest expenditures of a governmental fund should include A. Interest paid during the year, only. B. Interest paid during the year plus any interest that matured but was not paid during the year. C. Interest paid during the year, any interest that matured but was not paid during the year, and accrued interest on short-term debt recorded as a fund liability. D. Interest paid during the year, any interest that matured but was not paid during the year, and accrued interest on all general long-term liabilities. 6 Copyright © 2018 Pearson Education, Inc.
Answer: C Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 20. As payments are being made for debt service payments related to a capital lease, a General Fund will report A. An increase in capital assets equal to the amount of principal retired. B. Expenditures for interest only. C. Expenditures for principal reduction only. D. Expenditures for the full amount of the debt service payment. Answer: D Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 21. A county accounts for its debt service payments in the General Fund. The amount of unmatured, unpaid interest on general long-term liabilities at the beginning of the year was $122,000. The ending balance was $165,000. The General Fund also made principal payments of $600,000 and interest payments of $150,000 during the year. The General Fund should report expenditures for debt service for the year of A. $150,000. B. $722,000. C. $750,000. D. $793,000. Answer: C Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 22. A city entered into a general government capital lease for equipment on July 1, 20X7. The capitalizable cost of the equipment was $400,000. A down payment of $40,000 was made. The next lease payment of $100,000 is due July 1, 20X8. The implicit rate of interest on the lease agreement is 10%. The amount of expenditures that the city should report in its General Fund statement of revenues, expenditures, and changes in fund balance for the year ended December 31, 20X7 is 7 Copyright © 2018 Pearson Education, Inc.
A. $40,000. B. $58,000. C. $400,000. D. $418,000. Answer: C Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 23. A government entered into a general government capital lease for equipment during the year. The capitalizable cost of the equipment was $400,000. A down payment of $40,000 was made. The General Fund should report in its statement of revenues, expenditures, and changes in fund balance an A. Other financing use of $400,000. B. Expenditure of $360,000. C. Other financing source of $400,000. D. Other financing source of $360,000. Answer: D Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 24. The General Fund borrowed $10,000 on a six-month note, with 5% interest, on April 1. As of the June 30 fiscal year end, the General Fund would report accrued interest payable in the amount of A. $0. B. $125. C. $250. D. $500. Answer: B Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 25. Carter County entered into a capital lease to finance an Emergency-911 telecommunications system. The capitalizable cost of the equipment was $185,000. The county made a required 8 Copyright © 2018 Pearson Education, Inc.
down payment of $25,000. The first debt service payment will not be due until the next fiscal year. The entry to record the inception of this lease in the General Fund would be Debit Credit Expenditures .............................................................. $185,000 Lease Payable ...................................................... $160,000 Cash ..................................................................... 25,000 B. Expenditures .............................................................. $185,000 Other Financing Source ....................................... $160,000 Cash ..................................................................... 25,000 C. Capital Asset.............................................................. $185,000 Lease Payable ...................................................... $160,000 Cash ..................................................................... 25,000 D. Capital Asset.............................................................. $185,000 Other Financing Source ....................................... $160,000 Cash ..................................................................... 25,000 Answer: B Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge A.
26. A government has a principal and interest payment on long-term debt coming due in the next fiscal year. Which condition must hold true for the government to treat the payment as an expenditure in the current fiscal year? A. The payment must come due in the first month of the next fiscal year, and the government must transfer the cash for the payment to the debt service fund consistently from year-to-year. B. The payment comes due in the first 60 days of the next fiscal year, and the government must transfer the cash for the payment to the debt service fund consistently from year-toyear. C. The payment must come due in the first 60 days of the next fiscal year, but the government has some flexibility on when the cash for the payment is transferred to the debt service fund. D. The payment can come due at any time, and the government can make the payments from the General Fund so long as the resources are available at the time of the payment. Answer: A Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Difficult Classification: Concept AACSB Category: Analytical thinking 9 Copyright © 2018 Pearson Education, Inc.
27. Nathan Township financed emergency repairs on the Township Hall by borrowing on a $200,000, 6-month short-term note. The interest rate on the note was 6% and it was issued 2 months prior to the end of the fiscal year. Which of the following statements accurately reflects how the General Fund will be affected in the year the financing was acquired? A. The General Fund will report an other financing source of $200,000. B. The General Fund will report a Note Payable of $200,000. C. The General Fund will report interest expenditures of $12,000. D. The General Fund will report interest expense of $4,000. Answer: B Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 28. A government has claims and judgments outstanding at the beginning of 20X5 of $1,000,000. These claims and judgments are expected to result in awards against the government of $800,000. $75,000 of these claims were due and payable from the General Fund at December 31, 20X4. At the end of 20X5, the government has claims and judgments outstanding of $2,000,000. These claims and judgments are expected to result in awards against the government of $1,200,000. None of these claims is due and payable from the General Fund at December 31, 20X5. The government paid claims and judgments of $400,000 during 20X5. General Fund expenditures for claims and judgments for 20X5 should be reported at what amount? A. $325,000. B. $400,000. C. $725,000. D. $800,000. Answer: A Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 29. A government has a liability for accrued compensated absences at the beginning of 20X5 of $500,000. This liability did not mature in 20X4. At the end of 20X5, the government has a liability for accrued compensated absences (not due and payable) of $600,000. In addition, the government had $10,000 of matured compensated absences to be paid in early 20X6 from existing fund assets. The government paid compensated absences of $400,000 during 20X5. The General Fund expenditures for compensated absences for 20X5 should be reported at what amount? 10 Copyright © 2018 Pearson Education, Inc.
A. $400,000. B. $410,000. C. $500,000. D. $510,000. Answer: B Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 30. A court judgment was rendered against a county in which they were ordered to pay $500,000 in equal installments over a five-year period to the plaintiff. The county's General Fund will A. Report a fund liability of $500,000 in Year 1. B. Report expenditures of $500,000 in Year 1. C. Report expenditures of $100,000 in Year 1. D. Report expenditures of $100,000 in Year 1 and a fund liability of $400,000. Answer: C Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 31. Assume that Onyx County $10,000 to its OPEB plan for the current year. The net OPEB liability, none of which is due and payable at year end, increase from $25,000 to $45,000 during the year. The General Fund, which is the only fund with employees, would recognize expenditures in the current year of A. $45,000. B. $35,000. C. $25,000. D. $10,000. Answer: D Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 32. A city does not choose to advance fund its OPEB plan but instead will continue to pay these postretirement benefits as they come due. The current year's benefit payments total $2,500. The total OPEB liability increased from $14,000 to $16,500 during the year. The General 11 Copyright © 2018 Pearson Education, Inc.
Fund would recognize an expenditure of A. $0. B. $2,500. C. $14,000. D. $16,500. Answer: B Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 33. City of Alnwick makes pension contributions on behalf of its employees to both a defined benefit plan and a defined contribution plan. Assume that the employer contributions for the fiscal year totaled $55,000 for the defined benefit plan and $35,000 for the defined contribution plan. The net pension liability grew by $70,000 during the fiscal year. None of the liability was due and payable either at the beginning of the year or at the end of the year. The General Fund will report A. Total expenditures of $90,000. B. Expenditures of $55,000 and transfers out of $35,000. C. Transfers out of $90,000. D. Transfers out of $55,000 and expenditures of $35,000. Answer: A Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 34. The following benefits are examples of other postemployment benefits (OPEB) except for A. Health care insurance. B. Pension benefits. C. Vision insurance. D. Life insurance. Answer: B Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 35. Clinch River Authority has a defined contribution pension plan. How should the Authority 12 Copyright © 2018 Pearson Education, Inc.
report its General Fund contributions to the pension plan in its financial statements? A. As expenses. B. As transfers out. C. As expenditures. D. As other financing uses. Answer: C Objective: LO 6.3 Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds. Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge
13 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 6
Problem 1 – Matching: Match the Resource Flow with the Type of Expenditure Listed below in the left column are events that may or may not be expenditures for the General Fund. Listed in the right column are the classifications of expenditures for governmental funds. Correctly match each event with the appropriate expenditure classification. Unless specifically stated otherwise, assume all amounts have been incurred. If the event is not an expenditure, state how the event would be reported in the current year General Fund financial statements. Each classification of expenditure may be used once, more than once, or not at all.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.
19. 20. 21.
22. 23. 24.
Event Interest on short-term debt. Purchase of a vehicle that will be used in the Library (which is accounted for using a Special Revenue Fund). Signing a capital lease. Claim against the government to be paid in a future year. Borrowing money with a short-term note. Interest on long-term debt that is due in the next year. Compensated absences earned and paid during the year. Salaries and wages. Amounts withheld from salaries and wages for taxes and Social Security/Medicare. Ordering supplies and materials (assume the purchases method is used). Receiving supplies (assume the purchases method is used). Using supplies (assume the purchases method is used). Ordering supplies and materials (assume the consumption method is used). Issuing long-term debt. Receiving supplies (assume the consumption method is used). Using supplies (assume the consumption method is used). Capital lease principal payment. The General Fund reimbursed the Special Revenue Fund (SRF) for salaries paid originally from SRF resources. Capital lease interest payment. Repayment of a short-term note. The General Fund received a payment from the Library Fund (SRF) for its portion of the government electricity bill. Year-end accrual of interest on short-term note. Compensated absences incurred in the current year but to be paid in future years. Claim against the government to be paid in the current
Classification of Expenditure A. Expenditures – Operating B. Expenditures – Intergovernmental C. Expenditures – Capital Outlay D. Expenditures – Debt Service – Principal E. Expenditures – Debt Service – Interest F. Not a General Fund expenditure G. Event reduces expenditure (also identify which of above expenditures would be reduced)
1 Copyright © 2018 Pearson Education, Inc.
25. 26.
year. The General Fund received an electric bill for the entire government. The General Fund paid the bill. The General Fund transferred money to the Capital Projects Fund to provide financing for the construction of a major facility.
Answers: 1. E 2. F – reported as a capital outlay expenditure by the SRF 3. C 4. F – reported as a general long-term liability until paid 5. F – Balance Sheet liability 6. F – not accrued 7. A 8. A 9. F – Balance Sheet liability 10. F – reported as an encumbrance until received 11. A 12. F – expenditure reported when received 13. F – reported as an encumbrance until received 14. F – Other financing source 15. F – Balance Sheet asset 16. A 17. D 18. A 19. E 20. F – reduction of Balance Sheet liability 21. G – A 22. E 23. F – general long-term liability 24. A 25. A 26. F – Other financing use – transfer
2 Copyright © 2018 Pearson Education, Inc.
Problem 2 – Inventory Journal Entries A government with a beginning inventory of supplies of $100 in its General Fund and had the following transactions during the year (all amounts are in thousands). Transactions: 1. Ordered supplies with an estimated cost of $3,150. 2. Received supplies with an actual invoice cost of $2,920. No payment was made upon receipt; $2,950 was the encumbered amount. 3. Paid $2,300 on account for supplies received in #2. 4. During the year, the inventory warehouse issued $2,900 in supplies to general government departments. 5. The ending physical inventory of General Fund supplies found $150 on hand at year end. Requirements: A. Consumption method of accounting for inventory 1. Prepare the general journal entries required to account for the previous information. 2. Indicate the effects of the general journal entries on the Balance Sheet equation. 3. Indicate amounts reported on Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balance with respect to the Inventory of Supplies. B. Purchases method of accounting for inventory 1. Prepare the general journal entries required to account for the previous information. 2. Indicate the effects of the general journal entries on the Balance Sheet equation. 3. Indicate amounts reported on Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balance with respect to the Inventory of Supplies.
3 Copyright © 2018 Pearson Education, Inc.
Answers: A1.
Consumption method journal entries (assuming perpetual inventory system).
# Accounts 1 Encumbrances Encumbrances Outstanding
Debit 3,150
Credit 3,150
2a Encumbrances Outstanding Encumbrances
2,950
2b Supplies Inventory Vouchers Payable
2,920
3 Vouchers Payable Cash
2,300
4 Expenditures – Operating Supplies Inventory
2,900
2,950
2,920
2,300
5 Supplies Inventory Expenditures – Operating Beginning Inventory, Supplies Supplies received during year Supplies issued during year Ending Inventory – per books Ending Inventory – per physical count Inventory Overage Alternative entries for 2b, 4, and 5 – assumes periodic inventory system. 2b Expenditures – Operating Vouchers Payable
2,900 30 30 100 2,920 (2,900) 120 150 30
2,920 2,920
4 No entry required – expenditures already recorded in 2b. 5 Supplies Inventory Expenditures – Operating
50
Beginning Inventory, Supplies Ending Inventory, Supplies Increase in Inventory
100 150 50
4 Copyright © 2018 Pearson Education, Inc.
50
A2.
Trans # 1 2a 2b 3 4 5
Effects of journal entries on the Balance Sheet equation using regular entries (perpetual inventory system)
Assets NE NE 2,920 (2,300) (2,900) 30
Deferred Outflows NE NE NE NE NE NE
Liabilities NE NE 2,920 (2,300) NE NE
Deferred Inflows NE NE NE NE NE NE
Fund Balance NE NE NE NE (2,900) 30
Note: Since the effects for Deferred Outflows and Deferred Inflows are all NE, you may choose to omit those columns. Effects of journal entries on the Balance Sheet equation using regular entries (periodic inventory system). Trans # 1 2a 2b 3 4 5
A3.
Assets NE NE NE (2,300) NE 50
Deferred Outflows NE NE NE NE NE NE
Liabilities NE NE 2,920 (2,300) NE NE
Deferred Inflows NE NE NE NE NE NE
Financial Statement Reporting Balance Sheet Asset – Inventory Fund Balance – Nonspendable Operating Statement Expenditures – Operating
5 Copyright © 2018 Pearson Education, Inc.
150 150
2,870
Fund Balance NE NE (2,920) NE NE 50
B1.
Purchases method journal entries
# Accounts 1 Encumbrances Encumbrances Outstanding
Debit 3,150
Credit 3,150
2a Encumbrances Outstanding Encumbrances
2,950
2b Expenditures – Operating Vouchers Payable
2,920
3 Vouchers Payable Cash
2,300
2,950
2,920
2,300
4 No Entry Required 5 Supplies Inventory Other Financing Source – Increase in Inventory
50 50
Beginning Inventory, Supplies Ending Inventory, Supplies Increase in Inventory B2. Trans # 1 2a 2b 3 4 5
B3.
100 150 50
Effects of journal entries on the Balance Sheet equation
Assets NE NE NE (2,300) NE 50
Deferred Outflows NE NE NE NE NE NE
Liabilities NE NE 2,920 (2,300) NE NE
Deferred Inflows NE NE NE NE NE NE
Financial Statement Reporting Balance Sheet Asset – Inventory Fund Balance – Nonspendable Operating Statement Expenditures – Operating Other Financing Source – Increase in Inventory
6 Copyright © 2018 Pearson Education, Inc.
150 150
2,920 50
Fund Balance NE NE (2,920) NE NE 50
Problem 3 – Capital Leases A general government department of the City of Rocky Flats leased specialized equipment under a multi-year, noncancelable lease agreement that qualifies as a capital lease. The lease required a down payment of $500 and the present value of the minimum lease payments (i.e., the capitalizable cost of the leased asset) was $5,000. The implicit rate of interest on the lease is 10%. Subsequent lease payments of $750 are required annually beginning in 20X2. All amounts are in thousands of dollars. Transactions: 1. The lease was signed on March 1, 20X1. 2. Prepare any adjusting entries required at December 31, 20X1, the end of Rocky Flats fiscal year. 3. The City made the required payment on February 28, 20X2. Requirements: 1. Prepare the general ledger journal entries for the transactions for the General Fund. If no entry is required, do not leave it blank. State "No Entry Required" and briefly explain why. 2. Indicate the effects of the transaction on the accounting equations for the General Fund and the General Capital Assets and General Long-Term Liabilities accounts. Do not leave a cell blank. 3. How will the capital lease be reported on the General Fund financial statements for the year ended December 31, 20X1?
7 Copyright © 2018 Pearson Education, Inc.
Answers: 1. Journal Entries # Accounts 1 Expenditures – Capital Outlay Cash Other Financing Sources – Capital Lease
Debit 5,000
Credit 500 4,500
2 No entry required at December 31. The lease payment is not due until next year, and it is in-substance debt service on general long-term debt. Therefore, there is no accrual of interest or principal expenditures. 3 Expenditures – Debt Service – Interest (4,500 × 10%) Expenditures – Debt Service – Principal Cash
450 300 750
2. Effects on accounting equations for the General Fund and the General Capital Assets and General Long-Term Liabilities accounts. Trans Fund Net # Assets Liabilities Balance GCA GLTL Position 1 (500) NE (500) 5,000 4,500 500 2 NE NE NE NE NE NE* 3 (750) NE (750) NE (300) 300 *A government might choose to record interest payable (and the related interest expense) in the GLTL accounts but that is not presumed here. Likewise, GCA could be reduced by accumulated depreciation and net position by depreciation expense but insufficient information is provided to permit this. 3. Capital lease reporting in the General Fund Financial Statements Balance Sheet – no effect other than a lower cash balance. No asset or liability to report. Operating Statement – as noted in the journal entry, Capital Outlay expenditure of $5,000 and OFS for capital lease of $4,500 will be reported, netting to a $500 decrease in the change in fund balance.
8 Copyright © 2018 Pearson Education, Inc.
Problem 4 – Other Expenditure Transactions Listed below are various transactions affecting the City of Highland Flats General Fund for the fiscal year ending June 30, 20X4. Transactions: 1. Near the beginning of the year, the City was sued by one of its residents claiming that the resident was injured due to a hazardous sidewalk. The resident is asking for damages of $500,000. The City expects to win the case. 2. Later in the year, the City decided to settle the aforementioned lawsuit on the advice of its legal counsel. The government settled the suit for $300,000, paying $100,000 now, and $50,000 on August 1 for each of the next 4 years. For these types of lawsuits, the City is self-insured for the first $50,000 and 100% insured for the remaining payments. Because of a cash flow issue, the city borrowed $50,000 on a 6 month, 3% note that comes due 2 months after year end. No money was received from the insurance company by year end, but the total amount due was expected by August 15. 3. The city’s employees earned $25,000 in compensated absences during the year. Of this amount, $10,000 was paid during the year, and another $7,500 is due and payable in the first 45 days of the following year. In addition, $5,000 due at the end of previous year was paid in the current year. Finally, $7,000 earned in earlier years became due and payable and was paid this year. 4. The City’s OPEB Plan’s net OPEB liability, none of which is due and payable, increased $15,000 during the year. $5,000—the approximate amount of retiree healthcare costs paid for the year—was paid to the plan. Requirements: 1. Prepare the journal entries for the above events, including any necessary year-end adjusting entries. If a transaction requires no entry, state “No entry required” and explain why. 2. Demonstrate the effects of these transactions on the accounting equation for the General Fund and the General Capital Assets and General Long-term Liabilities accounts.
9 Copyright © 2018 Pearson Education, Inc.
Answers: 1. Journal entries: # Accounts 1 No entry required. At this time a loss is not probable and the amount of the loss cannot be reasonably estimated.
Debit
Credit
Therefore, no liability exists. 2a Expenditures – Operating Due from Insurance Company Cash OFS – Insurance Proceeds
100,000 100,000
b Cash Note Payable
50,000
100,000 100,000
50,000
c Expenditures – Debt Service – Interest Interest Payable (50,000 × 3% × 4/12)
500
3 Expenditures – Operating (10,000 + 7,000) Compensated Absences Payable Cash (10,000 + 5,000 + 7,000)
17,000 5,000
4 Expenditures – Operating Cash
5,000
10 Copyright © 2018 Pearson Education, Inc.
500
22,000
5,000
2. Effects on accounting equations for the General Fund (Deferred Outflows and Deferred Inflows have been excluded since all are no effect) and the General Capital Assets and General Long-Term Liabilities accounts. Trans # 1 2a 2b 2c 3 4
Assets NE NE 50,000 NE (22,000) (5,000)
Liabilities NE NE 50,000 500 (5000) NE
Fund Balance NE NE NE (500) (17,000) (5,000)
GCA NE NE NE NE NE NE
11 Copyright © 2018 Pearson Education, Inc.
GLTL NE 200,000 NE NE 15,000 15,000
Net Position NE (200,000) NE NE (15,000) (15,000)
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 7 Capital Projects Funds
1. Which of the following statements is true concerning accounting and financial reporting practices related to capital asset acquisitions? A. Routine capital purchases such as vehicles and equipment often may be financed and accounted for in a General Fund. B. Most capital lease transactions related to governmental funds are accounted for initially in either the General Fund or a Debt Service Fund. C. Capital Project Funds may be used only for acquisition or construction of major capital facilities. D. Most capital projects last only for on fiscal year. Answer: A Objective: LO7.1 Explain the typical capital projects financing sources, the number of Capital Projects Funds required, and the life cycle of a Capital Projects Fund as well as typical budgeting and budgetary reporting issues and the costs charged to Capital Projects Funds. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical thinking 2. Which of the following is true? A. A government is required to record each major general government capital project in a separate Capital Projects Fund. B. Acquisition or construction of general government capital assets must always be accounted for through a Capital Projects Fund. C. A Capital Projects Fund is not required by GAAP if a general government project is financed by issuing general obligation bonds. D. A Capital Projects Fund may be used to acquire vehicles and equipment. Answer: D Objective: LO 7.1 Explain the typical capital projects financing sources, the number of Capital Projects Funds required, and the life cycle of a Capital Projects Fund as well as typical budgeting and budgetary reporting issues and the costs charged to Capital Projects Funds. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical thinking 3. Which of the following capital asset-related transactions would most likely be accounted for through a Capital Projects Fund? A. A major general government capital lease transaction. B. Purchase of multiple computers for general government departments. C. Construction of a general government office building. D. Maintenance of general government fixed assets. Answer: C Objective: LO 7.1 Explain the typical capital projects financing sources, the number of Capital Projects Funds required, and the life cycle of a Capital Projects Fund as well as typical budgeting and budgetary reporting issues and the costs charged to Capital Projects Funds. 1 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 4. Which of the following statements is false? A. Capital leases are not commonly reported in a Capital Projects Fund. B. A governmental entity may report a Capital Project Fund in one year but not the next. C. Budgetary entries are commonly made in a Capital Projects Fund. D. Debt service payments on capital-related debt are paid from a Capital Projects Fund. Answer: D Objective: LO 7.1 Explain the typical capital projects financing sources, the number of Capital Projects Funds required, and the life cycle of a Capital Projects Fund as well as typical budgeting and budgetary reporting issues and the costs charged to Capital Projects Funds. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 5. The General Fund is partially funding the construction of a new police station. Eighty percent (80%) of the project is being financed; the General Fund's share of the project is $1,000,000. The Capital Project Fund would report the General Fund’s share as a A. $1,000,000 other financing source. B. $1,000,000 revenue. C. $1,000,000 nonoperating revenue. D. $1,000,000 other financing use. Answer: A Objective: LO 7.1 Explain the typical capital projects financing sources, the number of Capital Projects Funds required, and the life cycle of a Capital Projects Fund as well as typical budgeting and budgetary reporting issues and the costs charged to Capital Projects Funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 6. If a governmental entity issued a six-month, $400,000 note payable at 6% interest three months prior to the fiscal year end to help finance a new fire station, Capital Projects Fund interest payable should be accrued as of the end of the fiscal year in the amount of A. $0. B. $6,000. C. $12,000. D. $24,000. Answer: B Objective: LO 7.1 Explain the typical capital projects financing sources, the number of Capital Projects Funds required, and the life cycle of a Capital Projects Fund as well as typical budgeting and budgetary reporting issues and the costs charged to Capital Projects Funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 2 Copyright © 2018 Pearson Education, Inc.
7. Which of the following transactions would not be reported as an expenditure in a Capital Projects Fund? A. Payment of construction costs. B. Bond issue costs. C. Bond discounts. D. Interest on short-term debt issued to finance capital project. Answer: C Objective: LO 7.1 Explain the typical capital projects financing sources, the number of Capital Projects Funds required, and the life cycle of a Capital Projects Fund as well as typical budgeting and budgetary reporting issues and the costs charged to Capital Projects Funds. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 8. A county government secured a six-month, $600,000 loan at 5% interest from a local lending institution to finance a project at a county-owned park. The loan transaction took place one month prior to the end of the fiscal year, at which time 50% of the project was completed for $300,000. As of the end of the fiscal year, the county should report capital outlay expenditures in the amount of A. $15,000. B. $30,000. C. $150,000. D. $300,000. Answer: D Objective: LO 7.1 Explain the typical capital projects financing sources, the number of Capital Projects Funds required, and the life cycle of a Capital Projects Fund as well as typical budgeting and budgetary reporting issues and the costs charged to Capital Projects Funds. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 9. Which of the following expenditures is not capitalized as part of the cost of a capital asset acquired through a Capital Projects Fund? A. The retained percentage to insure proper completion of the construction by the contractor. B. Direct materials and labor that are used or consumed in the construction process. C. Interest expenditures on 5-year bonds issued to finance the project. D. Incremental overhead expenditures related to the construction project. Answer: C Objective: LO 7.1 Explain the typical capital projects financing sources, the number of Capital Projects Funds required, and the life cycle of a Capital Projects Fund as well as typical budgeting and budgetary reporting issues and the costs charged to Capital Projects Funds. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 10. Which of the following is a distinguishing feature of a budget for a Capital Projects Fund? 3 Copyright © 2018 Pearson Education, Inc.
A. The budget is usually for a single year. B. A budget is not used for projects for which contracts will be issued. C. The budget is usually for the term (life) of the project. D. Since a Capital Projects Fund usually just spends money, there is no reason for revenue or other financing sources to be part of the budget. Answer: C Objective: LO 7.1 Explain the typical capital projects financing sources, the number of Capital Projects Funds required, and the life cycle of a Capital Projects Fund as well as typical budgeting and budgetary reporting issues and the costs charged to Capital Projects Funds. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical thinking 11. The City of Bamberg, which has a fiscal year end of December 31, issued a nine-month $1,000,000 bond anticipation note on July 1. The city is planning to renew or re-issue the bond anticipation notes for another six-month period when they mature. What would the Capital Projects Fund liability for the note be on December 31? A. $0. B. $500,000. C. $1,000,000. D. $2,000,000. Answer: C Objective: LO 7.3 Describe Capital Projects Fund accounting for general long-term debt issuances, including accounting for bond proceeds (face amount, premiums and discounts, bond issuance costs), bond anticipation notes, and explain what arbitrage is and its potential impact. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 12. Bond anticipation notes are A. Always short-term liabilities of the fund until the bonds are issued. B. Always general long-term liabilities. C. Sometimes treated as fund liabilities even if they have a long-term maturity. D. Sometimes treated as general long-term liabilities even if they have a term of one year or less. Answer: D Objective: LO 7.3 Describe Capital Projects Fund accounting for general long-term debt issuances, including accounting for bond proceeds (face amount, premiums and discounts, bond issuance costs), bond anticipation notes, and explain what arbitrage is and its potential impact. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 13. A government issued bond anticipation notes to provide initial financing for a general 4 Copyright © 2018 Pearson Education, Inc.
government capital project. The bond anticipation note A. Proceeds are always reported as an other financing source in the Capital Projects Fund. B. Payable should be reported as a liability of the Capital Projects Fund except when the original term of the notes exceeds one year. C. Payable is usually repaid by the Capital Projects Fund. D. Interest on the bond anticipation note should be capitalized as part of the cost of the capital asset. Answer: C Objective: LO 7.3 Describe Capital Projects Fund accounting for general long-term debt issuances, including accounting for bond proceeds (face amount, premiums and discounts, bond issuance costs), bond anticipation notes, and explain what arbitrage is and its potential impact. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 14. Retirement of the principal of a bond anticipation note that is recorded as a liability in a Capital Projects Fund should be reported in the Capital Projects Fund statement of revenues, expenditures, and changes in fund balance as A. Expenditures. B. Other financing uses. C. Special item. D. This item would not reported in the Capital Projects Fund operating statement. Answer: D Objective: LO 7.3 Describe Capital Projects Fund accounting for general long-term debt issuances, including accounting for bond proceeds (face amount, premiums and discounts, bond issuance costs), bond anticipation notes, and explain what arbitrage is and its potential impact. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 15. A government issued short-term bond anticipation notes for a capital project. The notes are to be repaid from bond proceeds if the voters approve the bonds. The bond anticipation notes A. Must be reported as debt of the Capital Projects Fund. B. Must be reported as debt of the Capital Projects Fund if it is probable that the bond referendum will not pass. C. Must be reported as debt of the Capital Projects Fund unless it is probable that the bond referendum will pass. D. Must be reported as general long-term debt. Answer: A Objective: LO 7.3 Describe Capital Projects Fund accounting for general long-term debt issuances, including accounting for bond proceeds (face amount, premiums and discounts, bond issuance costs), bond anticipation notes, and explain what arbitrage is and its potential impact. Difficulty Level: Moderate Classification: Concept 5 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of knowledge 16. A government had $7,000,000 of 5%, six-month bond anticipation notes outstanding at the end of the fiscal year. As of this date, the government has completed all legal procedures and the notes will be refinanced to a term of ten years the following month. The BAN liability reported in the Capital Projects Fund as of the end of the fiscal year should be A. $0. B. $350,000. C. $3,500,000. D. $7,000,000. Answer: A Objective: LO 7.3 Describe Capital Projects Fund accounting for general long-term debt issuances, including accounting for bond proceeds (face amount, premiums and discounts, bond issuance costs), bond anticipation notes, and explain what arbitrage is and its potential impact. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 17. The county issued a six-month, 6%, $200,000 bond anticipation note on October 1, 20X7, to provide temporary financing for a police station construction project. The voters have not approved the issuance of bonds. The county government was billed $150,000 during the year for construction costs on its capital project and $125,000 was paid. If the bond referendum is not approved by the voters, the government should report Capital Projects Fund expenditures for the year ended December 31, 20X7 of A. $125,000. B. $150,000. C. $153,000. D. $162,000. Answer: C Objective: LO 7.3 Describe Capital Projects Fund accounting for general long-term debt issuances, including accounting for bond proceeds (face amount, premiums and discounts, bond issuance costs), bond anticipation notes, and explain what arbitrage is and its potential impact. Difficulty Level: Difficult Classification: Synthesis AACSB Category: Analytical thinking 18. On October 1, the county issued a six-month, 6%, $200,000 bond anticipation note to provide temporary financing for a police station. The voters have approved the issuance of bonds to finance the project and the bonds are issued early in the following year and used to retire the note. The county government was billed $150,000 during the year on its capital project and $125,000 was paid. The government should report Capital Projects Fund expenditures for the current year ending December 31 equal to A. $125,000. B. $150,000. C. $153,000. 6 Copyright © 2018 Pearson Education, Inc.
D. $162,000. Answer: B Objective: LO 7.3 Describe Capital Projects Fund accounting for general long-term debt issuances, including accounting for bond proceeds (face amount, premiums and discounts, bond issuance costs), bond anticipation notes, and explain what arbitrage is and its potential impact. Difficulty Level: Difficult Classification: Synthesis AACSB Category: Analytical thinking 19. A governmental entity issued general obligation bonds with a face value of $10,000,000 at a premium that totaled $100,000 for a governmental capital project. The General Long-Term Liability accounts would include total liabilities after issuance of A. $0. B. $100,000. C. $10,000,000. D. $10,100,000. Answer: D Objective: LO 7.3 Describe Capital Projects Fund accounting for general long-term debt issuances, including accounting for bond proceeds (face amount, premiums and discounts, bond issuance costs), bond anticipation notes, and explain what arbitrage is and its potential impact. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 20. Government A secured a $400,000 short-term loan from a local bank for interim financing for a governmental capital project. What would the journal entry be in the Capital Projects Fund to account for this transaction? Debit Credit A. Cash ............................................................................ $400,000 Other Financing Sources ........................................ $400,000 B. Cash ............................................................................ $400,000 Notes Payable......................................................... $400,000 C. Construction in Progress ............................................. $400,000 Other Financing Sources ........................................ $400,000 D. Cash ............................................................................ $400,000 Revenues ................................................................ $400,000 Answer: B Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 21. A city was awarded a $600,000 federal grant to help finance a bridge construction project 7 Copyright © 2018 Pearson Education, Inc.
that is expected to take two years to complete. The grant will be paid in two installments: (1) 60% at the beginning of the project in Year 1, and (2) 40% when the project is completed. Capital Projects Fund revenue should be recognized in Year 1 in the amount of A. $600,000. B. $360,000. C. $240,000. D. $0. Answer: B Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 22. Issuance of a short-term bond anticipation note—to provide temporary financing for a general government capital project—that does not meet the requirements for treatment as long-term debt: A. does not increase fund balance of the Capital Projects Fund (CPF). B. increases fund balance of the CPF because they are issued in anticipation of issuing longterm debt. C. would affect the General Long-Term Liabilities (GLTL) balance. D. would normally be repaid from a Debt Service Fund (DSF). Answer: A Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 23. A county was awarded a $900,000 expenditure-driven grant for a capital project that is expected to take three years to complete. As of the end of Year 1, the county had incurred expenditures of approximately $50,000. The county has applied for reimbursement from the grantor and the grant receivable is considered to be available. The county should recognize Capital Projects Fund revenue at the end of Year 1 in the amount of A. $0. B. $50,000. C. $300,000. D. $900,000. Answer: B Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 24. Ledford County issued $2,000,000 of general obligation bonds for the construction of a new recreation center. The bonds were sold at a 1% discount and the county incurred $150,000 in 8 Copyright © 2018 Pearson Education, Inc.
underwriter's fees, both of which were withheld from the settlement proceeds. The journal entry required in the Capital Projects Fund for the issuance of the bonds would be Debit Credit A. Cash ............................................................................ $2,000,000 Other Financing Sources ........................................ $2,000,000 B. Cash ............................................................................ $1,830,000 Other Financing Sources ........................................ $1,830,000 C. Cash ............................................................................ $1,850,000 Expenditures ............................................................... 150,000 Other Financing Sources – Bonds.......................... $1,980,000 Other Financing Sources – Discount ..................... 20,000 D. Cash ............................................................................ $1,830,000 Expenditures – Underwriter Fees ............................... 150,000 Other Financing Uses – Discount ............................... 20,000 Other Financing Sources – Bonds ......................... $2,000,000 Answer: D Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 25. A Capital Projects Fund received a $300,000 transfer from the General Fund and $200,000 of a $500,000 unrestricted state grant for a highway project. The grant is being paid in two phases–$200,000 in Year 1 and $300,000 when the project is completed (which is anticipated to be at the end of Year 2). Capital Projects Fund revenues reported at the end of Year 1 should be A. $0. B. $200,000. C. $300,000. D. $800,000. Answer: B Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 26. If a governmental entity issued $3,000,000 in bonds, received a $500,000 federal capital grant, and transferred $750,000 to a Capital Projects Fund from the General Fund, the Capital Projects Fund financial statements should report Other Financing Sources (OFS) of A. $500,000. B. $750,000. C. $3,750,000. D. $4,250,000. Answer: C 9 Copyright © 2018 Pearson Education, Inc.
Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge Comment: Federal capital grant is Intergovernmental Revenue. 27. Assume that a government received a $5,000,000 expenditure-driven grant in Year 1 for a project that was expected to take three years to complete. Further assume that qualifying expenditures for the project, which actually took four years to complete, were as follows: Year 1—$1,000,000; Year 2—$2,500,000; Year 3—$1,000,000; Year 4—$400,000. Assuming the grant receivable is available in each period, the government should report grant revenues in Year 2 in the amount of A. $1,000,000. B. $2,500,000. C. $3,500,000. D. $5,000,000. Answer: B Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 28. If a government earns and collects interest on Capital Projects Fund investments in the same fiscal year, the fund financial statements should report A. A transfer to the General Fund. B. A revenue. C. An unearned revenue. D. An other financing source. Answer: B Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 29. Arbitrage is: A. a means of settling tax disputes between professional athletes and the governmental unit. B. earning investment income on investment of the proceeds of bonds exempt from federal taxes that exceeds the interest on the bonds. C. the amount of tax plus interest paid by governments on the total of the excess of revenues and other financing sources over expenditures and other financing uses in the governmental funds and operating income in the proprietary funds. D. a payment in lieu of tax from the federal government to a local government for some services provided to the federal government by the local government. Answer: B 10 Copyright © 2018 Pearson Education, Inc.
Objective: LO 7.3 Describe Capital Projects Fund accounting for general long-term debt issuances, including accounting for bond proceeds (face amount, premiums and discounts, bond issuance costs), bond anticipation notes, and explain what arbitrage is and its potential impact. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 30. The city is installing curbs and sidewalks in a subdivision as part of a special assessment capital improvement project. The capital improvements are being financed by an $800,000 eight year, 10%, special assessment note payable. The note and interest are to be repaid from special assessments levied against the property owners of the subdivision. The total amount of special assessments of $840,000 was levied in the current year and will be collected evenly over eight years beginning next year. The government should report Capital Projects Fund revenues for the current year equal to A. $0. B. $105,000. C. $800,000. D. $840,000. Answer: A Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 31. The city is installing curbs and sidewalks in a subdivision as part of a special assessment capital improvement project. The capital improvements are being financed by an $800,000 eight year, 10%, special assessment note payable issued for cash at the Last National Bank at the beginning of the project earlier this year. The note and interest are to be repaid from special assessments levied against the property owners of the subdivision. The total amount of special assessments of $840,000 was levied in the current year and will be collected evenly over eight years beginning next year. The city spent $600,000 to install curbs and sidewalks during the year. For the year, the city should report what change in fund balance for the Capital Projects Fund? A. $(600,000). B. $200,000. C. $240,000. D. $840,000. Answer: B Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 32. Which of the following is (are) reported on the Balance Sheet of a Capital Projects Fund? 11 Copyright © 2018 Pearson Education, Inc.
A. Construction in progress. B. Bonds payable issued to finance a project. C. Bonds issue costs to finance a project. D. Cash and investments to be used to finance construction of a major GCA. Answer: D Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 33. The Board of Commissioners took its highest level formal action to dedicate resources for a particular project in the Capital Projects Fund. Those resources cannot be redirected for another use unless an equivalent formal action is taken. As of the end of the fiscal year, a portion of these resources remain in fund balance. The proper fund balance classification for these resources would be A. Nonspendable. B. Restricted. C. Committed. D. Assigned. Answer: C Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 34. A Capital Projects Fund may report a positive amount in each of the following fund balance classifications except A. Restricted. B. Committed. C. Assigned. D. Unassigned. Answer: D Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 35. General obligation bonds were issued to finance a particular governmental capital project fund. The resources received will affect which classification of fund balance until expended? A. Nonspendable. B. Restricted. C. Committed. D. Assigned. Answer: B 12 Copyright © 2018 Pearson Education, Inc.
Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 36. As of the end of the fiscal year, a Capital Projects Fund has material balances of supplies inventory. Which fund balance classification would reflect the inventory of supplies? A. Nonspendable. B. Restricted. C. Committed. D. Assigned. Answer: A Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 37. A Capital Projects Fund has outstanding encumbrances of $75,000 as of the end of the fiscal year. Assume that all resources in the Capital Projects Fund are considered to be restricted. Which fund balance classification increases because of these encumbrances? A. Restricted fund balance. B. Committed fund balance. C. Assigned fund balance. D. No fund balance category is increased. Answer: D Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 38. A governmental entity is funding a capital project with the issuance of general obligation bonds, as well as a federal grant. When qualifying expenditure reimbursements are collected, the grant would be reported on the operating statement as A. An other financing source. B. A revenue. C. A nonoperating revenue. D. An other financing use. Answer: B Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 13 Copyright © 2018 Pearson Education, Inc.
39. Construction in Progress would be recorded as an asset in A. A Capital Projects Fund. B. The General Fund. C. The General Capital Asset accounts. D. Construction in Project is not an asset in government financial reports. Answer: C Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 40. Assume a Capital Projects Fund of Henry County is holding investments as of the end of the fiscal year. Which of the following statements is true related to the interest earned on the investments? A. Henry County would report accrued interest receivable and interest revenue in the Capital Projects Fund as of the end of the fiscal year. B. Henry County would only report interest revenue when the investment matured. C. Henry County may choose to report interest revenue on the modified accrual basis or on the cash basis. D. The interest earned would be reported in the General Fund since it cannot be used to finance a capital project. Answer: A Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 41. The external financial statements for the Capital Projects Funds of a governmental entity may include the following except A. A budget-to-actual statement of revenues, expenditures, and changes in fund balance. B. A statement of revenues, expenditures, and changes in fund balance. C. A statement of cash flows. D. Balance Sheet. Answer: C Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 42. Which of the following accounts would appear in a Capital Projects Fund? A. Contracts payable–retained percentage. B. Bonds payable. C. Construction in progress. D. Buildings. 14 Copyright © 2018 Pearson Education, Inc.
Answer: A Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 43. Which of the following accounts would not appear in a Capital Projects Fund? A. Other financing sources–bond proceeds. B. Bond anticipation note payable. C. Bonds payable. D. Other financing sources–bond premium. Answer: C Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 44. A government was billed $3,000,000 during the year on its capital project, of which $2,700,000 was paid. The total contracted cost is $5,200,000. The government does not plan to pay the $300,000 balance currently owed to the contractor until the project has been completed and approved. The government should report Capital Projects Fund expenditures for the current year equal to A. $2,700,000. B. $3,000,000. C. $4,900,000. D. $5,200,000. Answer: B Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 45. Which of the following should not be reported as other financing sources (uses) in a Capital Projects Fund? A. Face value of general obligation bonds issued to finance a general government capital project. B. Premium on general obligation bonds issued to finance a general government capital project. C. Proceeds from special assessments levied against property owners to finance construction of a general government capital project initially financed with long-term debt. D. Transfer from General Fund. Answer: C Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. 15 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 46. Which of the following should not be reported as other financing sources (uses) in a Capital Projects Fund? A. Face value of general obligation bonds issued to finance a general government capital project. B. Premium on general obligation bonds issued to finance a general government capital project. C. Payment of construction costs. D. Transfers. Answer: C Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 47. The city's Capital Projects Fund had an excess of expenditures over revenues for the current year. Which of the following explanations for the excess is not plausible? A. The city financed a substantial portion of the project in the previous year. B. The city financed a significant portion of the project by issuing long-term bonds during the year C. The city financed a significant portion of the project from transfers from the General Fund. D. All of the above are plausible explanations. Answer: D Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 48. A deficit unassigned fund balance was reported in a city Capital Projects Fund balance sheet. Which of the following explanations for the deficit is not plausible? A. The project is being financed in large part by a federal grant, which provides that costs incurred will not be reimbursed until the project is completed. B. The city financed current year expenditures by issuing bond anticipation notes that are not general long-term liabilities. C. The city entered into a two-year construction contract. Transfers from the General Fund will be made each year to cover actual expenditures. D. The city had a large assigned fund balance. Answer: D Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Difficult 16 Copyright © 2018 Pearson Education, Inc.
Classification: Application AACSB Category: Analytical thinking 49. According to GASB Statement No. 34, a Capital Projects Fund statement of revenues, expenditures, and changes in fund balance—budget and actual is A. Required for each Capital Projects Fund. B. Required to be presented as a basic financial statement for each major Capital Projects Fund with a legally adopted annual budget. C. Required to be presented as a basic financial statement or required supplementary information for each major Capital Projects Fund with a legally adopted annual budget. D. Not required, but may be presented as other supplementary information. Answer: D Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 50. The construction of a new high school football complex for Allen Independent School District is accounted for in a Capital Projects Fund. Construction is scheduled to begin in 20X2 and financing for the construction came from the following sources in 20X1: Reimbursement grant (cash received) from state government Issuance of general obligation bonds Transfer from the General Fund
$ 2,000,000 60,000,000 3,000,000
In the 20X1 statements for the Capital Projects Fund, Allen should report these amounts as
Unearned Revenues A. $65,000,000 B. $63,000,000 C. $2,000,000 D. $0
Other Financing Sources $0 $2,000,000 $63,000,000 $65,000,000
Answer: C Objective: LO 7.2 Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 51. Dungannon Township’s council approved the modification of the town hall entrance to comply with the Americans with Disabilities Act. The township issued $50,000 of bond anticipation notes at face amount and placed the proceeds in a Capital Projects Fund. 17 Copyright © 2018 Pearson Education, Inc.
Although Dungannon completed all of the necessary legal steps to refinance the notes, the township was unable to consummate the refinancing. In the Capital Projects Fund, the $50,000 note issuance should be reported as
A. B. C. D.
Liability Yes No No No
Revenues No Yes No No
Other Financing Sources No No Yes No
Answer: A Objective: LO 7.3 Describe Capital Projects Fund accounting for general long-term debt issuances, including accounting for bond proceeds (face amount, premiums and discounts, bond issuance costs), bond anticipation notes, and explain what arbitrage is and its potential impact. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking
18 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 7
Problem 1 – Bond Anticipation Notes Green Mountain County had the following transactions related to the issuance of its bond anticipation notes. All amounts are in thousands of dollars. Transactions: 1. The county issued $5,000 of 6-month, 6% bond anticipation notes (BANs) on March 1, 20X5. The proceeds will be used to begin construction of a major courthouse addition and improvement. 2. Prepare any entries required at June 30, 20X5, the fiscal year end. 3. The county issued $9,000 of courthouse bonds at par on August 15, 20X5. The bond issuance costs were $100. 4. The BANs were repaid on the due date, August 31, 20X5. Requirements: A. (1) Prepare the journal entries required in a Capital Projects Fund to record these transactions, assuming the bond anticipation notes do not qualify for long-term debt treatment. If no entry is required, state “No entry required” and explain why. (2) Indicate the effects of each transaction on the accounting equation of the Capital Projects Fund and on the General Capital Assets and General Long-Term Liabilities accounts. If an element is not affected, put “NE” in the appropriate box. B. (1) Prepare the journal entries required in a Capital Projects Fund to record these transactions, assuming the bond anticipation notes qualify for long-term debt treatment. If no entry is required, state “No entry required” and explain why. (2) Indicate the effects of each transaction on the accounting equation of the Capital Projects Fund and on the General Capital Assets and General Long-Term Liabilities accounts. If an element is not affected, put “NE” in the appropriate box.
1 Copyright © 2018 Pearson Education, Inc.
Answers: #
Accounts A (1) BANs treated as short-term debt
Debit
1 Cash BANs Payable
Credit
5,000 5,000
2 Expenditures – Debt Service – Interest (5,000 × 6% × 3/12) Interest Payable
75 75
3 Cash Expenditures – Debt Service – Bond Issue Costs OFS – Bond Principal
8,900 100
4 BANs Payable Expenditures – Debt Service – Interest (5,000 × 6% × 3/12) Interest Payable Cash
5,000 75
9,000
75 5,150
A (2) Effects of journal entries Trans # 1 2 3 4
Assets 5,000 NE 8,900 (5,150)
Liabilities 5,000 75 NE (5,075)
Fund Balance NE (75) 8,900 (75)
GCA NE NE NE NE
2 Copyright © 2018 Pearson Education, Inc.
GLTL NE NE 9,000 NE
Net Position NE NE (9,000) NE
#
Accounts B (1) BANs treated as long-term debt
Debit
1 Cash OFS – BAN Principal
Credit
5,000 5,000
2 No entry required. No interest accrued on long-term debt. 3 Cash Expenditures – Debt Service – Bond Issue Costs OFS – Bond Principal
8,900 100
4 OFU – Repayment of BANs Expenditures – Debt Service – Interest (5,000 × 6% × 6/12) Cash
5,000 150
9,000
5,150
B (2) Effects of journal entries Trans # 1 2 3 4
Assets 5,000 NE 8,900 (5,150)
Liabilities NE NE NE NE
Fund Balance 5,000 NE 8,900 (5,150)
GCA NE NE NE NE
3 Copyright © 2018 Pearson Education, Inc.
GLTL 5,000 NE 9,000 (5,000)
Net Position (5,000) NE (9,000) 5,000
Problem 2 – Bond Issues There are four (4) separate scenarios for bond issuances below. For each scenario, prepare the journal entry or entries for the transaction for the Capital Projects Fund and indicate the effects of each scenario on the Capital Projects Fund balance sheet equation and the General Capital Assets and General Long-Term Liabilities accounts. Scenarios: A. $3,000 in 6%, 15-year serial bonds are issued at par in a private placement. B. $4,000 in 5%, 20-year serial bonds are issued at par. Bond issue costs were $100. C. $5,000 in 4%, 25-year serial bonds are issued at 104. Bond issue costs were $150. D. $6,000 in 4%, 30-year bonds were issued at 97. Bond issue costs were $200.
4 Copyright © 2018 Pearson Education, Inc.
Answers:
Journal entries
# Accounts A Cash OFS – Bond Principal
Debit 3,000
Credit 3,000
B Cash Expenditures – Debt Service – Bond Issue Costs OFS – Bond Principal
3,900 100
C Cash Expenditures – Debt Service – Bond Issue Costs OFS – Premium on Bonds (4% × 5,000) OFS – Bond Principal
5,050 150
D Cash Expenditures – Debt Service – Bond Issue Costs OFU – Discount on Bonds (3% × 6,000) OFS – Bond Principal
5,620 200 180
4,000
200 5,000
6,000
Effects of journal entries Trans # A B C D
Assets 3,000 3,900 5,050 5,620
Liabilities NE NE NE NE
Fund Balance 3,000 3,900 5,050 5,620
GCA NE NE NE NE
5 Copyright © 2018 Pearson Education, Inc.
GLTL 3,000 4,000 5,200 5,820
Net Position (3,000) (4,000) (5,200) (5,820)
Problem 3 – Comprehensive Capital Projects Fund Problem Requirements: 1. Prepare all the entries required in the Jail Addition Capital Projects Fund for Franklin County for the following transactions and events. No explanations are required. If no entry is required, state “No entry required” and state why. Assume that the bond anticipation notes meet the criteria for being treated as long-term debt. June 30 is the fiscal year end for Franklin County. All amounts are in thousands of dollars. 2. Indicate the effects of each transaction on the accounting equation of the Capital Projects Fund and on the General Capital Assets and General Long-Term Liabilities accounts. If an element is not affected, put “NE” in the appropriate box. Transactions: 1. The county issued $2,500 of 8-month, 9% bond anticipation notes on August 1, 20X3. The proceeds are to be used to begin construction of a recently approved addition to the county jail. 2. On July 10, the county signed a contract for $5,000,000 for construction of the addition. 3. On November 30, the contractor billed the county for 40% of the work on the jail addition. The actual cost of the work was $2,200. The county paid all but 10% of the amount billed. The balance is to be paid upon completion and approval of the project. 4. The county issued $5,000 of 10-year, 8% bonds at par on March 31, 20X4. Bond issue costs of $50 were withheld from the proceeds. Interest and one-tenth of the principal are payable annually on the bonds. The bond proceeds are to be used to repay the bond anticipation notes and to finance construction of the jail addition. 5. On March 31, the county transferred $200 from the General Fund to the Jail Addition Capital Projects Fund to provide additional funding for the project. The BANs and interest also were paid on that date. 6. In May, the contractor billed the county $2,800 for the remainder of the work on the jail. The county approved the facility and paid the contractor all amounts owed.
6 Copyright © 2018 Pearson Education, Inc.
Answers: 1.
Journal Entries
# Accounts 1 Cash OFS – BAN Principal
Debit 2,500
2,500
2 Encumbrances Encumbrances Outstanding
5,000
3 Encumbrances Outstanding (40% × 5,000) Encumbrances
2,000
5,000
2,000
Expenditures – Capital Outlay Contracts Payable – Retainage (10% × 2,200) Cash
2,200
4 Cash Expenditures – Debt Service – Bond Issue Costs OFS – Bond Principal
4,950 50
5 Cash OFS – Transfer from GF
220 1,980
5,000 200 200
OFU – Repayment of BANs Expenditures – Debt Service – Interest (2,500 × 9% × 8/12) Cash
2,500 150
6 Encumbrances Outstanding (60% × 5,000) Encumbrances
3,000
Expenditures – Capital Outlay Contracts Payable – Retainage Cash
7 Copyright © 2018 Pearson Education, Inc.
Credit
2,650
3,000 2,800 220 3,020
2. Effects of journal entries Trans # 1 2 3 4 5a 5b 6
Assets 2,500 NE (1,980) 4,950 200 (2,650) (3,020)
Liabilities NE NE 220 NE NE NE (220)
Fund Balance 2,500 NE (2,200) 4,950 200 (2,650) (2,800)
GCA NE NE 2,200 NE NE NE 2,800
8 Copyright © 2018 Pearson Education, Inc.
GLTL 2,500 NE NE 5,000 NE (2,500) NE
Net Position (2,500) NE 2,200 (5,000) NE 2,500 2,800
Problem 4 – Comprehensive Capital Projects Fund Problem with Budget Moore County is developing a new all-sports county park. The estimated cost of the project is $15,000 (all amounts are in thousands of dollars). Funding is being provided for the project based on the following schedule: General Obligation Bonds, 8%, 30-year serial bonds ........................ State capital grant (expenditure driven, 30% of total costs) .............. County resources (transfers from the General Fund) ......................... Total resources ...................................................................................
$ 9,000 4,500 1,500 $15,000
Transactions: 1. 2. 3. 4. 5.
The bonds were issued at 104 and with $20 in bond issue costs. The funding from the General Fund was received. The county purchased land for the project paying $2,000 in cash. A contract for construction of the required facilities 12,000. During the year, the county was billed $8,000 for the project. It was projected that this billing is for 75% of the construction project. The county paid all but 10% of the amount. The balance will be paid when the contract is completed. 6. Near the end of the fiscal year, the state paid the amount owed, less 20% that is in question. This amount will be paid no earlier than 90 days into the following fiscal year. Requirements: 1. Prepare all the entries required in the Park Capital Projects Fund for Moore County for these transactions and events. No explanations are required. If not entry is required, state “No entry required” and state why. All amounts are in thousands of dollars. 2. Indicate the effects of each transaction on the accounting equation of the Capital Projects Fund and on the General Capital Assets and General Long-Term Liabilities accounts. If an element is not affected, put “NE” in the appropriate box.
9 Copyright © 2018 Pearson Education, Inc.
1. Journal entries #
Accounts Budget for the Project GO Bonds State capital grant (expenditure driven) County resources Total
Debit
Credit
9,000 4,500 1,500 15,000
1 Cash Expenditures – Debt Service – Bond Issue Costs OFS – Premium on Bonds (4% × 9,000) OFS – Bond Principal
9,340 20
2 Cash OFS – Transfer from GF
1,500
3 Expenditures – Capital Outlay Cash
2,000
Due from State (2,000 × 30%) Revenues – Intergovernmental Grant
360 9,000
1,500
2,000 600 600
4 Encumbrances Encumbrances Outstanding
12,000
5 Encumbrances Outstanding (75% × 12,000) Encumbrances
9,000
12,000
9,000
Expenditures – Capital Outlay Contracts Payable – Retainage Cash
8,000
Due from State (8,000 × 30%) Revenues – Intergovernmental Grant
2,400
6 Cash (80% × 3,000) Due from State
60% 30% 10% 100%
800 7,200
2,400 2,400 2,400
Revenues – Intergovernmental Grant Deferred Revenues
10 Copyright © 2018 Pearson Education, Inc.
600 600
2. Effects of transactions Trans # 1 2 3a 3b 4 5a 5b 5c 6a 6b
Assets 9,340 1,500 (2,000) 600 NE NE (7,200) 2,400 NE NE
Liabilities NE NE NE NE NE NE 800 NE NE NE
Deferred Inflows NE NE NE NE NE NE NE NE NE 600
Fund Balance 9,340 1,500 (2,000) 600 NE NE (8,000) 2,400 NE (600)
11 Copyright © 2018 Pearson Education, Inc.
GCA NE NE 2,000 NE NE NE 8,000 NE NE NE
GLTL 9,360 NE NE NE NE NE NE NE NE NE
Net Position (9,360) NE 2,000 NE NE NE 8,000 NE NE NE
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 8 Debt Service Funds
1. Revenues in a Debt Service Fund are recognized when A. They are collected in cash. B. They are measurable and available. C. They are measurable and earned. D. Debt service payments are due. Answer: B Objective: LO 8.1 Summarize the basic Debt Service Fund environment, sources of financing, and expenditure recognition for debt service on general long-term liabilities (GLTL). Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 2. Equity in a Debt Service Fund is known as A. Restricted net position. B. Fund balance. C. Net investment in capital assets. D. Unrestricted net position. Answer: B Objective: LO 8.1 Summarize the basic Debt Service Fund environment, sources of financing, and expenditure recognition for debt service on general long-term liabilities (GLTL). Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 3. What measurement focus does a Debt Service Fund use? A. Total financial resources. B. Current financial resources C. Economic resources D. Cash resources Answer: B Objective: LO 8.1 Summarize the basic Debt Service Fund environment, sources of financing, and expenditure recognition for debt service on general long-term liabilities (GLTL). Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 4. All of the following statements regarding a Debt Service Fund are true except A. A Debt Service Fund is rarely used to account for all of a governmental entity's general obligation bond repayments. B. Debt service on capital lease obligations is generally not accounted for in a Debt Service Fund. C. A government may have several Debt Service Funds. D. A government may use one Debt Service Fund to account for multiple general 1 Copyright © 2018 Pearson Education, Inc.
government debt issuances. Answer: A Objective: LO 8.1 Summarize the basic Debt Service Fund environment, sources of financing, and expenditure recognition for debt service on general long-term liabilities (GLTL). Difficulty Level: Easy Classification: Concept AACSB Category: Analytical thinking 5. A government is required to use a Debt Service Fund in which of the following cases? A. Capital leases. B. When financial resources are being accumulated for long-term general government principal and interest maturing in future years. C. Debt refunding. D. All general obligation long-term debt. Answer: B Objective: LO 8.1 Summarize the basic Debt Service Fund environment, sources of financing, and expenditure recognition for debt service on general long-term liabilities (GLTL). Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 6. Which of the following transactions would not be reported as expenditures in a Debt Service Fund? A. Issuance costs incurred in a refunding bond issuance. B. Payments to escrow agents with resources transferred from the General Fund. C. Arbitrage rebate. D. Repayment of BANs issued to finance a capital project. Answer: D Objective: LO 8.1 Summarize the basic Debt Service Fund environment, sources of financing, and expenditure recognition for debt service on general long-term liabilities (GLTL). Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 7. Which of the following types of transactions would not potentially be reported as expenditures in a Debt Service Fund? A. Retirement of long-term debt principal. B. Interest on long-term debt. C. Discounts on refunding debt. D. Bond issuance costs. Answer: C Objective: LO 8.1 Summarize the basic Debt Service Fund environment, sources of financing, and expenditure recognition for debt service on general long-term liabilities (GLTL). Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 2 Copyright © 2018 Pearson Education, Inc.
8. Debt Service Fund expenditures reported on the Statement of Revenues, Expenditures, and Changes in Fund Balance commonly exclude A. Fiscal agent fees. B. Interest expenditures. C. Principal retirement expenditures. D. Gains and losses on early retirement of debt. Answer: D Objective: LO 8.1 Summarize the basic Debt Service Fund environment, sources of financing, and expenditure recognition for debt service on general long-term liabilities (GLTL). Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 9. Principal and interest expenditures on general long-term debt should be recognized in the period A. That the costs are incurred. B. Prior to the year in which they are due, i.e., when they become short-term debt. C. That they are legally due and payable. D. That they are paid. Answer: C Objective: LO 8.1 Summarize the basic Debt Service Fund environment, sources of financing, and expenditure recognition for debt service on general long-term liabilities (GLTL). Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 10. Debt service expenditures on general long-term debt principal should be recognized in the period that the liability: A. accrues, if paid. B. accrues, whether or not paid. C. is legally due, if paid. D. is legally due, whether or not paid. Answer: D Objective: LO 8.1 Summarize the basic Debt Service Fund environment, sources of financing, and expenditure recognition for debt service on general long-term liabilities (GLTL). Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 11. Calhoun County has a principal and interest payment due in the following fiscal year. However, the county Debt Service Fund has the cash necessary to make the payment in the current fiscal year. Assuming all other requirements have been met and the county plans to make the payment next year, at what point must the principal and interest payment come due in the next year to recognize the expenditure in the current fiscal year? A. The principal and interest payment must be due before the end of the next fiscal year. 3 Copyright © 2018 Pearson Education, Inc.
B. The principal and interest payment must come due not later than the end of the first quarter of next fiscal year. C. The principal and interest payment must come due no later than the first 60 days of the next fiscal year. D. The principal and interest payment must come due not later than one month into the next fiscal year. Answer: D Objective: LO 8.4 Describe the conditions permitting accrual of GLTL principal and interest expenditures. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 12. In order to recognize a debt service payment that comes due in the next fiscal year as an expenditure in the current fiscal year, which of the following conditions need not hold true? A. The payment must come due early (not more than one month) in the next fiscal year. B. Resources to make the payment need to have been raised in the current fiscal year to make the payment. C. The resources dedicated for the payment must be held in the appropriate Debt Service Fund. D. The payment must be for interest only; principal payments do not qualify for this early recognition. Answer: D Objective: LO 8.4 Describe the conditions permitting accrual of GLTL principal and interest expenditures. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 13. Assume that the fair market value of investments in a Debt Service Fund decreased by $25,000 as of the end of the fiscal year. What entry would be necessary to reflect this change? A. Debit investment income and credit investments. B. Debit interest expense and credit investments. C. Debit interest expense and credit cash. D. No entry is necessary since the investments have not actually been sold. Answer: A Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 14. Each of the following are appropriate fund balance classifications for a Debt Service Fund except A. Restricted. B. Committed. 4 Copyright © 2018 Pearson Education, Inc.
C. Assigned. D. Designated. Answer: D Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 15. Assume that a Debt Service Fund does not have nonspendable fund balance. Further, assume that total fund balance is less than the sum of restricted and committed levels of fund balance. This deficit should A. Be reported as negative assigned fund balance. B. Be reported as a negative unassigned fund balance. C. Be reported as a negative nonspendable fund balance. D. Be netted against the positive committed fund balance. Answer: B Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 16. A special tax has been levied by the city council in a formal vote. This new revenue source has been set aside for debt service purposes in an ordinance separate from the ordinance that created the tax. This revenue source would most likely impact A. Restricted fund balance. B. Committed fund balance. C. Assigned fund balance. D. Unassigned fund balance. Answer: B Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 17. The residual positive fund balance classification for a Debt Service Fund is A. Unassigned. B. Restricted. C. Assigned D. Committed. Answer: C Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Concept 5 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of knowledge 18. A Debt Service Fund retires bond principal during the year that is not related to a defeasance. The entry necessary to reflect the principal retirement would be A. Debit bonds payable and credit cash. B. Debit other financing use and credit cash. C. Debit expenditures and credit cash. D. Debit other financing source and credit cash. Answer: C Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 19. Which of the following would not be a likely source of financial resources for a Debt Service Fund? A. Property taxes. B. Sales taxes. C. Transfers from the General Fund. D. Proceeds from the sale of capital assets. Answer: D Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 20. If cash from the General Fund is transferred to a Debt Service Fund, the entry in the Debt Service Fund would A. Debit cash and credit revenues. B. Debit cash and credit other financing sources. C. Debit cash and credit accounts receivable. D. Debit cash and credit fund balance. Answer: B Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 21. If a special tax is levied to finance debt service for a particular debt issue, the entry to record the levy in the Debt Service Fund would include A. Debit Taxes Receivable and credit to Revenues. B. Debit Taxes Receivable and credit to Other Financing Sources. C. Debit Prepaid Assets and credit to Revenues. D. Tax levies may not be reported in a Debt Service Fund. 6 Copyright © 2018 Pearson Education, Inc.
Answer: A Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 22. In the fiscal year ended September 30, 20X9, debt service payments were made in January and July from the Debt Service Fund in the total amount of $25,000 ($10,000 principal, $15,000 interest). The sole financial resource for the debt service payments is the proceeds of a special debt service tax levy. The taxes are levied and collected in increments of about $27,000 and are due in June of each year. For the fiscal year ended September 30, 20X9, assuming $24,000 of taxes had been collected for this fiscal year, the expenditures reported in the Debt Service Fund would be A. $10,000. B. $15,000. C. $24,000. D. $25,000. Answer: D Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 23. Which of the following financial statements is not presented for a Debt Service Fund? A. A balance sheet. B. A statement of cash flows. C. A budget-to-actual statement. D. A statement of revenues, expenditures, and changes in fund. Answer: B Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 24. If General Fund cash is transferred to a Debt Service Fund to provide resources to refund outstanding debt, the Debt Service Fund statement of revenues, expenditures, and changes in fund balance would report A. An other financing source when the cash is received. B. An other financing use when the cash is used to refund the outstanding debt. C. A revenue. D. A special item for the difference in the amount received and the amount paid. Answer: A Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. 7 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 25. A government has $3,000,000 of 6%, 10-year general obligation bonds outstanding. The bonds were issued on November 1, 20X8 to finance construction of a general capital asset. Interest is payable semiannually on October 31 and April 30. What amount of debt service expenditures should the government report for the year ended December 31, 20X8? A. $0. B. $30,000. C. $90,000. D. $180,000. Answer: A Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 26. A government has $3,000,000 of 6%, 10-year general obligation bonds outstanding. The bonds were issued on July 2, 20X7 to finance construction of a general capital asset. Interest is payable semiannually on January 1 and July 1. What is the minimum amount of interest expenditures that the government would be permitted to report on the bonds for the year ended December 31, 20X7? A. $0 B. $30,000 C. $90,000 D. $180,000 Answer: A Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 27. A government has $3,000,000 of 6%, 10-year general obligation bonds outstanding. The bonds were issued on July 2, 20X7 to finance construction of a general capital asset. Interest is payable semiannually on January 1 and July 1. What is the maximum amount of interest expenditures that the government would be permitted to report on the bonds for the year ended December 31, 20X7? A. $0. B. $30,000. C. $90,000. D. $180,000. Answer: C Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. 8 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 28. A government has $1,000,000 of 6%, 10-year general obligation bonds outstanding. The bonds were issued on August 15, 20X6 to finance construction of a general capital asset. Interest is payable semiannually on February 15 and August 15. What is the maximum amount of interest expenditures that the government would be permitted to report on the bonds for the year ended December 31, 20X6? A. $0. B. $22,500. C. $30,000. D. $60,000. Answer: A Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 29. A government has $1,000,000 of 6%, 10-year general obligation bonds outstanding. The bonds were issued on November 1, 20X7 to finance construction of a general capital asset. Interest is payable semiannually on November 1 and May 1. The bonds also require an annual principal payment of $100,000 on May 1. What amount of debt service expenditures should the government report for the year ended December 31, 20X8? A. $60,000. B. $90,000. C. $160,000. D. $190,000. Answer: C Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 30. A government retired $5,000,000 of outstanding general obligation bonds when due. The government used $3,000,000 of proceeds from new bonds issued to provide resources for retiring the old bonds. The other $2,000,000 had been accumulated from tax and interest revenues over the years that the old bonds were outstanding. The government should report this transaction in its Debt Service Fund as A. Other financing uses of $5,000,000. B. Expenditures of $5,000,000. C. Other financing uses of $3,000,000 and expenditures of $2,000,000. D. Other financing uses of $2,000,000 and expenditures of $3,000,000. Answer: C 9 Copyright © 2018 Pearson Education, Inc.
Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 31. A Debt Service Fund received an annual payment from the General Fund to finance upcoming debt service payments. The amount received from the General Fund should be reported in the Debt Service Fund statement of revenues, expenditures, and changes in fund balance as A. Other financing sources. B. Revenues. C. Proceeds from interfund loans. D. Special item. Answer: A Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 32. A Debt Service Fund received a $100,000 payment from the General Fund to finance upcoming debt service payments. During the year, Debt Service Fund payments of $50,000 interest and $60,000 principal were made as they become due. The Debt Service Fund statement of revenues, expenditures, and changes in fund balance should report A. An excess of revenues over expenditures of $50,000. B. An excess of expenditures over revenues of $10,000. C. An excess of expenditures over revenues of $50,000. D. An excess of expenditures over revenues of $110,000. Answer: D Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 33. Debt Service Fund expenditures would include all of the following except A. Fiscal agent fees. B. Repayment of refunded bonds using resources transferred from the General Fund. C. Principal retirement payments. D. Discounts on refunding bonds. Answer: D Objective: LO 8.2 Record debt service transactions and prepare Debt Service Fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical thinking 10 Copyright © 2018 Pearson Education, Inc.
34. Assume that a county with a June 30 fiscal year end levied $900,000 in special assessments to finance debt service on a special assessment debt issuance. The levy date was January 20X1. The levy is to be paid by the property owners over a 10-year period beginning in January 20X2. The amount of revenue recognized by the county in the Debt Service Fund as of June 30, 20X1 would be A. $900,000. B. $90,000. C. $0. D. Tax and special assessment revenues are never recognized in a Debt Service Fund. Answer: C Objective: LO 8.3 Explain unique aspects of special assessment Debt Service Funds. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 35. A Debt Service Fund should be used to account for debt service on special assessment indebtedness A. Always. B. Unless the government is not legally obligated for the debt. C. If the government is obligated in some manner for the debt. D. Never. A Special Assessment Fund should be used. Answer: C Objective: LO 8.3 Explain unique aspects of special assessment Debt Service Funds. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 36. Which of the following is not usually a requirement of a Debt Service Fund (DSF) for a term bond issue? A. The DSF should be used to accumulate the necessary funds to pay the term bonds when they come due. B. The DSF makes periodic interest payment on the debt during its life. C. The DSF will have funded reserves as required by the debt covenant. D. A DSF that services a term bond issue is used to account for principal retirement only, with interest expenditures made directly from the General Fund. Answer: D Objective: LO 8.5 Discuss the basic accounting and reporting requirements for debt service on GLTL term bonds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 37. In the year that a governmental entity enters into an advance refunding to legally defease outstanding debt, which of the following note disclosures would not be required? A. The present value of the net debt service savings or cost of advance refunding transaction. 11 Copyright © 2018 Pearson Education, Inc.
B. The amount of defeased debt that is still outstanding. C. The difference between total of the remaining debt service requirements of the old defeased issue and the total debt service requirements of the new issue, adjusted for any additional cash received or paid. D. General description of the transaction. Answer: B Objective: LO 8.7 Explain debt refundings and defeasance of debt as well as the common reasons for refundings. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 38. The City of Newport issued $1,500,000 of general obligation refunding bonds at a 2% premium. Bond issuance costs of $15,000 were incurred. The proceeds, net of the premium and bond issue costs, are used in the same period to defease the outstanding bonds. Debt Service Fund Expenditures will be debited for A. $15,000. B. $30,000. C. $1,455,000. D. $1,470,000. Answer: A Objective: LO 8.7 Explain debt refundings and defeasance of debt as well as the common reasons for refundings. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 39. The Village of Bakersville issued $700,000 of refunding bonds at a 1% premium. Bond issuance costs were $10,000; $695,000 was used to retire the existing bonds. Other financing uses will be debited for A. $7,000. B. $10,000. C. $683,000. D. $695,000. Answer: D Objective: LO 8.7 Explain debt refundings and defeasance of debt as well as the common reasons for refundings. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 40. Apex County advance refunded $3,000,000 of outstanding bonds. $2,500,000 was financed with net refunding bond proceeds and the remaining $500,000 was transferred from the General Fund. The county incurred $35,000 of bond issuance costs when issuing the refunding bonds. Which of the following statements about the reporting of these transactions in the Debt Service Fund is not true? The Debt Service Fund financial statements would report 12 Copyright © 2018 Pearson Education, Inc.
A. $2,500,000 of other financing uses. B. Expenditures of $535,000. C. Transfers in of $500,000. D. Net other financing sources and uses of $500,000. Answer: D Objective: LO 8.7 Explain debt refundings and defeasance of debt as well as the common reasons for refundings. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 41. Monica City paid $6,000,000 to its fiscal agent to be placed in an irrevocable trust to be used to service an outstanding $5,000,000 general obligation bond issue and those bonds are deemed defeased in-substance. The payment included $3,000,000 of proceeds from the issuance of new general obligation bonds and $3,000,000 that had been accumulated over the years to service the old debt. The city should report the payment to the fiscal agent in its Debt Service Fund as A. Other financing uses of $6,000,000. B. Expenditures of $6,000,000. C. Other financing uses of $3,000,000 and expenditures of $3,000,000. D. Other financing uses of $5,000,000 and expenditures of $1,000,000. Answer: C Objective: LO 8.7 Explain debt refundings and defeasance of debt as well as the common reasons for refundings. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 42. A government paid $6,000,000 into an irrevocable trust to be used to service $5,000,000 of outstanding general obligation bonds, but the transaction does not meet the defeasance insubstance criteria. The payment included $3,000,000 of proceeds from a new bond issue that was issued to provide resources for the old bond. The other $3,000,000 had been accumulated over previous years from taxes and interest earnings in the Debt Service Fund. The government should report this transaction in its Debt Service Fund as A. Other financing uses of $6,000,000. B. Expenditures of $6,000,000. C. Other financing uses of $3,000,000 and expenditures of $3,000,000. D. No expenditures or other financing uses should be reported. Answer: D Objective: LO 8.7 Explain debt refundings and defeasance of debt as well as the common reasons for refundings. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 43. The Diné Nation—recognized by the United States Congress as a sovereign Native American nation—is accumulating financial resources that are legally restricted to service future 13 Copyright © 2018 Pearson Education, Inc.
principal and interest payments on general long-term debt. At June 30 of the current year, $5,000,000 and $500,000 have been accumulated for principal and interest payments, respectively. These restricted funds should be accounted for in the Debt Service Fund _ A. $0 B. $5,500,000 C. $500,000 D. $5,000,000
General Fund $5,500,000 $0 $5,000,000 $500,000
Answer: B Objective: LO 8.1 Summarize the basic Debt Service Fund environment, sources of financing, and expenditure recognition for debt service on general long-term liabilities (GLTL). Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 44. The GASB Codification sets forth circumstances in which a state or local government is permitted to accrue expenditures related to unmatured principal and interest on general obligation long-term liabilities. Which of the following are those circumstances? I. II. III.
Dedicated financial resources to pay the maturing principal and interest have been accumulated in a Debt Service Fund by year end. The debt service payment is due early next year (within 30 days). The debt service payment is due early next year (within 60 days).
A. I only. B. I and II. C. I and III. D. II only. Answer: B Objective: LO 8.4 Describe the conditions permitting accrual of GLTL principal and interest expenditures. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge
14 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 8
Problem 1 – General Government Refunding Transactions The City of Dandridge has $8,000 par value of general government, general obligation bonds payable outstanding. The bonds have a call option at 102. The city has decided to call the bonds at their call date. The city uses a Debt Service Fund for all refunding transactions. All amounts are in thousands of dollars. Transactions: SITUATION A 1. The city issued $8,160 refunding bonds at par. 2. The city paid $8,160 to bondholders to retire the bonds at the call date. SITUATION B 1. The city issued $4,000 of refunding bonds at par. 2. The city transferred $4,160 from the General Fund to the Debt Service Fund to provide the additional resources needed to call the bonds. 3. The city paid $8,160 to bondholders to retire the bonds at the call date. Requirements: 1. Prepare the journal entries required in a Debt Service Fund to record these transactions, assuming the bond anticipation notes do not qualify for long-term debt treatment. If no entry is required, state “No entry required” and explain why. 2. Indicate the effects of each transaction on the accounting equation of the Debt Service Fund and on the General Capital Assets and General Long-Term Liabilities accounts. If an element is not affected, put “NE” in the appropriate box.
1 Copyright © 2018 Pearson Education, Inc.
Answers: Requirement #1 #
Accounts
Debit
Credit
Situation A 1 Cash OFS – Refunding Bonds
8,160
2 OFU – Bond Principal Retirement Cash
8,160
8,160
8,160
Situation B 1 Cash OFS – Refunding Bonds
4,000
2 Cash OFS – Transfer from GF
4,160
3 OFU – Bond Principal Retirement Expenditures – Debt Service – Principal Cash
4,000 4,160
4,000
4,160
8,160
Requirement #2 Situation A Trans # 1 2
Assets 8,160 (8,160)
Liabilities NE NE
Fund Balance 8,160 (8,160)
Liabilities NE NE NE
Fund Balance 4,000 4,160 (8,160)
GCA NE NE
GLTL 8,160 (8,000)
Net Position (8,160) 8,000
GLTL 4,000 NE (8,000)
Net Position (4,000) NE 8,000
Situation B Trans # 1 2 3
Assets 4,000 4,160 (8,160)
GCA NE NE NE
2 Copyright © 2018 Pearson Education, Inc.
Problem 2 – Advance Refunding The City of Armona has decided to refinance $8,000 par value of general government, general obligation bonds outstanding. The bonds had a related unamortized bond premium of $200. The city issues $6,000 of refunding bonds and transfers $2,700 from the General Fund to the Debt Service Fund. The city paid $8,700 from the Debt Service Fund into an irrevocable trust to cover future payments on the original bonds. All amounts are in thousands of dollars. Requirements: 1. Record the above transactions in the Debt Service Fund assuming the refinancing meets the conditions for treatment as a defeasance in substance. 2. Record the above transactions in the Debt Service Fund assuming the refinancing does not meet the conditions for treatment as a defeasance in substance. 3. For both requirements (1) and (2), indicate the effects of each transaction on the accounting equation of the Debt Service Fund and on the General Capital Assets and General Long-Term Liabilities accounts. If an element is not affected, put “NE” in the appropriate box.
3 Copyright © 2018 Pearson Education, Inc.
Answers: #
Accounts
Debit
Requirement 1 1 Cash OFS – Refunding Bond Principal
Credit
6,000 6,000
2 Cash OFS – Transfer from GF
2,700
3 OFU – Payment to Refunding Bond Escrow Agent Expenditures – Debt Service – Payment to Refunding Bond Escrow Agent Cash
6,000
2,700
2,700 8,700
Requirement 2 1 Cash OFS – Refunding Bond Principal
6,000 6,000
2 Cash OFS – Transfer from GF
2,700
3 Investments Cash
8,700
2,700
8,700
Requirement 3 Refunding Trans # 1 2 3
GCA NE NE NE
GLTL 6,000 NE (8,200)
Net Position (6,000) NE 8,200
Trans Fund # Assets Liabilities Balance GCA 1 6,000 NE 6,000 NE 2 2,700 NE 2,700 NE 3 NE* NE NE NE *Investments increase and cash decreases by equal amounts.
GLTL 6,000 NE NE
Net Position (6,000) NE NE
Assets 6,000 2,700 (8,700)
Liabilities NE NE NE
Fund Balance 6,000 2,700 (8,700)
Investment (non-Refunding)
4 Copyright © 2018 Pearson Education, Inc.
Problem 3 – Debt Service Fund Transactions Listed below are selected transactions from a Loudon County Debt Service Fund (all amounts are in thousands of dollars). 1. The remaining funds of a Capital Projects Fund, $1,500, were transferred to the Debt Service Fund to be used in the repayment of debt and interest on that debt that was issued to finance and expansion of the county courthouse. 2. The county General Fund transferred $8,600 to the Debt Service Fund to provide financing for principal, interest, and fiscal agent fees for debt service transactions during the year. $6,000 of the transfer from the General Fund and all of the transfer from the CPF were invested. 3. The semi-annual payment of interest on bonds issued several years ago by a Capital Projects Fund came due and was paid. The outstanding principal of these 20-year, 4%, term bonds is $3,000. The unamortized discount on these bonds is $100. The bonds were issued 15 years ago on this date. The payment includes fiscal agent fees of $10. 4. The county has agreed to set up a small water treatment facility for the remote District 7, now that the local water supply has been polluted by a hog farm upstream. The cost of the facility, $2,500, is to be financed over 5 years by special assessments on the homeowners in that district, although the debt is guaranteed by the county. The assessment principal is paid annually, although the interest (4%) is paid semi-annually. The first interest payment is due in 6 months, with the first principal payment due in one year (60 days after year end). The water treatment facility will be operated as a general government activity. 5. The annual payment of serial bonds issued 10 years ago by the county came due. The amount owed is $1,250 in principal, $20 interest, and $5 in fiscal agent fees. The amount due was paid. 6. The county received interest on its investments, $85. In addition, investments that originally cost $4,000 were sold for $3,975. (See entry #2) 7. Another term bond issued 20 years ago by the county came due and was paid. The face amount and rate was $3,200 and 3%, respectively, and pays interest semi-annually. The fiscal agent fees were $60. 8. The semi-annual payment for interest on the outstanding special assessment bonds was paid when due. Also, $300 of assessments receivable has been collected for the principal payment due next year. 9. The regular semi-annual interest payment on the term bonds came due and was paid. (See entry #3) 10. A serial bond issued in the current year has its first annual payment of principal and interest due on the third day of the next fiscal year. As is required by the debt covenant and following the general procedures for all debt issues of the county, $1,200 ($1,000 for principal, $180 for interest, and $20 for fiscal agent fees) has been transferred from the General Fund to the Debt Service Fund to make this payment.
5 Copyright © 2018 Pearson Education, Inc.
Requirements: 1. Record the above transactions in the Debt Service Fund. 2. Indicate the effects of each transaction on the accounting equation of the Debt Service Fund and on the General Capital Assets and General Long-Term Liabilities accounts. If an element is not affected, put “NE” in the appropriate box. Answers: Requirement #1 #
Accounts 1 Cash OFS – Transfer from CPF
Debit 1,500
Credit 1,500
2a Cash OFS – Transfer from GF
8,600
2b Investments Cash
7,500
8,600
7,500
3 Expenditures – Debt Service – Interest (3,000 × .04 / 2) Expenditures – Debt Service – Fiscal Agent Fees Cash
60 10 70
4 Assessments Receivable – Current Assessments Receivable – Deferred Revenues – Special Assessments Deferred Revenues
500 2,000
5 Expenditures – Debt Service – Principal Expenditures – Debt Service – Interest Expenditures – Debt Service – Fiscal Agent Fees Cash
1,250 20 5
6a Cash Revenues – Investment Income 6b Cash Revenues – Investment Income Investments
6 Copyright © 2018 Pearson Education, Inc.
500 2,000
1,300 85 85 3,975 25 4,000
#
Accounts
Debit
Credit
7 Expenditures – Debt Service – Principal Expenditures – Debt Service – Interest (3,200 × .03 / 2) Expenditures – Debt Service – Fiscal Agent Fees Cash
3,200 48 60
8a Expenditures – Debt Service – Interest (2,500 × .04 / 2) Cash
50
8b Cash Assessments Receivable -- Current
300
9 Expenditures – Debt Service – Interest (3,000 × .04 / 2) Expenditures – Debt Service – Fiscal Agent Fees Cash
60 10
3,308
50
300
70
10 Cash
1,200 OFS – Transfer from GF
1,200
Requirement #2 Trans # 1 2a 2b 3 4 5 6a 6b 7 8a 8b 9 10
Assets 1,500 8,600 NE (70) 2,500 1,300 85 (25) 3,308 (50) NE (70) 1,200
Liabilities NE NE NE NE NE NE NE NE NE NE NE NE NE
Deferred Inflows NE NE NE NE 2,000 NE NE NE NE NE NE NE NE
Fund Balance 1,500 8,600 NE (70 500 1,300 85 (25) 3,308 (50) NE (70) 1,200
7 Copyright © 2018 Pearson Education, Inc.
GCA NE NE NE NE NE NE NE NE NE NE NE NE NE
GLTL NE NE NE NE NE (1,250) NE NE (3,200) NE NE NE NE
Net Position NE NE NE NE NE 1,250 NE NE 3,200 NE NE NE NE
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 9 General Capital Assets; General Long-Term Liabilities; Permanent Funds— Introduction to Interfund-GCA-GLTL Accounting
1. Which of the following methods of capital asset valuation is consistent with generally accepted accounting principles for a donated capital asset? A. Original cost B. Fair value C. Acquisition value D. Book value to donor. Answer: C Objective: LO 9.1 Describe how governments maintain the general capital assets (GCA) and general long-term liabilities (GLTL) information that governments need for managerial, accountability, and government-wide financial reporting purposes. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 2. Assume that the city foreclosed on a piece of property it intends to keep for a government use. The property has an estimated fair market value (and acquisition value) of $5,000. It has an assessed value for taxes of $4,000. The outstanding amount of taxes and penalties due on the property totals $3,500. Normally, the city would value the foreclosed property at A. $0. B. $3,500. C. $4,000. D. $5,000. Answer: B Objective: LO 9.1 Describe how governments maintain the general capital assets (GCA) and general long-term liabilities (GLTL) information that governments need for managerial, accountability, and government-wide financial reporting purposes. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 3. Which of the following comments best describes the accounting and financial reporting guidelines for works of art and historical treasures? A. Governments should depreciate capitalized works of art and historical treasures that are considered exhaustible. B. Works of art and historical treasures may be capitalized, but they should never be depreciated under any circumstances. C. Works of art and historical treasures that must be held for public exhibition, must be protected, and the proceeds of any sales must be used to acquire more collections are always capitalized and depreciated. D. Works of art should only be valued at historical cost at the time of receipt. Answer: A Objective: LO 9.1 Describe how governments maintain the general capital assets (GCA) and 1 Copyright © 2018 Pearson Education, Inc.
general long-term liabilities (GLTL) information that governments need for managerial, accountability, and government-wide financial reporting purposes. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 4. Which of the following capital assets would not be considered a general capital asset? A. Land at the local municipal park B. A highway bridge maintained by a city government C. Infrastructure associated with the local water system D. Public safety vehicles Answer: C Objective: LO 9.1 Describe how governments maintain the general capital assets (GCA) and general long-term liabilities (GLTL) information that governments need for managerial, accountability, and government-wide financial reporting purposes. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 5. The parks and recreation department, which is accounted for within the General Fund, purchased a new athletic field mower at a cost of $25,000. The mower has an estimated useful life of 5 years. The General Fund would report depreciation expense at the end of Year 2 in the amount of A. $0. B. $5,000. C. $10,000. D. $25,000. Answer: A Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 6. A government entered into a general government capital lease in the prior year. During the current year, a lease payment of $50,000, which includes implicit interest of $12,000, was made from the General Fund. What effect does the $50,000 payment have on the General Capital Assets and General Long-Term Liabilities accounts? A. Increases net position by $38,000. B. Increases capital assets $50,000. C. Increases capital assets by $38,000. D. Decrease capital lease liability by $50,000. Answer: A Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Application 2 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of knowledge 7. A county government sold two of its emergency vehicles for a total of $35,000. The vehicles had a collective net book value of $46,000 (total original cost = $150,000; accumulated depreciation = $104,000). The entry that would be made in the General Fund at the time of the transaction would be Debit Credit A. Cash ............................................................................ $35,000 Capital Contribution............................................... $35,000 B. Cash ............................................................................ $35,000 Other Financing Sources – Sale of Capital Assets $35,000 C. Cash ............................................................................ $35,000 Accumulated Depreciation ......................................... 104,000 Loss on Sale of Capital Assets ................................... 11,000 Capital Assets – Vehicles....................................... $150,000 D. Cash ............................................................................ $35,000 Loss on Sale of Capital Assets ................................... 11,000 Other Financing Sources – Sale of Capital Assets $46,000 Answer: B Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 8. Assume that a governmental entity acquires a new garbage truck. The garbage truck normally costs $189,000. The vendor allowed a $30,000 allowance with the trade-in of the entity's old garbage truck, which had a net book value of $42,000. The government financed the balance with a short-term bank note. The new garbage truck would be recorded in the General Capital Assets account at A. $147,000. B. $159,000. C. $189,000. D. $201,000. Answer: C Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 9. New municipal building office equipment costs $400,000 and is being financed with a capital lease. If the government makes a $40,000 down payment, which of the following best describes the external financial reporting effects? A. The General Fund statements will report expenditures of $400,000 and other financing sources of $360,000. The General Long-Term Liabilities accounts will report a liability of $360,000 and the General Capital Assets accounts will report an asset of $400,000. 3 Copyright © 2018 Pearson Education, Inc.
B. The General Fund statements will report expenditures of $40,000 and other financing sources of $360,000. The General Long-Term Liabilities accounts will report a liability of $400,000 and the General Capital Assets accounts will report an asset of $360,000. C. The General Fund statements will report expenditures of $360,000 and other financing sources of $400,000. The General Long-Term Liabilities accounts will report a liability of $360,000 and the General Capital Assets accounts will report an asset of $360,000. D. The General Fund statements will report expenditures and other financing sources of $40,000. The General Long-Term Liabilities accounts will report a liability of $360,000 and the General Capital Assets accounts will report an asset of $360,000. Answer: A Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 10. A city recently ordered a new fire truck. The base cost of the truck is $250,000. In addition, the city will be paying $1,000 in delivery charges and $5,000 for necessary calibrations once it is delivered; and the city will also have the necessary logos added at a cost $2,500. The capitalizable cost of the fire truck in the General Fund will be A. $0. B. $251,000. C. $256,000. D. $258,500. Answer: A Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 11. A local citizen donated land to the county government. It estimates that it could have purchased the same or similar land for $500,000. The donor had paid $550,000 for the land five years ago. The county incurred $150,000 in development costs to convert the land into a public park. The county should capitalize the new public park in the General Capital Assets accounts in the amount of A. $500,000. B. $550,000. C. $650,000. D. $700,000. Answer: C Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 4 Copyright © 2018 Pearson Education, Inc.
12. A local government purchased land to be used for a new city hall to be built within the next five years. The purchase price was for the land's fair value, $1,500,000. The government financed the required $150,000 down payment by securing a short-term note with a local lending institution. The remaining $1,350,000 was financed by issuing certificates of participation. Costs incurred in issuing the certificates of participation totaled $60,000. The land should be capitalized in the General Capital Assets account in the amount of A. $1,350,000. B. $1,410,000. C. $1,500,000. D. $1,560,000. Answer: C Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 13. A bridge construction project, accounted for in a Capital Projects Fund, is in Year 2 of an anticipated three year construction period. In Year 1, costs of $300,000 were incurred. In Year 2, $1,530,000 of costs were incurred. What entry would be necessary in the General Capital Assets accounts for Year 2?
A. Capital Outlay .......................................................... Cash..................................................................... B. Construction in progress .......................................... Cash..................................................................... C. Construction in progress .......................................... Net position ......................................................... D. Construction in progress .......................................... Net position .........................................................
Debit $1,530,000
Credit $1,530,000
$1,530,000 $1,530,000 $1,530,000 $1,530,000 $1,830,000 $1,830,000
Answer: C Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Difficult Classification: Application AACSB Category: application of knowledge 14. The city's new tax collector foreclosed on a piece of land. The fair market value of the land at the time of foreclosure was $9,000. The taxpayer had acquired the property at a cost of $11,000. The past due taxes on the property totaled $4,000. The city plans to retain the land for its use. The land should be recorded in the General Capital Assets accounts in the amount of A. $0. B. $4,000. C. $9,000. 5 Copyright © 2018 Pearson Education, Inc.
D. $11,000. Answer: B Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 15. A government has a general government capital project underway. In the first year of the project, the government paid $75,000 for land to be used as a building site; signed a contract with a contractor for $8,000,000; was billed $4,500,000 by the contractor for work completed during the year; and paid the contractor $4,050,000. At the end of the first year, what amount of assets should be included in General Capital Assets accounts as a result of this activity? A. $75,000. B. $4,125,000. C. $4,575,000. D. $8,075,000. Answer: C Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 16. A government entered into a general government capital lease at mid-year. The capitalizable cost of the leased asset was $200,000, including a $30,000 down payment at the inception of the lease. The implicit rate of interest in the lease agreement is 6% and annual payments of $50,000 are due each year during the lease term beginning one year from the inception of the lease. What accounting entities are most likely affected by this transaction? A. General Fund, Debt Service Fund and General Capital Assets and General Long-Term Liabilities accounts. B. Capital Projects Fund and General Long-Term Liabilities accounts. C. General Capital Assets and General Long-Term Liabilities accounts. D. General Fund, and General Capital Assets and General Long-Term Liabilities accounts. Answer: D Objective: LO 9.5 Account for transactions that affect both governmental funds and the General Capital Assets and General Long-Term Liabilities accounts. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical thinking 17. A city receives a donation of land from one of its citizens to be used as a park. How should the donation be recognized by the government? A. In the General Fund as a Special Item–Donation and in the General Capital Assets accounts. B. In the General Fund an Other Financing Source–Donation and in the General Capital Assets accounts. 6 Copyright © 2018 Pearson Education, Inc.
C. Only in the General Fund as Revenues–Other. D. Only in the General Capital Assets accounts. Answer: D Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 18. If a government forecloses on property because of unpaid taxes in the General Fund and retains it for general government use, which of the following funds and/or accounts would most likely be affected by the transaction? A. General Fund only. B. General Capital Assets accounts only. C. General Fund and General Capital Assets accounts. D. General Capital Assets and General Long-Term Liabilities accounts. Answer: C Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 19. Which of the following statements is true concerning intragovernmental transfers of capital assets? A. If a proprietary fund is donating a capital asset to a general government department, the proprietary fund will debit capital contribution for the net book value of the donated capital asset. B. If a proprietary fund donates a capital asset to a general government department, it will be reported as a nonoperating expense in the proprietary fund but as a transfer between activities at the government-wide level. C. If a general government department donates a capital asset to an Enterprise Fund, the General Fund will debit transfer out for the net book value of the donated asset. D. If a general government department donates a capital asset to an Enterprise Fund, the General Fund will debit capital contribution for the original cost of the capital asset. Answer: B Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 20. Jamestown has decided to enter into a capital lease for the purchase of its new recycling truck. The capitalizable cost of the capital asset is $175,000 and Jamestown made a $30,000 down payment at the inception of the lease agreement. The estimated useful life of the truck is ten years with $0 salvage value. Which of the following statements is false? A. General Fund fund balance will be reduced by $175,000. 7 Copyright © 2018 Pearson Education, Inc.
B. Other financing sources of $145,000 will be reported in Year 1. C. Expenditures of $175,000 will be reported in Year 1. D. Depreciation expense on the truck will be $17,500 per year. Answer: A Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 21. The Town of Nowhere purchased a new telecommunications system for the police department. The town entered into a capital lease to finance the system. In the year of acquisition, entries will be necessary in A. The General Fund, Debt Service Fund, and General Capital Assets accounts. B. The Debt Service Fund, the General Capital Assets accounts, and the General Long-Term Liabilities accounts. C. The General Capital Assets accounts and the General Long-Term Liabilities accounts. D. The General Fund, the General Capital Assets accounts, and the General Long-Term Liabilities accounts. Answer: D Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 22. A local industry donated one of its properties to the Anywhere School District. The school district plans to convert it to needed classroom space. In the year of the donation, the transaction will affect A. The government-wide statements only. B. The General Fund and General Capital Assets accounts. C. The General Fund, the General Capital Assets accounts, and the government-wide financial statements. D. The General Capital Assets accounts and the government-wide financial statements. Answer: D Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 23. A fire destroyed one of Government A's fire stations, which had a net book value of $635,000. The government received an insurance settlement of $400,000 in the same fiscal year the fire had occurred. Which of the following best describes the external financial reporting in the year of the fire? A. A special item in the amount of $635,000 should be reported in government-wide financial statements only. 8 Copyright © 2018 Pearson Education, Inc.
B. A loss of $235,000 should be reported in the government-wide financial statements. C. A loss of $235,000 should be reported in both the General Fund and the governmentwide financial statements. D. An other financing use of $236,000 should be reported in the General Fund. Answer: B Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 24. A local town received a donation of $300,000. The donor stipulated that the money be invested. The investment earnings are to be used to provide funding for the town's recreation programs but the principal is to remain intact. The town should record the $300,000 as A. an other financing source in the General Fund. B. an other financing source in a Permanent Fund. C. a revenue in a Permanent Fund. D. a Capital Contribution in a Permanent Fund. Answer: C Objective: LO 9.4 Identify circumstances requiring use of Permanent Funds and account for and report those funds. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 25. Assume that inspection services were performed by the General Fund department on a capital project that is being accounting for in a Capital Project Fund. The inspection is being charged to the project. The entry to record this transaction in the Capital Project Fund would be A. Debit expenditures and credit due to General Fund. B. Debit capital asset and credit due to General Fund. C. Debit other financing uses and credit due to General Fund. D. Debit expenditures and credit revenues. Answer: A Objective: LO 9.5 Account for transactions that affect both governmental funds and the General Capital Assets and General Long-Term Liabilities accounts. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 26. Heimbaugh County recently lost a lawsuit that it had been defending in court for two years relating to an incident involving one of the county's police officers. The county had always deemed a loss to be improbable. However, a judgment was ultimately rendered against the county and, immediately prior to the current fiscal year end, the county was ordered to pay a total of $300,000. $75,000 is due at year end but payment had not been completed. The remainder is to be paid in installments of $75,000 for an additional three years. How will the external financial statements of the county be affected in the year the court case was settled? A. The General Fund statements should report both expenditures and a claims and 9 Copyright © 2018 Pearson Education, Inc.
judgments liability of $300,000. B. The General Long-Term Liabilities accounts should report a $300,000 liability. C. The General Fund statements should report expenditures and a current liability of $75,000 and the General Long-Term Liabilities accounts should report a liability of $225,000. D. The General Fund statements should report a prior period adjustment for $75,000 and General Long-Term Liabilities liability of $225,000. Answer: C Objective: LO 9.3 Recognize, account for, and determine the financial reporting effects of transactions affecting general long-term liabilities, including liabilities for pension and other postemployment benefits. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 27. Land was donated to a government for use in a general government activity. The land should be reported in A. The General Fund at its acquisition value when donated. B. The General Capital Assets accounts at the cost incurred by the donor to acquire the land originally. C. The General Capital Assets accounts at the acquisition value of the land on the date it was donated to the government. D. The Capital Projects Fund since it is not a depreciable asset. Answer: C Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 28. A government may elect not to report depreciation expense on which type of exhaustible capital assets? A. Capital assets with original useful lives in excess of 25 years. B. Qualifying infrastructure capital assets. C. Capital assets acquired by the General Fund. D. Qualifying donated capital assets. Answer: B Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 29. Accumulated depreciation is not reported on which of the following financial statements? A. Government-wide statement of net position. B. General Fund balance sheet. C. Enterprise Fund statement of net position. 10 Copyright © 2018 Pearson Education, Inc.
D. Private-Purpose Trust Fund statement of fiduciary fund net position. Answer: B Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 30. If a government issues bonds with a face value of $5,000,000 at a 2% discount and incurs $55,000 of issuance costs, the General Long-Term Liabilities accounts will report a liability of A. $4,845,000. B. $4,900,000. C. $5,000,000. D. $5,100,000. Answer: B Objective: LO 9.3 Recognize, account for, and determine the financial reporting effects of transactions affecting general long-term liabilities, including liabilities for pension and other postemployment benefits. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 31. Cash payments for compensated absences were $685,000 for the year. The current portion of the compensated absences liability decreased by $62,000 during the year, but the noncurrent portion of the liability increased by $32,000. How will the General Long-Term Liabilities accounts be affected? A. Increase of $32,000. B. Decrease of $30,000. C. Decrease of $655,000. D. Net decrease of $685,000. Answer: A Objective: LO 9.3 Recognize, account for, and determine the financial reporting effects of transactions affecting general long-term liabilities, including liabilities for pension and other postemployment benefits. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 32. Which of the following accounts would not be included in a government’s General Capital Assets accounts? A. Infrastructure. B. Accumulated depreciation. C. Unrestricted net position. D. Net investment in capital assets. Answer: C Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions 11 Copyright © 2018 Pearson Education, Inc.
affecting general capital assets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 33. Which of the following accounts would not be included in a government's General Capital Assets accounts? A. Assets acquired under capital leases. B. Internal Service Fund equipment. C. Infrastructure. D. Accumulated depreciation. Answer: B Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 34. A government has the following debt:
Capital lease liabilities (General Fund department leases)...... Unmatured balance of net pension liabilities associated with general government employees ............................................... General government bonds that mature in the next fiscal year
$3,200,000 $1,000,000 $5,000,000
What amount of debt should be reported in the General Long-Term Liabilities accounts? A. $1,000,000. B. $3,200,000. C. $4,200,000. D. $9,200,000. Answer: D Objective: LO 9.3 Recognize, account for, and determine the financial reporting effects of transactions affecting general long-term liabilities, including liabilities for pension and other postemployment benefits. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 35. A government has the following general government capital assets: Streets and roads ......................................... $17,000 Buildings ..................................................... $20,000 Equipment ................................................... $ 4,000 Assets acquired under capital leases ........... $ 1,000 What is the minimum amount of general capital assets the government may report under GAAP? A. $42,000 12 Copyright © 2018 Pearson Education, Inc.
B. $41,000 C. $25,000 D. $24,000 Answer: A Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Application of knowledge 36. A government establishes a Permanent Fund to account for a donation. The earnings from the donation are to be used to purchase books for the library but the donated amount must be maintained intact. How should the donation be reported in the Permanent Fund statement of revenues, expenditures and changes in fund balance? A. Special Item. B. Revenue. C. Other financing source. D. Capital contribution. Answer: B Objective: LO 9.4 Identify circumstances requiring use of Permanent Funds and account for and report those funds. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 37. A general government department of a county government contributed a capital asset with an original cost of $40,000 and accumulated depreciation of $15,000 to one of the county's proprietary funds. The proprietary fund would record the transaction as a A. Debit to capital assets of $40,000 and a credit to revenue. B. Debit to capital assets of $25,000 and a credit to capital contribution. C. Debit to capital assets of $25,000 and a credit to revenue. D. Debit to capital assets of $40,000, and credits to accumulated depreciation and capital contribution for $15,000 and $25,000, respectively. Answer: D Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 38. An enterprise fund in Bobby County donated a vehicle that had an original cost of $50,000 to one of the County's general government departments. The net book value of the vehicle as of the date of donation was $15,000. The enterprise fund would record the transaction as a A. Debits to transfer out of $15,000 and to accumulated depreciation of $35,000, and credit to capital assets of $50,000 B. Debit to transfer out of $15,000 and credit to capital assets of $15,000 C. Debits to nonoperating expense of $15,000 and to accumulated depreciation of $35,000, 13 Copyright © 2018 Pearson Education, Inc.
and credit to capital assets of $50,000 D. Debit to capital contribution of $15,000 and credit to capital assets of $15,000 Answer: C Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 39. Mountain City received insurance proceeds of $35,000 in the General Fund for water and smoke damage that occurred at City Hall. What journal entry best describes the accounting treatment in the General Fund for the receipt of these funds? A. Debit cash and credit revenues. B. Debit cash and credit other financing sources. C. Debit cash and credit expenditures. D. Debit cash and credit other financing uses. Answer: B Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 40. The Village of Wisteria Lane purchased 10 new police cruisers on January 1 at a total cost of $240,000. An additional $60,000 is being spent to paint the village's name and logo and vehicle number on the vehicles and add necessary lighting and other equipment. The cruisers will have an anticipated useful life of six years with no salvage value. As of the end of the first fiscal year (December 31), the depreciation expense in the government-wide statement of activities should be A. $0. B. $40,000. C. $50,000. D. $60,000. Answer: C Objective: LO 9.2 Recognize, account for, and determine the reporting effects of transactions affecting general capital assets. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 41. If the governing body contributes $65,000 from the General Fund to a Debt Service Fund, the General Fund statements should report A. A debt service expenditure of $65,000. B. An other financing use of $65,000. C. A capital contribution of $65,000. D. A reimbursement of $65,000. Answer: B 14 Copyright © 2018 Pearson Education, Inc.
Objective: LO 9.3 Recognize, account for, and determine the financial reporting effects of transactions affecting general long-term liabilities, including liabilities for pension and other postemployment benefits. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge
15 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 9
Problem 1 – Comprehensive Interfund Transactions Prepare the general journal entries to properly record each of the following transactions and events in the appropriate general ledger accounts of the appropriate funds for the year ended June 30, 2011. The City of Middlesettlements uses a series of each type of nominal account (e.g., Revenues–Property Taxes, Revenues–Other, Expenditures–Operations, Expenditures– Capital Outlay, Expenditures–Debt Service–Interest, OFS–Bond Principal, OFU–Transfer to GF, etc.), except for budgetary entries where no additional detail is required. The General Capital Assets and General Long-term Liability accounts are updated whenever a relevant transaction occurs. ADDITIONAL INFORMATION: ■ The fiscal year for the City is July 1 to June 30. ■ All premiums on bonds payable, net of bond issue costs, are transferred to the DSF that will be used to service the debt. The amounts transferred are used for future bond interest payments. ■ When bonds are issued at a discount or bond issue costs are incurred, a special transfer is made from the GF to the fund used to account for the bond proceeds to reimburse it for the discount and issue costs. This transfer is over and above any previously authorized transfers from the GF to that fund. ■ The City uses the consumption method / periodic inventory system to account for supplies. The City is constructing a new municipal building. Capital Projects Fund #1 will be used to account for this construction. The expected cost of and the sources of proportional financing for the municipal building are: Bond issue (authorized July 1, 2010, 6%, 30-year serial bonds) ...................... State grant for 30% of actual qualifying costs incurred (expenditure driven) .. Transfer from the General Fund ....................................................................... Total sources and cost of building .............................................................. All amounts are in thousands of dollars.
$ 3,000 1,500 500 $5,000
Transactions: 1. A computer has been leased for the City for its accounting and payroll operations. The lease has a capitalizable cost (and a net present value) of $2,000. The lease will be serviced through the General Fund. 2. A contract for the construction of the new municipal building was accepted by Swann & Hall (S&H) Construction Company for $4,500. The required transfer from the General Fund to the Capital Projects Fund was made. 3. $400 in 6-month, 4%, bond anticipation notes (BANs) were issued to finance expenditures in advance of the bond issue. The BANs are to be repaid from the proceeds 1 Copyright © 2018 Pearson Education, Inc.
of the previously authorized bond issue—as required by the debt covenant—by CPF #1. All legal steps have been taken to refinance the BANs and the City has the ability to consummate the refinancing. 4. The City accounts for its supplies in the General Fund. The City started the year with $100 in its supply account and purchased $200 in supplies to augment its inventory. 5. The first capital lease payment on the computer, $150 (including $100 in interest), was paid. (See entry 1) 6. 5 acres of land were purchased for $200 for the new municipal building. This purchase had not been previously encumbered, but it is included in the budget for the project. 7. The bonds authorized on July 1, 2010, were issued at 103 on October 1, 20X1. Bond issue costs were $20. The bonds pay interest on March 31 and September 30. Principal payments occur evenly over the life of the bonds each year (1/30 each September 30). DSF #1 was established to service this debt. (See entries 3 & 8) 8. The BANs were paid when due. (See entries 3 and 7) 9. The City issued $125 in supplies to its departments. 10. Expenditures totaling $2,500 were made for the construction project. These expenditures had originally been encumbered for $2,600. The amount was vouchered for payment to S&H Construction net of a 10% retainage. (See entry 2) 11. Sufficient funds were transferred from the General Fund to the DSF #1 to finance one year's principal retirement, interest, and fiscal agent fees ($10) for the municipal building bonds. (See entries 7 and 13) 12. The City issued another $100 in supplies to its departments. 13. DSF #1 made the required March 31 bond payments. (See entries 7 and 11) 14. At year end an inventory of supplies revealed that $80 were on hand. The appropriate adjustments were made. Requirement:
Prepare the general journal entries for the City of Middlesettlements, using standard fund-type terminology, identifying the fund or list for which the entry is being prepared. Appropriate abbreviations are acceptable (e.g., GF, SRF, CPF, DSF, GCA, GLTL, OFS, OFU). If no entry is required, write “No Entry Required” and briefly explain why. Do not include formal entry explanations or dates, but include any important assumptions made and all calculations. If an amount is not given in the exam, you must show your work to demonstrate how you determined the amount.
2 Copyright © 2018 Pearson Education, Inc.
Answers: Fund or Nonfund # Accounts 1a GF
Accounts Expenditures – Capital Outlay OFS – Capital Lease
Debit 2,000
1b GCA/GLTL Equipment under Capital Lease Leases Payable
2,000
2a CPF #1
Encumbrances Encumbrances Outstanding
4,500
Cash OFS – Transfer from GF
500
OFU – Transfer to CPF Cash
500
Cash OFS – BANs Principal
400
Net Position BANs Payable
400
Expenditures – Operating Cash / Vouchers Payable / Accounts Payable
200
Expenditures – Debt Service – Principal Expenditures – Debt Service – Interest Cash
50 100
Leases Payable Net Position
50
Expenditures – Capital Outlay Cash
200
Due from State (200 × 30%) Revenues – Intergovernmental
60
Land Net Position
200
2b CPF #1
2c GF
3a CPF #1
3b GLTL
4 GF
5a GF
5b GLTL
6a CPF #1
6b CPF #1
6b GCA
3 Copyright © 2018 Pearson Education, Inc.
Credit 2,000
2,000
4,500
500
500
400
400
200
150
50
200
60
200
Fund or Nonfund # Accounts 7a CPF #1
7b CPF #1
7c DSF #1
7d GLTL
8a CPF #1
8b GLTL
9 GF 10a CPF #1
10b CPF #1
10c CPF #1
10d GCA
11
Accounts Cash Expenditures – Debt Service – Bond Issue Costs OFS – Bond Premium (3,000 × .03) OFS – Bond Principal
Debit 3,070 20
90 3,000
OFU – Transfer to DSF #1 (90 – 20) Cash
70
Cash OFS – Transfer from CPF #1
70
Net Position Serial Bonds Payable Bond Premium
Credit
70
70 3,090 3,000 90
OFU – Repayment of BANs Expenditures – Debt Service – Interest (400 × 4% / 2) Cash
400 8
BANs Payable Net Position
400
408
400
No Entry Required – periodic inventory method Encumbrances Outstanding Encumbrances
2,600
Expenditures – Capital Outlay Retainage Payable (2,500 × 10%) Contracts Payable
2,500
Due from State (2,500 × 30%) Revenues – Intergovernmental
750
2,600
250 2,250
750
Construction in Progress Net Position
2,500
Principal (3,000 / 30) Interest (3,000 × 6%) Fiscal agent fees Total Transfer
100 180 10 290
4 Copyright © 2018 Pearson Education, Inc.
2,500
Fund or Nonfund # Accounts 11a GF
11b DSF #1
Accounts OFU – Transfer to DSF #1 Cash
Debit 290
Cash OFS – Transfer from GF
290
290
290
12 GF
No Entry Required – periodic inventory method
13 DSF #1
Expenditures – Debt Service – Interest (180 / 2) Expenditures – Debt Service – Fiscal Agent Fees (10/2) Cash
90 5
Expenditures – Operating (BI – EI, 100 – 80) Inventory of Supplies
20
14 GF
5 Copyright © 2018 Pearson Education, Inc.
Credit
95
20
Problem 2 – Other Interfund Transactions: Transfers Transactions: 1. The $10 of remaining assets (cash) from a terminated Capital Projects Fund (CPF #1) were received by the General Fund. 2. General Fund resources of $250 were paid to a newly established Capital Projects Fund (CPF #2). The resources will not be repaid to the General Fund. 3. The government ordered that $140 be paid from its General Fund to the fund that services the principal and interest payments on its long-term debt. 4. The government directed that $200 be moved from the General Fund to the Jail Addition Capital Projects Fund (CPF–JA) to provide additional funding for the project. The actual payment will occur at the beginning of the next fiscal year. Requirement: Prepare the general journal entries using standard fund-type terminology, identifying the fund or nonfund accounts for which the entry is being prepared. Appropriate abbreviations are acceptable (e.g., GF, SRF, CPF, DSF, GCA, GLTL, OFS, or OFU). If no entry is required, write “No Entry Required” and briefly explain why. Do not include formal entry explanations or dates, but include any important assumptions made and all calculations.
6 Copyright © 2018 Pearson Education, Inc.
Answers: Fund or Nonfund # Accounts 1a GF
1b CPF #1
2a GF
2b CPF #2
3a GF
3b DSF
4a GF
4b CPF–JA
Accounts Cash OFS – Transfer from CPF #1
Debit 10
10
OFU – Transfer to GF Cash
10
OFU – Transfer to CPF #2 Cash
250
Cash OFS – Transfer from GF
250
OFU – Transfer to DSF Cash
140
Cash OFS – Transfer from GF
140
OFU – Transfer to CPF–JA Due to CPF–JA
200
Due from GF OFS – Transfer from GF
200
7 Copyright © 2018 Pearson Education, Inc.
Credit
10
250
250
140
140
200
200
Problem 3 – Other Interfund Transactions: Loans Transactions: 1. A loan of $50 was made from the General Fund to the Gasoline Tax Fund (GTF), which is accounted for as a Special Revenue Fund. The loan will be repaid in five years. 2. The General Fund loaned $320 to the Capital Projects Fund (CPF #9)—to be repaid in 90 days. Requirement: Prepare the general journal entries using standard fund-type terminology, identifying the fund or nonfund accounts for which the entry is being prepared. Appropriate abbreviations are acceptable (e.g., GF, SRF, CPF, DSF, GCA, GLTL, OFS, or OFU). If no entry is required, write “No Entry Required” and briefly explain why. Do not include formal entry explanations or dates, but include any important assumptions made and all calculations.
8 Copyright © 2018 Pearson Education, Inc.
Answers: Fund or Nonfund # Accounts 1a GF
1b SRF–GTF
2a GF
2b CPF #9
Accounts Advance to SRF-GTF Cash
Debit 50
50
Cash Advance from GF
50
Due from CPF #9 Cash
320
Cash Due to GF
320
9 Copyright © 2018 Pearson Education, Inc.
Credit
50
320
320
Problem 4 – Other Interfund Transactions: Capital Leases Transactions: 1. A government Special Revenue Fund leased specialized equipment under a multi-year, noncancelable lease agreement that qualifies as a capital lease. The lease required a down payment of $500 and the present value of the minimum lease payments including the down payment (i.e., the capitalizable cost of the leased asset) was $5,000. The implicit rate of interest on the lease is 10%. 2. The government made the first annual lease payment of $750. 3. The government made the second annual lease payment of $750. Requirement: Prepare the general journal entries using standard fund-type terminology, identifying the fund or nonfund accounts for which the entry is being prepared. Appropriate abbreviations are acceptable (e.g., GF, SRF, CPF, DSF, GCA, GLTL, OFS, or OFU). If no entry is required, write “No Entry Required” and briefly explain why. Do not include formal entry explanations or dates, but include any important assumptions made and all calculations.
10 Copyright © 2018 Pearson Education, Inc.
Answers: Fund or Nonfund # Accounts 1a SRF
Accounts Expenditures – Capital Outlay Cash OFS – Capital Lease
Debit 5,000
1b GCA/GLTL Equipment (under Capital Lease) Capital Lease Payable Net Position
5,000
2a SRF
2b GLTL
3a SRF
3b GLTL
500 4,500
4,500 500
Expenditures – Debt Service – Principal Expenditures – Debt Service – Interest Cash Interest = 4,500 × 10%
300 450
Capital Lease Payable Net Position
300
Expenditures – Debt Service – Principal Expenditures – Debt Service – Interest Cash Interest = (4,500 – 300) × 10%
330 420
Capital Lease Payable Net Position
330
11 Copyright © 2018 Pearson Education, Inc.
Credit
750
300
750
330
Problem 5 – Other Interfund Transactions: Capital Asset Acquisitions and Disposals Transactions: 1. A pickup truck purchased seven years ago for $30 with General Fund money was sold for $5. The government's proprietary funds usually depreciate this type of asset over a 10year period using straight-line depreciation with zero (0) salvage value and disposes of assets at the end of its useful life. 2. Sold land for $300, which had been used many years ago as a public park. The land had been purchased for $140. 3. The county purchased a police vehicle for $22 and paid cash. 4. The government signed a contract for $5,000 for construction of an addition to the jail. 5. The contractor billed the county for 40% of the work on the jail addition. The actual cost of the work was $2,200. The county paid all but 10% of the amount billed. The balance is to be paid upon completion and approval of the project. The state was billed for its 30% of the project based on an expenditure-driven grant. (See entry #4 and #6) 6. The contractor billed the county $2,800 for the remainder of the work on the jail. The county approved the facility and paid the contractor all amounts owed. The state was billed for its portion of the work. (See entries #4, #5, and #7) 7. The state reimbursed only $1,400. Other costs were disallowed for reimbursement. (See entries #5 and #6) Requirement: Prepare the general journal entries using standard fund-type terminology, identifying the fund or nonfund accounts for which the entry is being prepared. Appropriate abbreviations are acceptable (e.g., GF, SRF, CPF, DSF, GCA, GLTL, OFS, OFU). If no entry is required, write “No Entry Required” and briefly explain why. Do not include formal entry explanations or dates, but include any important assumptions made and all calculations.
12 Copyright © 2018 Pearson Education, Inc.
Answers: Fund or Nonfund # Accounts 1a GF
1b GCA
2a GF
2b GCA
3a GF
3b GCA
4 CPF
Accounts Cash OFS – Proceeds from Sale of GCA (Vehicle)
Debit 5
5
Accumulated Depreciation Net Position Furniture and Equipment (Vehicles)
21 9
Annual Depreciation 30 / 10 Number of years Accumulated Depreciation
3 7 21
Cash Special Item–Proceeds from Sale of GCA (Land)
300
Net Position Land
140
Expenditures – Capital Outlay Cash
22
Furniture and Equipment (Vehicles) Net Position
22
Encumbrances Encumbrances Outstanding
13 Copyright © 2018 Pearson Education, Inc.
Credit
30
300
140
22
22 5,000 5,000
5a CPF
5b CPF
5c GCA
5d CPF Fund or Nonfund # Accounts 6a CPF
6b
CPF
6c GCA
6d CPF
7 CPF
Encumbrances Outstanding Encumbrances
2,000
Expenditures – Capital Outlay Retainage Payable Cash
2,200
Construction in Progress Net Position
2,200
Due from State (30% × 2,200) Revenues – Intergovernmental
2,000
220 1,980
2,200 660 660
Accounts Encumbrances Outstanding Encumbrances
Debit 3,000
Expenditures – Capital Outlay Retainage Payable Cash
2,800 220
Buildings Construction in Progress Net Position
5,000
Due from State (30% × 2,800) Revenues – Intergovernmental Cash Revenues – Intergovernmental Due from State
14 Copyright © 2018 Pearson Education, Inc.
Credit 3,000
3,020
2,200 2,800 840 840 1,400 100 1,500
Problem 6 – Other Interfund Transactions: BANs and Long-Term Debt Transactions: 1. The government issued $2,500 of 8-month, 9% bond anticipation notes. The notes meet the requirements to be accounted for as long-term debt. The proceeds are to be used to begin construction of a recently approved addition to the county jail. 2. The government issued $5,000 of 10-year, 8% bonds at par. Bond issue costs of $50 were withheld from the proceeds. Interest and one-tenth of the principal are payable annually on the bonds. The bond proceeds are to be used to repay the bond anticipation notes and to finance construction of the jail addition. (See entries #1 and #3) 3. The BANs and interest were paid on their due date. (See entries #1 and #2) 4. The semiannual payment of interest on bonds issued several years ago by a Capital Projects Fund came due and was paid. The outstanding principal of these 20-year, 4%, term bonds is $3,000. The unamortized discount on these bonds is $100. The bonds were issued 15 years ago on this date. The payment includes fiscal agent fees of $10. 5. The annual payment of serial bonds issued 10 years ago by the government came due. The amount owed is $1,250 in principal, $20 interest, and $5 in fiscal agent fees. The amount due was paid. 6. Another term bond issued 20 years ago by the government came due and was paid. The face amount and rate was $3,200 and 3%, respectively, and pays interest semiannually. The fiscal agent fees were $60. 7. A serial bond issued in the current year has its first annual payment of principal and interest due on the third day of the next fiscal year. As is required by the debt covenant and following the general procedures for all debt issues of the county, $1,200 ($1,000 for principal, $180 for interest, and $20 for fiscal agent fees) has been transferred from the General Fund to the Debt Service Fund to make this payment. Requirement: Prepare the general journal entries using standard fund-type terminology, identifying the fund or nonfund accounts for which the entry is being prepared. Appropriate abbreviations are acceptable (e.g., GF, SRF, CPF, DSF, GCA, GLTL, OFS, OFU). If no entry is required, write “No Entry Required” and briefly explain why. Do not include formal entry explanations or dates, but include any important assumptions made and all calculations.
15 Copyright © 2018 Pearson Education, Inc.
Answers: Fund or Nonfund # Accounts 1a CPF
1b GLTL
2a CPF
2b GLTL
3a CPF
3b GLTL
4a DSF
4b GLTL
5a DSF
5b GLTL
Accounts Cash OFS – BAN Principal
Debit 2,500
2,500
Net Position BANs Payable
2,500
Cash Expenditures – Debt Service – Bond Issue Costs OFS – Bond Principal
4,950 50
Net Position Bonds Payable
5,000
OFU – Repayment of BANs Expenditures – Debt Service – Interest Cash Interest = 2,500 × 9% × 8/12
2,500 150
BANs Payable Net Position
2,500
2,500
5,000
5,000
2,650
2,500
Expenditures – Debt Service – Interest Expenditures – Debt Service – Fiscal Agent Fees Cash Interest = 3,000 × 4% / 2
60 10
Net Position (or Interest Expense) Discount on Bonds Payable Amortization = 100 / 5 / 2 [Original calculation 400 / 20 / 2]
10
70
10
Expenditures – Debt Service – Principal Expenditures – Debt Service – Interest Expenditures – Debt Service – Fiscal Agent Fees Cash
1,250 20 5
Serial Bonds Payable Net Position
1,250
16 Copyright © 2018 Pearson Education, Inc.
Credit
1,500
1,250
# 6a
Fund or Nonfund Accounts DSF
6b GLTL
7a GF
7b DSF
Accounts Expenditures – Debt Service – Principal Expenditures – Debt Service – Interest Expenditures – Debt Service – Fiscal Agent Fees Cash Interest = 3,200 × 3% / 2
Debit 3,200 48 60
Serial Bonds Payable Net Position
3,200
OFU – Transfer to DSF Cash
1,200
Cash OFS – Transfer from GF
1,200
17 Copyright © 2018 Pearson Education, Inc.
Credit
3,308
3,200
1,200
1,200
Problem 7 – Other Interfund Transactions: Debt Refunding Transactions: The City of Armona has decided to refinance $8,000 of par value, general government, general obligation bonds outstanding. The bonds had a related unamortized bond premium of $200. The city issues $6,000 of refunding bonds at par and transfers $2,700 from the General Fund to the Debt Service Fund. The city paid $8,700 from the Debt Service Fund into an irrevocable trust to cover future payments on the original bonds. Requirement: Prepare the general journal entries using standard fund-type terminology, identifying the fund or nonfund accounts for which the entry is being prepared. Appropriate abbreviations are acceptable (e.g., GF, SRF, CPF, DSF, GCA, GLTL, OFS, or OFU). If no entry is required, write “No Entry Required” and briefly explain why. Do not include formal entry explanations or dates, but include any important assumptions made and all calculations.
18 Copyright © 2018 Pearson Education, Inc.
Answers: Fund or Nonfund # Accounts 1a DSF
1b DSF
1c GLTL
2a DSF
2b GLTL
Accounts Cash OFS – Refunding Bond Principal
Debit 6,000
6,000
Cash OFS - Transfer from GF
2,700
Net Position Refunding Bonds Payable
6,000
OFU – Payment to Refunding Bond Escrow Agent Expenditures – Debt Service – Payment to Refunding Bond Escrow Agent Cash
6,000
Bonds Payable Premium on Bonds Payable Net Position
8,000 200
19 Copyright © 2018 Pearson Education, Inc.
Credit
2,700
6,000
2,700 8,700
8,200
Problem 8 – Other Liability Transactions Assume that the fiscal year-end for all the transactions below is June 30. Transactions: 1. The General Fund paid $12 to a Special Revenue Fund to repay it for General Fund employee salaries that were inadvertently recorded as expenditures in the Special Revenue Fund. 2. The government decided to settle a lawsuit on the advice of its legal counsel. The lawsuit came about because of damage to a citizen’s property caused by a garbage service employee. The garbage operation is accounted for in the General Fund. The government settled the suit for $300, paying $100 on June 1, 20X1, and $50 on July 1 for each of the next 4 fiscal years. For these types of lawsuits, the government is self-insured for the first $50 and 100% insured for the remaining payments. Because of a cash flow issue, the government borrowed $200 on a 6 month, 3% note that comes due 2 months after year end. No money was received from the insurance company by year end, but the total amount due was expected by August 15. Prepare all journal entries required through the end of the 20X1 fiscal year. 3. The government’s employees earned $25 in compensated absences during the year. Of this amount, $10 was paid during the year and another $8 is due to be paid in the first 45 days of the following fiscal year. In addition, $5 due at the end of last year was paid at the beginning of this year. Finally, $2 earned in earlier years came due and was paid this year. 4. The government contributed $5 to its OPEB Plan trust for the year. The net OPEB liability, none of which was due and payable either at the beginning or at the end of the year, increased $15. Requirement: Prepare the general journal entries using standard fund-type terminology, identifying the fund or nonfund accounts for which the entry is being prepared. Appropriate abbreviations are acceptable (e.g., GF, SRF, CPF, DSF, GCA, GLTL, OFS, OFU). If no entry is required, write “No Entry Required” and briefly explain why. Do not include formal entry explanations or dates, but include any important assumptions made and all calculations.
20 Copyright © 2018 Pearson Education, Inc.
Answers: Fund or Nonfund # Accounts 1a GF
1b SRF
2a GF
2b GLTL
2c GF
2d GF
2e GF
3a GF
3b GLTL
4a GF
GLTL
Accounts Expenditures – Operating Cash
Debit 12
Cash Expenditures – Operating
12
Expenditures – Operating Cash
100
Net Position ($50 × 4 years) Claims & Judgments Payable
200
Cash Notes Payable
200
Due from Insurance Company OFS – Insurance Proceeds
50
Expenditures – Debt Service – Interest Interest Payable Interest = $200 × 3% × 4/12
2
Expenditures – Operating (10 + 2) Compensated Absences Payable Cash (10 + 5 + 3)
12 5
Net Position Compensated Absences Payable (25 – 10 – 2)
13
Expenditures – Operating Cash
5
Net Position Net OPEB Liability
15
21 Copyright © 2018 Pearson Education, Inc.
Credit 12
12
100
200
200
50
2
17
13
5
15
Problem 9 – General Capital Assets Note Disclosure The general capital assets balances for the City of Sugarland as end of the December 31, 20X1 fiscal year are: Nondepreciable Capital Assets: Land ............................................................................................................... Construction in Progress ................................................................................
$1,350 2,200
Depreciable Capital Assets: Buildings ........................................................................................................ Accumulated Depreciation....................................................................... Infrastructure .................................................................................................. Accumulated Depreciation....................................................................... Vehicles.......................................................................................................... Accumulated Depreciation....................................................................... Equipment ...................................................................................................... Accumulated Depreciation.......................................................................
$ 16,500 7,500 186,000 103,000 8,500 2,600 3,450 2,800
The following events related to the city’s capital assets occurred during fiscal year 20X2: 1. A pickup truck purchased for $30 was sold. It had accumulated depreciation of $21. 2. Land purchased many years ago for $140 was sold. 3. A new police car was purchased for $50 (5 year useful life) as was a new fire truck for $250 (10 year useful life). Both were purchased at the beginning of the fiscal year. Depreciation on all new buildings, vehicles, and equipment is for the nearest full year, using the straight-line method with zero salvage value. 4. A new civic center was started in the previous fiscal year. Costs were $2,200 in the previous year. It cost $2,800 to finish it in the current fiscal year. The center was ready for use just in time for a Christmas pageant on December 20, 20X2. 5. New roads costing $550 were built during the year. Depreciation on new roads starts the following fiscal year. 6. Depreciation expenses for FY 20X2 on capital assets on hand at the beginning of the year are: Building, $500; Infrastructure, $2,500; Vehicles, $415; and Equipment, $200. 7. Depreciation on all capital assets except infrastructure is allocated to government functions as follows: general government, 30%; public safety, 50%; streets and roads, 20%. Infrastructure depreciation is charged to the function responsible for maintaining it. Requirement:
Answers:
Using the information presented above, complete the general capital asset note disclosure for FY 20X2. Note, the incomplete note is in this Excel file: Ch09P-9.xlsx The solution is in this Excel File: Ch09P-9S.xlsx
22 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 10 Enterprise Funds
1. When charges to external users are a principal revenue source of an activity, the use of an Enterprise Fund is required by generally accepted accounting principles in each of the following situations except A. When user fees are charged for the majority of the activity’s operations. B. When an activity is financed with debt that is secured solely by the pledge of revenues. C. When laws and regulations require that the activity's costs be recovered with fees and charges. D. When pricing policies of the activity establish fees and charges are designed for cost recovery.
Answer: A Objective: LO 10.2 Determine what activities should be reported using Enterprise Funds. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 2. Which of the following conditions does not require that an activity which provides services for a user fee be reported in an Enterprise Fund? A. Net revenues are pledged as the sole security for debt issued to finance the activity. B. Laws or regulations require the activity to recover its costs, including capital costs. C. Pricing policies require the activity to recover its costs, including capital costs. D. The primary source of revenue for the activity is charges to external users.
Answer: D Objective: LO 10.2 Determine what activities should be reported using Enterprise Funds. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 3. Which of the following statements is false concerning interest capitalization? A. Generally accepted accounting principles require the capitalization of interest for assets constructed for an Enterprise Fund in most situations. B. Interest cost should not be capitalized for asset acquisitions financed by restricted gifts or grants. C. Interest capitalization is computed differently for tax-exempt versus taxable debt. D. Interest capitalization is not allowed in Enterprise Funds. Answer: D
Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical thinking 4. When accounting for inventory in an Enterprise Fund, which of the following methods should be used for external financial reporting? A. Acquisition method. B. Allocation method. 1 Copyright © 2018 Pearson Education, Inc.
C. Consumption method. D. Purchases method.
Answer: C Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 5. A city Enterprise Fund was awarded an operating grant during the fiscal year. Assuming qualifying costs were incurred during the year and all other eligibility requirements were met, the Enterprise Fund will report this grant on the statement of revenues, expenses, and changes in net position as A. Operating revenues. B. Nonoperating revenues. C. Other financing sources. D. Other financing uses.
Answer: B Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical thinking 6. Wartrace City’s Communications Enterprise Fund, which has a December 31 year end, was awarded a $400,000 federal grant for a system hardware upgrade to meet FCC requirements. The grant was awarded in June 20X7. Work began immediately on the project and qualifying costs of $200,000 were incurred prior to December 31, 20X7, however, the capital project is not expected to be completed until June 20X8. The grantor does not reimburse grantees until a project is complete. As of December 31, 20X7, the Communications Enterprise Fund should
A. Report nonoperating revenues of $400,000. B. Report nonoperating revenues of $200,000. C. Report a capital contribution of $400,000. D. Report a capital contribution of $200,000. Answer: C Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate 2 Copyright © 2018 Pearson Education, Inc.
Classification: Application AACSB Category: Application of knowledge 7. A government defeased in-substance $10 million of old Enterprise Fund bonds by paying $12 million into a qualifying trust for that purpose. The refunded bonds had an unamortized premium of $200,000 and a prepaid bond insurance balance of $50,000. No borrowed resources were used to accomplish the defeasance. What amount of deferred interest expense adjustment should the government report? A. $0. B. $1,850,000 debit. C. $1,800,000 debit. D. $1,850,000 credit.
Answer: A Objective: LO 10.4 Account for and report proprietary fund refunding transactions and restricted assets. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 8. A government defeased in-substance $10 million of old Enterprise Fund bonds by paying $12 million into a qualifying trust for that purpose. The refunded bonds had an unamortized premium of $200,000 and a prepaid bond insurance balance of $50,000. Resources to finance the defeasance of the old bonds were provided by issuing $12,000,000 of new bonds issued at par. What amount of deferred interest expense adjustment should the government report? A. $0. B. $1,850,000 debit. C. $1,800,000 debit. D. $1,850,000 credit.
Answer: B Objective: LO 10.4 Account for and report proprietary fund refunding transactions and restricted assets. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 9. Refunding bonds were issued by an Enterprise Fund with a face value of $15,000,000 at a 1% discount. Issuance costs were $225,000. The entry to record the issuance of the refunding bonds would be
3 Copyright © 2018 Pearson Education, Inc.
A.
B.
C.
D.
Cash ................................................................................... Expenditures ...................................................................... Other Financing Uses – Discount ...................................... Other Financing Sources – Bonds ................................ Cash ................................................................................... Expenditures ...................................................................... Other Financing Sources – Bonds ................................ Cash ................................................................................... Unamortized Deferred Charges/Discount ......................... Bond Payable ............................................................... Cash ................................................................................... Bond Issuance Expense ..................................................... Unamortized Discount ....................................................... Bonds Payable ..............................................................
Debit $14,625,000 225,000 150,000
Credit
$15,000,000 $14,625,000 225,000 $14,850,000 $14,625,000 375,000 $15,000,000 $14,625,000 225,000 150,000 $15,000,000
Answer: D Objective: LO 10.4 Account for and report proprietary fund refunding transactions and restricted assets. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 10. A city's Enterprise Fund issued revenue bonds with a face value of $10,000,000. The bonds were issued with a 2% premium and the issuance costs totaled $150,000. When the bonds are issued, the Enterprise Fund will report total other financing sources in the amount of A. $0. B. $9,850,000. C. $10,000,000. D. $10,200,000.
Answer: A Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Easy Classification: Synthesis AACSB Category: Analytical thinking 11. An Enterprise Fund is donating equipment to a general government department. The equipment has a net book value of $25,000 (original cost was $60,000). The acquisition value of the equipment at the transaction date was $28,000. The entry that should be recorded for the Enterprise Fund would include A. A debit to nonoperating expense of $25,000. B. A debit to transfer out of $28,000. C. A debit to capital contribution of $25,000. D. A debit to nonoperating expense of $28,000.
Answer: A Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial 4 Copyright © 2018 Pearson Education, Inc.
reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 12. A general government department donates equipment with an original cost of $50,000 to an Enterprise Fund. The net book value as of the date of donation is $17,500, and its acquisition value is $15,000. The entry that should be recorded by the Enterprise Fund would be
A. A debit to equipment of $15,000 and a credit to transfer in of $17,500. B. A debit to equipment of $50,000 and credits to accumulated depreciation of $32,500 and nonoperating revenues of $17,500. C. A debit to capital assets of $15,000 and a credit to capital contribution of $17,500. D. A debit to capital assets of $50,000 and credits to accumulated depreciation of $32,500 and capital contribution of $17,500. Answer: D Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 13. A developer agreed to pay for water and wastewater infrastructure associated with one of his development projects. Once the work is completed and the new lines are connected, they will become part of the city's Enterprise Fund capital assets. The entry that should be recorded by the Enterprise Fund when the project is complete would be
A. A debit to capital assets and a credit to net investment in capital assets. B. A debit to capital assets and a credit to capital contribution. C. A debit to capital assets and a credit to transfer in. D. A debit to capital assets and a credit to nonoperating revenues. Answer: B Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 14. A city's Enterprise Fund sold land, which rarely occurs in the government. The land was originally 5 Copyright © 2018 Pearson Education, Inc.
purchased at $35,000 and sold for $235,000. The Enterprise fund would record the sale as a A. Debit to cash for $235,000 and credit to nonoperating revenues for $235,000. B. Debit to cash for $235,000 and credit to operating revenues for $235,000. C. Debit to cash for $235,000, a credit to capital assets (land) for $35,000, and a credit to nonoperating revenues (gain on sale of land) for $200,000. D. Debit to cash for $235,000, a credit to capital assets (land) for $35,000, and credit to special item (gain on sale of land) for $200,000.
Answer: D Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 15. An Enterprise Fund contributed $85,000 to the General Fund for operations. The money is not intended to be a loan. Which of the following statements is true? A. The Enterprise Fund will report capital contributions of $85,000. B. The Enterprise Fund will report other financing uses of $85,000. C. The Enterprise Fund will report advances of $85,000. D. The Enterprise Fund will report transfers out of $85,000.
Answer: D Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 16. An Enterprise Fund entered into a capital lease for the purchase of equipment. The capitalizable cost of the asset was $300,000 and fund made a $30,000 down payment. In the year of inception the Enterprise Fund would report A. Expenses of $30,000. B. Capital assets of $300,000. C. Long-term liabilities of $300,000. D. An other financing use of $270,000 and expenses of $30,000.
Answer: B Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate 6 Copyright © 2018 Pearson Education, Inc.
Classification: Application AACSB Category: Application of knowledge 17. The Public Utilities Enterprise Fund was ordered by the court to pay environmental damages of $500,000. The fund is to pay $100,000 immediately and the remaining $400,000 in equal installments for next four years. In the year of the judgment, the Enterprise Fund would report A. $500,000 in expenses. B. $500,000 in liabilities. C. $100,000 in expenses. D. Nothing. All amounts would be recorded in General Long-term Liabilities accounts.
Answer: A Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 18. The Water Enterprise Fund customers are billed on a monthly basis. As of the end of the fiscal year, water valued at $3,956,000 was sold. The accounts receivable for the fund was $256,000 at the beginning of the year and was $326,000 at the end of the year. Given these facts, the revenue in the Water Enterprise Fund should be
A. $3,956,000. B. $3,886,000. C. $3,700,000. D. $3,630,000. Answer: A Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 19. An Enterprise Fund incurs $35,000 of interest during the current year related to its outstanding bonds. The $35,000 will be reported as A. Operating expenses. B. Nonoperating expenses. C. Other financing uses. D. Capitalized interest because all interest must be capitalized in an Enterprise fund.
Answer: B Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt 7 Copyright © 2018 Pearson Education, Inc.
refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 20. An Enterprise fund receives a $100,000 capital grant and uses the funds to partially finance the purchase of a $175,000 capital asset. The Enterprise Fund will report A. Revenues of $100,000 and expenses of $175,000. B. Nonoperating revenues of $100,000 and capital assets of $175,000. C. Capital contributions of $100,000 and expenses of $175,000. D. Capital contributions of $100,000 and capital assets of $175,000.
Answer: D Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 21. The Utility Enterprise Fund is in Year 2 of a three-year construction project that is projected to cost $3,000,000. The fund incurred $300,000 of costs in Year 1 and $1,800,000 in Year 2. The fund will report A. Expenses of $300,000 in Year 1 and $1,800,000 in Year 2. B. Total construction in progress in Year 2 of $1,800,000. C. Total construction in progress in Year 2 of $2,100,000. D. Expenditures of $300,000 in Year 1 and $1,800,000 in Year 2. Answer: C
Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 22. An Enterprise Fund made a debt service payment of $75,000 ($45,000 principal, $30,000 interest). The Enterprise Fund will report A. $0 expenses. B. $30,000 of expense. C. $75,000 of expense. D. a liability reduction of $75,000.
Answer: B Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial 8 Copyright © 2018 Pearson Education, Inc.
reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 23. Which of the following is not a required financial statement of an Enterprise Fund?
A. Statement of net position. B. Statement of revenues, expenses and changes in fund net position. C. Statement of revenues, expenses and changes in fund net position—budget to actual (GAAP basis). D. Statement of cash flows. Answer: C Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 24. Which of the following would be included in determining operating income of an Enterprise Fund? A. Transfers. B. Depreciation expense. C. Interest expense. D. Capital contributions.
Answer: B Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 25. A government was awarded a grant from another government. The $8,000,000 grant is restricted to use for construction of a facility for one of the grantee government's enterprise activities. The grant is for half the cost of the facility. The grantor will reimburse half of the costs as they are incurred. At the end of the first fiscal year, $3,000,000 has been spent on the project. $1,500,000 has been collected from the grantor. How should the grantee's Enterprise Fund statement of cash flows report the cash inflows? A. Operating activities. B. Noncapital financing activities. 9 Copyright © 2018 Pearson Education, Inc.
C. Capital and related financing activities. D. Investing activities. Answer: C
Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 26. The City of Alnwick was awarded a grant by Blount County. The $8,000,000 grant is restricted to use for construction of a facility for a city enterprise activity. The grant is for half the cost of the facility. The grantor will reimburse half of the costs as they are incurred. At the end of the first fiscal year, $3,000,000 has been spent on the project. $1,500,000 has been collected from the grantor. How should the grant be reported in the statement of revenues, expenses, and changes in net position? A. Capital contribution of $1,500,000. B. Operating revenues of $1,500,000. C. Nonoperating revenues of $1,500,000. D. Special item of $1,500,000.
Answer: A Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 27. Enterprise Fund payments in lieu of taxes to the General Fund that are not payments for services from a government's Enterprise Fund to its General Fund should be reported by the Enterprise Fund as
A. Operating expenses. B. Nonoperating expenses. C. Transfers out. D. Special item. Answer: C Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 10 Copyright © 2018 Pearson Education, Inc.
28. Which of the following statements is true about interfund transfers in an Enterprise Fund? A. They are always reported as capital and related financing activities in the statement of cash flows. B. They are always the last item reported immediately before the change in net position in the statement of revenues, expenses, and changes in fund net position. C. They do not affect changes in net position of the proprietary fund. D. They are always reported as noncapital financing activities in the statement of cash flows.
Answer: B Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical thinking 29. A government borrowed $20 million by issuing general obligation bonds to finance construction of a new airport terminal for its Airport Enterprise Fund. The bonds were issued at par, and the government intends to service the bonds from Enterprise Fund revenues. The proceeds of the bonds should be reported as
A. An other financing source in the Enterprise Fund statement of revenues, expenses, and changes in fund net position. B. Capital and related financing activities in the Enterprise Fund statement of cash flows. C. Revenues in the Enterprise Fund statement of revenues, expenses, and changes in fund net position. D. Only in the General Long-Term Liabilities account. Answer: B Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical thinking 30. Which of the following is not a cash flow classification used in a Proprietary Fund statement of cash flows? A. Cash flows from operating activities. B. Cash flows from financing activities. C. Cash flows from investing activities. D. Cash flow from noncapital financing activities.
Answer: B Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt 11 Copyright © 2018 Pearson Education, Inc.
refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical thinking 31. Cash received from a transfer from the General Fund to subsidize operations of an Enterprise Fund is reported in which section of a statement of cash flows? A. Cash flows from operating activities. B. Cash flows from noncapital financing activities. C. Cash flows from capital and related financing activities. D. Cash flows from investing activities. Answer: B
Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical thinking 32. A Proprietary Fund statement of cash flows reports cash flows from operating activities
A. Using the direct method. B. Using the indirect method. C. Equal to net income plus depreciation and plus/minus changes in appropriate current asset and current liability accounts. D. Using either the direct or the indirect method of presentation. Answer: A
Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 33. Where should a cash grant received to support the operations of an Enterprise Fund be reported on that fund’s statement of revenues, expenses, and changes in fund net position when it is earned? A. Operating revenues. B. Nonoperating revenues. C. Reduction to operating expenses. D. Capital contributions.
Answer: B Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial 12 Copyright © 2018 Pearson Education, Inc.
reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 34. A city’s Enterprise Fund received $3,000,000 cash in the form of a capital grant during the fiscal year ended June 30, 20X3. The Enterprise Fund incurred and paid construction costs from that grant in the amount of $1,200,000. What amount should be reported on the Enterprise Fund Statement of Net Position as net investment in capital assets?
A. $0 B. $1,200,000 C. $1,800,000 D. $3,000,000 Answer: B Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 35. A city’s Enterprise Fund received $3,000,000 cash in the form of a capital grant during the fiscal year ended June 30, 20X3. The Enterprise Fund incurred and paid construction costs from that grant in the amount of $1,200,000. What amount should be reported on the Enterprise Fund Statement of Net Position as restricted for capital outlay? A. $0 B. $1,200,000 C. $1,800,000 D. $3,000,000
Answer: A Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 36. A government borrowed $20 million by issuing general obligation bonds to finance construction of a new airport terminal for its Airport Enterprise Fund. The bonds were issued at par, and the government intends to service the bonds from Enterprise Fund revenues. At year end, none of the 13 Copyright © 2018 Pearson Education, Inc.
bond proceeds has been spent. The bonds payable would be included in which component of net position of an Enterprise Fund? A. Unrestricted net position. B. Restricted net position. C. Net investment in capital assets. D. Temporarily restricted net position.
Answer: B Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Application of knowledge 37. Which of the following would not be reported as a component of net position of an Enterprise Fund? A. Unrestricted net position. B. Restricted net position. C. Net Investment in capital assets. D. Permanently restricted net position.
Answer: D Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 38. A long-term liability for compensated absences would typically be included in which component of net position of an Enterprise Fund? A. Unrestricted net position. B. Restricted net position. C. Net investment in capital assets. D. Net position would not be affected.
Answer: A Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 14 Copyright © 2018 Pearson Education, Inc.
39. Which of the following equity classifications would not apply to an Enterprise Fund?
A. Retained earnings. B. Net investment in capital assets. C. Unrestricted net position. D. Restricted net position. Answer: A Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical thinking 40. Inventory in an Enterprise Fund will most likely affect which equity classification? A. Nonspendable net position. B. Net investment in capital assets. C. Restricted net position. D. Unrestricted net position.
Answer: D Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 41. On January 1, an Enterprise Fund issues $1,000,000 of 6%, ten-year tax-exempt bonds to finance the construction of a new water treatment plant. During the year, the Enterprise Fund earned $40,000 of interest income on the bond proceeds and incurred $600,000 of construction costs. What amount of interest cost should be capitalized for the year? A. $0. B. $20,000. C. $36,000. D. $60,000.
Answer: B Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Difficult Classification: Application 15 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of knowledge 42. A transfer out would be reported in an Enterprise Fund’s operating statement for A. “Free” services provided to other departments. B. Capital assets transferred to a general government department. C. Interfund loans to other departments. D. Services provided and billed to other departments.
Answer: A Objective: LO 10.3 Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings. • Prepare journal entries for typical proprietary fund transactions. • Prepare the proprietary fund financial statements. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge
16 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 10
Problem 1 – Enterprise Fund Transactions Listed below are selected transactions for the Rhea County Garbage Service, which is accounted for in an Enterprise Fund. All amounts are in thousands of dollars. Transactions: 1. 2. 3. 4. 5.
Services of $5,000 were provided and billed to outside customers. Services of $750 were provided and billed to the General Fund. $750 was collected from other funds, and $4,000 was collected on account. $20 of accounts receivable were written off as uncollectible. Estimated bad debts for the year were $100.
Requirements: 1. Prepare the journal entries required in the Enterprise Fund. If no entry is required, state “No entry required” and explain why. 2. Compute the amount of sales revenues that should be reported for the Enterprise Fund.
1 Copyright © 2018 Pearson Education, Inc.
Answers: Requirement #1 # Accounts 1 Accounts Receivable Sales / Charges for Services 2 Due from General Fund Sales / Charges for Services 3 Cash (4,000 + 750) Due from General Fund Accounts Receivable
Debit 5,000
Credit 5,000
750 750 4,750 750 4,000
4 Allowance for Doubtful Accounts Accounts Receivable
20
5 Sales / Charges for Services Allowance for Doubtful Accounts
100
20
100
Requirement #2 Gross Sales (5,000 + 750) Less Increase in Allowance for Doubtful Accounts Net Sales
2 Copyright © 2018 Pearson Education, Inc.
5,750 100 5,650
Problem 2 – Advance Refunding of Debt Dayton County decided to refund an outstanding term bond issue in its Enterprise Fund. The old bonds have a par value of $3,200 and an unamortized premium of $120. These bonds are scheduled to mature in 6 more years. Transactions: 1. On January 2, 20X2, the County issued $3,700 face value of refunding bonds at a $350 premium for a total of $4,050. The bonds bear interest at 5% payable annually and mature in 5 years. The bond issuance costs were $250. 2. On January 2, The County paid $3,800 into an irrevocable trust in order to defease insubstance the previously outstanding bonds payable of the Enterprise Fund. 3. The annual interest payment on the new bonds was made on December 31 when due. Requirements: 1. Prepare the journal entries required in an Enterprise. If no entry is required, state “No entry required” and explain why. 2. Indicate how all bond and refunding related amounts should be reported at December 31, 20X2.
3 Copyright © 2018 Pearson Education, Inc.
Answers: Requirement #1 # Accounts 1 Cash Expenses – Bond Issue Costs Refunding Bonds Payable Premium on Refunding Bonds
Debit 3,800 250
2 Bonds Payable [old] Premium on Bonds Payable [old] Deferred Interest Expense Adjustment Cash 3 Interest Expense Premium on Refunding Bonds ($350 / 5) Deferred Interest Expense Adjustment (480 / 5) Cash (3,700 × 5%)
Credit
3,700 350 3,200 120 480 3,800 211 70 96 185
Requirement #2 Statement of Net Position: Deferred Outflows of Resources—Deferred Interest Expense Adjustment
$ 384
Liabilities: Refunding Bonds Payable Premium on Refunding Bonds ($350 − $70)
$3,700 280
Statement of Revenues, Expenses, and Changes in Fund Net Position: Nonoperating Expenses: Bond issue costs Interest
4 Copyright © 2018 Pearson Education, Inc.
$
250 211
Problem 3 – Grant Accounting and Reporting Over the course of one year, Obed County received two grants: $10,000 grant (in cash) to be used to finance half the cost of expanding the town’s water treatment plant. All eligibility requirements are met once qualifying costs are incurred. $40 grant to educate users on water conservation measures and to monitor water usage by a study group. No cash was received upon notification of the award. Transactions: 1. Received the grant to assist in expanding the water treatment plant. 2. Signed a contract with Swann & Hall Construction to build the water treatment plant expansion, $20,000. The construction project is expected to take less than one year. 3. Received a $5,000 transfer from the General Fund to cover part of the cost of expanding the treatment plant. 4. Received an invoice from S&H Construction for $6,000,000 on the project for work completed to date. Paid the contractor the invoiced amount less a 10% retainage. 5. Received the grant to do the water study, but no cash was received in advance. 6. Issued $5,000 in bonds at mid-year at par to provide part of the financing for the treatment plant expansion. The bond issue costs were 1% of the face value. The bonds bear interest at 6%, payable semiannually on January 1 and July 1. 7. Received a second invoice for $10,000,000 on the project. Paid the contractor the invoiced amount less a 10% retainage. 8. Expenses incurred and paid during the year under this second grant total $30. 9. Received the final invoice from the contractor ($4,000,000). The expansion project was finished on-time and in accordance with the contract. Paid the contractor all amounts owed. 10. Make any necessary year-end adjusting entries. Requirements: 1. Prepare the journal entries required in an Enterprise. If no entry is required, state “No entry required” and explain why. 2. How would these grants be reported in the statement of revenues, expenses, and changes in net position of the Enterprise Fund? 3. Assuming year-end had occurred after transaction #4, how would the grant and transfer affect the Statement of Net Position for the Enterprise Fund.
5 Copyright © 2018 Pearson Education, Inc.
Answers: Requirement #1 #
Accounts 1 Cash Unearned Capital Grant Revenues
Debit 10,000
Credit 10,000
2 No entry required – Enterprise Funds do not use encumbrance accounting. 3 Cash Transfer from General Fund
5,000
4a Construction in Progress (20,000 × 30%) Retainage Payable (6,000 × 10%) Cash
6,000
4b Unearned Capital Grant Revenues Capital Contributions—Capital Grant ($6,000 × 50%)
3,000
5,000
600 5,400
3,000
5 No entry until qualifying costs are incurred or cash is received. 6 Cash Expenses – Bond Issue Costs (5,000 × 1%) Bonds Payable
4,950 50
7a Construction in Progress Retainage Payable (10,000 × 10%) Cash
10,000
7b Unearned Capital Grant Revenues Capital Contributions—Capital Grant ($10,000 × 50%)
5,000
5,000
1,000 9,000
5,000
8a Expenses – Operating Cash
30
8b Due from Grantor Nonoperating Revenues—Operating Grant
30
30
9a Buildings Retainage Payable Cash (20,000 × 20%) Construction in Progress 6 Copyright © 2018 Pearson Education, Inc.
30 20,000 1,600 5,600 16,000
9b Unearned Capital Grant Revenues Capital Contributions—Capital Grant ($4,000 × 50%)
2,000 2,000
10* Interest Expense (5,000 × 6% / 2) 150 Interest Payable 150 *Adjusting entries recognizing the capital grant revenues and operating grant revenues are needed if not recorded earlier, as is done in this solution. Requirement #2 The capital grant revenue of $10,000 would be reported as a separate line item after “income before other revenue, expenses, and transfers.” The operating grant revenue of $30 is reported as part of nonoperating revenues. Requirement #3 The unspent balance from the capital grant and the transfer, 10,600 (10,000 + 5,000 – 5,400), would be reported as restricted cash. The liability for Unearned Capital Grant Revenues of $7,000,000 should be deducted from this amount leaving Restricted Net Position of $3,600,000. (Note that the $5,000 transferred in is considered restricted because it essentially is part of a required local match since the grant covers only 50% of the construction costs. If the remaining $5,000,000 match is from existing assets of the Enterprise Fund, The Restricted Net Position would be increased by that amount.) The Retainage Payable is a capital-asset related liability that must be deducted from the construction in progress to determine the Net Investment in Capital Assets of $9,400 (10,000 – 600). Note that only $3,000,000 of capital grant revenues have been earned at this point and no operating grant revenues have been earned. The question does not inquire about the operating statement presentation when the year ends after transaction 4, however.
7 Copyright © 2018 Pearson Education, Inc.
Problem 4 – Preparation of the Statement of Cash Flows The following transactions occurred in the City of Jimtown Enterprise Fund: 1. Equipment belonging to the Enterprise Fund was sold for $300. 2. The proceeds from the sale of the asset were transferred to the General Fund. 3. Cash, $2,800, was paid for construction costs. The cash was paid out of unrestricted cash available for any Enterprise Fund purpose—i.e., was not set aside strictly for capital asset construction or acquisition. 4. Paid principal, $18, and interest, $59, on a mortgage note. 5. The Enterprise Fund collected $12,500 from external customers and $2,500 from the General Fund for services. 6. The City signed a lease for equipment. The present value of the future payments and fair value of the equipment is $5,000, and the City made a down payment of $500 7. Proceeds of bonds issued to refund previously outstanding bonds that had been issued to finance plant expansion several years earlier, $18,000. 8. Interest paid on the refunding bonds, $1,080. 9. Cash proceeds from sale of investments, $900. Investments were purchased with the proceeds of debt issued to finance construction of specialized equipment that is almost completed. 10. Cash received from a capital grant, $5,000. 11. Cash paid for construction costs that qualify under the capital grant, $1,500. 12. The City acquired land for future plant expansion, $750, by issuing a 10-year bond in the same amount. 13. Cash received from operating grants, $500. 14. Cash paid for salaries covered by operating grant, $85. 15. The City had an unrealized gain on investments of $12. 16. The Enterprise Fund incurred $10,000 in operating expenses, including $1,000 in depreciation, $3,000 for employees, and $6,000 paid to suppliers. All but $500 of the salary expenses were paid by year end. 17. Cash paid for equipment purchased with the proceeds of an operating grant, $34. 18. Cash received from the General Fund to cover part of the cost of plant expansion, $1,000. 19. Cash proceeds from the sale of fund capital assets, $23. 20. Cash received from another fund as a 6-month loan for the sole purpose of financing purchase of equipment, $90. The balance of cash and cash equivalents at October 1, 20X1, was $313. The balance of cash and cash equivalents at year end (9/30/20X2) is $26,250. Requirement: Prepare the City of Jimtown Enterprise Fund Statement of Cash Flows for the year ended September 30, 20X2. You may exclude the reconciliation of operating income to cash flows from operating activities.
8 Copyright © 2018 Pearson Education, Inc.
Answer: City of Jimtown Enterprise Fund Statement of Cash Flows For the Year Ended September 30, 20X2 Cash Flows from Operating Activities: Cash received from customers Cash received from other funds Cash paid to employees (85 + 3,000 – 500) Cash paid to suppliers Net Cash Provided by Operating Activities Cash Flows from Noncapital Financing Activities: Cash paid for interfund transfers Cash received from operating grants Net Cash Provided by Noncapital Financing Activities Cash Flows from Capital and Related Financing Activities: Cash received from sale of equipment (300 + 23) Cash received from refunding bonds Cash received from capital grant Cash received from General Fund transfer Cash received from loan Cash paid for construction (2,800 + 1,500) Cash paid on mortgage note Cash paid for interest (59 + 1,080) Cash paid for capital lease Cash paid for equipment
$12,500 2,500 (2,585) (6,000) $6,415 (300) 500 200 323 18,000 5,000 1,000 90 (4,300) (18) (1,139) (500) (34)
Net Cash Provided by Capital and Related Financing Activities Cash Flows from Investing Activities: Cash received from sale of investments Net Cash Provided by Investing Activities
18,422 900 900
Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents, October 1, 20X1 Cash and Cash Equivalents, September 30, 20X2 Noncash Transactions: Signed lease for equipment Land acquired by issuing long-term bonds Unrealized gain on investments
9 Copyright © 2018 Pearson Education, Inc.
$25,937 313 $26,250
$4,500 750 12
Problem 5 – Statement of Revenues, Expenses, and Changes in Fund Net Position Using the information provided below for the Water Utility Enterprise Fund of the City of Rice, prepare a statement of revenues, expenses, and changes in fund net position for 20X3. Charges for services ................................................................................................... $3,300 Interest received ......................................................................................................... 105 Increase in fair value of investments ......................................................................... 12 Gain on sale of capital assets ..................................................................................... 8 Operating transfers from the General Fund ............................................................... 450 Capital Grant .............................................................................................................. 1,200 Salaries expense ......................................................................................................... 1,000 Contractual services used ........................................................................................... 300 Supplies used ............................................................................................................. 400 Depreciation ............................................................................................................... 1,100 Interest expense .......................................................................................................... 250 Unrestricted Net Position, January 1, 20X3............................................................... 1,000 Restricted Net Position, January 1, 20X3 .................................................................. 200 Net Investment in Capital Assets, January 1, 20X3................................................... 1,800
10 Copyright © 2018 Pearson Education, Inc.
Answer: City of Rice Water Utility Enterprise Fund Statement of Revenues, Expenses, and Changes in Fund Net Position For the Year Ended December 31, 20X3 Operating Revenues – Charges for Services Operating Expenses: Salaries Expense Contractual Services Expense Supplies Expense Depreciation Expense Operating Income Nonoperating Revenues (Expenses): Interest Revenue (105 + 12) Interest Expense Gain on Sale of Capital Assets Income before Other Revenues, Expenses, and Transfers Capital Contributions Transfer from the General Fund Change in Net Position Net Position, January 1, 20X3 Net Position, December 31, 20X3
11 Copyright © 2018 Pearson Education, Inc.
$3,300 $1,000 300 400 1,100
117 (250) 8
2,800 500
(125) 375 1,200 450 2,025 3,000 $5,025
Problem 6 – Matching Transactions and Classifications of Cash Flows Note that X in the following Proprietary Fund statement of cash flows identifies a dollar amount and the letters (A) through (I) identify specific items which appear in the major sections of the statement. Partial Statement of Cash Flows Cash Flows from Operating Activities: Inflows Outflows Net Cash Provided (Used) by Operating Activities
+X (A) −X (B)
Cash Flows from Noncapital Financing Activities: Inflows Outflows Net Cash Provided (Used) by Noncapital Financing Activities
+X (C) −X (D)
Cash Flows from Capital and Related Financing Activities: Inflows Outflows Net Cash Provided (Used) by Capital and Related Financing Activities
+X (E) −X (F)
Cash Flows from Investing Activities: Inflows Outflows Net Cash Provided (Used) by Investing Activities
+X (G) −X (H)
X
X
X
X
Net Increase (Decrease) in Cash
X
Noncash noncapital, capital and related, and investing activities ±X
(I)
Instructions: For each of the following items, indicate the section where the effect would be reported. Use the code (A through I) from above. Codes may be used once, more than once, or not at all. Assume that generally accepted accounting principles have been followed and that there are no short-term securities which are considered cash equivalents. _____ 1. Interest payments on long-term obligations not related to capital assets _____ 2. Proceeds from maturities of investments _____ 3. Contributed capital assets _____ 4. Investment income received _____ 5. Cash received from operating grants _____ 6. Transfers to other funds _____ 7. Principal payments on capital-related long-term obligations _____ 8. Receipts from customers and users _____ 9. Capital purchases with notes payable _____ 10. Payments to employees
12 Copyright © 2018 Pearson Education, Inc.
Answers: 1. D 2. G 3. I 4. G 5. C 6. D 7. F 8. A 9. I 10. B
13 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 11 Internal Service Funds 1. An Internal Service Fund is considered to be A. A governmental fund. B. A proprietary fund. C. A fiduciary fund. D. Either a governmental fund or a proprietary fund, depending on the nature of the activity accounted for within the fund. Answer: B Objective: LO 11.1 Describe the nature and usage of Internal Service Funds. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 2. The use of an Internal Service Fund is mandated by generally accepted accounting principles for which of the following activities? A. Risk financing activities. B. Government motor pool. C. Centralized warehouse. D. GAAP does not require the use of an Internal Service Fund. Answer: D Objective: LO11.2 Summarize the accounting principles that apply to Internal Service Funds. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 3. A government plans to create an Internal Service Fund to account for its new central warehouse. The General Fund loans the Internal Service Fund $100,000, which is going to pay back the loan interest-free in five years. The entry in the Internal Service Fund to record this transaction would be
A. Cash ............................................................................ Revenue..................................................................
Debit $100,000
Credit $100,000
B. Cash ............................................................................ Capital Contribution...............................................
$100,000
C. Cash ............................................................................ Transfer from General Fund ..................................
$100,000
$100,000
$100,000
D. Cash ............................................................................ $100,000 Advance from General Fund .................................. $100,000 Answer: D Objective: LO11.4 Prepare basic journal entries for various types of Internal Service Funds. Difficulty Level: Moderate 1 Copyright © 2018 Pearson Education, Inc.
Classification: Application AACSB Category: Application of knowledge 4. Nathan Township's General Fund transfers three vehicles to the Internal Service Fund. The vehicles, which have a useful life of five years, are transferred at the end of their fourth year. The original cost for all three vehicles totaled $75,000. The entry in the Internal Service Fund would be Debit Credit A. Vehicles ...................................................................... $75,000 Accumulated Depreciation – Vehicles................... $60,000 Net Investment in Capital Assets ........................... 15,000 B. Vehicles ...................................................................... Accumulated Depreciation – Vehicles................... Capital Contributions .............................................
$75,000
C. Vehicles ...................................................................... Capital Contributions .............................................
$15,000
$60,000 15,000
$15,000
D. Vehicles ...................................................................... $75,000 Accumulated Depreciation – Vehicles................... $60,000 Transfer from General Fund .................................. 15,000 Answer: B Objective: LO11.4 Prepare basic journal entries for various types of Internal Service Funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 5. A Motor Pool Internal Service Fund purchased ten new vehicles for their fleet inventory. The fund entered into a capital lease. The capitalizable cost totaled $300,000 and there was a $50,000 down payment. The entry to record the transaction in the Internal Service Fund would be
2 Copyright © 2018 Pearson Education, Inc.
A. Vehicles ...................................................................... Expenditures ............................................................... Other Financing Source – Capital Lease ............... Cash........................................................................
Debit $300,000 50,000
Credit
$300,000 50,000
B. Vehicles ...................................................................... Other Financing Source – Capital Lease ............... Cash........................................................................
$300,000
C. Vehicles ...................................................................... Capital Lease Payable ............................................ Cash........................................................................
$300,000
$250,000 50,000
$250,000 50,000
D. Vehicles ...................................................................... $250,000 Expenditures ............................................................... 50,000 Capital Lease Payable ............................................ $250,000 Cash........................................................................ 50,000 Answer: C Objective: LO11.4 Prepare basic journal entries for various types of Internal Service Funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 6. The Central Warehouse Internal Service Fund purchased $15,000 of inventory on account, which was unpaid as of the month end. Which of the following statements regarding the accounting for the transaction is false? A. Expenses in the Internal Service Fund will increase. B. Capital assets recorded in the Internal Service Fund remain unchanged. C. The transaction will increase total assets. D. The transaction will increase total liabilities. Answer: A Objective: LO11.4 Prepare basic journal entries for various types of Internal Service Funds. Difficulty Level: Easy Classification: Application AACSB Category: Analytical thinking 7. Caraway County has a Self-Insurance Internal Service Fund. If the fund purchases $100,000 of investments during the month, the A. Fund's total assets will increase by $100,000. B. Fund's total assets will decrease by $100,000. C. Fund's total assets will remain the same. D. Fund's expenditures will increase by $100,000. Answer: C Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Easy Classification: Application 3 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of knowledge 8. An Internal Service Fund had investments with an original cost of $100,000. As of the end of the fiscal year, the fair market value on these investments was $85,000. The Internal Service Fund would A. Report expenses of $15,000. B. Report a reduction of revenue of $15,000. C. Not adjust the value of the investments reported on the balance sheet. D. Report a loss on investments of $15,000. Answer: B Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 9. The General Fund paid $4,000 to the Internal Service Fund for services rendered. Which of the following statements accurately reflects the reporting effects of the transaction? A. The Internal Service Fund will report revenues of $4,000. B. The Internal Service Fund will report capital contributions of $4,000. C. The Internal Service will report a transfer in of $4,000. D. The Internal Service Fund will record a direct adjustment to unrestricted net position. Answer: A Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 10. Which of the following would most likely be accounted for in an Internal Service Fund? A. A government's water and sewer department if it provides water and sewer services to government departments as well as to residents and businesses in the community. B. A government's central printing shop that provides a very minimal amount of services to a few outside customers. C. The Payroll and Benefits Department of the government. D. A consolidated supplies facility where most of the customers are other governments. Answer: B Objective: LO 11.1 Describe the nature and usage of Internal Service Funds. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge
4 Copyright © 2018 Pearson Education, Inc.
11. A municipality's Central Garage Internal Service Fund had total billings for $8,000 for the month. Of the 40 vehicles serviced, 20 were police vehicles, 10 were water department vehicles, and 10 were wastewater department vehicles. What would the journal entry be to account for this transaction? Debit Credit A. Accounts Receivable .................................................. $8,000 Transfer from Other Funds .................................... $8,000 B. Accounts Receivable .................................................. Revenues—Charges for Services ...........................
$8,000
C. Due from General Fund .............................................. Due from Water Fund ................................................. Due from Wastewater Fund ........................................ Revenues—Charges for Services ...........................
$4,000 2,000 2,000
$8,000
$8,000
D. Due from General Fund .............................................. $4,000 Due from Water Fund ................................................. 2,000 Due from Wastewater Fund ........................................ 2,000 Transfer from Other Funds .................................... $8,000 Answer: C Objective: LO11.4 Prepare basic journal entries for various types of Internal Service Funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 12. The Tullahoma School District’s Print Shop Internal Service Fund received $25,000 from a state grant to help subsidize the purchase of new printing equipment. The Internal Service Fund will report this contribution as a A. Transfer in. B. Capital contribution. C. Nonoperating revenue. D. Direct equity adjustment to restricted net position. Answer: B Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 13. The Tullahoma School District’s Print Shop Internal Service Fund received $25,000 from a state grant to help subsidize its printing operations. The Internal Service Fund will report this contribution as a A. Transfer in. B. Capital contribution. C. Nonoperating revenue. D. Direct equity adjustment to restricted net position. Answer: C 5 Copyright © 2018 Pearson Education, Inc.
Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 14. The General Fund contributes $40,000 to an Internal Service Fund to subsidize its operations. The contribution is not considered to be an interfund loan. The Internal Service Fund will report this contribution as a A. Transfer in. B. Capital contribution. C. Nonoperating revenue. D. Direct equity adjustment to restricted net position. Answer: A Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 15. The General Fund contributes $40,000 to an Internal Service Fund to subsidize the purchase of a capital asset. The contribution is not considered to be an interfund loan. The Internal Service Fund will report this contribution as a A. Transfer in. B. Capital contribution. C. Nonoperating revenue. D. Direct equity adjustment to restricted net position. Answer: A Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 16. Inventory in an Internal Service Fund would most likely be reflected in which of the following net position classifications? A. Nonspendable net position. B. Net investment in capital assets. C. Restricted net position. D. Unrestricted net position. Answer: D Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 17. Interest revenue earned by an Internal Service Fund will be reported on the statement of revenues, expenses, and changes in net position as A. Operating revenue. B. Nonoperating revenue. 6 Copyright © 2018 Pearson Education, Inc.
C. An other financing source. D. A capital contribution. Answer: B Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 18. Which of the following statements accurately describes why the statement of revenues, expenses and changes in net position for an Internal Service Fund differs slightly from one for an Enterprise Fund? A. Internal Service Funds do not report operating revenue. B. Internal Service Funds report other financing sources and uses. C. Internal Service Funds do not report depreciation expense. D. The statement of revenues, expenses and changes in net position is formatted the same for Enterprise Funds and Internal Service Funds. Answer: D Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 19. Which of the following accounts would potentially appear on both an Internal Service Fund statement of net position and a General Fund balance sheet? A. Inventory. B. Capital assets. C. Bonds payable. D. Restricted net position. Answer: A Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 20. Internal Service Funds may report each of the following net position classifications except A. Net investment in capital assets. B. Restricted net position. C. Nonspendable net position. D. Unrestricted net position. Answer: C Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 21. Assume that an Internal Service Fund purchases land on which to construct a new warehousing facility. The fund paid cash for 30% of the purchase price and financed the 7 Copyright © 2018 Pearson Education, Inc.
reminder with a loan from a local lending institution. The Internal Service Fund will A. Increase Net Investment in Capital Assets. B. Report capital outlay expenditures. C. Depreciate the cost of the land over its useful life. D. Record the land in the General Capital Assets accounts. Answer: A Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 22. Cash paid to purchase capital assets is reported as a cash outflow in which section of an Internal Service Fund statement of cash flows? A. Cash flows from operating activities. B. Cash flows from noncapital financing activities. C. Cash flows from capital and related financing activities. D. Cash flows from investing activities. Answer: C Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 23. An Internal Service Fund billed other departments $1,200,000 for services provided during the year. Expenses of $700,000 for salaries, $250,000 for supplies and materials used, $100,000 for depreciation, and $100,000 for interest expenses were incurred. The fund received a $42,000 transfer from the General Fund during the year. The Internal Service Fund should report operating income for the year of A. $50,000. B. $92,000. C. $150,000. D. $192,000. Answer: C Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 24. The General Fund transfers cash to provide working capital for a new Internal Service Fund. The Internal Service Fund would report this transaction in the statement of cash flows as A. Cash flows from operating activities. B. Cash flows from noncapital financing activities. C. Cash flows from capital and related financing activities. D. Cash flows from investing activities. Answer: B Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate 8 Copyright © 2018 Pearson Education, Inc.
Classification: Concept AACSB Category: Application of knowledge 25. The General Fund transfers cash to provide working capital for a new Internal Service Fund. The Internal Service Fund would report this transaction in the operating statement as A. Revenues. B. Other financing sources. C. Nonoperating revenues. D. Transfer in. Answer: D Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 26. The required statements for an Internal Service Fund include a Statement of A. Activities. B. Revenues, Expenditures, and Changes in Fund Balance. C. Revenues, Expenditures, and Changes in Fund Net Position. D. Revenues, Expenses, and Changes in Fund Net Position. Answer: D Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 27. If a Self-Insurance Internal Service Fund pays claims of $5,000 during the month, the fund will report A. Expenses of $5,000. B. Transfers out of $5,000. C. Nonoperating expenses of $5,000. D. A decrease in prepaid assets of $5,000. Answer: A Objective: LO11.6 Explain the unique aspects of accounting for self-insurance Internal Service Funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 28. If a government has more than one Internal Service Fund, they are reported in the basic financial statements A. In separate columns for each fund. B. In separate columns for each major Internal Service Fund. C. As a single column by fund type. D. Not included in the basic financial statements. Answer: C Objective: LO11.5 Prepare Internal Service Fund financial statements. 9 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 29. An Internal Service Fund would report which of the following items on its balance sheet A. Restricted fund balance. B. Unrestricted net position. C. Assigned fund balance. D. Capital contributions. Answer: B Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 30. A self-insurance Internal Service Fund may not include which of the following in its charges to other funds? A. A reasonable provision for profit over a period of time. B. Charges based on actuarial or other acceptable estimates of costs. C. A reasonable provision for expected future catastrophic losses. D. An amount equal to current year costs. Answer: A Objective: LO11.6 Explain the unique aspects of accounting for self-insurance Internal Service Funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 31. Governments that centralize their risk financing activities should not account for this activity in which type of fund? A. General Fund. B. Internal Service Fund. C. Special Revenue Fund. D. Permanent Fund. Answer: D Objective: LO11.6 Explain the unique aspects of accounting for self-insurance Internal Service Funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 32. A self-insurance activity that is accounted for in an Internal Service Fund pays $365,000 in claims during the year. Because the Internal Service Fund is a proprietary fund, the claims will be reported on the statement of revenues, expenses, and change in net position as A. An operating expense. B. A nonoperating expense. C. A contra-revenue to premiums charged. 10 Copyright © 2018 Pearson Education, Inc.
D. An other financing use. Answer: A Objective: LO11.6 Explain the unique aspects of accounting for self-insurance Internal Service Funds. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 33. In an Internal Service Fund, the expectation is that A. Each year's revenues should equal each year's expenses because the revenues are simply an allocation of that year's expenses. B. Each year's revenues should equal each year's expenditures because the revenues are simply an allocation of that year's expenditures. C. Accumulated revenues over time should approximately equal the accumulated expenses over time. D. Expenses will exceed revenues because depreciation expense is reported in an Internal Service Fund. Answer: C Objective: LO11.7 Account for disposition of changes in net position. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 34. Which measurement focus and basis of accounting should an Internal Service Fund use? Measurement Focus Basis of Accounting A. Economic resources Modified accrual B. Current financial resources Modified accrual C. Economic resources Accrual D. Current financial resources Accrual Answer: C Objective: LO11.2 Summarize the accounting principles that apply to Internal Service Funds. Difficulty Level: Easy Classification: Concept AACSB Category: Analytical thinking 35. Transfers from an Internal Service fund to another fund are reported in the Internal Service Fund’s Statement of Cash Flows as A. Cash flows from operating activities. B. Cash flows from noncapital financing activities. C. Cash flows from capital and related financing activities. D. Cash flows from investing activities. Answer: B Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 11 Copyright © 2018 Pearson Education, Inc.
36. According to GAAP, Only City’s Transportation Services Internal Service Fund must present which financial statements? I. II. III. IV.
A Statement of Net Position A Statement of Revenues, Expenditures, and Changes in Fund Net Position A Statement of Revenues, Expenses, and Changes in Fund Net Position A Statement of Cash Flows
A. I and II only. B. I and III only. C. I, II, and IV only. D. I, III, and IV only. Answer: D Objective: LO11.5 Prepare Internal Service Fund financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge
12 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 11
Problem 1 – Statement of Cash Flows Five sections for reporting items in an Internal Service Fund Statement of Cash Flows prepared using the direct method (excluding the reconciliation of operating income to cash flows from operations) are: A. Operating Activities B. Noncapital Financing Activities C. Capital and Related Financing Activities D. Investing Activities E. Noncash Financing and Investing Activities Using these five sections, indicate in which section each of the following Internal Service Fund transactions should be reported. If a transaction should not be reported on the Statement of Cash Flows, indicate it using the letter “X”. 1. Purchase of an Internal Service Fund capital asset for cash. 2. Providing services to other funds on a cash basis. 3. Issuing refunding bonds to refinance bonds issued 10 years ago to provide financing for capital asset acquisitions. 4. Sale of Internal Service Fund capital assets for cash. 5. Transfer from a Special Revenue Fund for the specific purpose of financing an Internal Service Fund capital asset purchase. 6. Payment of office workers' salaries. 7. Amortization of the Deferred Interest Expense Adjustment created when the capital asset debt was refunded. 8. Transfer to a Capital Projects Fund to provide financing for a general government capital asset construction project. 9. Purchases of investments with cash received from issuing bonds to finance construction of Internal Service Fund capital assets. 10. Transfer to the General Fund for the purpose of financing specific operating costs of a department accounted for in that fund. 11. Issuing bonds to provide operating cash for the Internal Service Fund. 12. Signing a capital lease for equipment to be used by activities accounted for in the Internal Service Fund. 13. Interest received during the year earned on investments. 14. Transfer the proceeds from the sale of an Internal Service Fund capital asset to the General Fund. 15. Depreciation on Internal Service Fund capital assets. 16. Proceeds of bonds issued to finance construction of Internal Service Fund capital assets. 17. Interest paid on bonds issued to finance construction of an Internal Service Fund capital asset. 1 Copyright © 2013 Pearson Education, Inc.
18. Principal retirement payments on bonds issued to finance construction of Internal Service Fund capital assets 19. Unrealized gain on investments held at year end. 20. Receipt of a capital grant for an ongoing Internal Service Fund capital asset construction project.
2 Copyright © 2013 Pearson Education, Inc.
Answers: 1. C 2. A 3. C 4. C 5. C 6. A 7. X 8. B 9. D 10. B 11. B 12. E 13. D 14. B 15. X 16. C 17. C 18. C 19. E 20. C
3 Copyright © 2013 Pearson Education, Inc.
Problem 2 – Internal Service Fund Journal Entries Listed below are selected transactions for the Maury County Internal Service Fund. Transactions: 1. Purchased a building on January 2, 20X2, by paying $100,000 down and borrowing $350,000 on a 6%, 10-year mortgage. Assume semi-annual mortgage payments are due each June 30 and December 31, beginning this year. The building will be depreciated over 20 years with no salvage value using the straight-line method. 2. Purchased supplies on account, $58,000. The fund uses the perpetual inventory method when accounting for supplies. 3. Paid employee salaries, $120,000. Accrued salaries at year end were $13,000. Accrued salaries at the beginning of the year were $9,000. 4. Billed General Fund departments $400,000 for services provided to those departments. Billings to the Enterprise Fund totaled $30,000. 90% of these billings were collected by year end. The remaining 10% is not expected to be collected from the other funds until the second quarter of the next fiscal year. 5. The first semi-annual mortgage payment of $23,500 was made. 6. Paid $50,000 on account. 7. Supplies on hand at year end have a cost of $4,000. The beginning of the year inventory was $6,000. 8. The second semi-annual mortgage payment of $23,500 was made. 9. Record depreciation on the building for the year. Requirements: 1. Prepare the journal entries required in the Internal Service Fund. If no entry is required, state “No entry required” and explain why. 2. Indicate the effects of each transaction on the accounting equation of the Internal Service Fund accounts. If an element of the equation is not affected or if the net effect is zero, put “NE” in the appropriate box. Do not leave any boxes blank.
4 Copyright © 2013 Pearson Education, Inc.
Answers: Requirement #1 # Accounts 1 Building Cash Mortgage Payable
Debit 450,000
Credit 100,000 350,000
2 Supplies Inventory Accounts Payable
58,000
3 Salaries Expense Salaries Payable ($13,000 – $9,000) Cash
124,000
4a Due from Other Funds Billings to Departments
430,000
4b Cash ($430,000 × 90%) Due from Other Funds
387,000
5 Mortgage Payable Interest Expense ($350,000 × 6% × 6/12) Cash
13,000 10,500
6 Accounts Payable Cash
50,000
7 Supplies Expense ($6,000 + $58,000 – $4,000) Supplies
60,000
8 Mortgage Payable Interest Expense (($350,000 – $13,000) × 6% × 6/12) Cash
13,390 10,110
9 Depreciation Expense ($450,000 / 20 years) Accumulated Depreciation–Building
22,500
58,000
4,000 120,000
430,000
387,000
23,500
50,000
5 Copyright © 2013 Pearson Education, Inc.
60,000
23,500
22,500
Requirement #2 Trans # 1 2 3 4a 4b 5 6 7 8 9
Current Assets (100,000) 58,000 (120,000) 430,000 NE (23,500) (50,000) (60,000) (23,500) NE
Noncurrent Assets 450,000 NE NE NE NE NE NE NE NE (22,500)
Current Liabilities NE 58,000 4,000 NE NE NE (50,000) NE NE NE
6 Copyright © 2013 Pearson Education, Inc.
Noncurrent Liabilities 350,000 NE NE NE NE (13,000) NE NE (13,390) NE
Net Position NE NE (124,000) 430,000 NE (10,500) NE (60,000) (10,110) (22,500)
Problem 3 – Financial Statement Preparation The accounts listed below are taken from an Internal Service Fund adjusted trial balance (all amounts are in thousands): Accounts
Debit
Accounts Payable Accumulated Depreciation – Buildings Accumulated Depreciation – Furniture and Equipment Billings to Departments Buildings Capital Contribution Cash Construction in Progress Depreciation Expense Due from Other Funds Due to Other Funds Net Position, July 1, 20X2 Interest Expense Interest Revenue Investments Land Maintenance Expense Mortgage Payable Personnel Services Expense Restricted Cash – Construction Supplies Expense Supplies Inventory Transfer from General Fund Furniture and Equipment
Credit $44 200 210 981
$319 60 243 20 50 60 24 729 11 15 160 120 35 50 630 90 251 73 75 326 $2,388
$2,388
Requirements: Prepare Statement of Fund Net Position and Statement of Revenues, Expenses, and Changes in Fund Net Position for the year ended June 30, 20X3, for the City of Bell Buckle. Answers:
See Excel file Freeman11e_TIF_ch11_p-3.xlsx.
7 Copyright © 2013 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 12 Trust and Agency (Fiduciary) Funds Summary of Interfund-GCA-GLTL Accounting 1. An other postemployment benefit plan where assets have been placed in trust would be reported as A. A Permanent Fund. B. An Agency Fund. C. Part of the General Fund. D. As a Pension and Other Employee Benefit Trust Fund. Answer: D Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 2. Which types of funds are classified as fiduciary funds? A. Pension trust, permanent trust, private-purpose trust, and investment trust funds. B. Pension trust, permanent trust, and agency funds. C. Pension trust, private-purpose trust, investment trust, and agency funds. D. Expendable trust, nonexpendable trust, pension trust, and investment trust funds. Answer: C Objective: LO12.1 Summarize and discuss the circumstances in which fiduciary funds are used to report assets held by governments in fiduciary relationships. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 3. The accounting parameters established by GASB Statement No. 67 require which financial statements to be reported for a defined benefit pension plan? I. II. III. IV.
Statement of Plan Net Position Statement of Changes in Plan Net Position Statement of Revenues, Expenses, and Changes in Fund Net Position Statement of Cash Flows
A. I, III, and IV only. B. I, and III only. C. I, II, and IV only. D. I and II only. Answer: D Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Concept 1 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of knowledge 4. Even though each of the following funds involve a form of fiduciary responsibility, the fund that is not reported as a fiduciary fund for GAAP reporting purposes is a (an) A. Investment Trust Fund. B. Permanent Fund. C. Private-purpose Trust Fund. D. Pension Trust Fund. Answer: B Objective: LO12.1 Summarize and discuss the circumstances in which fiduciary funds are used to report assets held by governments in fiduciary relationships. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 5. Which of the following activities would most likely be accounted for in an Agency Fund that would be reported in the external financial statements? A. Tax collections by a county on behalf of local municipalities. B. Interfund loan payments and disbursements. C. A Federal pass-through grant where the primary government has administrative involvement in the grant program. D. Special assessments for debt on which the government is not obligated in any manner. Answer: A Objective: LO12.2 Define Agency Funds and prepare basic journal entries and financial statements for such funds. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 6. Generally accepted accounting principles require the use of an Investment Trust Fund A. For governments that have any investment activity. B. For governments that sponsor external investment pools. C. For governments that are investing in investments that carry high risk. D. For governments that pool their cash for investment purposes. Answer: B Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 7. A county provides health insurance coverage for retirees up until they reach the age of 65. This type of plan is known as A. A simple pension plan. B. A deferred compensation plan. C. An other postemployment benefit plan. D. A permanent plan. 2 Copyright © 2018 Pearson Education, Inc.
Answer: C Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 8. The principal of a Private-Purpose Trust Fund A. Must be nonspendable in nature. B. Must be spendable in nature. C. Must never fall below a pre-determined threshold that is determined by generally accepted accounting principles. D. May be spendable or nonspendable in nature. Answer: D Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 9. A Pension Trust Fund that is provided by a government solely for the benefit of its own employees is known as a A. Single-employer plan. B. Cost-sharing plan. C. Defined contribution plan. D. Defined benefit plan. Answer: A Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 10. An Agency Fund is used to account for debt service on special assessment bonds A. That are not backed by the full faith and credit of the governmental unit. B. That are not backed by the full faith and credit of the governmental unit unless the government guarantees the indebtedness. C. On which the government is not obligated in any manner. D. With terms exceeding 10 years. Answer: C Objective: LO12.2 Define Agency Funds and prepare basic journal entries and financial statements for such funds. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 11. Pass-through grants are reported in an Agency Fund of the primary recipient 3 Copyright © 2018 Pearson Education, Inc.
A. In all cases. B. Unless the primary recipient holds the resources longer than one year prior before paying the subrecipients. C. Only if the primary recipient has no direct financial involvement in the grant program. D. Only if the primary recipient has no administrative or direct financial involvement in the grant program. Answer: D Objective: LO12.2 Define Agency Funds and prepare basic journal entries and financial statements for such funds. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 12. A government receives a donation of $300,000 to establish an endowment fund whose income is to be used to support scholarships for local high school students. The school district is not part of the government. The government should report this activity in which type of fund? A. Permanent Fund B. Private-Purpose Trust Fund C. Investment Trust Fund D. Agency Fund Answer: B Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 13. A Pension Trust Fund will be reported in the government-wide financial statements within A. The governmental activities column. B. The business-type activities column. C. The discrete component unit presentations. D. The Pension Trust Fund is not reported at the government-wide level. Answer: D Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 14. The General Fund's share of its contribution to a Pension Trust Fund on behalf of the its employees would be reported by the General Fund as A. A transfer out. B. An other financing source. C. An expenditure. D. An other financing use. Answer: C 4 Copyright © 2018 Pearson Education, Inc.
Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 15. A county uses an agency fund to collect property taxes for both itself and on behalf of the three municipalities within its borders. If the county collected $7,000 of taxes during the month on behalf of the other municipalities, what would be reported in the agency fund? A. Revenues of $7,000. B. Revenues of $7,000, offset by expenses of $7,000. C. An increase in equity in the agency fund of $7,000. D. An increase in assets of $7,000 and an increase in liabilities of $7,000. Answer: D Objective: LO12.2 Define Agency Funds and prepare basic journal entries and financial statements for such funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 16. A county uses an agency fund to collect property taxes for both itself and on behalf of the three municipalities within its borders. If the county collected $10,000 of taxes during the month—$2,000 of its own taxes and $8,000 on behalf of the other municipalities, what would be reported in the agency fund? A. Revenues of $10,000. B. Revenues of $10,000 offset by expenses of $8,000. C. An increase in equity in the agency fund of $10,000. D. An increase in assets of $8,000 and an increase in liabilities of $8,000. Answer: D Objective: LO12.2 Define Agency Funds and prepare basic journal entries and financial statements for such funds. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 17. A Scholarship Private-Purpose Trust Fund of a local school board pays tuition of $10,000 on behalf of scholarship recipients. What journal entry would be made to record this transaction in the trust fund?
5 Copyright © 2018 Pearson Education, Inc.
A. Tuition Expenses ........................................................ Cash........................................................................
Debit $10,000
Credit $10,000
B. Transfers to Other Governmental Units ..................... Cash........................................................................
$10,000
C. Deductions – Tuition .................................................. Cash........................................................................
$10,000
D. Trust Revenue ............................................................. Cash........................................................................
$10,000
$10,000
$10,000
$10,000
Answer: C Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 18. The General Fund transfers $75,000 of employer pension contributions to the Pension Trust Fund. The Pension Trust Fund should A. Report revenues of $75,000. B. Report transfers of $75,000. C. Report expenses of $75,000. D. Report additions of $75,000. Answer: D Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 19. Which of the following accounts would typically be reported in an agency fund? A. Due to Other Governments. B. Taxes Receivable. C. Restricted Net Position. D. Due from the General Fund. Answer: A Objective: LO12.2 Define Agency Funds and prepare basic journal entries and financial statements for such funds. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 20. Which of the following statements are required for a Tax Agency Fund? A. Statement of revenues, expenditures and changes in net position 6 Copyright © 2018 Pearson Education, Inc.
B. Statement of revenues, expenses, and changes in net position C. Statement of cash flows D. Statement of changes in assets and liabilities. Answer: D Objective: LO12.2 Define Agency Funds and prepare basic journal entries and financial statements for such funds. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 21. At year end, a county tax agency fund's only asset was $500,000 in cash. The cash was collected on behalf of the following entities: County $300,000 School district $150,000 Fire district $50,000 In the county’s basic financial statements, the Tax Agency Fund should report what amount of assets and liabilities? A. $200,000. B. $300,000. C. $450,000. D. $500,000. Answer: A Objective: LO12.2 Define Agency Funds and prepare basic journal entries and financial statements for such funds. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 22. In a Tax Agency Fund, revenues must be recognized A. When measurable and available. B. On the cash basis. C. At net realizable value of the taxes receivable. D. Revenues are not reported for Agency Funds. Answer: D Objective: LO12.2 Define Agency Funds and prepare basic journal entries and financial statements for such funds. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 23. The local school board received a donation of $1,000,000 to establish a scholarship fund for graduating students. The scholarship is accounted for in a Private-Purpose Trust Fund. The fund would report A. Additions of $1,000,000. B. Revenues of $1,000,000. 7 Copyright © 2018 Pearson Education, Inc.
C. A transfer of $1,000,000. D. Capital contributions of $1,000,000. Answer: A Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 24. A Private-Purpose Trust Fund has investments totaling $1,500,000. As of the end of the fiscal year, the fair market value of these investments increased by $125,000 from the previous year. The Private-Purpose Trust Fund would A. Report revenues of $125,000. B. Report additions of $125,000. C. Report a transfer of $125,000. D. Not report any change until the investments are sold. Answer: B Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 25. If an Enterprise Fund transfers employer contributions to the Pension Trust Fund, which of the following best describes the effect of the transaction on each fund? A. The Enterprise Fund will report expenses and the Pension Trust Fund will report revenues. B. The Enterprise Fund will report deductions and the Pension Trust Fund will report additions. C. The Enterprise Fund will report expenses and the Pension Trust Fund will report additions. D. The Enterprise Fund will report expenditures and the Pension Trust Fund will report revenues. Answer: C Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 26. A local citizen donated land to the city's Private-Purpose Trust Fund. The land has an acquisition value of $50,000 but the donor's basis was $45,000. The trust fund will report A. Additions of $50,000. B. Additions of $45,000. C. Capital contributions of $50,000. D. Capital contributions of $45,000. Answer: A 8 Copyright © 2018 Pearson Education, Inc.
Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 27. The municipalities for whom the county collects property taxes paid $5,000 in administrative fees to county to cover collection costs. The county will report A. Revenues of $5,000 in the General Fund. B. Revenues of $5,000 in the Agency Fund. C. Other financing sources of $5,000 in the General Fund. D. Other financing sources of $5,000 in the Agency Fund. Answer: A Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 28. Additions reported in the statement of changes in plan net position of a pension plan commonly include all of the following except A. Actuarial gains from revision of actuarial assumptions. B. Employer contributions. C. Net appreciation in the fair value of investments. D. Employee contributions. Answer: A Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 29. Fiduciary net position of a pension plan equals? A. Pension plan assets ‒ plan liabilities B. Pension plan assets + plan deferred outflows of resources ‒ total pension liability ‒ plan deferred inflows of resources C. Total pension liability ‒ pension plan assets D. Pension plan assets + plan deferred outflows of resources ‒ plan liabilities ‒ plan deferred inflows of resources Answer: D Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 30. In government-wide, proprietary fund, and fiduciary fund financial statements, most 9 Copyright © 2018 Pearson Education, Inc.
employers must report a net pension liability equal to A. The difference between their total pension liability and the related pension plan fiduciary gross position. B. The difference between their total pension liability and the related pension plan fiduciary net position. C. The difference between their total pension liability and the related pension plan fiduciary total position. D. The difference between their total pension liability and the related pension plan actuarial cost. Answer: B Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 31. Which of the following statements about Pension Trust Fund accounting and reporting requirements is true? A. A Statement of Cash Flows must be presented for each Pension Plan Trust Fund. B. Actuarial information is not reported in the fiduciary fund financial statements. C. Debt investments are not reported at amortized cost. D. Pension plan capital assets are reported at historical cost but are not depreciated. Answer: B Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 32. Which of the following are reported for a private-purpose trust fund? A. Expenditures B. Expenses C. Deductions D. Decreases to nonspendable fund balance. Answer: C Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 33. A government receives a donation of $300,000 to establish a Private-Purpose Trust Fund. The donation should be reported as A. Revenues. B. Other financing sources. C. Additions. D. Special items. 10 Copyright © 2018 Pearson Education, Inc.
Answer: C Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 34. A government establishes an Investment Trust Fund. During the year, it receives $500,000 from other separate legal entities to invest. The Investment Trust Fund should report this activity in the statement of changes in net position as A. Revenues. B. Other financing sources. C. Additions. D. Should not be reported. Answer: C Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 35. Which financial statements are required for a private purpose trust fund? A. Statement of net position and statement of revenues, expenses and changes in net position. B. Statement of net position, statement of revenues, expenses, and changes in retained earnings, and statement of cash flows. C. Statement of net position and statement of changes in net position. D. Statement of net position, statement of changes in net position, and statement of cash flows. Answer: C Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 36. Equity in a fiduciary fund is referred to as A. Net position. B. Fund balance. C. Retained earnings. D. Contributed Capital. Answer: A Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 11 Copyright © 2018 Pearson Education, Inc.
37. Which measurement focus and basis of accounting should an Investment Trust Fund use? Measurement Focus Basis of Accounting A. Economic resources Modified accrual B. Current financial resources Modified accrual C. Economic resources Accrual D. Current financial resources Accrual Answer: C Objective: LO12.3 Define Trust Funds and prepare basic journal entries and financial statements for these fund types. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge
12 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 12
Problem 1 – Agency Fund Entries Shelby County collects property taxes levied by the county for its General Fund. It also collects the taxes levied by two towns within the county—Ford's Way and Foote’s Corner. The county charges the towns a collection fee equal to 1% of taxes collected for those entities. Two percent of the property taxes have been uncollectible historically. All amounts are in thousands of dollars. Transactions: 1. Taxes levied for 20X6 were $12,000 for the county, $5,000 for Ford's Way, and $3,000 for Foote’s Corner. 2. During the year tax collections for the county totaled $9,000, $4,000 was collected for Ford’s Way, and $2,200 was collected for Foote’s Corner. 3. One percent of the gross taxes receivable were written off as uncollectible during the year. 4. All cash collected, less the collection fee, was remitted to the appropriate fund or entity. 5. The collection fee was remitted to the appropriate fund or entity. Requirement:
Prepare the entries required in the Shelby County General Fund and in the Shelby County Tax Agency Fund to record the transactions. If no entry is required, state “No entry required” and explain why.
1 Copyright © 2018 Pearson Education, Inc.
Answers: Fund or Nonfund # Accounts 1a SC GF
1b SC AF
2 SC AF
3a SC GF
3b SC AF
4a SC AF
4b SC GF
5a SC AF
5b SC GF
Accounts Taxes Receivable – Current Allowance for Uncollectible Taxes – Current Revenues – Property Taxes
Debit 12,000
Credit 240 11,760
Taxes Receivable for Taxing Units Due to Taxing Units
20,000
Cash Taxes Receivable for Taxing Units
15,200
20,000
15,200
Allowance for Uncollectible Taxes – Current Taxes Receivable – Current (12,000 × 1%)
120
Due to Taxing Units (20,000 × 1%) Taxes Receivable for Taxing Units
200
Due to Taxing Unites Due to GF [(4,000 + 2,200) × 1%)] Cash
15,200
Cash Due from AF Taxes Receivable Revenues – Collection Fees
9,000 62
120
200
62 14,138
9,000 62
Due to GF Cash
62
Cash Due from AF
62
62
2 Copyright © 2018 Pearson Education, Inc.
62
Problem 2 – Private-Purpose Trust Funds The City of Lucky received a $3,000 gift of cash. The donor stipulated that the principal of the gift must be maintained intact. Earnings of the trust may be used only to restore historic buildings. The buildings are owned and maintained by the local, not-for-profit historical society, which is not part of the city government entity. All amounts are in thousands of dollars. Transactions: 1. Record the receipt of the gift on January 2, 20X3. 2. The city purchased investments for $2,800. 3. The city earned $200 in interest on some investments and sold investments that cost $750 for $700. 4. The city received bills from the historical society for $140 in repairs to historical buildings for the year. The city paid $125, with the balance to be paid later. 5. By year end the fair value of investments increased $300. Requirements: 1. Prepare journal entries to record the transactions in a city's accounts. If no entry is required, state “No entry required” and explain why. 2. Prepare the Statement of Changes in Fund Net Position and Statement of Net Position for the year ended December 31, 20X3.
3 Copyright © 2018 Pearson Education, Inc.
Answers: Requirement #1 # Accounts 1 Cash Additions – Nonexpendable Contributions 2 Investments Cash
Debit 3,000
Credit 3,000
2,800 2,800
3a Cash Additions – Investment Income
200
3b Cash Additions – Loss on Sale of Investments Investments
700 50
4 Deductions – Restoration Costs Accounts Payable Cash
140
5 Investments Additions – Increase in Fair Value of Investments
300
4 Copyright © 2018 Pearson Education, Inc.
200
750
15 125
300
Requirement #2 City of Lucky Private Purpose Trust Fund Statement of Changes in Net Position For the Year Ended December 31, 20X3 Additions: Contributions Investment earnings Investment Income Net Increase in the Fair Value of Investments Total Additions Deductions: Payment of Restoration Costs Change in Net Position Net Position, January 1, 20X3 Net Position, December 31, 20X3 Calculation of Net Increase in the Fair Value of Investments Loss on Sale of Investments Increase in Fair Value of Investments
5 Copyright © 2018 Pearson Education, Inc.
$3,000 200 250
450 3,450 140 3,310 0 $3,310
$(50) 300 $250
Requirement #3 City of Lucky Private Purpose Trust Fund Statement of Net Position December 31, 20X3 Assets Cash Investments Total Assets
$975 2,350 3,325
Liabilities – Accounts Payable Net Position Restricted for Endowment – Nonexpendable Restricted for Restoration Costs – Expendable Total Net Position
6 Copyright © 2018 Pearson Education, Inc.
15
3,000 310 $3,310
Problem 3 – Pension Trust Fund Entries Record the following transactions and information for a government's Pension Trust Fund (all amounts are in thousands of dollars). Transactions (all amounts are in thousands of dollars): 1. Employer contributions became due from the General Fund, $400, and an Enterprise Fund, $150. Equal employee contributions have been withheld from employee paychecks and also are due to the pension trust fund. 2. Ninety percent of the amounts due were collected from each fund. 3. Investments of $540 were purchased. 4. Interest received on investments of the fund during the year totaled, $380. 5. An employee resigned prior to retirement and withdrew $17 from the pension plan. 6. Retirement benefits of $92 were paid during the year. Additional current benefit payments of $4 were accrued but not paid by year end. 7. The present value of future benefits earned by active employees during the period is estimated to be $700. 8. The fair value of the pension plan investments increased by $83 during the year. 9. Prepare the closing entry for the year. Requirements: 1. Prepare journal entries to record transactions in the City of LeConte Pension Fund accounts. If no entry is required, state “No entry required” and explain why. 2. Prepare the Statement of Changes in Fiduciary Net Position for the year ended December 31, 20X3. The Net Position – Restricted for Pension Benefits at January 1, 20X3 was $3,345.
7 Copyright © 2018 Pearson Education, Inc.
Answers: Requirement #1 # Accounts 1 Due from General Fund (400 × 2) Due from Enterprise Fund (150 × 2) Additions – Employer Contributions Additions – Employee Contributions
Debit
Credit 800 300 550 550
2 Cash Due from General Fund (800 × 90%) Due from Enterprise Fund (300 × 90%)
990
3 Investments Cash
540
4 Cash Additions – Interest Income
380
5 Deductions – Payments to Resigned Employees Cash
17
6 Deductions – Retirement Benefits Cash Benefits Payable
96
720 270
540
380
17
92 4
7 No entry required. This information affects the required supplementary information schedules, not the accounts or financial statements. 8 Investments Additions – Net Increase in Fair Value of Investments
83
9 Additions – Employer Contributions Additions – Employee Contributions Additions – Interest Income Additions – Net Increase in Fair Value of Investments Net Position – Restricted for Pension Benefits Deductions – Payments to Resigned Employees Deductions – Retirement Benefits
550 550 380 83
8 Copyright © 2018 Pearson Education, Inc.
83
1,450 17 96
Requirement #2 City of LeConte Pension Plan Statement of Changes in Fiduciary Net Position For the Year Ended December 31, 20X3 Additions: Contributions: Employer Employee Investment Earnings Interest Net Increase in Fair Value of Investments Total Additions Deductions: Benefits Refunds
$550 550 380 83
96 17
Net Increase for the Year Net Position – Restricted for Pension Benefits: January 1, 20X3 December 31, 20X3
9 Copyright © 2018 Pearson Education, Inc.
$1,100
463 1,563
113 1,450 3,345 $4,795
Problem 4 – Interfund, General Capital Assets, and General Long-Term Liabilities Transactions Transactions (all amounts are in thousands of dollars): 1. Employer contributions became due from the General Fund, $140, and an Enterprise Fund, $64, to the Pension Trust Fund. Total payroll costs were $2,000 for the General Fund and $900 for the Enterprise Fund. Equal employee contributions are to be withheld from these payroll costs and paid to the Pension Trust Fund with the balance paid to the employees. 2. The Pension Trust Fund collected 75% of the amounts due from each fund. 3. A payment in lieu of taxes was made from an Enterprise Fund to the General Fund, $200. The payment was not for services. 4. A payment in lieu of taxes was made from an Enterprise Fund to the General Fund, $150. The payment was for services. 5. A vehicle purchased with General Fund resources 3 years ago for $30, was transferred to an Enterprise Fund. The city has a policy of depreciating all vehicles over a five-year period, using the straight-line depreciation method, and no salvage value. 6. A vehicle purchased by an Enterprise Fund 2 years ago for $25, was transferred to the Parks and Recreation Department, accounted for in the General Fund. The city has a policy of depreciating all vehicles over a five-year period, using the straight-line depreciation method, and no salvage value. 7. A Special Revenue Fund advanced $300 to an Internal Service Fund. The loan is to be repaid in 3 years. 8. When the City expanded the golf course a few years ago, the Enterprise Fund used to account for it issued $1,500 in long-term bonds. It has been determined that the golf course will be unable to generate sufficient revenues to repay the debt. Therefore, the debt was reclassified as general long-term liabilities and will be repaid with general government resources. 9. Building inspection services, accounted for in the General Fund, were billed to an Enterprise Fund, $100. The Enterprise Fund paid for the service. 10. Later, it was determined that half the inspection services should have been charged to an Internal Service Fund. The ISF paid the Enterprise Fund for the services provided by the General Fund. Requirement: Prepare journal entries to the record transactions. If no entry is required, state “No entry required” and explain why.
10 Copyright © 2018 Pearson Education, Inc.
Answers: Fund or Nonfund # Accounts 1a GF
1b GF
1c EF
1d EF
1e PTF
2a GF
2b EF
2c PTF
3a EF
3b GF
4a EF
Accounts Expenditures – Operating (Pensions) Due to Pension Trust Fund Expenditures – Operating (Salaries and Wages) Cash Due to Pension Trust Fund
Debit 140
140 2,000 1,860 140
Expenses – Operating (Pensions) Due to Pension Trust Fund
64
Expenses – Operating (Salaries and Wages) Cash Due to Pension Trust Fund
900
Due from General Fund Due from Enterprise Fund Additions – Employer Contributions Additions – Employee Contributions
280 128
Due to Pension Trust Fund [(140 + 140) × 75%] Cash
210
Due to Pension Trust Fund [(64 + 64) × 75%] Cash
96
Cash Due from General Fund Due from Enterprise Fund
306
Transfer to General Fund Cash
200
Cash OFS – Transfer from Enterprise Fund
200
Expenses – Operating Cash
150
11 Copyright © 2018 Pearson Education, Inc.
Credit
64
836 64
204 204
210
96
210 96
200
200
150
4b GF
Fund or Nonfund # Accounts 5a EF
5b GCA
6a EF
6b GCA
7a SRF
7b ISF
8a EF
8b GLTL
9a GF
9b EF
Cash Revenues – Charges for Services
Accounts Furniture and Equipment (Vehicles) Accumulated Depreciation – Furniture and Equipment ($30 / 5 years × 3) Revenues – Capital Contributions
150 150
Debit
Credit 30 18 12
Net Position Accumulated Depreciation – Furniture and Equipment Furniture and Equipment (Vehicles)
12 18
Nonoperating Expenses – Transfer of Vehicle Accumulated Depreciation – Furniture and Equipment ($25 / 5 years × 2) Furniture and Equipment (Vehicles)
15
Furniture and Equipment (Vehicles) Accumulated Depreciation – Furniture and Equipment Net Position
25
Advance to Internal Service Fund Cash
300
Cash Advance from Special Revenue Fund
300
30
10 25
10 15
300
300
Bonds Payable Revenues – Capital Contributions
1,500
Net Position Bonds Payable
1,500
1,500
1,500
Cash Revenues – Charges for Services
100
Expenses – Operating Cash
100
12 Copyright © 2018 Pearson Education, Inc.
100
100
Fund or Nonfund # Accounts 10a EF
10b ISF
Accounts
Debit
Credit
Cash Expenses – Operating
50
Expenses – Operating Cash
50
13 Copyright © 2018 Pearson Education, Inc.
50
50
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 13 Financial Reporting—The Basic Financial Statements and Required Supplementary Information
1. When preparing external financial statements that are in accordance with generally accepted accounting principles, the minimum financial report will include A. Basic financial statements, management's discussion and analysis, and other required supplementary information. B. A comprehensive annual financial report. C. Basic financial statements only. D. Only the financial section of a comprehensive annual financial report. Answer: A Objective: LO13.1 Identify a government’s basic financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 2. The minimum requirements for general purpose external financial reporting does not include A. Fund financial statements. B. A transmittal letter. C. Management's discussion and analysis. D. Required supplementary information. Answer: B Objective: LO13.1 Identify a government’s basic financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 3. Governmental activities in the government-wide financial statements would potentially report the following equity classifications except A. Restricted net position. B. Restricted fund balance. C. Unrestricted net position. D. Net investment in capital assets. Answer: B Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 4. The fund financial statements included in the basic financial statements include separate balance sheets (or statements of net position) for all of the following except A. Fiduciary funds. 1 Copyright © 2018 Pearson Education, Inc.
B. Governmental funds. C. Proprietary funds. D. Discretely presented component units. Answer: D Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 5. A budgetary comparison schedule is required for A. The General Fund and all major governmental funds with legally adopted annual budgets. B. The General Fund and all major Special Revenue Funds with legally adopted annual budgets. C. The General Fund only. D. All governmental funds. Answer: B Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 6. In the proprietary fund statements, a government should include a separate column for A. Each major Enterprise Fund only. B. Each major Enterprise Fund, nonmajor Enterprise Funds in the aggregate, and Enterprise Funds total only. C. Each major Enterprise Fund, nonmajor Enterprise Funds in the aggregate, Enterprise Funds total, and Internal Service Funds in the aggregate. D. Each major Enterprise Fund, nonmajor Enterprise Funds in the aggregate, Enterprise Funds total, Internal Service Funds in the aggregate, and Proprietary Funds total. Answer: C Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 7. Which financial statement may be presented as required supplementary information? A. Government-wide statement of cash flows. B. General Fund and major Special Revenue Funds statement of revenues, expenditures, and changes in fund balances–budget and actual. C. Proprietary fund statement of cash flows. D. Discretely presented component units statement of net position. Answer: B Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. 2 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 8. In the fund financial statements, a government should include a separate column for all of the following except A. Each major Enterprise Fund. B. Each major Internal Service Fund. C. Each major Capital Projects Fund. D. Each major Permanent Fund. Answer: B Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: application of knowledge 9. Which governmental fund must always be reported in a separate column in the governmental fund financial statements? A. Capital Projects Fund. B. Debt Service Fund. C. General Fund. D. Special Revenue Fund. Answer: C Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 10. For general purpose external financial reporting, discretely presented component unit information A. Is not presented. B. Is included in the government-wide statements only. C. Is included in the fund financial statements only. D. Is included in both the government-wide and the fund financial statements. Answer: B Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 11. The government-wide statement of net position would report the following component of net position except 3 Copyright © 2018 Pearson Education, Inc.
A. Unrestricted net position. B. Restricted net position. C. Net investment in capital assets. D. Designated net position. Answer: D Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 12. In the government-wide statement of net position, interfund receivables and payables A. Should not be reported. B. Should only be reported for balances payable between governmental activities and business-type activities. C. Can be reported in either the governmental activities or business-type activities columns. D. Should be eliminated in the governmental activities column but not the business-type activities column. Answer: B Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 13. Which of the following may be reported in the government-wide statements and the fund financial statements? A. Nonfiduciary component units B. General government long-term debt C. General government capital assets D. Short-term debt. Answer: D Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 14. In the government-wide statements, business-type activities include A. Primarily only Enterprise Fund operations. B. Primarily only Internal Service Fund operations. 4 Copyright © 2018 Pearson Education, Inc.
C. Both a government's Enterprise Fund and all of its Internal Service Fund activities. D. A government's Enterprise Fund, Internal Service Fund, and nonexpendable trust fund activities. Answer: A Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 15. Which of the following classifications is not used in the government-wide statement of activities? A. General revenues. B. Extraordinary items. C. Transfers. D. Nonoperating revenues. Answer: D Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 16. In the statement of activities, depreciation is reported on A. All depreciable capital assets of the government except infrastructure assets that use the modified approach. B. All depreciable capital assets of the government. C. Only depreciable capital assets of business-type activities of the government. D. Only depreciable capital assets of governmental activities of the government. Answer: A Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 17. The government-wide statements include A. Statement of Activities. B. Statement of Cash Flows. C. Statement of Assets and Liabilities D. Budget-to-actual statement 5 Copyright © 2018 Pearson Education, Inc.
Answer: A Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 18. The government-wide statement of net position must include a column for each of the following except A. Governmental activities. B. Business-type activities. C. Component units. D. Fiduciary activities. Answer: D Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 19. Depreciation was calculated for the police department's vehicle fleet. The expense will be reported A. As depreciation expenditure in the General Fund. B. As depreciation expense in the General Fund. C. As depreciation expense in the public safety function of governmental activities. D. As unallocated depreciation expense for governmental activities. Answer: C Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 20. Capital assets are not reported A. In governmental activities. B. In business-type activities. C. In the Enterprise Funds. D. In the General Fund. Answer: D Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. 6 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 21. The government-wide financial statements do not include A. Discretely presented component units. B. Governmental fund information. C. Business-type activities. D. Net position. Answer: B Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 22. A city had the following accounts and amounts on its statement of activities: Public safety expenses of $2,755,500 Public safety charges for services of $20,500 Public safety operating grants and contributions of $105,000 Public safety capital grants and contributions of $75,000 General government charges for services of $455,500 Property tax general revenues of $2,905,000 Unrestricted grants of $300,000 Net (expense) revenue for the public safety function would be A. $(2,555,000). B. $200,500. C. $956,000. D. $2,555,000. Answer: A Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 23. The government-wide financial statements report all of the following equity classifications except A. Restricted net position. B. Retained earnings. C. Unrestricted net position. 7 Copyright © 2018 Pearson Education, Inc.
D. Net investment in capital assets. Answer: B Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 24. If the General Fund has restricted fund balance, then the governmental activities column will automatically have A. Committed net position. B. Restricted net position. C. Designated net position. D. Net investment in capital assets. Answer: B Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 25. Interest expense for governmental activities at the government-wide level should be reported A. As part of the function for which the financing was beneficial. B. As part of the general government function. C. In total as capitalized interest. D. As an indirect expense not allocated to a functional area. Answer: D Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 26. The General Fund levies taxes of $3,750,000 during the fiscal year, 1% of which is deemed to be uncollectible. $3,650,000 was collected or met the availability criteria. How much revenue should be recorded in the government-wide financial statements? A. $3,613,500. B. $3,650,000. C. $3,712,500. D. $3,750,000. Answer: C Objective: LO13.3 Describe the format and content of the government-wide financial statements including: 8 Copyright © 2018 Pearson Education, Inc.
The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 27. A city reports three Pension Trust Funds, one Private-Purpose Trust Fund, one Investment Trust Fund, and three Agency Funds. How many columns would the City's statement of fiduciary net position would report? A. Two (2). B. Three (3). C. Four (4). D. Eight (8). Answer: C Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 28. A government issued general obligation bonds to finance the construction of a new fire station. In the current year, the government incurred $107,000 of interest expense on the debt. This amount will be reported on the government-wide statement of activities as A. Expenses of the general government function. B. Expenses of the public safety function. C. Interest expenses of the governmental activities. D. An offset to interest earnings in the General Fund. Answer: C Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 29. Fiduciary funds are reported A. In both the fund financial statements and the government-wide financial statements. B. As required supplementary information. C. By fund type in the government-wide financial statements. D. By fund type in the fund financial statements. Answer: D Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 9 Copyright © 2018 Pearson Education, Inc.
30. Each of the following would be considered required supplementary information except A. Management's discussion and analysis. B. Budgetary comparison information that is eligible for basic financial statement presentation but not included therein. C. A letter of transmittal. D. Disclosures for governments that use the modified approach to infrastructure accounting and reporting. Answer: C Objective: LO13.5 Explain the required supplementary information (RSI) required to accompany a government’s basic financial statements, including: The required information components of Management’s Discussion and Analysis (MD&A) and identify The reporting requirements for special purpose governments Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 31. Equity in a fiduciary fund is, by nature, considered to be A. Committed. B. Assigned. C. Designated. D. Restricted. Answer: D Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 32. A city determines in the current year that it has three major governmental funds, including the General Fund, and two major enterprise funds. The city will A. Always have three major governmental funds and two major enterprise funds. B. Evaluate each year which funds are major and which funds are considered to be nonmajor except the General Fund which is always considered a major fund. C. Only be required to show a separate column for the General Fund. D. Be able to report all of the major funds in one column on the respective fund financial statements. Answer: B Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 33. Assume that a governmental entity has, in addition to the General Fund, four other governmental funds. Upon applying the quantitative criteria to determine the minimum 10 Copyright © 2018 Pearson Education, Inc.
requirements for major fund reporting it is determined that two of those four funds meet the criteria. At a minimum, the governmental entity will report how many major funds? A. One (1). B. Two (2). C. Three (3). D. Four (4). Answer: C Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 34. A city has, in addition to the General Fund, three other governmental funds. Two of those three governmental funds have been deemed to be major funds. At most, how many funds may be reported as major funds? A. One (1). B. Two (2). C. Three (3). D. Four (4). Answer: D Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 35. Major fund reporting is required for which of the following fund types? A. Enterprise Funds. B. Internal Service Funds. C. Agency Funds. D. Private-Purpose Trust Funds. Answer: A Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 36. A governmental entity has a General Fund, four Special Revenue Funds, two Debt Service Funds, a Permanent Fund, two Enterprise Funds, three Internal Service Funds, and two Pension Trust Funds. Using the criteria from GASB Statement No. 34 to identify major funds, the government discovers that two of the Special Revenue Funds and one Enterprise Fund meet the minimum criteria to be a major fund. How many individual governmental funds may be reported as major funds? A. Four (4). B. Eight (8). 11 Copyright © 2018 Pearson Education, Inc.
C. Ten (10). D. Fifteen (15). Answer: B Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 37. Hannah Township has a General Fund, two Capital Projects Funds, one Permanent Fund, two Enterprise Funds, two Internal Service Funds, three Pension Trust Funds, and one PrivatePurpose Trust Fund. Assuming all governmental and enterprise funds meet the major fund criteria, how many columns will the proprietary fund statement of net position have? A. Two (2). B. Three (3). C. Four (4). D. Five (5). Answer: C Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 38. Which of the following funds would not be eligible for major fund reporting? A. General Fund. B. Enterprise Fund. C. Debt Service Fund. D. Internal Service Fund. Answer: D Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 39. In the government-wide financial statements, a recipient government should report passthrough grants as A. Program revenues. B. General revenues. C. Other financing sources. D. Operating revenues. Answer: A Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets 12 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 40. Which of the following types of revenue would always be reported as a general revenue in the government-wide financial statements? A. Interest earned on a capital grant. B. Charges for services. C. Operating grant. D. Property taxes. Answer: D Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 41. A county had the following earnings during the year: Charges for services in public works of $289,000 Public safety operating grants of $100,000 Property taxes of $1,950,000 Interest earned on restricted grants of $5,750 Interest earned on unrestricted grants of $3,250 Public works capital grants of $310,000 Sales taxes of $425,000 Based on this information and assuming all revenues were earned, governmental activities general revenues for the year would be A. $704,750. B. $1,950,000. C. $2,378,250. D. $3,083,000. Answer: C Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 42. Sales taxes levied by a county government are shared with the local municipal government. The municipal government chooses to use the intergovernmental revenues for drug enforcement activities. In the government-wide statement of activities, the municipal government would report the sales taxes as 13 Copyright © 2018 Pearson Education, Inc.
A. Unrestricted grants and contributions general revenue. B. Operating grants and contributions program revenue. C. Capital grants and contributions program revenue. D. A transfer in general revenue. Answer: A Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 43. Which of the following cannot be classified as program revenues? A. Contributions. B. Grants. C. Charges for services. D. Taxes. Answer: D Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 44. Which of the following would not be classified as charges for services? A. Operating special assessments. B. Licenses and permits. C. Fines and forfeitures. D. A special tax levied for a particular function. Answer: D Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 45. A government that uses the modified approach to account for qualifying assets should report all infrastructure asset related costs for the year as A. Expenses. B. Assets. C. Expenses, unless they were additions or qualitative improvements. D. Assets unless incurred in disposing of an infrastructure asset. 14 Copyright © 2018 Pearson Education, Inc.
Answer: C Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 46. A government that uses the modified approach will A. Report depreciation expense on infrastructure assets. B. Capitalize all costs related to infrastructure assets. C. Expense all costs related to infrastructure assets. D. Expense costs related to maintenance of infrastructure capital assets. Answer: D Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 47. Topics to be covered in the management’s discussion and analysis A. Are limited to a specific list of topics in GASB Statement No. 34. B. Must, at a minimum, cover the specific list of topics in GASB Statement No. 34 but may include additional topics that management considers significant. C. Are determined based upon management's judgment. D. Can only include topics not in the specific list in GASB Statement No. 34 if agreed to by both management and the auditors. Answer: A Objective: LO13.5 Explain the required supplementary information (RSI) required to accompany a government’s basic financial statements, including: The required information components of Management’s Discussion and Analysis (MD&A) and identify The reporting requirements for special purpose governments Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 48. Management’s discussion and analysis A. Does not have to cover any budgetary issues. B. May not include charts and graphs. C. Must discuss significant variations between the original budget and the final budget. D. May provide speculative information about future government actions. Answer: C Objective: LO13.5 Explain the required supplementary information (RSI) required to accompany 15 Copyright © 2018 Pearson Education, Inc.
a government’s basic financial statements, including: The required information components of Management’s Discussion and Analysis (MD&A) and identify The reporting requirements for special purpose governments Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 49. Which of the following statements concerning the notes to the financial statements is true? A. The notes to the financial statements are an integral part of the basic financial statements. B. The notes to the financial statements are considered to be required supplementary information. C. The auditor's opinion generally does not extend to the notes to the financial statements. D. The notes support the basic financial statements, management’s discussion and analysis, and other required supplementary information. Answer: A Objective: LO13.4 Identify the types of notes to the financial statements required for governments. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 50. Which of the following statements is true regarding financial reporting by state and local governments? A. The notes to the financial statements are not essential to fair presentation of the basic financial statements. B. The notes are required supplementary information (RSI). C. The notes to the financial statements are not an integral part of the basic financial statements. D. The notes to the financial statements are essential to fair presentation of the basic financial statements. Answer: D Objective: LO13.4 Identify the types of notes to the financial statements required for governments. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 51. In accordance with GAAP, Management’s Discussion and Analysis is part of the A. Required supplementary information and is presented before the basic financial statements. B. Required supplementary information and is presented after the basic financial statements. C. Basic financial statements and is presented before the notes to the financial statements. D. Basic financial statements and is presented after the government-wide financial statements. Answer: A Objective: LO13.5 Explain the required supplementary information (RSI) required to accompany 16 Copyright © 2018 Pearson Education, Inc.
a government’s basic financial statements, including: The required information components of Management’s Discussion and Analysis (MD&A) and identify The reporting requirements for special purpose governments Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 52. According to the GASB Codification, Management’s Discussion and Analysis is A. To be based on currently known statements, schedules, statistical data, and other information about future economic growth. B. To be based on currently known facts, decisions, or conditions expected to have significant effects on financial activities. C. To provide information that is necessary for fair presentation of each of the various entities reported in a government’s basic financial statements. D. To be limited to quantitative analysis only and should not state the reasons changes in the financial activities from year-to-year. Answer: B Objective: LO13.5 Explain the required supplementary information (RSI) required to accompany a government’s basic financial statements, including: The required information components of Management’s Discussion and Analysis (MD&A) and identify The reporting requirements for special purpose governments Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 53. Which of the following statements is true regarding the statement of cash flows for a governmental unit? A. The statement of cash flows is included in the government-wide and proprietary fund financial statements. B. The statement of cash flows is included in the proprietary fund financial statements only. C. The statement of cash flows is included in the proprietary and fiduciary fund financial statements. D. The statement of cash flows is included in the proprietary fund financial statements only, and the government can choose the presentation format—direct or indirect. Answer: B Objective: LO13.2 Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 54. The government-wide statement of activities A. Distinguishes between major and nonmajor funds. B. Distinguishes between governmental and business-type activities. C. Excludes discretely presented component units. 17 Copyright © 2018 Pearson Education, Inc.
D. Excludes direct expenses of governmental and business-type activities. Answer: B Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 55. Which of the following financial statements are prepared using the flow of economic resources measurement focus and accrual basis of accounting? I. II. III. IV.
Government-wide Governmental funds Proprietary funds Fiduciary funds
A. I, II, and III only. B. I, II, and IV only. C. I, III, and IV only. D. I and III only. Answer: C Objective: LO13.1 Identify a government’s basic financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 56. For governmental activities, the minimum level of functional detail required for direct expenses on the Statement of Activities is the same level of detail required in the A. Proprietary funds Statement of Revenues, Expenses, and Changes in Fund Net Position. B. Business-type activities column. C. Fiduciary funds Statement of Changes in Fiduciary Net Position. D. Governmental funds Statement of Revenues, Expenditures, and Changes in Fund Balance. Answer: D Objective: LO13.3 Describe the format and content of the government-wide financial statements including: The difference between program revenues and general revenues The unique reporting provisions for infrastructure capital assets Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge
18 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 13
Problem 1 – Program and General Revenues The following information was drawn from the records of Wise County (all amounts are in thousands of dollars). Local gas tax restricted for street maintenance .............................................. State grant restricted for police training......................................................... Federal grant for new library ......................................................................... Gain on sale of general capital assets ........................................................... License and permit fees ................................................................................ Interest collected on investments ................................................................... Fines and forfeitures ...................................................................................... Contributions to permanent fund which supports education ......................... Shared state revenues restricted to public health ...........................................
$13,000 4,000 1,222 300 70 108 500 635 1,100
Requirement: Prepare schedules computing amounts to be reported as Charges for Services, Operating Grants and Contributions, Capital Grants and Contributions, and General Revenues.
1 Copyright © 2018 Pearson Education, Inc.
Answers: Charges for Services: License and permit fees .......................................................................... Fines and forfeitures ................................................................................ Total ...................................................................................................
$70 500 $570
Operating Grants and Contributions: State grant restricted for police training................................................... Shared state revenues restricted to public health ..................................... Total ...................................................................................................
$4,000 1,100 $5,100
Capital Grants and Contributions: Federal grant for new library ...................................................................
$1,222
General Revenues: Local gas tax restricted for street maintenance ........................................ Gain on sale of general capital assets ...................................................... Interest collected on investments ............................................................. Contributions to permanent fund which supports education ................... Total General Revenues .....................................................................
$13,000 300 108 635 $14,043
2 Copyright © 2018 Pearson Education, Inc.
Problem 2 – Statement of Activities Presented below is information for the governmental activities for the City of Pleasant Hill for the year ended December 31, 20X9 (all amounts are in thousands of dollars). General property taxes revenue ..................................................................... Unrestricted grants ......................................................................................... Restricted grants for public safety ................................................................. Capital grants for highways ........................................................................... Increase in fair value of investments ............................................................. Interest on investments .................................................................................. Principal paid on general long-term liabilities ............................................... Interest expense on general long-term liabilities ........................................... Expenses: General government ................................................................................. Public safety ............................................................................................. Highways and streets ............................................................................... Health and welfare ................................................................................... Fees charged for health and welfare programs .............................................. Transfer to Enterprise Fund ........................................................................... Collection of interfund advance to Enterprise Fund ...................................... Proceeds from sale of public safety vehicle (book value of $25) .................. Net position, governmental activities, January 1, 20X9 ................................
$13,000 4,000 1,200 300 70 108 1,100 100 1,700 4,200 2,100 3,000 270 2,500 1,000 7 3,017
Requirement: Prepare in good form a statement of activities for governmental activities only for 20X9. Some professors may want to give students a blank sheet of paper to complete this problem. Another option is the lined and labeled paper available in an Excel file, Ch13P-2. The solution is in Excel file, Ch13P-2S.
3 Copyright © 2018 Pearson Education, Inc.
Problem 3 – Net Position Calculations Note to Adopters: There are two versions of this problem: 3A, for the City of Floyd, contains the concept of “unspent proceeds” which is a complex addition to the problem; 3B, for the City of Raymond, excludes this concept. Choose the version that best fits what you covered in class. Problem 3A – Net Position Calculations The City of Floyd reports the following fund information (all amounts are in thousands of dollars): All governmental funds’ fund balance ........................................................... Restricted fund balances: Special Revenue Fund.............................................................................. Capital Projects Fund (unspent bond proceeds)....................................... Debt Service Fund.................................................................................... General capital assets ..................................................................................... Accumulated depreciation on capital assets ................................................. General long-term liabilities: Bonds payable for capital assets .................................................................... Liability for compensated absences ............................................................... Internal Service Fund serving governmental activities Net position .............................................................................................. Capital assets net of accumulated depreciation ....................................... Liability, capital related ...........................................................................
$13,000 1,200 900 1,700 10,800 4,100 5,700 3,200 3,000 1,700 500
Requirement: Prepare the net position section for governmental activities for the statement of net position for the City of Floyd for the year ended December 31, 20X9.
4 Copyright © 2018 Pearson Education, Inc.
Answer 3A: Net Investment in Capital Assets Capital assets ...................................................................................... – Accumulated depreciation ................................................................. – Bonds payable .................................................................................... + Unspent bond proceeds ...................................................................... + Internal Service Fund (1,700 – 500) .................................................. Net Investment in Capital Assets ...................................................
$10,800 4,100 5,700 900 1,200 $3,100
Restricted Net Position Special Projects (Special Revenue Fund) .......................................... + Debt Service (Debt Service Fund) ..................................................... + Capital Projects Fund ......................................................................... – Unspent bond proceeds ...................................................................... Restricted Net Position ..................................................................
$1,200 1,700 900 900 $2,900
Unrestricted Net Position Total Fund Balance ............................................................................ – Restricted Fund Balances (1,200 + 900 + 1,700) .............................. – Liability for Compensated Absences ................................................. + Internal Service Fund (3,000 – 1,200) ............................................... Unrestricted Net Position ...............................................................
$13,000 3,800 3,200 1,800 $7,800
Net Position Net investment in capital assets ............................................................... Restricted for: Special projects .................................................................................. Debt service ....................................................................................... Unrestricted .............................................................................................. Total Net Position ................................................................................
5 Copyright © 2018 Pearson Education, Inc.
$3,100 1,200 1,700 7,800 $13,800
Problem 3B – Net Position Calculations The City of Raymond reports the following fund information (all amounts are in thousands of dollars): All governmental funds’ fund balance ........................................................... Restricted fund balances: Special Revenue Fund.............................................................................. Debt Service Fund.................................................................................... General capital assets ..................................................................................... Accumulated depreciation on capital assets ................................................. General long-term liabilities: Bonds payable for capital assets .................................................................... Liability for compensated absences ............................................................... Internal Service Fund serving governmental activities Net position .............................................................................................. Capital assets net of accumulated depreciation ....................................... Liability, capital related ...........................................................................
$13,000 1,200 1,700 10,800 4,100 5,700 3,200 3,000 1,700 500
Requirement: Prepare the net position section for governmental activities for the statement of net position for the City of Raymond for the year ended December 31, 20X9.
6 Copyright © 2018 Pearson Education, Inc.
Answer 3B: Net Investment in Capital Assets Capital assets ...................................................................................... – Accumulated depreciation ................................................................. – Bonds payable .................................................................................... + Internal Service Fund (1,700 – 500) .................................................. Net Investment in Capital Assets ...................................................
$10,800 4,100 5,700 1,200 $2,200
Restricted Net Position Special Projects (Special Revenue Fund) .......................................... + Debt Service (Debt Service Fund) ..................................................... Restricted Net Position ..................................................................
$1,200 1,700 $2,900
Unrestricted Net Position Total Fund Balance ............................................................................ – Restricted Fund Balances (1,200 + 1,700) ......................................... – Liability for Compensated Absences ................................................. + Internal Service Fund (3,000 – 1,200) ............................................... Unrestricted Net Position ...............................................................
$13,000 2,900 3,200 1,800 $8,700
Net Position: Net investment in capital assets ............................................................... Restricted for: Special projects .................................................................................. Debt service ....................................................................................... Unrestricted .............................................................................................. Total Net Position ................................................................................
7 Copyright © 2018 Pearson Education, Inc.
$2,200 1,200 1,700 8,700 $13,800
Problem 4 – Major Funds Below is information on total assets for various funds of the City of Dublin (all amounts are in thousands of dollars). Fund General Federal Grants Special Revenue State Grants Special Revenue City Hall Capital Projects Debt Service Water and Sewer Enterprise Swimming Pool Enterprise Fleet Management Internal Service Employee Pension Fund
Assets $1,300 500 200 900 700 8,000 1,000 10,800 6,500
Requirement: Prepare a schedule computing the threshold for asset amounts that should be used to determine which funds must be reported as major. Identify which funds are major funds.
8 Copyright © 2018 Pearson Education, Inc.
Answer: Governmental Funds 10% Test for Assets Amounts General Federal Grants Special Revenue State Grants Special Revenue City Hall Capital Projects Debt Service Total Governmental Funds 10% Test Requirement
Assets $1,300 500 200 900 700 $3,600 $360
Enterprise Funds 10% Test for Assets Amounts Water and Sewer Enterprise Fund Swimming Pool Enterprise Fund Total Enterprise Funds 10% Test Requirement 5% Test for Assets Amounts Total Governmental Funds Total Enterprise Funds Total Governmental and Enterprise Funds 5% Test Requirement
Assets $8,000 1,000 $9,000 $900 Assets $3,600 9,000 $12,600 $630
The threshold for determining that a governmental fund other than the General Fund is a major fund is $630 (the larger of $360 and $630). The threshold for determining that an Enterprise Fund is a major fund is $900 (the larger of $900 and $630). Therefore, the major funds are those shown in the chart below. Major Funds General (always major by rule) City Hall Capital Projects Fund Water and Sewer Enterprise Fund Swimming Pool Enterprise Fund
Assets $1,300 900 4,000 1,000
9 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 14 Financial Reporting Deriving Government-Wide Financial Statements and Required Reconciliations
The questions in this chapter are divided into 3 parts: Part I contains generic questions about deriving the government-wide financial statements. Part II contains questions that specifically address the two-worksheet approach to the conversion process, which is in the main part of the chapter. Part III contains questions that specifically address the one-worksheet approach to the conversion process, which is in Appendix 14-2 of the chapter. PART I 1. Which of the following do most governmental entities not integrate into their general ledger accounts? A. Governmental fund accounts. B. Fiduciary fund accounts. C. Government-wide information. D. Proprietary fund accounts. Answer: C Objective: LO 14.1 Summarize and explain the types of worksheet adjustments needed to derive governmental activities data for the government-wide financial statements from governmental funds financial statement data. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 2. All of the following transactions could potentially be reconciling items between the governmental fund financial statements and government-wide governmental activities column except A. The purchase of capital assets. B. Accrual of compensated absences liability. C. Issuance of long-term debt. D. Borrowing from a local bank with a short-term loan. Answer: D Objective: LO 14.1 Summarize and explain the types of worksheet adjustments needed to derive governmental activities data for the government-wide financial statements from governmental funds financial statement data. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 3. If an Internal Service Fund provides 60% of its services to the General Fund and 40% of its services to an Enterprise Fund, then governmental activities column in the government-wide financial statements will 1 Copyright © 2018 Pearson Education, Inc.
A. Include 60% of the capital assets of the Internal Service Fund. B. Reflect a reduction in expenses equal to 60% of the profit the Internal Service Fund reported for the year. C. Include none of the capital assets of the Internal Service Fund. D. Reflect a reduction in expenses equal to 100% of the profit the Internal Service Fund reported for the year. Answer: B Objective: LO 14.1 Summarize and explain the types of worksheet adjustments needed to derive governmental activities data for the government-wide financial statements from governmental funds financial statement data. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 4. When converting the multiple governmental funds to the single entity represented by the governmental activities in the government-wide financial statements, which of the following adjustments will not be necessary? A. Converting the cash account to reflect the different basis of accounting. B. Adjusting for capital assets. C. Adjusting for long-term liabilities. D. Converting fund balance to net position. Answer: A Objective: LO 14.1 Summarize and explain the types of worksheet adjustments needed to derive governmental activities data for the government-wide financial statements from governmental funds financial statement data. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 5. Which of the following financial accounting elements is not common to both the governmental funds and the governmental activities function in the government-wide financial statements? A. Cash. B. Short-term liabilities. C. Deferred inflows. D. Capital assets. Answer: D Objective: LO 14.1 Summarize and explain the types of worksheet adjustments needed to derive governmental activities data for the government-wide financial statements from governmental funds financial statement data. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 6. Which of the following adjustments will not be necessary to covert the measurement focus and basis of accounting found in the governmental funds to the governmental activities reported in the government-wide financial statements? 2 Copyright © 2018 Pearson Education, Inc.
A. Recording expenses with no corresponding expenditures. B. Converting “when due” payables to accrual based payables. C. Eliminating expenditures with no expense counterparts. D. Adjusting the fair value of investments. Answer: D Objective: LO 14.1 Summarize and explain the types of worksheet adjustments needed to derive governmental activities data for the government-wide financial statements from governmental funds financial statement data. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 7. Which of the following items would not require an adjustment to convert governmental fund information to governmental activities in the statement of net position? A. Due to Debt Service Fund B. Due to an Enterprise Fund C. Due from a Special Revenue Fund D. Due to Capital Projects Fund. Answer: B Objective: LO 14.1 Summarize and explain the types of worksheet adjustments needed to derive governmental activities data for the government-wide financial statements from governmental funds financial statement data. Difficulty Level: Easy Classification: Application AACSB Category: Application of knowledge 8. A city reports deferred tax revenue of $300,000 at the beginning of the year and $350,000 at the end of the year. What adjustment is needed to the change in fund balances to reconcile the governmental funds operating statement information to the change in net position for governmental activities in the government-wide statement? A. ($300,000). B. $(50,000). C. $50,000. D. $350,000. Answer: C Objective: LO 14.1 Summarize and explain the types of worksheet adjustments needed to derive governmental activities data for the government-wide financial statements from governmental funds financial statement data. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 9. A city reports deferred tax revenue of $300,000 at the beginning of the year and $350,000 at the end of the year. What adjustment is needed to fund balance to reconcile the governmental funds balance sheet information to net position for governmental activities in the government-wide statement? A. $350,000. 3 Copyright © 2018 Pearson Education, Inc.
B. $50,000. C. $(50,000). D. ($300,000). Answer: A Objective: LO 14.1 Summarize and explain the types of worksheet adjustments needed to derive governmental activities data for the government-wide financial statements from governmental funds financial statement data. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 10. A city has a long-term general government liability for compensated absences of $700,000 at the beginning of the year and $650,000 at the end of the year. What adjustment is needed to the change in fund balances to reconcile the governmental funds operating statement information to the change in net position for governmental activities in the government-wide statement? A. $(50,000). B. $50,000. C. $650,000. D. $700,000. Answer: B Objective: LO 14.1 Summarize and explain the types of worksheet adjustments needed to derive governmental activities data for the government-wide financial statements from governmental funds financial statement data. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 11. A city has a long-term general government liability for compensated absences of $700,000 at the beginning of the year and $650,000 at the end of the year. What adjustment is needed to the fund balance to reconcile the governmental funds balance sheet information to net position for governmental activities in the government-wide statement? A. $(650,000). B. $(50,000). C. $50,000. D. $700,000. Answer: A Objective: LO 14.1 Summarize and explain the types of worksheet adjustments needed to derive governmental activities data for the government-wide financial statements from governmental funds financial statement data. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 12. A city's Internal Service Fund provides services only to general government departments. During the year, the Internal Service Fund reports operating revenue of $100,000 and operating expenses of $80,000. What adjustment is needed to the governmental funds 4 Copyright © 2018 Pearson Education, Inc.
operating statement information to reflect these transactions in the statement of activities in the government-wide statement? A. Increase revenue by $100,000. B. Decrease revenue by $20,000. C. Decrease expenses by $20,000. D. Increase expenses by $80,000. Answer: C Objective: LO 14.1 Summarize and explain the types of worksheet adjustments needed to derive governmental activities data for the government-wide financial statements from governmental funds financial statement data. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 13. A city's Internal Service Fund provides services only to general government departments. During the year, the Internal Service Fund reports operating revenue of $100,000, operating expenses of $80,000 and interest income of $10,000. What adjustments are needed to the governmental funds operating statement information to reflect these transactions in the statement of activities in the government-wide statement? A. Increase revenue by $110,000 and decrease expenses by $80,000. B. Increase revenue by $10,000 and decrease expenses by $20,000. C. Decrease expenses by $80,000 and increase revenue by $10,000. D. Decrease expenses by $30,000 and decrease revenue by $20,000. Answer: B Objective: LO 14.1 Summarize and explain the types of worksheet adjustments needed to derive governmental activities data for the government-wide financial statements from governmental funds financial statement data. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 14. Adjustments to Enterprise Funds to prepare the government-wide financial statements will mostly be limited to A. Changes in measurement focus adjustments. B. Changes in basis of accounting adjustments. C. Internal Service Fund adjustments. D. Changes in budgetary basis adjustments. Answer: C Objective: LO 14.3 Summarize and explain the types of worksheet adjustments needed to derive business-type activities. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 15. General capital assets with a net book value of $46,000 were transferred to an Enterprise Fund. The business-type activities column in the government-wide financial statements would report 5 Copyright © 2018 Pearson Education, Inc.
A. A transfer in of $46,000. B. A capital contribution of $46,000. C. An other financing source of $46,000. D. A revenue of $46,000. Answer: A Objective: LO 14.3 Summarize and explain the types of worksheet adjustments needed to derive business-type activities. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 16. The General Fund borrowed $100,000 from a Special Revenue Fund. Interest will be paid on the loan annually for five years and the principal repaid in full at the end of the fifth year. The governmental activities column should report A. Both a loan payable and loan receivable for $100,000. B. Other financing sources of $100,000. C. Other financing uses of $100,000. D. Nothing related to the loan arrangement. Answer: D Objective: LO 14.4 Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 17. Business-type activities typically include A. Only the enterprise funds. B. Only the internal service funds. C. All of the proprietary funds. D. All of the proprietary and fiduciary funds. Answer: A Objective: LO 14.4 Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 18. A county's Central Warehouse Internal Service Fund provides 65% of its services to governmental funds, 30% of its services to Enterprise Funds, and the remaining 5% to a local municipality. If there was a $10,000 loss in the Internal Service Fund during 20X9, the expenses in the governmental activities column would A. Decrease by $10,000. B. Increase by $7,000. C. Increase by $10,000. D. Decrease by $7,000. 6 Copyright © 2018 Pearson Education, Inc.
Answer: B Objective: LO 14.4 Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 19. Internal Service Funds, classified as a proprietary fund type, are reported in the governmentwide statements as A. Governmental activities. B. Business-type activities. C. Either governmental activities or business-type activities depending upon the primary user of the activity. D. Like Fiduciary Funds, Internal Service Funds are not reported in the government-wide statements. Answer: C Objective: LO 14.4 Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 20. Depreciation expense for the current year was $366,750 in the Water Enterprise Fund. Depreciation expense will be reported at the government-wide level as A. Part of unallocated depreciation expense in governmental activities. B. Part of unallocated depreciation expense in the business-type activities. C. Part of the business-type activities expenses for the water activity. D. Capital outlay expenses in business-type activities. Answer: C Objective: LO 14.4 Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 21. The General Fund transferred $10,000 to Enterprise Fund A; a Special Revenue Fund transferred $20,000 to a Capital Projects Fund; Enterprise Fund A transferred $35,000 to a Capital Projects Fund and $25,000 to Enterprise Fund B. The governmental activities column on the Statement of Activities will be report A. Transfers in of $25,000. B. Transfers out of $30,000. C. Transfers in of $55,000. D. Transfers in of $35,000. Answer: A 7 Copyright © 2018 Pearson Education, Inc.
Objective: LO 14.4 Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 22. The General Fund paid $195,000 related to compensated absences during the year. If the beginning balance of long-term compensated absences payable for the governmental activities was $65,000 and the ending balance was $55,000, then the expenses related to compensated absences in the governmental activities column would be A. $195,000. B. $185,000. C. $65,000. D. $55,000. Answer: B Objective: LO 14.4 Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 23. Net investment in capital assets would not include A. Accounts payable, even if it was capital related. B. Notes payable that is capital related. C. Inventory. D. Accumulated depreciation. Answer: C Objective: LO 14.4 Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 24. The required reconciliation of the governmental fund financial statement information to the governmental activities information in the corresponding government-wide financial statements A. Must be presented at the bottom of the fund financial statements and at the bottom of the government-wide financial statements. B. Must be presented only at the bottom of the government-wide financial statements. C. May be presented either at the bottom of the fund financial statements or in separate schedules. D. Must be presented in separate schedules, not on the face of the financial statements. Answer: C Objective: LO 14.4 Prepare the government-wide financial statements and the required 8 Copyright © 2018 Pearson Education, Inc.
reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 25. Which of the following items is not included in reconciling the governmental funds operating statement information to the change in net position in the government-wide statement? A. Depreciation. B. Amortization of bond premiums. C. Expenditures for retirement of general long-term debt principal. D. Increase in salaries payable. Answer: D Objective: LO 14.4 Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 26. The required reconciliation of the governmental fund balance sheet to the governmental activities statement of net position does not include adjustments related to A. Capital assets. B. Interfund charges for services. C. Deferred revenue. D. Long-term liabilities. Answer: B Objective: LO 14.4 Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 27. Which of the following items would be added to the change in fund balances in reconciling the governmental funds operating statement information to the change in net position in the government-wide statement? A. Depreciation. B. Capital outlay expenditures. C. Book value of capital assets sold. D. Bond proceeds. Answer: B Objective: LO 14.4 Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Moderate Classification: Application 9 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of knowledge 28. Which of the following items would be added to the change in fund balances in reconciling the governmental funds operating statement information to the change in net position in the government-wide statement? A. Depreciation. B. Bond proceeds. C. Book value of capital assets sold. D. Repayment of bond principal. Answer: D Objective: LO 14.4 Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 29. Which of the following items would be subtracted from the change in fund balances in reconciling the governmental funds operating statement information to the change in net position in the government-wide statement? A. Depreciation. B. Capital outlay expenditures. C. Internal Service Fund increase in net position. D. Repayment of bond principal. Answer: A Objective: LO 14.4 Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 30. Which of the following items would be subtracted from the change in fund balances in reconciling the governmental funds operating statement information to the change in net position in the government-wide statement? A. Depreciation. B. Bond issue costs. C. Salary expenditures. D. Debt principal payments. Answer: A Objective: LO 14.4 Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 10 Copyright © 2018 Pearson Education, Inc.
PART II 31. In the two-worksheet approach, each of the following worksheet adjustments would be made for the operating statement except A. Adding depreciation expense. B. Adding accumulated depreciation. C. Converting interest expenditures to interest expenses. D. Eliminating other financing sources or uses. Answer: B Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 32. In the two-worksheet approach, what type of adjustment will be necessary for interest payable on the balance sheet conversion worksheet? A. No adjustment is necessary for interest payable. This amount is the same in the fund statements and the government-wide statements. B. Interest on long-term debt that has been incurred but not paid will need to be added to the interest payable reported on the governmental funds balance sheet. C. Interest paid this year that is attributable to the previous year accrual for long-term debt will need to be deducted from interest payable reported on the governmental funds balance sheet. D. The net change in accrued interest payable on long-term debt from the beginning of the year to the end of the year will be added to the amount of interest payable reported on the governmental funds balance sheet. Answer: B Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 33. In the two-worksheet approach, which of the following worksheet adjustments would not be made for the balance sheet? A. Add capital assets. B. Add accrued interest payable. C. Add depreciation expenses. D. Add bonds payable. Answer: C Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 11 Copyright © 2018 Pearson Education, Inc.
34. The Capital Projects Fund issued general long-term debt at a premium. The balance sheet conversion worksheet of the two-worksheet approach would include A. A deduction from an other financing source. B. An addition to an other financing use. C. An addition to an other financing source. D. A deduction from an other financing use. Answer: B Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 35. In the two-worksheet approach, what type of adjustment will be necessary for interest expenditure/expense on the operating statement conversion worksheet? A. No adjustment is necessary for interest expenditure/expense. The amount of interest expenditure on the governmental fund financial statements is the same amount that will be reported as interest expense in the government-wide statements. B. Interest on long-term debt that has been incurred but not paid will need to be added to the interest expenditure reported on the governmental funds balance sheet. C. Interest paid this year that is attributable to the previous year accrual for long-term debt will need to be deducted from interest expenditure reported on the governmental funds balance sheet. D. An adjustment to the interest expenditure reported on the governmental funds operating statement will be necessary for the net change in accrued interest payable on long-term debt from the beginning of the year to the end of the year. Answer: D Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 36. Depreciation expense on assets of the public safety function totaled $195,000 for the year. What is the effect on the operating statement conversion worksheet in the two-worksheet approach of this event? A. There is no effect. The impact of depreciation is already reflected in the General Capital Assets accounts. B. Public safety expenditures/expenses will be increased by $195,000. C. Unallocated depreciation for the governmental activities will be increased by $195,000. D. The depreciation will decrease the program revenues of the public safety function. Answer: B Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 12 Copyright © 2018 Pearson Education, Inc.
37. If a county sells a capital asset with a net book value of $35,000 for $27,000, how will this transaction be recorded on the operating statement conversion worksheet of the twoworksheet conversion approach? A. A deduction from an other financing source for $8,000. B. An addition to an other financing use for $35,000. C. An addition to an other financing use for $8,000. D. A deduction from an other financing source for $35,000. Answer: D Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 38. A government had capital outlay expenditures of $226,000 during the year for the public safety function accounted for in the General Fund. It was determined that only $195,000 of the expenditures met the capitalization threshold of the government. How would this transaction appear on the operating statement conversion worksheet in the two-worksheet conversion approach? A. The only effect would be to reduce capital outlay expenditures by $226,000. B. Capital outlay expenditures would be reduced by $226,000, and public safety expenditures/expenses would be increased by $31,000. C. Capital outlay expenditures would be reduced by $195,000, and public safety expenditures/expenses would be increased by $31,000. D. The only effect would be to reduce capital outlay expenditures by $195,000. Answer: B Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking
13 Copyright © 2018 Pearson Education, Inc.
PART III 39. The Cable Enterprise Fund purchased $300,000 of capital equipment during the year. The one-worksheet conversion adjustment necessary for the preparation of the government-wide financial statements would be
A. Capital Assets ............................................................. Capital Outlay Expenditures ..................................
Debit $300,000
Credit $300,000
B. Capital Assets ............................................................. Cash .......................................................................
$300,000
C. Capital Assets ............................................................. Capital Contributions .............................................
$300,000
D. Capital Assets ............................................................. Capital Outlay Expenses ........................................
$300,000
$300,000
$300,000
$300,000
Answer: A Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 40. A government had capital outlay expenditures of $226,000 during the year for the public safety function accounted for in the General Fund. It was determined that $195,000 of the capital outlay should be reported as capital assets in the government-wide financial statements. What would the one-worksheet conversion adjustment be to record the capital assets as a governmental activity? Debit Credit A. Capital Outlay Expenditures ....................................... $226,000 Fund Balance ......................................................... $226,000 B.
C.
D.
Capital Assets ............................................................. Capital Outlay Expenditures ..................................
$195,000
Capital Assets ............................................................. Capital Outlay Expenditures ..................................
$226,000
Capital Assets ............................................................. Expenses – Public Safety ............................................ Capital Outlay Expenditures ..................................
$195,000 31,000
14 Copyright © 2018 Pearson Education, Inc.
$195,000
$226,000
226,000
Answer: D Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 41. If a county receives $27,000, for the sale of a dump truck with a historical cost of $60,000, and accumulated depreciation of $25,000, the one-worksheet conversion adjustment would be
A. Other Financing Source – Sale of GCA ...................... Accumulated Depreciation – Furniture and Equipment Loss on sale of vehicle ................................................ Furniture and Equipment ........................................
Debit 27,000 25,000 8,000
Credit
60,000
B. Other Financing Source – Sale of GCA ...................... Furniture and Equipment ........................................
27,000
C. Other Financing Source – GCA .................................. Accumulated Depreciation – Furniture and Equipment Furniture and Equipment ........................................
27,000 33,000
D. Other Financing Source – Sale of GCA ...................... Loss on sale of vehicle ................................................ Furniture and Equipment ........................................
27,000 33,000
27,000
60,000
60,000
Answer: A Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical thinking 42. The Capital Projects Fund issued general long-term debt at a premium. The one-worksheet conversion adjustment would include a A. Debit to cash. B. Credit to bonds payable. C. Debit to unamortized premium on bonds. D. Credit to other financing sources. Answer: B Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Moderate 15 Copyright © 2018 Pearson Education, Inc.
Classification: Application AACSB Category: Application of knowledge 43. The one-worksheet conversion adjustment to reflect debt service payments of $85,000 ($55,000 principal; $30,000 interest) by a governmental fund would be
A.
B.
C.
D.
Debt Service Expense ................................................. Net Position............................................................
Debit $85,000
Credit $85,000
Bonds Payable ............................................................ Cash .......................................................................
$55,000
Bonds Payable ............................................................ Debt Service Expenditures – Principal ..................
$55,000
Bonds Payable ............................................................ Debt Service Expenditures – Principal ..................
$85,000
$55,000
$55,000
$85,000
Answer: C Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 44. Taxes were levied in the General Fund during 20X8. $157,700 of the taxes were still uncollectible as of the end of the fiscal year. The one-worksheet conversion adjustment necessary as the government-wide statements are being prepared would include a DEBIT to A. Deferred revenues. B. Allowance for doubtful accounts. C. Taxes receivable. D. Other financing sources. Answer: A Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 45. Depreciation expense on assets of the public safety function totaled $195,000 for the year. The one-worksheet conversion adjustment necessary to record the depreciation expense as part of governmental activities would be
16 Copyright © 2018 Pearson Education, Inc.
A. Depreciation Expense – Public Safety ........................ Accumulated Depreciation .....................................
Debit $195,000
Credit $195,000
B. Depreciation Expense – Public Safety ........................ Capital Outlay Expenditures ..................................
$195,000
C. Capital Outlay Expenditures ....................................... Capital Assets .........................................................
$195,000
D. Capital Outlay Expenditures ....................................... Accumulated Depreciation .....................................
$195,000
$195,000
$195,000
$195,000
Answer: A Objective: LO 14.2 Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) deriving governmental activities data. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge
17 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 14
Problem 1 – Worksheet Adjustments – Two Worksheet Approach An incomplete operating statement conversion worksheet is provided below [in Excel file Ch14P-1] for the City of Walden Creek for FY 20X7. Additional information: 1. Depreciation Expense for the year was: a. Buildings ...................................................................................... 10,000 b. Improvements Other Than Buildings........................................... 6,000 c. Furniture and Equipment ............................................................. 4,000 d. Infrastructure ................................................................................ 15,000 Except for infrastructure, which is charged to the Highways and Streets function, depreciation is allocated as follows: General Government .................................................................... 40% Public Safety ................................................................................ 40% Highways and Streets ................................................................... 20% 2. All capital outlay expenditures were capitalized except for $30,000 in asset purchases for the General Government that did not meet the capitalization threshold. 3. Deferred Revenues were $7,000 at the end of FY 20X6, $10,000 at the end of FY 20X7. 4. Interest Payable at the end of FY 20X6 was $4,000. At the end of FY 20X7 it was $3,000. 5. A vehicle with a net book value of $4,500 was sold for $2,000 during FY 20X7. 6. Long-term compensated absences for the government increased $8,000 during the year. This increase was allocated to the functions at the same rate as depreciation. Requirement: Complete the operating statement conversion worksheet. Answers:
See Excel file Ch14P-1S.
1 Copyright © 2018 Pearson Education, Inc.
Problem 2 – Worksheet Adjustments – One Worksheet Approach Selected governmental fund data from the City of Miller’s Cove is presented below (all amounts are in thousands of dollars): Expenditures – Capital Outlay (Furniture and Equipment) ................................. Expenditures – Debt Service – Principal ............................................................. Expenditures – Debt Service – Interest ................................................................ Other Financing Sources — Proceeds from Sale of General Capital Assets ....... Other Financing Sources — Bonds...................................................................... Other Financing Sources — Bond Premium ....................................................... Transfers from the General Fund ......................................................................... Transfer to the Debt Service Fund ....................................................................... Transfer to the Enterprise Fund ........................................................................... Revenue – Property Taxes ................................................................................... Increase in compensated absences reported as general long-term liabilities .......
$3,500 200 200 120 1,000 100 650 650 250 1,500 23
Additional information: 1. Land was sold that had a book value of $25. 2. Deferred property taxes were $10 at the beginning of the year. Deferred property taxes at the end of the year were $12. 3. All of the compensated absence liabilities relate to the public safety function. Requirement: Prepare the worksheet adjustments that would be needed to convert the following governmental fund data to governmental activities data for the government-wide statements.
2 Copyright © 2018 Pearson Education, Inc.
Answers: # Accounts 1 Furniture and Equipment Expenditures – Capital Outlay
Debit 3,500
3,500
2 Bonds Payable Expenditures – Debt Service – Principal
200
3 OFS – Proceeds from Sale of General Capital Assets Land Gain on Sale of Land
120
200
25 95
4 OFS – Bonds OFS – Bond Premium Bonds Payable Premium on Bonds Payable
1,000 100
5 Transfer from General Fund Transfer to Debt Service Fund
650
6 Deferred Revenues – Property Taxes Revenues – Property Taxes Net Position (Beginning)
12
7 Expenses – Public Safety Compensated Absences Payable—Long-Term
23
3 Copyright © 2018 Pearson Education, Inc.
Credit
1,000 100
650
2 10
23
Problem 3 – Statement of Net Position Reconciliation Information about the conversion of the June 30, 20X6, Governmental Funds Balance Sheet to the Statement of Net Position for the City of Pleasant Hill is presented below (all amounts are in thousands of dollars): All governmental funds' fund balances ................................................................ Deferred revenues related to property taxes ........................................................ Accrued interest on long-term liabilities.............................................................. General capital assets ........................................................................................... Accumulated depreciation on general capital assets ........................................... General long-term liabilities: Bonds payable for capital assets .................................................................... Compensated absences payable ..................................................................... Internal service fund serving governmental activities Net position .................................................................................................... Capital assets, net of accumulated depreciation ............................................ Capital-related liabilities ................................................................................
$13,000 2,000 1,200 10,800 4,100 5,700 3,200 3,000 1,700 500
Requirement: Prepare the reconciliation of total fund balance to net position for governmental activities for the City of Pleasant Hill, given the following information.
4 Copyright © 2018 Pearson Education, Inc.
Answer:
City of Pleasant Hill Reconciliation of Total Fund Balance to Total Net Position June 30, 20X6
Total Fund Balances – Governmental Funds
$13,000
Amounts reported for governmental activities in the Statement of Net Position are different because: Capital assets used in governmental activities are not financial resources and therefore are not reported in the governmental funds: General Capital Assets Less Accumulated Depreciation
$10,800 (4,100)
6,700
Long-term liabilities are not due and payable in the current period and therefore are not reported in the governmental funds: Bonds Payable Compensated Absences Accrued Interest
$(5,700) (3,200) (1,200)
(10,100)
Revenues deferred in the governmental funds because of the availability criterion are recognized as revenues of governmental activities
2,000
Internal Service Funds
3,000
Total Net Position of Governmental Activities
5 Copyright © 2018 Pearson Education, Inc.
$14,600
Problem 4 – Statement of Activities Reconciliation Information about the December 31, 20X7, year-end conversion of the Governmental Funds Change in Fund Balance to the Statement of Activities Change in Net Position for the City of Six Mile is presented below (all amounts are in thousands of dollars): Net increase in all governmental funds' fund balances ........................................ Increase in deferred revenues (all related to property taxes) ............................... Increase in accrued interest on long-term liabilities ............................................ Expenditures – capital assets .............................................................................. Expenditures – principal on capital-related debt ................................................. Depreciation expenses on capital assets ............................................................. Proceeds from general long-term capital debt ..................................................... Proceeds from the sale of general capital assets (book value of $25) ................. Increase in long-term liability for compensated absences ................................... Internal service net income ..................................................................................
6 Copyright © 2018 Pearson Education, Inc.
$1,300 200 12 5,080 3,000 4,100 3,500 40 30 520
Answer: City of Six Mile Reconciliation of the Changes in Fund Balances to the Changes in Net Position For the Year Ended December 31, 20X7 Change in Fund Balances – Total Governmental Funds Governmental funds report capital outlays as expenditures, while governmental activities report depreciation expense to allocate those expenditures over the life of the assets. Add capital acquisitions Deduct current year depreciation In the Statement of Activities, only the gain (loss) on capital assets is reported. In the governmental funds, the proceeds from the sale increase financial resources. Thus, the change in net position differs from the change in fund balance by the book value of the capital asset sold. Bond proceeds provide current financial resources to governmental funds, but issuing debt increases longterm liabilities in the Statement of Net Position. Repayment of bond principal is an expenditure in the governmental funds, but the repayment reduces longterm liabilities in the Statement of Net Position. Add debt principal repayment Deduct debt proceeds Some expenses reported in the Statement of Activities do not require the use of current financial resources and therefore are not reported as expenditures in the governmental funds: Change in accrued interest on debt Change in compensated absences Revenues in the Statement of Activities that do not provide current financial resources are not reported as revenues in the governmental funds. Internal Service Funds are used by management to charge the costs of certain services to individual funds. The net revenue (expense) of the Internal Service Funds is reported with governmental activities. Change in Net Position of Governmental Activities
7 Copyright © 2018 Pearson Education, Inc.
$1,300
$5,080 (4,100)
980
25
3,000 (3,500)
(500)
(12) (30)
(42)
200
520 $2,483
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 15 Financial Reporting—The Comprehensive Annual Financial Report and the Financial Reporting Entity
1. Management's Discussion and Analysis is A. Part of the basic financial statements. B. Included in the introductory section of a CAFR. C. Required supplementary information. D. Optional in a CAFR. Answer: C Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 2. Which of the following must be included to meet the minimum requirements for general purpose external financial reporting? A. Basic financial statements, notes to the financial statements, management's discussion and analysis, and other required supplementary information. B. Basic financial statements, notes to the financial statements, and other required supplementary information. C. Basic financial statements, notes to the financial statements, narrative explanations, and required supplementary information. D. Basic financial statements, notes to the financial statements, management's discussion and analysis, other required supplementary information, and combining statements. Answer: A Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 3. Which of the following statements is false? A. Governments that do not prepare a CAFR are not required to prepare a Management's Discussion and Analysis. B. The Governmental Accounting Standards Board has established requirements for the statistical section of a CAFR. C. Governments have some latitude in selecting major funds to be reported in the CAFR. D. Governments are allowed to have additional information in their statistical section that is not required information. Answer: A Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Concept 1 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Analytical thinking 4. The introductory section of a CAFR typically includes all of the following except A. The letter of transmittal. B. An organizational chart. C. The independent auditor's opinion. D. The table of contents. Answer: C Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 5. The independent auditor's opinion covers, at a minimum, the A. Basic financial statements. B. CAFR. C. Financial section of the CAFR. D. Primary government. Answer: A Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 6. In the statistical section, the required demographic and economic information includes all of the following except A. Unemployment rate. B. Total personal income. C. Debt per capita. D. Population. Answer: C Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 7. The independent auditor's report is normally included within A. The introductory section of a CAFR. B. Management's discussion and analysis. C. The financial section of a CAFR. D. The statistical section of a CAFR. Answer: C Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report 2 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 8. GAAP does not require A. A management's discussion and analysis. B. Governments to prepare a CAFR. C. A statistical section to be included within a CAFR. D. Discretely presented component units to be included in the government-wide financial statements. Answer: B Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Concepts AACSB Category: Application of knowledge 9. All of the following statistical tables should include ten individual years of trend information except A. Demographic and economic indicators. B. Information about net position. C. Information about government employees. D. Information about principal revenue payers. Answer: D Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 10. Which of the following is not part of the financial section of a comprehensive annual financial report? A. Transmittal letter. B. Management's discussion and analysis. C. Required supplementary information. D. Notes to the financial statements. Answer: A Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 11. Statistical tables are A. Required in the basic financial statements and in the CAFR. B. Optional in the basic financial statements but required in the CAFR. C. Optional in the basic financial statements and optional in the CAFR. 3 Copyright © 2018 Pearson Education, Inc.
D. Required in the CAFR. Answer: D Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 12. Footnote information that duplicates information in financial statements included in the CAFR A. May be eliminated. B. May be eliminated if the government does not issue its basic financial statements separately. C. May be eliminated if the government does issue its basic financial statements. D. Is common and must be presented despite the duplication. Answer: D Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 13. A “dual opinion” audit is one where A. The auditors render an opinion on the primary government and any component units. B. The auditors render an opinion on both the basic financial statements and the combining and individual fund financial statements. C. The auditors render an opinion on both the financial and statistical sections of the CAFR. D. The auditors render an opinion on the primary government, component units, and the CAFR as a whole. Answer: B Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 14. In reviewing their governmental funds, a local municipality determines that three of the funds (including the General Fund) are considered major funds and the remaining six governmental funds are nonmajor. However, management prefers to report all of its governmental funds as major funds. What is the maximum number of fund columns that could be presented on the governmental fund balance sheet? A. 3. B. 4. C. 6. D. 9. Answer: D Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a 4 Copyright © 2018 Pearson Education, Inc.
Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 15. Assume that a government has three nonmajor Enterprise Funds. Which of the following statements regarding the reporting requirements in a CAFR is false? A. Nonmajor funds are not reported on an Enterprise Fund statement of cash flows. B. Even if the funds are nonmajor, the government may choose to declare them as major funds and report each in a separate column on the appropriate fund statements. C. The CAFR must include combining financial statements for any nonmajor fund columns that include more than one fund. D. Nonmajor funds are reported in the aggregate on all proprietary fund financial statements. Answer: A Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 16. Which of the following financial statements would not be reported anywhere in the fund financial statements presented as part of the basic financial statements? A. Statement of net position. B. Statement of cash flows. C. Balance sheet. D. Statement of Changes in Assets and Liabilities. Answer: D Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 17. Which fund types report the results of operations using a Statement of Revenues, Expenditures, and Changes in Fund Balances? A. General Fund, Special Revenue Funds, Debt Service Funds, Capital Projects Funds, Enterprise Funds, and Internal Service Funds. B. General Fund, Special Revenue Funds, Debt Service Funds, and Enterprise Funds. C. General Fund, Special Revenue Funds, Debt Service Funds, Capital Projects Funds, and Fiduciary Funds. D. General Fund, Special Revenue Funds, Debt Service Funds, Capital Projects Funds, and Permanent Funds. Answer: D Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Easy Classification: Concept 5 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of knowledge 18. Which fund type would be reported in the Statement of Revenues, Expenditures, and Changes in Fund Balances? A. Enterprise Funds. B. Internal Service Funds. C. Permanent Funds. D. Pension trust funds. Answer: C Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Easy Classification: Concept AACSB Category: Application of knowledge 19. In the basic financial statements, separate sets of fund financial statements should be presented for A. Each fund. B. Each major fund C. Each fund type. D. Each fund category. Answer: D Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 20. Whether or not to declare a fund as being major is not optional for A. The General Fund. B. A Capital Projects Fund. C. Debt Service Fund. D. Enterprise Fund. Answer: A Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 21. What is the maximum number of columns that could appear on the statement of fiduciary net position in the fund financial statements presented as part of the basic financial statements? A. 1. B. 2. C. 3. D. 4. Answer: D 6 Copyright © 2018 Pearson Education, Inc.
Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 22. When there are more than two funds of the relevant fund type, combining financial statements would not be required in the CAFR for which types of funds? A. Nonmajor governmental funds. B. Major Enterprise Funds. C. Internal Service Funds. D. Agency Funds. Answer: B Objective: LO 15.1 Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 23. In which of the following situations would a component unit be required to prepare a CAFR, not just the basic financial statements? A. The primary government prepares a CAFR. B. The component unit will be issuing general obligation bonds in the coming year. C. The component unit has prepared a CAFR in the past. D. There are no situations in GAAP where any entity is required to prepare a CAFR. Answer: D Objective: LO 15.2 Explain how to determine whether a government should treat an associated entity as a component unit. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 24. Blended and discretely presented component units may issue separate financial statements. Which of the following statements is false related to this provision in GAAP? A. If a blended or discretely presented component unit issues separate financial statements, they are not required to be reported as part of the primary government's reporting entity. B. GAAP require component units to report any component units they may have as part of their separately issued financial statements. C. GAAP do not prevent component units from separately issuing their own financial statements. D. The primary government must include any component units in their external financial reporting to comply with GAAP. Answer: A Objective: LO 15.3 Determine which component units should be blended and which should be discretely presented. Difficulty Level: Moderate Classification: Application 7 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Analytical thinking 25. If a primary government reports a discretely presented component unit, then the primary government must A. Prepare two separate Management's Discussion and Analyses. B. Prepare two sets of note disclosures. C. Include the financial information of the discretely presented component unit in the government-wide financial statements. D. Include information related to the discretely presented component unit within the statistical section of the CAFR. Answer: C Objective: LO 15.3 Determine which component units should be blended and which should be discretely presented. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 26. Britt County has seven discretely presented component units. Three of the component units are considered “governmental” in nature and the remaining four are considered “businesstype” in nature. How many columns for the discretely presented component units would be reported on the General Fund balance sheet? A. 0. B. 1. C. 2. D. 7. Answer: A Objective: LO 15.3 Determine which component units should be blended and which should be discretely presented. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 27. If a state has three discretely presented component units, two of which are “governmental” in nature and one of which is “business-type” in nature, what is the minimum number of discretely presented component unit columns that can be reported in the government-wide statements? A. 0. B. 1. C. 2. D. 3. Answer: B Objective: LO 15.3 Determine which component units should be blended and which should be discretely presented. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 8 Copyright © 2018 Pearson Education, Inc.
28. The City of Newport appointed the original governing board of the Newport Historical Association, at which point the board became self-sustaining. The city has historically (but voluntarily) provided funding for the Association for the past several years. The city of Newport should A. Not report the Association as a component unit. B. Report the Association as a blended component unit. C. Report the Association as discretely presented component unit. D. Disclose that the Association is a joint venture. Answer: C Objective: LO 15.2 Explain how to determine whether a government should treat an associated entity as a component unit. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 29. Which of the following criteria is not required to be met for a government to be considered fiscally independent? A. Has separate legal standing. B. Has the authority to adopt its own budget without the substantive approval of any other entity. C. Has the authority to issue bonded debt without the substantive approval of any other entity. D. Has the authority to set its own fees and charges without substantive approval of any other entity. Answer: A Objective: LO 15.2 Explain how to determine whether a government should treat an associated entity as a component unit. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 30. An entity is a component unit of another entity if A. A voting majority of its governing body is appointed by the other entity. B. It is fiscally dependent on the other entity and a benefit or burden relationship exists with the other entity. C. It has a financial benefit or burden relationship with the other entity. D. The other entity is obligated in some manner on its debt. Answer: B Objective: LO 15.2 Explain how to determine whether a government should treat an associated entity as a component unit. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 31. In discrete presentation, component unit A. Funds are reported as the same type of funds of the primary government. B. Funds are treated as Special Revenue Funds of the primary government since the 9 Copyright © 2018 Pearson Education, Inc.
resources can only be used for the component unit's programs. C. Data is presented in the government-wide financial statements separate from the primary government data. D. Basic financial statements must always be included in the primary government's comprehensive annual financial report. Answer: C Objective: LO 15.3 Determine which component units should be blended and which should be discretely presented. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of knowledge 32. Substantively the same governing body means that A. Virtually the entire governing body of the primary government serves, in an ex officio capacity, as virtually the entire governing body of a component unit. B. A voting majority of the component unit governing body is made up of a voting majority of the primary government governing body. C. A voting majority of the primary government governing body serves on the component unit governing body. D. A voting majority of the component unit governing body also serves on the primary government governing body. Answer: B Objective: LO 15.2 Explain how to determine whether a government should treat an associated entity as a component unit. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 33. How should information about each major discretely presented component unit be presented in the financial statements? A. Report only as condensed financial statements reported in the notes to the financial statements. B. Report only in single column in the government-wide statements. C. Report only in combining financial statements which are included in the primary government's basic financial statements after the fund financial statements. D. Report only in a single column in the government-wide statements with condensed financial statements in the notes. Answer: D Objective: LO 15.3 Determine which component units should be blended and which should be discretely presented. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 34. The governing board of the City of Wheaton is also the governing board of Mosquito Abatement District, a business-type activity. A benefit or burden relationship exists between the city and the district. Which of the following statements regarding the financial reporting 10 Copyright © 2018 Pearson Education, Inc.
options is false? A. The District is a blended component unit and is reported in both the fund financial statements and the government-wide financial statements. B. The District is not subject to major fund reporting criteria. C. The District may be reported in a separate column on the Proprietary Fund financial statements, but would most likely be reported within the business-type activities column in the government-wide financial statements. D. The District is not to be reported as a discretely presented component unit. Answer: B Objective: LO 15.2 Explain how to determine whether a government should treat an associated entity as a component unit. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 35. The Mount Pilot Airport Authority is governed by a seven-member board. Four of the board members are appointed by the town of Mount Pilot and the remaining three are appointed by the governing board of Griffith County. Neither the town nor the county share in any profits, nor are required to fund any deficits, of the Authority. The town, however, does approve the Authority's proposed budget. The county may make budgetary recommendations to the Authority, but they are not required to approve the proposed budget. The Authority should be reported as A. A jointly governed organization by both the town and the county. B. A joint venture by both the town and the county. C. Discrete component units of both the town and the county. D. A discretely presented component unit of the town. Answer: D Objective: LO 15.2 Explain how to determine whether a government should treat an associated entity as a component unit. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 36. If a governmental entity has a blended component unit, the note disclosures should include all of the following except A. How the component unit met the blending criteria. B. A statement that identifies the component units as a being blended. C. How to access separately issued external financial statements. D. The number of component unit governing board members. Answer: D Objective: LO 15.3 Determine which component units should be blended and which should be discretely presented. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge 37. Assume that a blended component unit of the town has its own General Fund, Special 11 Copyright © 2018 Pearson Education, Inc.
Revenue Fund, and Capital Projects Fund. All funds meet the major fund criteria. The primary government has a General Fund, three Special Revenue Funds, one Permanent Fund, one Debt Service Fund, and three Capital Projects Funds. All but the Permanent Fund and two Special Revenue Funds of the primary government are major funds. How many fund columns would be presented on the governmental funds’ balance sheet? A. 4. B. 5. C. 9. D. 12. Answer: C Objective: LO 15.3 Determine which component units should be blended and which should be discretely presented. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 38. Assume that a blended component unit of the town has its own General Fund, Special Revenue Fund, and Capital Projects Fund. All funds meet the major fund criteria. The primary government has a General Fund, three Special Revenue Funds, one Permanent Fund, one Debt Service Fund, and three Capital Projects Funds. All but the Permanent Fund and two Special Revenue Funds of the primary government are major funds. How many major Special Revenue Funds would the primary government report in the governmental funds financial statements? A. 4. B. 3. C. 2. D. 1. Answer: B Objective: LO 15.3 Determine which component units should be blended and which should be discretely presented. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 39. Which of the following potential component units would not be reported as blended component unit of the county? A. A hospital which is the primary health care provider for the county residents and whose board is appointed by the county. B. A recreation district where the governing board of the county serves as its governing board and the management of the country operates the recreation district. C. A financing authority that exclusively serves the county. D. A school district whose debt will be repaid by the county. Answer: A Objective: LO 15.3 Determine which component units should be blended and which should be discretely presented. Difficulty Level: Moderate Classification: Application 12 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of knowledge 40. Which of the following scenarios does not describe governing boards of a primary government and a potential component unit that are substantially the same? A. A city’s governing board members are the ex-officio governing board members of the Library District. B. A county has a seven-member board. Five of these board members serve on an eightmember authority board. C. A county has a seven-member board. Three of these board members serve on a fivemember authority board. D. There are seven members serving on the city council. Five of these council members are the entire governing board of a historical district board. Answer: C Objective: LO 15.2 Explain how to determine whether a government should treat an associated entity as a component unit. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical thinking 41. Castlewood City School District has a separately elected governing body that administers the public school system. Although the district’s budget is subject to the approval of the city council, the city is not obligated in any manner to provide financial support to the school district nor can the city access the resources of the school district. The district’s financial activity should be A. Blended with the city’s financial statements. B. Excluded from the city’s financial statements. C. Discretely presented with the city’s financial statements. D. Included as other required supplementary information (RSI) to the city’s financial statements. Answer: B Objective: LO 15.2 Explain how to determine whether a government should treat an associated entity as a component unit. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 42. Wakefield Village and Wakefield County were partners in the development of the Wakefield Water Authority, which is a separate legal entity. Neither the village nor the county will share in any profits of the Authority. Both, however, are obligated to fund any deficits or debt defaults that may occur, though this scenario is considered to be highly unlikely. Both the village and the county appoint three of the seven Water Authority board members. The seventh is appointed by another village in the county. Both the Wakefield Village and Wakefield County should report the Authority as A. A related organization. B. A jointly governed organization. C. A joint venture. D. A discretely presented component unit. 13 Copyright © 2018 Pearson Education, Inc.
Answer: C Objective: LO 15.4 Explain the differences between and among the reporting requirements for related organizations, jointly governed organizations, and joint ventures. Difficulty Level: Moderate Classification: Application AACSB Category: Application of knowledge 43. If a primary government has an equity interest in a joint venture, the net investment (total equity interest) is reported as A. An asset of either governmental or business-type activities, as appropriate, in the government-wide statement of net position. B. An asset of the General Fund in the governmental funds balance sheet. C. A liability of either governmental or business-type activities, as appropriate, in the government-wide statement of net position. D. A Permanent Fund in the governmental funds financial statements. Answer: A Objective: LO 15.4 Explain the differences between and among the reporting requirements for related organizations, jointly governed organizations, and joint ventures. Difficulty Level: Difficult Classification: Application AACSB Category: Application of knowledge 44. Information about related party transactions must be disclosed by a state or local government for which of the following? I. Related organizations II. Jointly governed organizations III. Joint ventures A. I only. B. I and II only. C. II and III only. D. I, II, and III. Answer: D Objective: LO 15.4 Explain the differences between and among the reporting requirements for related organizations, jointly governed organizations, and joint ventures. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of knowledge
14 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 15
Problem 1 – Reporting Entity A city has three related entities. Its finance and accounting staff is trying to determine which, if any, of those entities must be included in the city reporting entity. Also, for the entities that are included the staff must determine whether they are to be blended or discretely presented. Explain how each of the related entities should be treated and why. Situations: 1. The first entity is the city school district. The district has a separately elected board and is legally separate from the city. The school board can establish its own budget except that its property tax levy must be approved by the city council. The city does not guarantee the debt of the schools or have any other authority over the school district. 2. The second entity is the municipal gas utility. The city appoints the seven members of the utility governing board and can remove them at will. The city must approve the budget and the rate structure of the utility. The utility cannot issue bonded debt without the city council's prior approval. The city is entitled to, and regularly receives, the operating surpluses of the utility. 3. The third entity is the City Library Commission. According to the commission's charter, the commission board consists of the city mayor, the city finance director, and the superintendent of the city schools, and two other members of city council besides the mayor. City council consists of the mayor and four other council members. The library commission budget must be approved by the city council, and all long-term debt issued by the Library Commission is to be repaid by the city.
1 Copyright © 2018 Pearson Education, Inc.
Answers: 1. The school district is not a component unit of the city. Since the school board is separately elected, that rules out establishing component unit status using either (1) the appointment authority and ability to impose will or (2) appointment authority and financial benefit or burden. Since the school district requires the city’s approval of its budget, the school board is fiscally dependent on the city. However, since no benefit or burden relationship exists, fiscally dependency is not enough to establish component unit status. 2. Since the city appoints all members of the governing board and can remove them at will, that is sufficient to make the city financially accountable for the utility. That relationship alone makes the utility a component unit of the city. Also, since the city must approve the utility’s budget and regularly receives the utility’s operating surpluses, that combination would also establish financial accountability. Moreover, there is financial accountability between the city and the utility because of the appointment power and the benefit relationship. The gas utility should be discretely presented. The only pertinent criterion for blending is substantively the same governing body criterion. Even though the utility board is appointed by the council and can be removed at will, this criterion is not met. No council member serves ex officio as a board member of the utility. 3.
The library commission is a component unit of the city because the city has substantive approval authority over the commission's budget. This means that the commission is fiscally dependent on the city. Also, since the city must repay any long-term debt issued by the commission, a benefit/burden relationship exists. Taken together, these two criteria establish that the commission is financially accountable to the city. The commission will be a blended component unit, since the commission’s long-term debt is expected to be repaid by the city.
2 Copyright © 2018 Pearson Education, Inc.
Problem 2 – Discrete Presentation versus Blending Requirements: 1. Describe discrete presentation in the context of the government-wide statements. Assume that a government has five major discretely presented component units. Include the reporting and disclosures required for each of the major component units. 2. Describe blending. When is it required? Is it permitted under other circumstances—i.e., when is it not required?
3 Copyright © 2018 Pearson Education, Inc.
Answers: 1. Discretely presented component units are presented in the government-wide financial statements separately from the primary government. They are not included in the fund financial statements. Governments must report certain information about each major discretely presented component unit. Governments may meet this requirement by reporting each of the five component units in separate columns of the government-wide financial statements. More likely, the government will meet this requirement by either disclosing condensed financial statements for each of the five component units in the notes to the financial statements or by providing a combining component unit financial statement. 2. Blending means that a component unit is being reported in substantially the same manner it would be if the component unit was actually a part of the primary government legal entity. Each fund of a component unit is reported as an additional fund of the same fund type of the primary government. The major exception is that the General Fund of a component unit is reported as a primary government Special Revenue Fund. Blending is required under the following circumstances: The component unit’s governing body is substantively the same as the governing body of the primary government and (1) there is a financial benefit or burden relationship between the primary government and the component unit, or (2) management of the primary government has operational responsibility for the component unit. The component unit provides services entirely, or almost entirely, to the primary government or otherwise exclusively, or almost exclusively, benefits the primary government even though it does not provide services directly to it. The component unit’s total debt outstanding, including leases, is expected to be repaid entirely or almost entirely with resources of the primary government.
4 Copyright © 2018 Pearson Education, Inc.
Problem 3 – Preparation and Organization of the CAFR Listed below are various statements, schedules, notes, and other elements that appear in a Comprehensive Annual Financial Report (CAFR). A. Demographic and Economic Information B. Organization Chart C. Table of Contents D. Statement of Net Position E. Schedule of Revenues, Expenditures, and Changes in Fund Balance—Budget-to-Actual F. Proprietary Funds Statement of Cash Flows G. Summary of Significant Accounting Policies H. Letter of Transmittal I. Governmental Funds Balance Sheet J. Capital Assets note disclosure K. Reconciliation of Changes in Fund Balances to Changes in Net Position L. Management’s Discussion and Analysis M. Statement of Net Position—Component Units N. GFOA Certificate of Achievement for Excellence in Financial Reporting O. Statement of Fiduciary Net Position P. Parks and Recreation Special Revenue Fund Balance Sheet Q. Changes in Net Position, Last 10 Years R. Statement of Activities S. Auditor’s Report Requirement – Recommend that you choose one of the following requirements, 1. Identify the major section of the CAFR in which each element is found. a. Introductory b. Financial c. Statistical 2. Identify the major subsection of the CAFR in which each element of the financial section is found. a. Basic Financial Statements 1. Government-wide financial statements 2. Fund financial statements 3. Notes to the financial statements b. Required Supplementary Information (RSI) c. Other Supplementary Information (OSI) 3. List each element in the proper order that they are found in the CAFR.
5 Copyright © 2018 Pearson Education, Inc.
Answers: 1. Major sections of the CAFR. a. Introductory: B, C, H, N, b. Financial: D, E, F, G, I, J, K, L, M, O, P, R, S c. Statistical: A, Q 2. Identify the major subsection of the CAFR in which each element of the financial section is found. a. Basic Financial Statements 1. Government-wide financial statements: D, R 2. Fund financial statements: F, I, K, M, O 3. Notes to the financial statements: G, J b. Required Supplementary Information (RSI): E, L c. Other Supplementary Information (OSI): P Note: The Auditor’s Report (item S) is in the Financial Section but stands alone—it is not part of any subsection. 3. List each element in the proper order that they are found in the CAFR. C, H, B, N, S, L, D, R, I, K, F, O, M, G, J, E, P, Q, A Item C H B N S L D R I K F O M G J E P Q A
Description Table of Contents Letter of Transmittal Organization Chart GFOA Certificate of Achievement Auditor's Report Management's Discussion and Analysis Statement of Net Position Statement of Activities Governmental Funds Balance Sheet Reconciliation of Changes in Fund Balances to Changes in Net Position Proprietary Funds Statement of Cash Flows Statement of Fiduciary Net Position Statement of Net Position—Component Units Summary of Significant Accounting Policies Capital Assets note disclosure Schedule of Revenues, Expenditures, and Changes in Fund Balance—Budget and Actual Parks and Recreation Special Revenue Fund Balance Sheet Changes in Net Position, Last 10 years Demographic and Economic Information
6 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 16 Non-SLG Not-for-Profit Organizations
1. Nongovernment not-for profit organizations that wish to follow generally accepted accounting principles in the preparation of their financial statements should follow A. FASB standards. B. GASB standards. C. Nonprofit Accounting Standards Board (NASB) standards. D. AICPA Audit and Accounting Guide, “Not-for-Profit Entities. Answer: A Objective: LO16.1 Distinguish voluntary health and welfare organizations from other not-forprofit organizations and explain the two net asset classes used in reporting nongovernment not-for-profit organizations. Difficulty Level: Easy Classification: Concept AACSB Category: Application of Knowledge 2. A nongovernment not-for-profit organization received donated services from a local volunteer. The volunteer works as a receptionist for the organization. The market value of service is $5,000. How should this activity be reported be in the statement of activities? A. Not be reported. B. Unrestricted support, $5,000. C. Restricted support, $5,000. D. Both unrestricted support and program expense, $5,000. Answer: A Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical Thinking 3. Other not-for-profit organizations include A. Hospitals. B. Colleges and universities. C. Religious organizations. D. Voluntary health and welfare organizations. Answer: C Objective: LO16.1 Distinguish voluntary health and welfare organizations from other not-forprofit organizations and explain the two net asset classes used in reporting nongovernment not-for-profit organizations. Difficulty Level: Easy Classification: Concept AACSB Category: Application of Knowledge 4. Nongovernment not-for-profit organizations are required to report their financial statements on 1 Copyright © 2018 Pearson Education, Inc.
A. A current financial resources measurement focus. B. An economic resources measurement focus. C. A cash measurement focus. D. A modified accrual measurement focus. Answer: B Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty Level: Easy Classification: Concept AACSB Category: Application of Knowledge 5. A not-for-profit organization was the recipient of a significant fixed asset donation. The assets, a building valued at $82,000, and one acre of land, valued at $210,000, are going to be used by the organization for office space and parking. The donor's net book value of the building was $22,000, and of the land, $65,000. The not-for-profit organization should record the assets at a total value of A. $87,000. B. $104,000. C. $147,000. D. $292,000. Answer: D Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical Thinking 6. A not-for-profit organization receives donated supplies valued at $40,000 in June. As of the fiscal year end December, 31, 20X3, the organization had used 25% of the materials. The organization should report A. Restricted contributions of $40,000 and no expenses. B. Restricted contributions and expenses of $40,000. C. Unrestricted contributions of $40,000 and expenses of $10,000. D. Unrestricted contributions of $10,000 and no expenses. Answer: C Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Analytical Thinking 7. A nongovernment voluntary health and welfare organization received unrestricted cash donations of $23,000 for the current year, $30,000 of pledges to be received in and used for general purposes in the following year, and a $100,000 donation to establish a permanent investment endowment. The organization should report A. Revenues without donor restrictions of $53,000 and revenues with donor restrictions of $100,000. 2 Copyright © 2018 Pearson Education, Inc.
B. Revenues with donor restrictions of $153,000. C. Revenues without donor restrictions of $23,000, net assets released from restrictions of $30,000, and revenues with donor restrictions of $100,000. D. Revenues without donor restrictions of $23,000 and revenues with donor restrictions of $130,000. Answer: D Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 8. A private school is given $40,000 to permanently endow one of its education programs. A debit of $40,000 should be made to A. Cash. B. Unrestricted cash. C. Temporarily restricted cash. D. Cash restricted for endowment. Answer: D Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 9. A not-for-profit entity that receives a donation restricted for a specific purpose and meets the use restriction in the same reporting period reports A. Revenues without donor restrictions. B. Revenues with donor restrictions and revenues without donor restrictions. C. Revenues with donor restrictions and net assets released from restrictions. D. Either A or C. Answer: D Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 10. The statement of net assets for a nongovernment nonprofit organization would report the following components of net assets A. Unrestricted net assets and net assets with donor restrictions. B. Net assets without donor restrictions and temporarily restricted net assets. C. Net investment in capital assets, restricted net assets, and unrestricted net assets. D. Net assets without donor restrictions and net assets with donor restrictions. Answer: D Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. 3 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Easy Classification: Concept AACSB Category: Application of Knowledge 11. A nongovernment, not-for-profit organization provides the following information and asks you to determine how much revenue should be reported in each of its changes in net assets categories. All pledges are unconditional Cash contributions restricted to specific programs Cash contributions restricted to endowment Net realizable value of pledges to a building program resulting from current year fund raising efforts Net realizable value of unconditional pledges resulting from current year fund raising efforts
A. B. C. D.
$200,000 $1,000,000 $450,000 $105,000
Changes in Net Assets Net Assets without With Donor Restrictions Donor Restrictions $0 $1,755,000 $0 $755,000 $105,000 $1,650,000 $305,000 $1,450,000
Answer: A Objective: LO16.3 Prepare journal entries for common transactions of nongovernment not-forprofit organizations—including restricted contributions and restricted investment income— and prepare nongovernment not-for-profit organization financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical Thinking 12. The line item, net assets released from restrictions, may be reported in a nongovernment, notfor-profit organization's statement of activities in which classifications? A. Changes in net assets with donor restrictions only. B. Changes in net assets without donor restrictions and changes in net assets with donor restrictions. C. Changes in unrestricted net assets and changes in permanently restricted net assets. D. Changes in unrestricted net assets, changes in temporarily restricted net assets, and/or changes in permanently restricted net assets. Answer: B Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Application AACSB Category: Application of Knowledge 4 Copyright © 2018 Pearson Education, Inc.
13. Special fund-raising events of a nongovernment, not-for-profit organization A. Must always be reported as revenues and at gross amounts. B. Must always be reported as gains and at net amounts. C. Must be reported as revenues at gross amounts or gains reported at net amounts. D. Must be reported as revenues at gross amounts unless the event is incidental or peripheral. Answer: D Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Concept AACSB Category: Application of Knowledge 14. Membership dues of nongovernment, not-for-profit organizations are A. Always treated as exchange transactions and reported as revenues. B. Always treated as contribution revenues. C. Permitted to be reported either as exchange revenues or as contributions revenues depending on the organization's preference. D. Reported as contribution revenues if no benefits are received as a result of membership. Answer: D Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Concept AACSB Category: Application of Knowledge 15. Fund-raising expenses are classified as A. Program services expenses. B. Supporting services expenses. C. Management and general expenses. D. Nonoperating expenses. Answer: B Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Concept AACSB Category: Application of Knowledge 16. The net realizable value or present value of unrestricted pledges receivable outstanding at the end of a year for a nongovernmental not-for-profit organization are A. Always considered unrestricted net assets. B. Always considered temporarily restricted net assets. C. Always considered permanently restricted net assets. D. Considered temporarily restricted unless the donor specified that the pledge was intended to finance current year expenses. Answer: D Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) 5 Copyright © 2018 Pearson Education, Inc.
and the financial statements. Difficulty: Moderate Classification: Concept AACSB Category: Application of Knowledge 17. Pledges should be reported by a nongovernment not-for-profit organization as revenues in the period that they are unconditionally received A. By the organization. B. By the organization if the pledges are unrestricted. C. By the organization if the pledges are unrestricted and have been collected by year end. D. If the organization has incurred qualifying costs. Answer: A Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Concept AACSB Category: Application of Knowledge 18. With respect to collections, nongovernment not-for-profit organizations are A. Required to capitalize all collections. B. Prohibited from capitalizing collections. C. Required to either capitalize all collections or to capitalize no collections. D. Permitted to capitalize no collections, to capitalize all collections, or to capitalize only those collections acquired after the FASB adopted its original not-for-profit accounting standards. Answer: D Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Difficult Classification: Concept AACSB Category: Application of Knowledge 19. Computer equipment used in the business office of a not-for-profit organization was sold for $9,000. The original cost of the equipment had been $21,000 and there was $15,000 of accumulated depreciation as of the date of sale. How will the gain be reported? A. Gains are not recognized in not-for-profit organizations. B. Gain of $3,000 in changes in net assets without donor restrictions. C. Gain of $3,000 in changes in net assets with donor restrictions. D. Net assets released from restrictions of $3,000. Answer: B Objective: LO16.3 Prepare journal entries for common transactions of nongovernment not-forprofit organizations—including restricted contributions and restricted investment income— and prepare nongovernment not-for-profit organization financial statements. Difficulty: Moderate Classification: Application AACSB Category: Application of Knowledge 20. How should a nongovernment not-for-profit organization generally report increases in the 6 Copyright © 2018 Pearson Education, Inc.
fair value of marketable debt securities in its statement of activities? A. Such increases in fair value should not be reported because debt securities are reported at amortized cost. B. As an increase in net assets with donor restrictions C. As an increase in net assets without donor restrictions D. As an increase in net assets without donor restrictions, unless restricted by donor stipulation or law Answer: D Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Concept AACSB Category: Application of Knowledge 21. In 20X8, the following pledges were made: $35,000 in unrestricted contributions for use in 20X8; $20,000 in contributions restricted for use in 20X9; and a $400,000 contribution restricted for the establishment of a permanent endowment. It is anticipated that 10% of all pledges except the endowment pledge will be uncollectible. Pledges receivable for 20X8 should be A. $455,000. B. $449,500. C. $55,000. D. $49,500. Answer: A Objective: LO16.3 Prepare journal entries for common transactions of nongovernment not-forprofit organizations—including restricted contributions and restricted investment income— and prepare nongovernment not-for-profit organization financial statements. Difficulty: Moderate Classification: Application AACSB Category: Analytical Thinking 22. Investment earnings of $1,250 were earned on restricted investments. The earnings are to be used for various research projects during the current year. The earnings would be reported as A. Revenues without donor restrictions. B. Revenues with donor restrictions. C. Net assets released from restrictions. D. Revenues from donations. Answer: B Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Application AACSB Category: Application of Knowledge 23. A nongovernment not-for-profit organization received a cash donation restricted for construction of a new building. How should the donation be reported be reported in the statement of cash flows? 7 Copyright © 2018 Pearson Education, Inc.
A. Cash inflows from operating activities. B. Cash inflows from financing activities. C. Cash inflows from investing activities. D. Cash inflows from capital and related financing activities. Answer: B Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Concept AACSB Category: Application of Knowledge 24. A nongovernment not-for-profit organization received a cash donation of $100,000 restricted for a specific operating purpose. Only $20,000 of the donation was spent during the current year. How should the donation be reported be in the statement of activities? A. Revenues without donor restrictions - $100,000. B. Revenues without donor restrictions - $20,000. C. Revenues with donor restrictions - $100,000. D. Revenues with donor restrictions - $20,000. Answer: C Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Application AACSB Category: Analytical Thinking 25. A nongovernment not-for-profit organization received a cash donation of $100,000 restricted for a specific operating purpose. Only $20,000 of expenses related to the specific operating purpose was incurred during the current year. How should this activity be reported be in the statement of activities? A. Expenses in changes in net assets without donor restrictions, $20,000. B. Expenses in changes in net assets with donor restrictions, $20,000. C. Both revenues of $100,000 and expenses of $20,000 in changes in net assets without donor restrictions. D. Both expenses and net assets released from restrictions of $20,000 in changes in net assets with donor restrictions. Answer: A Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Synthesis AACSB Category: Analytical Thinking 26. Land valued at $100,000 was donated to a not-for-profit organization. The donation came with no restrictions. The organization's management decided to hold the land for resale and use the proceeds to establish a reserve for future capital needs. Which of the following journal entries would be made on the date of donation?
8 Copyright © 2018 Pearson Education, Inc.
A. Land Held for Resale..........................................................
Debit $100,000
Contribution Revenues with Donor Restrictions ...........
B. Land Held for Resale..........................................................
$100,000 $100,000
Capital Contributions.....................................................
C. Land Held for Resale..........................................................
$100,000 $100,000
Contribution Revenues without Donor Restrictions......
D. Land Held for Resale.......................................................... Contributions Released from Restrictions .....................
Credit
$100,000 $100,000 $100,000
Answer: C Objective: LO16.3 Prepare journal entries for common transactions of nongovernment not-forprofit organizations—including restricted contributions and restricted investment income— and prepare nongovernment not-for-profit organization financial statements. Difficulty: Moderate Classification: Application AACSB Category: Analytical Thinking 27. Which of the following financial statements is not required for all nongovernment not-forprofit organizations? A. Statement of net assets. B. Statement of activities. C. Statement of cash flows. D. Statement of changes in assets and liabilities. Answer: D Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Easy Classification: Concept AACSB Category: Application of Knowledge 28. A nongovernment not-for-profit organization statement of activities reports A. Only changes in net assets without donor restrictions. B. Only changes in net assets without donor restrictions that are revenues, expenses, gains, or losses. C. Both changes in net assets without donor restrictions and changes in net assets with donor restrictions. D. Only changes in total net assets. Answer: C Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Concept AACSB Category: Application of Knowledge 29. A nongovernment, not-for-profit environmental organization conducts a mailing about the 9 Copyright © 2018 Pearson Education, Inc.
dangers of global warming. Included in the mailing is a request for donations. How should this activity be reported be in the statement of activities? A. Fund-raising expense. B. Program expense. C. Fund-raising, unless certain criteria are met. D. Always allocated between fund-raising and program support. Answer: C Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Concept AACSB Category: Application of Knowledge 30. A nongovernment, not-for-profit organization received $5,000,000 of unconditional pledges during 2013 that had not been collected by year end. In its 2013 statement of activities, the organization should recognize A. No revenues, but should report receivables and deferred revenues in its balance sheet. B. Revenues without donor restrictions of $5,000,000. C. Revenues with donor restrictions of $5,000,000. D. Other financing sources of $5,000,000. Answer: C Objective: LO16.3 Prepare journal entries for common transactions of nongovernment not-forprofit organizations—including restricted contributions and restricted investment income— and prepare nongovernment not-for-profit organization financial statements. Difficulty: Moderate Classification: Application AACSB Category: Analytical Thinking 31. Nongovernment not-for-profit organizations recognize revenues when A. Pledges are measurable and available. B. Unconditional pledges become due. C. Unconditional pledges are made by donors, even if not yet collected. D. Unconditional pledges are made by donors and qualifying costs have been incurred. Answer: C Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Concept AACSB Category: Application of Knowledge 32. What costs may be deducted directly from revenues instead of being reported with the as other expenses? A. Direct costs of special fund raising events. B. Expenses for benefits provided in exchange for membership dues. C. Fund raising expenses. D. Depreciation expense. Answer: A 10 Copyright © 2018 Pearson Education, Inc.
Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Concept AACSB Category: Application of Knowledge 33. Nongovernment, not-for-profit organizations use the following classifications to report expenses in the statement of activities A. Changes in net assets without donor restrictions and changes in net assets with donor restrictions. B. Operating and nonoperating. C. Management and general and supporting services. D. Mission critical, non-mission-critical, and discretionary. Answer: C Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Application AACSB Category: Application of Knowledge 34. Fund raising expenses are reported as A. Nonoperating expenses. B. Operating expenses. C. Program expenses. D. Supporting services expenses. Answer: D Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Concept AACSB Category: Application of Knowledge 35. Which of the following is true for a nongovernment, not-for-profit organization? A. Revenues and expenses may be reported in changes in net assets without donor restrictions. B. Revenues and expenses may be reported in changes in net assets with donor restrictions. C. Expenses and net assets released from restrictions may be reported in changes in net assets with donor restrictions. D. Expenses may be reported in changes in net assets without donor restrictions or in changes in net assets with donor restrictions. Answer: A Objective: LO16.2 Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements. Difficulty: Moderate Classification: Application AACSB Category: Analytical Thinking 11 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 16
Problem 1 – Journal Entries for Nongovernmental, Not-for-Profit Entities Transactions: The following selected transactions occurred for a nongovernmental, not-for-profit organization. All amounts are in thousands of dollars. 1. Unrestricted cash contributions received during the year, $300. 2. Restricted cash contributions were received during the year for the following: (a) Education programs, $43; (b) Building fund, $202; and (c) Endowment, $1,000. 3. Pledges received during the year were as follows: Unrestricted, $3,000; (b) Building fund, $5,000; and (c) Endowment, $20,000. 10% of pledges receivable typically prove uncollectible. Pledges expect to be collected early in the next year. 4. A benefit concert was held to raise resources for the building fund. Receipts totaled $1,400 and direct costs incurred totaled $850. 5. Salary expenses incurred for the education programs were paid, $14. 6. Materials were purchased on account for the education programs, $25. 7. Fees paid to an architect for design of the building during the year were $92. Additionally, payments to the building contractor during the year were $110. 8. Earnings on endowment fund investments are restricted to the entity's education programs. The earnings for the year were $13. 9. Cost of materials used for education programs during the year, $32 10. Earnings on building fund investments were not restricted by donors but the board requires that they be used to finance the building. The earnings on those investments for the year were $25. Requirement: Prepare the journal entries for the above transactions.
1 Copyright © 2018 Pearson Education, Inc.
Answers: #
Accounts 1 Cash Contribution Revenues without Donor Restrictions
Debit 300
Credit 300
2 Cash Contribution Revenues with Donor Restrictions – Education Contribution Revenues with Donor Restrictions – Building Contribution Revenues with Donor Restrictions – Endowment
1,245
3 Pledges Receivable Allowance for Uncollectible Pledges Contribution Revenues with Donor Restrictions – Education Contribution Revenues with Donor Restrictions – Building Contribution Revenues with Donor Restrictions – Endowment
28,000
4 Cash Expenses – Direct Costs of Special Event Special Events Revenues with Donor Restrictions – Building
550 850
5a Expenses – Education Cash
14
5b Reclassifications to Net Assets without Donor Restrictions Reclassifications from Net Assets with Donor Restrictions
14
6 Materials Inventory Vouchers Payable
25
7a Construction in Progress Cash
202
7b Reclassifications to Net Assets without Donor Restrictions Reclassifications from Net Assets with Donor Restrictions
202
43 202 1,000
2,800 2,700 4,500 18,000
1,400
14
14
25
202
2 Copyright © 2018 Pearson Education, Inc.
202
#
Accounts 8 Cash Investment Income with Donor Restrictions – Education
Debit
Credit 13 13
9a Expenses – Education Materials Inventory
32
9b Reclassifications to Net Assets without Donor Restrictions Reclassifications from Net Assets with Donor Restrictions
32
10a Cash Investment Income without Donor Restrictions
25
10b Net Assets without Donor Restrictions Net Assets without Donor Restrictions – Designated for Building
25
32
3 Copyright © 2018 Pearson Education, Inc.
32
25
25
Problem 2 – Accounting for Restricted Gifts Listed below are two transactions for an alcohol rehabilitation treatment program. All amounts are in thousands of dollars. Transactions: 1. Received pledges of $300 and cash gifts of $100 during the year to be used only for alcohol rehabilitation treatment programs. 2. Incurred expenses of $220 for its alcohol rehabilitation program but paid the expenses from unrestricted resources, not from available restricted resources. Requirement: Prepare the journal entries for these transactions.
4 Copyright © 2018 Pearson Education, Inc.
Answers: # Accounts 1 Pledges Receivable Cash Contribution Revenues with Donor Restrictions – Alcohol Rehabilitation
Debit 300 100
Credit
400
2a Expenses – Alcohol Rehabilitation Cash
220
2b Reclassifications to Net Assets without Donor Restrictions Reclassifications from Net Assets with Donor Restrictions
220
220
220
Note that the FASB considers the restrictions met if restricted resources could have been used for the expenses—even if they were not used.
5 Copyright © 2018 Pearson Education, Inc.
Problem 3 – Reporting for Not-for-Profit Organizations Requirements: Explain the way a nongovernmental, not-for-profit organization must report the following items in its statement of activities: A. Receipt of unrestricted contributions B. Pledges restricted to a specific program C. Collections, in a subsequent year, of pledges restricted to a specific purpose D. Pledges restricted to fixed asset construction E. Earnings on restricted investments
6 Copyright © 2018 Pearson Education, Inc.
Answers: A. Unrestricted contributions received in cash are reported as revenues in the changes in net assets without donor restrictions section of the statement of activities in the period received. If the unrestricted contributions are pledges that are not received by year end, a time restriction is implied unless the donor specifies that the resources are contributed to support the current period. Because of the implied time restrictions, the pledges would be reported as contribution revenues (at their present value or at their net realizable value) in the changes in net assets with donor restrictions section. When collected, net assets released from restrictions is reported as an increase in the changes in net assets without donor restrictions and as a decrease in the changes in net assets with donor restrictions section. B. Pledges restricted to a specific program are reported as contribution revenues in the changes in net assets with donor restrictions section of the statement of activities, either at present value or at net realizable value. When the pledge has been received and expenses incurred for the restricted purpose, net assets released from restrictions is reported as an increase in the changes in net assets without donor restrictions and as a decrease in the changes in net assets with donor restrictions. C. This collection is not reflected in the statement of activities. There are two restrictions in this case when the pledges are made—a time restriction (implied) and a use restriction. Collection removes the time restriction, but the use restriction remains. Hence, the assets are not yet released from restrictions. D. Pledges restricted to fixed asset construction are reported as contributions in the changes in net assets with donor restrictions section of the statement of activities, either at present value or at net realizable value. When construction costs are incurred for the restricted purpose and the asset has been placed in use, an organization must adopt one of two polices. Under the first approach, when the asset is placed in service, net assets released from restrictions is reported as an increase in the changes in net assets without donor restrictions and as a decrease in the changes in net assets with donor restrictions. Under the second approach, when construction costs are incurred, there is no change in net assets. As the assets are used up (depreciated), depreciation expense is reported in net assets without donor restrictions and net assets released from restrictions is reported as an increase in the changes in net assets without donor restrictions and as a decrease in the changes in net assets with donor restrictions. The depreciation expense and the net assets released from restrictions are not necessarily equal in amount. For instance, while they may be recognized over the same period, residual value would not be taken into account in computing the net assets released from restrictions—even if the same time period is appropriate. E. Earnings on restricted investments are considered unrestricted unless the donor specifically restricted their use. Therefore, these earnings are reported as investment income in the changes in net assets without donor restrictions. 7 Copyright © 2018 Pearson Education, Inc.
Problem 4 – Statement of Activity for a Nongovernmental, Not-for-Profit Organization Selected information from the accounts of the Weinstein Musical Society, a nongovernment, notfor-profit organization for the year ended December 31, 20X5 is presented below. (All amounts are in thousands of dollars and all accounts have a normal balance): Administrative salaries..................................................................................................... Cash contributions restricted for Classical Music Appreciation Program ....................... Collections of unrestricted pledges from prior year ........................................................ Depreciation—Office Equipment .................................................................................... Depreciation—Equipment—Classical Music Appreciation Program ............................. Depreciation—Maestro Program ..................................................................................... Fundraising expenses ....................................................................................................... Investment Income ........................................................................................................... Materials and supplies used—Maestro Program ............................................................. Net assets with donor restrictions, January 1, 20X5 ........................................................ Net assets without donor restrictions, January 1, 20X5 ................................................... Payment of interest on note.............................................................................................. Payment to retire long-term note that matured during the year ....................................... Pledges during year (and outstanding at year end) to support Maestro Program ............ Rent—Performance Halls—Professional Program.......................................................... Salaries—Professional Program ...................................................................................... Teacher salaries—Classical Music Appreciation Program.............................................. Teacher salaries—Maestro Program ................................................................................ Ticket sales—Performances of Musicians in the Professional Program ......................... Unrestricted cash contributions........................................................................................ Unrestricted pledges during year (and outstanding at year end)...................................... Unrestricted earnings on investments of restricted assets................................................
$45 250 300 2 12 5 75 100 330 1,100 320 22 250 1,200 500 379 23 77 150 800 540 58
All expenses of the Maestro and the Classical Music Appreciation Programs are payable from donor restricted resources. Requirement:
Prepare the Statement of Activity for the Society
8 Copyright © 2018 Pearson Education, Inc.
Answer: Weinstein Musical Society Statement of Activities For the Year Ended December 31, 20X5
Changes in Net Assets without Donor Restrictions Revenues and Gains without Donor Restrictions Contribution Revenues Ticket Sales Investment Income (100+58) Total Revenue and Gains without Donor Restrictions Net Assets Released from Restrictions (300 + 407 + 23) Increase in Net Assets without Donor Restrictions Expenses Program Services Maestro Program (77 + 5 + 330) Classical Music Appreciation Program (23 + 12) Professional Program (379 + 500) Total Program Services Supporting Services Management and General (45 + 2 + 22) Fund Raising Total Supporting Services Total Expenses Net Increase in Net Assets without Donor Restrictions Changes in Net Assets with Donor Restrictions Contributions (540 + 250 + 1,200) Net Assets Released from Restrictions Increase in Net Assets with Donor Restrictions Increase in Total Net Assets Net Assets, January 1, 20X5 (320 + 1,100) Net Assets, December 31, 20X5
$800 150 158 1,108 730 1,838
$412 35 879 1,326 69 75
Solution assumes that depreciation does not satisfy any restrictions on resources use.
9 Copyright © 2018 Pearson Education, Inc.
144 1,470 368 1,990 (730) 1,260 1,628 1,420 $3,048
Problem 5 – Additional Journal Entries for a Nongovernmental, Not-for-Profit Organization Transactions: The following selected transactions occurred for a nongovernment, not-for-profit organization. All amounts are in thousands of dollars. 1. Received a contribution of stock to establish an endowment fund. The income from the endowment is unrestricted. The donor had acquired the stock for $23 about 20 years earlier. Its estimated fair value when donated was $250. 2. Pledges receivable at year end were $100, all from pledges received during the year. The pledges are unrestricted and 5% of the pledges are estimated to be uncollectible. The pledges expect to be collected early next year. For questions 3-5, assume that the organization has adopted a policy that restrictions on donations made for capital purposes are met when the capital item is purchased. 3. A cash gift of $200 was received restricted for the purchase of equipment. 4. Equipment of $80 was purchased from the gift restricted for this purpose. 5. Depreciation expense for the year on the equipment purchased is $10. Requirement: Prepare the journal entries for the above transactions.
10 Copyright © 2018 Pearson Education, Inc.
Answers: # Accounts 1 Investments Contribution Revenues with Donor Restrictions – Endowment
Debit 250
Credit
250 2 Pledges Receivable Allowance for Uncollectible Pledges Contribution Revenues with Donor Restrictions – Time Restriction* *The time restriction is implied.
100
3 Cash Contribution Revenues with Donor Restrictions – Equipment
200
4a Equipment Cash
80
4b Reclassifications to Net Assets without Donor Restrictions Reclassifications from Net Assets with Donor Restrictions
80
5 Expenses – Depreciation Accumulated Depreciation
10
5 95
200
80
11 Copyright © 2018 Pearson Education, Inc.
80
10
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 17 Accounting for Colleges and Universities
1. Which of the following statements is true? A. All colleges and universities report under the same GAAP guidelines. B. Private colleges and universities must report using FASB guidance. Public colleges and universities are permitted to follow either the FASB guidance or the GASB guidance. C. Private colleges and universities must report using the FASB guidance. Public colleges and universities must report using GASB guidance. D. Public colleges and universities must report as special purpose governments engaged only in business-type activities. Answer: C Objective: LO 17.6 Describe the principal differences between reporting government and nongovernment not-for-profit colleges and universities. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical Thinking 2. Which measurement focus is used by governmental universities that report as a business-type special-purpose government? A. Cash measurement focus. B. Current financial resources measurement focus. C. Economic resources measurement focus. D. Accrual measurement focus. Answer: C Objective: LO 17.1 Explain why most government colleges and universities choose to report as “business-type only” special-purpose governments. Difficulty Level: Easy Classification: Concept AACSB Category: Application of Knowledge 3. Governmental universities typically report as A. General purpose governments. B. Special-purpose governments engaged in only business-type activities. C. Special-purpose governments engaged in only governmental activities. D. Private sector entities. Answer: B Objective: LO 17.1 Explain why most government colleges and universities choose to report as “business-type only” special-purpose governments. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 4. Jim Catlett establishes a trust that is administered by Mansfield National Bank in the amount of $750,000. Jim has promised that he will donate an additional $50,000 a year to the trust in each of the next 5 years. The income from the trust will go to the state university. How much 1 Copyright © 2018 Pearson Education, Inc.
should the university record as income in the year that the trust is established? A. $1,000,000. B. $750,000 plus the present value of the five $50,000 donations. C. $750,000. D. $0. Answer: D Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Difficult Classification: Concept AACSB Category: Analytical Thinking 5. Which of the following statements is true regarding life income gifts? A. Require the amount of the payment to the beneficiary to vary based on the earnings of the trust. B. Require a fixed-dollar payment to be made annually to a designated recipient. C. Assets are recorded at historical cost when donated. D. Life income gifts are no longer allowed by governmental colleges and universities. Answer: A Objective: LO 17.4 Explain the basic accounting and reporting for a basic split-interest gift agreement. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of Knowledge 6. A government university’s tuition and fees at the standard rates are $20 million. Scholarship allowances of $1,500,000 are granted to students by the university and tuition waivers for employees granted under the university’s tuition waiver policy are $100,000. Uncollectible accounts are expected to equal $150,000. The amount of tuition and fees revenues that the university should report is: A. $18,250,000. B. $18,350,000. C. $18,500,000. D. $20,000,000. Answer: B Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical Thinking 7. Charges for tuition for the current semester of a local college totaled $300,000. Academic scholarships were awarded to students in the amount of $25,000 and tuition waivers were given to children of employees in the amount of $10,000. The college should report A. Revenues of $265,000 and Expenses of $35,000 2 Copyright © 2018 Pearson Education, Inc.
B. Revenues of $275,000 and $10,000 in Expenses. C. Revenues of $290,000 and $25,000 in Expenses. D. Revenues of $300,000 and Expenses of $35,000. Answer: B Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical Thinking 8. A college has a June 30 fiscal year end. Assume that tuition revenue for the summer session that begins June 1, 20X8, and ends August 31, 20X8 totals $270,000. Tuition is billed and is due at the beginning of the session term. How much revenue should be reported as of the fiscal year ended June 30, 20X8? A. $270,000. B. $180,000. C. $135,000. D. $90,000. Answer: D Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical Thinking 9. Tuition revenues of government colleges and universities are reported A. Net of bad debts, scholarships and fellowships. B. Net of bad debts. C. Net of scholarships and fellowships. D. At the gross amount of the standard tuition and fees. Answer: A Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 10. Government colleges and universities must recognize private donations received with purpose restrictions as A. Deferred revenue until the restrictions are met. B. Operating revenues. C. Nonoperating revenues. D. None of the above. Answer: C 3 Copyright © 2018 Pearson Education, Inc.
Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 11. Purchase of capital assets by government colleges and universities engaged only in businesstype activities would be reported as A. Expenditures. B. Transfers to capital assets. C. Reclassifications. D. Increases in capital assets. Answer: D Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 12. A public college was the recipient of an annuity gift. The elderly alumnus donated cash of $110,000 and investments of $610,000 with the restriction that the college pays them a sum of $50,000 per year for five years. If the annuity payable has been actuarially valued at $305,000, the college should report revenues upon receipt of the gift in the amount of A. $0. B. $415,000. C. $470,000. D. $720,000. Answer: A Objective: LO 17.4 Explain the basic accounting and reporting for a basic split-interest gift agreement. Difficulty Level: Difficult Classification: Concept AACSB Category: Analytical Thinking 13. Which type of gifts would normally not be reported by a government university? A. Split-interest annuity gifts. B. Split-interest life income gifts. C. Trust held by others. D. Endowment gifts. Answer: C Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Difficult Classification: Concept 4 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of Knowledge 14. A government university that chooses to report as a business-type special purpose government, purchases land for a planned dormitory by securing a ten year bank loan. The entry to record the purchase and procurement of funding would include A. A debit to assets. B. A credit to fund balance. C. A debit to expenditures. D. A credit to other financing sources. Answer: A Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 15. A wealthy alumnus donated land to be used for a new arts and sciences building at the local state university. The land has a fair market value of $250,000. The donor purchased the land ten years ago at a cost of $75,000. The entry to record the receipt of the donation would be
A. Land ............................................................................ Capital Contributions .............................................
Debit $250,000
Credit $250,000
B. Land ............................................................................ Capital Contributions .............................................
$75,000
C. Land ............................................................................ Special Item ............................................................
$250,000
D. Land ............................................................................ Special Item ............................................................
$75,000
$75,000
$250,000
$75,000
Answer: A Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 16. Stock valued at $15,000 was donated to a college. The donor stipulated that the stock was to be immediately sold and the proceeds included in donations to the college's capital campaign. The entry to record the receipt of the gift would be
5 Copyright © 2018 Pearson Education, Inc.
A. Restricted Assets – Capital Campaign ........................ Revenue .................................................................
Debit $15,000
Credit $15,000
B. Restricted Assets – Capital Campaign ........................ Deferred Revenues .................................................
$15,000
C. Investments ................................................................. Deferred Revenues .................................................
$15,000
D. Investments ................................................................. Special Item ............................................................
$15,000
$15,000
$15,000
$15,000
Answer: A Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 17. A university's endowment fund has investments that were purchased for $400,000. As of the end of the fiscal year, the fair value of the investments decreased by $33,000. What journal entry is required to reflect the change in the fair market value of the investments?
A. Loss on Endowment Investments ............................... Endowment Investments ........................................
Debit $33,000
Credit $33,000
B. Interest Expense .......................................................... Endowment Investments ........................................
$33,000
C. Revenues—Investment Income .................................. Endowment Investments ........................................
$33,000
D. Interest Expense .......................................................... Deferred Revenues .................................................
$33,000
$33,000
$33,000
$33,000
Answer: C Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 18. If a government university provides loans to qualifying students for tuition and fees, the 6 Copyright © 2018 Pearson Education, Inc.
loans should be reported on the statement of cash flows as A. Operating activities. B. Noncapital financing activities. C. Capital and related financing activities. D. Investing activities. Answer: A Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 19. A public university received a restricted donation from one of their trustees. The donation was to be used to pay debt service costs for one year on the new athletic field. When received, the donation will be reported on the statement of cash flows as A. Operating activities. B. Noncapital financing activities. C. Capital and related financing activities. D. Investing activities. Answer: C Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 20. Which financial statements are required for government colleges and universities engaged only in business-type activities? A. Statement of net position; statement of revenues, expenditures, and other changes; and statement of cash flows. B. Statement of net position; statement of revenues, expenses, and changes in net position; and statement of cash flows. C. Statement of net position; statement of revenues, expenses, and changes in net position; and statement of changes in net position. D. Statement of net position; statement of activities; and statement of cash flows. Answer: B Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 21. The statement of net position of government colleges and universities engaged only in business-type activities would not report which component of net position? 7 Copyright © 2018 Pearson Education, Inc.
A. Unrestricted net position. B. Net position with donor restrictions. C. Net investment in capital assets. D. Restricted net position. Answer: B Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 22. The balance sheet of nongovernment, not-for-profit colleges and universities would report which component of net assets? A. Net assets without donor restrictions. B. Restricted net position. C. Net investment in capital assets. D. Nonspendable net assets. Answer: A Objective: LO 17.6 Describe the principal differences between reporting government and nongovernment not-for-profit colleges and universities. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 23. Government colleges and universities engaged only in business-type activities would report state appropriations as A. Operating revenues. B. Special items. C. Other financing sources. D. Nonoperating revenues. Answer: D Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 24. A state university assessed its students $2,000,000 of tuition and fees. However, only $1,500,000 was expected to be collected because of an estimated uncollectible amount of $25,000, scholarship allowances of $400,000, and tuition waivers to staff of $75,000. What amount of net tuition and fees revenue should be reported in the statement of revenues, expenses and changes in net position? A. $1,500,000. B. $1,575,000. C. $1,600,000. 8 Copyright © 2018 Pearson Education, Inc.
D. $2,000,000. Answer: B Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical Thinking 25. A government university received a cash donation $1,000,000 to create an endowment. The income of the endowment can be used to support any activity of the university. In the balance sheet, the $1,000,000 endowment should be included in which component of net position? A. Unrestricted net position. B. Restricted — nonexpendable net position. C. Nonspendable net position. D. Permanently restricted net position. Answer: B Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 26. Chase Foundation establishes a $1,000,000 trust for a government university. The local bank is appointed as trustee of the fund. The income of the trust can be used to support any activity of the university. In the university's statement of net position, the $1,000,000 trust should be included in which component of net position? A. Not reported. B. Unrestricted net position. C. Restricted — nonexpendable net position. D. Permanently restricted net position. Answer: A Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Difficult Classification: Application AACSB Category: Application of Knowledge 27. The statement of cash flows of government colleges and universities engaged only in business-type activities would report all of the following sections except: A. Investing. B. Noncapital financing. C. Capital and related financing. D. Financing. Answer: D 9 Copyright © 2018 Pearson Education, Inc.
Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 28. A state college receives a life income gift of $200,000 from an individual. The individual is to receive the earnings on the assets until her death, at which time any remaining resources may be used for any purpose of the college. The present value of the estimated payments to the individual is $150,000. How much revenues should the college report upon receipt of this gift? A. $0. B. $20,000. C. $50,000. D. $200,000. Answer: A Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Difficult Classification: Concept AACSB Category: Analytical Thinking 29. Which of the following classifications of net position likely would be found on the statement of net position of a governmental university that reports as a business-type activity? A. Temporarily restricted net position. B. Unrestricted net position. C. Net position without donor restrictions. D. Nonspendable net position. Answer: B Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 30. A government university collected unrestricted student fees of $200,000 and fees restricted for technology of $400,000 in the current academic year. A. The full $600,000 should be reported as revenues for the academic year. B. $200,000 should be reported as revenues and $400,000 should be reported as unearned revenues C. $200,000 should be reported as revenues and $200,000 as deferred revenues. D. $400,000 should be reported as unearned revenues and $200,000 as deferred revenues. Answer: A Objective: LO 17.3 Prepare journal entries consistent with government college and university 10 Copyright © 2018 Pearson Education, Inc.
financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 31. A government college received a $2 million federal grant restricted to research on developing a process for synthesizing a stable triple helix. $500,000 of qualifying research costs were incurred during the year. The college should report: A. Grant revenues of $2 million. B. Grant revenues of $500,000 and a liability for unearned grant revenues of $1.5 million. C. Grant revenues of $500,000 and deferred inflows of $1.5 million. D. Unearned grant revenues of $2 million until the research is completed. Answer: B Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical Thinking 32. A state university receives an appropriation for from the state for capital projects of $5 million and a state appropriation for other purposes of $20 million. How should the amounts received be reported in the university’s statement of revenues, expenses, and changes in net position? A. Operating revenues of $20 million and nonoperating revenues of $5 million. B. Operating revenues of $20 million and capital contributions of $5 million. C. Nonoperating revenues of $20 million and capital contributions of $5 million. D. Nonoperating revenues of $25 million. Answer: C Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical Thinking 33. Cash collected by a government university from tuition and fees should be reported in the statement of cash flows as A. Operating activities. B. Noncapital financing activities. C. Capital and related financing activities. D. Investing activities. Answer: A Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. 11 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 34. Fees collected from students but restricted to finance construction of a student recreation facility should be reported in the statement of cash flows as: A. Operating activities. B. Noncapital financing activities. C. Capital and related financing activities. D. Investing activities. Answer: A Objective: LO 17.3 Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 35. Management’s discussion and analysis must be reported by A. All colleges and universities. B. Nongovernment not-for-profit colleges and universities. C. All government colleges and universities. D. Only government colleges and universities that report as special purpose governments engaged only in business-type activities. Answer: C Objective: LO 17.6 Describe the principal differences between reporting government and nongovernment not-for-profit colleges and universities. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 36. Which financial statements are required for nongovernment, not-for-profit colleges and universities? A. Balance sheet, statement of revenues, expenditures, and other changes, and statement of cash flows. B. Balance sheet, statement of revenues, expenses, and changes in net assets, and statement of cash flows. C. Balance sheet, statement of revenues, expenses, and changes in net assets, and statement of changes in net assets. D. Balance sheet, statement of activities, and statement of cash flows. Answer: D Objective: LO 17.6 Describe the principal differences between reporting government and nongovernment not-for-profit colleges and universities. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 12 Copyright © 2018 Pearson Education, Inc.
37. The statement of cash flows of nongovernment, not-for-profit colleges and universities would report which category of cash flows? A. Investing. B. Noncapital financing. C. Capital and related financing. D. Nonoperating financing. Answer: A Objective: LO 17.6 Describe the principal differences between reporting government and nongovernment not-for-profit colleges and universities. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge
13 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 17
Problem 1 – Government College Journal Entries Below are selected transactions for the Lake County Community College (LCCC). LCCC reports as a special government engaged only in business-type activities. All amounts are in thousands of dollars. Transactions: 1. Tuition and fees charged for the fall 20X3 semester totaled $2,800. Of this, $98 was waived as a result of scholarship allowances, and another $15 is expected to be uncollectible. 2. The college received a reimbursement grant restricted to research on composite materials, $300. 3. Salaries paid to researchers in the Composite Materials Lab of $40 qualified under the research grant received. 4. The college purchased equipment for use in its building and grounds maintenance department at a cost of $35. Unrestricted resources were used for this purpose. 5. The college paid $30 interest and $15 principal on one of its mortgages. Requirement: Prepare the necessary journal entries to record these transactions.
1 Copyright © 2018 Pearson Education, Inc.
Answers: # Accounts 1 Accounts Receivable Revenue Deduction – Scholarship Allowances Revenues – Tuition and Fees Allowance for Uncollectible Accounts
Debit 2,702 98
Credit
2,785 15
2 Cash – Restricted for Specific Operating Purpose Unearned Revenue – Grants
300
3a Expenses – Educational and General Cash – Restricted for Specific Operating Purpose
40
3b Unearned Revenues – Grants Revenues – Grants
40
4 Equipment Cash
35
5 Expenses – Educational and General (Interest) Mortgage Payable Cash
30 15
300
40
40
35
2 Copyright © 2018 Pearson Education, Inc.
45
Problem 2 – Governmental University Journal Entries Selected transactions of Shelbyville State University are listed below. The university reports as a special purpose government engaged in only business-type activities. All amounts are in thousands of dollars. Transactions: 1. Tuition and fees assessed total $4,500; 70% is collected immediately; scholarships allowances are granted for $120; and $45 is expected to prove uncollectible. 2. Revenues collected from sales and services of the university bookstore, an auxiliary enterprise, were $275. 3. Salaries and wages paid, $1,500; $62 of this was for employees of the university bookstore. 4. Tuition remissions were granted in the amount of $35 for employees. 5. Mortgage payments totaled $520; $290 of this was for interest. 6. Restricted contributions for the Master of Accountancy (MAcc) program were received, $250. 7. Expenditures for the MAcc program were incurred and paid, $230. 8. Equipment was purchased from unrestricted resources, $34. Requirement: Prepare the necessary journal entries to record these transactions.
3 Copyright © 2018 Pearson Education, Inc.
Answers: # Accounts 1 Cash (4,500 × 70%) Accounts Receivable Revenue Deduction – Scholarship Allowances Revenues – Tuition and Fees Allowance for Uncollectible Accounts
Debit 3,150 1,230 120
Credit
4,455 45
2 Cash Revenues – Auxiliary Enterprises
275
3 Expenses – Educational and General Expenses – Auxiliary Enterprises Cash
1,438 62
4 Expenses – Educational and General Accounts Receivable
35
5 Mortgage Payable Expenses – Educational and General Cash
230 290
6 Cash Restricted for the MAcc Program Revenue – Private Gifts
250
7 Expenses – Educational and General Cash Restricted for the MAcc Program
230
8 Equipment Cash
34
275
1,500
35
520
250
230
34
4 Copyright © 2018 Pearson Education, Inc.
Problem 3 The following information was derived from the accounts and records of Mockingbird State University for 20X3. All amounts are in thousands of dollars. Tuition and fees Total assessed....................................................................................................... Expected uncollectible ......................................................................................... Appropriations State...................................................................................................................... Auxiliary enterprises Sales ..................................................................................................................... Salaries ................................................................................................................. Other expenses ..................................................................................................... Endowment income Restricted to research ........................................................................................... Private gifts and grants Restricted to student scholarships ........................................................................ Restricted to plant expansion ............................................................................... Unrestricted .......................................................................................................... Expenses: Instruction ............................................................................................................ Research ............................................................................................................... Student services ................................................................................................... Institutional support ............................................................................................. Operation of plant ................................................................................................ Mortgage payment ($10,000 interest) ........................................................................ Scholarships allowances ............................................................................................ Net positon, January 1, 20X3 .....................................................................................
$4,000 80 800 500 280 140 370 0,200 2,000 180 3,100 600 220 190 180 15 200 3,827
Mockingbird State University reports as a special purpose government engaged only in businesstype activities. Requirement: Prepare a statement of revenues, expenses, and changes in net position for Mockingbird State University for 20X3.
5 Copyright © 2018 Pearson Education, Inc.
Answer: Mockingbird State University Statement of Revenues, Expenses, and Changes in Net Position For the Year Ended December 31, 20X3
Revenues: Operating Revenues Tuition and Fees (net of scholarship allowances of $200 and uncollectible accounts of $80) Auxiliary Enterprise Sales Total Operating Income Expenses: Operating Expenses Educational and General Instruction Research Student Services Institutional Support Operation of Plant Auxiliary Enterprise (280 + 140) Total Operating Expenses Operating Income (Loss) Nonoperating Income (Expenses) State Appropriations Gifts (200 + 180) Investment Income Interest Expense Net Nonoperating Revenues Income Before Other Revenues, Expenses, and Transfers Capital Gifts Increase in Net Position Net Position, January 1, 20X3 Net Position, December 30, 20X3
6 Copyright © 2018 Pearson Education, Inc.
$3,720 500 4,220
$3,100 600 220 190 180
4,290 420 4,710 (490)
800 380 370 (10) 1,540 1,050 2,000 3,050 3,827 $6,877
Problem 4 – College & University Annuity Gift Transactions Dogwood State University is a government university that reports as a special government engaged only in business-type activities. Listed below are selected transactions that affect its annuity gifts. All amounts are in thousands of dollars. Transactions: 1. At the beginning of the year, the college receives cash of $200 with a stipulation that the donor be paid $25 each year for 10 years. The present value of the payments to the donor is $175. 2. Investments in the amount of $170 are purchased. 3. Investment income of $20 is earned and received during the year. 4. Payment of $25 is made to the donor at year end. 5. The present value of the expected payments to the donor was $162 at year end. Requirement: Prepare the necessary journal entries to record these transactions.
7 Copyright © 2018 Pearson Education, Inc.
Answers: # Accounts 1 Cash Annuities Payable Deferred Inflows – Annuity Gifts
Debit
Credit 200 175 25
2 Investments Cash
170
3 Cash Deferred Inflows – Annuity Gifts
20
4 Annuities Payable Cash
25
5 Deferred Inflows – Annuity Gifts Annuities Payable ($162 – ($175 – $25))
12
170
20
25
8 Copyright © 2018 Pearson Education, Inc.
12
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 18 Accounting for Health Care Entities
1. A county hospital's patient services charges for the year were $3,000,000. Of this amount, 25% is deemed to be uncollectible, 5% is considered to be charity services after the services were provided, and 10% will be reduced by contractual adjustments with third-party providers. How much related to these items will be reported as expense in the external financial statements? A. $0. B. $300,000. C. $750,000. D. $1,200,000. Answer: A Objective: LO 18.3 Prepared journal entries for hospital transactions. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical Thinking 2. Hospitals disclose the level of charity services provided by disclosing A. The amount of revenues foregone in providing the services B. The direct costs of providing charity services C. Both the direct and indirect costs of providing charity services D. The quantities and types of charity services provided Answer: C Objective: LO 18.2 Account for unique hospital revenue sources such as patient-service revenues. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of Knowledge 3. The measurement focus used by governmental hospitals is the A. Cash measurement focus. B. Current financial resources measurement focus. C. Economic resources measurement focus. D. Accrual measurement focus. Answer: C Objective: LO 18.1 Explain the basic internal fund structure used by many health care entities and the broad approach to reporting government health care entities. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 4. Hospital operating revenues include all of the following except A. Investment income B. Patient service revenue C. Premium fees 1 Copyright © 2018 Pearson Education, Inc.
D. Cafeteria sales Answer: A Objective: LO18.2 Account for unique hospital revenue sources such as patient-service revenues. Difficulty Level: Easy Classification: Concept AACSB Category: Application of Knowledge 5. Patient service revenues of a government hospital should be reported in the statement of revenues, expenses, and changes in net position A. At the standard rates charged for the service regardless of bad debts, contractual adjustments, policy discounts, etc. B. Net of bad debts, contractual adjustments, policy discounts, and charity services. C. Net of contractual adjustments, policy discounts, charity services, but not net of bad debts. D. Net of bad debts, contractual adjustments, policy discounts, etc., but not net of charity services. Answer: B Objective: LO18.2 Account for unique hospital revenue sources such as patient-service revenues. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 6. Premium fee revenues should be recognized as A. Revenue in the period the premium was received. B. Revenue in the period covered by the premium. C. Deferred revenue until the services are actually provided. D. Revenue only if services with standard charges equal to or greater than the premium for the period are provided in the period. Answer: B Objective: LO18.2 Account for unique hospital revenue sources such as patient-service revenues. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of Knowledge 7. For external financial reporting purposes, charity services are reported as A. Expenses. B. Revenues. C. Deductions from revenues. D. Nonoperating gains and losses. Answer: C Objective: LO18.2 Account for unique hospital revenue sources such as patient-service revenues. Difficulty Level: Moderate Classification: Concept 2 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of Knowledge 8. Which of the following statements about services contributed to a government hospital is true? A. Government hospitals may report contributed services as operating revenues. B. Government hospitals are permitted, but not required, to recognize contributed services regardless of the value of the services. C. Government hospitals are required to report contributed services at their fair market value. D. Government hospitals are required to report contributed services as gains. Answer: B Objective: LO18.2 Account for unique hospital revenue sources such as patient-service revenues. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 9. Welby County Hospital entered into a capital lease to purchase a new MRI machine. The capitalizable cost of the equipment was $400,000 and the hospital made a $40,000 down payment. The entry required when the asset was acquired was
A. Equipment ................................................................... Other Financing Sources – Capital Lease .............. Cash ........................................................................
Debit $400,000
Credit $360,000 40,000
B. Expenditures ............................................................... Other Financing Sources – Capital Lease .............. Cash ........................................................................
$400,000
C. Equipment ................................................................... Expenditures ............................................................... Lease Payable ......................................................... Cash ........................................................................
$360,000 40,000
D. Equipment ................................................................... Lease Payable ......................................................... Cash ........................................................................
$400,000
$360,000 40,000
$360,000 40,000
$360,000 40,000
Answer: D Objective: LO 18.3 Prepared journal entries for hospital transactions. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 10. County General Hospital estimates uncollectible accounts to be $112,000 and contractual adjustments to be $79,000. The entry needed to record these estimates would be 3 Copyright © 2018 Pearson Education, Inc.
A. Expenses ..................................................................... Allowance for Doubtful Accounts .........................
Debit $191,000
Credit $191,000
B. Expenses ..................................................................... Revenue Deductions – Contractual Adjustments ....... Allowance for Doubtful Accounts ......................... Allowance for Contractual Adjustments................
$112,000 79,000
C. Revenue Deductions – Uncollectible Accounts ......... Expenses ..................................................................... Allowance for Doubtful Accounts ......................... Allowance for Contractual Adjustments................
$112,000 79,000
D. Revenue Deductions – Uncollectible Accounts ......... Revenue Deductions – Contractual Adjustments ....... Allowance for Doubtful Accounts ......................... Allowance for Contractual Adjustments................
$112,000 79,000
$112,000 79,000
$112,000 79,000
$112,000 79,000
Answer: D Objective: LO 18.3 Prepared journal entries for hospital transactions. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 11. If a government hospital receives unrestricted donations that are not a part of the hospital's major ongoing operations, those donations are classified on the statement of revenues, expenses, and changes in net position as A. An operating revenue. B. An operating gain. C. An other financing source. D. A nonoperating gain. Answer: D Objective: LO18.2 Account for unique hospital revenue sources such as patient-service revenues. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 12. Hospital equipment that originally cost $150,000 was sold for $60,000. The net book value of the equipment at the date of sale was $75,000. The hospital should report A. An operating loss of $15,000. B. A nonoperating loss of $15,000. C. Expenses of $75,000. D. Other financing sources of $60,000. Answer: B Objective: LO 18.3 Prepared journal entries for hospital transactions. 4 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Moderate Classification: Application AACSB Category: Analytical Thinking 13. The fair market value of a government hospital's investments that are restricted for future capital needs increased by $7,000. As of the end of the fiscal year, A. Nonoperating gains will increase by $7,000. B. General revenue will increase by $7,000. C. This change in market value will not be reported unless the assets are sold. D. Other financing sources will increase by $7,000. Answer: A Objective: LO 18.3 Prepared journal entries for hospital transactions. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 14. County Medical Center received unrestricted contributions of $22,000. The hospital used the contributions to support general services. These contributions would be reported on the statement of cash flows as A. Operating activities. B. Noncapital financing activities. C. Capital and related financing activities. D. Investing activities. Answer: B Objective: LO 18.3 Prepared journal entries for hospital transactions. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 15. A government hospital would not report which category of net position: A. Specific purpose net position. B. Unrestricted net position. C. Restricted net position. D. Net investment in capital assets. Answer: A Objective: LO 18.4 Prepare government hospital financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 16. Restricted assets of a nongovernment hospital are used to account for resources A. Restricted by donors or grantors. B. Restricted by bond and other contracts. C. Restricted by the hospital board of directors. D. Restricted by management. Answer: A Objective: LO18.2 Account for unique hospital revenue sources such as patient-service 5 Copyright © 2018 Pearson Education, Inc.
revenues. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 17. A government hospital board of directors voted to set aside $3,000,000 of investments for future hospital expansion. In the hospital balance sheet, these resources should be reported. A. Unrestricted net position. B. Restricted net position. C. Net investment in capital asset. D. Permanently restricted net position. Answer: A Objective: LO 18.4 Prepare government hospital financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical Thinking 18. Which of the following statements of a government hospital is not required? A. Statement of cash flows. B. Statement of net position. C. Statement of revenues, expenses and changes in net position. D. Statement of changes in fund balances. Answer: D Objective: LO 18.4 Prepare government hospital financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 19. A government hospital received a cash donation restricted for construction of a new wing to the hospital. How should the donation be reported be reported in the statement of cash flows? A. Cash inflows from operating activities. B. Cash inflows from noncapital financing activities. C. Cash inflows from capital and related financing activities. D. Cash inflows from investing activities. Answer: C Objective: LO 18.4 Prepare government hospital financial statements. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical Thinking 20. In the statement of revenues, expenses and changes in net position, expenses of government hospitals should be reported by A. Natural classifications. B. Department. C. Function. D. Either by natural classification or by function. Answer: D 6 Copyright © 2018 Pearson Education, Inc.
Objective: LO 18.4 Prepare government hospital financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 21. Dublin State Hospital would have earned $3,000,000 of patient service revenue under its established rate structure for the year. However, it does not expect to collect this amount due to charity allowances of $75,000, discounts to third-party payers of $200,000, and an estimated uncollectible amount of $50,000. For the year, how much should Dublin State Hospital report as patient service revenue? A. $3,000,000. B. $2,800,000. C. $2,725,000. D. $2,675,000. Answer: D Objective: LO18.2 Account for unique hospital revenue sources such as patient-service revenues. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Application of Knowledge 22. The standard charges for all services provided by a government hospital during the year were $5,000,000. The charges included charges for charity services valued at $100,000. They were reduced by contractual adjustments related to insurance contracts of $400,000. Uncollectible amounts related to these services are estimated at $150,000. The hospital must report net patient services revenues and expenses, respectively, of A. $4,900,000 and $550,000 B. $4,500,000 and $150,000 C. $4,750,000 and $400,000 D. $4,350,000 and $0 Answer: D Objective: LO18.2 Account for unique hospital revenue sources such as patient-service revenues. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Application of Knowledge 23. Which item is reported significantly differently by government hospitals than by nongovernment, not-for-profit hospitals? A. Patient service revenues. B. Net position. C. Assets limited as to use. D. Charity services. Answer: B Objective: LO 18.5 Understand the key differences between accounting and reporting for government and nongovernment not-for-profit hospitals and prepare nongovernment not-forprofit hospital financial statements. 7 Copyright © 2018 Pearson Education, Inc.
Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 24. Which of the following items are not reported in much the same manner by government hospitals and nongovernment not-for-profit hospitals? A. Patient service revenues. B. Donated professional services. C. Premium fee revenues. D. Cafeteria sales. Answer: B Objective: LO 18.5 Understand the key differences between accounting and reporting for government and nongovernment not-for-profit hospitals and prepare nongovernment not-forprofit hospital financial statements. Difficulty Level: Difficult Classification: Concept AACSB Category: Analytical Thinking 25. Sources of generally accepted accounting principles for government hospitals include A. AICPA Audit and Accounting Guide, Health Care Entities. B. FASAB standards. C. FASB not-for-profit standards. D. GAO Yellow Book. Answer: A Objective: LO 18.5 Understand the key differences between accounting and reporting for government and nongovernment not-for-profit hospitals and prepare nongovernment not-forprofit hospital financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 26. Government hospitals and nongovernment not-for-profit hospitals report all of the following in the same manner except A. Patient service revenues B. Rent revenues C. Provision for bad debts D. Charity services Answer: C Objective: LO 18.5 Understand the key differences between accounting and reporting for government and nongovernment not-for-profit hospitals and prepare nongovernment not-forprofit hospital financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 27. Which of the following are reported by both government and nongovernment, not-for-profit hospitals? 8 Copyright © 2018 Pearson Education, Inc.
A. Bad debt expense. B. Restricted net position. C. Investment income. D. Unrestricted net position. Answer: C Objective: LO 18.5 Understand the key differences between accounting and reporting for government and nongovernment not-for-profit hospitals and prepare nongovernment not-forprofit hospital financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 28. Which of the following are reported for government hospitals but not for nongovernment, not-for-profit hospitals? A. Capital leases. B. Deferred inflows of resources. C. Net patient service revenues. D. Premium fees. Answer: B Objective: LO 18.5 Understand the key differences between accounting and reporting for government and nongovernment not-for-profit hospitals and prepare nongovernment not-forprofit hospital financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 29. A nongovernment not-for-profit hospital presents all of the following financial statements, except A. A balance sheet. B. A statement of operations. C. A statement of activities. D. A statement of cash flows. Answer: C Objective: LO 18.5 Understand the key differences between accounting and reporting for government and nongovernment not-for-profit hospitals and prepare nongovernment not-forprofit hospital financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 30. A nongovernment not-for-profit hospital presents the following categories on its statement of cash flows, except A. Cash flows from operating activities. B. Cash flows from investing activities. C. Cash flows from noncapital financing activities. D. Cash flows from financing activities. Answer: C 9 Copyright © 2018 Pearson Education, Inc.
Objective: LO 18.5 Understand the key differences between accounting and reporting for government and nongovernment not-for-profit hospitals and prepare nongovernment not-forprofit hospital financial statements. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 31. Nongovernment not-for-profit hospitals report assets limited as to use for A. Assets limited to a specific use by donors, by contracts, or by the hospital board. B. Assets limited to a specific use by contracts or by the hospital board. C. Assets limited to a specific use by contracts only. D. Assets limited to a specific use by the hospital board only. Answer: B Objective: LO 18.5 Understand the key differences between accounting and reporting for government and nongovernment not-for-profit hospitals and prepare nongovernment not-forprofit hospital financial statements. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of Knowledge
10 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 18
Problem 1 – Government Hospital Journal Entries Listed below are selected transactions from the City of Watertown Hospital. All amounts are in thousands of dollars. Transactions: 1. The hospital provided patient services during the year that had standard charges of $12,500. Contractual adjustments awarded to patients under contracts with insurance companies and under government programs totaled $2,000. Uncollectible accounts are expected to be approximately $800. 2. Nursing and other professional salaries paid during the year totaled $2,300. 3. Depreciation for the year was $500 for the building and $900 for equipment. 4. Medical supplies costing $2,600 were purchased during the year. The inventory of supplies increased from $200 at the beginning of the year to $300 at year end. 5. The hospital received a $4,000 to be used for the purchase of specialized diagnostic equipment. 6. The hospital received a $500 gift to be used for providing specialized coronary care services to patients. 7. The hospital purchased $2,000 of diagnostic equipment with the donation received for that purpose. 8. The hospital incurred $400 of operating expenses for the care of coronary patients consistent with the purposes of that donation. 9. The hospital issued $5,000 of 20-year, 8% bonds at par at mid-year to finance a new addition for the hospital. 10. The hospital estimates that malpractice claims against the hospital of $400 ultimately will result in liabilities of $100 that will have to be paid—but probably will not have to be paid during the next fiscal year. Requirement: Prepare the journal entries required of a government hospital for these transactions.
1 Copyright © 2018 Pearson Education, Inc.
Answers: # Accounts 1a Accounts Receivable Revenues – Patient Service Charges
Debit 12,500
12,500
1b Revenue Deductions – Contractual Adjustments Revenue Deductions – Provision for Uncollectible Accounts Accounts Receivable Allowance for Uncollectible Receivables and Third-Party Contractuals
2,000 800
2 Expenses – Nursing Services Cash
2,300
3 Expenses – Depreciation – Building Expenses – Depreciation – Equipment Accumulated Depreciation – Building Accumulated Depreciation – Equipment
2,000 800
2,300 500 900 500 900
4a Medical Supplies Inventory Cash
2,600
4b Expenses – Medical Supplies (200 + 2,600 – 300) Medical Supplies Inventory
2,500
5 Cash – Restricted for Plant Replacement and Expansion Revenues – Capital Contributions
4,000
6 Cash – Restricted for Coronary Care Program Nonoperating Gains – Contributions 7 Equipment Cash – Restricted for Plant Replacement and Expansion 8 Expenses – Nursing Services Cash – Restricted for Coronary Care Program 9a Cash Bonds Payable
Credit
2,600
2,500
4,000 500 500 2,000 2,000 400 400 5,000 5,000
9b Year-end Adjustment Expenses – Interest (5,000 × 8% × 6/12) Interest Payable
2 Copyright © 2018 Pearson Education, Inc.
200 200
# Accounts 10 Expenses – Malpractice Claims Claims and Judgments Payable
3 Copyright © 2018 Pearson Education, Inc.
Debit 100
Credit 100
Problem 2 – Hospital Reporting Discussion Questions Briefly answer the following questions on hospital reporting: 1. Identify the financial statements that must be presented for a government hospital. 2. How are the financial statements for a government hospital different from the financial statements for a not-for-profit hospital?
4 Copyright © 2018 Pearson Education, Inc.
Answers: 1. The required statements for a government hospital are: Statement of Net Position Statement of Revenues, Expenses, and Changes in Net Position Statement of Cash Flows 2. Although there are many similarities among the financial statements for a government hospital and a not-for-profit hospital, the key differences are: Net assets for not-for-profit hospitals are classified as net assets without donor restrictions and net assets with donor restrictions. Net position for government hospitals are classified as unrestricted, restricted, and net investment in capital assets. Not-for-profit hospitals report a statement of operations and a statement of changes in net assets. Government hospitals report a statement of revenues, expenses, and changes in net position. Not-for-profit hospitals report changes in both categories of net assets separately. Government hospitals report only changes in total net position. Not-for-profit hospitals report net assets released from restrictions. Government hospitals do not report net assets released from restrictions. Not-for-profit hospitals follow FASB cash flow statement guidance (three sections). Not-for-profit hospitals may prepare the statement using either the indirect method or the direct method. Government hospitals follow GASB cash flow statement guidance (four sections). Government hospitals must prepare the statement using the direct method. Government hospitals defer revenue recognition on reimbursement grants until qualifying costs are incurred. Nongovernment, not-for-profit hospitals do not.
5 Copyright © 2018 Pearson Education, Inc.
Problem 3 – Government Hospital Financial Reporting The following selected information is taken from the accounting records of the Jackson County Hospital for fiscal year 20X0. All accounts have a normal balance and are listed in alphabetical order. Also, all amounts are in thousands of dollars. Administrative expenses ............................................................................................ Cafeteria sales ............................................................................................................ Charity services (at gross amounts) .......................................................................... Contractual adjustments ............................................................................................. Depreciation expense—Building ............................................................................... Depreciation expense—Other .................................................................................... Estimated uncollectible accounts ............................................................................... Federal grant restricted for heart research (all eligibility requirements met) ............ Fiscal service expenses .............................................................................................. Gain on sale of capital assets ..................................................................................... General services expenses.......................................................................................... Gross patient service charges ..................................................................................... Income from investments of endowment—donor restricted to heart research .......... Other professional services expense .......................................................................... Net investment in capital assets, January 1 ................................................................ Nursing services expenses ......................................................................................... Proceeds from bond issue for building addition ........................................................ Restricted net position, January 1 .............................................................................. State appropriations—capital ..................................................................................... State appropriations—operating ................................................................................ Unrestricted contributions .......................................................................................... Unrestricted net position, January 1...........................................................................
6 Copyright © 2018 Pearson Education, Inc.
$
440 440 500 1,100 1,400 2,740 710 1,300 300 75 1,100 18,000 870 890 15,000 8,000 22,000 3,200 700 500 350 9,000
Answer: Jackson County Hospital Statement of Revenues, Expenses, and Changes in Net Position For the Year Ended December 31, 20X0
Net Patient Service Revenues* Other Revenues: Cafeteria Sales Total Operating Revenues Expenses: Nursing Services Other Professional Services General Services Fiscal Services Administrative Depreciation (1,400 + 2,740)
$15,690 440 16,130
$8,000 890 1,100 300 440 4,140
Operating Income
14,870 1,260
Nonoperating Gains and (Losses): State Appropriations – Operating Federal Grants Investment Income Contributions Gain on Sale of Capital Assets Income Before Other Revenues, Expenses, and Transfers State Appropriations – Capital Change in Net Position Net Position, January 1, 20X0** Net Position, December 31, 20X0
500 1,300 870 350 75
3,095 4,355 700 5,055 27,200 $32,255
*Calculations: Patient service charges ($18,000) less charity service ($500) less contractual adjustments ($1,100) less uncollectible accounts ($710). **Calculations: Net investment in capital assets, January 1 ($15,000) plus Restricted net position, January 1 ($3,200) plus Unrestricted net position, January 1 ($9,000).
7 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 19 Federal Government Accounting
1. Who has responsibility to develop and recommend accounting and financial reporting principles for the federal government? A. Federal Accounting Standards Advisory Board. B. Financial Accounting Standards Board. C. Governmental Accounting Standards Board. D. Government Accountability Office. Answer: A Objective: LO 19.1 Describe the federal financial management environment, including the roles and responsibilities of various federal organizations. Difficulty Level: Easy Classification: Concept AACSB Category: Application of Knowledge 2. Federal budgetary authority has been exceeded in the following situations except A. When a commitment has occurred within an agency. B. An apportionment exceeds an appropriation. C. An obligation exceeds an allotment. D. An expended appropriation exceeds an apportionment. Answer: A Objective: LO 19.2 Explain the basic budgetary process and terminology used by the federal government. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 3. Cumulative results of operations is comprised of A. Unexpended appropriations and earmarked funds. B. Earmarked and non-earmarked funds. C. Expended appropriations and unexpended appropriations. D. Increases in appropriation authority less expended appropriations and withdrawal of unexpended or unobligated appropriation authority. Answer: B Objective: LO 19.3 Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole. Difficulty Level: Difficult Classification: Concept AACSB Category: Application of Knowledge 4. The net position of the U.S. government is not: A. The net assets of the federal government. B. Equal to the difference between the assets and liabilities of the federal government. C. Comprised of cumulative results of operations and unexpended appropriations. 1 Copyright © 2018 Pearson Education, Inc.
D. Available for expenditure. Answer: D Objective: LO 19.3 Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole. Difficulty Level: Difficult Classification: Application AACSB Category: Application of Knowledge 5. An appropriation was made for a federal agency in the amount of $1,000,000. The agency's unexpended appropriations component of net position A. Does not change. B. Increases by $1,000,000. C. Decreases by $1,000,000. D. Will either increase or decrease, depending on the nature of the appropriation. Answer: B Objective: LO 19.3 Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 6. Which of the following is a component of the net position of the U.S. Government? A. Cumulative results of operations. B. Restricted net position. C. Capital Contributed by Treasury. D. Net investments in capital assets. Answer: A Objective: LO 19.3 Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 7. Which of the following does not change cumulative results of operations of a federal agency? A. Appropriations used. B. Gains on sales of agency assets. C. Expenses. D. Purchase of capital assets. Answer: D Objective: LO 19.3 Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole. Difficulty Level: Moderate Classification: Application 2 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of Knowledge 8. Which of the following funds would you not expect to find in federal government accounting? A. General fund. B. Special funds. C. Revolving funds. D. Capital projects funds. Answer: D Objective: LO 19.3 Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 9. Which of the following budgetary accounts typically have a debit balance? A. Apportionments. B. Expended Appropriations. C. Undelivered Orders–unpaid. D. Appropriations Realized. Answer: D Objective: LO 19.3 Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 10. Unexpended, unobligated appropriation authority from a previous year is representative of A. A commitment. B. An apportionment. C. Allotments—expired authority. D. A suballotment. Answer: C Objective: LO 19.3 Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 11. The budgetary fund balance of an agency is also known as A. Unassigned fund balance. B. Undesignated fund balance. C. Unexpended appropriations. D. Obligated appropriations. 3 Copyright © 2018 Pearson Education, Inc.
Answer: C Objective: LO 19.3 Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 12. What is the primary financing source reported by most federal agencies? A. Sales revenues. B. Appropriations used. C. Appropriations received from Congress. D. Apportionments. Answer: B Objective: LO 19.3 Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 13. In a federal agency's budgetary accounts, which account is most similar to encumbrances in a state or local government? A. Allotments. B. Commitments. C. Apportionments. D. Appropriated capital. Answer: B Objective: LO 19.3 Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 14. When agency directors make allotments, what budgetary accounts are affected? A. Unapportioned Authority and Allotments–Realized Resources. B. Allotments–Realized Resources and Undelivered Orders. C. Appropriations and Allotments–Realized Resources. D. Allotments–Realized Resources and Expended Appropriations. Answer: C Objective: LO 19.3 Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 4 Copyright © 2018 Pearson Education, Inc.
15. Assume that Congress enacted an appropriation for a federal agency in the amount of $500,000. The proprietary entry that would be necessary would be
A. Fund Balance with Treasury ....................................... Unexpended Appropriations ..................................
Debit $500,000
Credit $500,000
B. Cash ............................................................................ Appropriations .......................................................
$500,000
C. Appropriation Realized............................................... Unapportioned Authority .......................................
$500,000
D. Cash ............................................................................ Obligations .............................................................
$500,000
$500,000
$500,000
$500,000
Answer: A Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 16. If an agency incurs expenses that were not previously obligated, the agency should make a proprietary entry that DEBITS A. Fund balance. B. Advances to others. C. Appropriations used. D. Unexpended appropriations. Answer: D Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 17. An agency makes an internal preliminary request for the purchase of $75,000 of equipment and supplies with an anticipated cost of $10,000. The budgetary entry made by the agency would be
5 Copyright © 2018 Pearson Education, Inc.
A. Expenditures ............................................................... Capital Assets ............................................................. Appropriations .......................................................
Debit $10,000 75,000
Credit
$85,000
B. Allotments – Realized Resources ............................... Commitments .........................................................
$85,000
C. Appropriations ............................................................ Commitments .........................................................
$85,000
D. Appropriations ............................................................ Allotments ..............................................................
$85,000
$85,000
$85,000
$85,000
Answer: B Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 18. A budgetary entry for depreciation on an agency's equipment would A. Include a debit to expenses. B. Include a credit to accumulated depreciation. C. Include a debit to appropriations. D. Not be necessary. Answer: D Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 19. Which transaction of a federal agency requires both budgetary and proprietary entries? A. Receipt of budgetary authority from the Congress, i.e., receipt of appropriation. B. Consumption of materials and supplies. C. Depreciation of capital assets. D. Signing a contract to buy services. Answer: A Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 6 Copyright © 2018 Pearson Education, Inc.
20. When materials or supplies that have been ordered are received, what budgetary account is credited? A. Undelivered orders. B. Appropriations. C. Expended appropriations. D. Appropriations used. Answer: C Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 21. Which of the following budgetary accounts typically is not closed at year end? A. Unapportioned Authority. B. Expended Appropriations. C. Allotments-Expired Authority. D. Commitments. Answer: C Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 22. When equipment is purchased on account, what proprietary accounts are credited? A. Accounts Payable and Unexpended Appropriations. B. Cash and Unexpended Appropriations. C. Accounts Payable and Appropriations Used. D. Accounts Payable and Expended Appropriations. Answer: C Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 23. Which transaction of a federal agency requires a budgetary entry but not a proprietary entry? A. Receipt of budgetary authority from the Congress, i.e., receipt of appropriation. B. Consumption of materials and supplies. C. Depreciation of fixed assets. D. Approval and placement of purchase order. Answer: D 7 Copyright © 2018 Pearson Education, Inc.
Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 24. Which transaction of a federal agency requires a proprietary entry, but not a budgetary entry? A. Receipt of capital assets or materials ordered. B. Consumption of materials and supplies. C. Accrued salaries and benefits. D. Approval and placement of purchase order. Answer: B Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 25. Which transaction of a federal agency does not require both budgetary and proprietary entries? A. Receipt of budgetary authority from the Congress, i.e., receipt of appropriation. B. Payment of liabilities. C. Accrued salaries and benefits. D. Receipt of fixed assets or materials ordered. Answer: B Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 26. When equipment is purchased on account, what proprietary accounts are debited? A. Equipment and Unexpended Appropriations. B. Capital Expenses and Unexpended Appropriations. C. Equipment and Appropriations Used. D. Equipment and Expended Appropriations. Answer: A Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 8 Copyright © 2018 Pearson Education, Inc.
27. Which of the following journal entries would you expect to see for a federal agency? A. Debit to unapportioned authority and credit to commitments. B. Debit to unapportioned authority and credit to allotments–realized resources. C. Debit to unapportioned authority and credit to apportionments. D. Debit to unapportioned authority and credit to expended appropriations. Answer: C Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 28. Which of the following journal entries would you expect to see for a federal agency? A. Debit to commitments and credit to unappropriated authority. B. Debit to commitments and credit to allotments–realized resources. C. Debit to commitments and credit to undelivered orders–unpaid. D. Debit to commitments and credit to expended appropriations. Answer: C Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 29. Previously purchased materials costing $50,000 were used by a federal agency. The proprietary entry to record this transaction would be Debit Credit A. Operating/Program Expenses – Materials .................. $50,000 Inventory for Agency Operations .......................... $50,000 B. Operating/Program Expenses – Materials .................. Appropriations Used ..............................................
$50,000
C. Appropriations Realized ............................................. Inventory for Agency Operations ..........................
$50,000
D. Inventory for Agency Operations ............................... Accounts Payable ...................................................
$50,000
$50,000
$50,000
$50,000
Answer: A Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Application 9 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of Knowledge 30. Which of the following proprietary accounts of a federal agency would be closed at year end? A. Appropriations realized. B. Apportionments. C. Appropriations used. D. Unexpended appropriations. Answer: C Objective: LO 19.4 Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 31. The following are representative of the basic year-end financial statements required by an agency except A. Statement of Net Cost. B. Statement of Social Insurance. C. Statement of Investing. D. Statement of Custodial Activity. Answer: C Objective: LO 19.3 Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 32. Which of the following would not be included as part of the consolidated financial statements of the federal government? A. Balance sheet. B. Statement of custodial activity. C. Statement of net cost. D. Statement of social insurance. Answer: B Objective: LO 19.3 Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge
10 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 19
Problem 1 – Federal Accounting Journal Entries The following transactions and events were selected from a federal agency. All amounts are in millions of dollars. Transactions: 1. 2. 3. 4. 5. 6. 7. 8.
Received a warrant from Treasury for its appropriation for the fiscal year, $300. The OMB apportioned $80 to the agency. The agency head allotted $79 to specific purposes. Preliminary requests were made within the agency for the purchase of $8 in supplies. Purchase orders were approved and placed for the $8 of supplies requested. Salaries of $40 were paid to agency employees. Equipment with an estimated cost of $17 was ordered. The equipment was received along with an invoice for its $17 cost.
Requirement: Prepare the entries a federal agency should make to record these transactions and events.
1 Copyright © 2018 Pearson Education, Inc.
Answers: # Accounts 1a Fund Balance with Treasury Unexpended Appropriations
Debit 300
Credit 300
1b Appropriations Realized Unapportioned Authority
300
2 Unapportioned Authority Apportionments
80
3 Apportionments Allotments – Realized Resources
79
4 Allotments – Realized Resources Commitments
8
5 Commitments Undelivered Orders – Unpaid
8
6a Allotments – Realized Resources Expended Appropriations
40
6b Expenses – Salaries Fund Balance with Treasury
40
6c Unexpended Appropriations Appropriations Used
40
7 Allotments – Realized Resources Undelivered Orders – Unpaid
17
8a Undelivered Orders – Unpaid Expended Appropriations
17
8b Equipment Accounts Payable
17
8c Unexpended Appropriations Appropriations Used
17
300
80
79
8
8
40
40
40
17
17
17
2 Copyright © 2018 Pearson Education, Inc.
17
Problem 2 – Federal Financial Management Environment Requirements:
Compare and contrast the financial management responsibilities of: A. Department of the Treasury B. Office of Management and Budget C. Government Accountability Office D. Federal Accounting Standards Advisory Board
3 Copyright © 2018 Pearson Education, Inc.
Answers: A.
The Department of the Treasury is part of the executive branch of the government. It is headed by the Secretary of the Treasury. The Treasury acts as both the chief accountant and the banker for the federal government. Its financial management responsibilities include: Central accounting and reporting for the federal government as a whole, including development of government-wide consolidated financial statements. Cash receipt and disbursement management, including supervising the federal depository system and disbursing cash for virtually all civilian agencies. Management of the public debt, including the scheduling of borrowing to meet current needs, repayment of debt principal, and meeting interest requirements. Supervision of agency borrowing from the Treasury. Maintenance of the government-wide Standard General Ledger (SGL).
B.
Office of Management and Budget (OMB) is an agency within the Executive Office of the President. It has broad financial management powers and prepares the budget for submission to Congress. Its financial management responsibilities include: To apportion enacted appropriations among the agencies and establish reserves in anticipation of cost savings, contingencies, etc. To set forth the requirements for accounting and reporting on budget execution. To prescribe the form and content of financial statement consistent with applicable accounting principles, standards, and requirements. To provide guidance on all matters related to budget preparation and execution.
C.
Government Accountability Office (GAO) is headed by the Comptroller General of the United States. The GAO is an arm of the Congress and assists it in the general overall oversight of the executive branch while serving as the independent legislative auditor of the federal government. Its primary financial management responsibilities are: Prescribing principles and standards for federal agency accounting and financial reporting, internal control, accounting systems, and auditing. Auditing the financial statements of the federal agencies.
D.
Federal Accounting Standards Advisory Board (FASAB) is an independent agency created by the Treasury, OMB, and GAO to promulgate the accounting principles and standards to be followed by the federal agencies. FASAB standards are recognized as GAAP for federal agencies by the AICPA. The Department of the Treasury, OMB, and GAO each has veto power over any standard issued by the FASAB. However, the AICPA has said it would remove the GAAP status of the FASAB should this veto ever occur.
4 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Chapter 20 Auditing Governments and Not-for-Profit Organizations
1. Generally accepted government auditing standards (GAGAS) are established by A. The GASB. B. The Comptroller General. C. The AICPA. D. The FASB. Answer: B Objective: LO 20.1 Describe the different types of government and not-for-profit organization audits, including: Identify the sources of standards for government and not-for-profit organization auditing – and the relationships between and among generally accepted auditing standards (GAAS), generally accepted government auditing standards (GAGAS), and the Single Audit standards. Differentiate between the basic aspects of an audit of government or not-for-profit organization financial statements under GAAS and GAGAS in comparison to privatesector entities. Recognize the SLG “reporting units” and “major fund” approaches to judging materiality quantitatively as well as the concept of qualitative materiality. Difficulty Level: Difficulty Classification: Concept AACSB Category: Application of Knowledge 2. Generally accepted governmental auditing standards are issued by the A. AICPA. B. U.S. Government Accountability Office. C. U.S. Office of Management and Budget. D. U.S. Department of the Treasury. Answer: B Objective: LO 20.1 Describe the different types of government and not-for-profit organization audits, including: Identify the sources of standards for government and not-for-profit organization auditing – and the relationships between and among generally accepted auditing standards (GAAS), generally accepted government auditing standards (GAGAS), and the Single Audit standards. Differentiate between the basic aspects of an audit of government or not-for-profit organization financial statements under GAAS and GAGAS in comparison to privatesector entities. Recognize the SLG “reporting units” and “major fund” approaches to judging materiality quantitatively as well as the concept of qualitative materiality. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 3. The scope of a financial audit opinion will generally include all of the following except 1 Copyright © 2018 Pearson Education, Inc.
A. The note disclosures. B. The government-wide financial statements. C. The governmental funds' balance sheet. D. The statistical section. Answer: D Objective: LO 20.1 Describe the different types of government and not-for-profit organization audits, including: Identify the sources of standards for government and not-for-profit organization auditing – and the relationships between and among generally accepted auditing standards (GAAS), generally accepted government auditing standards (GAGAS), and the Single Audit standards. Differentiate between the basic aspects of an audit of government or not-for-profit organization financial statements under GAAS and GAGAS in comparison to privatesector entities. Recognize the SLG “reporting units” and “major fund” approaches to judging materiality quantitatively as well as the concept of qualitative materiality. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 4. All of the following represent criteria for determining questioned costs except A. Unallowable costs. B. Unreasonable costs. C. Unquestioned costs. D. Unapproved costs. Answer: C Objective: LO 20.1 Describe the different types of government and not-for-profit organization audits, including: Identify the sources of standards for government and not-for-profit organization auditing – and the relationships between and among generally accepted auditing standards (GAAS), generally accepted government auditing standards (GAGAS), and the Single Audit standards. Differentiate between the basic aspects of an audit of government or not-for-profit organization financial statements under GAAS and GAGAS in comparison to privatesector entities. Recognize the SLG “reporting units” and “major fund” approaches to judging materiality quantitatively as well as the concept of qualitative materiality. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 5. Which of the following is not a reporting unit? A. Governmental activities. B. Aggregate nonmajor governmental funds. C. Aggregate of all discretely presented component units, aggregate nonmajor governmental funds; aggregate nonmajor Enterprise Funds, Internal Service Fund type; and aggregate fiduciary fund type. 2 Copyright © 2018 Pearson Education, Inc.
D. Agency Funds. Answer: C Objective: LO 20.1 Describe the different types of government and not-for-profit organization audits, including: Identify the sources of standards for government and not-for-profit organization auditing – and the relationships between and among generally accepted auditing standards (GAAS), generally accepted government auditing standards (GAGAS), and the Single Audit standards. Differentiate between the basic aspects of an audit of government or not-for-profit organization financial statements under GAAS and GAGAS in comparison to privatesector entities. Recognize the SLG “reporting units” and “major fund” approaches to judging materiality quantitatively as well as the concept of qualitative materiality. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 6. Which of the following is not an opinion unit? A. Governmental activities. B. Internal Service Fund type. C. Aggregate of all discretely presented component units; aggregate nonmajor governmental funds; aggregate of nonmajor Enterprise Funds, Internal Service Fund type; and aggregate fiduciary fund type. D. Each major governmental fund. Answer: B Objective: LO 20.1 Describe the different types of government and not-for-profit organization audits, including: Identify the sources of standards for government and not-for-profit organization auditing – and the relationships between and among generally accepted auditing standards (GAAS), generally accepted government auditing standards (GAGAS), and the Single Audit standards. Differentiate between the basic aspects of an audit of government or not-for-profit organization financial statements under GAAS and GAGAS in comparison to privatesector entities. Recognize the SLG “reporting units” and “major fund” approaches to judging materiality quantitatively as well as the concept of qualitative materiality. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 7. A single audit must include all of the following except A. A financial statement audit. B. Compliance testing. C. A performance audit. D. Internal control evaluation and testing. Answer: C Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its 3 Copyright © 2018 Pearson Education, Inc.
role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 8. Single audits must comply with all of the following guidance except A. AICPA generally accepted auditing standards. B. Generally accepted government auditing standards. C. OMB Uniform Guidance. D. Single audits must comply with all of the above guidance. Answer: D Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 9. Which single audit report does not include an "opinion"? A. Report on the schedule of expenditures of federal awards. B. Report on internal controls over federal financial assistance. C. Report on financial statements. D. Report on major federal financial assistance program compliance. Answer: B Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 4 Copyright © 2018 Pearson Education, Inc.
10. Which of the following is true? A. A single audit must include a GAAS audit and a GAGAS audit. B. A single audit must include a GAAS audit, but not a GAGAS audit. C. A single audit must include a GAGAS audit, but not a GAAS audit. D. A single audit does not include a GAAS audit or a GAGAS audit. Answer: A Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 11. Questioned costs that may not reflect the actions that a prudent person would take under the circumstances are A. Unallowable costs. B. Unreasonable costs. C. Unapproved costs. D. Undocumented costs. Answer: B Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 12. A government is required to have a single audit for any year in which it expends federal awards of A. At least $300,000. B. At least $500,000. C. At least $750,000 D. At least 25% of its total expenditures. Answer: C Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single 5 Copyright © 2018 Pearson Education, Inc.
Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 13. An auditor must audit as a major program A. All Type A programs unless the auditor has identified one as low risk. B. All Type A programs. C. All Type B programs. D. At least two programs in each audit cycle. Answer: A Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 14. Assume that programs classified as major federal programs totaled $4,500,000. If the auditee is considered low-risk, the percentage of coverage rule would not be satisfied if the total federal awards expended were more than: A. $4,500,000. B. $9,000,000. C. $11,250,000. D. $22,500,000. Answer: D Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Difficult Classification: Application AACSB Category: Application of Knowledge 6 Copyright © 2018 Pearson Education, Inc.
15. At what amount would the percentage of coverage rule be exceeded if the total of major federal programs was $7,000,000 for an auditee who is not low risk? A. $7,000,000. B. $17,500,000. C. $21,000,000. D. $35,000,000. Answer: B Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Difficult Classification: Synthesis AACSB Category: Analytical Thinking 16. Which of the following statements concerning the identification of a Type A low-risk program is true? A. A Type A program can be considered low-risk if it has been audited as a major program in one of the last two years, and the most recent audit had no internal control deficiencies or a modified opinion on the program. B. A Type A program is low-risk if it was audited as a major program last year, whether or not there were any reportable audit findings. C. A Type A program is low-risk if there were no audit findings within the last two years. D. A Type A program can never be classified as low-risk. Answer: A Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Difficult Classification: Synthesis AACSB Category: Analytical Thinking 17. If required to perform risk assessments on Type B programs, an auditor is permitted to exclude any Type B programs with expenditures that are: A. Less than 25% of the Type A threshold. B. Less than the larger of $750,000 or 3% of the Type A threshold. C. Less than the smaller of $750,000 or 1% of total federal awards expended if the total is less than $100 million. 7 Copyright © 2018 Pearson Education, Inc.
D. Less than the smaller of $750,000 or 1% of total federal awards expended if the total is more than $100 million. Answer: A Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical Thinking 18. For governments that expend less than $25 million of federal awards during a year, each federal program for which it expended $750,000 or more is A. Always treated as a major federal program. B. Treated as a major federal program if it is a high risk Type B program. C. Treated as a major federal program if it has not been audited as a major program in either of the two previous years. D. Treated as a major federal program only if needed to meet the 40% test. Answer: C Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical Thinking 19. A federal program that a government classifies as a Type A program A. Must be treated as a major program. B. Cannot normally be treated as a low-risk program in three consecutive years. C. Can usually be treated as a low-risk program in more than three consecutive years. D. May be treated as a low-risk program for an indefinite number of consecutive years. Answer: B Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. 8 Copyright © 2018 Pearson Education, Inc.
Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 20. For a government that has less than $25 million in total federal awards expended, an auditor that must perform a risk assessment on a federal program classified as a Type B should consider as eligible all programs that A. Have not been assessed in last three years. B. Have not been assessed in the last two years. C. Have expenditures that exceed $100,000 D. Have expenditures that exceed $187,500. Answer: D Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Application of Knowledge 21. Which of the following could not be an independent auditor for governmental entities? A. Public auditors. B. Officials of a government other than the one being examined. C. Officials of the government being examined even if they are a part of government's management assuming they meet certain prescribed criteria. D. Officials of the government being examined that are separately elected. Answer: C Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 22. Auditors are responsible for A. Preparing a government's financial statements and related notes to the financial 9 Copyright © 2018 Pearson Education, Inc.
statements. B. Reporting on financial and other economic events, transactions, and balances. C. Maintaining a government's internal control system. D. Collecting sufficient objective data to allow them to express an opinion on the accuracy and reliability of management's assertions regarding a government's financial statements. Answer: D Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 23. With respect to illegal acts, an auditor should A. Design procedures to find illegal acts. B. Alert appropriate law enforcement officials regarding any material illegal acts found while conducting the audit. C. Report any illegal acts discovered during the audit. D. Stop the audit until the illegal acts are resolved. Answer: C Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 24. Which of the following categories is not a threat to an auditor’s independence? A. The auditor performed the work that is being audited. B. The auditor lacks any vested interest in the results of the audit. C. The auditor has become too close to the audited organization over time. D. The auditor makes management decisions. Answer: B Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. 10 Copyright © 2018 Pearson Education, Inc.
Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 25. Which of the following is not an auditee responsibility? A. Prepare appropriate financial statements. B. Ensure that the audit procedures performed are appropriate. C. Comply with laws, regulations, and the provisions of contracts related to each of the federal programs. D. Take corrective action on audit findings. Answer: B Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 26. A nonfederal entity is required to have either a Program-Specific Audit or a Single Audit if in a fiscal year it A. Received $300,000 or more in federal awards. B. Expended $300,000 or more in federal awards. C. Received $750,000 or more in federal awards. D. Expended $750,000 or more in federal awards. Answer: D Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Synthesis AACSB Category: Application of Knowledge 27. For basic financial statements of a general purpose local government to be presented fairly in 11 Copyright © 2018 Pearson Education, Inc.
all material respects, the basic financial statements must include an opinion unit for: A. Governmental activities in the government-wide financial statements. B. All funds in the special revenue fund type reported together as a unit. C. Investment trust funds as a unit apart from other fiduciary funds. D. All agency funds reported together as a unit. Answer: A Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge 28. A material weakness in internal control is a significant deficiency, or combination of significant deficiencies, that results A. From a material misstatement in the financial statements. B. In more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected on a timely basis. C. In a material misstatement of the financial statements. D. In a government having a qualified audit opinion on their financial statements. Answer: B Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Difficult Classification: Application AACSB Category: Analytical Thinking 29. When reporting on internal control deficiencies, an auditor need not report A. Significant deficiencies. B. Material weaknesses. C. Significant deficiencies for nonmajor funds. D. Immaterial differences. Answer: D Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single 12 Copyright © 2018 Pearson Education, Inc.
Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Easy Classification: Concept AACSB Category: Analytical Thinking 30. Audit reports that meet the requirements of the Single Audit Act and OMB Uniform Guidance need not include A. An opinion on the financial statements. B. An opinion on the schedule of expenditures of federal awards. C. A report on internal controls. D. A report on management’s discussion and analysis. Answer: D Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Easy Classification: Concept AACSB Category: Application of Knowledge 31. To complete a single audit in conformity with generally accepted governmental auditing standards, the auditor should perform all of the following except A. Audit the financial statements following generally accepted auditing standards. B. Obtain an understanding of the internal controls over major federal financial assistance programs. C. Audit the schedule of expenditures of federal awards. D. Audit management’s discussion and analysis and the statistical section since both include information from the basic financial statements. Answer: D Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Application 13 Copyright © 2018 Pearson Education, Inc.
AACSB Category: Application of Knowledge 32. A data collection form A. Is used in detailed testing of major federal program compliance. B. Is used to summarize the results of a single audit. C. Is completed by the cognizant agency. D. Is not necessary unless the single audit report does not include a schedule of findings and questioned costs. Answer: B Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Application AACSB Category: Application of Knowledge 33. In order for a government to have a program-specific audit, which of the following must be met? A. Expend less than $750,000 of federal awards. B. Expend federal awards under only one federal program. C. Have low-risk programs. D. Have a combination of high-risk and low-risk programs. Answer: B Objective: LO 20.2 Explain the Single Audit – in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization. Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements. Identify and understand the audit reports required by a single audit and who is to receive the audit reports. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical Thinking 34. Governmental auditing may include I. Financial audits II. Attestation engagements III. Performance audits A. I, II, and III. 14 Copyright © 2018 Pearson Education, Inc.
B. I and II only. C. I and III only. D. II and III only. Answer: A Objective: LO 20.1 Describe the different types of government and not-for-profit organization audits, including: Identify the sources of standards for government and not-for-profit organization auditing – and the relationships between and among generally accepted auditing standards (GAAS), generally accepted government auditing standards (GAGAS), and the Single Audit standards. Differentiate between the basic aspects of an audit of government or not-for-profit organization financial statements under GAAS and GAGAS in comparison to privatesector entities. Recognize the SLG “reporting units” and “major fund” approaches to judging materiality quantitatively as well as the concept of qualitative materiality. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 35. A local government that expends $750,000 or more of federal financial assistance is subject to: GAO Government SarbanesAuditing Single Oxley Act Standards Audit I. Yes Yes Yes II. Yes Yes No III. No Yes Yes IV. Yes No No A. II. B. IV. C. I. D. III. Answer: D Objective: LO 20.1 Describe the different types of government and not-for-profit organization audits, including: Identify the sources of standards for government and not-for-profit organization auditing – and the relationships between and among generally accepted auditing standards (GAAS), generally accepted government auditing standards (GAGAS), and the Single Audit standards. Differentiate between the basic aspects of an audit of government or not-for-profit organization financial statements under GAAS and GAGAS in comparison to privatesector entities. Recognize the SLG “reporting units” and “major fund” approaches to judging 15 Copyright © 2018 Pearson Education, Inc.
materiality quantitatively as well as the concept of qualitative materiality. Difficulty Level: Moderate Classification: Application AACSB Category: Analytical Thinking 36. The primary purpose of an auditor’s opinion is to A. Detect and report fraud. B. Help the client design and implement proper internal controls. C. Add credibility to those representations properly made by management. D. Guarantee the accuracy of management’s representations. Answer: C Objective: LO 20.1 Describe the different types of government and not-for-profit organization audits, including: Identify the sources of standards for government and not-for-profit organization auditing – and the relationships between and among generally accepted auditing standards (GAAS), generally accepted government auditing standards (GAGAS), and the Single Audit standards. Differentiate between the basic aspects of an audit of government or not-for-profit organization financial statements under GAAS and GAGAS in comparison to privatesector entities. Recognize the SLG “reporting units” and “major fund” approaches to judging materiality quantitatively as well as the concept of qualitative materiality. Difficulty Level: Easy Classification: Concept AACSB Category: Application of Knowledge 37. Which of the following statements most accurately describes audit procedures? A. Overall guidelines against which legal compliance is measured. B. Guidance governing the auditor’s judgment. C. Overall guidelines for audit quality. D. Specific tests and processes used to collect audit evidence. Answer: D Objective: LO 20.1 Describe the different types of government and not-for-profit organization audits, including: Identify the sources of standards for government and not-for-profit organization auditing – and the relationships between and among generally accepted auditing standards (GAAS), generally accepted government auditing standards (GAGAS), and the Single Audit standards. Differentiate between the basic aspects of an audit of government or not-for-profit organization financial statements under GAAS and GAGAS in comparison to privatesector entities. Recognize the SLG “reporting units” and “major fund” approaches to judging materiality quantitatively as well as the concept of qualitative materiality. Difficulty Level: Moderate Classification: Concept AACSB Category: Analytical Thinking 16 Copyright © 2018 Pearson Education, Inc.
38. Auditors working under generally accepted government auditing standards (GAGAS) should complete a minimum of 80 hours of continuing professional education every two years. What is the minimum number of hours that must be directly related to governmental accounting, governmental auditing, and related subjects? A. 24. B. 48. C. 40. D. 20. Answer: A Objective: LO 20.1 Describe the different types of government and not-for-profit organization audits, including: Identify the sources of standards for government and not-for-profit organization auditing – and the relationships between and among generally accepted auditing standards (GAAS), generally accepted government auditing standards (GAGAS), and the Single Audit standards. Differentiate between the basic aspects of an audit of government or not-for-profit organization financial statements under GAAS and GAGAS in comparison to privatesector entities. Recognize the SLG “reporting units” and “major fund” approaches to judging materiality quantitatively as well as the concept of qualitative materiality. Difficulty Level: Moderate Classification: Concept AACSB Category: Application of Knowledge
17 Copyright © 2018 Pearson Education, Inc.
Governmental and Nonprofit Accounting: Theory and Practice, 11e (Freeman) Problems – Chapter 20
Problem 1 – Single Audit Essay #1 Answer the following questions related to the single audit. 1. Explain the concept of a single audit. 2. What is a major federal program? Why does it matter if a federal assistance program is a major program? 3. What is a low-risk auditee, and what is the impact of being a low-risk auditee?
1 Copyright © 2018 Pearson Education, Inc.
Answers: 1. The concept underlying a single audit is that one audit should meet multiple objectives, including: Formulating an opinion on the fairness of presentation of an entity's financial statements. Determining whether the entity has complied with laws and regulations with which noncompliance may have a material effect on the financial statements of the entity. Studying and evaluating internal controls of the entity to determine the nature, extent, and timing of the auditing procedures necessary to express an opinion on the entity's financial statements. Determining whether the supplementary schedule of federal awards is fairly presented in relation to the financial statements as a whole. Determining whether the entity has established internal control systems to provide reasonable assurance that federal monies are managed in compliance with applicable laws and regulations. Determining whether the entity has complied with the laws and regulations that may have a material effect on each major federal assistance program. 2. A major federal program is essentially a federal program which has been selected using guidance established in the OMB Uniform Guidance for the most intensive level of audit coverage. The factors that the selections are based on are a combination of size of the program (in terms of amount of federal expenditures in the audit period) and risk. In addition, there is a minimum coverage provision requiring that programs containing at least 40% (or 20% for low-risk auditees) of federal expenditures for the year be designated as major programs in a single audit. Auditors must perform more work and take more responsibility for internal controls and compliance for major programs than for other programs. 3. A low-risk auditee is an entity that has had single audits performed for each of the preceding two years; received unmodified opinions on the financial statements and on the schedule of expenditures of federal awards; had no substantial doubt about the ability to continue as a going concern; had no material weaknesses in internal controls per government auditing standards guidance; and had no audit findings on Type A programs regarding material weaknesses in internal controls over the federal program, no modified opinions on Type A programs, or known or likely questioned costs that exceed 5% of the total federal awards expended for Type A programs during the year.
2 Copyright © 2018 Pearson Education, Inc.
Problem 2 – Single Audit Essay #2 Requirement: Explain the process for identifying major federal programs in a single audit of a government that receives federal financial assistance.
3 Copyright © 2018 Pearson Education, Inc.
Answer: Identifying major programs requires a multiple step process. First, the auditor identifies the larger federal programs, which are called Type A programs. For most governments, these are programs with federal awards expended during the audit period of $750,000 or more. Once a government’s total federal expenditures reach $25 million, a sliding scale is used. Next, the auditor must identify low-risk Type A programs. These essentially are Type A programs that have been audited as a major program in at least one of the last two years, receiving an unmodified opinion with no internal control deficiencies and questioned costs less than 5% of program expenditures. Type A programs are major programs unless the auditor excludes them because they are low-risk. Next, Type B programs—all programs not identified as Type A—are selected for treatment as major programs based upon assessment of risks of noncompliance occurring that could be material for the federal program. However, small Type B programs with expenditures less than $187,500 are not subject to risk assessment. Also, the auditor does not have to identify more high-risk Type B programs than at least 25% of the number of low-risk Type A programs. Finally, at a minimum, the audit must include as major programs (1) all high-risk Type A programs, (2) all identified high-risk Type B programs, and (3) additional programs as necessary to achieve the required percentage of coverage rule (40% or 20%).
4 Copyright © 2018 Pearson Education, Inc.
Problem 3 – Identifying Major Programs A local government received and expended the following federal financial assistance under several programs during 20X4: Program A Program B Program C Program D Program E Program F Program G Total
$100,000 200,000 650,000 875,000 1,025,000 900,000 1,000,000 $4,750,000
Requirements: A. Is this government required to have a single audit? Why? B. If a single audit is performed on the government, what are its Type A programs? C. Assume that the two largest Type A programs that you identified in Part B of this question were audited as major federal financial assistance programs in one of the past two years and that the audits uncovered no findings or questioned costs. Further assume that each of the Type B programs could reasonably be assessed as high-risk programs. Which programs should be audited as major programs? Why?
5 Copyright © 2018 Pearson Education, Inc.
Answers: A. Yes. Federal award expenditures by a nonfederal entity exceeded the threshold of $750,000 in a fiscal year. B. The Type A programs are defined as federal programs with federal awards expended during the audit period of $750,000 or more for auditees with total federal expenditures of more than $750,000 and less than or equal to $25 million. Using these guidelines, this government’s major programs are Programs D, E, F, and G. C. Programs D and F must be treated as major. Programs E and G can be treated as low-risk Type A and not deemed major programs. Assuming the government is not a low-risk auditee, the 40% coverage rule applies; 40% of the total expenditures of federal awards for this government equals $1,900,000 ($4,750,000 × 0.4). Program C is the most likely Type B program to be picked up as a major program. The sum of expenditures for Programs C, D, and F is $2,425,000. The 40% coverage rule is met. If the government were a low-risk auditee, only Programs D and F would be major programs since their total federal expenditures would exceed the 20% threshold ($950,000) for a low-risk auditee.
6 Copyright © 2018 Pearson Education, Inc.
Problem 4 – Matching audit items to standard setters Match the following audit items with the most appropriate standard setting body. A standard setting body may be used once, more than once, or not at all. Audit Item
Standard Setting Body
1.
Type A Program
2.
Generally accepted auditing standards
3.
Opinion on financial statements
4.
FFA
5.
Single Audit
6.
Generally accepted governmental auditing standards
7.
Uniform Guidance
8.
Overall report on compliance with laws and regulations—based on the financial statement audit
9.
AU-C
A. B. C. D. E. F. G. H.
AICPA FASAB FASB GAO GASB OMB PCAOB SEC
10. Yellow Book
7 Copyright © 2018 Pearson Education, Inc.
Answers: 1. F 2. A 3. A 4. F 5. F 6. D 7. F 8. D 9. A 10. D
8 Copyright © 2018 Pearson Education, Inc.