Solution Manual for Accounting for Governmental & Nonprofit Entities, 19th Edition, Jacqueline Reck by Ace Test Banks

Solution Manual for Accounting for Governmental & Nonprofit Entities, 19th Edition.

By Jacqueline L. Reck , Suzanne Lowensohn, Daniel Neely

Chapter 01 - Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities

CHAPTER 1: INTRODUCTION TO ACCOUNTING AND FINANCIAL REPORTING FOR GOVERNMENT AND NOT-FORPROFIT ENTITIES OUTLINE Number

Topic

Type/Task

Status (re: 18/e)

Differences between types of organizations Distinguishing between general purpose and special purpose governments Standards-setting bodies Not-for-profit financial reports Relationship of interperiod equity and fiscal accountability Determining the purpose of the two types of accountability Primary reporting objectives for NFPs and governments Objective of federal financial reports Federal government performance and accountability report NFP reporting of expenses

Identify Identify

Same Revised

Identify Identify Define/Compare

Same New New

Determine

Same

Compare

Same

Explain Identify/Describe

New Same

Explain

Same

Research Case—Accountability Reporting Research Case—GASB Research Case—FASB Research Case—FASB Research Case—FASAB Research Case—Federal Financial Reporting Objectives

Report Analyze Explain Analyze Summarize Analyze

New Revised 1-11 New Same Same Same

Exercises/Problems: 1-17 Examine the CAFR 1-18 Financial statement differences 1-19 Various

Examine Differentiate Multiple Choice

1-20

Classify

Same Same Items 4, and 7 are new; other items are the same Revised

Classify

Revised

Questions: 1-1 1-2 1-3 1-4 1-5 1-6 1-7 1-8 1-9 1-10 Cases: 1-11 1-12 1-13 1-14 1-15 1-16

1-21

Matching concepts and reporting characteristics or requirements for government and NFP organizations Matching standards governing organizations

Chapter 01 - Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities

CHAPTER 1: INTRODUCTION TO ACCOUNTING AND FINANCIAL REPORTING FOR GOVERNMENT AND NOT-FORPROFIT ENTITIES Answers to Questions 1-1.

Following is a list of some of the differences between business organizations and government/not-for-profit organizations.

Business Organizations Providers of resources expect either repayment or economic benefits proportionate to the resources provided. Primary operations are undertaken to provide goods or services at a profit. There are defined ownership interests that can be sold, transferred, or redeemed; or entitle the owner to a share of remaining resources at liquidation.

Government/Not-for-for profit Organizations Many providers of resources do not expect repayment or economic benefits proportionate to the resources provided. Primary operations are not undertaken to provide goods or services at a profit or profit equivalent. There are no defined ownership interests.

General Problem Information: Differences between types of organizations Learning Objective: 1-1 Topic: Differences Between Governmental and Not-for-Profit Organizations Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry Level of Difficulty: Easy 1-2.

a. GP b. SP

c. SP d. GP

e. GP f. SP

General Problem Information: Distinguishing between general purpose and special purpose governments Learning Objective: 1-1 Topic: Differences Between Governmental and Not-for-Profit Organizations Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry Level of Difficulty: Easy

Chapter 01 - Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities

1-3.

Illustration 1-1 shows the standard-setting jurisdiction of the FASB, GASB and FASAB. As shown, the FASB has responsibility for setting accounting and financial reporting standards for business entities and nongovernmental not-for-profit organizations. The GASB has responsibility for setting standards for state and local governments and government not-for-profit organizations. The FASAB has responsibility for setting accounting and reporting standards for the federal government and its agencies and departments. General Problem Information: Standards-setting bodies Learning Objective: 1-2 Topic: Sources of Financial Reporting Standards Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

1-4.

The required financial statements for a not-for-profit (NFP) organization applying the FASB standards are (1) Statement of financial position or a balance sheet, (2) Statement of activities, and (3) Statement of cash flows. Although not a required statement, NFPs are also required to provide information on the relationship between functional expenses and natural expenses. The FASB allows NFPs to provide that information using a separate financial statement, a schedule in the notes, or displayed on the statement of activities. General Problem Information: Financial reporting of not-for-profit organizations Learning Objective: 1-6 Topic: Financial Reporting for Not-for-Profit Organizations Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

1-5.

Interperiod equity is whether current period revenues are sufficient to pay for current period services, and it is considered an important component of accountability. Failure to pay for current period services means that the financial burden is being passed to future year taxpayers who may not receive any benefit from the past services. Interperiod equity is closely related to fiscal accountability in that fiscal accountability is intended to help ensure that the government is raising and spending resources in compliance with laws and regulations, which would include the legally approved budget. Providing information on whether the government is meeting budgetary requirements helps in assessing whether the government is “living within its means” (achieving interperiod equity) during the current reporting period.

Chapter 01 - Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities

Ch. 1, Answers, Question 1-5 (Cont’d)

General Problem Information: Relationship of interperiod equity and fiscal accountability Learning Objective: 1-3 Learning Objective: 1-4 Topic: Objectives of Financial Reporting; Financial Reporting of State and Local Governments Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: BB Critical Thinking Level of Difficulty: Medium 1-6.

The purpose of operational accountability is to assess whether the government has used its resources efficiently and effectively in meeting its operating objectives. The purpose of fiscal accountability is to assess the short-term flow of current financial resources. Government-wide financial statements are primarily focused on providing information to assess operational accountability, while fund financial statements are focused on providing information to assess fiscal accountability. General Problem Information: Determining the purpose of the two types of accountability Learning Objective: 1-4 Topic: Financial Reporting of State and Local Governments Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

1-7.

The primary financial reporting objective for not-for-profit organizations is to provide decision-useful financial information to resource providers, such as donors, members, and creditors. The primary financial reporting objective for a government organization is accountability, but other objectives include providing useful information for economic, social, and political decisions. Thus, the reporting focus for the two types of organizations differs in that the not-for-profit organization financial reports are to focus on providing information that is useful in making decisions; while the government organization financial reports are to focus primarily on providing information that can be used to assess whether public resources were raised and used for their intended purposes. General Problem Information: Primary reporting objectives for NFPs and governments Learning Objective: 1-3 Topic: Objectives of Financial Reporting Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

1-8.

The FASAB indicates that federal financial reports are to help meet the needs of both external and internal users. As such, financial reports are prepared to provide information that is useful in assessing accountability, efficiency, effectiveness and the results of providing and spending federal resources. 1-4 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 01 - Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities

Ch. 1, Answers, Question 1-8 (Cont’d)

General Problem Information: Objective of federal financial reports Learning Objective: 1-5 Topic: Financial Reporting of the Federal Government Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 1-9.

The four sections of a federal agency’s performance and accountability report (PAR) are (1) an MD&A, which provides a brief overview of the entire PAR and describes the agency’s mission and performance goals, among other items; (2) the performance section, essentially consisting of the agency’s annual performance report (APR); (3) the basic financial statements, which are listed in this chapter; and (4) other accompanying information, such as information about the nation’s tax burden, the tax gap, challenges facing the agency’s management, and revenue foregone. General Problem Information: Federal government performance and accountability report Learning Objective: 1-5 Topic: Financial Reporting of the Federal Government Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

1-10. Reporting program expenses separately from management and general expenses and fund-raising costs provides information to donors, members, and oversight bodies to assess the effectiveness of the organization in accomplishing its purpose. Most donors and members wish to have the funds they contribute used for the organizational purpose rather than supporting management costs or fund-raising expenses. This reporting is also necessary for oversight bodies, such as the Internal Revenue Service, to permit the continued existence of the organization as a not-for-profit. General Problem Information: NFP reporting of expenses Learning Objective: 1-6 Topic: Financial Reporting of Not-for-Profit Organizations (NFPs) Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium Solutions to Cases 1-11. Instructors may want to note that answers for a are found under Impact, b under Datasets, and c will be determined by the student. As with all websites, the location of the answers may change. Accessing Open Government will provide students with insight into data sources that are becoming increasingly available to users of government data and information.

Chapter 01 - Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities

Ch. 1, Solutions, Case 1-11 (Cont’d)

a. Data.gov increases the transparency of government, making it more open and accountable to citizens, allowing data to have a greater impact. By making data available, data.gov increases accessibility and transparency of government information, allowing for more informed and increased public participation on government policy and issues. b. Data are available from states, cities, counties, foreign countries, and regions. c. There is a wide variety of data available from the different sites, with the amount of data available varying considerably by government. Data can include information on finance, public safety, transportation, parks and recreation, health, demographics, economic development, enterprise activities (such as trash, recycling, etc.), among others. General Problem Information: Research Case—Accountability reporting Learning Objective: 1-4 Topic: Financial Reporting of State and Local Governments Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Technology, AICPA: BB Leveraging Technology Level of Difficulty: Easy 1-12. Instructors may wish to provide specific instructions for the format of the students' brief reports. Only some of the topics covered in the White Paper have been identified for this assignment. Major revenue sources – for-profits’ major revenue is generated from the goods or services provided in exchange transactions. As a result, the principle for recognizing revenue under the FASB standard is: “Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” This is unlike governments that depend heavily on taxes or nonexchange revenues. Since property taxes are nonexchange transactions, the same rules as are used for recognition of revenue by for-profit organizations cannot apply, in that there is frequently no transfer of promised goods or services. For this reason, the government will recognize and report tax revenue in the period that the costs of providing the services for which the taxes were levied are provided, generally defined as the revenues being measurable and available to pay for current period costs.

Chapter 01 - Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities

Ch. 1, Solutions, Case 1-12 (Cont’d)

Postemployment benefits: Although similar in several respects, postemployment benefit accounting and reporting for government differs due to the longevity of governments, the importance of information to policymakers and others on the cost of providing the benefits, and the need to address interperiod equity. As a result of these different information needs, accounting for postemployment benefits for governments differs from the FASB standards in two key areas: • The discount rate used for determining the actuarial present value of postemployment benefits. The GASB allows the use of expected rate of return as the discount rate, provided the postemployment plan is projected to have enough resources to cover all projected benefit payments for current employees and retirees. If all or a portion of the projected benefit payments will not be covered (i.e., projected payments are greater than projected resources), the discount rate is to be adjusted to a municipal bond index rate for that period and beyond in which the projected resources are less than the projected payments. This differs from the FASB, which requires a discount rate that reflects the rate at which the postemployment benefits could be settled. • The effect of the benefit received by the employee for work provided is represented as a percentage of projected pay over the projected career of the employee. This differs from the FASB standard that bases the benefits formula on the assignment of benefits to units of service credits. General Problem Information: Research Case—GASB Understanding why government reporting standards are different Learning Objective: 1-2 Topic: Differences Between Governmental and Not-for-Profit Organizations Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Communication, AICPA: FN Research Level of Difficulty: Hard 1-13. Instructors may wish to provide specific instructions for the format of the students’ brief reports. The objective of this case is to familiarize students with the FASB website and allow them to see how standards are ever changing and can differ between for-profit entities and NFPs. Following are the two updates related to intangible assets and collections. 2019-06-Intangibles-Goodwill and Other: Extending the Private Company Accounting Alternatives on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities This update provides not-for-profit entities an alternative to the annual impairment testing of goodwill that is required of private companies. Under this alternative the not-for-profit is allowed to amortize goodwill. A not-for-profit entity should amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the not-for-profit entity demonstrates that a shorter useful life is more appropriate. A not-for-profit entity that elects this accounting alternative is required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. A not-for-profit entity is required to test goodwill for 1-7 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 01 - Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities

Ch. 1, Solutions, Case 1-13 (Cont’d)

impairment when a triggering event occurs that indicates that the fair value of the entity (or a reporting unit) may be below its carrying amount. 2019-03-Not-for-Profit Entities: Updating the Definition of Collections The amendments in this update modify the definition of the term collections and require that a collection-holding entity disclose its policy for the use of proceeds when collection items are removed from a collection. If a collection-holding entity has a policy that allows proceeds from collection items removed from the collection to be used for direct care, it should disclose its definition of direct care. This modification to the definition aligns the definition with the American Alliance of Museums Code of Ethics for Museums definition. General Problem Information: Research Case—FASB NFP reporting standards changes Learning Objective: 1-6 Topic: Financial Reporting of Not-for-profit Organizations Bloom’s Taxonomy: Summarize Accreditation Skills tag: AACSB: Communication, AICPA: FN Research Level of Difficulty: Medium 1-14. Instructors may wish to provide specific instructions for their students’ brief reports. Unlike for-profit organizations, not-for-profit organizations do not have a profit indicator such as net income to help users in determining how to allocate their scarce resources. For this reason, it is important that financial reports assist the users in determining not only that management has kept safe the assets of the organization, but that it has also efficiently and effectively used the assets to meet and grow the organization’s mission. In addition, effective stewardship means the management has complied with all legal and contractual responsibilities. General Problem Information: Research Case—FASB NFP reporting objectives Learning Objective: 1-3 Topic: Objectives of Financial Reporting Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Communication, AICPA: FN Research Level of Difficulty: Hard 1-15. Instructors may wish to provide specific instructions for their students’ brief reports. FASAB’s website may change over time, but the website does provide extensive information about the board’s mission, structure, and due process. A good source of information is the Memorandum of Understanding between the Comptroller General, Director of OMB, and the Secretary of the Treasury that created the FASAB, which currently is a 9-member board. Because FASAB’s technical projects and members of the Accounting and Auditing Policy Committee will change over time, students should describe the projects and committee representation that currently exist. 1-8 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 01 - Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities

Ch. 1, Solutions, Case 1-15 (Cont’d)

All statements and other pronouncements of the FASAB are contained in a compendium of all original pronouncements called Pronouncements as Amended and are available for downloading from its website at no charge. All due process documents are available at that site as well. General Problem Information: Research Case—Understanding FASAB Learning Objective: 1-2 Topic: Sources of Financial Reporting Standards Bloom’s Taxonomy: Summarize Accreditation Skills tag: AACSB: Communication, AICPA: FN Research Level of Difficulty: Medium 1-16. Instructors may wish to provide specific instructions for the format of the students’ brief reports. The four major groups of users identified by the board are citizens, Congress, executives, and program managers. Citizens – Citizens pay for and receive government services. Therefore, they are interested in individual government programs, candidates for office, and the fiscal and operational accountability of their elected officials. They want to know what services are provided and what the outputs or outcomes of the services are, as well as the efficiency and effectiveness with which they are provided. Congress – Congress is concerned with broad policies, priorities, and the programs that implement the priorities. It is responsible for imposing taxes and determining the amount of funds that should be spent and the purposes of the expenditures. Congress is concerned with how to finance and execute programs. It also assists in monitoring and assessing the effectiveness and efficiency of programs, as well as evaluating the management performance of the executive branch. Executives – Executives focus on strategic plans and programs to accomplish specific goals and implement policies. One primary focus is on budgets, which are used to provide funding for these plans and programs. They propose funding amounts to Congress and develop plans for financing and generating revenues to provide the funding. They are also concerned with the efficiency and effectiveness of plans and programs. Program Managers – Program managers assist in the design and delivery of program objectives and provide input into funding requirements. They must manage their programs within the budget approved by Congress. The four objectives identified are budgetary integrity, operating performance, stewardship, and systems and controls. Students should be able to make connections between the needs of the user groups and the objectives identified. 1-9 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 01 - Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities

Ch. 1, Solutions, Case 1-16 (Cont’d)

General Problem Information: Research Case—Federal Financial Reporting Objectives Learning Objective: 1-3 Topic: Objectives of Financial Reporting Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Hard

Solutions to Exercises and Problems 1-17. As students may have different CAFRs, there is no single solution to this exercise. It works well to devote class time to asking students some of the questions listed in the exercise, and perhaps tabulating the number of reports containing statements that are audited (1) by CPAs, (2) by state auditors, and (3) by employees of the reporting government. If such a tabulation is made, students may be interested in knowing in which states the local government units are located that are audited by each of the classes of auditors (or whatever other characteristic is being tabulated). Requiring that students download a CAFR is a good exercise in obtaining financial information. Allow students to share their experiences, as some governments make it easier to get CAFRs than others. Remind students that governments are not required to prepare a full CAFR, so some governments may simply refer to their report as the “audited annual financial statement,” or even the “audit report.” General Problem Information: Examine the CAFR Learning Objective: 1-4 Topic: Financial Reporting of State and Local Governments Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 1-18. Although the major similarities and differences have been provided below, students will undoubtedly also find additional items that you may wish to discuss. a. The following represent some of the similarities and differences in Denver’s Statement of Net Position and the Promote Health Association’s (PHA) Balance Sheet. Similarities: • Both use accrual accounting. • Both have Assets, Liabilities, and Net Assets/Net Position sections. • Both list assets in the order of liquidity.

Chapter 01 - Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities

Ch. 1, Solutions, Exercise 1-18 (Cont’d)

Dissimilarities: • Denver does not provide a comparative year, as does the PHA. • Denver lists a primary government and divides it into two columns – governmental activities and business-type activities. It then also includes a component units column. The PHA has only one column for the year’s activity. • Denver has additional sections in its statement called Deferred Outflows of Resources (this appears below Total Assets) and Deferred Inflows of Resources (this appears below the Total Liabilities). The PHA has nothing similar to this. • Denver uses net position rather than net assets and divides the net position into net investment in capital assets, restricted, and unrestricted. However, the PHA uses the term net assets and divides the net assets into net assets with donor restrictions and net assets without donor restrictions. b. Other than the name, there are very few similarities between Denver’s Statement of Activities and the PHA’s Statement of Activities. Listed below are some similarities and differences. Similarities: • Both use accrual accounting. • Both use the terms revenues and expenses. • Both list revenues by sources and expenses by function. • Both add beginning net assets/position to the change in net assets/position to arrive at the ending net assets/position. Dissimilarities: • Denver divides its revenues into program revenues (charges for services, operating grants and contributions, and capital grants and contributions) and general revenues, whereas the PHA divides its revenues into contributions and grants, and fees from exchange transactions. • The PHA divides its expenses into program activities and supporting services, whereas Denver does not make this distinction. • The general format of the statements is different, with Denver starting the statement by listing expenses from which it deducts program revenues and general revenues. The PHA uses the traditional format, starting with revenues and deducting expenses. • As with the statement of net position, Denver includes separate sections for governmental activities, business-type activities, and component units. • The PHA includes separate columns showing the activity in each of its net asset components – net assets with donor restrictions and net assets without donor restrictions. Denver does not show activity by net position component.

Chapter 01 - Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities

Ch. 1, Solutions, Exercise 1-18 (Cont’d)

General Problem Information: Financial statement differences Learning Objective: 1-4 Learning Objective: 1-6 Topic: Financial Reporting of State and Local Governments; Financial Reporting of Notfor-Profit Organizations (NFPs) Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard 1-19. 1. d. 2. a. 3. b. 4. a. 5. c.

6. b. 7. c. 8. d. 9. c. 10. d.

General Problem Information: Various Learning Objective: 1-1 Learning Objective: 1-2 Learning Objective: 1-3 Learning Objective: 1-4 Learning Objective: 1-5 Learning Objective: 1-6 Topic: Various chapter topics Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 1-20. This is an exercise that may generate considerable discussion in class, as some of the answers will be absolutely true and others partially true, depending on individual judgments and interpretations. Keeping this in mind, you may wish to provide some leeway in grading this exercise, depending on how literally you interpret the particular item’s relationship to type of organization.

Chapter 01 - Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities

Ch. 1, Solutions, Exercise 1-20 (Cont’d)

Characteristic, Concept, or Financial Reporting Requirement Accountability is the foundation of financial reporting Management’s discussion and analysis (MD&A) Performance & accountability report Stewardship is identified as a financial statement purpose A concern with budgetary compliance Absence of defined ownership interests Oversight by the Financial Accounting Foundation (FAF) Required fund financial statements are presented as part of the financial report Considered private sector standard-setting boards Standards focus on just the external users of financial information

State and Local Governments Y

Federal Nongovernmental Government Not-for-profit Organizations Y N

General Problem Information: Concepts and reporting characteristics or requirements for governmental and NFP organizations Learning Objective: 1-1 Learning Objective: 1-2 Learning Objective: 1-4 Learning Objective: 1-5 Topic: Various chapter topics Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 01 - Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities

1-21

1. 2. 3. 4. 5. 6. 7. 8. 9.

FB F FB F G F G G F

General Problem Information: Sources of financial reporting standards for various organizations Learning Objective: 1-2 Topic: Sources of Financial Reporting Standards Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

CHAPTER 2:

PRINCIPLES OF ACCOUNTING AND FINANCIAL REPORTING FOR STATE AND LOCAL GOVERNMENTS OUTLINE

Number

Topic

Type/Task

Status (re: 18/e)

Questions: 2-1 2-2 2-3 2-4 2-5 2-6 2-7 2-8 2-9 2-10

Communicating financial information Service activities categories Financial report differences Modified accrual accounting Fund categories Purpose of funds Deferred inflows and outflows of resources Expenses/Expenditures Fund balance classifications Major fund criteria

Compare Identify Compare Compare Identify Explain Recall Compare Identify Define

New Revised New Revised Same Same Revised Same Same Same

Accounting and reporting principles Evaluation of a city’s basic financial statements Fund balances Financial reporting model

Analysis Evaluate

Revised Revised

Describe Summarize

Same New

Exercises/Problems: 2-15 Examine the CAFR 2-16 Various

Examine Multiple Choice

2-17 2-18

Classify Classify

Same 1, 3, 6, 11, and 12 are new; other items are same Same Revised

Classify Analyze Analysis; calculate Analysis; calculate

Revised Revised Same Same

Cases: 2-11 2-12 2-13 2-14

2-19 2-20 2-21 2-22

Matching fund types with fund categories Matching government-wide and fund financial reporting characteristics Matching transactions with funds Fund balance classifications Determination of major funds Determination of major funds

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

CHAPTER 2:

PRINCIPLES OF ACCOUNTING AND FINANCIAL REPORTING FOR STATE AND LOCAL GOVERNMENTS

Answers to Questions 2-1.

In answering this question, students can provide various examples of required supplementary information and other supplementary information to help support their answer. One example is provided in the solution below. GASB Concepts Statement No. 3 defines RSI as information that is essential to placing the financial statements and related notes in their proper context. RSI is a higher order of communicating information than is other “supplementary information.” Supplementary information is useful when trying to understand the financial statements and related notes but it is not essential to their understanding. A good example of RSI is the MD&A, which is specifically designed to help the reader better understand the financial statements. This differs from the supplementary information found in the demographic tables and graphs of the statistical section of the CAFR, which is useful in understanding factors that may affect the numbers in the financial statements, but it is not essential. General Problem Information: Communicating financial information Learning Objective: 2-1 Topic: Conceptual Framework—Providing Useful Financial Reports Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium

2-2.

The three activity categories common to most general purpose governments are governmental, business-type, and fiduciary. Governmental activities include administrative support and core government services, such as public safety, public works, culture and recreation, and health and welfare. Business-type activities are activities that are generally intended to be self-supporting, such as public utilities. Fiduciary activities are those where the government acts as a trustee or custodian for parties outside the government. These activities, which do not directly benefit the government, include such activities as pension trusts, investment trusts, and tax collection. General Problem Information: Service activities categories Learning Objective: 2-2 Topic: Activities of Government Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry Level of Difficulty: Easy

2-3.

The government-wide statement of activities differs from the governmental fund statement of revenues, expenditures, and changes in fund balance in at least

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

Ch. 2, Answers, Question 2-3 (Cont’d)

three key ways: the basis of accounting and measurement focus used to provide the information for the statements, the level at which the information is provided, and the presentation formats used by the statements. • The statement of activities is prepared on an accrual basis of accounting with an economic resources measurement focus. This results in information being recognized and reported similar to a business entity. The statement of activities recognizes revenues similar to business entities and reports expenses since it is interested in reporting when resources are used to provide goods or services. This differs from the statement of revenues, expenditures, and changes in fund balance, where the focus is on the flow of current financial resources as measured using the modified accrual basis of accounting. The statement of revenues, expenditures, and changes in fund balance reports revenues when they are measureable and available for use in the current period, and it reports expenditures since it is interested in when resources are used to acquire assets or pay obligations. • The statement of activities reports on an entity-wide basis, thus providing an aggregate view of the government’s governmental activities (captured by the activities of the governmental funds) and business-type activities (captured by the activities of the enterprise funds). This differs from the statement of revenues, expenditures, and changes in fund balance, which reports activities at a disaggregated level, providing information for each major fund of government, and the aggregate of all nonmajor funds, on the face of the financial statement. • Finally, the presentation formats are quite different. The statement of activities starts by identifying the functional expenses of the government and from these expenses it deducts program revenues to arrive at a net expense or revenue for each function identified. To the net expense/revenue, general revenues are added, along with any adjustment for transfers in/out to arrive at the reporting period’s change in net position. Conversely, the statement of revenues, expenditures, and changes in fund balance is prepared in a format similar to a business entity’s income statement. The statement starts with revenues and then deducts expenditures from the revenues. To this result any adjustment needed for other financing sources/uses is made to arrive at the reporting period’s change in fund balances. General Problem Information: Financial report differences Learning Objective: 2-3 Topic: Financial Reporting Model Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry Level of Difficulty: Medium 2-4.

The modified accrual basis of accounting records revenues when they are measurable and available for use in paying current period obligations, while expenditures are recorded when an obligation has been incurred that will be paid from current financial resources. This differs from the accrual basis of accounting in that revenue recognition is not constrained by the availability of the resources for use in paying current period

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

Ch. 2, Answers, Question 2-4 (Cont’d)

obligations. Further, the accrual basis uses expense accounting, which recognizes an expense when a resource is used in the provision of a good or service. Because governmental fund financial statements focus on fiscal accountability, the modified accrual basis of accounting allows for reporting on current sources and uses of financial resources as opposed to the longer-term view provided by accrual accounting. General Problem Information: Modified accrual accounting Learning Objective: 2-3 Topic: Financial Reporting Model Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 2-5.

The three categories of funds are governmental, proprietary, and fiduciary. The fund types included in each category are shown below: Governmental General Fund Special revenue funds Debt service funds Capital projects funds Permanent funds

Proprietary Enterprise funds Internal service funds

Fiduciary Custodial funds Investment trust funds Pension (and other employee benefit) trust funds Private-purpose trust funds

The basis of accounting used by governmental funds is modified accrual. Proprietary funds use the accrual basis of accounting, as do fiduciary funds. General Problem Information: Fund categories Learning Objective: 2-4 Topic: Fund Reporting Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 2-6.

Governmental accounting systems must provide both reporting in accordance with GAAP and reporting to determine and demonstrate compliance with finance-related legal and contractual requirements. To ensure that both GAAP and compliance reporting requirements are met, a separate accounting mechanism is used. The mechanism that is used is fund accounting, which makes it possible to ensure that the compliance reporting requirement is met. A fund is a separate reporting entity that may be established by imposition of grant or contract provisions by external parties, by constitutional provisions or legislation, or by discretionary action of the reporting government.

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

Ch. 2, Answers, Question 2-6 (Cont’d)

General Problem Information: Purpose of funds Learning Objective: 2-3 Topic: Financial Reporting Model Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 2-7.

Deferred outflows of resources are resources that have been consumed but are applicable to a future reporting period (e.g., costs related to a debt refunding). Deferred inflows of resources are resources that have been acquired but are applicable to a future period (e.g. resources received but unavailable for use until a future period). These accounts, used only when required by a GASB standard, represent timing differences between the actual outflow or inflow of cash and the time period to which they apply. Deferred outflows of resources are shown on the balance sheet or the statement of net position below total assets but before liabilities. Because deferred outflows of resources increase net position they have a normal debit balance. Deferred inflows of resources are shown on the balance sheet or the statement of net position below total liabilities but before fund balances or net position. Because deferred inflows of resources decrease net position they have a normal credit balance. General Problem Information: Deferred inflows and outflows of resources Learning Objective: 2-1 Topic: Conceptual Framework—Providing Useful Financial Reports Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

2-8

Expenditures report actual outlays of funds, whether for an operating cost or the purchase of an asset. Expenses focus on costs necessary to generate revenues or fund operations, and may be a result of the using up or expiration of an asset, even if no cash was paid out. General Problem Information: Expenses/Expenditures Learning Objective: 2-3 Topic: Financial Reporting Model Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

2-9.

The governmental fund balance classifications and an example for each are provided below. There are numerous examples of what could be included in each classification; therefore, consideration should be given to whether the student’s answer appropriately fits the definition for the fund balance classification. Nonspendable: This would include items such as endowments and prepaids (including inventory). Restricted: This would include items restricted by those outside of government, such as operating and capital grants that can be used only for specific purposes, and resources restricted by contractual arrangements such as debt proceeds. Committed: This would include items that the governing body has set aside as a result of formal legislative action, such as items related to capital acquisition/construction or operations (specific activities). Assigned: These are items that the government intends to use for specific purposes but for which formal legislative action has not been taken. Items could be similar to those found under committed fund balances. Additionally, it would include any fund balances in special revenue, capital projects, debt service or permanent funds that have not been identified as nonspendable, restricted or committed. Unassigned: This would be the balance in the General Fund that has not been identified as nonspendable, restricted, committed or assigned. General Problem Information: Fund balance classifications Learning Objective: 2-4 Topic: Fund Reporting Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

2-10. The GASB requires that any fund that meets the following relative size criteria be designated as major: a.

Total assets and deferred outflows of resources, liabilities and deferred inflows of resources, revenues or expenditures/expenses of that governmental or enterprise fund are at least 10 percent of the corresponding element total (assets and deferred outflows of resources, liabilities and deferred inflows of resources, and so forth) for all funds of that category or type (that is, total governmental or total enterprise funds), and (emphasis added) The same element that met the 10 percent criterion in (a) is at least 5 percent of the corresponding element total for all governmental and enterprise funds combined.

In addition to funds that meet these two criteria, the General Fund of a state or local government must always be reported as a major fund. Finally, at its discretion management can report as a major fund any other governmental or enterprise fund that it considers of significant importance to financial statement users.

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

Ch. 2, Answers, Question 2-10 (Cont’d)

General Problem Information: Major fund criteria Learning Objective: 2-4 Topic: Fund ReportingBloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy Solutions to Cases 2-11. A quick look at these financial statements reveals that the statements clearly do not conform to the GASB reporting model. a.

It appears the accrual basis of accounting was used. There are at least three items reported that would appear on statements prepared using accrual accounting but would not appear if modified accrual accounting was used. The three items are the capital asset accounts (Land, buildings and equipment), noncurrent liabilities, and expenses (modified accrual would record expenditures).

The information provided indicates that the town has two fund classifications: governmental funds (General fund and special revenue fund) and proprietary (enterprise fund). As a result the town would be required to prepare the following financial statements: 1. Governmental fund financial statements: balance sheet, and statement of revenues, expenditures and changes in fund balances. 2. Proprietary fund financial statements: statement of net position, statement of revenues, expenses and changes in fund net position, and statement of cash flows. 3. Government-wide financial statements: statement of net position, and statement of activities.

The format seems most similar to the government-wide statements in that all three funds are being reported on the statements using what appears to be the accrual basis of accounting. To conform with the government-wide financial statements many changes would be needed: 1. Governmental activities and business-type activities would need to be reported in different columns on both government-wide statements. 2. Additional detail on noncurrent liabilities needs to be included. It is unclear whether any of the amount provided is due within a year. 3. The term net assets is a FASB term; the GASB uses net position. 4. Additionally, the net position information would need to be classified as net position-restricted, net position-net investment in capital assets, and net position-unrestricted. The terms being used in the presented financial statements are not used, as presented, in any reporting models. 5.

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

6. The statement of activities is not in the cost of services format recommended by GASB, where the expenses are adjusted for program revenues (such as charges for services) to determine the net expenses from which general revenues (such as taxes) are deducted (see Illustration A2-2, for example). 7. Expense detail is lacking. More functional detail is needed under “Government services,” such as general government, public safety, public works, and other relevant functions, so the amounts expended for each service area can be determined. This may also reduce the relatively large amount reported as “Miscellaneous.” General Problem Information: Accounting and reporting principles Learning Objective: 2-3 Topic: Financial Reporting Model Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making Level of Difficulty: Hard 2-12. a.

Based on the description of this city’s financial statements in the MD&A, the statements appear to conform fairly well to GASB standards, with some minor exceptions that require clarification. Specifically: Government-wide Financial Statements • Include the two required financial statements—statement of net position and statement of activities. • Use “accounting methods similar to those used by the private sector,” i.e., economic resources measurement focus and the accrual basis of accounting. • Report governmental and business-type activities in separate columns. • However, the city is reporting internal service funds as part of business-type activities. Internal service funds are generally included as governmental activities, and without further explanation it would be expected that is where the funds would appear (see Illustration 2-2 in the text). Fund Financial Statements • Provide detailed information about major funds. All nonmajor funds are summarized and presented in a single column. • Report on two kinds (i.e., categories) of funds—governmental and proprietary. However, it is noted that the city reports it has not included fiduciary fund activities in its financial reports. This implies there could be fiduciary funds, and if so, the activities of the funds should be reported in separate fiduciary fund financial statements—the statement of fiduciary net position and the statement of changes in fiduciary fund net position.

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

Ch. 2, Solutions, Case 2-12 (Cont’d)

•

• •

Governmental funds are “prepared on a modified accrual basis, which means they measure only current financial resources and uses.” Capital assets and other longlived assets, along with long-term liabilities, are not presented in the governmental fund statements. However, it should be noted it is stated that “only current assets and current liabilities” are reported on the governmental fund balance sheet. It is unclear whether the government has deferred inflows of resources or deferred outflows of resources, which should be included as separate sections if there are timing issues that would prevent recognition of some sources and uses of resources in the current reporting period. Proprietary funds include both enterprise and internal service funds, prepared on the accrual basis and include all their assets and liabilities, current and long-term. Fiduciary funds should be included as part of the financial statements (see earlier comments concerning the fiduciary funds).

b. This is a straightforward way of saying that the governmental fund information focuses only on current financial resources, not all economic resources. As a result, it is necessary to present a reconciliation of the governmental fund total fund balances to the government-wide governmental activities net position and change in fund balances to change in net position, as explained in Chapter 2 and shown in Illustrations A2-4 and A2-6 for the City and County of Denver. General Problem Information: Evaluation of basic financial statements Learning Objective: 2-3 Topic: Financial Reporting Model Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making Level of Difficulty: Hard 2-13. There are a variety of reasons for the amounts that have been provided for each fund balance classification appearing on the governmental fund balance sheet for Denver. Following are some of the reasons provided in the 2019 CAFR. Nonspendable sources: The majority of the nonspendable fund balance appears in the General Fund column. The balance appearing in the General Fund column is related to prepaid assets. The remaining nonspendable balance is Other Governmental Funds and the majority of that balance represents an endowment (permanent fund). Restricted sources: Most of the functions of the government (General Government, Public Safety, Public Works, Health, Parks and Recreation, among others) have received restricted resources. Fund balances are restricted for a variety of reasons having to do with the many sources from which the amounts were received. The sources providing the funds include external parties, enabling legislation, and constitutional provisions. Ch. 2, Solutions, Case 2-13 (Cont’d) 2-8 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

Committed sources: A number of governmental funds identify committed fund balances. For the City and County of Denver it is the city council that has the authority to commit funds through the passing of an ordinance. Most of the committed funds appear in the General Fund, indicating that most commitments are related to operating activities. Assigned sources: The City and County of Denver allows the city council, as authorized by city charter, to assign funds for specific purposes. There is only one function of government with assigned funds, and that is Parks and Recreation. General Problem Information: Major fund criteria Learning Objective: 2-4 Topic: Fund Reporting Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 2-14. Depending on when the students are assigned this case, they may have access to the preliminary views document, exposure draft, or the final standard for the financial reporting model. As a result, their answers may differ a bit from what is outlined below, but in general they should identify some or all of the points listed. • Short-term measurement focus is defined as “a measurement focus that incorporates elements of financial statements arising from short-term transactions and other events as they occur and elements of financial statements arising from long-term transactions and other events when payments are due.” Short-term is intended to be measured as within one year from the inception of the transaction or other event giving rise to the transaction. • Rationales for a new model o Lack of effectiveness in the current model. There are conceptual inconsistencies and a general lack of guidance on how to deal with complex transactions. o Lack of conceptual consistency, as noted. The current financial resources measurement focus is not based on a conceptual framework. As a result, it represents a collection of accounting conventions occurring over time that capture both short-term and long-term transactions but not in a consistent manner. o Lack of guidance for complex transactions. As governments have entered into more complicated transactions, the current financial resources measurement focus has been unable to address how the transactions should be recorded since it is not based on a conceptual framework. o Lack of consistency in the short-term perspective. Under the current financial resources measurement focus, management defines when revenues are available for recognition, with the exception of property taxes. As a result, there is a lack of comparability among governments related to revenue recognition.

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

Ch. 2, Solutions, Case 2-14 (Cont’d)

o The new short-term measurement focus addresses all of these concerns by clearly defining the focus and related terms in the context of the conceptual framework. This will allow future standard-setters a basis for considering how transactions should be recognized and reported. General Problem Information: Financial reporting model Learning Objective: 2-3 Topic: Financial Reporting Model Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium Solutions to Exercises and Problems 2-15. Each student should have a different government annual report, so each will have different answers to questions in this exercise. We suggest allowing students to discuss their answers, which will give them an idea of the range of the answers from other students. General Problem Information: Examine the CAFR Learning Objective: 2-3 Topic: Financial Reporting Model Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 2-16. 1. 2. 3. 4. 5.

b. d. c. d. a.

6. 7. 8. 9. 10.

a. b. c. c. b.

11. 12. 13. 14. 15.

d. a. c. b. a.

General Problem Information: Various Learning Objective: 2-1 Learning Objective: 2-2 Learning Objective: 2-3 Learning Objective: 2-4 Topic: Various chapter topics Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry Level of Difficulty: Medium

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

2-17. 1. Custodial fund 2. Permanent fund 3. Debt service fund 4. Internal service fund 5. Pension (and other employee benefit) trust fund 6. Special revenue fund 7. Enterprise fund 8. General Fund 9. Investment trust fund 10. Capital projects fund 11. Private-purpose trust fund

FF GF GF PF FF GF PF GF FF GF FF

General Problem Information: Matching fund types with fund categories Learning Objective: 2-3 Topic: Financial Reporting Model Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 2-18. 1. 2. 3. 4. 5.

Governmental funds Proprietary funds Fiduciary funds Governmental activities, government-wide Business-type activities, government-wide

c, e, f, h, i a, b, c, g, j b, d, g, j b, g, j b, g, j

General Problem Information: Matching government-wide and fund financial reporting characteristics Learning Objective: 2-3 Topic: Financial Reporting Model Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium Explanation: 4. Note: Internal service fund information is typically reported in governmental activities using the same measurement focus and basis of accounting. 5.Note: Internal service fund information may be reported as part of business-type activities if the internal service activity primarily supports an enterprise activity. 2-19. 1. k.

7. e.

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

2. 3. 4. 5. 6.

b. j. d. g. a.

8. 9. 10. 11.

i. f. c. h.

General Problem Information: Matching transactions with funds Learning Objective: 2-4 Topic: Fund Reporting Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 2-20. 1. 2. 3. 4. 5.

d. c. a. b. b.

6. 7. 8. 9. 10.

a. e. d. c. e.

General Problem Information: Fund balance classifications Learning Objective: 2-4 Topic: Fund Reporting Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making Level of Difficulty: Hard 2-21.

DATE: MEMO TO: FROM: RE:

xxx City Manager, Forest City Independent Auditor Major Special Revenue Funds

As shown by the blue shading in the following calculations, only the Housing and Urban Development Grant must be reported as a major fund. Neither the Gas Tax Revenue Fund nor the Forest City Library Fund meets the GASB threshold for major fund reporting; that is, none of the four elements of those funds (assets, liabilities and deferred inflows of resources, revenues, or expenditures) is at least 10% of the corresponding total of all governmental funds and at least 5% of the corresponding total of all governmental and enterprise funds. Both total assets and total revenues of the Housing and Urban Development Grant meet the 10 percent of all governmental funds and 5 percent of all governmental and enterprise funds combined criteria.

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

Ch. 2, Solutions, Exercise 2-21 (Cont’d)

Calculation of Major Fund Thresholds Gas Tax Revenue Fund >5% of >10% of GovernFinancial Governmental and Statement mental Enterprise Elements Funds Funds Assets Yes-10.3% No-4.6% Liabilities No-8.4% No-4.9% Revenues No-9.0% No-4.6% Expenditures No-8.3% No-4.6%

Housing and Urban Development Fund >5% of >10% of GovernGovernmental and mental Enterprise Funds Funds Yes-11.2% Yes-5.01% No-9.8% Yes-5.7% Yes-11.1% Yes-5.7% No-8.7% No-4.9%

Forest City Library Fund >5% of >10% of GovernGovernmental and mental Enterprise Funds Funds No-6.5% No-2.9% No-0.0% No-0.0% No-7.8% No-4.0% No-8.0% No-4.5%

General Problem Information: Determination of major funds Learning Objective: 2-4 Topic: Fund Reporting Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Decision Making Level of Difficulty: Hard 2-22. The students should identify the General Fund as a major fund because it is always considered a major fund. The only other governmental fund that meets the 10% and the 5% criteria is the Debt Service Fund. It meets the criteria on both expenditures and revenues. Of the enterprise funds, the Utility Fund and City Airport Fund would be considered major. The Utility Fund meets the criteria on assets, expenses and revenues, while the City Airport Fund meets the criteria for all four elements. The following table provides the calculations for the major fund determination. The columns next to the elements indicate if the 10% criterion was met (Y=Yes, N=No), and whether the 5% criterion was met (Y=Yes, N=No). Those funds and elements with both the 10% and 5% criteria met are highlighted in blue.

Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments

Ch. 2, Solutions, Exercise 2-22 (Cont’d)

Calculation of Major Fund Thresholds Assets

Met?

Liabilities

Met?

Expenditures /Expense

Met?

Revenues

Met?

Governmental Funds General Fund

462.2

52.8

915.9

992.8

Health & Human Services Fund

110.7

YN*

11.9

118.8

125.1

Community Development Fund

220.5

20.9

28.4

16.6

Debt Service Fund

70.8

6.1

132.4

134.7

Total of Governmental Funds by Element 10% of Total Governmental Funds by Element

864.2

91.7

1,195.5

1,269.2

86.42

9.17

119.55

126.92

Enterprise Funds Utility Fund

639.4

97.5

104.1

115.9

City Airport Fund

5,419.5

5,017.3

616.7

661.6

Golf Course Fund

48.9

8.6

19.6

18.1

Total of Enterprise Funds by Element

6,107.8

5123.4

740.4

795.6

10% of Total Enterprise Funs by Element

610.78

512.34

74.04

79.56

5% of the Total of Governmental & Enterprise Funds by Element

348.6

260.755

96.795

103.24

* First letter indicates if the 10% criterion is met the second letter indicates if the 5% criterion is met. General Problem Information: Determination of major funds Learning Objective: 2-4 Topic: Fund Reporting Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Decision Making Level of Difficulty: Hard

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

CHAPTER 3:

GOVERNMENTAL OPERATING STATEMENT ACCOUNTS; BUDGETARY ACCOUNTING OUTLINE

Number Questions: 3-1 3-2 3-3 3-4 3-5 3-6 3-7 3-8 3-9 3-10 Cases: 3-11 3-12 3-13 3-14

Topic

Type/Task

Status (re: 18/e)

Program and general revenues Depreciation expense Operating and budgetary statements Extraordinary and special items Revenue, Other Financing Sources, Expenditures, Other Financing Uses Encumbrances Budgetary fund balance and fund balances Budgetary comparison schedules/statements Budgetary and resource outflow accounts Allotments

Compare List Compare Define and compare Compare

3-6 Same New Same Same

Explain Compare Explain Compare Explain

New Same Revised Same Revised

Revenue and expense/expenditure classification Budgetary comparison schedule Estimating the required property tax rate; economic and political considerations National Center for Education Statistics

Research, analyze

Revised

Research, analyze Analyze, calculate, explain Research, calculate

Revised New

Examine Multiple Choice

Same 5 and 7 new; other items are same or revised Same Revised Revised Same New Revised New Same

Exercises/Problems: 3-15 CAFR 3-16 Various

3-17 3-18 3-19 3-20 3-21 3-22 3-23 3-24 3-25 3-26 3-27 3-28

Program and general revenue Expenditure classifications Revenue classifications Recording budget and ending fund balance Budgetary control over expenditures Recording budget Recording encumbrances and expenditures Recording budgetary and operating transactions Subsidiary ledgers Division budget report Government-wide statement of activities Governmental fund statement and schedule

Classify Classify Classify Explain and calculate Examine and analyze Journal entries Journal entries Journal entries, calculate Calculate Analyze and explain Prepare Prepare

Revised

Same New Same Same

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

CHAPTER 3: GOVERNMENTAL OPERATING STATEMENT ACCOUNTS; BUDGETARY ACCOUNTING Answers to Questions 3-1.

Program revenue is tied to a specific function or program of government. Generally, the program or function helped to generate the revenue; for example, it may have applied for and received a grant to help with its operations or to help purchase capital assets it needs. General revenue is not tied to a specific function or program of government. Examples of general revenues include all taxes. Taxes are not raised by the specific actions of a function or program, even though they may be restricted for use. Thus, the difference between a program and a general revenue is the ability to tie the revenue to a specific function or program of government. The GASB requires this distinction because it allows the reader of the financial statements to see the net expense of operating a function or program. The net expense is the total expense of the function or program less the program revenues it generates. Once readers know the net expense, they can see how much tax revenue (and other general revenues) is going to be needed to help cover the expenses of the function or program. In some instances, there may be a function or program of government that actually has net revenue and thus is contributing to a decreased need for tax revenues. General Problem Information: Program and general revenues Learning Objective: 3-1 Topic: Reporting of Expenses and Revenues at the Government-wide Level Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

3-2.

Depreciation expense can be reported on the statement of activities as either a direct expense or an indirect expense. As a direct expense, it can be reported as an expense of the function with which it clearly identifies (e.g., infrastructure would be an expense of the public works or a transportation function), or it can be allocated to functions it benefits using a systematic and rational method (e.g., square footage of building use). The indirect method is used for capital assets that benefit all functions of government. If a capital asset’s depreciation cannot be reasonably assigned to a function of government, it can be reported as a separate line item on the statement of activities, provided it clearly indicates that it excludes the direct depreciation allocated to other functions. For example, the line item to identify indirect allocation might be titled unallocated depreciation expense. General Problem Information: Depreciation expense Learning Objective: 3-1 Topic: Reporting of Expenses and Revenues at the Government-wide Level

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Answers, Question 3-2 (Cont’d)

Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 3-3.

Students should be able to identify some of the following similarities and differences between (1) the statement of revenues, expenditures, and changes in fund balance (operating statement), and (2) the schedule of revenues, expenditures, and changes in fund balance—budget and actual (comparison schedule): Similarities: • Both reports are period of time reports that cover the activity in the fiscal period. • The classification of accounts is generally the same on the two reports—both start with revenues classified in the same manner, followed by expenditures identified by function/program, with a separate section for other financing sources (uses). Both arrive at changes in fund balance for the reporting period. • Both reports provide columns for the General Fund and major funds. However, the budgetary comparison schedule’s major funds may not align with the operating statement classifications, since the budgetary comparison schedule provides for only those major special revenue funds with legally adopted budgets. Differences: • The operating statement is presented on a GAAP basis; whereas, the budgetary comparison schedule is presented on a budgetary basis, which may not be GAAP. • The operating statement is a required financial statement, while the budgetary comparison schedule is recommended to be presented as required supplementary material. Management does have the discretion to raise the budgetary comparison schedule to a financial statement. • Only the budgetary comparison schedule contains budgetary accounts. Estimated Revenue, Estimated Other Financing Sources, Appropriations, and Estimated Other Financing Uses account balances are reported in the original and final budget columns of the budgetary comparison schedule. Encumbrances account balances are combined with Expenditure account balances and reported in the Actual Amounts column of the budgetary comparison statement. • The operating statement includes all governmental funds; therefore, it provides a column for total governmental funds. There is no total column in the budgetary comparison schedule since not all governmental funds are required to prepare a budgetary comparison schedule. (There may be a variance column in the budgetary comparison schedule, but that is not required it is optional.) General Problem Information: Operating and budgetary statements Learning Objective: 3-2 Learning Objective: 3-3 Topic: Structure and Characteristics of the General Fund and Other Governmental Funds; Reporting Budgeted and Actual Results 3-3 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Answers, Question 3-3 (Cont’d)

Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 3-4.

Extraordinary items are both unusual in nature and infrequent in occurrence. The FASB does not recognize extraordinary items; therefore, there is no extraordinary item classification under the FASB standards. A special item is either unusual in nature or infrequent in occurrence and must be within management’s control. If it is not within management’s control it cannot be considered a special item. It is this additional requirement relating to management control that makes the definition of a special item different from the FASB requirement for reporting special items. General Problem Information: Extraordinary and special items Learning Objective: 3-1 Topic: Reporting of Expenses and Revenues at the Government-wide Level Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

3-5.

Revenue is defined as an increase in fund financial resources other than from financing sources such as interfund transfers and debt issue proceeds. Transfers into a fund and the proceeds of debt issues and sales of government assets are examples of inflows classified as other financing sources of the fund. Expenditures represent the cost to purchase a good or service, whereas other financing uses represent transfers of financial resources from one fund to another fund and other resource uses that do not meet the definition of expenditures. Other financing sources have the same effect on fund balance as revenues, while other financing uses have the same effect on fund balance as Expenditures, but they are each reported differently within the fund financial statements. On the governmental funds statement of revenues, expenditures, and changes in fund balances revenues are reported by fund and source, followed by expenditures reported by function/program. After a subtotal termed Excess (deficiency) of revenues over expenditures, a separate section of the statement reports other financing sources and uses before arriving at a net change in fund balance. General Problem Information: Revenue, Other Financing Sources, Expenditures, Other Financing Uses Learning Objective: 3-2 Topic: Structure and Characteristics of the General Fund and Other Governmental Funds Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 3-4 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

3-6.

Encumbrances would remain open at year-end if the government has commitments against appropriations that are outstanding at fiscal year-end, and the government is required or intends to honor the outstanding commitments in the new fiscal year. If the government will not honor outstanding commitments in the new fiscal year, Encumbrances should be closed at fiscal year-end, releasing the resources for use in the new fiscal year. The government also has the option of closing the nominal Encumbrances account at fiscal year-end and reestablishing it in the new fiscal year for amounts it intends to honor in the new fiscal year. General Problem Information: Encumbrances Learning Objective: 3-5 Topic: Budgetary Accounting Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Easy

3-7.

Budgetary Fund Balance is a nominal budgetary account that is closed at the end of the budgetary period. Its sole purpose is to capture the net difference between the anticipated inflows and outflows for the budgetary period. This is very different from Fund Balances, which is a permanent account that appears on the balance sheet and represents the residual of governmental fund assets and deferred outflows of resources minus liabilities and the deferred inflows of resources. The Fund Balances account is classified into nonspendable, restricted, committed, assigned, and unassigned. General Problem Information: Budgetary fund balance and fund balances Learning Objective: 3-5 Topic: Budgetary Accounting Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

3-8.

Budgetary comparison schedules (or statements) are required to be presented for the General Fund and all major special revenue funds for which a budget is legally adopted. In order for budget to actual comparisons to be meaningful, actual revenues and expenditures must be reported in the same manner as the budgeted amounts. Actual revenues and expenditures reported in the statement of revenues, expenditures, and changes in fund balances should be on the GAAP basis. GASB standards identify several possible differences between GAAP and budgetary financial accounting. These include basis, timing, perspective, and entity. GASB requires reconciliation of the differences between amounts reported in the GAAP basis operating statement and those reported in the budgetary comparison schedule, either on the face of the budgetary comparison schedule or on a separate page.

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Answers, Question 3-8 (Cont’d)

General Problem Information: Budgetary comparison schedules/statements Learning Objective: 3-3 Topic: Reporting Budgeted and Actual Results Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium 3-9.

An appropriation is an authorization by the legislative branch for administrators to incur expenditures for specified purposes not to exceed specified amounts. Usually, the authorization is for a limited time. Expenditures and encumbrances are both charges against appropriations. An encumbrance is a charge for an estimated amount at the time goods are ordered; an expenditure is a charge against an appropriation for an actual amount at the time the goods are received or paid. Expenditures represent outflows of current financial resources for asset acquisition as well as for salaries, supplies for immediate consumption, travel, and other items; that is, whatever is allowed by the appropriations. Expenses, in governmental accounting as well as business accounting, are expired costs; the full cost of services or goods used or consumed in providing services to citizens and others. Expenditures are recorded in governmental fund operating statements, while expenses are found in the government-wide financial statements as well as in the proprietary financial statements. Appropriations and encumbrances are found only on the budgetary comparison schedule. General Problem Information: Appropriations, expenditures, encumbrances, and expenses Learning Objective: 3-4 Learning Objective: 3-5 Topic: Terminology and Classification for Budgetary and Operating Statement Accounts; Budgetary Accounting Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

3-10. A government would use an allotment when it is trying to control spending over the budgetary period. An allotment releases only a portion of the appropriation, thereby preventing a function or program from spending too much of its appropriation early in the budgetary period. General Problem Information: Allotments Learning Objective: 3-5 Topic: Budgetary Accounting Bloom’s Taxonomy: Understand

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Answers, Question 3-10 (Cont’d)

Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Easy Solutions to Cases 3-11. Responses to each of the questions in this case will depend on how a particular city classifies its revenues and expenses/expenditures. a. In most cases, all function line items on the statement of activities will report a net expense, with numbers in parentheses. This is not a problem since most functions are supported in part from general revenues reported at the bottom of the statement of activities. If there are any functions reporting net revenue, it would be worth discussing the purpose of the function and why it is generating net revenues. b. On the government-wide statement of activities, students may well find one or two indirect expense line items. The most common item may be interest. It is also possible there will be some unallocated depreciation expenses. c. Some cities will report a different amount for property tax revenues on their statement of activities than on their statement of revenues, expenditures, and changes in fund balances because all property tax revenues levied for the year will be reported on the former statement. However, only those that will be collected during the current fiscal year or within 60 days thereafter are reported on the latter statement because they are the only revenues considered available for use. This difference arises from the difference in revenue recognition under the two bases of accounting. d. Students are almost certain to find different amounts reported for expenses on the statement of activities and expenditures on the statement of revenues, expenditures, and changes in fund balances. Among other explanations, expenses exclude outlays for capitalized assets, but include depreciation expense; expenditures include capital outlays but exclude depreciation expense. e. It is unusual to see special or extraordinary items reported. If reported, the items and/or the amounts may not be the same on the two statements. Differences will be the result of the different bases of accounting. For example, the loss on disposal of an asset would appear on the statement of activities; however, if it did not result in the use of resources it would not appear on the statement of revenues, expenditures, and changes in fund balance. Similarly, the proceeds (cash) from the sale of an asset would be reported on the statement of revenues, expenditures, and changes in fund balance, but the gain on the sale of the asset would be reported on the statement of activities. General Problem Information: Revenue and expense/expenditure classification Learning Objective: 3-1 Learning Objective: 3-2 3-7 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Solutions, Case 3-11 (Cont’d)

Topic: Classification and Reporting of Expenses and Revenues at the Governmentwide Level; Structure and Characteristics of the General Fund and Other Governmental Funds Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Research Level of Difficulty: Medium 3-12. Again, the responses to individual questions will depend on the practices of the particular city selected. Some general expectations for each question include: a. Detail is generally the same between the statement and the schedule. However, in some instances more detail is provided for revenues and expenditures in the budgetary comparison schedule. The reason for including more detail in the budgetary comparison schedule, both for revenues and expenditures, is to better match the level of detail used in the budget document. For revenues, cities often report budget and actual information for subclasses of sources, such as various types of taxes. For expenditures, cities often report budget and actual information for organization units and objects. They are required to report budgetary comparisons at the legal level of budgetary control. b. Students will probably find that actual revenues on the budgetary comparison schedule agree in amount with those reported on the GAAP operating statement. If a difference is noted between these amounts, it is likely attributable to revenues being recognized on a cash basis for budgetary purposes, rather than modified accrual. c. Some students will discover that actual expenditures on the budgetary comparison schedule differ from those reported on the GAAP operating statement. The explanation given in most of these cases will be that expenditures on the budgetary comparison schedule also include encumbrances outstanding at year-end. d. If actual revenues and/or expenditures are prepared on a non-GAAP budgetary basis, the budgetary comparison schedule should indicate such, either in the schedule heading or the Actual column heading. e. Although a variance column is not required by GASB standards, it is difficult to imagine a city not providing a column showing the variance between the actual and the final budget amounts. There should be small or no instances when expenditures exceeded appropriations given that appropriations are the legal spending limit. In cases where expenditures are greater than appropriations, an explanation should be provided. f. The notes to the financial statements or the RSI will generally include disclosure of budgetary information, including which funds are required to adopt budgets, the legal level of budgetary control. 3-8 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Solutions, Case 3-12 (Cont’d)

General Problem Information: Budgetary comparison schedule Learning Objective: 3-3 Learning Objective: 3-4 Topic: Reporting Budgeted and Actual Results; Terminology and Classification for Budgetary and Operating Statement Accounts Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Research Level of Difficulty: Medium 3-13. a.

The estimated amount of the required property tax levy is calculated, in good form, as follows:

City of Erickson General Fund Estimate of Amount to be Raised by Property Taxes For Fiscal Year Ending June 30, 20X2 As of Current Date—May 1, 20X1 Estimated resource requirements: Estimated expenditures, remainder of FY 20X1 Appropriations proposed for FY 20X2 Estimated spendable fund balances required, beginning of FY 20X3 Total estimated resource requirements Estimated resources available and to be raised, other than from property taxes: Actual spendable fund balances, May 1 of FY 20X1 From estimated revenues, remainder of FY 20X1 From revenues in FY 20X2, other than property taxes Total estimated resources available, other than property taxes Amount required from property taxes in FY 20X2

$ 13,361,475 82,561,500 20,640,375 116,563,350

$18,250,000 11,470,900 64,379,970 94,100,870 $ 22,462,480

Calculation of the required tax rate (assuming the full tax levy will be collected): Since Erickson City’s legal tax rate is expressed as $ per $100 of assessed valuation, the first step is to divide the assessed valuation by 100, giving $51,951,404.44. The required tax rate = $22,462,480 / $51,951,404.44 = $0.432 per $100 of assessed valuation.

Yes. Given the increased property valuations, the city is able to raise more tax revenue with a lower tax rate justifying the city manager’s recommendation. However, the property tax owner’s tax bill will likely increase given the increased valuation of the homeowner’s property. A comparative analysis shows the following results.

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Solutions, Case 3-13 (Cont’d)

FY 20X1 tax levy: $0.44 × ($51,951,404.44 / 1.05) = $21,770,112 FY 20X2 tax levy: $0.432 × $51,951,404.44 = $22,443,007. The city council can point out to taxpayers that even with the provision of the pay raise, the property tax rate for the period will decline. However, taxpayers may still be unhappy given their tax bills will increase. General Problem Information: Estimating the required property tax rate; economic and political considerations Learning Objective: 3-4 Topic: Classification of Estimated Revenues and Revenues Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard 3-14.

The purpose of this exercise is to familiarize the students with the government website and the abundance of data and information that is available through federal government websites. Not only is information available about public schools, but there is also information available about post-secondary education on the site. b.

The purpose of the National Center for Education Statistics (NCES) is to collect and analyze data related to education in the U.S. and other nations. Located in the Department of Education, NCES is mandated to collect, collate, analyze, and report complete statistics on the condition of American education; conduct and publish reports; and review and report on education activities internationally. The answers to this section will depend on the school districts the students have selected or reviewed. The greatest value of the case would be a class discussion where the students compare their results and discuss possible reasons. Reasons for difference in results can relate to rural versus urban districts, districts located in different states (state mandates related to education can significantly affect both revenues and costs), geographic areas of the country (different areas of the country have historically spent more on public education), and different socio-economic areas.

General Problem Information: National Center for Education Statistics Learning Objective: 3-6 Topic: Accounting for Public School Systems Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB Industry Level of Difficulty: Medium Solutions to Exercises and Problems 3-10 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

3-15. Each student should have a different governmental annual report, so will have different answers to the questions in this exercise. Some time spent in class to allow students to report on their own answers and to get an idea of the range of answers of other students is useful. General Problem Information: CAFR Learning Objective: 3-1 Learning Objective: 3-2 Learning Objective: 3-3 Topic: Reporting of Expenses and Revenues at the Government-wide Level; Structure and Characteristics of the General Fund and Other Governmental Funds; Reporting Budgeted and Actual Results Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Easy 3-16.

1. 2. 3. 4.

c. d. b. d.

5. 6. 7. 8.

a. d. c. d.

9. 10. 11. 12.

c. a. b. c.

13. 14. 15.

b. d. a.

General Problem Information: Various Learning Objective: 3-1 Learning Objective: 3-2 Learning Objective: 3-3 Learning Objective: 3-4 Learning Objective: 3-5 Topic: Various Chapter Topics Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium 3-17.

1. 2. 3. 4. 5.

G - general revenues. P - program revenues. P - program revenues. G - general revenues. P - program revenues.

6. 7. 8. 9. 10.

P - program revenues. G - general revenues. P - program revenues. P - program revenues. P - program revenues.

General Problem Information: Program and general revenues Learning Objective: 3-1 Topic: Program Revenues and General Revenues Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Easy

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

3-18.

1. 2. 3. 4. 5.

F - function. OU - organization unit. A - activity. C & O - both character and object. O - object.

6. A - activity. 7. OU - organizational unit. 8. F - function. 9. OU - organization unit. 10. O - object.

General Problem Information: Expenditure classifications Learning Objective: 3-4 Topic: Classifications of Appropriations and Expenditures Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Easy 3-19.

1. 2. 3. 4. 5.

T - taxes . CS - charges for services. LP - licenses and permits. M - miscellaneous. I - intergovernmental.

6. 7. 8. 9. 10.

CS - charges for services. LP - licenses and permits. FF - fines and forfeits. I - intergovernmental. M - miscellaneous.

General Problem Information: Revenue classifications Learning Objective: 3-4 Topic: Classifications of Estimated Revenues and Revenues Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Easy 3-20. Debits a.

ESTIMATED REVENUES BUDGETARY FUND BALANCE APPROPRIATIONS

Credits

32,150,000 25,000 32,175,000

The answer is no to both parts of the question. Any fund balances, other than nonspendable and those subject to minimum fund balance requirements by ordinance or policy, can be considered available for appropriation in the same manner as revenues and other financing sources. Consequently, if the sum of any excess fund balances and estimated revenues exceeds appropriations, then town officials would be in compliance with any balanced budget requirement. In fact, legislative bodies often budget the use of a portion of fund balance if it exceeds any minimum requirement established by ordinance or policy.

Fund Balance—Unassigned on September 30 after all closing entries will be $505,000, as shown below: 3-12 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Solutions, Exercise 3-20 (Cont'd)

SPENDABLE FUND BALANCES Fund Balance—Unassigned (beginning balance)

500,000

To close revenues for the year

32,190,000

To close expenditures for the year

(32,185,000)

Fund Balance—Unassigned (ending balance)

505,000

General Problem Information: Recording budget and ending fund balance Learning Objective: 3-5 Topic: Budgetary Accounting Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting, Decision Making Level of Difficulty: Medium 3-21. a.

CITY OF GALAXY The balance in Appropriations after subtracting the Encumbrances amount is $3,205 ($8,000-$4,795 for the PO issued January 21). This is also the amount remaining in the account after adjusting for the voucher on January 30. The balance in the Encumbrances account is $2,260 after adjusting for the voucher amount, this balance is added to the amount of the Expenditure ($2,535 vouchered). The result of $2,260 in outstanding encumbrances and expenditures of $2,535 leaves an Appropriations balance of $3,205. No, not in the Equipment account. After receiving the item on January 30, the available appropriation balance is $3,205, which does not provide sufficient legal authorization to order the new computer with an estimated cost of $3,600. The balance available in Appropriations after issuing the PO on January 15 and subtracting the Encumbrance amount is $4,500. The amount in the Appropriations account after canceling the PO and adjusting for the voucher issued on January 30 is $4,505. If the Office Supplies account can be used to help purchase the copier there would be sufficient appropriations available. This answer depends upon the legal level of budgetary control established by the city. If the legal level is at the account level, then excess appropriations in other Personnel Department accounts will not legally be available to spend for other purposes without city council approval. However, if the legal level of budgetary control is at a fund, departmental, or program level, then local government budget policies often permit the finance director, upon recommendation of the department head, to transfer appropriation amounts from one line item to another within the same department. Any overall increase in an appropriation must be approved by ordinance of the governing body. It might also be recommended that the Personnel Department consider a different brand or model of copier that would be cheaper and within the available appropriation.

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Solutions, Exercise 3-21 (Cont'd)

General Problem Information: Budgetary control over expenditures Learning Objective: 3-5 Topic: Budgetary Accounting Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Decision Making Level of Difficulty: Hard 3-22.

TOWN OF WILLINGDON

General Ledger Debits ESTIMATED REVENUES

Credits

Subsidiary Ledger Debits

Credits

16,558,700

BUDGETARY FUND BALANCE APPROPRIATIONS

28,700 16,530,000

Estimated Revenues Ledger: TAXES

14,900,000

INTERGOVERNMENTAL REVENUES

600,000

CHARGES FOR SERVICES

810,500

FINES AND FORFEITS

150,000

MISCELLANEOUS REVENUES

98,200

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Solutions, Exercise 3-22 (Cont'd)

Appropriations Ledger: GENERAL GOVERNMENT

5,400,000

PUBLIC SAFETY

8,550,000

PUBLIC WORKS

1,540,000

CULTURE AND RECREATION

960,000

MISCELLANEOUS

80,000

General Problem Information: Recording the budget Learning Objective: 3-5 Topic: Budgetary Accounting Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Measurement Level of Difficulty: Medium 3-23.

TOWN OF LYNTON General Ledger Debits

ENCUMBRANCES—20xx

Credits

Subsidiary Ledger Debits

Credits

2,294,315

ENCUMBRANCES OUTSTANDING—20xx

2,294,315

Encumbrances Ledger:

GENERAL GOVERNMENT

550,000

PUBLIC SAFETY

735,200

PUBLIC WORKS

954,845

CULTURE AND RECREATION

54,270

ENCUMBRANCES OUTSTANDING—20xx

1,727,763

ENCUMBRANCES—20xx EXPENDITURES—20xx VOUCHERS PAYABLE

1,727,763 1,727,813 1,727,813

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Solutions, Exercise 3-23 (Cont'd)

Encumbrances Ledger: GENERAL GOVERNMENT

490,000

PUBLIC SAFETY

720,013

PUBLIC WORKS

463,480

CULTURE AND RECREATION

54,270

Expenditures Ledger: GENERAL GOVERNMENT

490,000

PUBLIC SAFETY

720,013

PUBLIC WORKS

463,480

CULTURE AND RECREATION

54,320

Note: Except Culture and Recreation, all functions received only portions of the products requested. Therefore, the amount of the encumbrances cancelled is equal to the actual cost of the products received. The total encumbrance for Culture and Recreation was cancelled since it received everything ordered. General Problem Information: Recording encumbrances and expenditures Learning Objective: 3-5 Topic: Budgetary Accounting Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Measurement & Reporting Level of Difficulty: Medium

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

3-24. General Ledger Debits a.

ESTIMATED REVENUES

Credits

Subsidiary Ledger Debits

Credits

2,700,000

BUDGETARY FUND BALANCE

50,000

APPROPRIATIONS

2,650,000

Estimated Revenues Ledger: TAXES

1,900,000

LICENSES AND PERMITS

350,000

FINES AND FORFEITS

250,000

INTERGOVERNMENTAL REVENUES

200,000

Appropriations Ledger: GENERAL GOVERNMENT

500,000

PUBLIC SAFETY

1,600,000

PUBLIC WORKS

350,000

CULTURE AND RECREATION

150,000

MISCELLANEOUS

50,000

b. General Ledger Debits 1.

CASH REVENUES

Credits

Subsidiary Ledger Debits

Credits

43,000 43,000

Revenues Ledger: LICENSES AND PERMITS

31,000

FINES AND FORFEITS

12,000

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Solutions, Exercise 3-24 (Cont'd)

General Ledger Debits 2.

ENCUMBRANCES—20xx

Credits

Subsidiary Ledger Debits

Credits

29,900

ENCUMBRANCES OUTSTANDING—20xx

29,900

Encumbrances Ledger: GENERAL GOVERNMENT

7,400

PUBLIC SAFETY

11,300

PUBLIC WORKS

6,100

CULTURE AND RECREATION

4,200

MISCELLANEOUS

900

ENCUMBRANCES OUTSTANDING—20xx

29,100

ENCUMBRANCES—20xx EXPENDITURES—20xx

29,100 29,200

CASH

29,200

Encumbrances Ledger: GENERAL GOVERNMENT

7,400

PUBLIC SAFETY

10,700

PUBLIC WORKS

5,900

CULTURE AND RECREATION

4,200

MISCELLANEOUS

900

Expenditures Ledger: GENERAL GOVERNMENT

7,300

PUBLIC SAFETY

10,800

PUBLIC WORKS

6,100

CULTURE AND RECREATION

4,100

MISCELLANEOUS

900

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Solutions, Exercise 3-24 (Cont'd)

c. CALCULATION OF BUDGETED BUT UNREALIZED REVENUES AS OF JULY 31 UNREALIZED SOURCE PROPERTY TAXES

BUDGETED

ACTUAL

REVENUE

$1,900,000

-0-

$1,900,000

LICENSES AND PERMITS

350,000

31,000

319,000

FINES AND FORFEITS

250,000

12,000

238,000

INTERGOVERNMENTAL

200,000

-0-

200,000

$2,700,000

$43,000

$2,657,000

TOTAL

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Solutions, Exercise 3-24 (Cont'd)

CALCULATION OF AVAILABLE APPROPRIATIONS, AS OF JULY 31 AVAILABLE APPROPRIATIONS

ENCUMBRANCES

EXPENDITURES

APPROPRIATIONS

GENERAL GOVERNMENT

$ 500,000

$ -0-

$ 7,300

$ 492,700

PUBLIC SAFETY

1,600,000

600

10,800

1,588,600

PUBLIC WORKS

350,000

200

6,100

343,700

CULTURE AND RECREATION

150,000

-0-

4,100

145,900

MISCELLANEOUS

50,000

-0-

900

49,100

$2,650,000

$800

$29,200

$2,620,000

TOTAL

General Problem Information: Recording General Fund operating budget and operating transactions Learning Objective: 3-5 Topic: Budgetary Control of Encumbrances and Expenditures Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Measurement Level of Difficulty: Medium

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

3-25.

CITY OF AUGUSTA

Estimated revenues total $900,000, while appropriations total $860,000 (the sum of the amounts designated as “Budget Authorization” in the Estimated Revenues and Appropriations columns of the respective subsidiary ledgers). 1. Intergovernmental Revenues (entry 103) was adjusted by $12,500 in the Revenues ledger and Public Safety (entry 103) was adjusted $50,000 in the Appropriations ledger. 2. Decreased. Both Estimated Revenues and Appropriations were increased; however, the overall impact on the original budget was a $37,500 decrease ($50,000 increase in Appropriations - $12,500 increase in Estimated Revenues) to Budgetary Fund Balance. 1. There is a debit balance in the three Revenues ledger accounts totaling $912,500, while there is a credit balance totaling $910,000 in the four accounts in the Appropriations ledger. 2. Totaling the Revenues column equates to $225,000; the one Encumbrances balance is $1,700; while Expenditures to date sum to $200,650. 3. Of the $912,500 estimated revenues (original budget plus amendment), $225,000 has been recognized and $687,500 remains to be recognized. The city has authorizations to spend $910,000, of which $1,700 is encumbered and $200,650 has been spent, indicating that $707,650 may legally be spent as authorized.

General Problem Information: Subsidiary ledgers Learning Objective: 3-5 Topic: Budgetary Accounting Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Measurement Level of Difficulty: Hard 3-26.

CITY OF LEEVILLE

Generally, encumbrances are not used with salary and wage expenditures. The reason encumbrances are not used is because salary and wage expenditures tend to be recurring and relatively constant in amount.

Yes, normally it would be expected that encumbrances would be used with capital outlays given that such outlays are not recurring and costs vary from item to item. The most likely reason there are no encumbrances is that all purchases have been received and there are currently no requests for additional purchases.

Based strictly on spending to date, it would appear that Personnel, Materials & Supplies, and Capital Outlays could overspend the appropriated amounts prior to the fiscal year end. Personnel has spent 83% ($537,010/$647,000) of its appropriation, Materials & Supplies has spent or encumbered 90% of its appropriation ([$979,968+$19,599]/$1,113,600), and Capital Outlay has spent 94% ($110,250/$117,000) of its appropriation. It also appears that Miscellaneous could underspend its appropriation since only 64% 3-21 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Solutions, Exercise 3-26 (Cont'd)

([$87,681+$4,384]/$144,928) of the appropriation has been spent or encumbered at the end of the 3rd quarter.

Given that this city is located in the northeastern part of the United States it is likely that the costs of snow removal and keeping streets clear during winter weather would cause a greater use of Material & Supplies in the 1st and 2nd quarters of the fiscal year. It is also possible that there would be a need for additional personnel or overtime costs during those periods, causing the Personnel costs to be higher. Additionally, street maintenance activities may be higher during the summer when the weather allows for street, curb and sidewalk repair. As a result, the higher costs seen to date may not be indicative of spending for the remaining quarter. Capital Outlays are planned expenditures; therefore, it is probable that the Division’s management has already acquired most of the capital assets it had budgeted for the period, rather than waiting to the 4th quarter to acquire the assets. Since it is unknown what is included in Miscellaneous it is difficult to determine what is affecting the spending pattern. However, because this is Miscellaneous and contains a variety of items, it would make it more difficult to budget. As a result, management may have opted to be conservative when setting the budget for Miscellaneous for the current fiscal year. General Problem Information: Departmental budgetary comparison report Learning Objective: 3-3 Topic: Reporting Budgeted and Actual Results Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application; AICPA: BB Critical Thinking Level of Difficulty: Hard

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

3-27. WESTOVER VILLAGE Statement of Activities (partial) For the Year Ended June 30, 2023 Net (Expense) Revenue and Changes in Net Position

Functions/Programs Primary Government General government Public safety Health and sanitation Culture and recreation Interest on long-term debt Total governmental activities

Expenses $ 9,571 34,844 6,738 12,352 6,068 $ 69,573

Program Revenues Charges for Operating Capital Services Grants Grants $ 3,146 1,198 5,612 3,995 _______ $ 13,951

$ 843 1,307

$ 62

2,450 _____ $ 4,600

____ $ 62

General revenues: Property taxes Unrestricted grants and contributions Investment earnings Total general revenues Special item—gain on sale of park land Total general revenues and special items Change in net position Net position—July 1, 2022 Net position—June 30, 2023

Governmental Activities $

(5,582) (32,277) (1,126) (5,907) (6,068) (50,960)

56,300 1,200 1,958 59,458 3,473 62,931 11,971 1,643 $ 13,614

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Solutions, Exercise 3-27 (Cont'd)

General Problem Information: Government-wide statement of activities Learning Objective: 3-1 Topic: Classification and Reporting of Expenses and Revenues at the Government-wide Level Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

3-28. a. CITY OF GREENVILLE General Fund Statement of Revenues, Expenditures, and Changes in Fund Balances for the Fiscal Year (amounts in thousands)

Revenues: Taxes Fines and forfeits Intergovernmental revenue Charges for services Total Revenues

Expenditures: General government Public safety Public works Culture and recreation Total Expenditures

6,051 308 500 366 7,225

$ 1,622 3,361 1,443 718 7,144

Other Financing Sources and (Uses) Interfund transfer out Change in Fund Balances Fund Balances, January 1 Fund Balances, December 31

(50) 31 152 183

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Solutions, Exercise 3-28 (Cont'd)

CITY OF GREENVILLE General Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances—Budget and Actual for the Fiscal Year (amounts in thousands) Budgeted Amounts Original Final

Revenues Taxes Fines and forfeits Intergovernmental revenue Charges for services Total revenues Expenditures and Encumbrances General government Public safety Public works Culture and recreation Total Expenditures Excess of revenues over expenditures Other Financing Sources and (Uses) Interfund transfers out

Excess of revenues over expenditures and other financing sources

6,048 303 500 370 7,221

Actual Amounts Budget Basis

6,048 303 500 370 7,221

Variance with Final Budget Over(Under)

6,051 308 500 366 7,225

3 5 (4) 4

1,635 3,375 1,448 724 7,182 39

1,630 3,372 1,446 718 7,166 59

(5) (3) (2) (6) (16) 20

(11) -

9 22

20 22

Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting

Ch. 3, Solutions, Exercise 3-28 (Cont'd)

Increase in encumbrances outstanding Increase in fund balances for the year Fund balances, January 1 Fund balances, December 31

(11) 152 141

31 152 183

42 42

General Problem Information: Governmental fund statement and schedule Learning Objective: 3-3 Topic: Reporting Budgeted and Actual Results Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

CHAPTER 4:

ACCOUNTING FOR GOVERNMENTAL OPERATING ACTIVITIES⎯ILLUSTRATIVE TRANSACTIONS AND FINANCIAL STATEMENTS OUTLINE

Number

Topic

Questions: 4-1 Appropriate choice of governmental fund 4-2 Uncollected property taxes 4-3 Tax anticipation notes 4-4 Dual effects of transactions 4-5 Property tax revenue 4-6 Differences in property tax revenues 4-7 Accounting for supplies 4-8 Interim financial reporting 4-9 Payments in lieu of taxes 4-10 Classes of nonexchange transactions 4-11 Deferred inflows of resources Cases: 4-12 Analyzing budget and actual data 4-13 Policy issues relating to property taxes 4-14 Delinquent taxes and tax liens 4-15 Property taxes and economic development Exercises/Problems: 4-16 4-17 4-18 4-19 4-20 4-21 4-22 4-23 4-24 4-25 4-26 4-27 4-28

Examine the CAFR Various Various Accounting for property taxes Differences in accounting for property taxes Tax anticipation financing and issuance of TANs Preparing statements from revenue and appropriations ledgers Special revenue fund, voluntary nonexchange transactions Transactions and budgetary comparison schedule Interfund and interactivity transactions Comparison of inventory methods Operating transactions and financial statements Permanent fund accounting

Type/Task

Status (re: 18/e)

Analyze Explain Explain Explain, examples Compute Explain Explain Explain Describe Describe Describe

Same New Same Same Same Same Same Same New Same Revised

Examine, write Analyze, write Research, write Analyze, explain

Same Same Same New

Examine Multiple Choice Multiple Choice Calculate, JEs Calculate, JEs Calculate, JEs

Updated 1, 2, and 10 are new New Same Same Same

JEs, Statements

New

Analyze, JEs

Same

JEs and schedule

Revised

JEs Calculate, JEs JEs and statement

Same Same Revised

JEs and statements

Same

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

CHAPTER 4:

ACCOUNTING FOR GOVERNMENTAL OPERATING ACTIVITIES—ILLUSTRATIVE TRANSACTIONS AND FINANCIAL STATEMENTS

Answers to Questions 4-1.

In addition to the General Fund, governmental fund categories include: special revenue, debt service, capital projects, and permanent funds. The property taxes are recorded in the General Fund. As set forth in GASB Codification Sec. 1300, paragraph 105, special revenue funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects. Therefore, the gas tax should be recorded in a special revenue fund. Permanent funds are used to account for and report resources that are restricted to the extent that only earnings, and not principal, may be used for purposes that benefit the government or its citizenry (GASB Codification Sec. 1300, paragraph 108). Hence, the contribution for historical books should be recorded in a permanent fund. It should be noted, however, that a government may not be required to establish a special revenue or permanent fund and can account for all activity in the General Fund, if manageable. GASB Codification Sec. 1300, paragraph 118 advises governments to establish the minimum number of separate funds consistent with legal specifications, operational requirements, and the principles of fund classification. General Problem Information: Appropriate choice of governmental fund Learning Objective: 4-4 Learning Objective: 4-6 Topic: Special Revenue Funds, Permanent Funds Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

4-2.

Uncollected property taxes receivable should be reclassified as delinquent after their due date passes. Furthermore, any amounts that are not expected to be collected within 60 days of fiscal year end, will also be reported as Deferred Inflows of Resources— Unavailable Revenues (net of any associated allowance for uncollectible taxes). Some governments sell the collection rights for unpaid property taxes to investors. Accordingly, these governments would not report property taxes receivable, despite the fact that all of its taxpayers failed to pay their assessed taxes. General Problem Information: Uncollected property taxes Learning Objective: 4-1 Topic: Accounting for Property Taxes Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 4-2 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Answers (Cont’d)

4-3.

Since cash inflows to governments often do not occur on a consistent basis, many governments borrow money on a short-term basis. The taxing power of the government is ample security for short-term debt, thus banks customarily meet the working capital needs of a government by issuing a tax anticipation note to the government. General Problem Information: Tax anticipation notes Learning Objective: 4-1 Topic: Tax Anticipation Notes Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

4-4.

Under the GASB financial reporting model, governmental activities are reported on a long-term perspective at the government-wide level using the economic resources measurement focus and the accrual basis of accounting, similar to business accounting. This means that both current and noncurrent assets and liabilities, as well as deferred inflows and outflows of resources, are reported on the statement of net position. Revenues, and expenses recognized on the accrual basis, are reported on the statement of activities. Conversely, the General Fund reports on a short-term perspective using the current financial resources measurement focus and the modified accrual basis of accounting. Therefore, the General Fund reports only current assets, current liabilities, and deferred inflows and outflows of resources. Revenues and expenditures and other financing sources and uses, recognized on the modified accrual basis, are reported on the statement of revenues, expenditures, and changes in fund balances. Examples of transactions or events that are recorded only in the General Fund general journal include budgetary entries and encumbrance transactions. Examples of transactions that are recorded only in the governmental activities general journal include depreciation expense on general capital assets and accrual of interest on long-term debt (as discussed in Chapter 6). Purchases of non-capital goods and services, salaries and wages, and most revenue items are examples of transactions that are recorded in both the General Fund general journal and the governmental activities journal. General Problem Information: Dual effects of transactions Learning Objective: 4-1 Topic: Dual-track Accounting Approach Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Answers (Cont’d)

4-5.

$6,720,000 = gross levy − (.04 × gross levy) $6,720,000 = (1 − .04) × gross levy $6,720,000 = .96 × gross levy gross levy = $6,720,000/.96 = $7,000,000. General Problem Information: Property tax revenue Learning Objective: 4-1 Topic: Accounting for Property Taxes Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Critical Thinking Level of Difficulty: Medium

4-6.

Property tax revenue is an example of an imposed nonexchange revenue, thus revenue should be credited in the year for which the tax was levied. In governmental funds, however, revenue is recognized when measurable and available, with available specified for property taxes as collected within the current period or within 60 days of year-end (GASB Codification, Sec. P70.104). The available criteria and 60-day rule do not apply to governmental activities at the government-wide level, resulting in differences between property tax revenue reported in governmental funds and in the governmental activities. In any given year, the full portion of property tax revenue that is considered collectible will be recognized as revenue at the government-wide level. In the governmental funds, property tax revenue will include current year property taxes levied and collected during the current year or within 60 days of year-end. It will also include prior year delinquent property taxes collected more than 60 days after the previous year-end. Property taxes receivable that are not considered available are classified as deferred inflows of resources in the governmental fund financial statements. General Problem Information: Differences in property tax revenues Learning Objective: 4-1 Learning Objective: 4-7 Topic: Accounting for Property Taxes Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

4-7.

The purchases method is consistent with the modified accrual basis of accounting as an expenditure is recognized for the full cost of supplies when purchased, regardless of the amount used during the year. The consumption method is consistent with the accrual basis of accounting as an expenditure or expense is recognized for the cost of supplies used during the year. Some governments may choose to use the purchases method in the General Fund, since it is more consistent with the modified accrual basis used for budgeting. At the government-wide level, GASB standards require the use of accrual 4-4 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Answers, Question 4-7 (Cont’d)

accounting. The purchases method would therefore be inappropriate at the governmentwide level. General Problem Information: Accounting for supplies Learning Objective: 4-1 Learning Objective: 4-2 Topic: Adjusting Entries Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 4-8.

Although there is no requirement for external interim financial reporting, all state and local governments should prepare interim financial schedules for the internal use of administrators and legislators. Interim budgetary comparison schedules are essential to sound budgetary control and ensure that appropriate officials can take timely action to correct unexpected revenue or expenditure/encumbrance variances. General Problem Information: Interim financial statements Learning Objective: 4-8 Topic: Interim Financial Statements (Appendix B) Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

4-9.

A payment in lieu of taxes (PILOT) is a contribution made by a tax-exempt property holder to compensate a government for the value of government services provided (e.g., police and fire protection). Since some properties within a government's domain may be exempt from property tax assessment but still benefit from government services, the taxing government may impose fees upon these tax-exempt property holders based on the value of services provided by the government. The tax-exempt property holder often pays at least a portion of the imposed fee to retain good relations with the government and local taxpayers. General Problem Information: Payments in lieu of taxes Learning Objective: 4-1 Topic: Services Provided by an Enterprise Fund Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

4-10.

As shown in Appendix A to Chapter 4, the four classes of nonexchange transactions are (1) derived tax revenues, (2) imposed nonexchange revenues, (3) government-mandated nonexchange transactions, and (4) voluntary nonexchange transactions. For derived tax

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Answers, Question 4-10 (Cont’d)

revenues, such as sales and similar taxes, revenues should be recognized when the underlying exchange (e.g., sale of goods or services) has occurred. Revenues for imposed nonexchange revenues should be recognized when resources are required to be used or the first period that use is permitted. For both government-mandated and voluntary transactions, revenues (and expenses or expenditures for the other party) should be recognized in the period when all eligibility requirements, such as meeting matching requirements, have been met, unless received (or paid) in advance of use in a following period. If cash is received in advance of eligibility requirements having been met, the receipt should be reported as a liability. Resources received before time requirements are met, but after all other eligibility requirements have been met, should be reported as a deferred inflow of resources by the recipient. General Problem Information: Classes of nonexchange transactions Learning Objective: 4-7 Topic: Exchange Transactions (Appendix A) Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 4-11. Deferred inflows of resources are resources that have been acquired but are applicable to a future period (e.g. resources received but unavailable for use until a future period). Deferred inflows decrease net position. These accounts, used only when required by a GASB standard, represent timing differences between the actual outflow or inflow of cash and the time period to which they apply. Deferred inflows related to unavailable revenues represent revenues in governmental funds that will not be available soon enough after year-end to meet current obligations. Examples are delinquent property taxes receivable and interest and penalties receivable on taxes (net of associated allowances) that are not expected to be collected within 60 days of year end (GASB Codification, Sec. P70.104). General Problem Information: Deferred inflows of resources Learning Objective: 4-1 Learning Objective: 4-3 Topic: Illustrative Journal Entries Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium Solutions to Cases: 4-12. a. Students will examine different governments and may locate budgetary comparisons with the fund financial statements or in required supplementary information. The variance column is not required, but it is often presented. 4-6 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Case 4-12 (Cont’d)

b. Students are often interested in large variances between the original, legally-adopted budget and the final results. Historically the original budget was not presented in budgetary comparisons, so the final amended budget was compared to actual results. You may discuss budgets with students. It is also informative to note whether changes to revenue projections impacted expenditures. c. Students responses will differ. The MD&A should include a brief discussion of budgetary highlights. This information could also appear in the Letter of Transmittal or Notes to the Financial Statements if the government faced budgetary issues. General Problem Information: Analyzing budget and actual data Learning Objective: 4-3 Topic: General Fund Financial Statements Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 4-13. This is a case for which there is no “right” answer. Rather students should be given credit for how well they identify, develop, and communicate pertinent issues, and on the quality of their analysis. a. (1) Most students should see their tax situation during the first two years of the prerecession period in a very favorable light. After all, who wouldn’t be delighted to find their property taxes declining while the market value of the same property is increasing? (2) Many would be alarmed to see that the assessed valuation of their property increased by 35 percent. Because the increase only brings the assessed valuation of their property in line with market value, the level of concern likely would not warrant an appeal to the Equalization Review Commission. After all, for two years the taxpayer had been paying lower property taxes than many other taxpayers with similar property. (3) This is the time that the student, as property owner, should be getting very concerned. On top of owing more than the property is worth, he/she is facing an increasing property tax payment. Many taxpayers could be expected to appeal to the commission in hopes of obtaining a decrease in the assessed valuation of their property. However, if the commission looks at the full five years an appeal might be dismissed. b. (1) While it may be tempting to leave the tax rate unchanged during the period property taxes are increasing, property owners whose properties have recently been reassessed upward can be expected to lobby their council members or testify at budget hearings for a reduction in the property tax rate. Since it is in the city manager’s interest to maintain the revenue base as high as possible, her or his 4-7 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Case 4-13, Part b.(1) (Cont’d)

efforts should be focused on maintaining a relatively consistent tax projection. She/he can argue that assessed values of property are seldom synchronized with actual market values, so tax rates should be kept within a consistent range to help deal with uncertainty about future economic and market conditions. (2) As it was for the property owners, the recessionary period is the period of greatest concern to the city manager. Revenues from sources other than property taxes, particularly sales taxes, will be declining sharply during a severe recession. Thus, while the city manager would like to increase the property tax rate to offset declining revenues, political opposition to any kind of tax increase can be expected. Even restoring the property tax rate to its historical level, after three years of rollbacks during the pre-recession period, might be a politically tough sell. The city manager’s best tactical approach might be to focus on the “normal” property tax rate, pointing out that tax rates should return to their normal level following rate rollbacks during an economic upswing. Even if the city manager can persuade the city council to approve only a slight increase in the property tax rate, that would help to partially offset the decline in other revenues. At any rate, this case raises one’s awareness that in the government environment political considerations are often as important as economic considerations, particularly during times of economic distress. Such situations almost always pose significant challenges for local government officials, both elected and appointed. General Problem Information: Policy issues relating to property taxes Learning Objective: 4-1 Topic: Accounting for Property Taxes Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making Level of Difficulty: Medium 4-14. Student responses will vary depending upon the government selected and the policies in effect regarding delinquent taxes and tax liens. Students should find this research case interesting, especially when they learn that, in some cases, tax lien buyers are able to obtain legal title to a property by paying delinquent taxes and filing necessary paperwork. The instructor may wish to make note of governments with interesting tax lien policies. General Problem Information: Delinquent taxes and tax liens Learning Objective: 4-1 Topic: Accounting for Property Taxes Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making Level of Difficulty: Easy

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Cases (Cont’d)

4-15. This case addresses the issue of property that may or may not assessed by the local government for property taxes. In this case the property is in a commercial area where annual property and sales taxes of $208,000 could potentially be collected if a commercial property owner moved in, rather than a government agency. The $208,000 is somewhat offset by estimated payments in lieu of taxes (PILOT) that the government agency would remit. An additional factor is that new jobs would be generated by both the government agency and the shops being proposed. While the shops would employ more people, it should be discussed that these jobs would likely be lower-paying and for less-skilled workers than those provided by the government agency. The mayor might want to know the building and opening schedules for each prospective tenant to estimate when taxes or the PILOT might begin. Other questions might involve the length of time that each prospective property holder plans to stay and the construction plans. Would there be any other impact on town resources? General Problem Information: Property taxes and economic development Learning Objective: 4-1 Topic: Services Provided by an Enterprise Fund Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making Level of Difficulty: Medium Solutions to Exercises and Problems 4-16. The answers will differ from student to student, since each has a different annual report. The instructor may wish to have copies made of good examples of statements, charts, graphs, informative schedules, and tables. Some class discussion of the different presentations found by students is worthwhile. As a suggestion, you could ask students to carefully review the government-wide statement of net position and statement of activities and comment on the usefulness of those two statements. General Problem Information: Examine the CAFR Learning Objective: 4-3 Topic: Various Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

4-17.

1. 2. 3. 4. 5.

c. b. d. c. b.

6. 7. 8. 9. 10.

d. d. c. b. d.

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-18 (Cont’d)

General Problem Information: Various Learning Objective: 4-1 Learning Objective: 4-2 Learning Objective: 4-3 Learning Objective: 4-4 Learning Objective: 4-5 Topic: Various chapter topics Bloom’s Taxonomy: Remember/Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 4-18.

1. 2. 3. 4. 5.

b. d. d. d. a.

6. 7. 8. 9. 10.

c. c. a. d. a.

General Problem Information: Various Learning Objective: 4-1 Learning Objective: 4-2 Learning Objective: 4-4 Learning Objective: 4-5 Learning Objective: 4-6 Learning Objective: 4-7 Topic: Various chapter topics Bloom’s Taxonomy: Remember/Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions (Cont’d)

4-19.

RIDGEDALE COUNTY General Ledger Debits Credits

General Fund: TAXES RECEIVABLE—CURRENT 4,200,000 ALLOWANCE FOR UNCOLLECTIBLE CURRENT TAXES REVENUES

84,000 4,116,000

Revenues Ledger: PROPERTY TAXES b.

General Fund: CASH

4,116,000

3,900,000

TAXES RECEIVABLE— CURRENT c.

Subsidiary Ledger Debits Credits

General Fund: CASH

3,900,000

57,800

TAXES RECEIVABLE— DELINQUENT

53,000

INTEREST AND PENALTIES RECEIVABLE ON TAXES

4,800

DEFERRED INFLOWS OF RESOURCES—UNAVAILABLE REVENUES REVENUES Revenues Ledger: PROPERTY TAXES INTEREST AND PENALTIES

57,800 57,800 53,000 4,800

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-19 (Cont’d)

General Ledger Debits Credits d.

General Fund: TAXES RECEIVABLE— DELINQUENT

300,000

ALLOWANCE FOR UNCOLLECTIBLE CURRENT TAXES

84,000

TAXES RECEIVABLE— CURRENT

300,000

ALLOWANCE FOR UNCOLLECTIBLE DELINQUENT TAXES

84,000

REVENUES

216,000

DEFERRED INFLOWS OF RESOURCES—UNAVAILABLE REVENUES Revenues Ledger:

216,000

PROPERTY TAXES e.

General Fund: INTEREST AND PENALTIES RECEIVABLE ON TAXES

Subsidiary Ledger Debits Credits

216,000

14,500

ALLOWANCE FOR UNCOLLECTIBLE INTEREST AND PENALTIES

1,700

DEFERRED INFLOWS OF RESOURCES—UNAVAILABLE REVENUES

12,800

Yes. Since the property taxes were not expected to be collected within 60 days of year-end, they were reclassified from Revenues to Deferred Inflows of Resources—Unavailable Revenues in the General Fund. If the taxes are collected within 60 days of year-end, they should be recognized in current year revenues. Since audited financial statements of governments are 4-12 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-19 (Cont’d)

typically issued several months after year-end, an adjusting entry should be made to properly include the amounts in tax revenue. General Problem Information: Accounting for property taxes Learning Objective: 4-1 Topic: Accounting for Property Taxes Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application Level of Difficulty: Medium

4-20. a.

CITY OF PLATTSBURGH General Ledger Debits Credits

General Fund: TAXES RECEIVABLE—CURRENT 6,600,000 ALLOWANCE FOR UNCOLLECTIBLE CURRENT TAXES REVENUES

General Fund: CASH

132,000 6,468,000

5,975,000

TAXES RECEIVABLE— CURRENT 3.

General Fund: CASH

5,975,000

57,800

TAXES RECEIVABLE— DELINQUENT

53,000

INTEREST AND PENALTIES RECEIVABLE ON TAXES

4,800

DEFERRED INFLOWS OF RESOURCES—UNAVAILABLE REVENUES REVENUES

57,800 57,800

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-20 a., (Cont’d)

General Ledger Debits Credits 4.

General Fund: INTEREST AND PENALTIES RECEIVABLE ON TAXES

7,500

ALLOWANCE FOR UNCOLLECTIBLE INTEREST AND PENALTIES DEFERRED INFLOWS OF RESOURCES— UNAVAILABLE REVENUES 5.

1,300

6,200

General Fund: TAXES RECEIVABLE— DELINQUENT

625,000

ALLOWANCE FOR UNCOLLECTIBLE CURRENT TAXES

132,000

TAXES RECEIVABLE— CURRENT

625,000

ALLOWANCE FOR UNCOLLECTIBLE DELINQUENT TAXES

132,000

REVENUES DEFERRED INFLOWS OF RESOURCES— UNAVAILABLE REVENUES

493,000

(This figure, $493,000, includes taxes recorded as revenues less collections.)

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-20 (Cont’d)

CITY OF PLATTSBURGH General Ledger Debits Credits Governmental Activities: TAXES RECEIVABLE—CURRENT 6,600,000 ALLOWANCE FOR UNCOLLECTIBLE CURRENT TAXES

132,000

GENERAL REVENUES— PROPERTY TAXES 2.

Governmental Activities: CASH

6,468,000

5,975,000

TAXES RECEIVABLE— CURRENT 3.

Governmental Activities: CASH

5,975,000

57,800

TAXES RECEIVABLE— DELINQUENT

53,000

INTEREST AND PENALTIES RECEIVABLE ON TAXES

4,800

Governmental Activities: INTEREST AND PENALTIES RECEIVABLE ON TAXES ALLOWANCE FOR UNCOLLECTIBLE INTEREST AND PENALTIES GENERAL REVENUES— INTEREST AND PENALTIES ON DELINQUENT TAXES

7,500

1,300

6,200

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-20 b. (Cont’d)

Governmental Activities: TAXES RECEIVABLE— DELINQUENT

625,000

ALLOWANCE FOR UNCOLLECTIBLE CURRENT TAXES

132,000

TAXES RECEIVABLE— CURRENT

625,000

ALLOWANCE FOR UNCOLLECTIBLE DELINQUENT TAXES

132,000

c. General Fund Revenues:

Government-wide Revenues:

1. Tax levy 3. + Delinquent collections 5. – Unavailable revenues

$ 6,468,000 + 57,800 − 493,000

1. Tax levy $ 6,468,000 2. + Interest & penalties $6,200

Current year revenue

$ 6,032,800

Current year revenue $6,474,200

The difference between General Fund revenues and revenues recorded at the government-wide level is that only amounts that are measurable and available can be recognized on the modified accrual basis of accounting. The difference of $441,400 will be a reconciling item within the financial statements. General Problem Information: Differences in accounting for property taxes Learning Objective: 4-1 Topic: Accounting for Property Taxes Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application Level of Difficulty: Medium

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions (Cont’d)

4-21. a.

City of Troy Calculation of Estimated Required Tax Anticipation Financing

Estimated Expenditure Requirements: Budgeted expenditures, remainder of year Current liabilities payable

$2,500,000 830,000 $3,330,000

Estimated Resources Available: Cash on hand, beginning of year Collections of budgeted revenues and delinquent property taxes, including interest and penalties

770,000

1,100,000

Estimated Amount of Required Tax Anticipation Note Financing b.

1,870,000 $1,460,000

General Ledger Debits Credits

General Fund and Governmental Activities: CASH

1,460,000

TAX ANTICIPATION NOTES PAYABLE c. General Fund: TAX ANTICIPATION NOTES PAYABLE EXPENDITURES

1,460,000

1,460,000 43,800

CASH

1,503,800

Governmental Activities: TAX ANTICIPATION NOTES PAYABLE

1,460,000

EXPENSES—GENERAL GOVERNMENT

43,800

CASH

1,503,800

(Note: Interest on notes is $1,460,000 × .06 × 6/12 = $43,800) General Problem Information: Tax anticipation financing and issuance of TANs Learning Objective: 4-1 Topic: Tax Anticipation Notes Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application Level of Difficulty: Medium 4-17 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions (Cont’d)

4-22. a.

CITY OF GREEN FALLS GENERAL LEDGER Debits

General Fund: APPROPRIATIONS

Credits

9,134,750

ESTIMATED OTHER FINANCING USES

50,000

BUDGETARY FUND BALANCE

60,200

ESTIMATED REVENUES

9,244,950

REVENUES

9,248,375

FUND BALANCE—UNASSIGNED

71,042

EXPENDITURES

9,127,333

OTHER FINANCING USES

50,000

b. ENCUMBRANCES OUTSTANDING: GENERAL GOVERNMENT

830

PUBLIC SAFETY

5,300

PUBLIC WORKS

17,240

CULTURE AND RECREATION

7,225

TOTAL

$ 30,595

Encumbrances outstanding are not reported on the General Fund balance sheet, unless amounts are restricted, committed, or assigned. In that case a portion of fund balance will be so classified. Encumbrances outstanding are added to expenditures in the budget to actual statement or schedule “actual” column if the encumbrances will be honored and charged against the current year budget.

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

c. CITY OF GREEN FALLS GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED REVENUES: TAXES—PROPERTY

$6,492,000

TAXES—SALES

710,600

INTEREST AND PENALTIES ON TAXES

21,800

LICENSES AND PERMITS

455,050

FINES AND FORFEITS

493,050

INTERGOVERNMENTAL REVENUE

517,750

CHARGES FOR SERVICES

342,950

MISCELLANEOUS REVENUES

215,175

TOTAL REVENUES

9,248,375

EXPENDITURES: GENERAL GOVERNMENT

$1,817,676

PUBLIC SAFETY

3,481,644

PUBLIC WORKS

1,682,471

HEALTH AND WELFARE

1,011,678

CULTURE AND RECREATION

1,025,864

MISCELLANEOUS

108,000

TOTAL EXPENDITURES

9,127,333

EXCESS OF REVENUES OVER EXPENDITURES

121,042

OTHER FINANCING SOURCES (USES): INTERFUND TRANSFERS OUT TOTAL OTHER FINANCING SOURCES (USES)

(50,000) (50,000)

INCREASE IN FUND BALANCES

71,042

FUND BALANCES, JANUARY 1

158,260

FUND BALANCES, DECEMBER 31

$229,302

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions 4-22 (Cont’d)

CITY OF GREEN FALLS GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES— BUDGET AND ACTUAL FOR THE YEAR ENDED

REVENUES: TAXES —PROPERTY TAXES—SALES INTEREST AND PENALTIES ON TAXES LICENSES AND PERMITS FINES AND FORFEITS INTERGOVERNMENTAL REVENUE CHARGES FOR SERVICES MISCELLANEOUS REVENUES TOTAL REVENUES EXPENDITURES GENERAL GOVERNMENT PUBLIC SAFETY PUBLIC WORKS HEALTH AND WELFARE CULTURE AND RECREATION MISCELLANEOUS TOTAL EXPENDITURES EXCESS OF REVENUES OVER EXPENDITURES AND ENCUMBRANCES OTHER FINANCING USES INCREASE IN ENCUMBRANCES O/S INCREASE IN FUND BALANCE FUND BALANCES, 1/1 FUND BALANCES, 12/31

ORIGINAL BUDGET

FINAL BUDGET

$6,452,400 736,250

$6,492,400 $6,492,000 711,250 710,600

($400) (650)

46,550 460,750 489,250 508,250 332,500 209,000 9,234,950

21,550 460,750 489,250 518,250 342,500 209,000 9,244,950

21,800 455,050 493,050 517,750 342,950 215,175 9,248,375

250 (5,700) 3,800 (500) 450 6,175 3,425

1,809,750 3,491,250 1,686,250 1,011,750 1,026,000 99,750 9,124,750

1,819,750 3,481,250 1,696,250 1,011,750 1,026,000 99,750 9,134,750

1,818,506 3,486,944 1,699,711 1,011,678 1,033,089 108,000 9,157,928

(1,244) 5,694 3,461 (72) 7,089 8,250 23,178

110,200 (50,000)

60,200 158,260 $218,460

90,447 (50,000) 30,595 71,042 158,260 $229,302

(19,753) 0 30,595 10,842 0 $10,842

ACTUAL

VARIANCE OVER(UNDER)

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions Exercise 4-22 (Cont’d)

General Problem Information: Preparing statements from revenue and appropriations ledgers Learning Objective: 4-1 Learning Objective: 4-2 Learning Objective: 4-3 Topic: Closing entries, General Fund Financial Statements Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard

4-23.

CITY OF WATERVILLE GENERAL JOURNAL

1. May 1 NO ENTRY REQUIRED – Eligibility requirements must be met before an asset and revenue can be recognized. 2. May 5 Debits CASH

Credits

200,000

INTERFUND LOANS PAYABLE—CURRENT

200,000

3. During the year EXPENDITURES

165,000

VOUCHERS PAYABLE DUE FROM STATE GOVERNMENT

165,000 165,000

REVENUES

165,000

(While the city can record this entry, the final determination that eligibility requirements have been met is determined by the state.)

(4) December 13 CASH DUE FROM STATE GOVERNMENT

165,000 165,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-23 (Cont’d)

(5) December 31 Debits REVENUES

Credits

165,000

EXPENDITURES

165,000

(No additional entries need to be made, since eligibility requirements have not been met as of YE for the remaining $35,000 of grant funds awarded.) General Problem Information: Special revenue fund and voluntary nonexchange transactions Learning Objective: 4-1 Learning Objective: 4-4 Learning Objective: 4-7 Topic: Special Revenue Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application Level of Difficulty: Medium 4-24.a.

CITY OF EVERGREEN⎯JOURNAL ENTRIES General Ledger Debits Credits

Subsidiary Ledger Debits Credits

General Fund: 1.

ESTIMATED REVENUES

2,774,000

ESTIMATED OTHER FINANCING USES

22,000

APPROPRIATIONS

2,693,000

BUDGETARY FUND BALANCE

59,000

Estimated Revenues Ledger: TAXES LICENSES AND PERMITS

1,943,000 372,000

INTERGOVERNMENTAL REVENUE MISCELLANEOUS REVENUES

397,000 62,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-24 a. (Cont’d)

General Ledger Debits Credits

Subsidiary Ledger Debits Credits

Appropriations Ledger: GENERAL GOVERNMENT

471,000

PUBLIC SAFETY

886,000

PUBLIC WORKS

650,000

HEALTH AND WELFARE

600,000

MISCELLANEOUS

86,000

Estimated Other Financing Uses Ledger: INTERFUND TRANSFERS OUT

22,000

General Fund: 2.

ENCUMBRANCES⎯2023 ENCUMBRANCES OUTSTANDING⎯2023

931,000 931,000

Encumbrances Ledger—2023: GENERAL GOVERNMENT

58,000

PUBLIC SAFETY

250,000

PUBLIC WORKS

392,000

HEALTH AND WELFARE

160,000

MISCELLANEOUS

71,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-24 a. (Cont’d)

General Ledger Debits Credits

Subsidiary Ledger Debits Credits

General Fund: 3.

TAXES RECEIVABLE⎯ CURRENT

2,005,000

ALLOWANCE FOR UNCOLLECTIBLE CURRENT TAXES

65,000

REVENUES

1,940,000

Revenues Ledger: PROPERTY TAXES

1,940,000

Governmental Activities: TAXES RECEIVABLE⎯ CURRENT

2,005,000

ALLOWANCE FOR UNCOLLECTIBLE CURRENT TAXES

65,000

GENERAL REVENUES— PROPERTY TAXES

1,940,000

General Fund and Governmental Activities: CASH 1,591,000 TAXES RECEIVABLE⎯ DELINQUENT

132,000

TAXES RECEIVABLE⎯ CURRENT

1,459,000

General Fund: 5.

EXPENDITURES⎯2023 VOUCHERS PAYABLE

1,750,100 1,750,100

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-24, a (5) (Cont’d)

General Ledger Debits Credits

Subsidiary Ledger Debits Credits

Expenditures Ledger—2023: GENERAL GOVERNMENT

411,000

PUBLIC SAFETY

635,000

PUBLIC WORKS

254,000

HEALTH AND WELFARE

439,000

MISCELLANEOUS

11,100

Governmental Activities: EXPENSES—GENERAL GOVERNMENT*

422,100

EXPENSES—PUBLIC SAFETY

635,000

EXPENSES—PUBLIC WORKS

254,000

EXPENSES—HEALTH AND WELFARE

439,000

VOUCHERS PAYABLE

1,750,100

*Miscellaneous items are included in General Government General Fund: 6.

ENCUMBRANCES OUTSTANDING—2022

14,000

ENCUMBRANCES—2022

14,000

Encumbrances Ledger⎯2022: PUBLIC SAFETY

14,000

EXPENDITURES⎯2022

14,000

EXPENDITURES⎯2023

470

VOUCHERS PAYABLE

14,470

Expenditures Ledger⎯2023: PUBLIC SAFETY

470

Expenditures Ledger⎯2022: PUBLIC SAFETY

14,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-24 a (6) (Cont’d)

General Ledger Debits Credits

Subsidiary Ledger Debits Credits

Governmental Activities: EXPENSES—PUBLIC SAFETY

14,470

VOUCHERS PAYABLE

14,470

General Fund: 7.

ENCUMBRANCES— OUTSTANDING—2023

851,200

ENCUMBRANCES—2023

851,200

Encumbrances Ledger—2023: GENERAL GOVERNMENT

52,200

PUBLIC SAFETY

240,900

PUBLIC WORKS

357,000

HEALTH AND WELFARE

130,100

MISCELLANEOUS

71,000

EXPENDITURES⎯2023 VOUCHERS PAYABLE

850,500 850,500

Expenditures Ledger—2023: GENERAL GOVERNMENT

52,700

PUBLIC SAFETY

236,200

PUBLIC WORKS

360,000

HEALTH AND WELFARE

130,600

MISCELLANEOUS

71,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-24 a (7) (Cont’d)

General Ledger Debits

Credits

Subsidiary Ledger Debits

Credits

Governmental Activities: EXPENSES—GENERAL GOVT.

123,700

EXPENSES—PUBLIC SAFETY

236,200

EXPENSES—PUBLIC WORKS

360,000

EXPENSES—HEALTH AND WELFARE

130,600

VOUCHERS PAYABLE

850,500

General Fund: 8.

CASH

839,000

REVENUES

839,000

Revenues Ledger: LICENSES AND PERMITS

373,000

INTERGOVERNMENTAL REVENUE

400,000

MISCELLANEOUS REVENUES

66,000

Governmental Activities: CASH PROGRAM REVENUES— GENERAL GOVERNMENT— CHARGES FOR SERVICES PROGRAM REVENUES— PUBLIC SAFETY— OPERATING GRANTS AND CONTRIBUTIONS GENERAL REVENUES— MISCELLANEOUS

839,000

373,000

400,000 66,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-24 a (Cont’d)

General Ledger Debits

Credits

Subsidiary Ledger Debits

Credits

General Fund: 9.

OTHER FINANCING USES— INTERFUND TRANSFERS OUT 22,000 CASH

22,000

Governmental Activities: NO EFFECT General Fund and Governmental Activities: 10.

VOUCHERS PAYABLE CASH

2,505,000 2,505,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-24 a. (Cont’d)

Note: The Governmental Activities ledger is not shown here. CITY OF EVERGREEN GENERAL FUND REVENUE LEDGER (NOT REQUIRED) ESTIMATED REVENUES

REVENUES

BALANCE Debit (Credit)

TAXES 1 3

1,943,000 1,940,000 LICENSES AND PERMITS 372,000

372,000

373,000

(1,000)

INTERGOVERNMENTAL REVENUE 397,000

1,943,000 3,000

400,000

(3,000)

MISCELLANEOUS REVENUES 62,000

66,000

397,000

62,000 (4,000)

CITY OF EVERGREEN GENERAL FUND ESTIMATED OTHER FINANCING USES LEDGER (NOT REQUIRED) ESTIMATED OTHER FINANCING USES 1 9

OTHER FINANCING USES

22,000 22,000

BALANCE Debit (Credit)

(22,000) 0

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-24 a. (Cont’d)

GENERAL FUND APPROPRIATIONS/ENCUMBRANCES/EXPENDITURES LEDGER (NOT REQUIRED) AVAILABLE TRANSACTION APPROPRIATION

1 2 5 7

ENCUMBRANCE EXPENDITURE BALANCE

GENERAL GOVERNMENT_______________________ 471,000 471,000 58,000 413,000 411,000 2,000 (52,200) 52,700 1,500

1 2 5 6 7

886,000

1 2 5 7

650,000

1 2 5 7

600,000

PUBLIC SAFETY_________________________ 886,000 250,000 636,000 635,000 1,000 (Note A) 470 530 (240,900) 236,200 5,230 PUBLIC WORKS_________________________ 650,000 392,000 258,000 254,000 4,000 (357,000) 360,000 1,000 HEALTH AND WELFARE_____________________ 600,000 160,000 440,000 439,000 1,000 (130,100) 130,600 500 MISCELLANEOUS

1 2 5 7

86,000 71,000 (71,000)

______________ 86,000 15,000 11,100 3,900 71,000 3,900

Note A: The Public Safety account shown here is for 2023. In addition, a credit of $14,000 would be made to the Public Safety subsidiary account for 2022, at which time that account would be placed in the “dead file” with other 2022 subsidiary accounts that had been retired at the end of that fiscal year. 4-30 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-24 (Cont’d)

CITY OF EVERGREEN GENERAL FUND BUDGETARY COMPARISON SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 2023

BUDGET (ORIGINAL AND FINAL)

ACTUALA

VARIANCE WITH FINAL BUDGET OVER (UNDER)

$1,943,000

$1,940,000

$ (3,000)

LICENSES AND PERMITS

372,000

373,000

1,000

INTERGOVERNMENTAL REVENUE

397,000

400,000

3,000

MISCELLANEOUS REVENUES

62,000

66,000

4,000

2,774,000

2,779,000

5,000

GENERAL GOVERNMENT

471,000

469,500

(1,500)

PUBLIC SAFETY

886,000

880,770

(5,230)

PUBLIC WORKS

650,000

649,000

(1,000)

HEALTH AND WELFARE

600,000

599,500

(500)

MISCELLANEOUS

86,000

82,100

(3,900)

TOTAL EXPENDITURES

2,693,000

2,680,870

(12,130)

EXCESS OF REVENUES OVER EXPENDITURES

81,000

98,130

17,130

OTHER FINANCING USES: INTERFUND TRANSFERS OUT

22,000

- 0-

-0-

65,800

INCREASE IN FUND BALANCES

59,000

141,930

82,930

FUND BALANCES, 1/1

96,900

- 0-

$ 155,900

$ 238,830

$ 82,930

REVENUES: TAXES

TOTAL REVENUES EXPENDITURES (BUDGET BASIS):

INCREASE IN ENCUMBRANCES OUTSTANDINGB

FUND BALANCES, 12/31

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-24 b. (Cont’d)

NOTES: A The actual expenditures in this statement include encumbrances of 2023

appropriations outstanding at year-end, but do not include the expenditures of the 2022 appropriations recorded in Entry 6. B Fund balances do not include encumbrances. Therefore, the $79,800 of

encumbrances that were included as part of actual expenditures for budgetary comparison purposes must be added back to ensure they do not affect fund balances. However, $14,000 of the expenditures made during the year for goods received in 2023 that were ordered in 2022 were reported as expenditures of the current year for GAAP purposes and therefore reduced fund balances by that amount. Thus, the change in fund balances must be adjusted for that amount as well.

General Problem Information: Transactions and budgetary comparison schedule Learning Objective: 4-1 Learning Objective: 4-3 Topic: Illustrative Journal Entries Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard

4-25. a.

TOWN OF BIG SPRINGS Debits 1.

General Fund: EXPENDITURES CASH

100,000

Governmental Activities: EXPENSES—PUBLIC SAFETY CASH

100,000

Enterprise Fund: CASH REVENUES

100,000

Credits

100,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-25 (Cont’d)

Debits 2.

General Fund: INTERFUND LOANS RECEIVABLE CASH

Credits

50,000 50,000

Governmental Activities: NO EFFECT Special Revenue Fund: CASH INTERFUND LOANS PAYABLE 3.

General Fund: OTHER FINANCING USES—INTERFUND TRANSFERS OUT CASH

50,000 50,000

100,000 100,000

Governmental Activities: NO EFFECT Debt Service Fund: CASH OTHER FINANCING SOURCES— INTERFUND TRANSFERS IN 4.

General Fund: CASH OTHER FINANCING SOURCES— INTERFUND TRANSFERS IN

100,000 100,000

5,000 5,000

Governmental Activities: NO EFFECT Capital Projects Fund: OTHER FINANCING USES— INTERFUND TRANSFERS OUT CASH 5.

General Fund: INTERFUND LOANS RECEIVABLE— NONCURRENT CASH

5,000 5,000

50,000 50,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-25, 5 (Cont’d)

Debits

Credits

Governmental Activities: NO EFFECT

Internal Service Fund: CASH INTERFUND LOANS PAYABLE— NONCURRENT

50,000 50,000

Proprietary funds, such as the enterprise fund, measure total economic resources using the accrual basis of accounting. Since this is the same measurement focus and basis of accounting used at the government-wide level, there would be no difference between entries in the enterprise fund and a business-type activities journal. Note that although the internal service funds are proprietary funds focusing on total economic resources using the accrual basis of accounting, they are combined with governmental activities if they predominantly provide services to departments within the government rather than to enterprise funds.

General Problem Information: Interfund and interactivity transactions Learning Objective: 4-5 Topic: Interfund Activity Bloom’s Taxonomy: Apply Accreditation Skills tag: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, (Cont’d)

4-26. a.

JEDVILLE TOWNSHIP—JOURNAL ENTRIES CONSUMPTION METHOD GENERAL FUND Debits

1. ENCUMBRANCES

847,000

ENCUMBRANCES OUTSTANDING

2. ENCUMBRANCES OUTSTANDING

847,000

ENCUMBRANCES

INVENTORY OF SUPPLIES

847,000

850,000

CASH

3. EXPENDITURES

850,000

780,000

INVENTORY OF SUPPLIES

FUND BALANCE—UNASSIGNED

780,000

70,000

FUND BALANCE—NONSPENDABLE

FUND BALANCE—UNASSIGNED EXPENDITURES

Credits

70,000

780,000 780,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-26 a. (Cont’d)

Debits 4. ENCUMBRANCES

855,000

ENCUMBRANCES OUTSTANDING

5. ENCUMBRANCES OUTSTANDING

855,000

ENCUMBRANCES

INVENTORY OF SUPPLIES

855,000

860,000

CASH

6. EXPENDITURES

860,000

870,000

INVENTORY OF SUPPLIES

FUND BALANCE—NONSPENDABLE

870,000

10,000

FUND BALANCE— UNASSIGNED

FUND BALANCE—UNASSIGNED EXPENDITURES

Credits

10,000

870,000 870,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-26 (Cont’d)

JEDVILLE TOWNSHIP—JOURNAL ENTRIES PURCHASES METHOD GENERAL FUND Debits

1. ENCUMBRANCES

847,000

ENCUMBRANCES OUTSTANDING

2. ENCUMBRANCES OUTSTANDING

847,000

ENCUMBRANCES

EXPENDITURES

847,000

850,000

CASH

3. INVENTORY OF SUPPLIES

850,000

70,000

FUND BALANCE—NONSPENDABLE

FUND BALANCE—UNASSIGNED

70,000

850,000

EXPENDITURES

4. ENCUMBRANCES

850,000

855,000

ENCUMBRANCES OUTSTANDING

5. ENCUMBRANCES OUTSTANDING

855,000

ENCUMBRANCES

EXPENDITURES CASH

Credits

855,000

860,000 860,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-26 b. (Cont’d)

Debits 6. FUND BALANCE—NONSPENDABLE

10,000

INVENTORY OF SUPPLIES

FUND BALANCE—UNASSIGNED

10,000

860,000

EXPENDITURES c.

Credits

860,000

JEDVILLE TOWNSHIP—JOURNAL ENTRIES GOVERNMENTAL ACTIVITIES

1. NO JOURNAL ENTRY REQUIRED

2. INVENTORY OF SUPPLIES

850,000

CASH

3. EXPENSES

850,000

780,000

INVENTORY OF SUPPLIES

NET POSITION—UNRESTRICTED

780,000

EXPENSES

780,000

4. NO JOURNAL ENTRY REQUIRED

5. INVENTORY OF SUPPLIES

860,000

CASH

6. EXPENSES

860,000

870,000

INVENTORY OF SUPPLIES

NET POSITION—UNRESTRICTED EXPENSES

870,000

870,000 870,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-26 (Cont'd)

4/4/22 Bal.

CONSUMPTION METHOD – 2022 Inventory of Supplies . 850,000 Various 780,000 70,000

Expenditures Various 780,000

12/31/22 780,000

Fund Balance-Unassigned 12/31/22 70,000 12/31/22 780,000 Bal. 850,000

12/31/22 Bal.

CONSUMPTION METHOD – 2023 Inventory of Supplies . Bal. 70,000 3/6/23 860,000 Various 870,000 Bal. 60,000 Expenditures Various 870,000

. 12/31/23 870,000

Fund Balance-Unassigned . Bal. 850,000 12/31/23 870,000 12/31/23 10,000 Bal. 1,710,000

Fund Balance-Nonspendable . 12/31/22 70,000 Bal. 70,000

Fund Balance-Nonspendable . Beg. 70,000 12/31/23 10,000 Bal. 60,000

PURCHASES METHOD – 2022 Supplies Inventory 70,000 70,000

. Beg. Bal.

PURCHASES METHOD – 2023 Inventory of Supplies . 70,000 12/31/23 10,000 60,000 Expenditures

Expenditures 4/4/22 850,000

. 12/31/22 850,000

Fund Balance-Unassigned 12/31/22 850,000 Bal. 850,000

3/6/23 860,000

. 12/31/23 860,000

Fund Balance-Unassigned Beg. 850,000 12/31/23 860,000 Bal. 1,710,000

Fund Balance-Nonspendable . 12/31/22 70,000 Bal. 70,000

Fund Balance-Nonspendable . Beg. 70,000 12/31/23 10,000 Bal. 60,000

GOVERNMENTAL ACTIVITIES – 2022 Inventory of Supplies . 4/4/22 850,000 Various 780,000 Bal. 70,000

GOVERNMENTAL ACTIVITIES – 2023 Inventory of Supplies . Bal. 70,000 3/6/23 860,000 Various 870,000 Bal. 60,000

Expenses Various 780,000

. 12/31/22 780,000

Net Position 12/31/22 780,000 Bal. 780,000

Expenses Various 870,000

. 12/31/23 870,000

Net Position-Unrestricted Beg. 780,000 12/31/23 870,000 Bal. 1,710,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-26 (Cont'd)

NOTE: Fund balance and net position balances are not required but can be used to demonstrate that the net effects of each method on total fund balance and net position are the same under all methods. d.

Under both the accrual accounting and the consumption method of accounting for inventory, expenses and expenditures were equal to the $780,000 inventory used during 2022 and $870,000 used during 2023. Under the purchases method of accounting, expenditures were equal to the $850,000 and the $860,000 purchased. The purchases method is consistent with the modified accrual basis of accounting. The total amount expended is compared to appropriations budgeted for the year.

Under each method, the balance of Supplies Inventory will be $70,000 and $60,000 for 2022 and 2023, respectively. In the governmental funds, these amounts will also be included in Fund Balance—Nonspendable. There is no such designation at the government-wide level.

General Problem Information: Comparison of inventory methods Learning Objective: 4-1, 4-2 Topic: Special Topics – Accounting for Supplies Bloom’s Taxonomy: Apply Accreditation Skills tag: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions (Cont’d)

4-27. a.

CITY OF CASTLETON JOURNAL ENTRIES FY 2023 Debits

General Fund: ESTIMATED REVENUES

3,140,000

APPROPRIATIONS

3,000,000

ESTIMATED OTHER FINANCING USES

100,000

BUDGETARY FUND BALANCE

40,000

General Fund and Governmental Activities: CASH

500,000

TAX ANTICIPATION NOTES PAYABLE

Credits

General Fund: TAXES RECEIVABLE⎯CURRENT

500,000

2,150,000

ALLOWANCE FOR UNCOLLECTIBLE CURRENT TAXES

64,500

REVENUES

2,085,500

(COMPUTATIONS: $43,000,000 ASSESSED VALUATION × $5 TAX RATE PER $100 = $2,150,000 GROSS LEVY; $2,150,000 GROSS LEVY × .03 = $64,500 ESTIMATED UNCOLLECTIBLE.)

Governmental Activities: TAXES RECEIVABLE⎯CURRENT

2,150,000

ALLOWANCE FOR UNCOLLECTIBLE CURRENT TAXES

64,500

REVENUES

General Fund: ENCUMBRANCES⎯2023 ENCUMBRANCES OUTSTANDING⎯2023

2,085,500

2,060,000 2,060,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-27 a. 3. (Cont’d)

Debits

General Fund and Governmental Activities: CASH

2,078,840

TAXES RECEIVABLE⎯CURRENT

1,961,000

TAXES RECEIVABLE⎯DELINQUENT

103,270

INTEREST AND PENALTIES RECEIVABLE

3,570

SALES TAXES RECEIVABLE

11,000

General Fund: DEFERRED INFLOWS OF RESOURCES⎯ UNAVAILABLE REVENUES

106,840

REVENUES 6.

106,840

General Fund: INTEREST AND PENALTIES RECEIVABLE

3,430

ALLOWANCE FOR UNCOLLECTIBLE INTEREST AND PENALTIES

1,029

REVENUES

2,401

Governmental Activities: INTEREST AND PENALTIES RECEIVABLE

Credits

3,430

ALLOWANCE FOR UNCOLLECTIBLE INTEREST AND PENALTIES

1,029

GENERAL REVENUES—INTEREST AND PENALTIES ON DELINQUENT TAXES

2,401

General Fund: BUDGETARY FUND BALANCE

80,000

ESTIMATED REVENUES

80,000

(THIS ENTRY ADJUSTS THE ORIGINAL BUDGETARY INCREASE OF $40,000 IN BUDGETARY FUND BALANCE TO A NET DECREASE OF $40,000.)

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-27 a. (Cont’d)

Debits 8.

General Fund and Governmental Activities: ALLOWANCE FOR UNCOLLECTIBLE DELINQUENT TAXES ALLOWANCE FOR UNCOLLECTIBLE INTEREST AND PENALTIES

12,792 952

TAXES RECEIVABLE⎯DELINQUENT

12,792

INTEREST AND PENALTIES RECEIVABLE

General Fund: EXPENDITURES⎯2023

952

819,490

DUE TO FEDERAL GOVERNMENT

166,400

DUE TO STATE GOVERNMENT

34,400

CASH

618,690

Governmental Activities: EXPENSES⎯(function details omitted)

10.

819,490

DUE TO FEDERAL GOVERNMENT

166,400

DUE TO STATE GOVERNMENT

34,400

CASH

618,690

General Fund: EXPENDITURES⎯2023

62,690

DUE TO FEDERAL GOVERNMENT Governmental Activities: EXPENSES⎯(function details omitted)

62,690 62,690

DUE TO FEDERAL GOVERNMENT

11.

Credits

62,690

General Fund: CASH

935,000

SALES TAXES RECEIVABLE

12,000

REVENUES

947,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-27 a. 11. (Cont’d)

Debits Governmental Activities: CASH

935,000

SALES TAXES RECEIVABLE

12,000

REVENUES⎯(itemize as program or general and by source)

12.

947,000

General Fund and Governmental Activities: DUE TO FEDERAL GOVERNMENT

258,580

DUE TO STATE GOVERNMENT

34,400

VOUCHERS PAYABLE

13.

General Fund: ENCUMBRANCES OUTSTANDING⎯2023

292,980

1,988,040

ENCUMBRANCES⎯2023 EXPENDITURES⎯2023

1,988,040 1,887,570

VOUCHERS PAYABLE Governmental Activities: EXPENSES⎯(function details omitted)

1,887,570 1,887,570

VOUCHERS PAYABLE

14.

General Fund: VOUCHERS PAYABLE

1,887,570

2,101,660

CASH

2,093,630

EXPENDITURES⎯2023 Governmental Activities: VOUCHERS PAYABLE CASH EXPENSES⎯(function detail omitted)

Credits

8,030 2,101,660 2,093,630 8,030

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, 4-27, a. (Cont’d)

Debits 15.

General Fund: TAX ANTICIPATION NOTES PAYABLE

500,000

EXPENDITURES

10,000

CASH

510,000

Governmental Activities: TAX ANTICIPATION NOTES PAYABLE

500,000

EXPENSES—GENERAL GOVERNMENT

10,000

CASH

16.

Credits

510,000

General Fund: OTHER FINANCING USES—INTERFUND TRANSFERS OUT

100,000

CASH

100,000

Governmental Activities: No entry required – transfer is between two governmental funds.

17.

General Fund and Governmental Activities: TAXES RECEIVABLE—DELINQUENT

189,000

TAXES RECEIVABLE—CURRENT ALLOWANCE FOR UNCOLLECTIBLE CURRENT TAXES

189,000 64,500

ALLOWANCE FOR UNCOLLECTIBLE DELINQUENT TAXES General Fund: REVENUES DEFERRED INFLOWS OF RESOURCES⎯ UNAVAILABLE REVENUES

64,500

126,901 126,901

(THIS ADJUSTS FOR THE NET PROPERTY TAXES [$189,000-64,500] AS WELL AS THE NET INTEREST AND PENALTIES FROM ENTRY 6 [$2,401] THAT ARE NOT “AVAILABLE”.)

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, 4-27, a. (Cont’d)

Debits 18.

General Fund: INVENTORY OF SUPPLIES

Credits

3,000

FUND BALANCE—NONSPENDABLE— INVENTORY OF SUPPLIES

3,000

Governmental Activities: No entry required – expenses are recorded periodically. Debits b.

Credits

CLOSING ENTRIES, JUNE 30, 2023 General Fund: APPROPRIATIONS ESTIMATED OTHER FINANCING USES

3,000,000 100,000

ESTIMATED REVENUES

3,060,000

BUDGETARY FUND BALANCE

REVENUES

40,000

3,014,840

EXPENDITURES—2023

2,771,720

OTHER FINANCING USES

100,000

FUND BALANCE—UNASSIGNED

143,120

Governmental Activities: (Not closed here since the governmental activities general ledger includes operating statement transactions related to all governmental funds, not just those of the General Fund. See Chapter 9 for an example of closing the governmental activities temporary accounts.)

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-27 (Cont’d)

c. CITY OF CASTLETON GENERAL FUND BALANCE SHEET AS OF JUNE 30, 2023 ASSETS CASH

$ 456,640

SALES TAXES RECEIVABLE

12,000

TAXES RECEIVABLE⎯DELINQUENT

$255,938

LESS: ALLOWANCE FOR UNCOLLECTIBLE TAXES⎯DELINQUENT

73,668

INTEREST AND PENALTIES RECEIVABLE

182,270

5,188

LESS: ALLOWANCE FOR UNCOLLECTIBLE INTEREST AND PENALTIES

1,237

INVENTORY OF SUPPLIES

3,951 9,100

TOTAL ASSETS

$ 663,961

LIABILITIES AND FUND BALANCES LIABILITIES: VOUCHERS PAYABLE

$127,390

DEFERRED INFLOWS OF RESOURCES— UNAVAILABLE REVENUES

186,221

TOTAL LIABILITIES AND DEFERRED INFLOWS OF RESOURCES

313,611

FUND BALANCES: NONSPENDABLE—INVENTORY OF SUPPLIES UNASSIGNED

$ 9,100 341,250

TOTAL FUND BALANCES TOTAL LIABILITIES AND FUND BALANCES

350,350 $ 663,961

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-27 (Cont’d)

CITY OF CASTLETON GENERAL FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE FOR THE YEAR ENDED JUNE 30, 2023

REVENUES TAXES INTEREST AND PENALTIES ON TAXES OTHER SOURCES TOTAL REVENUES

$2,901,270 3,570 110,000 3,014,840

EXPENDITURES SALARIES AND WAGES

882,180

INTEREST ON NOTES PAYABLE

10,000

OTHER TOTAL EXPENDITURES

1,879,540 2,771,720

EXCESS OF REVENUES OVER EXPENDITURES

243,120

OTHER FINANCING USES

(100,000)

CHANGE IN FUND BALANCE

143,120

INCREASE IN INVENTORY OF SUPPLIES

3,000

FUND BALANCES, JULY 1, 2022

204,230

FUND BALANCES, JUNE 30, 2023

$ 350,350

Computations: Taxes = [(3) 2,085,500 + (5) 106,840 – (5) 3,570 + (6) 2,401 + (11) 837,000 − (17) 126,901] Interest and Penalties on Taxes = [(5) 3,570] Other Sources = [(11) 110,000] Salaries and Wages = [(9) 819,490 + (10) 62,690] Interest on Notes Payable = [(15) 10,000] Other = [(13) 1,887,570 − (14) 8,030]

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-27 d. (Cont’d)

NOTE: The Governmental Activities general ledger is not shown here. CITY OF CASTLETON General Fund General Ledger (Not Required)

7/1/2022 Bal.

Cash 265,120

(9)

(2)

500,000

(14) 2,093,630

(5)

2,078,840

(15)

510,000

(11)

935,000

(16)

100,000

6/30/2023 Bal.

456,640

618,690

Sales Taxes Receivable 7/1/2022 Bal.

11,000

(11)

12,000

Interest and Penalties Rec.__ ____ 7/1/2022 Bal. 6,280 (5) 3,570 (6)

3,430

Allow. for Uncoll. Interest & Penalties (5) 11,000 952

(6) 1,029 6/30/2023 Bal. 1,237

(16)

4-27(17)

7/1/2022 Bal. 1,160 (8)

Taxes Receivable⎯Current 2,150,000 (5) 1,961,000

6/30/2023 Bal.

952

6/30/2023 Bal 5,188

6/30/2023 Bal. 12,000

(3)

(8)

189,000

-0-

Inventory of Supplies_________ 7/1/2022 Bal. 6,100 (18)

3,000

6/30/2023 Bal. 9,100

Allow. for Uncoll. Current Taxes 64,500 (3) 64,500 6/30/2023 Bal.

-0-

Taxes Receivable⎯Delinquent 7/1/2022 Bal. 183,000 (5) 103,270 (17)

189,000

6/30/2023 Bal.

255,938

(8)

12,792

Allow. for Uncoll. Delinquent Taxes 7/1/2022 Bal. 21,960 (8)

12,792

(17)

64,500

6/30/2023 Bal. 73,668

Vouchers Payable___________ (14) 2,101,660 7/1/2022 Bal 48,500 (12)

292,980

(13) 1,887,570 6/30/2023 Bal. 127,390

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-27 d. (Cont'd) Due to Federal Government (12)

258,580

Revenues____________

7/1/2022 Bal. 29,490

(17) 126,901

(3) 2,085,500

b 3,014,840

(5)

106,840

(9)

166,400

(10)

62,690

(6)

2,401

-0-

(11)

947,000

6/30/2023 Bal.

Due to State Government (12)

34,400

Expenditures⎯2023_________

(9) 6/30/2023 Bal.

34,400

(9)

819,490

(14)

8,030

-0-

(10)

62,690

2,771,720

(13) 1,887,570 (15)

(15)

Tax Anticipation Notes Payable 500,000 (2) 500,000 6/30/2023 Bal.

-0-

(5) 106,840

(17) 126,901 6/30/2023 Bal. 186,221

Fund Balance—Nonspendable— ____Inventory of Supplies _ 7/1/2022 Bal. 6,100

b 143,120 6/30/2023 Bal. 341,250

(17) 3000 6/30/2023 Bal. 9,100

3,140,000

(7)

____

3,000,000

Encumbrances⎯2023__________

80,000

(4) 2,060,000

b 3,060,000

6/30/2023 Bal. 71,960

Appropriations b

Deferred Inflows of Resources— ____Unavailable Revenues _ 7/1/2022 Bal. 166,160

Fund Balance—Unassigned 7/1/2022 Bal. 198,130

Estimated Revenues (1)

10,000

(13) 1,988,040

Encumbrances Outstanding⎯2023___ (1) 3,000,000

(13) 1,988,040

(4) 2,060,000 6/30/2023 Bal. 71,960

Budgetary Fund Balance (7)

80,000

(1)

40,000

Est. Other Fin Uses b

100,000

(1) 100,000

Other Financing Uses (16) 100,000

___ b 100,000

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, 4-27 (Cont’d)

General Problem Information: Operating transactions and financial statements Learning Objective: 4-1 Learning Objective: 4-2 Learning Objective: 4-3 Topic: Various chapter topics Bloom’s Taxonomy: Apply Accreditation Skills tag: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium 4-28. a

CITY OF FOUNTAINS PONCE DE LEON ENDOWMENT FUND GENERAL JOURNAL FOR YEAR ENDED JUNE 30, 2023 Debits CASH 1,500,000 REVENUES—CONTRIBUTIONS FOR ENDOWMENT

1,500,000

INVESTMENT IN BONDS CERTIFICATE OF DEPOSIT CASH

1,406,300

Credits

406,300 1,000,000

CASH 16,000 REVENUES—INVESTMENT EARNINGS—CD 10,000 REVENUES—INVESTMENT EARNINGS—BONDS 6,000 ($1,000,000 × .02 × 6/12 months = $10,000; $400,000 × .03 × 6/12 months = $6,000) 4.

OTHER FINANCING USES—INTERFUND TRANSFERS OUT

16,000

CASH 5.

INVESTMENT IN BONDS REVENUES—CHANGE IN FAIR VALUE OF INVESTMENTS [$409,600 − $406,300] = $3,300

16,000 3,300 3,300

(NOTE: As stipulated in the agreement, change in fair value is not included in earnings for transfer purposes, rather it adds to the principal of the endowment.) 4-51 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-28 a. (Cont'd)

ADJUSTING ENTRIES: NONE REQUIRED. CLOSING ENTRIES: REVENUES—CONTRIBUTIONS FOR ENDOWMENT

Debits

Credits

1,500,000

REVENUES—CHANGE IN FAIR VALUE OF INVESTMENTS

3,300

REVENUES—INVESTMENT EARNINGS—CD

10,000

REVENUES—INVESTMENT EARNINGS—BONDS

6,000

OTHER FINANCING USES—INTERFUND TRANSFERS OUT FUND BALANCE—NONSPENDABLE— PRINCIPAL OF ENDOWMENT b. (1)

16,000 1,503,300

CITY OF FOUNTAINS PONCE DE LEON ENDOWMENT FUND BALANCE SHEET AS OF JUNE 30, 2023 ASSETS

CURRENT ASSETS: CASH TOTAL CURRENT ASSETS INVESTMENTS: BONDS, AT FAIR VALUE (PAR $400,000) CERTIFICATE OF DEPOSIT TOTAL INVESTMENTS TOTAL ASSETS

$ 93,700 93,700 $409,600 1,000,000 1,409,600 $1,503,300

FUND BALANCE FUND BALANCE: NONSPENDABLE—PRINCIPAL OF ENDOWMENT TOTAL FUND BALANCE

1,503,300 $1,503,300

Chapter 04 - Accounting for Governmental Operating Activities—Illustrative Transactions and Financial Statements

Ch. 4, Solutions, Exercise 4-28 b. (Cont’d)

(2)

CITY OF FOUNTAINS PONCE DE LEON ENDOWMENT FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE FOR YEAR ENDED JUNE 30, 2023

REVENUES RECEIVED FOR CONTRIBUTION TO ENDOWMENT REVENUES EARNED FOR TRANSFER TO EXPENDABLE TRUST FUND: INTEREST ON BONDS INTEREST ON CERTIFICATE OF DEPOSIT TOTAL REVENUE EARNED FOR TRANSFER REVENUES FROM CHANGE IN FAIR VALUE OF INVESTMENTS TOTAL REVENUES OTHER FINANCING USES: OPERATING TRANSFERS TO PONCE DE LEON MAINTENANCE FUND

$6,000 10,000

EXCESS OF REVENUE OVER OTHER FINANCING USES FUND BALANCE, JULY 1, 2022 FUND BALANCE, JUNE 30, 2023 c.

$1,500,000

16,000 3,300 1,519,300

16,000 1,503,300 -0$1,503,300

The fund is a permanent fund, more specifically a public-purpose trust fund. Permanent funds that are nonexpendable usually do not require budgetary entries, but if this were an expendable fund, laws might require the use of budgetary control. That does not preclude the city from preparing a budget based upon expected investment earnings. General Problem Information: Permanent fund accounting Learning Objective: 4-6 Topic: Permanent Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application; AICPA: Critical Thinking, FN Reporting Level of Difficulty: Medium 4-53 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 05 - Accounting for General Capital Assets and Capital Projects

CHAPTER 5: ACCOUNTING FOR GENERAL CAPITAL ASSETS AND CAPITAL PROJECTS OUTLINE Number

Topic

Type/Task

Status (re: 18/e)

Questions: 5-1 5-2 5-3 5-4 5-5 5-6 5-7 5-8 5-9 5-10

Defining and reporting general capital assets Capital asset disclosures Capital asset valuation Lease accounting Intangible assets Modified approach for infrastructure assets Encumbrances Special assessments Residual or deficit capital projects fund balances Service concession arrangements

Define and explain Explain Explain Describe Describe Compare Explain Explain Explain Explain

Same Same Revised Revised Same Same Same Same New Same

Cases: 5-11 5-12 5-13 5-14 5-15

Modified approach for infrastructure assets Construction costs spiraling out of control Criteria for intangible asset recognition Potential impairment of capital assets Service concession arrangements

Evaluate, write Evaluate, write Evaluate, explain Evaluate, explain Evaluate, explain

Same New Same New Same

Examine Multiple Choice

Same Items 8, 12, 14 and 15 are new; 1-2 revised Revised Same

Exercises/Problems: 5-16 Examine the CAFR 5-17 Various

5-18 5-19

General capital assets Capital asset disclosure schedule

5-20 5-21 5-22 5-23 5-24 5-25 5-26

Lease classification and accounting Asset impairment Capital projects fund Funding capital projects Capital projects fund financial statements Multi-project construction fund Capital project transactions

Journal entries Financial statement Calculate; JEs JEs; reporting JEs JEs FS; explain JEs & FS JEs & FS

Revised Same Same New Revised Revised New

Chapter 05 - Accounting for General Capital Assets and Capital Projects

CHAPTER 5: ACCOUNTING FOR GENERAL CAPITAL ASSETS AND CAPITAL PROJECTS Answers to Questions 5-1.

General capital assets are those assets acquired with the resources of governmental funds. The resources used by the governmental funds to acquire a general capital asset are reported as an expenditure of the acquiring governmental fund in the fund financial statements. General capital assets are reported as assets in the Governmental Activities column of the government-wide financial statements at historical cost. Those capital assets identified as depreciable are shown net of accumulated depreciation. (Donated capital assets are recorded at acquisition value and depreciated, as appropriate.) Capital assets acquired by proprietary and fiduciary funds are not considered general capital assets. They are recorded by their respective funds and reported as assets within the fund financial statements. Capital assets acquired by proprietary funds are also reported in the government-wide statement of net position. As discussed in Chapter 7, enterprise fund capital assets are reported in the Business-type Activities column, while internal service fund capital assets are included in the Governmental Activities column of the government-wide financial statements. General Problem Information: Defining and reporting general capital assets Learning Objective: 5-1 Topic: Accounting for General Capital Assets Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

5-2.

Capital asset disclosures required by the GASB include descriptions of policies for capitalizing assets and for estimating the useful lives of depreciable assets. In addition, the disclosures should include: (1) beginning-of-year and end-of-year balances showing accumulated depreciation separate from historical cost, (2) capital acquisitions during the year, (3) sales or other dispositions during the year, (4) depreciation expense showing amounts charged to each function in the statement of activities, and (5) disclosures regarding collections of art or historical treasures. For leased assets, a lessee should disclose a general description of its leasing arrangements, the total amount of lease assets and the related accumulated amortization, the amount of lease assets by major classes of underlying assets, the amount of outflows of resources recognized for the period for variable lease or other payments not previously included in the lease liability, principal and interest requirements to maturity, commitments under leases that have not yet begun, and the components of any net impairment loss recognized on the lease asset during the period.

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Answers, Question 5-2 (Cont’d)

General Problem Information: Capital asset disclosures Learning Objective: 5-5 Topic: Required Disclosures about Capital Assets Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 5-3.

In general, the valuation principles used in government and for-profit accounting are very similar. Assets acquired should be valued at historical cost when possible, and the definition of historical cost is basically the same for both. However, governments are more likely to receive capital assets through donation. Capital assets donated to a government should be recorded at acquisition value, defined as the price that would be paid to acquire an asset with equivalent service potential in a market transaction at the acquisition date (GASB Codification, Sec. 1400, footnote 1). Finally, GASB standards prohibit capitalization of interest incurred during the construction of general capital assets; while interest is capitalized as part of self-constructed capital assets recorded by for-profit organizations. General Problem Information: Capital asset valuation Learning Objective: 5-2 Topic: Accounting for General Capital Assets Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

5-4.

When an asset is acquired with lease financing, the governmental fund journal entry on the date of inception will include a debit to Expenditures and a credit to Other Financing Sources—Lease Agreements for the present value of all lease payments. The journal entry at the government-wide level will include a debit to Leased Assets and a credit to Lease Obligations Payable for the same amount. Leased Assets is an intangible asset account that represents the government’s right to use the leased asset. Cash paid at the inception of the lease is recorded with a credit. General Problem Information: Lease accounting Learning Objective: 5-4 Topic: General Capital Assets Acquired under Capital Lease Agreements Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

Chapter 05 - Accounting for General Capital Assets and Capital Projects

5-5.

Under both GASB and FASB standards intangible assets are defined as assets that lack physical substance. Intangible assets held by a government might include easements, water, timber, mineral rights, patents, trademarks, and computer software. In addition, under GASB Statement No. 87, leased assets represent the government’s right to use the leased assets and are deemed intangible assets. The GASB considers intangible assets to be a type of general capital asset; therefore, intangibles are reported under the capital asset heading in the statement of net position. In contrast, under FASB standards intangible assets are reported under the heading intangibles, appearing after the property, plant, and equipment heading in the balance sheet. FASB standards do not consider leased assets to be intangible assets. General Problem Information: Intangible assets Learning Objective: 5-1 Topic: Intangible Assets Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

5-6.

Under the modified approach to accounting for infrastructure assets, adjusting entries, recognizing depreciation expense, and accumulated depreciation are not required. Rather, the government reports, as an expense, the costs of maintaining the infrastructure assets at an established level or condition. By doing this, the book value of the infrastructure asset remains unchanged (i.e., there is no accumulated depreciation). This is unlike the depreciation method, whereby the book value of the infrastructure assets decreases each time depreciation expense is recorded. Only certain infrastructure assets are eligible to use the modified approach. Eligible assets are defined as those assets that are parts of major networks of infrastructure assets or subsystems of networks, where a network might be a highway system, for example. If the government meets two requirements, it can use the modified approach for eligible infrastructure assets. The two requirements are: (1) management of eligible infrastructure assets using a management system that includes an up-to-date inventory of eligible assets, condition assessments and results using a measurement scale, and estimates of annual costs to maintain assets at the established and disclosed condition level, and (2) documentation that the assets are being preserved at or above the established condition level. If the government fails to maintain the assets at or above the established condition level, it must revert to reporting depreciation for its infrastructure assets and discontinue use of the modified approach. General Problem Information: Modified approach for infrastructure assets Learning Objective: 5-2 Topic: Infrastructure Assets Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 05 - Accounting for General Capital Assets and Capital Projects

5-7.

To facilitate preparation of financial statements at the end of the fiscal year, all operating accounts should be closed; however, since the project is still underway and contractual commitments still exist to pay contractors when billed, it is essential that Encumbrances be maintained. (If a government chooses to close encumbrance accounts at year-end, they should be reestablished at the beginning of the next year in order to maintain budgetary control over outstanding commitments.) Since encumbrances and encumbrances outstanding are budgetary accounts, they will not be reported on the capital projects fund balance sheet; however, the fund balances should be classified as restricted, committed or assigned, as appropriate, with no reference to encumbrances. General Problem Information: Encumbrances Learning Objective: 5-2 Learning Objective: 5-4 Learning Objective: 5-5 Topic: Multi-Period and Multiple-Project Funds Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

5-8.

A special assessment is a mandatory tax levy against specified properties to fund a service or property improvement that will benefit the property owner. For example, homeowners’ associations often collect special assessments from homeowners within the community to repair roads, erect a fountain, or install streetlights within the subdivision. Some of these improvements also benefit the general citizenry of the adjoining community. Improvements under a special assessment are fully or primarily funded by affected property owners, whereas general improvements for a local government are funded by all taxpayers within the government. General capital assets financed wholly or partially through collections of special assessments are recorded in the same manner as any other general capital assets in the governmental activities category at the government-wide level. General Problem Information: Special Assessments Learning Objective: 5-4 Topic: Capital Projects Financed by Special Assessments Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 05 - Accounting for General Capital Assets and Capital Projects

5-9.

It is not uncommon for a capital project to end with a small residual or deficit fund balance. If long-term debt has been incurred for the purposes of the capital projects fund, the residual equity is ordinarily transferred to the fund that services the debt. If the residual equity has come from grants or shared revenues restricted for capital acquisitions or construction, legal advice may indicate that any residual equity must be returned to the source(s) of the restricted grants or restricted shared revenues. If the deficit is a relatively small amount, the legislative body of the government may be able to authorize transfers from one or more other funds to cover the deficit in the capital projects fund. If the deficit is relatively large, and/or if intended transfers are not feasible, the government may seek additional grants or shared revenues from other governments to cover the deficit. If no other alternative is available, the government would need to finance the deficit by issuing debt in whatever form is legally possible and feasible under market conditions then existing. General Problem Information: Residual or Deficit Capital Projects Fund Balances Learning Objective: 5-4 Topic: Alternative Treatment of Residual Equity or Deficits Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

5-10. Under a service concession arrangement, a government transfers the rights and obligations of a capital asset to another legally separate government or private sector entity. This external entity, the operator, provides public services through the use of the asset, collecting related fees in return for an up-front payment to the transferring government. A government will generally enter into a service concession arrangement to generate revenue and cash flows from its capital assets or to improve the efficiency of public services. Recently, governments have entered into service concession arrangements with parking facilities, airports, zoos, office buildings, and water supplies. General Problem Information: Service concession arrangements Learning Objective: 5-2 Topic: Service Concession Arrangements Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Solutions to Cases 5-11. a. Discuss with students various methods of obtaining financial statements to make comparisons across entities. The Government Finance Officers Association (GFOA) reviews factors to consider when exploring the modified approach for infrastructure reporting at https://gfoa.org/sites/default/files/GFOAPrimer_ModifiedApproachInfrastrutcureReporting.pdf. Since students will have a different list of cities, ask them to compare their results with other students and look for patterns in which types and sizes of governments make similar choices in accounting methods, particularly, in this case, regarding choice of infrastructure asset accounting methods. b. An important communication skill for students to master is the ability to convey technical financial accounting information in an effective way so that decision makers find the information useful for making informed decisions. You may wish to ask students to show their memo or essay to a finance director of a city and get the director’s opinion about whether the student has captured the fundamental issues relating to infrastructure and communicated it in a professional and informative manner. General Problem Information: Modified approach for infrastructure assets Learning Objective: 5-2 Topic: Infrastructure Assets Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making Level of Difficulty: Medium 5-12. a. Student responses will vary, but they are likely to question how the budget increased by nearly $20 million, how the deficit will be covered, and if there will be a reduction in other governmental operations. Some will wonder if it is possible for a city to legally overspend to this extent. This provides a good opportunity to discuss state and local laws governing these issues. The students may be interested in researching this case. As the book goes to press, the police headquarters are not complete. Students might be interested in following up with the status of the construction at https://www.cityofsalem.net/Pages/salem-police-station.aspx. b. The article that this case is based upon described some of the reasons that spending eclipsed the budget – construction cost increases, especially in the Oregon area, and design improvements. It also discussed efforts to curb costs, such as reduced cabinetry and fewer electrical outlets. As noted in the case, funding has been diverted from downtown buildings, police operations, and public works. See https://www.salemreporter.com/posts/1176/snowballing-out-of-control-how-theprice-rose-by-millions-on-salem-police-headquarters.

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Case 5-12 (Cont’d)

General Problem Information: General capital asset funding Learning Objective: 5-1 Learning Objective: 5-2 Topic: Capital Projects Funds Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making Level of Difficulty: Medium

5-13. a. The GASB guidelines for the accounting treatment of intangible assets appear in Codification Section 1400.138–153). To really understand this particular issue, one needs to first understand the definition of an asset and then the characteristics that describe an intangible asset. The GASB provided the definition of an asset in Concepts Statement No. 4. An asset is “a resource with present service capacity that the government presently controls.” Two important terms in this definition are resource and present service capacity. A resource is “an item that can be drawn on to provide services to the citizenry.” Present service capacity is an asset’s “existing capability to enable the government to provide services, which in turn enables the government to fulfill its mission.” The GASB identified three basic characteristics that intangible assets possess. The first characteristic is that the item has no physical substance; you cannot touch it. The exception to this characteristic is if there is a tangible item, such as a computer disk, that carries an intangible item, or computer software. The second characteristic is that the item is non-financial in nature. That means that while it has value, it is not in a monetary form, like cash or securities. Other financial assets that are not intangible assets are receivables or prepaid items. The final characteristic is that the item’s useful life is greater than a single accounting period. b. Given these definitions, does the government’s power to tax meet the definition of an intangible asset? Consider the three characteristics of an intangible asset. First, the power to tax has no physical substance. Second, the power to tax is non-financial in nature. Finally, the power to tax does have a useful life that is greater than a single accounting period. So, it looks like the power to tax has the three characteristics of an intangible asset. That leaves us with determining whether the power to tax meets the definition of an asset. The power to tax is definitely a resource of a government, since it can be used to acquire funds to provide services to the citizens. That leaves only the concept of present service capacity. Does the power to tax have the “existing capability to enable the government to provide services?” The GASB’s answer in Concepts Statement No. 4 was “No.” The power in and of itself does not have the capability to enable the government to provide services, so it is not an asset. 5-8 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Case 5-13 (Cont’d)

c. When the power to tax is exercised, an asset with present service capacity is created – taxes receivable. General Problem Information: Intangible assets Learning Objective: 5-1 Topic: Intangible assets Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making Level of Difficulty: Medium 5-14. a. GASB Codification Section 1400.181 defines asset impairment as “a significant, unexpected decline in the service utility of a capital asset” related to events not considered “normal or ordinary.” Physical damage is a common indicator of impairment, and the damage to Fairview’s city hall appears significant enough to demonstrate impairment. If it is determined that an impairment has occurred, the restorative approach to measuring the impairment appears to be appropriate, since there has been physical damage. b. City hall operations are generally accounted for in governmental funds, so appropriate fund level costs would be recorded as expenditures and insurance proceeds would be reported as Other Financing Sources. At the government-wide level, an impairment loss or gain is reported separately from the work (capitalized or expensed costs) needed to restore the building. Items 1-3 and 5 appear to be reasonable costs related to the city hall damage. Whether valid or not, lost productivity does not represent an outlay of resources and is likely not covered by insurance; however, the cost of rent and moving are generally recoverable. Thus, the costs related to the tornado damage total $ 917,000 ($447,000 + 175,000 + 95,000 + 75,000 + 125,000). Insurance proceeds of $1,000,000 cover the costs and result in an impairment gain of $83,000, which would be reported as an extraordinary item on government-wide financial statements. At the government-wide level, the question remains whether the building and furniture capital asset balances should be adjusted to reflect impairment. The rebuilding of the walls did not extend the useful life of the building; however, the improvement, as well as the floor replacement, would likely add value to the building. If the furniture is a replacement, the old furniture’s historical value and accumulated depreciation should be written off and replaced with the new furniture values. General Problem Information: Recording and reporting damaged capital assets Learning Objective: 5-2 Topic: Asset Impairments and Insurance Recoveries Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium 5-9 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 05 - Accounting for General Capital Assets and Capital Projects

5-15. a. Some relevant questions might include: Are there any alternative uses for the parking operations that the town might like to exercise in the next 20 years? Who retains any risk associated with the parking operations? Who will maintain the assets? Does the economy appear to be turning around? How severe is the current financial situation? Could the town increase parking fees independent of this proposal? How do the citizens feel about the proposal? Does the investment team have experience in handling parking operations? Will the team improve operations? Is the up-front payment sufficient to cover potential growth and parking rate increases in future years? b. On a short-term basis, the proposal appears favorable. The town receives a cash infusion that may help to alleviate current budget woes. Citizens will be relieved that the town’s finances are stable, and they will likely not notice much difference in parking operations. It is important to note, that selling or leasing assets to cover current financial obligations, in and of itself, is not a solid public policy, hence the town should not make a habit of this type of transaction unless it enhances efficiency. In the long-term, the town will want to ensure that parking rates remain at reasonable levels, that the assets are maintained in good, working condition, and that overall parking operations are run in such a manner that does not reflect poorly on the town. Before entering into the proposal, the town council should consider if there are any alternative uses for the property or assets before tying them up for 20 years. c. It depends. In the case of the City of Chicago and the State of Arizona, bond rating agencies downgraded bond ratings, because they viewed such arrangements as onetime cash infusions to pay current operating expenses. If the proposal improves efficiency in an area where a government has not been particularly successful, bond ratings might be unaffected in the short-term but might improve in the longer-term.

General Problem Information: Service concession arrangements Learning Objective: 5-2 Topic: Service Concession Arrangements Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Solutions to Exercises and Problems 5-16. Each student will have a different annual report, so he or she will have different answers to questions in this exercise. The various kinds of capital assets and capital projects, wide variety of financing mechanisms, and different accounting policies used in and by governments should generate interesting classroom discussions. General Problem Information: Examine the CAFR Learning Objective: 5-5 Topic: Various Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

5-17. 1. 2. 3. 4. 5.

d. c. d. a c.

6. 7. 8. 9. 10.

b. b. d. d. c.

11. 12. 13. 14. 15.

a. d. d. b. d

General Problem Information: Various Learning Objective: 5-1 Learning Objective: 5-2 Learning Objective: 5-3 Learning Objective: 5-4 Topic: Various chapter topics Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Remember

Chapter 05 - Accounting for General Capital Assets and Capital Projects

CITY OF LOVELAND

5-18.

Debits 1.

Credits

General Fund: THERE WOULD BE NO ENTRY SINCE THERE IS NO FLOW OF FINANCIAL RESOURCES.

Governmental Activities: LAND

5,200,000

PROGRAM REVENUE—CULTURE AND RECREATION—CAPITAL GRANTS AND CONTRIBUTIONS

5,200,000

General Fund: CASH

6,000

OTHER FINANCING SOURCES—PROCEEDS OF SALE OF ASSETS

6,000

Governmental Activities: CASH

6,000

ACCUMULATED DEPRECIATION

28,700

LOSS ON SALE OF MACHINERY

400

MACHINERY AND EQUIPMENT

35,100

General Fund: EXPENDITURES—GENERAL GOVERNMENT OTHER FINANCING SOURCES—LEASE AGREEMENTS CASH

30,000 29,000 1,000

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Exercise 5-18 (Cont’d)

Debits

Credits

Governmental Activities: LEASED ASSETS—MACHINERY AND EQUIPMENT 30,000

LEASE OBLIGATIONS PAYABLE

29,000

CASH

1,000

Capital Projects Fund: EXPENDITURES—GENERAL GOVERNMENT

750,000

CASH OTHER FINANCING USES—INTERFUND TRANSFERS OUT

750,000

5,000

CASH

5,000

General Fund: CASH

5,000

OTHER FINANCING SOURCES—INTERFUND TRANSFERS IN

5,000

Governmental Activities: CONSTRUCTION IN PROGRESS

750,000

CASH

BUILDING CONSTRUCTION WORK IN PROGRESS

750,000

9,720,000 9,720,000

General Fund: THERE WOULD BE NO ENTRY SINCE THERE IS NO FLOW OF FINANCIAL RESOURCES.

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Exercise 5-18, part 5 (Cont’d)

Debits

Credits

Governmental Activities: DEPRECIATION EXPENSE—BUILDINGS

162,000

ACCUMULATED DEPRECIATION— BUILDINGS

162,000

(9,720,000/30 years × ½ year = 162,000) 6.

General Fund: THERE WOULD BE NO ENTRY SINCE THERE IS NO FLOW OF FINANCIAL RESOURCES.

Governmental Activities: EXPENSES—GENERAL GOVERNMENT

1,156,000

MACHINERY AND EQUIPMENT

1,156,000

General Problem Information: General Capital Assets Learning Objective: 5-2 Learning Objective: 5-4 Topic: Various chapter topics Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application; AICPA: FN Reporting Level of Difficulty: Medium 5-19. a.

No, the note does not comply with GASB requirements. The following changes would help bring the note into compliance. 1.

Instead of one change column there should be two columns—one identifying additions to capital assets and one identifying deletions to capital assets.

Separate line disclosures should be provided for asset classes such as land, buildings and equipment.

Depreciation expense by function should be provided.

Leased assets should be amortized rather than depreciated, and the amortization amount should be disclosed.

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Exercise 5-19, a. (Cont’d)

Leased assets and their associated amortization amounts should be reported separately from other capital assets.

Yes. Infrastructure is listed with “Total capital assets not being depreciated”; therefore, the government must be using the modified approach to maintaining infrastructure. If the modified approach was not being used the infrastructure assets would need to be depreciated.

General Problem Information: Capital asset disclosure schedule Learning Objective: 5-1 Learning Objective: 5-5 Topic: Required Disclosures about Capital Assets Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application; AICPA: FN Reporting Level of Difficulty: Medium 5-20. a.

Debits

Credits

Capital Projects Fund: EXPENDITURES

12,000,000

CASH

822,441

OTHER FINANCING SOURCES— LEASE AGREEMENTS Governmental Activities: LEASE ASSETS—BUILDINGS CASH LEASE OBLIGATIONS PAYABLE

11,177,559

12,000,000 822,441 11,177,559

b. The capital asset and long-term liability would be reflected only on the government-wide statement of net position.

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Exercise 5-20 (Cont’d)

c. It is not uncommon for government lease agreements to contain a “fiscal funding clause,” or cancellation clause, which permits government lessees to terminate the agreement on an annual basis if funds are not appropriated to make required lease payments. GASBS 87 specifies that lease agreements containing such clauses should be evaluated, but the clause should not impact the lease term unless it is reasonably certain the clause will be exercised. Thus, in most cases, the accounting is not impacted. General Problem Information: Lease classification and accounting Learning Objective: 5-2 Topic: General Capital Assets Acquired under Lease Agreements Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application; AICPA: FN Reporting Level of Difficulty: Medium

5-21. a. Because Sunshine City is located in an area that is susceptible to hurricanes, the unusual criterion would not be met for the loss to be reported as extraordinary. To be reported as a special item requires that the event be either unusual or infrequent in occurrence (but not both) and be within management’s control. Since this is the first hurricane to hit the city in 48 years, the infrequent criterion would appear to be met, but hurricanes may be considered frequent for the broader geographic area. Moreover, the hurricane was clearly beyond management’s control, so this event cannot be reported as a special item. In addition to reporting the item as an ordinary expense, it should be disclosed in the notes to the financial statement if it is deemed to be significant and infrequently occurring.

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Exercise 5-21 (Cont’d)

Debits b.

Governmental Activities: EXPENSES—CULTURE AND RECREATION

230,000

BUILDINGS c.

Credits

230,000

GASB requires that the $120,000 insurance recoveries be reported as program revenues (presumably of the Culture and Recreation function in the Capital Grants and Contributions column under Governmental Activities) on the government-wide statement of activities in the year received. In addition, it should be reported as an other financing source by the General Fund.

General Problem Information: Asset Impairment Learning Objective: 5-2 Topic: Asset Impairments and Insurance Recoveries Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

5-22.

FULBRIGHT COUNTY Debits

Credits

1. Capital Projects Fund: CASH

6,000,000

OTHER FINANCING SOURCES—PROCEEDS OF BONDS

6,000,000

Governmental Activities: CASH

6,000,000

BONDS PAYABLE

6,000,000

2. Capital Projects Fund: CASH REVENUES

650,000 650,000

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Chapter 5, Solutions, Exercise 5-22, part 2 (Cont’d)

Debits

Credits

Governmental Activities: CASH

650,000

PROGRAM REVENUES—CULTURE & RECREATION—CAPITAL GRANTS & CONTRIBUTIONS

650,000

3. Capital Projects Fund: CASH

250,000

OTHER FINANCING SOURCES—INTERFUND TRANSFERS IN

250,000

Governmental Activities: NO ENTRY WHEN TRANSFERS ARE BETWEEN GOVERNMENTAL FUNDS

(Note: There would also be an entry in the special revenue fund.)

4. Capital Projects Fund: ENCUMBRANCES

6,800,000

ENCUMBRANCES OUTSTANDING

6,800,000

Governmental Activities: BUDGETARY TRANSACTIONS ARE NOT RECORDED IN THE GOVERNMENTAL ACTIVITIES JOURNAL

5. Capital Projects Fund: ENCUMBRANCES OUTSTANDING

6,800,000

ENCUMBRANCES CONSTRUCTION EXPENDITURES CASH

6,800,000 6,890,000 6,890,000

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Chapter 5, Solutions, Exercise 5-22, part 5 (Cont’d)

Debits

Credits

Governmental Activities: CONSTRUCTION WORK IN PROGRESS

6,890,000

CASH

LAND

6,890,000

200,000

BUILDINGS MACHINERY AND EQUIPMENT

6,295,000 395,000

CONSTRUCTION WORK IN PROGRESS

6,890,000

6. Capital Projects Fund: To close nominal accounts:

OTHER FINANCING SOURCES— PROCEEDS OF BONDS

6,000,000

OTHER FINANCING SOURCES— INTERFUND TRANSFERS IN

250,000

REVENUES

650,000

CONSTRUCTION EXPENDITURES

6,890,000

FUND BALANCE—RESTRICTED

10,000

To close the fund: OTHER FINANCING USES— INTERFUND TRANSFERS OUT

10,000

CASH FUND BALANCE—RESTRICTED

10,000 10,000

OTHER FINANCING USES— INTERFUND TRANSFERS OUT

10,000

(Note: There would also be an entry in the debt service fund.) Governmental Activities: NO ENTRY SINCE THE CLOSING ONLY RELATES TO THE FUND 5-19 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Chapter 5, Solutions, Exercise 5-22 (Cont’d)

General Problem Information: Capital Projects Fund Learning Objective: 5-4 Topic: Capital Projects Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application; AICPA: FN Reporting Level of Difficulty: Medium

5-23. Debits

Credits

1. Capital Projects Fund: CASH

2,000,000

OTHER FINANCING SOURCES— PROCEEDS OF BONDS

2,000,000

Governmental Activities: CASH

2,000,000

BONDS PAYABLE

2,000,000

2. Capital Projects Fund and Governmental Activities: CASH

150,000

NOTES PAYABLE

150,000

3. Capital Projects Fund: CASH

500,000

OTHER FINANCING SOURCES—PROCEEDS OF BOND ANTICIPATION NOTES

500,000

Governmental Activities: CASH BOND ANTICIPATION NOTES PAYABLE

500,000 500,000

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Chapter 5, Solutions, Exercise 5-23 (Cont’d)

General Problem Information: Recording Bond Transactions Learning Objective: 5-4 Topic: Bonds Sold at a Premium or Discount; Bond Anticipation Notes Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application; AICPA: FN Reporting Level of Difficulty: Medium

5-24. a.

WOODLAND PARK CAPITAL PROJECTS FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE YEAR END

REVENUES

$ 707,000

EXPENDITURES: CONSTRUCTION EXPENDITURES

4,150,000

EXCESS OF REVENUES OVER (UNDER) EXPENDITURES

(3,443,000)

OTHER FINANCING SOURCES: PROCEEDS OF BONDS EXCESS OF REVENUES AND OTHER FINANCING SOURCES OVER EXPENDITURES FUND BALANCES, BEGINNING FUND BALANCES, ENDING

4,700,000 1,257,000 0 $1,257,000

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Chapter 5, Solutions, Exercise 5-24 (Cont’d)

WOODLAND PARK CAPITAL PROJECTS FUND BALANCE SHEET FOR THE YEAR END

ASSETS: CASH GRANT RECEIVABLES INVESTMENTS TOTAL ASSETS

987,000 600,000 1,000,000

$ 2,587,000

LIABILITIES AND FUND BALANCES: CONTRACTS PAYABLE

1,263,500

CONTRACTS PAYABLE—RETAINED PERCENTAGE TOTAL LIABILITIES

66,500 1,330,000

FUND BALANCE—RESTRICTED

1,257,000

TOTAL LIABILITIES AND FUND BALANCES

$2,587,000

It would appear that the capital project has not been completed since encumbrances remain at year-end. Additionally, there are a number of current receivables/payables that are open at year-end, and the ending fund balance is large.

General Problem Information: Statement of Revenues and Expenditures Learning Objective: 5-5 Topic: Capital Projects Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application; AICPA: FN Reporting Level of Difficulty: Medium

Chapter 05 - Accounting for General Capital Assets and Capital Projects

5-25. a.

SURPRISE COUNTY Debits

Credits

1. Construction Fund: CASH

100,000

OTHER FINANCING SOURCES—PROCEEDS OF BOND ANTICIPATION NOTES

100,000

Governmental Activities: CASH

100,000

BOND ANTICIPATION NOTES PAYABLE

100,000

2. Construction Fund: CONSTRUCTION EXPENDITURES—POLICE

30,000

CONSTRUCTION EXPENDITURES—FIRE

30,000

VOUCHERS PAYABLE

60,000

Governmental Activities: CONSTRUCTION WORK IN PROGRESS—POLICE

30,000

CONSTRUCTION WORK IN PROGRESS—FIRE

30,000

VOUCHERS PAYABLE

60,000

3. Construction Fund: ENCUMBRANCES—POLICE

21,000,000

ENCUMBRANCES—FIRE

11,000,000

ENCUMBRANCES OUTSTANDING—POLICE

21,000,000

ENCUMBRANCES OUTSTANDING—FIRE

11,000,000

Governmental Activities: NO ENTRY REQUIRED

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Chapter 5, Solutions, Exercise 5-25, a. (Cont’d)

Debits

Credits

4. Construction Fund: CASH

30,000,000

OTHER FINANCING SOURCES—PROCEEDS OF BONDS

30,000,000

Governmental Activities: CASH

30,300,000

BONDS PAYABLE

30,000,000

PREMIUM ON BONDS PAYABLE

300,000

5. Construction Fund: OTHER FINANCING USES—RETIREMENT OF BANs INTEREST EXPENDITURES

100,000 1,500

CASH

101,500

(BANs = BOND ANTICIPATION NOTES) Interest due is calculated as follows: $100,000 × .03 × 180/360 = $1,500; interest is not capitalized for general capital assets.

Governmental Activities: BOND ANTICIPATION NOTES PAYABLE EXPENSES—INTEREST ON BANs CASH

100,000 1,500 101,500

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Chapter 5, Solutions, Exercise 5-25, a. (Cont’d)

Debits

Credits

6. Construction Fund: ENCUMBRANCES OUTSTANDING—POLICE

10,000,000

ENCUMBRANCES OUTSTANDING—FIRE

6,000,000

ENCUMBRANCES—POLICE

10,000,000

ENCUMBRANCES—FIRE

6,000,000

CONSTRUCTION EXPENDITURES—POLICE

10,000,000

CONSTRUCTION EXPENDITURES—FIRE

6,000,000

CONTRACTS PAYABLE

16,000,000

Governmental Activities: CONSTRUCTION WORK IN PROGRESS—POLICE

10,000,000

CONSTRUCTION WORK IN PROGRESS—FIRE

6,000,000

CONTRACTS PAYABLE

16,000,000

7. Construction Fund: CASH

500,000

REVENUES

500,000

Governmental Activities: CASH PROGRAM REVENUES—ECONOMIC DEVELOPMENT—CAPITAL GRANTS & CONTRIBUTIONS

500,000

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Chapter 5, Solutions, Exercise 5-25, a. (Cont’d)

Debits

Credits

8. Construction Fund and Governmental Activities: CONTRACTS PAYABLE

16,000,000

CONTRACTS PAYABLE—RETAINED PERCENTAGE

800,000

CASH

15,200,000

9. Construction Fund: ENCUMBRANCES OUTSTANDING—FIRE

5,000,000

ENCUMBRANCES—FIRE

CONSTRUCTION EXPENDITURES—FIRE

5,000,000

CONTRACTS PAYABLE

5,000,000

Governmental Activities: CONSTRUCTION WORK IN PROGRESS—FIRE

5,000,000

CONTRACTS PAYABLE BUILDINGS

5,000,000 11,030,000

CONSTRUCTION WORK IN PROGRESS—FIRE

11,030,000

10. Construction Fund and Governmental Activities: CONTRACTS PAYABLE CONTRACTS PAYABLE—RETAINED PERCENTAGE

5,000,000 300,000

CASH

5,300,000

(5% of 6,000,000 for the fire station from [6] had been retained in [8].)

11. Construction Fund: ENCUMBRANCES OUTSTANDING—POLICE ENCUMBRANCES—POLICE

7,500,000 7,500,000

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Chapter 5, Solutions, Exercise 5-25, a. (11) (Cont’d)

Debits Credits CONSTRUCTION EXPENDITURES—POLICE

7,500,000

CONTRACTS PAYABLE

7,500,000

Governmental Activities: CONSTRUCTION WORK IN PROGRESS—POLICE

7,500,000

CONTRACTS PAYABLE

7,500,000

12. Construction Fund: OTHER FINANCING SOURCES—PROCEEDS OF BOND ANTICIPATION NOTES

100,000

OTHER FINANCING SOURCES—PROCEEDS OF BOND

30,000,000

REVENUES

500,000

CONSTRUCTION EXPENDITURES—POLICE

17,530,000

CONSTRUCTION EXPENDITURES—FIRE

11,030,000

INTEREST EXPENDITURES OTHER FINANCING USES—RETIREMENT OF BANs FUND BALANCE—RESTRICTED

1,500 100,000 1,938,500

Governmental Activities: NO CLOSING ENTRY REQUIRED AS THERE ARE NO TEMPORARY ACCOUNT BALANCES.

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Exercise 5-25 (Cont’d)

SURPRISE COUNTY CONSTRUCTION FUND GENERAL LEDGER (NOT REQUIRED) CASH (1)

CONTRACTS PAYABLE

100,000

(5)

101,500

(8) 16,000,000

(6) 16,000,000

(4) 30,000,000

(8) 15,200,000

(10) 5,000,000

(9) 5,000,000

(7)

(10) 5,300,000

(11) 7,500,000

VOUCHERS PAYABLE (2) 60,000

CONTRACTS PAYABLE⎯ RETAINED PERCENTAGE (10) 300,000 (8) 800,000

500,000

ENCUMBRANCES—POLICE (3) 21,000,000

(6)

ENCUMBRANCES—FIRE

10,000,000

(3) 11,000,000

(6) 6,000,000

(11) 7,500,000

(9) 5,000,000

ENCUMBRANCES OUTSTANDING —POLICE (6) 10,000,000 (3) 21,000,000 (11) 7,500,000

ENCUMBRANCES OUTSTANDING —FIRE (6) 6,000,000 (3) 11,000,000 (9) 5,000,000

CONSTRUCTION EXPENDITURES —POLICE (2) 30,000 (12) 17,530,000

CONSTRUCTION EXPENDITURES —FIRE (2) 30,000 (12) 11,030,000

(6) 10,000,000

(6) 6,000,000

(11)

(9) 5,000,000

7,500,000

INTEREST EXPENDITURES (5)

1,500

(12)

OFU—RETIREMENT OF BANS 1,500

OFS—PROCEEDS OF BANS (12)

100,000

(1) 100,000

REVENUES (12)

500,000

(7)

(5)

100,000

(12) 100,000

OFS—PROCEEDS OF BONDS (12) 30,000,000

(4) 30,000,000

FUND BALANCE—RESTRICTED 500,000

(12)

1,938,500

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Exercise 5-25 (Cont’d)

SURPRISE COUNTY CONSTRUCTION FUND BALANCE SHEET DECEMBER 31, 2023

ASSETS CASH

$ 9,998,500

TOTAL ASSETS

$ 9,998,500

LIABILITIES AND FUND BALANCES LIABILITIES: VOUCHERS PAYABLE CONTRACTS PAYABLE

60,000 7,500,000

CONTRACTS PAYABLE—RETAINED PERCENTAGE TOTAL LIABILITIES

500,000 8,060,000

FUND BALANCES: FUND BALANCE—RESTRICTED TOTAL LIABILITIES AND FUND BALANCES

1,938,500 $9,998,500

(Note that encumbrances and encumbrances outstanding are not reported on the balance sheet. They are budgetary accounts that represent construction commitments.)

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Exercise 5-25 (Cont’d)

SURPRISE COUNTY CONSTRUCTION FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE PERIOD ENDED DECEMBER 31, 2023

REVENUES

500,000

EXPENDITURES: CONSTRUCTION EXPENDITURES—POLICE

17,530,000

CONSTRUCTION EXPENDITURES—FIRE

11,030,000

INTEREST EXPENDITURES

1,500

TOTAL EXPENDITURES

28,561,500

EXCESS OF EXPENDITURES OVER REVENUES

28,061,500

OTHER FINANCING SOURCES (USES): PROCEEDS OF BOND ANTICIPATION NOTES PROCEEDS OF BONDS RETIREMENT OF BOND ANTICIPATION NOTES TOTAL OTHER FINANCING SOURCES (USES)

100,000 30,000,000 (100,000) 30,000,000

EXCESS OF REVENUES AND OTHER FINANCING SOURCES AND USES OVER EXPENDITURES FUND BALANCES, JANUARY 1, 2023 FUND BALANCES, DECEMBER 31, 2023

1,938,500 -0$ 1,938,500

In the Governmental Activities column of the statement of net position, the fire station will be reported with other buildings, net of depreciation, if any is taken in the first year. The police facility construction expenditures of $17,530,000 for this year will appear as construction work in progress in the capital assets section. The Governmental Activities column of the statement of activities will show any depreciation expense on the fire station (if applicable), most likely in the functional expense category (row) called public services. 5-30 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Exercise 5-25 (Cont’d)

General Problem Information: Multi-project Construction Fund Learning Objective: 5-2 Learning Objective: 5-4 Learning Objective: 5-5 Topic: Capital Projects Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard

5-26. a.

SOUTHFORK SENIOR CENTER CAPITAL PROJECTS FUND Debits

CASH

500,000

OTHER FINANCING SOURCES—INTERFUND TRANSFERS IN 2.

CONSTRUCTION EXPENDITURES

500,000 400,000

CASH 3.

CONSTRUCTION EXPENDITURES

400,000 95,000

VOUCHERS PAYABLE 4.

ENCUMBRANCES

95,000 4,950,000

ENCUMBRANCES OUTSTANDING

CASH

Credits

4,950,000

5,000,000

OTHER FINANCING SOURCES—PROCEEDS OF BONDS

INVESTMENTS

5,000,000

3,500,000

CASH

CONSTRUCTION EXPENDITURES DUE TO OTHER FUNDS

3,500,000

49,500 49,500

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Exercise 5-26, part a. (Cont’d)

Debits 8. ENCUMBRANCES OUTSTANDING

1,500,000

CONSTRUCTION EXPENDITURES

1,500,000

ENCUMBRANCES

1,500,000

CONTRACTS PAYABLE

1,500,000

9. CONTRACTS PAYABLE

1,500,000

CONTRACTS PAYABLE—RETAINED PERCENTAGE

75,000

CASH

10.

Credits

1,425,000

DUE TO OTHER FUNDS

25,000

VOUCHERS PAYABLE

47,500

CASH

11. CASH

72,500

100,000

REVENUES

100,000

12. OTHER FINANCING SOURCES— INTERFUND TRANSFERS IN

500,000

OTHER FINANCING SOURCES— PROCEEDS OF BONDS

5,000,000

REVENUES

100,000

FUND BALANCE—RESTRICTED

2,500,000

FUND BALANCE—ASSIGNED

1,055,500

CONSTRUCTION EXPENDITURES

2,044,500

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Exercise 5-26 (Cont’d)

SOUTHFORK SENIOR CENTER CAPITAL PROJECTS FUND GENERAL LEDGER (NOT REQUIRED) CASH (1)

500,000

(2)

400,000

(5)

5,000,000

(6)

3,500,000

(11)

100,000

(9)

1,425,000

(10)

72,500

(3)

95,000

(8)

1,500,000

INVESTMENTS (6)

3,500,000

VOUCHERS PAYABLE (10)

47,500

CONTRACTS PAYABLE (9)

1,500,000

CONTRACTS PAYABLE⎯RETAINED PERCENTAGE (9)

75,000

(7)

49,500

(12)

2,500,000

(12)

1,055,500

DUE TO OTHER FUNDS (10)

25,000

FUND BALANCE—RESTRICTED

FUND BALANCE—ASSIGNED Ch. 5, Solutions, Exercise 5-26 (Cont’d) 5-33 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 05 - Accounting for General Capital Assets and Capital Projects

REVENUES (12)

100,000

(11)

100,000

OTHER FINANCING SOURCES—INTERFUND TRANSFERS IN (12)

500,000

(1)

500,000

OTHER FINANCING SOURCES—PROCEEDS OF BONDS (12)

5,000,000

(5)

5,000,000

(8)

1,500,000

(4)

4,950,000

(12)

2,044,500

ENCUMBRANCES (4)

4,950,000

ENCUMBRANCES OUTSTANDING (8)

1,500,000

CONSTRUCTION EXPENDITURES (2)

400,000

(3)

95,000

(7)

49,500

(8)

1,500,000

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Exercise 5-26 (Cont’d)

SOUTHFORK SENIOR CENTER CAPITAL PROJECTS FUND STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED

REVENUES

$ 100,000

EXPENDITURES: CONSTRUCTION EXPENDITURES

2,044,500

EXCESS OF REVENUES OVER (UNDER) EXPENDITURES

(1,944,500)

OTHER FINANCING SOURCES AND USES: INTERFUND TRANSFERS IN

$ 500,000

PROCEEDS OF BONDS SOLD

5,000,000

5,500,000

EXCESS OF REVENUES AND OTHER SOURCES OVER EXPENDITURES FUND BALANCES, BEGINNING FUND BALANCES, ENDING

3,555,500 -0$3,555,500

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Exercise 5-26 (Cont’d)

SOUTHFORK SENIOR CENTER CAPITAL PROJECTS FUND BALANCE SHEET AS OF YEAR END ASSETS

CASH

$ 202,500

INVESTMENTS

3,500,000

TOTAL ASSETS

$3,702,500

LIABILITIES AND FUND BALANCES LIABILITIES: VOUCHERS PAYABLE

47,500

DUE TO OTHER FUNDS

24,500

CONTRACTS PAYABLE—RETAINED PERCENTAGE

75,000

TOTAL LIABILITIES

147,000

FUND BALANCES: FUND BALANCE—RESTRICTED

$2,500,000

FUND BALANCE—ASSIGNED

1,055,500

TOTAL FUND BALANCES TOTAL LIABILITIES AND FUND BALANCES

3,555,500 $3,702,500

(Note that encumbrances and encumbrances outstanding are not reported on the balance sheet. They are budgetary accounts that represent construction obligations, and for Southfork, $2,500,000 of these encumbrances are restricted. Per GASB Codification Section 1800.152, amounts that are not restricted or committed in a capital projects fund are considered assigned to the purposes of the respective fund.)

Chapter 05 - Accounting for General Capital Assets and Capital Projects

Ch. 5, Solutions, Exercise 5-26 (Cont’d)

General Problem Information: Capital Project Transactions Learning Objective: 5-2 Learning Objective: 5-4 Learning Objective: 5-5 Topic: Capital Projects Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

CHAPTER 6:

ACCOUNTING FOR GENERAL LONG-TERM LIABILITIES AND DEBT SERVICE OUTLINE

Number

Topic

Type/Task

Status (re: 18/e)

The need for long-term liabilities Defining general long-term liabilities; financial reporting Disclosures about long-term liabilities Reporting special assessment debt Term and serial bonds Overlapping debt Debt limit and debt margin Bond anticipation notes Debt issuance costs Advance refunding of bonds

Explain Define, explain

New 6-1

Explain Explain Describe, explain Explain Explain Explain Describe Explain

6-2 Same 6-8 Same Same 5-9 Same Same

Evaluating financing options Policy issues relating to general long-term debt The case of the vanishing debt Analysis of general obligation debt burden Comparing debt burdens Direct and Overlapping Debt and the Legal Debt Margin

Analyze, write Analyze, write Analyze, write Calculate, assess Calculate, assess Analyze

Revised Revised Same Same Same New

Exercises/Problems: 6-17 Examine the CAFR 6-18 Various

Examine Multiple Choice

6-19 6-20 6-21 6-22

Journal entries Journal entries Journal entries, FS Financial schedules

6-16 Updated Item 5 revised. Items 8, 11 and 13,15 are new Revised Revised Revised Same

Questions: 6-1 6-2 6-3 6-4 6-5 6-6 6-7 6-8 6-9 6-10 Cases: 6-11 6-12 6-13 6-14 6-15 6-16

6-23 6-24 6-25

Long-term liability transactions Budgeted and actual debt service transactions Lease agreement Legal debt margin, direct and overlapping debt Trial balance Serial bond debt service fund transactions and statements Term bond debt service fund transactions

Analysis, financial statements Journal entries, FS

Same

Journal entries

Revised

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

6-26

Comprehensive capital assets/serial bond problem

Journal entries

Revised

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

CHAPTER 6:

ACCOUNTING FOR GENERAL LONG-TERM LIABILITIES AND DEBT SERVICE

Answers to Questions 6-1.

As noted in the chapter, the use of long-term debt is a traditional part of the fiscal policy of state and local governments, particularly for financing general capital assets. Few governments possess the resources needed to finance capital projects in the short term, as annual tax revenues are often used for current operating purposes and to meet prior obligations. Thus, long-term debt is frequently used to fund new capital projects (e.g., government buildings, schools, roads, etc.) and capital asset improvements. In the shortterm, local governments might be able to sustain debt prohibitions; however, in the longer-term, government buildings, schools, roads, emergency service assets, etc. would suffer. Students may also suggest that typical government services, such as police and fire protection, might suffer; however, general governmental operations are typically not financed with long-term debt. General Problem Information: The need for long-term liabilities Learning Objective: 6-1 Topic: General Long-Term Liabilities Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

6-2.

General long-term liabilities arise from activities of the General Fund or some other governmental fund. These liabilities are distinguished from “fund” long-term liabilities that are incurred by a proprietary or fiduciary fund and for which debt service will be paid from that fund. General long-term liabilities are reported only in the Governmental Activities column of the government-wide financial statements and not in any fund financial statements. In comparison, other long-term liabilities are reported in the fund financial statements of the appropriate proprietary or fiduciary fund, in addition to being reported in the business-type activities column of the government-wide financial statements. General Problem Information: Defining general long-term liabilities; financial reporting Learning Objective: 6-1 Topic: General Long-Term Liabilities Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

6-3.

As shown in Illustration 6-1 for the City and County of Denver, note disclosures for longterm debt (such as bonds, notes, and leases) and operating long-term liabilities (such as claims and judgments, compensated absences, and other accrued liabilities) should show the beginning balance of each major class of long-term liability, as well as additions to, deletions from, and the ending balance of each major class. Disclosures should also include the portion of liabilities due within one year of the financial statement date. These disclosures should present separate sections for governmental activities and business-type activities. Presenting long-term liability disclosures for discretely presented component units, as the City and County of Denver has done, is discretionary and a matter of professional judgment, according to GASB Codification Section 2300.121. General Problem Information: Disclosures about long-term liabilities Learning Objective: 6-2 Topic: General Long-Term Liabilities Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

6-4.

(a) Special assessment debt for which a government provides secondary backing should be reported as “special assessment debt with governmental commitment” in the government-wide statement of net position, while any portion of special assessment debt that is the direct responsibility of a government and will be repaid from general government resources (the public benefit portion or the amount assessed against government-owned property) should be reported like other general long-term liabilities. (b)

If the government is not obligated in any manner for special assessment debt, the debt should not be reported in the financial statements; however, the notes to the financial statements should disclose the amount of the debt, as well as the fact that the government is in no way liable for repayment but is only acting as an agent for the property owners in collecting the assessments, forwarding the collections to bondholders, and initiating foreclosure proceedings, if appropriate.

General Problem Information: Reporting special assessment debt Learning Objective: 6-2 Learning Objective: 6-5 Topic: Debt Service Accounting for Special Assessment Debt Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

6-5.

Term bonds require repayment of long-term debt in a lump sum on a specified date. Serial bonds are repaid in a series of installments over the life of the debt. A debt service fund for serial bonds requires entries related primarily to the current repayment obligation. Term bonds require entries related to the accumulation and investment of funds needed to retire the debt in its entirety on the maturity date, as well as any currently required interest payments. Therefore, a debt service fund for term bonds will show increasing amounts of cash and investments throughout the life of the bonds, while a debt service fund for serial bonds will not. Governments have been more likely to issue serial bonds with recurring principal repayments. This preference is primarily reflective of the potential negative effects of term bond balloon payment requirements that lead to financial difficulties when resources were not sufficiently accumulated over the life of a bond issuance. General Problem Information: Term and serial bonds Learning Objective: 6-4 Topic: Types of Serial Bonds; Debt Service Accounting for Term Bonds Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

6-6.

Overlapping debt is when a parcel of real estate or object of personal property is subject at any given time to assessments for payment of taxes to retire bonds issued by two or more governments. Citizens care about the extent of overlapping debt since it means their property is subject to assessments from two or more governments for the retirement of debt. A government is concerned about the amount of overlapping debt since it can affect the government’s ability to issue general obligation debt. The greater the assessments on a citizen’s property, the less open the citizen will be to a government’s request to issue bonded debt. General Problem Information: Overlapping debt Learning Objective: 6-2 Topic: Overlapping Debt Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

6-7.

A debt limit is the maximum amount of long-term debt that a government may legally have outstanding at any point in time, expressed as a proportion or percentage of some measure of property value within the government’s jurisdiction. A debt limit is designed to help protect the taxpayers and citizens of the government from an excessive tax burden and potential downgrade of the credit rating of the government. Debt margin is the difference between the debt limit and net amount of existing governmental debt subject to limitation. It is a measure of the government’s remaining borrowing power.

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Answers, Question 6-7 (Cont’d)

General Problem Information: Debt limit and debt margin Learning Objective: 6-2 Topic: Debt Limit and Debt Margin Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 6-8.

Bond anticipation notes (BAN) may be classified as current or long-term depending upon the intent of the government regarding the financing agreement. A BAN is classified as short-term, unless all legal steps have been taken to refinance the BAN and the intent to refinance the notes is supported by an ability to secure refinancing of the notes on a longterm basis. If those two criteria are present, the BAN is, in essence, a long-term liability. General Problem Information: Bond Anticipation Notes Learning Objective: 6-5 Topic: Bond Anticipation Notes Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

6-9.

Debt issuance costs include insurance, financing charges from rating agencies, and printing, legal, administrative, and trustee fees. According to GASB Codification Section I30.115, debt issuance costs are recognized as expenditures at the governmental fund level. At the government-wide level, prepaid insurance costs should be reported as an asset and recognized as an expense over the life of the bond. All other bond issuance costs are expensed at the time of the bond issuance. General Problem Information: Debt issuance costs Learning Objective: 6-5 Topic: Accounting for Bond Premiums, Accrued Interest, and Bond Issue Costs Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

6-10. Advance refunding may be desirable when the interest rate on outstanding debt is considerably higher than current interest rates, when debt service fund assets accumulated for debt repayment are not sufficient to repay creditors when the debt matures, or if the covenants of the existing bonds are excessively burdensome. If the old debt issue is “defeased,” (either “legal” or “in-substance”), GASB standards permit the liability for the old issue to be removed from the accounts and the reporting of only the liability for the new (refunding) issue. General Problem Information: Advance refunding of bonds Learning Objective: 6-5 Topic: Advance Refunding of Debt Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Solutions to Cases 6-11. The following suggested solution is not all-inclusive; we recommend that the substance of a student’s analysis be emphasized more than its form. A city council member may argue that option (1), the sales tax approach, offers the advantage of spreading the burden for infrastructure improvements across a larger number of taxpayers, including many non-residents who visit or shop in Surf City. Since taxpayers often dislike tax increases of any kind, however, city council may face political risk for advocating for a tax increase. From an equity standpoint, the sales tax approach has appeal to current and future homeowners because infrastructure improvements enhance the city for visitors and shoppers, as well as for residents. Current and future business owners generally do not oppose sales taxes as long as the taxes do not significantly reduce aggregate sales or business activity. Also, retail sales may be less volatile than new construction, which can be strongly impacted by the local, regional, and national economies. Thus, an increased sales tax may provide a more stable revenue source. Option (2), the development fee approach, has the advantage of being relatively “invisible” to the public and efficient to administer, since the number of developers will be relatively small. Although real estate developers can be expected to pass the development fee to new homeowners and businesses, property values may be increased by enhanced infrastructure (e.g., improved streets and highways, adequate storm drainage, and so forth). As a result, taxpayers may recoup a portion of the development fee. The main disadvantage is the potential inequity of the development fee, since a relatively high financial burden is imposed on new homeowners and new businesses for infrastructure expansion and improvement that may substantially benefit the entire city. If potential developers see the fee as excessive and difficult to recover via property sales, they may choose to place their resources and efforts in other communities. A city council member may prefer the development fee approach since it holds less political risk than asking residents to approve a tax increase, as long as the fee does not hinder growth. Current homeowners and businesses might be expected to prefer the development fee approach since those fees would not have a direct impact on their property and would place the incidence of the tax on others. It would be surprising if new homeowners or new businesses favored the development fee approach, as they would probably view it as inequitable. General Problem Information: Evaluating financing options Learning Objective: 6-1 Topic: Various chapter topics Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making Level of Difficulty: Medium

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Each student’s memo should identify and support a position on the amendment. This is a case that can generate significant class discussion. While taxpayers often express distrust of government and generally desire reduced tax liabilities, astute individuals recognize that taxes and tax-supported debt support general government operations and public services upon which the general citizenry relies.

6-12.

For class discussion purposes, instructors might reference a “real world” example. In 2010, residents of the State of Colorado voted on Amendment 61, a measure which called for prohibition of new debt issuances by state or local governments and stringent limits on local government debt. It was estimated that 36 school districts, representing almost half of the students in the state, would have exceeded or equaled the new debt limits and been unable to borrow money to build public school facilities. While Amendment 61 did not pass in Colorado, it was hotly contested on both sides. The four statements in the case were adapted from pros and cons published by the press in Colorado. For more information, see https://ballotpedia.org/Colorado_State_and_Local_Debt_Limitations,_Initiative_61_( 2010). General Problem Information: Policy Issues Relating to General Long-term Debt Learning Objective: 6-1 Topic: Various chapter topics Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making Level of Difficulty: Hard

6-13. a.

In evaluating each student’s performance on this case, we recommend placing more weight on the quality and depth of analysis than on the student’s final conclusion. Indeed, there may not be a “right” answer given the facts of this case, particularly since the two parties involved in the transaction appear to have reached inconsistent conclusions about how the debt service advances should be reported. Because the case involves substantial uncertainty, it affords an excellent vehicle for generating classroom discussion. From the perspective of the authority, there are both legal and conceptual issues to consider before deciding whether it acted appropriately in removing the liability for debt service advances from its accounts. The legal issue is whether the authority can unilaterally remove the liability from its accounts without either being released from the obligation by the creditor (the county) or by appropriate judicial action. The main conceptual issue is whether the obligation meets the conceptual definition of a liability.

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, 6-13 a. (Cont’d)

In the authors’ view, neither legal nor conceptual analyses justify the authority’s removal of the liability. From a legal viewpoint, removal of the liability appears inappropriate as long as the creditor still insists that it has a valid receivable, and no legal release has been obtained. From a conceptual viewpoint, the GASB defines liabilities as: “…present obligations to sacrifice resources that the government has little or no discretion to avoid.” [GASB Concepts Statement No. 4]

In most cases of in-substance defeasance, the barrier for removing debt from a balance sheet is higher than that for recognizing it initially (i.e., FASB ASC 405.20). Thus, conceptually, it appears that the authority can justify removing the liability from its accounts only if the possibility of hitting the agreed upon attendance trigger (annual attendance of 3,000,000) is remote. Because a variety of sports and entertainment events can be held in the stadium, the possibility exists that the trigger point could be reached in the future. Thus, as the independent auditor, you should advise the authority to continue to report the liability on its statement of net position. b.

Much of the analysis for part a applies to this part as well. The unwillingness of the county board of commissioners to write off the receivable for debt service advances suggests that they believe there is a possibility that the attendance sales trigger may be reached in the future. As the independent auditor, you are not in a position to override the commission’s opinion, particularly given the stated facts in this case. However, you should question why the receivable is being carried at zero net realizable value if there is a positive probability that some portion of the advances may be repaid in the future. If the county is unwilling to report a nonzero amount of receivable, then you should advise them to write off the receivable altogether. In other words, the county cannot have it both ways. This, in turn, would provide justification for the authority to remove its liability. General Problem Information: The case of the vanishing debt Learning Objective: 6-1 Topic: General Long-Term Liabilities Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making Level of Difficulty: Hard

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

6-14. a. Students’ initial assessments of the city’s net general debt burden will vary. However, some students are likely to look at the increasing trend of bonded debt and assess the trend as a potential concern. The general trend shows an increase in the ratio of bonded debt to assessed valuation and the debt per capita. Analysis of the trend in assessed valuation shows an increase of about 85% over the past ten years. This compares to an increase of approximately 131.8% in net bonded debt. Thus, while property values are increasing, the increase in value is not keeping pace with the increase in net bonded debt. This is reflected in the large increase in the per capita debt (approximately 103%). When compared to benchmarks, the city is higher than the 4.56 ratio of net bonded debt to assessed valuation and the $1,376 per capita figure. Thus, citizens may want to be watchful of the city’s debt burden. Extraneous factors can also impact consideration of whether the debt burden is excessive. There may be environmental factors that impact increases in debt, such as floods or wind destruction. Additionally, the nature of the government issuing the debt may be a factor; for example, some cities are responsible for school construction, while in other cities, school districts separately issue debt (impacting the amount of overlapping debt). Finally, if the debt is part of a capital improvement plan, the level of debt may be considered more acceptable since there are plans in place to obtain needed capital assets while managing the level of debt. Ratio of Net General Bonded Debt to Actual Value of Taxable Property and Net General Bonded Debt per Capita (Last Ten Fiscal Years – $000s omitted) Fiscal Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Estimated Population 90,599 92,061 93,524 94,986 96,647 97,610 99,208 100,477 102,404 103,428

Assessed Valuation $ 1,792,747 1,939,316 2,057,130 2,197,710 2,386,169 2,585,416 2,843,133 3,080,629 3,201,498 3,325,203

Gross Bonded Debt $ 192,151 206,856 212,323 221,287 261,519 291,736 280,654 278,042 271,425 309,788

Less: Amount in Debt Service Fund $ 99,545 100,690 106,655 102,518 117,212 120,326 106,551 105,945 86,976 95,158

Net Bonded Debt $ 92,606 106,166 105,668 118,769 144,307 171,410 174,103 172,097 184,449 214,630

Net General Bonded Debt to Assessed Value 5.17% 5.47% 5.14% 5.40% 6.05% 6.63% 6.12% 5.59% 5.76% 6.45%

Net General Bonded Debt per Capita $ 1,022 1,153 1,130 1,250 1,493 1,756 1,755 1,713 1,801 2,075

General Problem Information: Analysis of general obligation debt burden Learning Objective: 6-1 Learning Objective: 6-2 Topic: General Long-Term Liabilities Bloom’s Taxonomy: Apply, Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

6-15. The instructions for this case were intentionally vague in hopes that the students would use the data provided to examine debt margin trends in total and per capita over the fiveyear period. Some instructors may wish to instruct the students to calculate legal debt margin per capita or to evaluate trends. While the legal debt margins for the City of Dreams and the City of Hopes are equal in the current year, it is notable that the debt margins of the two cities are moving in opposite directions. Legal debt margin signifies the amount of debt a government is legally allowed to enter into at a given time. It appears that Dreams has borrowed a great deal more of its allowable debt over time, while Hopes has been reducing its debt. This is at a time when Dreams’ population is decreasing, and Hopes’ population is increasing. At current levels, the City of Dreams has 41.68% of its debt limit available, while the City of Hopes has 66.36% available. Current population is not given, but based upon 2018 levels, that equates to $1,983.56 per capita for Dreams and $4,295.40 for Hopes. Other calculations of trend data are as follows: Dreams Year

Legal Debt Margin

Population

Legal Debt Margin per capita

2021 2020 2019 2018 2017

80,698,755 90,463,527 89,755,124 101,461,856 107,625,842

39,698 41,959 45,679 48,932 51,627

2,032.82 2,156.00 1,964.91 2,073.53 2,084.68

Hopes Year 2021 2020 2019 2018 2017

Legal Debt Margin 70,912,815 60,618,712 61,598,612 58,584,765 59,602,548

Population 18,332 17,845 16,795 16,259 12,488

Legal Debt Margin per capita 3,868.25 3,396.96 3,667.68 3,603.22 4,772.79

What does this all mean for a new resident? The City of Hopes is growing in population but is not issuing excessive debt to fund its growth. The City of Dreams has a declining population with growing debt obligations. Both may still issue debt, since they have not reached debt limits.

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Case 6-15 (Cont’d)

General Problem Information: Examine the CAFR Learning Objective: 6-2 Topic: Debt limit and debt margin Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Easy 6-16. The following answers apply to the City of San Francisco’s 2019 Comprehensive Annual Financial Report. They were found in the statistical section. a.

Three. The San Francisco Unified School District, the San Francisco Community College District, the Bay Area Rapid Transit District.

b. San Francisco Unified School District San Francisco Community College District Bay Area Rapid Transit District

100% 100% 34%

$7,756,615,000; $5,267,628,000.

32.09%.

The City of San Francisco’s general obligation bonds amounting to $2,488,987,000 are subject to the legal debt limit. This represents just over 64% ($2,488,987/3,884,194) of the city’s direct debt. The debt subject to limitation differs across governments, but it is common for general obligation debt to be included. Debt for which funds have been set aside or those which have specific revenues sources available for repayment of the debt are often exempted. The items exempted for the City of San Francisco include lease revenue bonds, sales tax revenue bonds, certificates of participation, loans, and lease purchase financing. General Problem Information: Direct and overlapping debt and the legal debt margin Learning Objective: 6-2 Topic: Long-Term Liability Disclosures Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking Level of Difficulty: Medium

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Solutions to Exercises and Problems 6-17. Each student will have a different annual report; therefore, there is no single set of answers to each question asked. Asking students to compare their answers to various questions is an effective active learning in-class technique. General Problem Information: Examine the CAFR Learning Objective: 6-1 Learning Objective: 6-2 Topic: Various chapter topics Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

6-18. 1. 2. 3. 4. 5.

b. a. a. c. d.

6. 7. 8. 9. 10.

a. c. a. d. d.

11. c. 12. a. 13. b. 14. c. 15. c.

General Problem Information: Various Learning Objective: 6-1 Learning Objective: 6-2 Learning Objective: 6-3 Topic: Various chapter topics Bloom’s Taxonomy: Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

6-19.

VILLAGE OF CENTERVILLE Debits

Credits

General Fund: CASH

750,000

REVENUES

OTHER FINANCING USES—INTERFUND TRANSFERS OUT

750,000

CASH

750,000

Debt Service Fund: CASH

750,000

OTHER FINANCING SOURCES—INTERFUND TRANSFERS IN

750,000

EXPENDITURES—BOND PRINCIPAL

600,000

EXPENDITURES—BOND INTEREST

150,000

CASH

750,000

Governmental Activities: CASH

750,000

GENERAL REVENUES—TAXES

750,000

EXPENSES—INTEREST ON LONG-TERM DEBT

150,000

BONDS PAYABLE

600,000

CASH

750,000

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-19 (Cont'd)

Debits 2.

Credits

Capital Projects Fund: CASH

5,000,000

OTHER FINANCING SOURCES— PROCEEDS OF BONDS

5,000,000

Debt Service Fund: CASH

150,000

OTHER FINANCING SOURCES— PREMIUM ON BONDS PAYABLE

100,000

REVENUES

50,000

(5,000,000 × 0.02) Governmental Activities: CASH

5,150,000

BONDS PAYABLE

5,000,000

INTEREST PAYABLE*

50,000

PREMIUM ON BONDS PAYABLE

100,000

* As noted in the textbook, this accrued interest could also have been recorded as a credit to interest expense at the government-wide level. 3.

Special Revenue Fund: CASH

110,000

REVENUES

OTHER FINANCING USES—INTERFUND TRANSFERS OUT CASH

110,000

110,000 110,000

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-19, part 3 (Cont'd)

Debits

Credits

Debt Service Fund: CASH

110,000

OTHER FINANCING SOURCES— INTERFUND TRANSFERS IN

110,000

EXPENDITURES—INTEREST ON LEASE OBLIGATION

15,809

EXPENDITURES—PRINCIPAL ON LEASE OBLIGATION 94,191 CASH

110,000

Governmental Activities: CASH

110,000

PROGRAM REVENUES—GENERAL GOVERNMENT—CAPITAL GRANTS & CONTRIBUTIONS

110,000

EXPENSES—INTEREST ON LEASES

15,809

LEASE OBLIGATIONS PAYABLE

94,191

CASH

110,000

Debt Service Fund: CASH

3,500,000

OTHER FINANCING SOURCES— PROCEEDS OF REFUNDING BONDS

OTHER FINANCING USES—PAYMENT TO REFUNDED BOND ESCROW AGENT CASH

3,500,000

3,500,000 3,500,000

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-19, part 4 (Cont'd)

Debits

Credits

Governmental Activities: CASH

3,500,000

BONDS PAYABLE (SERIAL)

BONDS PAYABLE (TERM)

3,500,000

CASH 5.

3,500,000

Debt Service Fund: CASH

500,000

OTHER FINANCING SOURCES— PROCEEDS OF SPECIAL ASSESSMENT BONDS

500,000

ASSESSMENTS RECEIVABLE—CURRENT

25,000

ASSESSMENTS RECEIVABLE—UNAVAILABLE

475,000

REVENUES

25,000

DEFERRED INFLOWS OF RESOURCES— UNAVAILABLE REVENUES

475,000

Governmental Activities: CASH

500,000

SPECIAL ASSESSMENT DEBT WITH GOVERNMENTAL COMMITMENT

500,000

ASSESSMENTS RECEIVABLE—CURRENT

25,000

ASSESSMENTS RECEIVABLE—UNAVAILABLE

475,000

PROGRAM REVENUES—GENERAL GOVT— CAPITAL GRANTS AND CONTRIBUTIONS

25,000

DEFERRED INFLOWS OF RESOURCES— UNAVAILABLE REVENUES

475,000

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-19, part 5 (Cont'd)

Debits EXPENSES—INTEREST ON SPECIAL ASSESSMENT DEBT (500,000 × 0.03 × 4/12)

5,000

INTEREST PAYABLE 6.

Credits

5,000

Capital Projects Fund: CASH

5,000,000

OTHER FINANCING SOURCES— PROCEEDS OF BONDS EXPENDITURES

5,000,000 50,000

CASH

50,000

Governmental Activities: CASH

5,000,000

BONDS PAYABLE

5,000,000

BOND ISSUANCE EXPENSES

45,000

PREPAID INSURANCE COSTS

5,000

CASH

50,000

7. Capital Projects Fund: CASH OTHER FINANCING USES— DISCOUNT ON BONDS

2,450,000 50,000

OTHER FINANCING SOURCES— PROCEEDS OF BONDS

2,500,000

Governmental Activities: CASH

2,450,000

DISCOUNT ON BONDS PAYABLE

50,000

BONDS PAYABLE

2,500,000

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Chapter 6, Exercise 6-19 (Cont’d)

Debits

Credits

8. Capital Projects Fund: CASH

150,000

NOTES PAYABLE

150,000

Governmental Activities: CASH

150,000

NOTES PAYABLE

150,000

9. Capital Projects Fund: CASH

500,000

OTHER FINANCING SOURCES—PROCEEDS OF BOND ANTICIPATION NOTES

500,000

Governmental Activities: CASH

500,000

BOND ANTICIPATION NOTES PAYABLE

500,000

General Problem Information: Long-term liability transactions Learning Objective: 6-5 Topic: Various chapter topics Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard 6-20. a.

Debits

Credits

Debt Service Fund: ESTIMATED OTHER FINANCING SOURCES— TRANSFER IN APPROPRIATIONS ($8,000,000 × .03 × ½)

120,000 120,000

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-20 (Cont'd)

Debits b.

Credits

Debt Service Fund: CASH

100,000

OTHER FINANCING SOURCES—PREMIUM ON BONDS ($8,000,000 × .01)

80,000

REVENUES ($8,000,000 x .03 x 1/12)

20,000

Governmental Activities: CASH

8,100,000

BONDS PAYABLE

8,000,000

PREMIUM ON BONDS PAYABLE

80,000

ACCRUED INTEREST PAYABLE

20,000

Calculation of Interfund Transfer to Debt Service Fund: Amount of appropriation required for the interest payment due on July 1

$120,000

Less: Premium

(80,000)

Accrued interest on bonds (Jan 1-Feb1)

(20,000) $ 20,000

Debt Service Fund: CASH

20,000

OTHER FINANCING SOURCES—INTERFUND TRANSFERS IN

20,000

Debt Service Fund: EXPENDITURES—BOND INTEREST CASH

120,000 120,000

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-20, d. (Cont'd)

Debits

Credits

Governmental Activities: ACCRUED INTEREST PAYABLE

20,000

PREMIUM ON BONDS PAYABLE ($80,000/20 interest periods)

4,000

INTEREST EXPENSE

96,000

CASH

120,000

The debt service fund would need to adjust its budget to account for the premium and accrued interest received. These amounts will reduce the required transfer from the General Fund, so the General Fund budget would also be adjusted accordingly. Also, in the governmental activities journal, interest expense would be accrued, and the premium would be amortized at year-end.

Since the first principal and a semiannual interest payment are due to be paid on January 1, the City of Amarillo may budget for the payments in its 2023 budget to ensure that the funds are available on January 1, 2024. In part a, this would require appropriation of an additional $120,000 for interest and $800,000 for principal in the debt service fund, and an additional $820,000 ($920,000 – 80,000 [premium] – 20,000 [accrued interest]) transfer from the General Fund. In part c, the General Fund would transfer $940,000, rather than $20,000. Because the payments are due “early” in the following year, they could be recorded as 2023 expenditures (GASB Codification Section 1500, pars. 122 and 123).

General Problem Information: Budgeted and actual debt service transactions Learning Objective: 6-2 Learning Objective: 6-5 Topic: Various chapter topics Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

6-21. a.

KENDALL COUNTY Debits

Credits

General Fund: EXPENDITURES

437,020

OTHER FINANCING SOURCES— LEASE AGREEMENTS

437,020

Debt Service Fund: EXPENDITURES—PRINCIPAL OF LEASE OBLIGATION

150,000

CASH

150,000

Governmental Activities: LEASED ASSETS

437,020

LEASE OBLIGATIONS PAYABLE

287,020

CASH

150,000

Note: The asset is recorded at the lesser of the present value of the lease obligation or the fair value of the computer equipment, $437,020.

Debt Service Fund: EXPENDITURES⎯INTEREST ON LEASE OBLIGATION

8,611

EXPENDITURES⎯PRINCIPAL OF LEASE OBLIGATION CASH

141,389 150,000

Governmental Activities: EXPENSES—INTEREST ON LEASES

8,611

LEASE OBLIGATIONS PAYABLE

141,389

CASH

150,000

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-21, b. (Cont'd)

Calculation: Interest

Payment

Unpaid Payment

Amount of

on Unpaid

Number

Payment

Balance at 3%

Principal

Lease Obligation 1 2 3

$150,000 150,000 150,000

-08,611 4,369

$150,000 141,389 145,631

$437,020 287,020 145,631 0

The asset and long-term liability would be reflected only on the government-wide statement of net position. At the end of the first year, the liability would be reported in the amount of $287,020.

General Problem Information: Lease accounting Learning Objective: 6-5 Topic: Use of Debt Service Funds to Record Lease Payments Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

6-22.

CITY OF APPLETON STATEMENT OF LEGAL DEBT MARGIN DECEMBER 31

ASSESSED VALUE OF PROPERTY

$240,000,000

RATE OF DEBT LIMITATION

AMOUNT OF DEBT LIMITATION

14,400,000

OUTSTANDING LONG–TERM INDEBTEDNESS SUBJECT TO DEBT LIMIT: CONVENTION CENTER BONDS

$ 3,600,000

GENERAL OBLIGATION SERIAL BONDS

3,100,000

TAX INCREMENT BONDS

2,500,000

TOTAL LONG–TERM DEBT

9,200,000

LESS DEDUCTIONS: AMOUNT ACCUMULATED FOR DEBT RETIREMENT

1,800,000

NET DEBT SUBJECT TO LIMITATION

7,400,000

LEGAL DEBT MARGIN: AMOUNT AVAILABLE FOR FUTURE INDEBTEDNESS

7,000,000

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-22 (Cont'd)

CITY OF APPLETON SCHEDULE OF DIRECT AND OVERLAPPING DEBT DECEMBER 31

Governmental Unit

General Obligation Bonds

Estimated Percentage Applicable

Estimated Share of Overlapping Debt

Clyde County School District Clyde County Health Services Regional Library Subtotal, Overlapping Debt

$ 15,000,000 8,000,000 2,400,000

25% 25% 33.33%

$ 3,750,000 2,000,000 800,000 6,550,000

City Direct Debt

$ 9,200,000

100%

$ 9,200,000

Total Direct and Overlapping Debt

$ 15,750,000

Note: The city also has $6,600,000 ($2,700,000 + $1,900,000 + $2,000,000) of self-supporting revenue bonds outstanding, which are backed by the full faith and credit of the city, should enterprise revenues be insufficient to make debt service payments.

General Problem Information: Legal debt margin, direct and overlapping debt Learning Objective: 6-2 Topic: General Long-Term Liabilities Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

6-23.

GRANT COUNTY Debits

Credits

a. Debt Service Fund: ESTIMATED OTHER FINANCING SOURCES

7,125,000

ESTIMATED REVENUES

1,607,500

ESTIMATED OTHER FINANCING USES

7,000,000

APPROPRIATIONS

1,525,000

BUDGETARY FUND BALANCE

207,500

b. $207,500

c. No. The only interest and principal expenditures recorded relate to bonds. If lease payments had been made, interest and principal expenditures would be recorded related to the lease.

d. Yes. Other Financing Sources—Proceeds of Refunding and Other Financing Uses—Payment to Escrow Agent indicate that a bond refunding has occurred.

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-23 (Cont'd)

e. GRANT COUNTY DEBT SERVICE FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES FOR THE YEAR ENDED JUNE 30 REVENUES: SALES TAXES

$1,582,000

INVESTMENT EARNINGS

11,500

TOTAL REVENUES

1,593,500

EXPENDITURES: BOND INTEREST

$ 525,000

BOND PRINCIPAL

1,000,000

TOTAL EXPENDITURES

1,525,000

EXCESS OF REVENUES UNDER EXPENDITURES

68,500

OTHER FINANCING SOURCES (USES): INTERFUND TRANSFERS IN

145,000

PROCEEDS OF REFUNDING BONDS

7,000,000

PAYMENT TO ESCROW AGENT

(7,000,000)

TOTAL OTHER FINANCING SOURCES (USES):

145,000

INCREASE IN FUND BALANCES

213,500

FUND BALANCES, JULY 1

56,500

FUND BALANCES, JUNE 30

$ 270,000

General Problem Information: Debt Service Fund Trial balance Learning Objective: 6-5 Topic: Various sections from chapter Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

6-24. a.

SANDY BEACH Debits

Credits

Serial Bond Debt Service Fund: ESTIMATED OTHER FINANCING SOURCES ESTIMATED REVENUE

277,500 1,020,000

APPROPRIATIONS

1,277,500

BUDGETARY FUND BALANCE

20,000

Budget for FY2023: Interfund transfers in for interest = $9,500,000 × 0.03 × ½ for January 1 payment and $9,000,000 × 0.03 × ½ for July 1 payment = $277,500.

Governmental Activities: No entries required

Serial Bond Debt Service Fund: CASH

142,500

OTHER FINANCING SOURCES—INTERFUND TRANSFERS IN

142,500

EXPENDITURES—BOND INTEREST

142,500

EXPENDITURES—BOND PRINCIPAL

500,000

CASH

642,500

Governmental Activities: INTEREST PAYABLE

142,500

BONDS PAYABLE

500,000

CASH

642,500

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-24 (Cont’d)

Debits 3.

Credits

Serial Bond Debt Service Fund: TAXES RECEIVABLE—CURRENT

1,020,000

REVENUES

1,020,000

Governmental Activities: TAXES RECEIVABLE—CURRENT

1,020,000

GENERAL REVENUES—PROPERTY TAXES

1,020,000

Serial Bond Debt Service Fund & Governmental Activities: CASH

1,019,000

TAXES RECEIVABLE—CURRENT

1,019,000

Serial Bond Debt Service Fund: CASH

135,000

OTHER FINANCING SOURCES—INTERFUND TRANSFERS IN

135,000

EXPENDITURES—BOND INTEREST

135,000

EXPENDITURES—BOND PRINCIPAL

500,000

CASH

635,000

Governmental Activities: EXPENSES—INTEREST ON LONG–TERM DEBT

135,000

BONDS PAYABLE

500,000

CASH

635,000

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-24 (Cont’d)

Debits 6.

Credits

Serial Bond Debt Service Fund: BUDGETARY FUND BALANCE APPROPRIATIONS

20,000 1,277,500

ESTIMATED OTHER FINANCING SOURCES

277,500

ESTIMATED REVENUE

TAXES RECEIVABLE—DELINQUENT

1,020,000

1,000

TAXES RECEIVABLE—CURRENT

REVENUES

1,000

DEFERRED INFLOWS OF RESOURCES— UNAVAILABLE REVENUES OTHER FINANCING SOURCES—INTERFUND TRANSFERS IN REVENUES

1,000

277,500 1,019,000

EXPENDITURES—BOND INTEREST

277,500

EXPENDITURES—BOND PRINCIPAL

1,000,000

FUND BALANCE—RESTRICTED

19,000

Governmental Activities: EXPENSES—INTEREST ON LONG–TERM DEBT

127,500

INTEREST PAYABLE

127,500

($8,500,000 × 0.03 × ½)

TAXES RECEIVABLE—DELINQUENT TAXES RECEIVABLE—CURRENT

1,000 1,000

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-24 (Cont'd)

b. SANDY BEACH DEBT SERVICE FUND STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE FOR THE YEAR ENDED DECEMBER 31, 2023 REVENUES: PROPERTY TAXES

$1,019,000

EXPENDITURES: BOND INTEREST

$ 277,500

BOND PRINCIPAL

1,000,000

TOTAL EXPENDITURES

1,277,500

EXCESS OF EXPENDITURES OVER REVENUES

258,500

OTHER FINANCING SOURCES (USES): INTERFUND TRANSFERS IN

277,500

INCREASE IN FUND BALANCE

19,000

FUND BALANCE, JANUARY 1, 2023

509,000

FUND BALANCE, DECEMBER 31, 2023 c.

$ 528,000

SANDY BEACH DEBT SERVICE FUND BALANCE SHEET DECEMBER 31, 2023 ASSETS: CASH TAXES RECEIVABLE—DELINQUENT TOTAL ASSETS

$ 528,000 1,000 $ 529,000

DEFERRED INFLOWS OF RESOURCES: UNAVAILABLE REVENUES

1,000

FUND BALANCES: FUND BALANCE—RESTRICTED FOR DEBT SERVICE TOTAL DEFERRED INFLOWS OF RESOURCES AND FUND BALANCE

528,000 $ 529,000

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-24 (Cont'd)

General Problem Information: Serial bond debt service fund transactions and statements Learning Objective: 6-2 Learning Objective: 6-5 Topic: Types of Serial Bonds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard 6-25.

TOWN OF BEAR CREEK DEBT SERVICE FUND Debits

ESTIMATED OTHER FINANCING SOURCES ESTIMATED REVENUES

Credits

422,328 1,912

APPROPRIATIONS

20,000

BUDGETARY FUND BALANCE

404,240

(Estimated Other Financing Sources consists of two times the sinking fund additions ($191,164) and the transfer in of two interest payments ($40,000); one interest payment is required in FY2023 and the other will take place just after year-end and is noted as being funded prior to the due date.) b.

CASH

211,164

OTHER FINANCING SOURCES—INTERFUND TRANSFERS IN INVESTMENTS

211,164 191,164

CASH c.

EXPENDITURES—INTEREST

191,164 20,000

CASH d.

CASH

20,000 211,164

OTHER FINANCING SOURCES—INTERFUND TRANSFERS IN INVESTMENTS

211,164 191,164

CASH e.

INVESTMENTS REVENUES—INVESTMENT EARNINGS

191,164 1,912 1,912

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-25 (Cont’d)

Debits

APPROPRIATIONS

20,000

BUDGETARY FUND BALANCE

404,240

ESTIMATED OTHER FINANCING SOURCES

422,328

ESTIMATED REVENUES OTHER FINANCING SOUCES—INTERFUND TRANSFERS IN REVENUES—INVESTMENT EARNINGS

Credits

1,912

422,328 1,912

EXPENDITURES—INTEREST

20,000

FUND BALANCE—RESTRICTED

404,240

General Problem Information: Term bond debt service fund transactions Learning Objective: 6-5 Topic: Debt Service Accounting for Term Bonds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

6-26.

JOURNAL ENTRIES CAPITAL PROJECTS FUND

DEBT SERVICE FUND (a)

(b)

(c)

(d)

(e)

(f)

(g)

Est. Revenues Appropriations Budgetary Fund Balance

350,000

NO ENTRY

(b)

Cash OFS*—Interfund Transfers In

1,000,000

Constr. Expenditures Cash

200,000

Encumbrances Encumbrances OS+

4,500,000

Cash OFS—Proceeds of Bonds

2,500,000

Constr. Expenditures Cash

50,000

GOVERNMENTAL ACTIVITIES (a)

NO ENTRY

(b)

NO ENTRY

(c)

CWIP** Cash

62,500 287,500

NO ENTRY

(c)

NO ENTRY

(d)

Cash OFS—Premium on Bonds

50,000

Est. OFS—Premium on Bonds Budgetary Fund Balance

50,000

(e) 50,000

1,000,000

200,000 (d)

NO ENTRY

(e)

Cash Premium on Bonds Payable Bonds Payable

200,000 200,000

4,500,000

2,500,000

2,550,000 50,000 2,500,000

50,000

NO ENTRY

Expenditures— Interest Cash

(a)

(f)

(g)

NO ENTRY

62,500 62,500

(f) 50,000 (g)

CWIP Cash Premium on Bonds Payable (50,000/40) Expenses—Interest Cash

50,000 50,000

1,250 61,250 62,500

Note: *OFS = Other Financing Sources. ** CWIP = Construction Work in Progress. + OS = Outstanding

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-26 (Cont’d) DEBT SERVICE FUND (h)

(i)

(j)

(k)

(l)

Cash Revenues

CAPITAL PROJECTS FUND

350,000

(h)

350,000

NO ENTRY

(i)

NO ENTRY

(j)

NO ENTRY

Appropriations

GOVERNMENTAL ACTIVITIES

NO ENTRY

(k)

62,500

(l)

Encumbrances OS Constr. Expenditures Encumbrances Contracts Payable

2,500,000 2,500,000

Contracts Payable CP—Retained %# Cash

2,500,000

Cash Revenues

1,500,000

(i)

337,500

(j) 125,000 2,375,000 (k) 1,500,000

Revenues

350,000

Est. OFS— Premium on Bonds

Revenues OFS—Premium on Bonds Expenditures— Interest Fund Balance— Restricted

OFS—Interfund Transfers In OFS—Proceeds of Bonds Constr. Expenditures

350,000

CWIP Contracts Payable

2,500,000

Contracts Payable CP—Retained % Cash

2,500,000

Cash Prog Rev—Gen. Govt.—Cap. Grant/Contrib.

1,500,000

350,000

2,500,000

2,500,000 2,500,000

(l) 1,500,000

Budgetary Fund Balance Est. Revenues

Cash Gen. Rev.— Taxes

125,000 2,375,000

1,500,000

NOT REQUIRED FOR PROBLEM

1,000,000 2,500,000 2,750,000

50,000 Fund Balance— Restricted Fund Balance— Assigned

350,000

1,250,000 1,000,000

50,000 62,500 337,500

# CP—Retained % = Contracts Payable—Retained Percentage

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-26 (Cont’d) DEBT SERVICE FUND (m)

(n)

(o)

(p)

(q)

(r)

Est. Revenues Budgetary Fund Balance Appropriations&

300,000 68,750

Cash Revenues

250,000

CAPITAL PROJECTS FUND NO ENTRY

(m)

NO ENTRY

(n)

NO ENTRY

(n)

Cash Gen. Rev.— Taxes

250,000

CWIP Contracts Payable

2,000,000

368,750

250,000

NO ENTRY

(o)

NO ENTRY

(p)

NO ENTRY

Expenditures— Interest Expenditures— Principal Cash

GOVERNMENTAL ACTIVITIES

(m)

(q)

(r) 62,500

Encumbrances OS Constr. Expenditures Encumbrances Contracts Payable

2,000,000 2,000,000

Constr. Expenditures Cash

130,000

Contacts Payable CP—Retained % Cash NO ENTRY

(o)

250,000

2,000,000

2,000,000 2,000,000 (p) 130,000 2,000,000 125,000

(q) 2,125,000 (r)

CWIP*** Cash Contacts Payable CP—Retained % Cash Premium on Bonds Payable Expenses—Interest

130,000 130,000 2,000,000 125,000 2,125,000 1,250 61,250

250,000 312,500

Bonds Payable Cash

250,000 312,500

&The appropriation includes a principal payment of $250,000, a semi-annual interest payment of $62,500 ($2,500,000 × .05 × 1/2) and a semi-annual interest payment of $56,250

([$2,500,000 − 250,000] × .05 × 1/2).

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch. 6, Solutions, Exercise 6-26 (Cont’d) DEBT SERVICE FUND

CAPITAL PROJECTS FUND

(s)

(s) Cash OFS—Interfund Transfers In

Est. OFS—Interfund Transfers In Budgetary Fund Balance

120,000 120,000

Fund Balance— Restricted Fund Balance— Assigned Construction Expenditures

GOVERNMENTAL ACTIVITIES

1,250,000

(s)

880,000

Buildings Improvements Other than Buildings CWIP

4,750,000 130,000 4,880,000

2,130,000

120,000 120,000

OFU—Interfund Transfers Out Cash Fund Balance— Assigned OFU—Interfund Transfers Out

120,000 120,000 120,000

120,000

Note: The resources provided to the Capital Projects Fund include restricted and assigned amounts. The bond proceeds and grant funds are restricted, while the interfund transfer was assigned for the historical renovation. It is assumed restricted funds are spent first, when available, explaining why restricted fund balance was used first.

General Problem Information: Comprehensive capital assets/serial bond problem Learning Objective: 6-2 Learning Objective: 6-5 Topic: Debt Service Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application; AICPA: Critical Thinking, FN Reporting Level of Difficulty: Hard

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

CHAPTER 7:

ACCOUNTING FOR THE BUSINESS-TYPE ACTIVITIES OF STATE AND LOCAL GOVERNMENTS OUTLINE

Number

Topic

Type/Task

Status (re: 18/e)

Questions: 7-1 7-2 7-3 7-4 7-5 7-6 7-7 7-8 7-9 7-10 7-11

Proprietary funds Internal service and enterprise funds Budgets and proprietary funds Proprietary funds vs. for-profit reporting Restricted assets of enterprise funds Components of net position Dual track accounting in proprietary funds Reporting internal balances Dissolving an internal service fund Regulatory accounting Segment information

Explain Describe Remember Compare Describe Describe, explain Explain Describe Explain Describe, explain Define

Same Revised New Same Revised Same Same Same 7-11 7-9 7-10

Cases: 7-12 7-13 7-14 7-15

Internal service fund reporting Proprietary fund statement of cash flows City and County of Denver proprietary funds Enterprise fund golf course management

Assess Analyze Evaluate Evaluate

Revised New Revised Same

Exercises/Problems: 7-16 Examine the CAFR 7-17 Various

Examine Multiple Choice

7-18 7-19 7-20 7-21 7-22 7-23 7-24 7-25 7-26 7-27 7-28

Remember JEs, FS, assess JEs FS JEs, FS FS JEs, FS, assess JEs, FS FS FS FS

Revised Items 1, 4, and 6 are new. Item 8 revised. All others same. Same Same New Same Same New Revised Revised Same Same Revised

Characteristics of proprietary funds Information Technology Internal Service Fund Human Resource Internal Service Fund Internal Service fund statement of cash flows Tribute Aquatic Center Enterprise Fund Net position classifications Central Station Enterprise Fund Enterprise Fund journal entries and FS Net position classifications Enterprise fund statement of cash flows Appendix - Solid Waste Enterprise Fund

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

CHAPTER 7: ACCOUNTING FOR THE BUSINESS-TYPE ACTIVITIES OF STATE AND LOCAL GOVERNMENTS Answers to Questions 7-1.

Proprietary funds are funds that are supported by user charges, and therefore require reporting that illustrates whether user charges are covering costs. They are often described as being operated more like a business than most governmental funds, and the reporting is similar to that of for-profit organizations. There are two basic types of proprietary funds: internal service funds and enterprise funds. Internal service funds are generally used for activities where centralization of a service or function is likely to result in efficiency and/or cost effectiveness. The customers of internal service funds would generally be within the government itself. Examples of internal service fund activities include information systems or purchasing. An enterprise fund carries on activities that provide goods or services to the general public, such as a public swimming pool or a public utility. These activities are referred to as business-type activities. Under GASB Codification Section 1300.109, a government must report business-type activities in an enterprise fund if any of the following criteria are met: (1) The activity is financed with debt that is secured solely by a pledge of the revenues from fees and charges of an activity; (2) Laws or regulations require that the activity’s costs of providing services, including capital costs (such as depreciation or debt service), be recovered with fees and charges, rather than with taxes or similar revenues; or (3) Pricing policies are designed to recover the costs of the activity, including capital costs. General Problem Information: Proprietary funds Learning Objective: 7-1 Topic: Proprietary funds Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

7-2.

Internal service funds and enterprise funds are presented in three proprietary fund financial statements—a statement of net position; a statement of revenues, expenses and changes in fund net position; and a statement of cash flows. Enterprise funds considered to be major funds are presented in separate columns of the proprietary fund financial statements, with nonmajor enterprise funds aggregated in an Other Enterprise Funds column. All internal service funds are aggregated and reported in a single column on the fund statements. At the government-wide level, the internal service funds balances are collapsed or consolidated into the Government Activities column of the government-wide statements. Enterprise funds are considered business-type activities and are reported in the Business-type Activities column of the government-wide statements.

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Answers, Question 7-2 (Cont’d)

Internal service funds and enterprise funds are both proprietary funds and are presented as such in the funds financial statements. However, since the transactions of internal service funds primarily involve sales of goods or services to the General Fund and other funds that compose the governmental activities of a government, while enterprise funds transact business with parties external to the government, internal service funds are reported in a different manner than enterprise funds. General Problem Information: Internal service and enterprise funds Learning Objective: 7-1 Learning Objective: 7-3 Topic: Proprietary funds Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 7-3.

Proprietary funds are not required by GASB standards to record budgets in their accounting systems, nor are they required to present a budgetary comparison statement or schedule. Some governments do, however, require all funds to prepare and operate under legally adopted budgets. In such cases, GASB standards permit but do not require the integration of budgetary accounts in the manner described in Chapters 3 and 4 for the General Fund and special revenue funds. If prepared, proprietary fund budgets are never reported in the financial statements. General Problem Information: Budgets and proprietary funds Learning Objective: 7-3 Learning Objective: 7-5 Topic: Financial Reporting Requirements Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

7-4.

A proprietary fund prepares a statement of net position; a statement of revenues, expenses, and changes in fund net position; and a statement of cash flows. The statement of net position can be compared to a for-profit organization’s balance sheet. The format for the statement of net position differs from a balance sheet, largely because there is no equity in a proprietary fund. Instead of using the basic accounting equation format where total assets equal total liabilities plus equity, the statement of net position subtracts liabilities and deferred inflows of resources from assets and deferred outflows of resources to arrive at an ending number called “net position.” Furthermore, net position is reported in three components: net investment in capital assets, restricted, and unrestricted.

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Answers, Question 7-4 (Cont’d)

The statement of revenues, expenses, and changes in fund net position can be compared to a for-profit organization’s income statement. One difference is that a for-profit organization does not net items like bad debts from the related revenue as a proprietary fund does. Also, revenues and expenses of proprietary funds are required to be identified as operating and non-operating. Finally, the statement may include items such as interfund transfers and capital contributions, which are unique to government accounting. The statement of cash flows for a proprietary fund differs somewhat from the statement of cash flows for a for-profit organization. The GASB requires the direct approach for preparing the statement, and, instead of three categories (operating, investing, and financing), a proprietary fund reports four categories: operating, noncapital financing, capital and related financing, and investing. Finally, some cash flows are treated differently. For example, the acquisition of a capital asset is an investing activity in forprofit, and it is a capital and related financing activity in government. General Problem Information: Proprietary funds vs. for-profit reporting Learning Objective: 7-1 Learning Objective: 7-3 Learning Objective: 7-5 Topic: Financial Reporting Requirements Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 7-5.

Restricted assets are assets that have been segregated, pursuant to an agreement with an external party or by law or regulation, for a specified purpose and therefore are not available for the discretionary use of management. Items typically reported in the Restricted Assets section of the statement of fund net position include assets set aside for retirement of revenue bonds in conformity with bond covenants, grant funds whose use is specified in the grant agreement, and contributions restricted for capital purposes. Customer deposits or resources held for the retirement of revenue bonds are commonly reported as restricted assets by government utilities that use proprietary fund accounting. General Problem Information: Restricted assets of enterprise funds Learning Objective: 7-5 Topic: Restricted Assets Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

7-6.

GASB Codification Section 2200.117-125 provides the following three components for the classification of net position: net investment in capital assets, restricted, and unrestricted. Net investment in capital assets is calculated as the total of gross capital assets, net of accumulated depreciation, less any outstanding debt related to the acquisition or construction of capital assets. If debt has been incurred for construction or acquisition of a capital asset, but the proceeds of the debt have not been spent by yearend, that debt is excluded in calculating net investment in capital assets. Restricted net position represents those net resources with restrictions on use imposed by law or external parties, while unrestricted net position represents the residual amount of net position after separately identifying net investment in capital assets and restrictions. General Problem Information: Components of net position Learning Objective: 7-1 Learning Objective: 7-2 Learning Objective: 7-5 Topic: Statement of Net Position Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

7-7.

The “dual-track” accounting approach is useful for recording transactions reported under both the modified accrual (governmental funds) basis and the accrual (government-wide) basis of accounting. Because proprietary funds and governmental activities both use accrual accounting, the “dual-track” approach is not needed to capture different bases of accounting at the fund level and the government-wide level. However, internal service funds are generally reported as a part of the Governmental Activities column of the government-wide financial statements. To ensure that double counting of revenues, expenses, and other transactions does not occur, GASB standards require the elimination of the effect of transactions between governmental funds and internal service funds. For this reason, the “dual-track” approach may be useful in recording internal service fund transactions to ensure that double counting does not occur at the government-wide level. General Problem Information: Internal service funds Learning Objective: 7-1 Topic: Internal Service Funds Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

7-8.

GASB standards require that activity between governmental activities and business-type activities should be reported as internal balances at the government-wide level. Although the internal balances do not meet the definition of elements of financial statements, they are reported for purposes of fairly presenting each reporting unit. Using the “dual track” method as demonstrated in this textbook, amounts reported in the funds as interfund receivables and payables are initially recorded as internal balances at the governmentwide level and only net residual amounts due between governmental and business-type activities will appear on the statement of net position. Note that amounts reported in the funds as receivable from or payable to fiduciary funds should be included in the statement of net position as receivable from and payable to external parties (consistent with the nature of fiduciary funds), rather than as internal balances. General Problem Information: Reporting internal balances Learning Objective: 7-1 Topic: Internal Service Funds Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

7-9.

An internal service fund may be dissolved in any one of the following three ways, or in combinations thereof: (1) Transfer the fund’s assets to another fund that will continue the operation as a subsidiary activity (i.e., a supply fund becoming a department of the General Fund); (2) Distribute the fund’s assets to another fund or to another government; or (3) Convert all of its noncash assets to cash and distribute the cash to another fund or other funds. Dissolution of an internal service fund, as for a private enterprise, would proceed by first paying outside creditors, followed by repayment of any long-term interfund loans outstanding and, finally, liquidation of remaining net resources. If net position has been built up from charges in excess of costs, liquidation will follow whatever regulations may govern the case; if none exist, the appropriate governing body must decide on the recipient or recipients. General Problem Information: Dissolution of an Internal Service Fund Learning Objective: 7-2 Topic: Dissolution of an Internal Service Fund Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Easy

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

7-10. Regulatory accounting principles (RAP) are accounting principles established by any one of a number of state and/or federal entities. An example of a federal entity that establishes regulatory accounting principles is the Federal Energy Regulatory Commission (FERC). The purpose of RAP is to help ensure that reports submitted to regulatory agencies are in a format that helps regulators determine that entities subject to regulators’ oversight are complying with laws and regulations. A number of enterprise funds may be subject to certain RAP requirements, given that enterprise funds frequently provide utility type services, which tend to be subject to state and federal regulation. General Problem Information: Regulatory accounting Learning Objective: 7-6 Topic: Appendix: Regulatory Accounting Principles Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Easy 7-11. A segment is an identifiable activity either within an enterprise fund or other standalone entity. Segment information consists of providing key operating and balance sheet information for each segment for which reporting is required. Information about the segments is provided in condensed statement format in the notes to the financial statements. An entity must disclose segment information if the segment has one or more bonds or other debt instruments outstanding, with revenues pledged to support the debt. The intent is that segment information be provided to bondholders, analysts, and others needing information to determine the financial condition of the segment on which the bonded debt is dependent. General Problem Information: Segment information Learning Objective: 7-6 Topic: Appendix: Required Segment Information Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Easy

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Solutions to Cases 7-12. a.

The financial statements suggest the Building Maintenance Fund is not being recorded and reported in accordance with GASB standards for internal service funds, as described in Chapter 7. Some of the inaccuracies include: 1. There is no recognition of equipment and/or buildings on the balance sheet (of which there should be at least equipment, given the nature of the operation). As a consequence, depreciation also is not being charged and reported on the statement of revenues, expenditures and changes in fund balance. 2. Leases should be capitalized in a proprietary fund rather than being reported as expenditures. 3. The headers for the financial statements suggest that modified accrual accounting is being used rather than accrual accounting, explaining the lack of capital assets on the balance sheet. The preferred titles for the financial statements under accrual accounting would be statement of net position and statement of revenues, expenses, and changes in fund net position. 4. Assuming that the fund primarily serves governmental funds, the Internal Balances account is used for payables or receivables between business-type activities and governmental activities. An internal service fund should not be reporting an amount due to the General Fund in this account. 5. Proprietary funds use contra-revenue accounts, rather than a bad debt expense/expenditure. 6. Transfers under both accrual and modified accrual accounting would be presented in a separate section after revenues and expenses/expenditures. 7. Reported activity should be classified as operating or nonoperating. 8. The fund equity section of the balance sheet and operating statement also suggests that the Building Maintenance Fund is using modified accrual rather than accrual accounting. This is reflected in the use of the line item “fund balance” rather than net position and the use of expenditures (rather than expenses) in the operating statement. Also, net position should be segregated into (1) net investment in capital assets, (2) restricted, and (3) unrestricted. 9. Internal service fund financial statements typically include a statement of cash flows.

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Case 7-12 (Cont’d)

As manager of a city department, you should want to know the full cost of the Building Maintenance Fund’s operations. Such information would aid in determining the appropriateness and fairness of the fund’s charges to departments. Although the financial statements indicate that revenues (which in the given statement improperly include transfers) exceed expenditures only slightly, the statements fail to disclose the relationship between operating revenues and operating expenses. As such, they provide you with little useful information, even though as a city employee you might have a pretty good idea if the salaries, wages, and number of employees of the Building Maintenance Fund are in line with those of the rest of the city departments. Cash and Investments exceed current liabilities if one assumes that Accrued Annual Leave is a long-term liability and Other Accrued Liabilities are current liabilities. (If current liabilities were reported separately it wouldn't be necessary to guess which is current and which is long-term.) It would also be useful to know how accrued annual leave was computed, and how much of this will probably have to be paid each year. Finally, one should determine that the inventory figure does not include an excessive supply of materials that could be obtained readily from suppliers when needed. It is also possible that some managers of city departments that use the services of the Building Maintenance Fund may have little interest in the financial statements if the employees of that fund are doing a good job of keeping the city’s buildings well maintained, and the charges of that fund do not strain their maintenance budgets. If, however, managers perceive the service to be poor or the charges to be excessive, the lack of full accrual financial information to objectively evaluate the Building Maintenance Fund manager’s performance could become a problem. General Problem Information: Internal Service Fund Reporting Learning Objective: 7-2 Topic: Internal Service Funds Bloom’s Taxonomy: Analyze Accreditation Skills tag: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

7-13. Some of the errors noted in the City of Cypress statement of cash flows include: • The proprietary fund statement of cash flows should be prepared using the direct method whereby cash flows are listed by source, rather than reconciling net income to cash flows. • Cash flows from financing activities should be broken into two categories: cash flows from noncapital financing activities, and cash flow from capital and related financing activities. • Several of the cash flow items are in the incorrect category: - Operating grants paid to other governments should be classified as a noncapital financing cash flow rather than an operating cash flow. - The purchase of property, plant, and equipment should be classified as a capital and related financing cash flow rather than an investing cash flow. - The proceeds from the sale of equipment should be classified as a capital and related financing cash flow rather than an investing cash flow. - Payments in lieu of taxes should be classified as an operating cash flow rather than a financing cash flow. - Proceeds from issuance of long-term debt for capital projects should be classified as a capital and related financing cash flow. - Interest payments for long-term debt for capital projects should be classified as a capital and related financing cash flow - Proceeds from issuance of debt (non-capital) should be classified as a noncapital and related financing cash flow. General Problem Information: Proprietary fund statement of cash flows Learning Objective: 7-2 Learning Objective: 7-5 Topic: Financial Reporting Requirements Bloom’s Taxonomy: Analyze Accreditation Skills tag: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

7-14. a. Yes, the City and County of Denver uses two internal service funds. They are: Asphalt Plant - to account for the expenditures and revenues of the city’s Asphalt Plant that provides a service to the metropolitan Denver area and is an essential element in the street resurfacing program of the city’s Street Maintenance division. Workers’ Compensation - to account for the city’s workers’ compensation selfinsurance activities. b. The City and County of Denver has two major enterprise funds. They are: Wastewater Management – accounts for the city’s storm and sewer operations. Denver Airport System – accounts for the operation of the city’s airport system which includes Denver International Airport. The City and County of Denver has two non-major enterprise funds. They are: Environmental Services - to account for the operation and activity of the city’s chemical waste disposal, to phase out of hazardous materials disposal sites, and litter prevention. Golf Course - to account for the administration, operation, maintenance and improvement of city-owned golf facilities. c. A negative unrestricted net position balance indicates that most of the golf course’s equity is tied up in capital assets. Net investment in capital assets is calculated by subtracting accumulated depreciation and debt used to acquire capital assets from the capital asset total. While the reason for a negative net position should be examined, it makes sense that a golf course’s major assets are land and course facilities, and that the public course is not overly profitable. The golf course’s operations should be evaluated over time and compared with the government’s objectives in operating the facility. By accessing Denver’s 2018 CAFR for comparison, the golf course’s unrestricted net position, decreased by $1,369,000 from ($2,881,000) to ($4,250,000). d. At $270,394 (in thousands) interest expense (under nonoperating revenues and expenses) is the airport’s largest expense. e. For both funds, the largest reconciling item is depreciation expense. This is not surprising given their significant investment in capital assets. f. Yes, the enterprise funds use leases. Table 34 in part 6 of Note G reveals that the Wastewater Management fund, the Denver Airport System, and the nonmajor enterprise funds all report capitalized lease obligations. (Note that the 2019 CAFR was issued prior to changes to lease accounting.)

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Case 7-14 (Cont’d)

g. The Worker’s Compensation Fund is an example of a risk-related insurance activity accounted for in an internal service fund. The most significant reconciling item for this fund on the statement of cash flows is the claims paid. The fund had a decrease in its net position for the year, which could signal that charges are not in line with costs. Charges for services were $10,000 while claims payments were only $9,380; however, there were several other operating expenses. It should also be noted that due to the timing of insurance claims, expenses and charges may not match in any one year; thus, it would be prudent to review numerous years or assess how much the net position is increasing relative to the total net position. General Problem Information: City and County of Denver proprietary funds Learning Objective: 7-1 Topic: Proprietary Funds Bloom’s Taxonomy: Analyze Accreditation Skills tag: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium 7-15.

By definition, a General Fund is used to account and report all financial resources not accounted for and reported in another fund (GASB Codification Sec. 1300.104), whereas business-type activities must be reported in an enterprise fund if GASB Codification Sec. 1300.109 criteria are met. In this case, there is no evidence that the golf course is financed with debt that is secured solely by a pledge of the golf course revenues or that laws require fees to cover costs and capital charges. Hence, the golf course could be accounted for in either fund, subject to administrative approval. Enterprise funds are used to account for business-type activities that offer goods and services to the public for a fee. When a golf course is operated in an enterprise fund, there is an expectation that the fund will be self-supporting and also retain equity for capital maintenance. If a golf course is operated within a General Fund, there is no requirement to produce a net income; however, taxpayers who do not utilize the golf course are often unhappy subsidizing the facility with tax dollars. If a government does subsidize with tax dollars, it is important to demonstrate that the golf course provides a public benefit to the community, perhaps by offering free golf lessons to at-risk youth or undertaking a marketing campaign that highlights the beauty of the public resource.

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Case 7-15 (Cont’d)

This exercise is intended to have students consider the options provided. Their questions might include: (1) Status Quo. Do the citizens support subsidies for the golf course? Is the decline in revenue a short- or long-term problem? Can rates be raised or are there other revenue sources that could make the fund self-supporting? How big are the ongoing losses expected to be? If the county selects this option, will administrators decide to maintain an enterprise fund, which may require subsidies from General Fund revenues during periods of loss, or to return operations to the General Fund? (2) Concession Agreements or Management Contracts. Would the management company or outside vendor maintain the facility at an acceptable level? How is the contract to be negotiated; are costs just competitive in the short-term and then increase (low-balling)? What happens if the services are not acceptable? Which operations should be retained? (3) Operating Lease. How does this offer differ in structure from option 2? Which is more beneficial to the county? Is it better to retain ownership of the golf course or sell it? (4) Selling the Golf Course. Do potential buyers exist? Would they upgrade the facility to an extent not affordable to the county? What benefit is derived from selling the golf course other than the one-time cash infusion and possible operating cost savings? (5) Modify the Golf Course. Could the golf course be modified for other government use? Could the land be used for a city park or housing development?

General Problem Information: Enterprise fund golf course management Learning Objective: 7-1 Topic: Proprietary Funds Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application; AICPA: Critical Thinking, FN Reporting Level of Difficulty: Hard Solutions to Exercises and Problems 7-16. Since each student has a different annual report, no two answers to this exercise will be exactly alike. Use this opportunity to discuss the value of government-wide financial statements to determine the “profitability” of proprietary activities and the extent of subsidies from resources arising from governmental activities.

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, 7-16 (Cont’d)

General Problem Information: Examine the CAFR Learning Objective: 7-2 Learning Objective: 7-3 Learning Objective: 7-4 Topic: Proprietary Funds Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 7-17. 1. 2. 3. 4. 5.

c. b. c. b. a.

6. 7. 8. 9. 10.

c. a. b. a. d.

11. d. 12. c.

General Problem Information: Various Learning Objective: 7-1 Learning Objective: 7-2 Learning Objective: 7-3 Learning Objective: 7-4 Learning Objective: 7-5 Topic: Various Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 7-18. 1. 2. 3. 4. 5.

B. N. EF. ISF. B.

6. 7. 8. 9. 10.

N. EF. ISF. N. B.

General Problem Information: Characteristics of proprietary funds Learning Objective: 7-1 Topic: Various Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

7-19. WASHINGTON CITY INFORMATION TECHNOLOGY FUND GENERAL JOURNAL (NOT REQUIRED) Debits 1.

WAGE EXPENSE

53,500

PAYROLL TAX EXPENSE

4,100

CASH

34,775

DUE TO FEDERAL GOVERNMENT

22,825

OFFICE EXPENSES

3,700

CASH 3.

MATERIALS AND SUPPLIES INVENTORY

3,700 8,400

ACCOUNTS PAYABLE 4.

UTILITIES EXPENSE

8,400 14,525

DUE TO OTHER FUNDS 5.

DUE TO FEDERAL GOVERNMENT

14,525 23,000

CASH 6.

DUE TO OTHER FUNDS

23,000 14,500

CASH 7.

ACCOUNTS PAYABLE

14,500 8,000

CASH (2,550 + 8,400 – 2,950) 8.

Credits

COST OF MATERIALS AND SUPPLIES USED MATERIALS AND SUPPLIES INVENTORY

8,000

8,250 8,250

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-19 (Cont’d)

Debits 9.

DUE FROM OTHER FUNDS

78,100

BILLINGS TO DEPARTMENTS

10.

CASH

Credits

78,100

77,050

DUE FROM OTHER FUNDS

77,050

(4,250 + 78,100 – 5,300)

11.

DEPRECIATION EXPENSE

6,100

ALLOWANCE FOR DEPRECIATION 12.

6,100

Closing Entries: BILLINGS TO DEPARTMENTS

78,100

EXCESS OF COST OVER NET BILLINGS TO DEPARTMENTS

12,075

WAGE EXPENSE

53,500

PAYROLL TAX EXPENSE

4,100

UTILITIES EXPENSE

14,525

OFFICE EXPENSES

3,700

COST OF MATERIALS AND SUPPLIES USED

8,250

DEPRECIATION EXPENSE

6,100

NET POSITION—UNRESTRICTED

12,075

EXCESS OF COST OVER NET BILLINGS TO DEPARTMENTS NET POSITION—NET INVESTMENT IN CAPITAL ASSETS NET POSITION—UNRESTRICTED

12,075

6,100 6,100

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-19 (Cont’d) WASHINGTON CITY T- ACCOUNTS FOR INFORMATION TECHNOLOGY FUND (NOT REQUIRED) CASH DUE FROM OTHER FUNDS Beg. Bal.

14,500

(1) 34,775

Beg. Bal.

4,250

(10)

77,050

(2) 3,700

(9)

78,100

(10) 77,050

(5) 23,000 (6) 14,500 (7) 8,000

MATERIALS AND SUPPLIES INVENTORY Beg. Bal.

350

(3)

(8) 8,250

MACHINERY AND EQUIPMENT Beg. Bal.

53,600

8,400

ALLOW FOR DEP⎯MACH & EQUIP Beg. Bal. 30,100 (11)

6,100

ACCOUNTS PAYABLE (7)

DUE TO FEDERAL GOVERNMENT

8,000

Beg. Bal. 2,550

(5)

23,000

Beg. Bal.

2,650

(1)

22,825

(3) 8,400

DUE TO OTHER FUNDS (6)

14,500

NET POSITION—UNRESTRICTED Beg. Bal. 1,200 (4)

14,525

Beg. Bal. Closing 12,075

NET POSITION—NET INVEST IN CAP. ASSETS Closing

6,100

Beg. Bal.

23,500

53,500

Closing

14,525

78,100

Closing 53,500

(1)

4,100

6,100

Closing

4,100

__COST OF MATERIALS AND SUPPLIES USED__ Closing

14,525

(8) 8,250

DEPRECIATION EXPENSE (11)

(9) 78,100

PAYROLL TAX EXPENSE

UTILITIES EXPENSE (4)

6,100

BILLINGS TO DEPARTMENTS

WAGE EXPENSE (1)

Closing

12,700

Closing

Closing 8,250

OFFICE EXPENSES 6,100

(2)

3,700

Closing

3,700

EXCESS OF NET BILLINGS TO DEPTS OVER COST Closing

12,075

Closing

12,075

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-19 (Cont’d)

WASHINGTON CITY INFORMATION TECHNOLOGY FUND STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET POSITION FOR YEAR ENDED DECEMBER 31

BILLINGS TO DEPARTMENTS

$78,100

OPERATING EXPENSES: WAGE EXPENSE

$53,500

PAYROLL TAX EXPENSE

4,100

OFFICE EXPENSES

3,700

UTILITIES EXPENSE

14,525

COST OF MATERIALS AND SUPPLIES USED

8,250

DEPRECIATION EXPENSE

6,100

TOTAL OPERATING EXPENSES

90,175

OPERATING LOSS

(12,075)

NET POSITION, JANUARY 1

36,200

NET POSITION, DECEMBER 31

$24,125

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-19 (Cont’d)

WASHINGTON CITY INFORMATION TECHNOLOGY FUND STATEMENT OF NET POSITION AS OF DECEMBER 31

ASSETS: CURRENT ASSETS: CASH DUE FROM OTHER FUNDS MATERIALS AND SUPPLIES INVENTORY

$ 7,575 5,300 500

TOTAL CURRENT ASSETS

$13,375

CAPITAL ASSETS: MACHINERY AND EQUIPMENT

53,600

LESS: ALLOWANCE FOR DEPRECIATION

36,200

TOTAL CAPITAL ASSETS

17,400

TOTAL ASSETS

30,775

LIABILITIES: ACCOUNTS PAYABLE

2,950

DUE TO FEDERAL GOVERNMENT

2,475

DUE TO OTHER FUNDS

1,225

TOTAL CURRENT LIABILITIES

6,650

NET POSITION: NET POSITION—NET INVESTMENT IN CAPITAL ASSETS NET POSITION—UNRESTRICTED TOTAL NET POSITION

17,400 6,725 $24,125

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-19 (Cont’d)

WASHINGTON CITY INFORMATION TECHNOLOGY FUND STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31

CASH FLOWS FROM OPERATING ACTIVITIES: CASH RECEIVED FROM CUSTOMERS

$77,050

CASH PAID TO: EMPLOYEES

$(34,775)

FEDERAL GOVERNMENT

(23,000)

SUPPLIERS

(11,700)

OTHER DEPARTMENTS

(14,500)

(83,975)

NET CASH PROVIDED BY OPERATIONS

$ (6,925)

NET DECREASE IN CASH AND CASH EQUIVALENTS

(6,925)

CASH AND CASH EQUIVALENTS, 1/1

14,500

CASH AND CASH EQUIVALENTS, 12/31

$ 7,575

RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATIONS OPERATING INCOME/(LOSS)

$ (12,075)

ADJUSTMENTS: DEPRECIATION EXPENSE⎯MACHINERY & EQUIPMENT

6,100

INCREASE IN INVENTORY

(150)

INCREASE IN RECEIVABLES FROM OTHER FUNDS

(1,050)

INCREASE IN ACCOUNTS PAYABLE

400

DECREASE IN DUE TO FEDERAL GOVERNMENT

(175)

INCREASE IN DUE TO OTHER FUNDS NET CASH PROVIDED BY OPERATING ACTIVITIES

25 $ (6,925)

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-19 (Cont’d)

d. On the basis of the operating statement for the current year ended December 31, the pricing policy is NOT achieving the goal of covering all operating expenses, including depreciation. The net loss for the year is 15.5 percent of billings to departments. The manager of the IT department needs to carefully look at department charges compared to costs and make major changes to one or the other to make this department viable.

General Problem Information: Information Technology Internal Service Fund Learning Objective: 7-2 Topic: Internal Service Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard

7-20. CITY OF TOWNSEND HUMAN RESOURCE FUND GENERAL JOURNAL Debits 1.

Internal Service Fund: CASH

100,000

INTERFUND TRANSFER IN

100,000

Internal Service Fund & Governmental Activities: LEASED ASSETS

Credits

87,218

LEASE OBLIGATIONS PAYABLE

82,218

CASH

5,000

Internal Service Fund: SALARIES AND WAGES EXPENSE CASH

15,000 15,000

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-20, part 3 (Cont’d)

Debits

Credits

Governmental Activities: EXPENSES—GENERAL GOVERNMENT

15,000

CASH

15,000

Internal Service Fund & Governmental Activities: OFFICE SUPPLIES

2,500

VOUCHERS PAYABLE

2,500

Internal Service Fund: UTILITIES EXPENSE

3,000

DUE TO OTHER FUNDS

3,000

Governmental Activities: EXPENSES—GENERAL GOVERNMENT

3,000

INTERNAL BALANCES

3,000

Internal Service Fund: DUE FROM OTHER FUNDS

20,700

BILLINGS TO DEPARTMENTS

20,700

Governmental Activities: No entry is necessary since the billings were between governmental funds and the internal service fund.

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-20, part 3 (Cont’d)

Debits 7.

Credits

Internal Service Fund: Closing Entries: BILLINGS TO DEPARTMENTS

20,700

SALARIES AND WAGES EXPENSE

15,000

UTILITIES EXPENSE

3,000

EXCESS OF NET BILLINGS OVER COSTS

2,700

EXCESS OF NET BILLINGS TO DEPARTMENTS OVER COSTS

2,700

NET POSITION—UNRESTRICTED

INTERFUND TRANSFERS IN

2,700

100,000

NET POSITION—UNRESTRICTED

NET POSITION—UNRESTRICTED NET POSITION—NET INVESTMENT IN CAPITAL ASSETS

100,000

5,000 5,000

General Problem Information: Human Resources Internal Service Fund Learning Objective: 7-2 Topic: Internal Service Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions (Cont'd)

7-21. INGLIS CITY INTERNAL SERVICE FUND STATEMENT OF CASH FLOWS

CASH FLOWS FROM OPERATING ACTIVITIES: CASH RECEIVED FROM CUSTOMERS

$2,915,500

CASH PAID TO SUPPLIERS

$(1,642,100)

CASH PAID TO EMPLOYEES

(479,300)

CASH PAID TO OTHER

(89,200)

(2,210,600)

NET CASH PROVIDED BY OPERATIONS

$704,900

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: GRANT FROM STATE

50,000

TRANSFER TO GENERAL FUND

(25,000)

NET CASH PROVIDED BY NONCAPITAL FINANCING ACTIVITIES

25,000

CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES: PROCEEDS FROM SALE OF CAPITAL ASSETS

57,500

DEBT PAYMENT

(525,000)

NET CASH USED BY CAPITAL FINANCING ACTIVITIES

(467,500)

CASH FLOWS FROM INVESTING ACTIVITIES: PURCHASE OF INVESTMENTS INTEREST RECEIVED ON INVESTMENTS NET CASH PROVIDED BY INVESTING ACTIVITIES NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING CASH AND CASH EQUIVALENTS, ENDING

(75,000) 42,400 (32,600) 229,800 895,635 $1,125,435

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-21 (Cont'd)

General Problem Information: Enterprise fund statement of cash flows Learning Objective: 7-2 Topic: Proprietary Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

7-22. a.

CITY OF SALTWATER BEACH TRIBUTE AQUATIC CENTER FUND STATEMENT OF REVENUE, EXPENSES, AND CHANGES IN FUND NET POSITION FOR THE CURRENT YEAR ENDED

OPERATING INCOME: CHARGES FOR SERVICES

$2,040,000

OPERATING EXPENSES: PERSONNEL EXPENSE

$1,034,000

UTILITIES EXPENSE

188,500

REPAIRS AND MAINTENANCE EXPENSE

82,100

SUPPLIES EXPENSE

67,200

DEPRECIATION EXPENSE

136,960

TOTAL OPERATING EXPENSES

1,508,760

OPERATING INCOME

531,240

NONOPERATING REVENUE/EXPENSES: INTEREST INCOME

92,500

INTEREST EXPENSE

(323,840)

TOTAL NONOPERATING INCOME (EXPENSE)

(231,340)

CHANGE IN NET POSITION

299,900

NET POSITION, BEGINNING

1,125,040

NET POSITION, ENDING

$1,424,940

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-22 (Cont'd)

CITY OF SALTWATER BEACH TRIBUTE AQUATIC CENTER FUND STATEMENT OF NET POSITION AS OF YEAR END

ASSETS: CURRENT ASSETS: CASH AND CASH EQUIVALENTS ACCOUNTS RECEIVABLE SUPPLIES TOTAL CURRENT ASSETS RESTRICTED CASH AND CASH EQUIVALENTS CAPITAL ASSETS: LAND BUILDINGS AND EQUIPMENT $ 925,000 LESS: ALLOW. FOR DEPRECIATION (41,625) IMPROVEMENTS OTHER THAN BUILDINGS 4,715,000 LESS: ALLOW. FOR DEPRECIATION (212,175) TOTAL CAPITAL ASSETS TOTAL ASSETS LIABILITIES: CURRENT LIABILITIES: ACCOUNTS & ACCRUED PAYABLES CURRENT PORTION OF LONG-TERM DEBT TOTAL CURRENT LIABILITIES NONCURRENT LIABILITIES: BONDS PAYABLE TOTAL LIABILITIES NET POSITION: NET INVESTMENT IN CAPITAL ASSETS* RESTRICTED UNRESTRICTED TOTAL NET POSITION

$ 182,240 5,225 8,225 $ 195,690 942,000 1,400,000 883,375

4,502,825 6,786,200 7,923,890

22,150 281,600 303,750 6,195,200 6,498,950 309,400 942,000 173,540 $1,424,940

* Calculated as capital assets ($6,786,200) less related debt (6,195,200 + 281,600) 7-26 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-22 (Cont'd)

CITY OF SALTWATER BEACH TRIBUTE AQUATIC CENTER FUND STATEMENT OF CASH FLOWS FOR THE YEAR ENDED

CASH FLOWS FROM OPERATING ACTIVITIES: CASH RECEIVED FROM CUSTOMERS

$2,038,355

CASH PAID TO: CASH PAID TO PERSONNEL

$(1,038,800)

CASH PAID TO UTILITIES

(185,800)

CASH PAID TO REPAIRS AND MAINTENANCE(86,225) CASH PAID TO SUPPLIERS

(65,900)

(1,376,725)

NET CASH PROVIDED BY OPERATIONS

$ 661,630

CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES: PROCEEDS FROM SALE OF CAPITAL ASSETS

9,250

PRINCIPAL PAID ON CAPITAL DEBT

(281,600)

INTEREST PAID ON CAPITAL DEBT

(323,840)

NET CASH USED BY FINANCING ACTIVITIES

(596,190)

CASH FLOWS FROM INVESTING ACTIVITIES: INTEREST RECEIVED ON INVESTMENTS

92,500

NET INCREASE IN CASH AND CASH EQUIVALENTS

157,940

CASH AND CASH EQUIVALENTS, BEGINNING

966,300

CASH AND CASH EQUIVALENTS, ENDING

$1,124,240

RECONCILIATION OF CASH AND CASH EQUIVALENTS TO THE BALANCE SHEET

CASH AND CASH EQUIVALENTS IN CURRENT AND ACCRUED ASSETS RESTRICTED CASH AND CASH EQUIVALENTS TOTAL CASH AND CASH EQUIVALENTS

END OF YEAR

BEGINNING OF YEAR

$ 182,240 942,000 $1,124,240

$ 99,300 867,000 $966,300

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-22, c. (Cont'd)

RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATIONS OPERATING INCOME

$531,240

ADJUSTMENTS: DEPRECIATION EXPENSE

136,960

INCREASE IN ACCOUNTS RECEIVABLE

(1,645)

DECREASE IN SUPPLIES

1,300

DECREASE IN ACCOUNTS AND ACCRUED PAYABLES

(6,225)

NET CASH PROVIDED BY OPERATING ACTIVITIES

$661,630

General Problem Information: Tribute Aquatic Center Enterprise Fund Learning Objective: 7-5 Topic: Enterprise Funds Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

7-23.

TOWN OF MASHPEE GOLF ENTERPRISE FUND PARTIAL STATEMENT OF NET POSITION AS OF YEAR END

NET POSITION: NET POSITION—NET INVESTMENT IN CAPITAL ASSETS

$ 1,764,300

NET POSITION—RESTRICTED

198,000

NET POSITION—UNRESTRICTED

359,382

TOTAL NET POSITION

$2,321,682

Calculations Net investment in capital assets: Beginning balance

$1,709,800

- Depreciation

69,500

- Sale of equipment

25,000

+ Lease payment

12,000

+ New equipment

125,000

- Note related to equipment

40,000

+ Construction costs

52,000

Ending balance

$1,764,300

NOTE: The construction in progress would also increase net investment in capital assets, but it is decreased by the same amount of outstanding debt ($302,000).

Restricted: Beginning balance

50,000

+ Restricted for construction ($500,000-302,000)

198,000

- Use of restricted funds for check-in stand

50,000

Ending balance

$198,000

Unrestricted: Beginning balance

$354,692

+ Net income

207,190

- Increase in net investment in capital assets

54,500

- Increase in resources restricted for construction

148,000

Ending balance

$359,382

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-23 (Cont'd)

General Problem Information: Net Position Classifications Learning Objective: 7-5 Topic: Enterprise Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

7-24. a.

TOWN OF ELIZABETH CENTRAL STATION FUND GENERAL JOURNAL Debits

ACCOUNTS RECEIVABLE

95,000

RENTAL INCOME

CASH

95,000

90,500

ACCOUNTS RECEIVABLE

90,500

ADMINISTRATIVE SERVICES EXPENSE

25,205

MAINTENANCE & REPAIRS EXPENSE

72,882

UTILITIES EXPENSE

30,124

CASH

GRANTS RECEIVABLE

128,211

10,000

GRANT REVENUE

CASH

10,000

60,000

INTERFUND TRANSFER IN

DEPRECIATION EXPENSE ALLOWANCE FOR DEPRECIATION

Credits

60,000

3,519 3,519

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-24 a. (Cont’d)

Debits 6.

RENTAL INCOME

95,000

GRANT REVENUE

10,000

INTERFUND TRANSFER IN

60,000

Credits

ADMINISTRATIVE SERVICES EXPENSE

25,205

MAINTENANCE & REPAIRS EXPENSE

72,882

UTILITIES EXPENSE

30,124

DEPRECIATION EXPENSE

3,519

NET POSITION—UNRESTRICTED

33,270

b. TOWN OF ELIZABETH CENTRAL STATION FUND STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET POSITION FOR THE YEAR ENDED OPERATING REVENUES: RENTAL INCOME

$ 95,000

GRANT REVENUE

10,000

GROSS MARGIN

105,000

OPERATING EXPENSES: ADMINISTRATIVE SERVICES

$ 25,205

MAINTENANCE & REPAIRS EXPENSE

72,882

UTILITIES EXPENSE

30,124

DEPRECIATION EXPENSE

3,519

TOTAL OPERATING EXPENSES

131,730

OPERATING INCOME (LOSS)

(26,730)

TRANSFERS IN

60,000

CHANGE IN NET POSITION

33,270

TOTAL NET POSITION, BEGINNING

60,129

TOTAL NET POSITION, ENDING

$ 93,399

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-24 (Cont'd)

No. The explanation notes that there is no long-term debt. Thus, the activity of the fund is not financed with debt secured by the Central Station Fund’s revenues. The Central Station Fund is not currently covering the cost of providing services with the revenues it generates, having operated at a loss in the current year. At least based on the current year’s operations, it does not appear that there is a law requiring the Central Station Fund to recover its costs with user charges. Additionally, it does not appear that the pricing policy is designed to recover all costs of the Central Station Fund, given the size of the current year’s operating loss (approaching 25.5% of operating revenues).

As manager, you may want to know what, if any, circumstances resulted in such a sizable operating loss. For example, were there a large number of un-booked event dates, and if so, why? Traditionally, what type of support has the General Fund provided the Central Station Fund and why? If the Central Station Fund is to be operated as a business, the pricing policy needs to be adjusted to ensure costs are recovered. If there are reasons why the government has decided not to recover costs, consideration needs to be given to dissolving the fund and transferring the activities to the General Fund or closing/selling the station. Since a large amount of support is being provided by taxpayers in the form of General Fund revenues, it may be more appropriate to reflect the additional burden created by the Central Station in the General Fund financial statements. On the other hand, did renovations financed by the grant enhance the condition of the station, and will they help to increase bookings? Also, did the renovations result in any closures of the facility?

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-24 (Cont'd)

General Problem Information: Town of Elizabeth Central Station Fund Learning Objective: 7-5 Topic: Enterprise Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

7-25. a.

CITY OF BAY LAKE WATER UTILITY FUND GENERAL JOURNAL Debits

SALES OF WATER

500,000

ACCRUED UTILITY REVENUE

500,000

ACCOUNTS RECEIVABLE

2,788,691

DUE FROM GENERAL FUND

193,866

SALES OF WATER

CASH

2,982,557

260,000

INTEREST INCOME

178,000

INTEREST RECEIVABLE

82,000

MANAGEMENT & ADMINISTRATION EXPENSE

360,408

MAINTENANCE & DISTRIBUTION EXPENSE

689,103

TREATMENT PLANT EXPENSE

695,237

ACCOUNTS PAYABLE

CASH—RESTRICTED

1,744,748

2,427

CUSTOMER DEPOSITS

Credits

CASH

2,427

2,943,401

ACCOUNTS RECEIVABLE

2,733,870

DUE FROM GENERAL FUND

209,531

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-25 (Cont'd)

Debits 7.

ACCOUNTS PAYABLE

1,462,596

INTEREST PAYABLE

131,772

INTEREST EXPENSE

264,145

CURRENT PORTION OF LONG-TERM DEBT

400,000

MACHINERY & EQUIPMENT

583,425

CUSTOMER DEPOSITS

912

CASH

2,841,938

CASH—RESTRICTED

CASH

912

475,000

CONTRIBUTION—CAPITAL GRANT 9.

475,000

ACCUMULATED PROVISION FOR UNCOLLECTIBLE ACCOUNTS

10,013

ACCOUNTS RECEIVABLE

10.

INTERFUND TRANSFER OUT

10,013

800,000

CASH

11.

Credits

800,000

DEPRECIATION EXPENSE

600,132

UNCOLLECTIBLE ACCOUNTS

14,913

INTEREST EXPENSE

61,406

ACCUMULATED DEPRECIATION—BUILDINGS

240,053

ACCUMULATED DEPRECIATION—MACHINERY & EQUIPMENT

360,079

ACCUMULATED PROVISION FOR UNCOLLECTIBLE ACCOUNTS INTEREST PAYABLE

14,913 61,406

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-25 (Cont'd)

Debits

12.

ACCRUED UTILITY REVENUE

700,000

INTEREST RECEIVABLE

15,849

SALES OF WATER

700,000

INTEREST INCOME

15,849

REVENUE BOND PAYABLE

400,000

CURRENT PORTION OF LONG-TERM DEBT

13.

Credits

400,000

SALES OF WATER

3,182,557

INTEREST INCOME

193,849

CONTRIBUTION—CAPITAL GRANT

475,000

MANAGEMENT & ADMINISTRATION EXPENSE

360,408

MAINTENANCE & DISTRIBUTION EXPENSE

689,103

TREATMENT PLANT EXPENSE

695,237

INTERFUND TRANSFERS OUT

800,000

INTEREST EXPENSE

325,551

DEPRECIATION EXPENSE

600,132

UNCOLLECTIBLE ACCOUNTS

14,913

NET POSITION—UNRESTRICTED

366,062

NET POSITION—UNRESTRICTED NET POSITION—NET INVESTMENT IN CAPITAL ASSETS*

383,293 383,293

*Net investment in capital assets was increased by the purchase of $583,425 of machinery and equipment and a $400,000 decrease in the revenue bonds. The account was decreased by $600,132 in depreciation.

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-25 (Cont'd)

CITY OF BAY LAKE WATER UTILITY FUND STATEMENT OF REVENUE, EXPENSES, AND CHANGES IN FUND NET POSITION FOR THE YEAR ENDED JUNE 30, 2023

OPERATING INCOME: SALES OF WATER (NET OF $14,913 PROVISION FOR UNCOLLECTIBLE ACCOUNTS)

$3,167,644

OPERATING EXPENSES: MANAGEMENT & ADMINISTRATION

$ 360,408

MAINTENANCE & DISTRIBUTION

689,103

TREATMENT PLANT

695,237

DEPRECIATION

600,132

TOTAL OPERATING EXPENSES

2,344,880

OPERATING INCOME

822,764

NONOPERATING REVENUE/EXPENSES: INTEREST INCOME

193,849

INTEREST EXPENSE

( 325,551)

TOTAL NONOPERATING INCOME (EXPENSE)

(131,702)

INCOME BEFORE TRANSFERS & CONTRIBUTIONS

691,062

INTERFUND TRANSFERS OUT

(800,000)

CAPITAL CONTRIBUTIONS

475,000

CHANGE IN NET POSITION

366,062

NET POSITION, JULY 1, 2022

5,513,127

NET POSITION, JUNE 30, 2023

$5,879,189

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-25 (Cont'd)

CITY OF BAY LAKE WATER UTLITY FUND STATEMENT OF NET POSITION JUNE 30, 2023

ASSETS: CURRENT ASSETS: CASH AND INVESTMENTS ACCOUNTS RECEIVABLE (NET OF $18,267 PROVISION FOR UNCOLLECTIBLE ACCOUNTS) ACCRUED UTILITY REVENUE DUE FROM GENERAL FUND INTEREST RECEIVABLE TOTAL CURRENT ASSETS RESTRICTED ASSETS: CASH CAPITAL ASSETS: LAND BUILDINGS (NET OF $3,660,053 IN ACCUMULATED DEPRECIATION MACHINERY AND EQUIPMENT (NET OF $5,490,007 IN ACCUMULATED DEPRECIATION) TOTAL CAPITAL ASSETS TOTAL ASSETS LIABILITIES: CURRENT LIABILITIES: ACCOUNTS PAYABLE INTEREST PAYABLE CURRENT PORTION OF LONG-TERM DEBT TOTAL CURRENT LIABILITIES

$ 1,811,482 346,777 700,000 13,646 15,849 $ 2,887,754 10,708 $1,780,945 4,974,354 8,711,741 15,467,040 18,365,502

814,199 61,406 400,000 1,275,605

LIABILITIES PAYABLE FROM RESTRICTED ASSETS: CUSTOMER DEPOSITS

10,708

LONG-TERM LIABILITIES: REVENUE BOND PAYABLE TOTAL LIABILITIES NET POSITION: NET INVESTMENT IN CAPITAL ASSETS UNRESTRICTED TOTAL NET POSITION

11,200,000 12,486,313

3,867,040 2,012,149 $ 5,879,189

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-25 (Cont'd)

CITY OF BAY LAKE WATER UTILITY FUND STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2023

CASH FLOWS FROM OPERATING ACTIVITIES: CASH RECEIVED FROM CUSTOMERS CASH PAID TO EMPLOYEES AND SUPPLIERS CUSTOMER DEPOSITS NET CASH PROVIDED BY OPERATIONS

$2,943,401 ( 1,462,596) 1,515 1,482,320

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: TRANSFER TO GENERAL FUND $(800,000) NET CASH USED BY NONCAPITAL FINANCING ACTIVITIES

(800,000)

CASH FLOWS FROM CAPITAL & RELATED FINANCING ACTIVITIES: PROCEEDS FROM CAPITAL GRANT PUCHASE OF MACHINERY & EQUIPMENT PRINCIPAL PAID ON CAPITAL DEBT INTEREST PAID ON CAPITAL DEBT NET CASH USED BY CAPITAL & RELATED FINANCING ACTIVITIES

(904,342)

CASH FLOWS FROM INVESTING ACTIVITIES: INTEREST RECEIVED ON INVESTMENTS NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, JULY 1, 2022 CASH AND CASH EQUIVALENTS, JUNE 30, 2023

475,000 (583,425) (400,000) (395,917)

260,000 37,978 1,784,212 $1,822,190

RECONCILIATION OF CASH AND CASH EQUIVALENTS TO THE BALANCE SHEET END BEGINNING OF YEAR OF YEAR CASH AND CASH EQUIVALENTS IN CURRENT AND ACCRUED ASSETS $1,811,482 $1,775,019 RESTRICTED CASH AND CASH EQUIVALENTS 10,708 9,193 TOTAL CASH AND CASH EQUIVALENTS $1,822,190 $1,784,212

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-25, d. (Cont'd)

RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATIONS OPERATING INCOME ADJUSTMENTS: DEPRECIATION EXPENSE UNCOLLECTIBLE ACCOUNTS INCREASE IN ACCOUNTS RECEIVABLE INCREASE IN ACCRUED UTILITY REVENUE DECREASE IN DUE FROM GENERAL FUND INCREASE IN ACCOUNTS PAYABLE NET CASH PROVIDED BY OPERATING ACTIVITIES

$ 822,764 600,132 4,900 (44,808) (200,000) 15,665 282,152 $1,480,805

General Problem Information: City of Bay Lake Water Utility Fund Learning Objective: 7-5 Topic: Enterprise Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

7-26. VILLAGE OF SHELBURNE GOLF COURSE ENTERPRISE FUND PARTIAL STATEMENT OF NET POSITION AS OF YEAR END NET POSITION: NET POSITION—NET INVESTMENT IN CAPITAL ASSETS NET POSITION—RESTRICTED

$ 594,300 5,000

NET POSITION—UNRESTRICTED

407,401

TOTAL NET POSITION

$1,006,701

Calculations Net investment in capital assets: Beginning balance

$585,400

+ Leased equipment

200,000

- Lease obligation (200,000-40,000)

160,000

- Sale of equipment

6,100

+ New equipment (lawnmower)

75,000

- Note related to lawnmower

25,000

- Depreciation and amortization

75,000

Ending balance

$594,300

Restricted: Beginning and ending balance

5,000

Unrestricted: Beginning balance

$254,790

+ Net income

161,511

- Increase in net investment in capital assets Ending balance

8,900 $407,401

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-26 (Cont'd)

General Problem Information: Net Position Classifications Learning Objective: 7-5 Topic: Net Position of an Enterprise Fund Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

7-27. CUMBERLAND COUNTY ENTERPRISE FUND STATEMENT OF CASH FLOWS FOR THE CURRENT YEAR ENDED CASH FLOWS FROM OPERATING ACTIVITIES: CASH RECEIVED FROM CUSTOMERS

$112,793

CASH PROVIDED FROM CUSTOMER DEPOSITS CASH PAID TO VENDORS

$(19,981)

CASH PAID TO EMPLOYEES

(35,250)

1,400

(55,231)

NET CASH PROVIDED BY OPERATIONS

$ 58,962

CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: TRANSFER FROM GENERAL FUND

5,000

NET CASH PROVIDED BY NONCAPITAL FINANCING ACTIVITIES

5,000

CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES: PROCEEDS FROM ISSUANCE OF DEBT

15,000

PURCHASE OF NEW EQUIPMENT

(8,000)

DEBT PAYMENT

(17,500)

NET CASH USED BY CAPITAL FINANCING ACTIVITIES

(10,500)

CASH FLOWS FROM INVESTING ACTIVITIES: INTEREST RECEIVED ON INVESTMENTS NET CASH PROVIDED BY INVESTING ACTIVITIES NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING CASH AND CASH EQUIVALENTS, ENDING

1,525 1,525 54,987 98,576 $153,563

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-27 (Cont'd)

RECONCILIATION OF CASH AND CASH EQUIVALENTS TO THE BALANCE SHEET END BEGINNING OF YEAR OF YEAR CASH AND CASH EQUIVALENTS IN CURRENT AND ACCRUED ASSETS $139,997 $86,210 RESTRICTED CASH AND CASH EQUIVALENTS* 13,566 12,366 TOTAL CASH AND CASH EQUIVALENTS $153,563 $98,576 * - Beginning balance + deposits received – deposits returned and those written off and released from restriction. General Problem Information: Enterprise fund statement of cash flows Learning Objective: 7-5 Topic: Enterprise Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

7-28. a.

BROWN COUNTY SOLID WASTE FUND GENERAL JOURNAL Debits

INTEREST ON LONG-TERM DEBT AMORTIZATION OF BOND PREMIUM

6,702,000 167,000

CASH 2.

INSURANCE EXPENSE

6,869,000 1,069,000

DUE TO OTHER FUNDS 3.

INVESTMENTS

Credits

1,069,000 3,952,000

REVENUES—CHANGE IN FAIR VALUE OF INVESTMENTS 4.

PROVISION FOR UNCOLLECTIBLE ACCOUNTS

3,952,000 45,000

ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS 5.

PROVISION FOR LANDFILL CLOSURE AND POSTCLOSURE

45,000

1,800,000

ACCRUED LANDFILL CLOSURE AND POSTCLOSURE LIABILITY (13,500/54,000) * $60,600,000 = $15,150,000 - $13,350,000 = $1,800,000 b.

1,800,000

Yes, the county is complying with GASB standards for recognition of closure and post-closure care costs. The county is recognizing an expense and liability each period based on a units-of-production approach. The county estimates the dollar value of closure and post-closure costs, and then recognizes the expense and liability using the proportion of cubic yards in the landfill already used to total cubic yards available in the landfill.

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, Exercise 7-27 (Cont'd)

The funds set aside to meet closure and post-closure obligations would be shown as Amounts Held by Trustee in the Restricted Assets section of the statement of net position and as net position restricted for closure and post-closure care costs. In the case of Brown County, if regulations require that 90% of the estimated liability be funded, it is in violation of the regulation. The liability is $15,150,000, and at $12,670,000, it has funded only 83.6% of that amount.

General Problem Information: Appendix - Solid Waste Enterprise Fund Learning Objective: 7-6 Topic: Appendix – Accounting for Municipal Solid Waste Landfills Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Hard

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

CHAPTER 8:

ACCOUNTING FOR FIDUCIARY ACTIVITIES— CUSTODIAL AND TRUST FUNDS OUTLINE

Number

Topic

Type/Task

Status (re: 18/e)

Define Distinguish, compare Explain Explain Compare

Same Same New 8-3 Same

8-7 8-8 8-9 8-10 8-11

Determining a fiduciary relationship Distinction between custodial and trust funds Identifying custodial funds and their purpose Identifying trust funds and their purpose Fiduciary and governmental fund reporting External investment pools and investment trusts Private purpose trusts and permanent funds Net pension liability and covered payroll Accounting for pension expenses/expenditures OPEB IRC Sec. 148 rules on arbitrage

Compare Compare Analyze Explain Explain Explain

Revised 8-6 New New Revised 8-10 8-11 New

Cases: 8-12 8-13 8-14 8-15

Research Case—CalPERS Research Case—OPEB Plans Research Case—Tax Custodial Fund Research Case—Custodial and Trust Funds

Locate, interpret Compare, evaluate Locate Identify, analyze

Revised Revised New New

Exercises/Problems: 8-16 Examine a CAFR 8-17 Various custodial and trust fund issues

Examine Multiple Choice

8-18

Various agency and trust fund issues

Multiple Choice

8-19 8-20 8-21 8-22 8-23 8-24 8-25 8-26 8-27

Tax custodial fund Identification of fiduciary funds Investment trust fund Pass-through custodial funds Pension trust fund Fiduciary financial statements Fiduciary fund financial statements Pension calculations Investment risk exposure

Journal entries Analysis Journal entries Journal entries Journal entries Financial statements Financial statements Calculate Apply

Revised New 3 and 4, revised 1, 2, 8 and 9 Items 1-5 new. Item 7 revised. Revised 8-21 revised 8-22 8-23 New Revised New Revised Same

Questions: 8-1 8-2 8-3 8-4 8-5 8-6

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

CHAPTER 8:

ACCOUNTING FOR FIDUCIARY ACTIVITIES— AGENCY AND TRUST FUNDS

Answers to Questions 8-1.

To establish a fiduciary relationship, the GASB Codification identifies three criteria that need to be met. The three criteria are: (1) The assets related to the activity must be controlled by the government, (2) The assets related to the activity cannot be generated by the government’s exchange or non-exchange revenues (there is an exception for passthrough grants on this criterion), and (3) The government cannot benefit from the assets. General Problem Information: Determining a fiduciary relationship Learning Objective: 8-1 Topic: Identifying Fiduciary Activities Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

8-2.

All fiduciary funds hold assets that benefit individuals, private organizations, or other governments that are not a part of the reporting entity. However, a fiduciary trust fund only exists if the fund meets certain requirements identified by the GASB, which include: (1) Assets are administered through a trust, (2) Assets are used only to provide benefits to recipients in accordance with benefit terms, and (3) Assets are legally protected from the government’s creditors. Assets that are held in a fiduciary relationship that does not meet the requirements of a trust are reported as custodial funds. Fiduciary activities are reported only in the fiduciary fund financial statements; they have no effect on the governmental or business-type activities of the primary government reported in the government-wide financial statements. Custodial fund financial information is reported in a separate column of the statement of fiduciary net position and the statement of changes in fiduciary net position. Custodial fund activity is reported in the aggregate with the exception of any external investment pool custodial funds. If a government has external investment pool custodial funds, the funds are reported in a separate custodial fund column on the financial statements. Trust funds are reported in the statement of fiduciary net position and the statement of changes in fiduciary net position. Trust funds are reported in separate columns by type (i.e., pension [and other employee benefit] trust funds, investment trust funds, privatepurpose trusts). General Problem Information: Distinction between custodial and trust funds Learning Objective: 8-1 Learning Objective: 8-2 Learning Objective: 8-3 Learning Objective: 8-4 8-2 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Answers, Question 8-2 (Cont'd)

Topic: Identifying Fiduciary Activities; Custodial Funds; Investment & Private-Purpose Trust Funds; Illustrative Financial Statements Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 8-3.

As mentioned in the text, custodial funds can serve many purposes and be of several types since any fiduciary activity that is not part of a trust agreement is reported as a custodial fund. Examples provided in the text include tax custodial funds, special assessment debt service funds, pass-through funds, and external investment pool funds. A tax custodial fund serves to collect and distribute tax and other types of revenues for several different governments. A special assessment debt service fund is one in which the government has no obligation to assume the debt service on special assessment debt. However, the government has agreed to collect the special assessments and pay the principal and interest on the special assessment debt on behalf of those benefiting from the special assessment. A pass-through fund is established when there is no administrative involvement on the part of the government receiving the funds, but it will redistribute the funds to others. As an example, the federal government may pass grant proceeds to a state government to distribute to local governments. An external investment pool exists if a government is managing the investments of several external parties, without the benefit of a trust agreement (in which case it would be an investment trust fund). General Problem Information: Identifying custodial funds and their purpose Learning Objective: 8-2 Topic: Custodial Funds Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

8-4.

There are many different types of trust funds. For reporting purposes, the GASB classifies trust funds as investment trusts, private-purpose trusts, and pension trusts (also referred to as pension and other employee benefit trusts). An investment trust fund is used to account for and report the fund equity in pooled investments held by fund participants who are external to the government operating the fund. Private-purpose trust funds record and report principal and/or interest managed by a government for the benefit of an individual, private organization, or another government. The distinguishing characteristic is that the party benefiting from the trust must be external to the government operating the trust. In pension and other employee benefits trusts, a government is managing benefits that belong to government employees. In each case the government is acting as a fiduciary, or in the best interest of parties outside the government. 8-3 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Answers, Question 8-4 (Cont'd)

General Problem Information: Identifying trust funds and their purpose Learning Objective: 8-3 Learning Objective: 8-5 Topic: Investment & Private-Purpose Trust Funds; Pension Trust Funds Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 8-5.

Unlike governmental funds, the activities of fiduciary funds are never included in the government-wide financial statements. Instead, their activities are reported in a set of fiduciary fund financial statements. Governmental funds, however, are included in the Governmental Activities column of the government-wide financial statements. The fiduciary fund financial statements are prepared using the accrual basis of accounting and the economic resources measurement focus, while the governmental fund financial statements use the modified accrual basis and the current financial resources measurement focus. General Problem Information: Fiduciary and governmental fund reporting Learning Objective: 8-4 Topic: Illustrative Financial Statements Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

8-6.

Both an external investment pool and an investment trust fund conduct investment activities on behalf of parties external to the government. However, an external investment pool that is administered through a formal trust agreement is reported as an investment trust. It is reported in the Investment Trust column of the fiduciary fund financial statements. If the external investment pool’s investments are not governed by a trust agreement, a custodial fund is used and the fund’s activities are reported in a separate external investment custodial fund column. Whether reported as a trust or a custodial fund, only those assets belonging to those participants external to the administering government are reported in the fiduciary fund financial statements.

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Answers, Question 8-6 (Cont'd)

General Problem Information: External investment pools Learning Objective: 8-3 Learning Objective: 8-4 Topic: Investment & Private-Purpose Trust Funds; Illustrative Financial Statements Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 8-7.

A private-purpose trust fund is a fiduciary fund administered by a government entity for beneficiaries external to the administering government, such as individuals, organizations, or governments other than the government administering the trust. The trust fund accounts for both endowment type assets (those which must be maintained in perpetuity) and spendable assets using the accrual basis of accounting. A governmental permanent fund is a fund administered by a government entity for the benefit of the government or its citizens. It accounts for assets that must be maintained in perpetuity using the modified accrual basis of accounting. Earnings generated from the assets are transferred to another governmental fund to be spent on the trust purpose. General Problem Information: Private purpose trusts and permanent funds Learning Objective: 8-3 Topic: Investment & Private-Purpose Trust Funds Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

8-8.

The net pension liability as a percentage of covered payroll tells the reader the size of the net pension liability relative to the annual payroll for employees the pension must cover. As the trend indicates, the liability has grown relative to the payroll. It has gone from being somewhat larger than the payroll (at 121.45% in 2014) to over two and a half times as large as the payroll in 2023. The increase in the size of the liability relative to the payroll over a ten-year period is troublesome and will need to be addressed by management if the pension is to be sustainable. General Problem Information: Net pension liability and covered payroll Learning Objective: 8-5 Topic: Pension Trust Funds Bloom’s Taxonomy: Analysis Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

8-9.

A government employer reports pension expenditures in a governmental fund on the modified accrual basis of accounting. Thus, the amount recognized will be the actual amount paid to the plan and the net annual change in amounts normally expected to be liquidated with expendable available financial resources. In proprietary funds and in the governmental activities journal at the government-wide level, employers would recognize the pension cost on the accrual basis. The pension expense includes current year benefits (service costs), interest on prior pension liabilities, plan changes, amortization of deferred amounts, changes resulting from items such as administrative expenses and member contributions, and projected investment earnings (see text for illustration of the expense components under Pension Expenditure and Expense). General Problem Information: Accounting for pension expenses/expenditures Learning Objective: 8-5 Topic: Pension Trust Funds Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

8-10. OPEB stands for other post-employment benefits and includes retirement benefits other than pensions. The primary OPEB benefit is healthcare, but examples of other benefits include life insurance and long-term care. Like pension funds, OPEB funds are considered employee related trust funds. As a result, the recognition and reporting of OPEB is very similar to pension reporting. Trust fund activity is reported in the pension column of the fiduciary financial statements. General Problem Information: OPEB Learning Objective: 8-6 Topic: Other Postemployment Benefits (OPEB) Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 8-11. The Internal Revenue Code, Sec. 148 limits the amount of interest a government can earn on tax-exempt bond debt proceeds. If a government chooses to invest its bond proceeds in investments with higher yields than the interest on the bonded debt it will have to pay the excess of permitted interest earnings to the Internal Revenue Service. In addition, it may be subject to penalties for violating arbitrage rules. General Problem Information: IRC Sec. 148 rules on arbitrage Learning Objective: 8-7 Topic: Managing Investments Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 8-6 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Solutions to Cases 8-12. Note the answers provided are based on Fiscal Year 2018-2019 information. If students access data for subsequent fiscal years answers may be different. a. CalPERS was established in 1932. b. In fiscal year 2018-2019, 2,890 employers contributed to CalPERS. c. In fiscal year 2018-2019, over 2.0 million members were served by CalPERS. d. Perf B and Perf C are cost-sharing multiple employer defined benefit pension programs. Perf B serves school district and charter school employees, while Perf C serves public agencies (which include cities, counties, and special districts). e. For fiscal year 2018-2019 the total net position was $386.1 billion. f. For fiscal year 2018-2019 the total change in net position was $20.5 billion. g. For fiscal year 2018-2019 the plan fiduciary net position as a percentage of total pension liability for Perf B was 70.0 percent and for Perf C it was 75.3 percent. The percentages indicate the funding position of the programs. The programs are considered funded at 70 and 75.3 percent. h. Both Perf B and Perf C had an annual money-weighted rate of return net of investment expense of 6.5 percent. General Problem Information: Research Case - CalPERS Learning Objective: 8-5 Topic: Pension Trust Funds Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 8-13. Following are answers based on the 2018-2019 fiscal year CAFRs for the City of Boston and New York City. The answers to the questions will vary with the year of the CAFRs examined; therefore, the answers provided serve as a guide to what should be considered in the analysis. a. The Boston ending total OPEB liability was $3,009,584,000 and its ending plan fiduciary net position was $594,249,000. This resulted in a plan net position as a percentage of total pension liability of 19.75 percent. b. The New York City ending total OPEB liability was $112,469,609,800 and its ending plan fiduciary net position was $4,679,551,174. This resulted in a plan net position as a percentage of total pension liability of 4.2 percent. c. Neither plan is well funded given that over the years displayed Boston has a high percentage of just 19.75 percent, and New York City has a high of only 5.0 percent over the same three-year time period. Of the two, Boston has the more well-funded plan. Boston also appears to have a funding strategy given it has improved its percentage each of the last three years. New York City’s percentage has declined each of the three years from its high three years ago of 5.0 percent to the most recent year percentage of 4.2 percent.

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Case 8-13 (Cont'd)

General Problem Information: Research case—OPEB plans Learning Objective: 8-6 Topic: Other Postemployment Benefits Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Reporting Level of Difficulty: Hard 8-14. a. The tax collector’s office collects current and delinquent real and personal property taxes, special assessments for all local taxing authorities, local business tax receipts, convention and tourist (hotel and restaurant) taxes, and gas and oil utility taxes. b. Motor vehicle, fishing and hunting licenses; fire and out of business, and disabled parking permits. c. The county, municipal governments, and special purpose governments such as the School Board and South Florida Water Management District. It also collects for Children's Trust. d. A one percent discount is offered for each month prior to the month in which the payment is due, up to four months in advance of the due date. That is, a 4 percent discount is offered if taxes are paid four months prior to the due date, 3 percent if paid three months before the due date, etc. e. After the due date, April 1, the taxes become delinquent and 3 percent interest is added to the gross amount due. Additional fees are also assessed. If taxes are not paid by June 1 the Tax Collector is required by law to hold a Tax Certificate Sale. The tax certificate represents a lien on unpaid real estate properties. Interest accrues on the tax certificate from June 1 until the taxes are paid. The amount of the certificate is the sum of the unpaid real estate tax and the non-ad valorem assessment, interest, advertising costs and fees. General Problem Information: Research case—Tax custodial funds Learning Objective: 8-2 Topic: Custodial Funds Bloom’s Taxonomy: Find Accreditation Skills tag: AACSB: Communication, AICPA: FN Research Level of Difficulty: Easy

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

8-15. a. On the City of Boston’s 2019 CAFR the term agency is used. GASB Statement No. 84, which changed terminology from agency funds to custodial funds, had been issued prior to the 2019 CAFR and is referenced in the CAFR; however, the effective date for implementing the new standard was for reporting periods beginning after December 15, 2018. Therefore, if students use a CAFR subsequent to the 2019 CAFR the terminology may differ. b. On the 2019 CAFR the columns reported are Pension and OPEB Trust Funds, Private-Purpose Trusts, and Agency Funds. c. In the 2019 CAFR the custodial/agency funds listed are a Law Enforcement Trust Fund, Student Activity Fund, and the Before and After School Fund (see combining statements). Law Enforcement Trust Fund is a drug evidence account for property seized from illegal drug activities. The proceeds are used for technical equipment or expertise and investigations. Additional information about this fund seems warranted given it appears the City benefits from the proceeds as disclosed in the notes. For the other two funds, it appears that the City is passing funds through to organizations external to the city; however, it would be helpful to know that these are external to the city and not part of a government function such as parks and recreation and that there are not trust agreements in place. d. Both a Pension and an OPEB trust fund are reported. It would appear that the pension and OPEB funds are properly reported as trusts. In addition, the City has some private-purpose trust funds. The four pools in the private-purpose trust are improvements of the City’s parks and cemeteries, educational scholarships and sporting equipment, creation of public utility and beauty, and co-mingled nontestamentary trusts. Educational scholarships and non-testamentary trusts appear to benefit those external to the City and if governed by a trust agreement would be properly reported. It would be helpful to have additional information on the improvements for the City’s parks and cemeteries and creation of public utility and beauty given that their names imply they benefit the City. General Problem Information: Research Case—Custodial and Trust Funds Learning Objective: 8-2 Learning Objective: 8-3 Topic: Custodial Funds; Investment & Private-purpose Trust Funds Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Reflective thinking, AICPA: FN Critical thinking Level of Difficulty: Hard

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Solutions to Exercises and Problems 8-16. Each student will have an annual report from a different government unit; therefore, the answers to these questions will differ from student to student. General Problem Information: Examine the CAFR Learning Objective: 8-2 Learning Objective: 8-3 Learning Objective: 8-4 Learning Objective: 8-5 Topic: Various Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 8-17. 1. 2. 3. 4. 5.

c. d. b. a. c.

6. 7. 8. 9. 10.

b. c. d. a. d.

11. 12. 13. 14. 15.

c. b. d. a. d.

General Problem Information: Various fiduciary and trust fund issues Learning Objective: 8-1 Learning Objective: 8-2 Learning Objective: 8-3 Learning Objective: 8-4 Learning Objective: 8-5 Learning Objective: 8-6 Topic: Various chapter topics Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium 8-18. 1. 2. 3. 4. 5.

a. c. b. a. b.

6. 7. 8. 9. 10.

c. d. c. b. d.

General Problem Information: Various agency and trust fund issues Learning Objective: 8-1 Learning Objective: 8-2 Learning Objective: 8-3 Learning Objective: 8-4 8-10 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 8-18 (Cont'd)

Learning Objective: 8-5 Learning Objective: 8-6 Topic: Various chapter topics Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

8-19. a.

SUN COUNTY TAX CUSTODIAL FUND GENERAL JOURNAL Debits

Credits

TAXES RECEIVABLE FOR OTHER FUNDS AND GOVERNMENTS⎯CURRENT

23,951,500

DUE TO OTHER FUNDS

7,664,480

ADDITIONS—PROPERTY TAX COLLECTIONS FOR OTHER GOVERNMENTS 2.

16,287,020

CASH

20,358,000

TAXES RECEIVABLE FOR OTHER FUNDS AND GOVERNMENTS⎯CURRENT

20,358,000

DEDUCTIONS—ADMINISTRATIVE FEE

276,869

DUE TO OTHER FUNDS

COMPUTATION

County Bayshore School

276,869

7,664,480/23,951,500 × 20,358,000 5,508,845/23,951,500 × 20,358,000 10,778,175/23,951,500 × 20,358,000

Taxes Collected = 6,514,560 = 4,682,340 = 9,161,100

DUE TO OTHER FUNDS

2.0% Fee + 276,869 − 93,647 − 183,222

Custodian's Payments 6,791,429 4,588,693 8,977,878

6,791,429

DEDUCTIONS—PAYMENTS OF PROPERTY TAXES TO OTHER GOVERNMENTS CASH

13,566,571 20,358,000

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 8-19 (Cont'd)

Debits 5.

Credits

ADDITIONS—PROPERTY TAX COLLECTIONS FOR OTHER GOVERNMENTS

16,287,020

DEDUCTIONS—ADMINISTRATIVE FEE

276,869

DEDUCTIONS—PAYMENTS OF PROPERTY TAXES TO OTHER GOVERNMENTS

13,566,571

NET POSITION—RESTRICTED FOR OTHER GOVERNMENTS

2,443,580

SUN COUNTY GENERAL FUND GENERAL JOURNAL

TAXES RECEIVABLE⎯CURRENT

7,664,480

ESTIMATED UNCOLLECTIBLE CURRENT TAXES

76,645

REVENUES

7,587,835

CASH

6,791,429

TAXES RECEIVABLE⎯CURRENT

6,514,560

REVENUES (COLLECTION FEES)

276,869

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 8-19 (Cont'd)

TOWN OF BAYSHORE GENERAL JOURNAL

TAXES RECEIVABLE⎯CURRENT

Debits 5,508,845

Credits

ESTIMATED UNCOLLECTIBLE CURRENT TAXES

55,088

REVENUES

5,453,757

CASH

4,588,693

EXPENDITURES (COLLECTION FEES) TAXES RECEIVABLE⎯CURRENT d.

93,647 4,682,340

The tax custodial fund would prepare a statement of tax custodial fund net position reflecting the asset, liability, and net position balances of the fund. It would also prepare a statement of changes in tax custodial net position to reflect the additions and deductions during the period. Since the fund holds the resources for less than three months, it need only report the aggregate additions (property taxes) and deductions (payments and fees). Additionally, the fund would be combined with any other custodial funds that Sun County has and the total of the assets, liabilities, and net position and the total of additions and deductions for the custodial funds would be shown in a single custodial fund column on the statement of fiduciary net position and the statement of changes in fiduciary net position, respectively. General Problem Information: Tax agency fund Learning Objective: 8-2 Topic: Tax Agency Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Financial Reporting Level of Difficulty: Medium

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

8-20. Fiduciary funds are described in a, c, d, f, g, i, and j. See explanations for each fund type below. a. Tri-Centennial Fund. This is a private-purpose trust fund since the resources will benefit a broad constituency rather than just the citizens of the city. b. Perpetual Care Fund. This describes a permanent fund as the principal amount must be kept intact, but earnings of the fund can be used to provide care for the city’s own cemeteries. c. Educational Scholarship Fund. This is a private-purpose trust fund since the resources will benefit individual local students with financial need. d. Green Acres Special Assessment Fund. Since the city is acting in a custodial capacity with no administrative or financial responsibility other than the collection and distribution of resources the fund is a custodial fund. e. Cultural Services and Facilities Fund. Since the resources are funds of the government, the program primarily benefits the government, and the majority of resources are provided on an ongoing basis from performing arts center and museum fees, it should be accounted for as a special revenue fund. f. Payroll Fund. Since payroll deductions are the assets of other governments/organizations (e.g., federal government, state government, pension funds) a custodial fund is used to account for the deductions. g. Youth Activities League. The city would use a private-purpose trust fund since the resources will benefit a not-for-profit organization and not the city. h. Block Grant Fund. Since the city is required to provide matching funds, the grant would be reported in a special revenue fund. i. Health Benefits Fund. This is a pension and other employee benefit trust fund since the city is providing a retirement benefit to those outside of government (employees). j. Unclaimed Property Fund. Since the state is maintaining the property until such time as a legal claimant can be found, a private-purpose trust fund would be used. Until the property reverts to the state it is considered a benefit to a party outside of government (as the claimant is not found yet).

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 8-20 (Cont'd)

General Problem Information: Identification of fiduciary funds Learning Objective: 8-2 Learning Objective: 8-3 Learning Objective: 8-5 Topic: Agency Funds, Trust Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Medium 8-21. a.

GENERAL JOURNAL Debits

Credits

City of Albertville General Fund: EQUITY IN POOLED INVESTMENTS

900,000

INVESTMENTS

890,000

REVENUES⎯CHANGE IN FAIR VALUE OF INVESTMENTS

10,000

Albertville Schools: EQUITY IN POOLED INVESTMENTS

4,230,000

INVESTMENTS

4,200,000

REVENUES⎯CHANGE IN FAIR VALUE OF INVESTMENTS

30,000 Debits

Credits

Richwood Township: EQUITY IN POOLED INVESTMENTS

3,870,000

REVENUES⎯CHANGE IN FAIR VALUE OF INVESTMENTS

20,000

INVESTMENTS

3,890,000

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 8-21 (Cont'd)

Investment Pool Trust Fund: 1. U.S. TREASURY NOTES

900,000

CERTIFICATES OF DEPOSIT

8,100,000

DUE TO GENERAL FUND

900,000

ADDITIONS⎯DEPOSITS IN POOLED INVESTMENTS⎯ALBERTVILLE SCHOOLS

4,230,000

ADDITIONS⎯DEPOSITS IN POOLED INVESTMENTS⎯RICHWOOD TOWNSHIP

2. U.S. TREASURY NOTES

3,870,000

30,000

DUE TO GENERAL FUND

3,000

ADDITIONS⎯INVESTMENT EARNINGS⎯ ALBERTVILLE SCHOOLS

14,100

ADDITIONS⎯INVESTMENT EARNINGS⎯ RICHWOOD TOWNSHIP

12,900

CASH

3,010,000

CERTIFICATES OF DEPOSIT

3,010,000

DEDUCTIONS⎯WITHDRAWAL FROM POOLED INVESTMENTS⎯RICHWOOD TOWNSHIP CASH

3,010,000 3,010,000

(Note: See investment earning calculations below.)

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 8-21 b. (Cont'd)

Debits 50,000

3. CASH

Credits

UNDISTRIBUTED EARNINGS ON POOLED INVESTMENTS

50,000

4. ACCRUED INTEREST RECEIVABLE

28,000

UNDISTRIBUTED EARNINGS ON POOLED INVESTMENTS

28,000

5. UNDISTRIBUTED EARNINGS ON POOLED INVESTMENTS

78,000

DUE TO GENERAL FUND

11,700

ADDITIONS⎯INVESTMENT EARNINGS⎯ ALBERTVILLE SCHOOLS

54,990

ADDITIONS⎯INVESTMENT EARNINGS⎯ RICHWOOD TOWNSHIP

COMPUTATION: EQUITY AT BEGINNING OF YEAR

11,310

City’s GF $900,000

Schools $4,230,000

Township $3,870,000

TOTAL $9,000,000

10.00%

47.00%

43.00%

100.00%

12,900

$ 30,000

$ 3,010,000

% INTEREST TREASURY NOTE DISTRIBUTION

3,000

14,100

WITHDRAWAL

EQUITY IN POOL BEFORE INTEREST $903,000 % INTEREST

15.00%

INTEREST DISTRIBUTION

$ 11,700

$4,244,100

70.50% $

54,990

872,900

$6,020,000

14.50%

100.00%

11,310

78,000

City of Albertville General Fund: EQUITY IN POOLED INVESTMENTS REVENUES⎯INVESTMENT EARNINGS

3,000 3,000

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 8-21 c. (Cont'd)

Debits

Credits

Albertville Schools: EQUITY IN POOLED INVESTMENTS

14,100

REVENUES⎯INVESTMENT EARNINGS

14,100

Richwood Township: EQUITY IN POOLED INVESTMENTS

12,900

REVENUES⎯INVESTMENT EARNINGS

CASH

12,900

3,010,000

EQUITY IN POOLED INVESTMENTS

3,010,000

City of Albertville General Fund: EQUITY IN POOLED INVESTMENTS

11,700

REVENUES⎯INVESTMENT EARNINGS

11,700

Albertville Schools: EQUITY IN POOLED INVESTMENTS

54,990

REVENUES⎯INVESTMENT EARNINGS

54,990

Richwood Township: EQUITY IN POOLED INVESTMENTS

11,310

REVENUES⎯INVESTMENT EARNINGS

11,310

e. The investment trust fund would not report the General Fund’s interest in the pool since the General Fund is an internal participant. The General Fund would report its interest in the investment pool in its financial statements. Since the school is an external participant, the investment trust fund would report the school’s interest in the statement of fiduciary net position and in the statement of changes in fiduciary net position. 8-19 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 8-21 (Cont'd)

General Problem Information: Investment trust fund Learning Objective: 8-3 Topic: Investment pools Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Financial Reporting Level of Difficulty: Hard 8-22. a.

EVERGREEN COUNTY PASS-THROUGH CUSTODIAL FUND GENERAL JOURNAL Debits 5,000,000

CASH ADDITIONS—GRANT FUNDS FOR RECIPIENTS

Credits 5,000,000

DEDUCTIONS—PAYMENT OF GRANT FUNDS TO RECIPIENTS

5,000,000

CASH

5,000,000

Note: Subsidiary ledgers would need to be maintained to reflect the funds distributed to each of the recipients. It is assumed these funds would be immediately distributed and thus the county would be allowed to aggregate additions and deductions.

City of Boulder

$2,100,000

Aspen Township

1,400,000

Snowton

900,000

Firtree Village

600,000

Total

$5,000,000

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 8-22 (Cont'd)

Debits b.

Credits

Aspen Township Performing Arts Capital Projects Fund CASH

1,400,000

REVENUES

1,400,000

Aspen Township Governmental Activities CASH

1,400,000

PROGRAM REVENUES – CULTURE & RECREATION – CAPITAL GRANTS AND CONTRIBUTIONS

1,400,000

Since the transactions are recorded in a custodial fund, they would not be reported on the government-wide financial statements. The activities of the fund would be included in a separate custodial funds column on the statement of fiduciary net position and the statement of changes in fiduciary net position, as required by GAAP. General Problem Information: Pass-through custodial funds Learning Objective: 8-2 Topic: "Pass-through" Agency Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Financial Reporting Level of Difficulty: Hard

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

8-23. a.

CAROL COUNTY PENSION TRUST FUND GENERAL JOURNAL Debits 148,807

CASH ADDITIONS—MEMBER CONTRIBUTIONS

80,437

ADDITIONS—EMPLOYER CONTRIBUTIONS

68,370

INVESTMENTS

110,000

CASH

110,000

CASH

39,960

ADDITIONS—INVESTMENT INCOME

Credits

CASH

39,960

227,812

INVESTMENTS

225,000

ADDITIONS—INVESTMENT INCOME

DEDUCTIONS—ANNUITY BENEFITS

2,812

259,493

CASH

259,493

DEDUCTIONS—ADMINISTRATIVE EXPENSES

4,617

ACCRUED PAYBABLE 7.

4,617

INTEREST RECEIVABLE

12,290

ADDITIONS—INVESTMENT INCOME b.

12,290

Since the transactions are recorded in a pension trust fund, they would not be reported on the government-wide financial statements. The activities of the fund would be included in a separate pension trust funds column on

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 8-23 b. (Cont'd)

the statement of fiduciary net position and the statement of changes in fiduciary net position, as required by GAAP. General Problem Information: Pension trust fund Learning Objective: 8-5 Topic: Pension Trust Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Financial Reporting Level of Difficulty: Hard 8-24. Some of the errors noted include: •

Each type of fiduciary fund should be reported in a separate column. Therefore, the trust funds column should be separated into two columns, one for the investment trust and one for the private-purpose trust.

• A total column is generally not used since the total is combining different types of fiduciary funds. As shown, the columns do not foot and crossfoot either. • Investments are to be reported at fair value. There needs to be an indication as to whether investments are being reported at fair value. • While a trust fund may have capital assets and a lease obligation, any capital assets would be reported net of depreciation rather than at cost. The custodial fund listed should not record a capital asset or a lease obligation. • Normally custodial funds should not report accounts payable. • The custodial funds would not report net position held in trust. However, a custodial fund would report net position restricted to the participants for the assets held in the custodial fund. •

Net position held in trust for the county should not be reported. Since the county is the administering government, the assets and liabilities of the fiduciary funds related to the county would not be

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 8-24 (Cont'd)

reported on the fiduciary financial statements. Rather the information would be reported by the appropriate fund in the county’s required fund and government-wide financial statements General Problem Information: Fiduciary financial statements Learning Objective: 8-4 Topic: Illustrative Financial Statements Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge application, AICPA: Critical thinking Level of Difficulty: Hard

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

8-25. a. CITY OF MARIVILLE Statement of Revenues, Expenses and Changes in Fiduciary Net Position For the Year Ended

Pension Trust Funds

PrivatePurpose Trust Funds

Total Trust Funds

Custodial Funds

ADDITIONS Contributions: Employer

$ 2,606,709

Members

709,784

Donations

49,560

Tax collections

$ 1,811,120

Investment Earnings: Interest & dividends

3,152,255

Total additions

$ 6,468,748

12,980

3,165,235

62,540

$ 6,531,288

$ 1,811,120

DEDUCTIONS Benefits paid

2,457,082

Payments to participants Administrative expenses &

1,759,099

other 156,357

32,477

188,834

32,021

32,477

$ 2,645,916

$ 1,791,120

3,855,309

30,063

3,885,372

20,000

Net position beginning

41,123,848

164,082

41,287,930

240,932

Net position ending

$ 44,979,157

$ 194,145

$ 45,173,302

Total deductions

$ 2,613,439

Net increase (decrease) in fiduciary net position

260,932

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 25 (Cont’d)

CITY OF MARIVILLE Statement of Fiduciary Net Position As of Year End

Pension Trust Funds

PrivatePurpose Trust Funds

Total Trust Funds

$ 1,479,147

$ 141,955

$ 1,621,102

Receivables

141,227

54,182

195,409

Investments

43,358,783

Custodial Funds

ASSETS Cash & cash equivalents

Total assets

58,196 206,937

43,358,783

$ 44,979,157

$ 196,137

$ 45,175,294

1,992

265,133

LIABILITIES Accounts payable Due to other funds

Total liabilities

4,201

1,992

4,201

NET POSITION Restricted for: Pensions

44,979,157

Other governments

260,932

Other purposes Total net position

$ 44,979,157

194,145

$ 194,145

$ 45,173,302

260,932

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 8-25 (Cont'd)

General Problem Information: Fiduciary financial statements Learning Objective: 8-4 Topic: Illustrative Financial Statements Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge application, AICPA: Critical thinking Level of Difficulty: Hard

8-26.

BLUFF COUNTY EMPLOYEE RETIREMENT SYSTEM SCHEDULE OF CHANGES IN THE COUNTY'S NET PENSION LIABILITY AND RELATED RATIOS LAST 3 FISCAL YEARS

Total pension liability Service cost Interest Differences between expected and actual experience Benefit payments (including refunds of employee contributions) Net change in total pension liability Total pension liability, beginning Total pension liability, ending Plan fiduciary net position Contributions—employee Contributions—employer Net investment income Benefit payments (including refunds of employee contributions) Administrative expenses Net change in plan fiduciary net position Plan fiduciary net position, beginning Plan fiduciary net position, ending Net pension liability, ending Plan fiduciary net position as a percentage of total pension liability Covered payroll Net pension liability as a percentage of covered payroll

2023

2022

2021

123,225 $ 189,730 1,250

125,440 $ 182,580 (850)

127,950 169,960 625

(248,000) 66,205 2,083,715 2,149,920

(231,580) 75,590 2,008,125 2,083,715

(217,960) 80,575 1,927,550 2,008,125

32,450 $ 98,620 18,990

36,240 $ 102,530 (12,380)

30,170 91,550 (21,510)

(64,500) (42,780) (51,330) (3,290) (3,110) (2,840) 82,270 80,500 46,040 1,138,220 1,057,720 1,011,680 1,220,490 1,138,220 1,057,720 $ 929,430 $ 945,495 $ 950,405

56.77% 502,150 $

54.62% 485,218 $

52.67% 489,810

185.09%

194.86%

194.04%

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 8-26 (Cont'd)

(a) 66,205 − [123,225 + 1,250 − 248,000] = 189,730 (b) 2,083,715 + 66,205 = 2,149,920 (c) 32,450 + 98,620 + 18,990 − 64,500 − 3,290 = 82,270 (d) 1,220,490 − 82,270 = 1,138,220 (e) 1,220,490/2,149,920 = .5677 (f) 929,430/1.8509 = 502,150 (g) 75,590 − [125,440 + 182,580 -850] = (231,580) (h) 2,083,715 − 75,590 = 2,008,125 (i) 2,083,715 = beginning 2023 balance (j) 80,500 − [36,240 + 102,530 – 42,780 – 3,110] = (12,380) (k) 1,057,720 = ending 2021 balance (l) 1,057,720 + 80,500 = 1,138,220 (m) 2,083,715(i) − 1,138,220(l) = 945,495 (n) 945,495(m)/1.9486 = 485,218 (o) 127,950 + 169,960 + 625 − 217,960 = 80,575 (p) 1,927,550 + 80,575(o) = 2,008,125 (q) 46,040(r) − [91,550 – 21,510 − 51,330 – 2,840] = 30,170 (r) 1,057,720 − 1,011,680 = 46,040 (s) 2,008,125(p) − 1,057,720 = 950,405 (t) 950,405(s)/489,810 = 194.04% General Problem Information: Pension calculations Learning Objective: 8-5 Topic: Pension Trust Funds Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge application, AICPA: Critical thinking Level of Difficulty: Hard 8-27. 1. c.

5. d.

2. a.

6. c.

3. b.

7. d.

4. e. General Problem Information: Investment risk exposure Learning Objective: 8-7 Topic: Investment Trust Funds Bloom’s Taxonomy: Apply

Chapter 08 – Accounting for Fiduciary Activities—Custodial and Trust Funds

Ch. 8, Solutions, Exercise 8-27 (Cont'd)

Accreditation Skills tag: AACSB: Knowledge application, AICPA: Critical thinking Level of Difficulty: Medium

Chapter 09 - Financial Reporting of State and Local Governments

CHAPTER 9:

FINANCIAL REPORTING OF STATE AND LOCAL GOVERNMENTS OUTLINE

Number

Topic

Type/Task

Status (re: 18/e)

Questions: 9-1 9-2 9-3 9-4 9-5 9-6 9-7 9-8 9-9 9-10 9-11

Primary governments Financial accountability Financial reporting entity Component units Types of component units CAFR Required financial statements Reconciliations Major component units IPSASB XBRL

Identify Explain Define Define Explain Identify List Explain Compare Explain Explain

Same New Same Same Same New Same Same New New New

Cases: 9-12 9-13 9-14 9-15

Identification of component units MD&A and statistical tables Analyzing reconciliation of financial reports XBRL

Analyze Analyze Analyze Understand

Same Revised Same New

Evaluate Multiple Choice

Revised Revised 1, 7, 10, 12, 14, 18 new 13, 15 Same Revised Same Same

Exercises/Problems: 9-16 Examine the CAFR 9-17 Various

9-18 9-19 9-20 9-21

Primary governments Financial reporting Comprehensive set of transactions Reconciliation of financial statements

9-22

Operating statement reconciliation

9-23 9-24 9-25

Adjusting net position balances Change in net position Governmental fund financial statements

9-26

Government-wide financial statements

9-27

Modified accrual to accrual accounting

Matching Matching Journal entries Report preparation Report preparation Matching Calculation Error identification Report preparation Adjustments, JEs

Revised Revised Revised Revised Revised Same

Chapter 09 - Financial Reporting of State and Local Governments

CHAPTER 9:

FINANCIAL REPORTING OF STATE AND LOCAL GOVERNMENTAL UNITS

Answers to Questions 9-1. A special purpose government can be considered a primary government if it has a separately elected governing body, is legally separate from other entities, and is fiscally independent of other state and local governments. To be legally separate, the special purpose government must be organized under its own identity and operate as an “artificial person” separate and apart from its creator and all others. A special purpose government is fiscally independent if it can determine its own budget, set its own rates or charges, levy its own taxes, and issue bonded debt without approval of another government. General Problem Information: Primary governments Learning Objective: 9-1 Topic: The Government Reporting Entity Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Easy 9-2.

A primary government will know if it is financially accountable for another entity if the following criteria are met: 1. The primary government appoints a majority of the entity’s governing board, and 2. Either of the following is present: a. The primary government is able to impose its will on the organization, b. The primary government receives a specific financial benefit from the entity or incurs a specific financial burden on behalf of the entity. Additionally, if an entity is fiscally dependent on the primary government, the primary government is considered financially accountable regardless of whether the entity has a separately elected governing board, a governing board appointed by another level of government, or a jointly appointed board. General Problem Information: Financial accountability Learning Objective: 9-1 Topic: The Government Reporting Entity Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Easy

9-3.

According to the GASB, a financial reporting entity is a primary government, organizations for which the primary government is financially accountable, and other organizations for which the nature of their relationships with the primary government are such that exclusion would make the reporting entity’s basic financial statements misleading. Organizations making up a financial reporting entity are the primary government and its component units. The primary government is a state or local generalpurpose government, or a special-purpose government. Component units are the entities

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Answers, Question 9-3 (Cont'd)

for which the primary government is financially accountable. General Problem Information: Financial reporting entity Learning Objective: 9-1 Topic: The Government Reporting Entity Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Easy 9-4.

A component unit is recognized within the reporting entity’s financial statements. By definition a component unit is a legally separate organization for which the elected officials of the primary government are financially accountable. Additionally, a primary government’s financial statements should include as a component unit any organization that by the nature and significance of its relationship with the government would be misleading to exclude, and any legally separate tax-exempt organization that meets certain criteria identified by the GASB. The three criteria that must be met are: (1) The assets received or held by the component unit are entirely or almost entirely for the direct benefit of the primary government, its component units, or its constituents; (2) The primary government, or its component units, is entitled to, or has the ability to otherwise access, a majority of the assets received or held by the component unit and these assets are significant to the primary government; and (3) The assets received or held by an individual organization that the specific primary government, or its component units, is entitled to or has the ability to otherwise access are significant to the primary government. General Problem Information: Component units Learning Objective: 9-2 Topic: The Government Reporting Entity Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Easy

9-5.

Component units for which the primary government is financially accountable are reported in one of two ways—through blended or discrete presentation. A blended component unit is one that is an integral part of the primary government, which can be demonstrated through factors such as common governing boards, financial benefit/burden relationships, operations that primarily provide services/benefits to the primary government, and/or component unit debt that is expected to be paid by the primary government. If a component unit is to be blended, its financial data is reported as a fund type and incorporated into the appropriate activities column on the government-wide financial statements. The one exception to this would be the General Fund of a component unit, which would be reported as a special revenue fund rather than being blended with the primary government’s General Fund.

Ch. 9, Answers, Question 9-5 (Cont'd)

Chapter 09 - Financial Reporting of State and Local Governments

A discretely presented component unit is not as closely aligned with the primary government as a blended component unit. It is more independent in one or more of the areas that were identified when considering whether a component unit should be blended. For example, the component unit may have a separately elected board, it may benefit entities other than the primary government, and/or the primary government may not have a debt responsibility. A discretely presented component unit will also exist if it is a legally separate tax-exempt entity that meets the following three criteria: 1. The assets received or held by the component unit are entirely or almost entirely for the direct benefit of the primary government, its component units, or its constituents. 2. The primary government, or its component units, is entitled to, or has the ability to otherwise access, a majority of the assets received or held by the component unit and these assets are significant to the primary government. 3. The assets received or held by an individual organization that the specific primary government, or its component units, is entitled to or has the ability to otherwise access are significant to the primary government. A discretely presented component unit’s financial data is shown in one or more columns that are separate from the financial data of the primary government. The columns will appear to the right of the total columns for the primary government. General Problem Information: Types of component units Learning Objective: 9-2 Topic: The Government Reporting Entity Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Medium 9-6.

Included as components of a CAFR are an introductory section (including a table of contents and a letter of transmittal), an auditor’s report (as appropriate), the basic financial statements and their accompanying notes, required supplementary material (including the MD&A), combining and individual fund statements and schedules, and a statistical section. General Problem Information: CAFR Learning Objective: 9-3 Topic: Government Financial Reports Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Easy

9-7.

The nine required statements are: • The two government-wide financial statements—statement of net position and statement of activities.

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Answers, Question 9-7 (Cont'd)

• • •

The two governmental fund financial statements—balance sheet and statement of revenues, expenditures, and changes in fund balances. The three proprietary fund financial statements—statement of net position; statement of revenues, expenses, and changes in fund net position; and statement of cash flows. The two fiduciary fund financial statements—statement of fiduciary net position and statement of changes in fiduciary net position.

Recall that GASB standards allow the budgetary comparison information to be presented as a statement or a schedule (required supplementary information). As a result, students may list ten statements under the assumption that the budgetary comparison is required when it is optional under the GASB standards. General Problem Information: Required financial statements Learning Objective: 9-3 Topic: Government Financial Reports Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Easy 9-8.

The GASB requires two financial statement reconciliations: (1) a reconciliation of the total governmental fund balances on the governmental funds balance sheet to the total governmental activities net position on the government-wide statement of net position and (2) a reconciliation of the net change in governmental fund balances on the statement of revenues, expenditures, and changes in fund balances to the change in governmental activities net position on the government-wide statement of activities. Reconciliations are required since the governmental funds statements and the government-wide statements report on two different bases of accounting. For this reason, the amounts reported on the statements vary and reconciling the differences assists the reader in understanding why the amounts on the statements vary. General Problem Information: Reconciliations Learning Objective: 9-4 Topic: Preparation of Basic Financial Statements Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Easy

9-9.

No. Recall from Chapter 2 that major funds are determined based on the size of the fund. Therefore, quantitative criteria are applied in determining major funds. Those funds with a financial statement element (such as revenues) that is a least 10 percent of the corresponding element total for all funds of that category or type (such as total governmental funds) and for that same element at least 5 percent of the corresponding element total for all governmental and enterprise funds are considered major funds. This is quite different from determining a major component unit where the criterion for

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Answers, Question 9-9 (Cont'd)

selection is qualitative in nature. A component unit is considered major based on the significance of its relationship with the primary government. This would include considering the significance of any financial benefit or burden, or the significance of the services provided to the primary government’s citizens. General Problem Information: Major component units Learning Objective: 9-2 Topic: Reporting Component Units Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium 9-10. IPSASB stands for International Public Sector Accounting Standards Board. It is an international standards setting board for the public sector, much like the IASB (International Accounting Standards Board) is an international standards setting board for the private sector. The purpose of the IPSASB is to provide high-quality public sector accounting standards that can be used by all governments and public sector entities around the world. General Problem Information: IPSASB Learning Objective: 9-5 Topic: Other Financial Reporting Issues and Topics Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Easy 9-11.

XBRL stands for eXtensible Business Reporting Language. It allows financial statement information to be presented in a machine-readable format. Currently, there is no requirement that state and local governments provide financial information in a machinereadable format. However, there is increasing interest in such reporting given that XBRL is believed to increase financial reporting transparency and there is some research indicating it can also increase timeliness of reporting. Additionally, federal legislation is increasingly focusing on requiring that federal funding information be available in a machine-readable format, increasing the need for state and local governments to adopt a machine-readable format, such as XBRL, for reporting. General Problem Information: XBRLLearning Objective: 9-5 Topic: Other Financial Reporting Issues and Topics Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium

Chapter 09 - Financial Reporting of State and Local Governments

Solutions to Cases 9-12. a.

Tesser Municipal Hospital is a component unit of the City of Tesser. Tesser is financially accountable for the hospital since the mayor appoints the governing board and the city is able to impose its will on the hospital through final approval of the budget.

The Atkins Convention and Visitor’s Bureau is a component unit of the City of Atkins. Since the city has the right to approve the rate of the tax (i.e., the city sets the tax) it has the ability to impose its will on the Convention and Visitor’s Bureau through its control over revenue. Because the city can impose its will on the Convention and Visitors’ Bureau, the city is financially accountable for the bureau.

The Sports Authority is not a component unit of Dawson County. As indicated, the Sports Authority is a legally separate entity with its own board; therefore, the only question is if there is fiscal dependency on the county. Since the actions of the Sports Authority are voluntary and the recommendations of the county need not be incorporated, no fiscal dependency is created.

The County Aviation Authority is a component unit of the City of Middle Falls. If the city is legally obligated to assume debt responsibilities in the event of a default a financial burden has been imposed on the city; therefore, the Aviation Authority would be considered a component unit. The opinion that the likelihood of default by the Aviation Authority is remote does not affect the decision.

Help for Kids is not a component unit of Alice County. Through its request the county is performing what is referred to as a “ministerial” or compliance function (GASB, Codification, Sec. 2100.116). A compliance function is not considered to result in fiscal dependence.

General Problem Information: Identification of component units Learning Objective: 9-3 Topic: The Governmental Reporting Entity Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Hard 9-13. a.

The three largest revenue sources for the City and County of Denver are sales taxes (36.05% of the 2019 total revenues), property taxes (19.26% of the 2019 total revenues), and charges for services (12.58% of the 2019 total revenues).

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Case 9-13b. (Cont'd)

Sales tax revenues have increased every year. (It should be noted that although it appears sales taxes declined steeply in 2017, a review of the sales taxes by category will reveal that there is an error in the first table, and in fact, sales tax revenues in 2017 were $721,512.) Relative to 2018, sales tax revenues have increased over 17.68% and over the period from 2010 sales tax revenues are up almost 101% from 2010. Significant growth in revenues can be seen in almost every category over the 10-year period. However, eating and drinking establishments; home furnishings, electronics, and appliances; building materials and supplies; and auto dealers and supplies have all seen over 100% growth. An interesting area of revenue growth for Denver has been marijuana sales. Taxes from retail sales have declined in the past year, however, non-retail sales in marijuana stores has increased by almost 385% in the last year. Based on trend information alone, the strong sales tax trends would seem to indicate that sales tax revenues will continue to grow over the next two to three years. One sector that does not appear as strong is information producers and distributors. This source has up and down periods, indicating it is not as stable as some other sectors. While the trend is favorable, Denver can anticipate that from 2020, and over an unknown period, sales taxes will be down due to COVID-19 and the contraction of the economy. The three largest sources of expenditures in 2019 are public safety (29.31%), general government (18.37%), and public works (14.34%). By far the most significant source of expenditures is public safety. However, a review of the trend since 2010 shows that it is public works (143%) and general government (91.36%) that have seen the largest growth in spending over the period. Public safety has seen 43.99% growth over the period. This same trend is seen relative to 2018, public works seeing a growth of 17.78% followed by general government (9.70%) and then public safety (4.51%).

Over the 10-year period provided on the table, revenues have grown 73.10% while expenditures have grown 63.43%. However, this is somewhat misleading in that for the last three years Denver’s total expenditures have exceeded its revenues. In fact, for the 10 years shown, expenditures have been greater than revenues six out of 10 years. It is difficult to predict the next two to three years, other than to say it can be expected that expenditures will exceed revenues. History seems to show that Denver has difficulty achieving a positive revenue over expenditures number and that the total of the deficits over the 10-year period is greater than the positive balances. Additionally, the challenges all local governments are going to face in 2020 and for a period thereafter as a result of COVID-19 means there will be increasing demand for services while important revenue sources, such as sales taxes, will undoubtedly see a decline.

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Case 9-13 (Cont'd)

General Problem Information: MD&A and statistical tables Learning Objective: 9-4 Topic: Government Financial Reports Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Critical Thinking Level of Difficulty: Hard 9-14. a.

The list provided by each student should vary somewhat based on the CAFR report used. However, some items that could be listed as leading to differences between the net change in fund balances and net change in governmental activities net position include: • Capital outlays reported as expenditures on the statement of revenues, expenditures, and changes in fund balances are not reported on the statement of activities. • Long-term debt proceeds reported as other financing sources on the statement of revenues, expenditures, and changes in fund balances are not reported on the statement of activities. • Depreciation not reported on the statement of revenues, expenditures, and changes in fund balances is reported on the statement of activities. • Some accrued expenses not reported on the statement of revenues, expenditures, and changes in fund balances are reported on the statement of activities. • Some revenues that are not available are not reported on the statement of revenues, expenditures, and changes in fund balances, but are reported on the statement of activities. • Interfund transfers among governmental funds are reported on the statement of revenues, expenditures, and changes in fund balances fund, but are not reported on the statement of activities. • Operating income (loss) of internal service funds is not reported on the statement of revenues, expenditures, and changes in fund balances, but is reported on the statement of activities.

The list provided by each student should vary somewhat based on the CAFR report used. However, some items that could be listed as leading to differences between the fund balances on the balance sheet and the governmental activities net position on the statement of net position include: • Capital outlays are reported as assets on the statement of net position and are not reported on the balance sheet. • Long-term debt (and any related premium or discounts) is reported as a liability on the statement of net position but is not reported on the balance sheet. • Accumulated depreciation is reported on the statement of net position but is not reported on the balance sheet.

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Case 9-14 b. (Cont’d)

•

• •

•

Some accrued liabilities reported on the statement of net position are not reported on the balance sheet. Some revenues recognized as deferred inflows of resources on the balance sheet are not recognized on the statement of net position. Internal balances reported on the statement of net position include only transactions between the governmental funds and business-type funds; whereas, interfund transactions among all funds are reported on the balance sheet. Assets and liabilities of internal service funds reported on the statement of net position are not reported on the balance sheet.

Each report will vary, but it is important that the student point out that the reason for the difference is due to different methods used in capturing and reporting the transactions (modified accrual versus accrual basis of accounting). The student will also want to point out that the reason for the difference is that the reports serve different purposes: a short-term focus (governmental funds) that provides information related to fiscal accountability and a long-term focus (governmental activities) that provides information related to operational accountability.

General Problem Information: Analyzing reconciliation of financial reports Learning Objective: 9-4 Topic: Preparation of Basic Financial Statements Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium 9-15. a.

c. d.

The work group is trying to address the lack of standard reporting in state and local government financial reporting, which prevents the ability to aggregate data and compare financial performance over time and across governments. To help address this problem, the workgroup is designing schemas and an XBRL implementation for open data reporting of financial results. As of May 2020, data standards had been released for the statement of net position, statement of activities, governmental funds balance sheet, governmental funds statement of revenues, expenditures and changes in fund balances, proprietary funds statement of net position, proprietary funds statement of revenues, expenses and changes in net position, proprietary funds statement of cash flows, pension footnotes, OPEB footnotes, schedule of expenditures of federal awards, schedule of findings and questioned costs, and general information. No, the format using XBRL is the same as what is shown in the textbook. As a note, Will County is using the Inline version of XBRL. Will County is reporting both the financial statement and some notes to the financial statements as tagged sections. In the 2018 financial statements (the most recent at the time the textbook went to press) there are four financial statements— statement of net position, statement of activities, balance sheet-governmental

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Case 9-15 d. (Cont’d)

f. g.

funds, statement of revenues, expenditures, and changes in fund balance. The notes information includes schedules for indebtedness and Pension and OPEB schedule information. Tagged data can be identified by the underlining of the amounts and information tagged. Hovering the cursor over the dollar amount provides the history on the tag. In 2018, Will County did not use any custom tags. The schedules are indebtedness and Pension and OPEB.

General Problem Information: XBRL Learning Objective: 9-5 Topic: Other Financial Reporting Issues and Topics Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium Solutions to Exercises and Problems 9-16. Since each of the students will have a different annual report, the solutions to 9-16 should differ from student to student. Note that not all reports that say “CAFR” on the cover have three sections. Some reports may only contain the middle or financial section. General Problem Information: Examine the CAFR Learning Objective: 9-3 Topic: Government Financial Reports Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Measurement and Reporting Level of Difficulty: Hard

9-17.

1. 2. 3. 4. 5.

d. d. b. c. c.

6. 7. 8. 9. 10.

d. a. a. b. d.

11. 12. 13. 14. 15.

c. c. b. a. c.

General Problem Information: Various Learning Objective: 9-1 Learning Objective: 9-2 Learning Objective: 9-3 Learning Objective: 9-4 Learning Objective: 9-5 Topic: Various Chapter Topics Bloom’s Taxonomy: Understand

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Exercise 9- 17 (Cont’d)

Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB Critical Thinking Level of Difficulty: Medium

9-18.

Waseca County is a general-purpose government and, by definition, is therefore a primary government. University of South Florida is not a primary government since it would not be considered legally separate if it is a part of another system, in this case the State University System. Tri-County School District is a special purpose government that meets the criteria for being considered a primary government in that it has a separately elected board, is legally separate and fiscally independent. The State of Colorado is a general-purpose government and by definition, is therefore a primary government. Greenfield Sports Authority is a joint venture and does not meet the definition of a primary government since it is owned and operated by two groups, one of which is not a government. There is no indication that the joint venture has a separately elected governing body or that it is fiscally independent.

General Problem Information: Primary government Learning Objective: 9-3 Topic: The Government Reporting Entity Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB Industry Level of Difficulty: Medium

9-19.

1. 2. 3. 4. 5.

RSI I S MDA S

6. 7. 8. 9. 10.

RSI MDA F S F

11. 12. 13. 14. 15.

I F S MDA S

General Problem Information: Financial reporting Learning Objective: 9-3 Topic: Preparation of Basic Financial Statements Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB Industry Level of Difficulty: Easy

Chapter 09 - Financial Reporting of State and Local Governments

9-20.

CITY OF LYNNWOOD

TRANS. FUND NO. OR ACTIVITY 1. GF

ACCOUNT TITLE ESTIMATED REVENUES

AMOUNTS Debits Credits 2,000,000

APPROPRIATIONS

1,990,000

BUDGETARY FUND BALANCE

TAXES RECEIVABLE—CURRENT

10,000

1,940,000

ALLOWANCE FOR UNCOLLECTIBLE CURRENT TAXES

9,000

REVENUES

TAXES RECEIVABLE⎯CURRENT

1,931,000

1,940,000

ALLOWANCE FOR UNCOLLECTIBLE CURRENT TAXES

9,000

GENERAL REVENUES— PROPERTY TAXES

OFU—INTERFUND TRANSFERS OUT

1,931,000

25,000

CASH ISF

25,000

CASH

25,000

EQUIPMENT

300,000

ACCUMULATED DEPRECIATION

65,000

OFS—INTERFUND TRANSFERS IN

260,000

INVESTMENTS—MARKETABLE SECURITIES

800,000

REVENUES—CONTRIBUTIONS FOR ENDOWMENT

800,000

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Exercise 9-20 (Cont'd)

TRANS. FUND NO. OR ACTIVITY

ACCOUNT TITLE

AMOUNTS Debits Credits

CASH

40,000

REVENUES—INVESTMENT EARNINGS

OFU—INTERFUND TRANSFERS OUT

40,000

CASH

SRF

CASH

40,000

OFS—INTERFUND TRANSFERS IN GA

40,000

INVESTMENTS—MARKETABLE SECURITIES

800,000

GENERAL REVENUES— CONTRIBUTIONS FOR ENDOWMENT

CASH

800,000

40,000

PROGRAM REVENUES—CULTURE AND RECREATION—OPERATING GRANTS & CONTRIBUTIONS

DUE FROM OTHER FUNDS

40,000

125,000

CHARGES FOR SERVICES

CASH

125,000

124,000

DUE FROM OTHER FUNDS

EXPENDITURES

124,000

125,000

DUE TO OTHER FUNDS

125,000

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Exercise 9-20 (Cont'd)

TRANS. FUND NO. OR ACTIVITY

ACCOUNT TITLE DUE TO OTHER FUNDS

AMOUNTS Debits Credits 124,000

CASH

EXPENSES—GENERAL GOVERNMENT

124,000

125,000

INTERNAL BALANCES

125,000

124,000

CASH

ISF & GA

INVENTORY OF SUPPLIES

124,000

4,500

CASH

4,500

1,988,000

TAXES RECEIVABLE—CURRENT

1,925,000

REVENUES

CASH

63,000

1,988,000

TAXES RECEIVABLE—CURRENT

1,925,000

PROGRAM REVENUE—GENERAL GOVERNMENT—CHARGES FOR SERVICES

ISF

DUE FROM OTHER FUNDS

63,000

23,800

BILLINGS TO DEPARTMENTS

EXPENSES—ADMINISTRATIVE

23,800

8,100

DUE TO OTHER FUNDS

8,100

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Exercise 9-20 (Cont'd)

TRANS. FUND NO. OR ACTIVITY GF

AMOUNTS ACCOUNT TITLE Debits Credits EXPENDITURES—GENERAL GOVERNMENT 15,700 DUE TO OTHER FUNDS

INTERNAL BALANCES

15,700

8,100

PROGRAM REVENUE—GENERAL GOVERNMENT—CHARGES FOR SERVICES

CPF

CASH

8,100

5,000,000

OFS—PROCEEDS OF BONDS

ENCUMBRANCES

5,000,000

4,500,000

ENCUMBRANCES OUTSTANDING

CASH

4,500,000

5,000,000

BONDS PAYABLE

10.

ENCUMBRANCES

5,000,000

32,000

ENCUMBRANCES OUTSTANDING

32,000

ENCUMBRANCES OUTSTANDING

32,000

EXPENDITURES

31,900

ENCUMBRANCES

32,000

CASH

31,900

EQUIPMENT

31,900

CASH

31,900

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Exercise 9-20 (Cont’d)

General Problem Information: Comprehensive set of transactions Learning Objective: 9-4 Topic: Preparation of Basic Financial Statements Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard 9-21. CITY OF ELIZABETH Reconciliation of the Balance Sheet—Governmental Funds to the Statement of Net Position June 30, 20xx Total fund balances—governmental funds

$157,700

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 by funds.

286,500

Deferred inflows of resources are recognized as revenues of governmental activities.

361,200

Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported in the funds.

(188,200)

Accrued interest payable is not due in the current period and therefore is not included in the funds.

(1,200)

Net position of governmental activities

$616,000

Calculations: Capital assets used in governmental activities is calculated as capital assets minus accumulated depreciation: $639,900-353,400=286,500 Long-term liabilities is calculated as the bond and long-term notes issues, the unamortized bond premium, and compensated absences: $174,200+700+13,300=188,200

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Exercise 9-21 (Cont’d)

General Problem Information: Reconciliation of financial statements Learning Objective: 9-4 Topic: Preparation of Basic Financial Statements Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard 9-22. CITY OF EDWARD Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances—Governmental Funds to the Statement of Activities For the Year Ended December 31, 20XX Net change in fund balances—governmental funds

$322,791

Amounts reported for the governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives as depreciation expense. This is the amount by which capital outlays exceed depreciation.

584,017

Some revenues reported in the statement of activities do not provide current financial resources and are not reported as revenues in the governmental funds.

23,119

Debt payments use financial resources of governmental funds, but decrease long-term liabilities in the statement of net position.

100,000

Some expenses reported in the statement of activities do not use current financial resources and are not reported as expenditures in the governmental funds.

(4,550)

Change in net position of governmental activities

$1,025,377

Calculations: Capital outlays reported as expenditures adjusted for depreciation is calculated $627,576 − 43,559 = $584,017.

as:

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Exercise 9-22 (Cont’d)

General Problem Information: Operating statements reconciliation Learning Objective: 9-4 Topic: Reconciling Items Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium 9-23.

1. 2. 3. 4. 5.

d. e. c. c. e.

6. 7. 8. 9. 10.

a. a. c. e. b.

General Problem Information: Adjusting net position balances Learning Objective: 9-4 Topic: Preparation of Basic Financial Statements Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard

Chapter 09 - Financial Reporting of State and Local Governments

9-24. ANNETTE COUNTY Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances—Governmental Funds to the Statement of Activities For the Year Ended June 30, 20xx Net change in fund balances—governmental funds

$ (289,200)

Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives as depreciation expense. This is the amount by which capital outlays of $3,750,000 exceeded depreciation of $603,000.

3,147,000

A sale of capital assets resulted in a gain on sale reported in the statement of activities, whereas the governmental funds reported the proceeds from the sale as an other financing source.*

(550,000)

Bond proceeds provide current financial resources to governmental funds, but issuing debt increases long-term liabilities in the statement of net position. Face amount $3,000,000 plus Premium $30,000 = $3,030,000 is the amount of the proceeds .................................................................. (3,030,000) Debt payments use current financial resources of governmental funds, but retiring debt decreases long-term liabilities in the statement of net position.

500,000

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.

(24,000)

Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds.

364,600

Change in net position of governmental activities

$118,400

*At the time of the sale the asset sold for cash of $570,600, this would have resulted in the governmental activities journal reporting an increase in cash and a decrease in assets of $550,000 for a net change in position of $20,600. Thus, net position increased by only the $20,600 gain while the fund balance increased by the full cash amount of $570,600 resulting in an adjustment of $550,000 to reconcile the numbers.)

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Exercise 9-24 (Cont’d)

General Problem Information: Change in net position Learning Objective: 9-4 Topic: Preparation of Basic Financial Statements Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard 9-25. Some of the modifications or corrections that should be made include: •

The word Expenses should be changed to Expenditures in the statement title.

•

An analysis should be done of the Other Governmental Funds column to determine whether any of the three funds included in the column meet the definition of a major fund. If so, the fund should be shown in a separate column to the right of the General Fund.

•

A Total Governmental Funds column should be provided to the right of the Other Governmental Funds column.

•

Debt proceeds is not a revenue. It should be shown in a separate section titled Other Financing Sources (Uses). This section appears after expenditures.

•

Transfers out is not an expenditure. It should be shown in a separate section titled Other Financing Sources (Uses). This section appears after expenditures.

•

Debt service should be shown separately from the General Government function. Further, debt service should show the expenditures for principal and the expenditures for interest. Generally, information on debt service is shown after the functional expenditures.

•

Capital outlay should be shown separately from the functions of government. Generally, information on capital outlays is shown after the functional expenditures.

•

The beginning and ending fund balances for the period should be included after the Net Change in Fund Balances.

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Exercise 9-25 (Cont’d)

General Problem Information: Governmental fund financial statements Learning Objective: 9-4 Topic: Preparation of Basic Financial Statements Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard

9-26.

TOWN OF FREAZ STATEMENT OF NET POSITION AS OF JUNE 30, 2023 (000s OMITTED)

ASSETS: CURRENT ASSETS: CASH

$ 3,639

INVESTMENTS

7,299

TAXES RECEIVABLE (NET $49 OF ALLOWANCE FOR UNCOLLECTIBLE TAXES)

5,739

DUE FROM OTHER GOVERNMENTS

6,343

TOTAL CURRENT ASSETS

23,020

CAPITAL ASSETS: LAND

$ 8,720

OTHER CAPITAL ASSETS (NET OF DEPRECIATION) INFRASTRUCTURE (NET $45,603)

40,165

BUILDINGS (NET $8,021)

17,659

MACHINERY AND EQUIPMENT (NET $13,785)

14,935

TOTAL CAPITAL ASSETS TOTAL ASSETS

81,479 104,499

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Exercise 9-26 (Cont'd)

LIABILITIES: CURRENT LIABILITES: ACCOUNTS PAYABLE

7,764

ACCRUED LIABILITIES

4,765

DUE TO OTHER FUNDS (NET) CURRENT PORTION OF LONG-TERM DEBT TOTAL CURRENT LIABILITIES

103 8,600 21,232

LONG-TERM LIABILITIES: BONDS PAYABLE TOTAL LIABILITES

28,700 49,932

NET POSITION: NET INVESTMENT IN CAPITAL ASSETS

44,179

RESTRICTED—DEBT SERVICE

2,210

UNRESTRICTED

8,178

TOTAL NET POSITION

$ 54,567

(Note: Net Investment in Capital Assets=$45,259 beginning balance – $1,080 depreciation. Restricted—Debt Service=$2,123 beginning balance + $87 increase in debt service. Unrestricted=$6,598 beginning balance + $587 increase in unrestricted net position + $1,080 depreciation − $87 increase in debt service.)

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Exercise 9-26 (Cont'd)

TOWN OF FREAZ STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2023 (000s OMITTED) NET (EXPENSES) REVENUES AND CHANGES IN NET POSITION S

PROGRAM REVENUES

EXPENSES

CHARGES FOR SERVICES

GENERAL GOVERNMENT

$ 2,468

$ 4,411

PUBLIC SAFETY

11,577

996

PUBLIC WORKS

5,311

CULTURE & RECREATION

1,817

FUNCTIONS

OPERATING CAPITAL GRANTS AND GRANTS AND CONTRIBUTIONS CONTRIBUTIONS

GOVERNMENTAL ACTIVITIES

PRIMARY GOVERNMENT:

INTEREST ON DEBT

307

$ 2,250 (10,581) $ 1,680

359

(3,631) (1,458)

749

(749)

TOTAL GOVERNMENTAL

______

_____

______

ACTIVITIES

$21,922

$ 5,766

$ 307

$ 1,680

(14,169)

GENERAL REVENUES: PROPERTY TAXES LEVIED FOR GENERAL PURPOSES

13,665

INTEREST & PENALTIES ON DELINQUENT TAXES

746

INTEREST INCOME

345

TOTAL GENERAL REVENUES

14,756

INCREASE IN UNRESTRICTED NET POSITION

587

NET POSITION, JULY 1, 2022

53,980

NET POSITION, JUNE 30, 2023

$54,567

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Exercise 9-26 (Cont’d)

General Problem Information: Government-wide financial statements Learning Objective: 9-4 Topic: Preparation of Basic Financial Statements Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard 9-27.

ACCOUNT AFFECTED

MODIFIED ACCRUAL/ ACCRUAL ACCOUNT

ADJUSTMENT Debit Credit

DEPRECIATION EXPENSE

ACCRUAL

674,300

BUILDINGS & EQUIPMENT

ACCRUAL

SALARY EXPENSE

ACCRUAL

SALARIES PAYABLE

ACCRUAL

BUILDINGS & EQUIPMENT

ACCRUAL

EXPENDITURES

MODIFIED ACCRUAL

NOTES PAYABLE

ACCRUAL

50,000

ACCRUAL

1,125

ACCRUAL

1,125

674,300

39,123 39,123

29,049 29,049

ACCRUED INTEREST PAYABLE INTEREST EXPENSE

EXPENDITURES—PRINCIPAL MODIFED ACCRUAL

50,000

EXPENDITURES—INTEREST MODIFIED ACCRUAL

2,250

INTERNAL BALANCES

ACCRUAL

DUE FROM OTHER FUNDS

MODIFED ACCRUAL

DUE TO OTHER FUNDS

MODIFIED ACCRUAL

INTERNAL BALANCES

ACCRUAL

480 480

950 950

Chapter 09 - Financial Reporting of State and Local Governments

Ch. 9, Solutions, Exercise 9-27 (Cont’d)

General Problem Information: Modified accrual to accrual accounting Learning Objective: 9-5 Topic: Other Financial Reporting Issues and Topics Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard

Chapter 10 - Analysis of Government Financial Performance

CHAPTER 10:

ANALYSIS OF GOVERNMENT FINANCIAL PERFORMANCE OUTLINE

Number

Topic

Type/Task

Status (re: 18/e)

Identify, define Define, explain Identify, explain Identify, explain

Same Same New Same

10-5 10-6 10-7 10-8 10-9 10-10 10-11

Economic condition Financial Trend Monitoring System Financial condition Financial Trend Monitoring System and citizens Economic condition and ratio analysis Organizational factors in the FTMS Pension plan funding Financial performance evaluation Electronic Municipal Market Access Benchmarking Credit rating agencies

Explain, relate Explain Explain Explain Define, explain Explain Identify, explain

Same Same Same New Same Same Same

Cases: 10-12 10-13 10-14 10-15

EMMA Financial analysis Financial analysis Financial analysis

Research Analyze Analyze Analyze

Revised New New New

Exercises/Problems: 10-16 Examine the CAFR 10-17 Various

Analyze Multiple Choice

10-18 10-19 10-20 10-21

Matching Evaluate Analyze Calculate

Revised Items 2, 5, 10, 11, 12, 14 revised. Items 4, 9 new. Revised Same Revised Revised

Questions: 10-1 10-2 10-3 10-4

Financial condition Benchmarks Financial analysis City of Arborland financial ratios

Chapter 10 - Analysis of Government Financial Performance

CHAPTER 10:

EVALUATION OF GOVERNMENT FINANCIAL PERFORMANCE

Answers to Questions

10-1. The GASB identifies economic condition as a composite measure that comprises three components: financial position, fiscal capacity, and service capacity. Financial position is the status of the items on the government’s balance sheets and statements of financial position. It relates to questions such as, “What is the value of the government’s assets or its liabilities?” Fiscal capacity is the government’s ongoing willingness and ability to meet its financial obligations as they become due. It relates to questions such as, “Is the government willing and able to pay its bills when they are due?” Service capacity refers to the government’s ongoing willingness and ability to meet commitments and provide services. A question related to service capacity might be, “Is the government maintaining streets?” General Problem Information: Economic condition Learning Objective: 10-2 Topic: Government Financial Reporting Concepts Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry Level of Difficulty: Easy 10-2. The Financial Trend Monitoring System (FTMS) is a tool developed by the International City/County Management Association (ICMA) that can be used to help governments track financial performance. The FTMS tool provides a large number of quantifiable indicators for different environmental, organizational and financial factors that can be used to monitor financial performance over time. General Problem Information: Financial Trend Monitoring System Learning Objective: 10-3 Topic: Internal Financial Trend Monitoring Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry Level of Difficulty: Easy 10-3. Financial position is generally viewed as a short-term concept that focuses primarily on a government’s liquid position. As such, emphasis is on cash and assets that can be converted to cash in the near future and liabilities that will require cash in the near future. Economic condition is broader in scope and includes not only financial position but also a government’s fiscal capacity and its service capacity. Therefore, economic condition focuses not only on the short-term but also the government’s ongoing capacities.

Chapter 10 - Analysis of Government Financial Performance

Ch. 10, Answers, Question 10-3 (Cont’d)

General Problem Information: Financial condition Learning Objective: 10-2 Topic: Government Financial Reporting Concepts Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry Level of Difficulty: Medium 10-4. As part of community needs and resources in Illustration 10-1 of the chapter several citizen characteristics are identified that can impact the government’s financial condition. Some of the characteristics include age, income, employment, and home ownership/property values. These characteristics can impact both the demand for services and ability to provide services. For example, the age of the citizenry can impact the need for schools, public safety, and perhaps the types of parks and recreation facilities. Additionally, it may impact the business climate given that the age of the population can affect the types of businesses establishing in a location. The income level of the citizens affects the demand for services and the ability to provide services. Lower income and unemployed individuals generally have a greater need for government services but are unable to provide the resources necessary for the services. The higher and more stable the employment rate among citizens the greater the business activity, which also helps contribute to higher and more stable government revenues. Higher levels of home ownership and high property values help generate revenues for those governments that rely on property taxes to fund services. Additionally, the revenues associated with home ownership generally tend to be a more stable and reliable source of revenues for governments. The citizen characteristics tend to be interrelated—i.e., income, employment and home ownership. General Problem Information: Financial Trend Monitoring System and citizens Learning Objective: 10-3 Topic: Internal Financial Trend Monitoring Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry Level of Difficulty: Medium 10-5. Ratios constructed from governmental fund financial statement information would reflect the modified accrual basis of accounting. Modified accrual focuses on the current sources and uses of funds. Since the focus is on cash and near-cash resources that will be available to expend in the current period, ratios constructed using the governmental fund information cannot provide information on long-run solvency or the ability of the government to meet its financial obligations and service commitments into the future (fiscal capacity and service capacity). General Problem Information: Economic condition and ratio analysis Learning Objective: 10-4 Topic: Analyzing Government-wide Financial Statements Bloom’s Taxonomy: Understand 10-3 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 10 - Analysis of Government Financial Performance

Ch. 10, Answers, Question 10-5 (Cont’d)

Accreditation Skills tag: AACSB: Communication, AICPA: BB Reporting Level of Difficulty: Easy 10-6. Organizational factors, such as management practices and legislative policies, play a crucial role in determining fiscal policy. If sound management policies are in place, then the financial problems that might arise from economic downturns or natural disasters can be minimized. Sound financial policies that plan for adverse environmental events and focus on long-term strategies for meeting government goals are critical determinants of strong financial condition. General Problem Information: Organizational factors in the FTMS Learning Objective: 10-3 Topic: Internal Financial Trend Monitoring Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry Level of Difficulty: Medium 10-7. Yes, citizens should consider a decrease in the ratio of the fiduciary net position to total pension liability from year to year to be a warning sign. Generally accepted accounting principles require display and disclosure of pension information, but do not prescribe the funding levels, so a decrease in the pension plan funding measure over time is not a violation of GAAP. The value of plan assets may fluctuate with changes in the value of investments of the plan, so the value of the fiduciary net pension amount does not reveal direct information about contributions that have been made to the plan. However, citizens, particularly those who are employees of the government, will likely view a decreasing ratio of fiduciary net position to total pension liabilities as a trigger to look for more information (usually in the notes to the financial statements) about the funding status of the pension plan and its ability to meet future obligations. General Problem Information: Pension plan funding Learning Objective: 10-4 Topic: Internal Financial Trend Monitoring Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 10-8. The reason for the importance of evaluating government performance can vary across stakeholders; however, having open and transparent financial information that allows for evaluation is critical regardless of the reason for evaluation. For creditors, evaluation of financial performance is necessary to ascertain whether the government is be able to meet debt obligations as they come due. Evaluation is also important when a creditor is considering extending credit to a government entity since it can help the creditor determine whether the government is an acceptable credit risk (will have the capacity to

Chapter 10 - Analysis of Government Financial Performance

Ch. 10, Answers, Question 10-8 (Cont’d)

repay future debt and meet interest payment obligations). Citizens, as taxpayers and users of government services should evaluate government financial performance to ensure tax dollars are being spent appropriately and efficiently to provide the services needed. Oversight entities with the responsibility of monitoring governments should regularly evaluate government financial performance as a necessary part of their government assessment. General Problem Information: Financial performance evaluation Learning Objective: 10-1 Topic: The Need to Evaluate Financial Performance Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 10-9. EMMA is the Electronic Municipal Market Access, which is operated by the Municipal Securities Rulemaking Board. EMMA is a free online service that is available to investors or other users who are interested in learning more about the municipal securities market and accessing information on specific state or local government debt issues. A person might want to use EMMA to check on a debt issue he/she is interested in purchasing. Someone may also want to follow a debt issue once he/she has purchased it. Issuers are required to file continuing disclosure documents once debt is issued. Continuing disclosures include financial reports and event disclosures such as defaults, rating changes, and significant bond calls, among others. General Problem Information: Electronic Municipal Market Access Learning Objective: 10-5 Topic: Use of Benchmarks to Aid Interpretation Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry Level of Difficulty: Medium 10-10. The most common type of benchmarking in government is the comparison over time of the government to itself. According to the Government Finance Officers’ Association a government’s past performance is the most relevant basis for considering the current year performance. This is due to the fact that it is difficult to find comparable governments. Governments tend to be quite diverse in the services offered, the population served, and the political and geographic environments in which they operate. General Problem Information: Benchmarking Learning Objective: 10-5 Topic: Use of Benchmarks to Aid Interpretation Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry Level of Difficulty: Easy 10-5 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 10 - Analysis of Government Financial Performance

10-11. Municipal bond rating agencies each have established criteria to conduct a bond rating analysis. Although there is some difference in the criteria, they all give considerable weight to the economy. Other factors that are common in the rating process are management, debt, and some aspect of finance (this could include liquidity, budget, and other more specific items). The factor over which management has the least control is the economy. Although management cannot control the economy its ability to plan and adapt to changes in the economy is important. Changes in the economy can impact both the government’s ability to generate revenues and its expenditure levels. If an economy is depressed, revenues derived from underlying transactions (e.g., sales and income taxes) can be severely depressed. Additionally, as unemployment increases in an economic downturn, there is an increased demand for services, driving up expenditures. This combines with decreased revenues, putting a strain on the government’s ability to provide the resources needed to meet the increased expenditure demand of its citizens. Thus, government planning to ensure the existence of adequate “rainy day” funds becomes important. General Problem Information: Credit rating agencies Learning Objective: 10-5 Topic: Use of Benchmarks to Aid Interpretation Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry Level of Difficulty: Medium Solutions to Cases 10-12. a.

1. An official statement is a document prepared in connection with a primary offering that includes information regarding the purposes of the issue, how the securities will be repaid, and the financial and economic characteristics of the issuer of the debt with respect to the security offering. (Found in the glossary of municipal securities terms.) 2. Typically audited annual financial reports are provided as part of the official statement; however, the audited financial report is not a required component of the official statement. (Found in For Investors: The Basics of a Municipal Bond Issuer’s Audited Financial Reports.) b. The answers for questions 1–4 will vary widely, depending on the city selected by the student. Information for the four questions is easily available once a debt issue is selected. The student should keep in mind that not all state and local governments opt to pay for a credit rating for their debt issue. Students should be able to tell if the initial issue of a debt maturity was sold at premium or discount by looking at the initial price. If the value provided is over 1.00 the issue sold at premium; whereas, if the value is below 1.00 the issue sold at discount. Students may not recognize the term CUSIP. CUSIP is a unique identifier that is assigned to each maturity of a bond issue. Students can find this definition by going to the EMMA glossary.

Chapter 10 - Analysis of Government Financial Performance

Ch. 10, Solutions, Case 10-12 (Cont’d)

General Problem Information: EMMA Learning Objective: 10-5 Topic: Use of Benchmarks to Aid Interpretation Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Leveraging Technology Level of Difficulty: Medium 10-13. a. Following is a narrative of some of the indicators that students may address. However, the indicators are not exhaustive, and students may include additional information. As can be seen, three ratios that students can construct that are helpful in the analysis are the liquidity ratio, the intergovernmental revenues percent, and the revenues over expenditures ratio or percent. The trend in liquidity is interesting, for several periods during the ten years, Flint has had a dangerously low level of liquidity. Liquidity increased sharply during the 2013 to 2017 time period, the period that coincides with a sharp increase in the debt limit used. This indicates that the liquid position was improved as a result of an increasing debt burden. However, it should be noted that again in the most recent time period, 2018, liquidity is very low at a 0.19. Despite its high debt position, the debt service level remains quite low and well within what is considered to be an acceptable range based on information in Illustration 10-3. Additionally, the debt per capita has been trending downward, even as the debt limit used has grown over time. Given the large amount of debt that must be outstanding based on the debt limit used, it would be interesting to see just what debt is outstanding and when the debt will be coming due. Since 2012 the City of Flint has been able to generate sufficient revenues to cover its operating expenditures, however, it will be noted that Flint relies heavily on intergovernmental revenues. Eight out of the ten years analyzed show that intergovernmental revenues accounted for over 40 percent of the total governmental revenues. The General Fund balance is becoming increasingly healthy, having gone from six negative balance years, to increasing positive fund balances over the last four years. There are large amounts of fund balances that are restricted for special revenue funds and capital projects. These restrictions decrease Flint’s flexibility in using its resources.

Chapter 10 - Analysis of Government Financial Performance

Ch. 10, Solutions, Case 10-13 (Cont’d)

Year

Liquidity

2018 2017 2016 2015 2014 2013 2012 2011 2010 2009

0.19 4.26 3.52 2.62 2.08 1.58 0.32 0.10 0.19 0.67

Intergovt’l Revenue 43.8% 41.6% 47.9% 27.4% 42.7% 45.1% 46.8% 42.8% 42.8% 37.6%

Revenues over Expenditures 106.4% 107.0% 105.7% 99.2% 109.8% 110.3% 87.7% 98.7% 84.1% 95.5%

Debt Limit Used 57.63% 62.24% 66.09% 41.87% 53.82% 52.95% 13.30% 11.82% 10.66% 9.40%

Debt Service 4.46% 3.97% 3.81% 3.10% 2.98% 2.16% 1.74% 2.62% 3.03% 3.26%

b. Based on the information provided and in response to the warning indicators the following is provided: 1. There is not a consistent decline in revenue; therefore, this is not a warning indicator. However, a review of the statistical section of the CAFR indicates that since 2009, taxable valuation of properties has declined by over half. Such a serious decline in property values is a warning sign. 2. There has actually been an increase in tax collection rate over the past three years; however, the collection rate is still well below 92 percent, and has been for the last seven years, which is a warning sign. 3. As discussed, expenditures are not growing faster than revenues in that revenues to expenditures ratios have been improving and the General Fund fund balances have not been in a deficit situation in the last four years. 4. The debt per capita ratio is decreasing, although short-term debt (current liabilities) has been increasing over the past three years, which is a warning sign. 5. A review of the statistical section shows that the funded ratio for pension plans is 36.3 percent in 2017, declining every year for the past 10 years and well below any benchmark for what would be considered acceptable. Such a low ratio is a red flag. 6. A decline in economic activity – economic indicators tend to be weak. The population has been trending down over the past 10 years. The unemployment rate is trending downward, which is a good sign, but remains high at 9.5 percent in 2017, which is a poor sign. Per capita income has been declining over the past 10 years. 7. Students will have different views on Flint’s financial condition. It certainly isn’t in a strong financial condition and how the city performs once it has weathered its current water crisis will help determine whether Flint is again under the watchful eye of an emergency manager. General Problem Information: Financial analysis Learning Objective: 10-3 Learning Objective: 10-4 Topic: Internal Financial Trend Monitoring, Use of Benchmarks to Aid Interpretation Bloom’s Taxonomy: Analyze

Chapter 10 - Analysis of Government Financial Performance

Ch. 10, Solutions, Case 10-13 (Cont’d)

Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: BB Critical Thinking Level of Difficulty: Hard 10-14. a. The Mercatus Center, founded in 1980, is a not-for-profit organization at George Mason University. The focus of the Mercatus Center is on the markets, with its emphasis on bridging the gap between academic research and public policy problems. The Center funds researchers focusing on the market, government entities and not-for-profit institutions. (Found in Learn About Us under the drop-down hamburger button.) b. The answers to the four questions listed will depend on the state the student selects 1. States are ranked from 1 to 50, with 1 being the best fiscal rank and 50 the worst. 2. The five categories on which the fiscal ranking is based are: • Cash solvency – cash to cover short-term liabilities • Budgetary solvency – current year spending covered by current year resources • Long-run solvency – sufficient assets to cover potential economic or other shocks or long-term financial risk • Service level solvency – assessment of how high taxes are relative to personal income to determine if there is “fiscal slack,” that is could revenues be raised without harming the state economy. • Trust fund solvency – measures the pension and OPEB liabilities relative to personal income. 3. Mercatus will provide an analysis of where the state ranked on the above factors. Those states that have overall strong rankings may not have a weak factor identified; conversely those with weak rankings may not have a strong factor identified. 4. A ten-year graph is provided for four ratios related to the fiscal factors. The students should analyze the trends to see if the state has been improving or declining for the ratios provided. An analysis of the trend ratios should help the student identify whether the fiscal ranking for the current period appears to be a trend, or if the ranking for the current period seems to be somewhat unique relative to other years. General Problem Information: Financial analysis Learning Objective: 10-2 Learning Objective: 10-5 Topic: Government Financial Performance Concepts, Use of Benchmarks to Aid Interpretation Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: BB Critical Thinking Level of Difficulty: Hard

Chapter 10 - Analysis of Government Financial Performance

10-15. a. At the time this solution was prepared the five risk factors were cash position/liquidity, debt burden, financial reserves, revenue trends and retirement obligations. b. Based on the 2016-2017 data on which the analysis was based at the time this solution was prepared the cities were Compton, Atwater, Blythe, Lindsay, and Calexico. c. Liquidity, debt burden, and General Fund reserves. d. The answers to following will be driven by the interactive map selections. 1. A city need only earn 71.24 points to be considered low risk, and it must only earn 41.77 points before it is moved out of the high-risk category and considered moderate risk 2. Student responses to this question will vary by the city selected. Students will find that although a city can have the same overall risk assessment, the financial indicators driving the level of risk can be very different. For example, both San Francisco and San Diego are identified as moderate risk, but the indicators that are contributing to their lower performance are different. For example, San Francisco is identified as low risk for pension funding, but San Diego is considered high risk. Both governments are high risk with regard to debt burden, whereas only San Diego is considered a high risk for General Fund reserves. San Diego has lower performance scores on four of the indicators than does San Francisco, with San Francisco not having any ratings lower than San Diego. General Problem Information: Financial analysis Learning Objective: 10-4 Learning Objective: 10-5 Topic: Analyzing Government Financial Statements, Use of Benchmarks to Aid Interpretation Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: BB Critical Thinking Level of Difficulty: Medium Solutions to Exercises and Problems 10-16. The specific solution to this exercise will depend on which city's CAFR is evaluated. Generally, the analysis for each ratio should follow the approach shown in Illustrations 10-3 and 10-4. Each student should present a well-organized and well written paper, detailing his or her analysis and conclusions. We recommend grading on the basis of both the quality of the written presentation and the quality and depth of the analysis, with the balance between these factors to be determined by each instructor. Regarding the analysis, the authors suggest placing some importance on the amount and quality of the graphical or tabular data support the student provides for his or her conclusions. Students should be encouraged to be judicious in selecting data to portray and should be discouraged from simply copying exhibits from the CAFR.

Chapter 10 - Analysis of Government Financial Performance

Ch. 10, Solutions, Exercise 10-16 (Cont’d)

General Problem Information: Examine the CAFR Learning Objective: 10-3 Learning Objective: 10-4 Topic: Use of Benchmarks to Aid Interpretation Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Measurement and Reporting Level of Difficulty: Hard 10-17. 1. 2. 3. 4. 5.

b. c. c. b. a.

6. 7. 8. 9. 10.

b. c. c. d. a.

11. 12. 13. 14. 15.

d. d. b. a. c.

General Problem Information: Various Learning Objective: 10-1 Learning Objective: 10-2 Learning Objective: 10-3 Learning Objective: 10-5 Topic: Various Chapter Topics Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB Critical Thinking Level of Difficulty: Medium 10-18. a. − f. + k. − b. − g. − l. − c. + h. + (see note) m. + d. − i. + n. + e. + j. − o. NE (see note) Note: Increasing fund balances are generally viewed as a positive; however, excessively large fund balances can indicate a management issue. The effect of birthrate on financial condition should have no short-term impact. General Problem Information: Financial condition Learning Objective: 10-4 Topic: Internal Financial Trend Monitoring Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application AICPA: FN Measurement Level of Difficulty: Medium

Chapter 10 - Analysis of Government Financial Performance

10-19. a. Here is a graphical presentation of the Town of Oakdale compared to three reference groups, other Aaa-rated municipalities in the same state, 11 other comparable municipalities in a reference group (RG) in the state, and the state median for two financial measures: total revenue and revenue per capita.

$ of Total Revenue

FY Total Revenue

200,000,000 150,000,000 100,000,000 50,000,000 0 Oakdale

Aaa-Rated Median

Comparison RG Median

State Median

Comparison Groups

$ of Revenue per Capita

FY Revenue per Capita 3500 3000 2500 2000 1500 1000 500 0 Oakdale

Aaa-Rated Median

Comparison RG Median

State Median

Comparison Groups

Chapter 10 - Analysis of Government Financial Performance

Ch. 10, Solutions, Exercise 10-19 (Cont’d)

Oakdale has a much higher amount of total revenue for the fiscal year than its reference groups’ medians, most notably larger than the state median. Oakdale’s revenue per capita, however, is only slightly higher than each of the benchmark groups’ medians. Based on this financial measure alone, Oakdale appears to be performing as well in terms of sources available to finance government services as its comparison groups.

Students should refer to Illustrations 10-3 and 10-4 in the text for examples of other measures that would add valuable information to an assessment of overall financial condition of the city. If students obtained a CAFR for a government to use for the “Examine the CAFR” exercise in each of the preceding chapters, they should investigate whether the government uses the Financial Trend Monitoring System and, if so, whether it makes public how the government compares to other governments. General Problem Information: Financial trends Learning Objective: 10-4 Learning Objective: 10-5 Topic: Analyzing Government Financial Statements, Use of Benchmarks to Aid Interpretation Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making Level of Difficulty: Hard

10-20. a. At 0.98 the total revenues over total expenditures ratio for 2023 indicates a below average position. The city is not quite covering its expenditures for the year with the revenues it is generating. A deficit of 2.9 percent is a weak indicator; however, because it is less than a negative 5 percent it is not considered abnormally large when considered within the context of a single year. The indication from this ratio is that the city was unable to cover General Fund operating expenditures with current period operating revenues. Although the General Fund is operating at a deficit in the current year, the fund balances ratio of 15.5 percent indicates there are adequate reserves available to fund the deficit. At 15.5 percent the General Fund balance is considered adequate. The liquidity ratio of 1.95 is somewhat weak with regard to the city’s ability to adequately cover its current liabilities, given that it is in the range of 1.0-2.0, which is considered a warning sign range. At 7.9 percent the current liabilities ratio is high, indicating weak performance. According to industry benchmarks a ratio of 5 percent or higher is a warning sign. Debt service is also high at 19.1 percent, given that a ratio of greater than 20 percent is considered a warning sign. This should be considered a somewhat weak indicator. The city will want to reduce its debt so it is able to free revenues for other purposes. b.

Over the time period the city has improved its revenues over expenditures ratio, moving from weak performance at 0.90 in 2020 to 0.98 in 2023. The city has been consistently trending up over the past four years; however, it has not been able to cover its expenditures with revenues since 2019. There is also improvement in the General Fund

Chapter 10 - Analysis of Government Financial Performance

Ch. 10, Solutions, Exercise 10-20 (Cont’d)

operating deficit position, moving from a negative 4.9 percent in 2020 to a negative 2.9 percent. The consecutive years of improvement is a strong indicator; however, the fact the city is still operating at a deficit is a weak indicator. Once again, the city has not seen a positive indicator since 2019. General Fund balance ratio has increased since 2022, a favorable indicator. Although remaining in the adequate General Fund Balance range, the trend up until 2023 had been a decrease in the General Fund balance ratio. The liquidity ratio has been improving since 2020, when a severe decline in liquidity had occurred. It remains in the warning range of 1.0-2.0. The current liabilities ratio has been high throughout the five-year period, always at a warning level of 5 percent or greater. Debt service has improved since 2022, decreasing from a value of 20.8 percent to 19.1 percent. However, it is over 200 percent higher than in 2020 and 2019, indicating weak performance. c.

Students should generally find that the city is weakly performing, while struggling to trend upward. Generally, the City of Alma has been trending in a positive direction; however, there are still many weak performance indicators.

Students will come up with several different answers to this question. However, some factors not included in the table but which would impact financial performance include: environmental factors (community demographics, political culture, how the economy is impacting Alma); organizational factors (management practices and experience); financial factors such as revenue diversity, long-term debt structure, and unfunded liabilities. Several students may indicate 2020 could have seen the impact of the COVID19 pandemic. General Problem Information: Financial analysis Learning Objective: 10-3 Learning Objective: 10-4 Topic: Internal Financial Trend Monitoring, Analyzing Government Financial Statements Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making Level of Difficulty: Hard

10-21. a. The performance measures shown in Illustration 10-4 use data from the basic financial statements, which includes the government-wide financial statements as well as the fund financial statements. The measures that can be calculated using the government-wide financial statements presented in this case are: 1. 2. 3. 4. 5.

Unrestricted net position Debt ratio Current ratio Change in net position Interperiod equity

Chapter 10 - Analysis of Government Financial Performance

Ch. 10, Solutions, Exercise 10-21 (Cont’d)

6. Business-type activities self-sufficiency 7. Capital asset condition Measures (8) bonded debt per capita, (9) available debt limit, and (10) property taxes per capita can be calculated using the additional data on population and debt limit presented in this case. b. City of Arborland Government-wide Financial Performance Measures

2023 Calculations (see Ill. 10-4 for definition of ratios) Ending Governmental activities: unrestricted net 3,597 position as a % of 20,302+3,860+1,886+495 annual revenue Business-type activities: 2,546 5,218+7 Debt ratio (total Governmental activities: liabilities as a % 19,266 of total assets) 34,040 Business-type activities: 7,167 14,740 Current ratio Governmental activities: 8,299 3,366 Business-type activities: 2,966 667 Change in net 22,347 – 17,447 position from the prior year (governmental and business-type activities total)

2023 2022 2021 ($ or % or number of times)

14%

11%

49%

27%

66%

57%

61%

68%

49%

61%

57%

2.47 times

3.70 times

1.90 times

4.45 times $4,900

4.43 times $3,220

5.36 times $3,867 (change in total net position from 2021 statement of activities)

Chapter 10 - Analysis of Government Financial Performance

Ch. 10, Solutions, Exercise 10-21 (Cont’d)

10.

Interperiod equity (number of times revenue exceeds expenses) BTA selfsufficiency

Governmental activities: 20,302+3,860+1,886 +495-100 23,973 for BTA see next ratio 5,218 2,895

Capital asset condition (% of useful life left in depreciable capital assets)

Governmental activities: 15,039 (37,683+37,600)/2* Business-type activities: 5,782 (17,775+14,455)/2* Governmental activities: 15,900,000 28,420

Bonded debt per capita

Available legal debt limit (remaining % of debt limit available) Property taxes per capita

Governmental activities: 15,900,000 20,000,000

Governmental activities: 17,296,000** 28,420

1.10 times

1.16 times

1.15 times

1.80 times

1.00 times

1.41 times

40%

43%

50%

36%

60%

50%

$559.47 $597.36

$602.87

79.5%

84.5%

79.5%

$608.59 $481.39

$496.70

* Insufficient information is available (i.e., the beginning of the year balance of depreciable assets) to calculate average depreciable assets for the year 2021. Thus, for 2021, the end of year balance was used in the denominator of the ratio. ** Actual property tax levy information was not provided, property tax revenues was used instead.

Chapter 10 - Analysis of Government Financial Performance

Ch. 10, Solutions, Exercise 10-21 (Cont’d)

The City of Arborland appears to be in a fairly strong financial condition based on the following interpretations of the ratios calculated for part b: Unrestricted net position has been positive and above 5 percent each of the three years in both governmental and business-type activities; the debt ratio is somewhat high but has been trending down; the current ratio indicates that the government is liquid and can pay its current liabilities; the change in net position increased over the prior year; interperiod equity and selfsufficiency ratios are all above 1 indicating revenues exceed expenses; capital assets still have at least half of their useful lives to go; there is still capacity to issue more debt if needed. General Problem Information: Financial trends Learning Objective: 10-4 Topic: Analyzing Government-wide Financial Statements Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Measuring Level of Difficulty: Hard

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

CHAPTER 11:

AUDITING OF GOVERNMENT AND NOT-FORPROFIT ORGANIZATIONS OUTLINE

Number

Topic

Type/Task

Status (re: 18/e)

Questions: 11-1 11-2 11-3 11-4 11-5 11-6 11-7 11-8 11-9 11-10

Definition of audit, standard setters GAGAS audit services GAGAS versus GAAS Opinion units GAAP hierarchy Single Audit guidance Use of auditing standards Supplementary information Independence under GAGAS Single Audit

Define, explain Define Explain Explain Explain Explain Compare Explain Remember Explain

Same Same 11-8 Same Same Revised New New Same Same

Cases: 11-11 11-12 11-13 11-14 11-15 11-16 11-17

Audit engagement Audit considerations Research Case⎯Performance Audit Research Case⎯Single Audit Auditing a federal program Auditor selection and independence NFP audit requirements

Apply Apply Apply Apply Apply Apply Analyze

Revised Same Same Same Revised Same New

Exercises/Problems: 11-18 Examine the CAFR 11-19 Various

Understand Understand

11-20 11-21 11-22 11-23 11-24 11-25

Apply Evaluate Apply Apply Understand Analyze

Revised Items 2, 3, 10 new. Items 1, 5, 11 revised. New Revised Revised Same Revised Revised

GAGAS Nonaudit services Single audit Single audit GAAS versus GAGAS standards Audit report

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

CHAPTER 11:

AUDITING OF GOVERNMENT AND NOT-FORPROFIT ORGANIZATIONS

Answers to Questions 11-1. An audit involves an independent review of information or processes by an external party for the purpose of evaluating the validity and reliability of information or assessing a program or process. The purpose of a financial audit is to express an opinion or provide assurance for users of the financial statements that the statements have been prepared in conformity with accounting and financial reporting standards established by authoritative bodies. Auditing standards for financial audits of government and not-for-profit organizations are referred to as generally accepted auditing standards (GAAS) and are set by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA). If required by statute, audit contract, or to satisfy a single audit, the auditor may also be required to follow generally accepted government auditing standards (GAGAS), set by the Government Accountability Office. General Problem Information: Definition of audit, standard setters Learning Objective: 11-1 Topic: Financial Audits by Independent CPAs Bloom’s Taxonomy: Define, Explain Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 11-2. Government Auditing Standards define three major types of services performed by auditors: financial audits, attestation engagements, and performance audits. Financial audits provide an auditor’s opinion that financial statements present fairly an entity’s financial position, changes in financial position, and where applicable, cash flows in conformity with generally accepted accounting principles, and informs users that they can rely on that information. Attestation engagements are examinations, reviews, or agreedupon procedures on subject matter that provide various levels of assurance on financial or nonfinancial matters depending upon the user’s needs. Performance audits provide an auditor’s independent assessment (but not an opinion) of the extent to which government officials are efficiently, economically, and effectively carrying out their responsibilities. General Problem Information: GAGAS audit services Learning Objective: 11-2 Topic: Government Auditing Standards Bloom’s Taxonomy: Define Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

11-3. GAGAS is the acronym for generally accepted government auditing standards (also referred to as GAS), the standards set forth by the Comptroller General in Government Auditing Standards. GAAS is the acronym for generally accepted auditing standards established by the AICPA. As covered in this chapter, GAAS enable an auditor to express an opinion on the financial statements. GAGAS cover not only financial audits, but also cover attestation engagements and performance audits (e.g., operational audits to assess the efficiency and effectiveness of an organization). In effect, GAGAS are broader than GAAS and generally encompass and expand on the AICPA’s generally accepted auditing standards. GAGAS are required to be used for a single audit engagement but may also be required by contract or law to be used for a financial statement audit. General Problem Information: GAGAS versus GAAS Learning Objective: 11-2 Topic: Government Auditing Standards Bloom’s Taxonomy: Explain Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 11-4. An opinion unit is related to the financial reporting structure of governments. Opinion units include governmental activities, business-type activities, aggregate discretely presented component units, each major governmental and enterprise fund, and the aggregate remaining funds. Auditors need to be familiar with the number of client opinion units since the auditor is required to opine on each unit. Because an opinion is needed on each unit, GAAS requires that materiality determinations be made for each opinion unit. The number of opinion units affects the complexity, time, and cost of an audit. General Problem Information: Opinion Units Learning Objective: 11-1 Topic: Materiality for Government Audits Bloom’s Taxonomy: Explain Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 11-5. Referring to Illustration 11-1, state and local governments and federal government entity financial reporting is governed by officially established accounting principles, including statements issued by the Governmental Accounting Standards Board (GASB) and the Federal Accounting Standards Advisory Board (FASAB), respectively. The FASAB also considers interpretations as Category (a) principles. Authoritative standards for nongovernment entities are set by the Financial Accounting Standards Board (FASB) and are included within the FASB Codification. If the accounting treatment for a transaction or event is not specified by a pronouncement, an accountant or auditor may refer to nonauthoritative accounting literature identified by the GASB, the FASB, or the FASAB. General Problem Information: GAAP hierarchy 11-3 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

Ch. 11, Answers, Question 11-5 (Cont’d)

Learning Objective: 11-1 Topic: The Audit Process Bloom’s Taxonomy: Explain Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 11-6. An auditor performing a single audit should be familiar with the unique purpose served by each of these resources. OMB Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) provides information and guidance for federal fund recipients and auditors regarding compliance with single audit requirements set forth in the Single Audit Act of 1984 (P.L. 98-502), as amended by Single Audit Act Amendments of 1996 (P.L. 104-156). An audit staff member would be most interested in subpart E, which covers scope of audit, audit reporting, audit findings, audit working papers, major program determination, criteria for federal program risk, and criteria for a low-risk auditee. While OMB Uniform Guidance is generic for all single audits, the Compliance Supplement provides specific audit requirements and suggested auditing procedures for each individual federal program. The Government Auditing Standards is much broader and provides auditing standards required to be followed when performing a single audit. General Problem Information: Single audit guidance Learning Objective: 11-3 Topic: Single Audit Bloom’s Taxonomy: Compare Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 11-7. Auditors of public for-profit organizations refer to auditing standards issued by the Public Company Accounting Oversight Board (PCAOB), while auditors of private for-profit organizations refer to generally accepted auditing standards (GAAS) issued by the Auditing Standards Board of the AICPA. Auditors of not-for-profit entities and governments would use either GAAS or generally accepted government auditing standards (GAGAS) issued by the Government Accountability Office. GAGAS are required to be used for single audits or when statutes or the audit contract and engagement letter specify them. In other cases, GAAS may be used for audits of not-forprofit entities and governments General Problem Information: Use of auditing standards Learning Objective: 11-1 Topic: Generally Accepted Auditing Standards Bloom’s Taxonomy: Compare Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Hard 11-4 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

11-8. It depends. Required supplementary information (RSI), such as the MD&A and budgetary comparison schedules, are outside the scope of the financial statement audit but are considered by the GASB to be essential to the financial report. Auditors apply certain limited procedures in connection with RSI and issue an opinion on whether the RSI is fairly presented in relation to the basic financial statements. Other items within government financial statements that are outside the scope of the financial statement audit can be deemed either supplemental information, for which an in relation to opinion may be issued, or other information, for which no opinion is issued. AU-C Sections 720, 725, and 730 cover auditor responsibilities regarding supplementary information that is included in a document containing audited financial statements. General Problem Information: Supplementary information Learning Objective: 11-2 Topic: Required Supplementary Information Bloom’s Taxonomy: Explain Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Hard 11-9. Government Auditing Standards, par. 3.81 identifies the following prohibited nonaudit activities considered management responsibilities that impair independence if performed by an independent auditor: a. setting policies and strategic direction for the audited entity; b. directing and accepting responsibility for the actions of the audited entity’s employees in the performance of their routine, recurring activities; c. having custody of an audited entity’s assets; d. reporting to those charged with governance on behalf of management; e. deciding which of the auditor’s or outside third party’s recommendations to implement; f. accepting responsibility for the management of an audited entity’s project; g. accepting responsibility for designing, implementing, or maintaining internal control; h. providing services that are intended to be used as management’s primary basis for making decisions that are significant to the subject matter of the audit; i. developing an audited entity’s performance measurement system when that system is material or significant to the subject matter of the audit; and j. serving as a voting member of an audited entity’s management committee or board of directors.

General Problem Information: Independence under GAGAS Learning Objective: 11-2 Topic: Ethics and Independence Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting 11-5 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

Ch. 11, Answers, Question 11-9 (Cont’d)

Level of Difficulty: Easy 11-10. When performing a single audit, federal awards programs are classified by risk. In Step 1, the larger (per the sliding scale presented in Chapter 11) federal programs are identified as Type A. All other programs are identified as Type B programs. In Step 2, any low-risk Type A programs are identified. This involves auditor judgment after fully considering the factors discussed in Chapter 11. In Step 3, Type B programs are risk assessed; however, the auditor is not expected to perform risk assessments on relatively small federal programs, defined as those measuring less than 25 percent of the Type A threshold. Also, the auditor is not required to identify more high-risk Type B programs than at least one fourth the number of low-risk Type A programs identified as low-risk under Step 2. At a minimum, the auditor should audit as major programs all high-risk Type A programs and all high-risk Type B programs identified under Step 3. As many major programs as necessary must be audited to ensure that at least 40% of total federal awards expended are audited. General Problem Information: Selecting Programs for Audit Learning Objective: 11-3 Topic: Selecting Programs for Audit Bloom’s Taxonomy: Explain Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

Solutions to Cases 11-11. This case addresses the issue of properly defining an audit engagement. In particular, students must assess whether a financial audit is sufficient, or whether an organization has expended sufficient federal awards to also require a single audit. It also provides an opportunity to discuss the process of accepting a new audit engagement, specifically the need to evaluate audit scope and to estimate preliminary audit planning prior to accepting an engagement and determining audit fee. These issues are addressed in the following solutions to the three requirements of the case. a.

Analysis of expenditures of federal awards shows that Lake View Mental Health Affiliates expended more than $750,000 in federal awards and therefore is required to have a single audit. Total expenditures of federal awards are determined as follows: Item 1. 2. 3. 4. 5.

Federal Awards Expended

Grant from City $ 75,000 (50% of $150,000 expended) Private gifts -0(not applicable) Medicare services -0(excluded) Pass through funds from County 300,000 Counseling services 400,000 (maximum) Total $775,000

Based upon the conclusion in part a and the information provided in the background, one could conclude that Mr. Wise would be unwise to accept this engagement for $10,000 – the going rate for a financial audit. A single audit conducted in accordance with GAGAS and OMB Uniform Guidance requires considerably more audit planning, audit work, and audit reporting than a financial statement audit conducted in accordance with GAAS. Also, as Mr. Wise notes in the case, an auditor should not accept an engagement at a given price before evaluating the extent of work that will be required. If he does accept the engagement, Mr. Wise should prepare an engagement letter stating that the audit will be a single audit to be conducted in accordance with GAAS, GAGAS, and OMB requirements. Ideally, the audit contract would specify Mr. Wise’s hourly billing rate and that of any audit staff and provide for payment based on actual hours of audit work performed. Personnel of a newly formed not-for-profit might not be familiar with single audit requirements, so it is Mr. Wise’s professional responsibility to communicate to Lake View’s management and audit committee (or, if no audit committee, to the governing board) that an audit in accordance with GAAS does not meet the legal and regulatory requirements established by the federal government for recipients who expend $750,000 or more in federal awards. 11-7

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

Ch. 11, Solutions, Case 11-11 (Cont’d)

Maybe. Mr. Wise would be required to reference the GAGAS conceptual framework for independence shown in Illustration 11-5. While the task of preparing routine tax filings was previously listed in the GAO’s Government Auditing Standards on independence as an example of a service that would not impair the independence of an auditor, in the current standards it is not clear whether providing tax services is prohibited or acceptable, so an auditor must use the conceptual framework for guidance.

General Problem Information: Single Audit Learning Objective: 11-1 Learning Objective: 11-3 Topic: The Audit Process, Determining Who Must Have a Single Audit Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 11-12. There is a great deal more information you will want before making your bid; however, some of the factors affecting price that you might have on your list include: 1. Number of major programs and component units. The larger the number of major programs, the more opinion units on which you will need to determine materiality and opine. An auditor should also consider whether the downtown development district is a component unit of the city for reporting purposes. 2. Predecessor auditor. When a prior auditor chooses not to pursue an audit engagement, it may indicate that there is an element of audit risk involved. An incoming auditor will want to determine whether there were disagreements between the prior auditor and management or the new administration. It also raises the question of whether there are problems that the previous audits failed to uncover and whether prior year work papers would be made available. 3. The amount of aid received from the federal government. If the city expends over $750,000 in federal funds, it is subject to a single audit, increasing the complexity of the audit. 4. The number of federal programs and the amount of funds expended by each program. The number and size of federal programs can affect the major programs selected for program compliance review, and thus the complexity of the audit. 5. Specifics of the former wastewater employee lawsuit and allegations of improper payments. These issues involve internal controls at the facility, potential illegal acts, and contingent liabilities to the city. Each of these areas impacts audit planning and fieldwork. 11-8 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

Ch. 11, Solutions, Case 11-12 (Cont’d)

6. In addition to the new administration and the lawsuit, other potential risk factors exist. The new controller is a CPA with government audit experience, which may help mitigate some risk. However, the controller is new to the culture and environment of the city government. Item 4 indicates that other risk factors could include a budgetary deficit and the adequacy of financial reserves. Risk factors can increase the amount of testing required, thus driving up the price. On the positive side, five months would provide adequate time for interim fieldwork. General Problem Information: Government audit considerations Learning Objective: 11-1 Learning Objective: 11-3 Learning Objective: 11-4 Topic: The Audit Process, Special Topics Related to Audits of Governments and Notfor-Profits Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 11-13. The objective of this case is to familiarize students with the nature of performance audits. Instructors may choose to specify an Oregon audit for review, such as the biennial one related to financial condition review of counties, or have students search for performance audits within their state or local governments rather than using the Oregon website. Instructors may also want to specify an expected length for the required memo or provide a grading rubric. Answers to parts a-c will vary with the performance report selected. Suggested answers are provided for the 2020 performance audit of Travel Oregon a. Title: Travel Oregon Should Strengthen Controls over Contracting and Improve Accountability of Compensation to Inform Decision Makers; Issued: February 2020; Conducted by: Secretary of State’s Audit Division b. The memo might describe that the objectives of the report were to determine if Travel Oregon has adequate processes in place to oversee contracts intended to fulfill the agency’s mission of strengthening the travel industry and to determine whether payroll expenditures are reasonable. The audit provided recommendations for stronger controls over contracting and management compensation. It also made recommendations regarding competitive bids and a consultant study on compensation.

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

c. Yes, Travel Oregon submitted a response at the end of the report. The CEO agreed with all recommendations and provided a target date to complete implementation activities. General Problem Information: Performance Audits Learning Objective: 11-2 Topic: Types of Audits and Engagements Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 11-14. The objectives of this case are to familiarize students with government audit resources available on the Internet and to illustrate the process for selecting major programs for audit using the risk-based approach. The following answers were obtained from the 2019 Compliance Supplement; note that programs can change annually. a. The Department of Health and Human Services sponsors the Child Care and Development Block Grant (CFDA 93.575); the Maternal, Infant, and Early Childhood Home Visiting Program (CFDA 93.870); and Head Start (CFDA 93.600). The National School Lunch Program (CFDA 10.555), School Breakfast Program (CFDA 10.553), and the Special Milk Program for Children (CFDA 10.556) are sponsored by the Department of Agriculture. The Special Education—Grants for Infants and Families (CFDA 84.181) is under the Department of Education. b. The three Department of Agriculture sponsored programs are part of the child nutrition cluster and can be treated as a cluster for audit purposes. c. Total expenditures are $1,581,261; therefore, the criterion for selecting a major Type A program would be $750,000 in federal funds expended. Head Start is the only program that meets this requirement. The Special Education grant at $25,000 falls below the threshold for assessment (25% of $750,000 = $187,500) and would be exempt from consideration based on its size. (The Department of Agriculture programs are below the threshold individually, but they should be considered together since they form a cluster.) d. Based on size alone, it would be reasonable to select the Head Start program. Head Start is a Type A program, and the resources expended are over 40% of those received by the entity. Since there are no indications of low-risk Type A programs, only the Head Start program would need to be audited.

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

Ch. 11, Solutions, Case 11-14 (Cont’d)

e. This is a difficult question. Notice that the only way the 40 percent coverage rule can be met is by auditing the Head Start program. One single audit problem that OMB and GAO have identified in the past relates to the same programs always being audited. This presents one situation where the auditor may continue to audit a lowrisk program just to meet single audit requirements. The auditor should analyze the auditee to determine if the auditee would qualify as a low-risk auditee. If the auditee is low-risk the auditor need audit only 20 percent of federal funds expended. The auditor must still select at least one-fourth the number of Type B programs for each low-risk Type A. Using the low-risk criterion, $316,252 ($1,581,261 × .20) of expended funds would need to be audited. To meet the requirements the auditor could select the childcare nutrition cluster and another program, or the Child Care and Development Block Grant and another program (i.e., to meet the $316,252 minimum). General Problem Information: Single audit and major programs Learning Objective: 11-3 Topic: Single Audit Requirements Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Hard 11-15. Although this case requires limited analysis, it is a useful exercise to give students a feel for the resources auditors use to test for compliance in performing single audits. The following answers were obtained from the 2019 Compliance Supplement; note that programs can change annually. a.

The Catalog of Federal Domestic Assistance (CFDA) number for this program is 10.516.

According to the Compliance Supplement, the Rural Health and Safety program addresses the health and well-being of rural America through supporting the development and/or implementation of projects focused on (1) individual and family health education programs with specified contents; (2) rural health leadership development education programs to assist rural communities in developing health care services and facilities and to assist community leaders and public officials in understanding their roles and responsibilities; and (3) farm safety education programs to provide information and training to farm workers, timber harvesters, and farm families.

Based on the matrix provided in Part 2 of the August 2019 draft of the Compliance Supplement, the description of compliance requirements in Part 3 of the Compliance Supplement, and the more detailed compliance requirements in Part 4, the following generic compliance requirements are applicable to the program. (Note: These are assigned the same identifying letters as shown in the Compliance Supplement.) 11-11

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

Ch. 11, Solutions, Case 11-15, c. (Cont’d)

A. B. C. F. L. M.

Activities Allowed or Unallowed Allowable Costs/Cost Principles Cash Management Equipment/Real Property Management Reporting Subrecipient Monitoring

d. The following answers are found under Activities Allowed or Unallowed. 1. Yes. This workshop appears to relate to a topic applicable to timber harvesters. It is noted that meals are not allowed for persons “not in travel status,” but the cost of registering for the meeting, and all travel-related costs, with the exception of alcoholic beverages, should be allowable. 2. It appears as though the cost of a picnic would be entertainment and not allowable. Meals for a person “not in travel status” are not allowable. Furthermore, “incentives” are not allowable. Some may believe the picnic is a means of incentivizing community members to use the cooperative extension department services. 3. No. Both general purpose equipment and renovation of extension space are not allowable. General Problem Information: Auditing a federal program Learning Objective: 11-3 Topic: Compliance Audits Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Medium 11-16. a. The seven threats found in GAGAS Section 3.30 are as follows: a. Self-interest threat – the threat that a financial or other interest will inappropriately influence an auditor’s judgment or behavior. b. Self-review threat – the threat that an auditor will not appropriately evaluate the results of a previous judgment made or service performed by the auditor, or the audit organization, on which the auditor will rely when forming a judgment significant to an audit. c. Bias threat – the threat that an auditor will, as a result of political, ideological, social, or other convictions, promote a position held by the auditor or the audited entity to the point that the auditor’s objectivity is compromised. d. Familiarity threat – the threat that due to a long or close relationship with management or personnel of an audited entity or employer, an auditor will be too sympathetic to their interests or too accepting of their work.

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

Ch. 11, Solutions, Case 11-16, a. (Cont’d)

e. Undue influence threat – the threat that external influences or pressures will impact an auditor or audit organization’s ability to make independent and objective judgments. f. Management participation threat – the threat that results from an auditor’s taking on the role of management or otherwise performing management functions on behalf of the entity undergoing an audit or attestation engagement. g. Structural threat – the threat that an audit organization’s placement within a government entity, in combination with the structure of the government entity being audited, will impact the audit organization’s ability to perform work and report results objectively.

Three of the seven threats could apply to this situation. Since the accounting firm put the accounting system in place, the auditor could be in a position of reviewing or evaluating his/her own work or set of controls (self-review threat). If the new auditor is familiar enough with the accounting system to have the ability to override controls, management participation threat could be a problem. Finally, if the personnel that implemented the accounting system change spent a great deal of time in the city offices, familiarity threat could also prove to be an issue. b.

A request for proposals for government audit services should describe accountingrelated characteristics of the government entity and detail the scope of audit services being requested, as well as the specific qualifications desired of audit firms responding to the RFP. An RFP should be widely dispersed to qualified audit firms and advertised in local business and professional periodicals. The introductory section typically includes information about the government entity and the audit. Some governments, primarily those with large, complex audits, require that a local or minority audit firm be subcontracted for portions of the audit. A section outlining the details of the audit should also be included. It will cover the scope of services contained in the proposal (financial audit, single audit, and any additional compliance auditing), the auditing standards to be followed (GAAS, GAGAS, or statemandated standards), reports to be issued, assistance to be provided to the auditor, and other considerations, such as working paper retention and access to working papers. The government seeking an audit should also be described in the RFP. Summary financial data (e.g., total revenues, number of funds, component units) and accounting function staff characteristics should be disclosed. Prospective auditors will also be interested in the availability of prior financial reports and records, including journal entries, as well as management letters issued and pension plan information. Engagement specifics, such as the timing of the audit, work schedules, estimated hours, prior year audit fees, and due date are also important. 11-13

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

Ch. 11, Solutions, Case 11-16, b. (Cont’d)

The government entity should also specify the required qualifications of the auditing firm, in terms of experience, staff size, licensing and training, and independence. References from other government audit clients and results of peer reviews might be requested. If available, evaluation criteria should be provided within the RFP. A solution this complete would require some research on the part of the student. Sample RFPs for government audits are available online. One example is: http://ct.gov/opm/lib/opm/igp/munfinsr/darien_rfp_for_audit_services.pdf General Problem Information: Auditor selection and independence Learning Objective: 11-2 Learning Objective: 11-4 Topic: Ethics and Independence, Special Topics Related to Audits of Governments and Not-for-Profits Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Hard 11-17. Vermont does not have an audit requirement for NFPs, but Massachusetts and New Hampshire have differing requirements: Massachusetts – a public charity with gross annual support and revenue over $200,000 must file an audited financial statement prepared by an independent CPA together with its annual report; however, if gross annual support and revenue is not more than $500,000, only a review is required. New Hampshire – a charitable organization with revenue, gains, and other support of $1 million or more must file an audited financial statement prepared by an independent CPA; those receiving support of $500,000 or more must submit “the organization's latest financial statement prepared in accordance with generally accepted accounting principles.” (If compliance would constitute a financial burden, nonprofits may request an exemption, which, if granted, is valid for 3 years.) Each student’s memo will differ but should note that the anticipated level of revenue may dictate when an audit is required. If revenues will be below $200,000, then a review would be required in Massachusetts, but there are no requirements in Vermont or New Hampshire. Revenues of $500,000 or more will require an audit or submission of financial statements. If an audit is desired by potential donors, this research may impact the decision regarding state registration; however, other factors, such as where fundraising events will be held, may also be important.

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

Ch. 11, Solutions, Case 11-17 (Cont’d)

General Problem Information: NFP audit requirements Learning Objective: 11-1 Topic: Audit Requirements for NFPs Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium Solutions to Exercises and Problems 11-18. Each student should have a different government annual report and so will have different answers to questions in this exercise. Some time spent in class to allow students to report on their own answers and to get an idea of the range of the answers of other students is useful. General Problem Information: Examine the CAFR Learning Objective: 11-1 Topic: Financial Audits by Independent CPAs Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

11-19. 1. 2. 3. 4. 5.

d. c. b. c. a.

6. 7. 8. 9. 10.

c. a. a. d. b.

11. a. 12. d. 13. c.

General Problem Information: Various Learning Objective: 11-1 Learning Objective:,11-2 Learning Objective: 11-3 Learning Objective: 11-4 Topic: Various Chapter Topics Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

11-20. 1. 2. 3. 4. 5.

BO GO BO BO GO

6. 7. 8.

BO GO BO

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

Ch. 11, Solutions, Exercise 11-20 (Cont’d)

General Problem Information: Generally accepted government auditing standards (GAGAS) Learning Objective: 11-2 Topic: Governmental Auditing Standards Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Medium 11-21. 1. 2. 3. 4.

C P A P

5. 6. 7. 8.

P A C P

General Problem Information: Allowable Nonaudit Services Learning Objective: 11-2 Topic: Governmental Auditing Standards Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Medium 11-22. a.

Total federal awards expended for the year are $12,394,000. Using the sliding scale for determining the threshold for a Type A program (found in Chapter 11), it can be determined that the threshold is $750,000, since it is larger than 3% ($12,394,000 × .03 = $371,820). Those programs that would be classified as Type A because they exceed the threshold would be Programs 2, 3, 4, 5, and 7. The Type B programs would be Programs 1, 6, 8, 9, and 10, since all programs not meeting Type A criteria are classified as Type B.

Low-risk programs are defined as those that were previously audited in at least one of the two most recent audit periods as a major program, with no audit findings in the most recent audit period or no significant changes to risk factors. With the information provided, Programs 4 and 5 would be identified as low-risk Type A programs. Type A programs that are not considered low-risk (Programs 2, 3, and 7) are classified as highrisk. Some Type B programs are too small to be assessed. Programs 1, 8, and 10 are below the 25% assessment threshold (25% of $750,000 = $187,500). Of the remaining Type B programs, the auditor is not required to identify more high-risk Type B programs than at least one fourth the number of low-risk Type A programs identified as low-risk. Given two low-risk Type A programs (Programs 4 and 5), only one Type B program need be identified. Since Program 9 was audited as a major program in the prior year with no findings, the only high-risk Type B program is Program 6.

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

Ch. 11, Solutions, Exercise 11-22 (Cont’d)

Programs 2, 3, and 7 would be audited as Type A programs in the current year, totaling $4,360,000. In addition, any Type B program identified as high-risk must be audited. Given that only two Type A programs were identified as low-risk, normally identifying one high-risk Type B program would suffice; however, since the county is not a low-risk auditee, a minimum of 40% of expended amounts or $4,957,600 ($12,394,000 × .40) must be audited. Adding Program 6 will only total $4,749,000, requiring the audit of Programs 6 and 9 to total $5,495,000. The auditor might justify auditing only Program 9, given the smaller size of Program 6, especially if the internal controls over Programs 6 and 9 are the same. In any event, Programs 2, 3, 7, 9, and possibly 6 should be audited. Note that Program 8 was audited as a major program in the prior year with findings. Its small size may indicate that these are the final expenditures of a large grant. If this is part of a cluster, or if the grant may be renewed, it may warrant inquiry. (This is a good area for class discussion.) General Problem Information: Single audit Learning Objective: 11-3 Topic: Selecting Programs for Audit Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Hard

11-23. a. Total federal awards expended for the year are $26,675,000. Using the sliding scale for determining the threshold for a Type A program (found in this chapter), it can be determined that the threshold is $800,250 ($26,675,000 × .03 = $800,250). Those programs that would be classified as Type A because they exceed the threshold would be Programs 3, 4, 5, 6, and 8. The Type B programs would be Programs 1, 2, 7, 9, and 10, since all programs not meeting Type A criteria are classified as Type B. Program 9 will not be risk-assessed, as it is less than 25% of the Type A threshold (.25 × $800,250 = $200,062.50). b.

Programs 2, 5, 6, 8, and 10 should be audited. All high-risk Type A must be audited; therefore, Programs 5 and 6 must be audited. Also, Type A programs must be audited every three years, so despite the fact that Program 8 is low-risk, it must be audited in the current year. The auditor is not required to identify more high-risk Type B programs than at least one fourth the number of low-risk Type A programs identified as low-risk. Programs 3 and 4 are classified as low-risk Type A programs, so one Type B high-risk program must be identified. Since firm policy is to select the program with the largest expenditure, Program 2 will be selected. (This is based solely upon firm selection criteria, but the auditor should also consider whether the program has been audited in the past with no findings. Auditors are encouraged to select different programs for audit over time.) 11-17 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

Ch. 11, Solutions, Exercise 11-23, b. (Cont’d)

The 40% coverage rule requires that $10,670,000 be audited ($26,675,000 × .40). Auditing Programs 5, 6, 8, and 2 provides coverage of $10,175,000, so at least one more program must be selected for audit. Following audit firm policy, it is likely that Program 10 would be selected. c.

Although a low-risk auditee is only required to have 20% coverage or $5,335,000 ($26,675,000 × .20), programs 5, 6, 8, and 2 must be audited. General Problem Information: Single audit Learning Objective: 11-3 Topic: Selecting Programs for Audit Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Hard

11-24.

1. GAGAS 2. GAAS 3. GAAS 4. GAGAS 5. GAGAS

6. 7. 8. 9. 10.

GAAS GAGAS GAAS GAAS GAGAS

General Problem Information: GAAS versus GAGAS standards Learning Objective: 11-2 Topic: Government Auditing Standards Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 11-25. The document appears more like a letter than an audit report. Some of the changes that would need to be made to bring the Tom and Jerry audit report into conformance with current audit standards include: • A title that includes the word independent. • The appropriate addressee would generally include the administrative head of the City (e.g., the mayor) and members of city government and/or the audit committee of the government. While it may include the citizens, it is generally not only addressed to the citizens. • A section with the heading “Opinion.” The opinion should relate to opinion units, rather than the financial statements in general. The section should also refer to GAAP rather than GASB standards. • If there are sections of the financial report that are not audited, the auditor should distinguish between required supplementary and supplementary information that receives an “in-relation-to” opinion and other information that is not opined upon. 11-18 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 11 – Auditing of Government and Not-for-Profit Organizations

Ch. 11, Solutions, Exercise 11-25 (Cont’d)

• •

• • • •

A section with the heading “Basis for Opinion.” This section should note whether the audit was a GAAS or GAGAS audit. (Reference to the documentation of independence suggests that it may have been a GAGAS audit.) There should be two sections that discuss responsibility for the financial statements – “Responsibilities of Management for the Financial Statements” and “Auditor’s Responsibilities for the Audit of the Financial Statements.” (See Illustration 11-2 for required content of each.) When applicable, a section subtitled “Report on Other Legal and Regulatory Requirements.” Removal of the “Other Matters” section and its contents. Removal of the sentence referring to questions regarding the audit. Removal of “Thank you.”

Note: The most current government audit report was not available at the time the textbook went to press. More specific requirements may be found in updated government audit reports available under Quick Links – Illustrative Audit Reports on the AICPA’s Governmental Audit Quality Center website at https://www.aicpa.org/interestareas/governmentalauditquality.html. General Problem Information: Audit Report Learning Objective: 11-1 Topic: Format of the Audit Report Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Hard

Chapter 12 - Budgeting and Performance Measurement

CHAPTER 12:

BUDGETING AND PERFORMANCE MEASUREMENT OUTLINE

Number

Topic

Type/Task

Status (re: 18/e)

Questions: 12-1 12-2 12-3 12-4 12-5 12-6 12-7 12-8 12-9 12-10

Government vs. corporate budgeting Government budgeting approaches Budget calendar Stakeholders in budgeting process Budget process and performance measurement Balanced scorecards SEA reporting and GASB Service efforts and accomplishments Enterprise risk management in government Federal grant accounting and allowable costs

Compare Compare Describe Identify Explain Describe Describe Define Identify Describe

12-3 New New Same New Same Same Same New Same

Cases: 12-11 12-12 12-13 12-14 12-15 12-16

GFOA Distinguished Budget Award Budgeting for outcomes Budget calendars Performance measurement Fiscal transparency Federal grant accounting and allowable costs

Internet research Evaluate Compare Analyze Examine Evaluate, report

Same Revised Same New New 12-14

Exercises/Problems: 12-17 Examine the budget 12-18 Various budgeting issues

Examine Multiple choice

12-19 12-20

Police department budget Illustrations within a budget document

Evaluate Examine, evaluate

12-21 12-22 12-23 12-24

SEA reporting Activity-based costing SEA reporting Allowable Costs under Federal Grants

Analyze Evaluate Analyze Examine, evaluate

12-15 Items 2, 6, 7, and 8 are new 12-17 12-18 updated New 12-20 New 12-22

Chapter 12 - Budgeting and Performance Measurement

CHAPTER 12:

BUDGETING AND PERFORMANCE MEASUREMENT

Answers to Questions 12-1. Although the underlying budget concepts are similar for corporations and governments, there are a number of nuances unique to governments. Government budgets are legally required. They are also integrated into a government’s accounting system and play a role in external financial reports through the required budget-to-actual comparison schedules or statements. Finally, government budgets are used to facilitate compliance with laws and to communicate performance effectiveness. General Problem Information: Government vs. corporate budgeting Learning Objective: 12-1 Topic: Objectives of Budgeting in the Public Sector Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 12-2. The oldest and simplest budget approach is the line-item approach which facilitates budgetary control by adopting specific expenditures by classification that cannot be exceeded. During the late 1940s and 1950s, performance budgeting was developed whereby proposed expenditures of each government subdivision were linked to the programs and activities to be accomplished by that subdivision during the budget period. In the late 1960s, a planning-programming-budgeting system (PPBS) with statistical applications became popular. In the 1970s, zero-based budgeting (ZBB) added the requirement that each activity or program must be justified to be funded. Most recently, entrepreneurial budgeting encourages administrators to look beyond typical spendingoriented budgeting to develop the revenue side of the budget. Overall, budgeting has become more sophisticated and linked with performance measurement. General Problem Information: Government budgeting approaches Learning Objective: 12-2 Topic: Budgeting Approaches Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Hard 12-3. The budget process requires coordination of departments and administrators throughout the government. After preparing initial budget targets and projections, there must be time for integration of department or functional budgets, budget meetings, and preparation of the proposed budget. The proposed budget is made available to legislators and the public before budget hearings take place. There will likely be iterations of budgets after work sessions and public input. Illustration 12-2 provides detail of budget activities for the City of Chesapeake, Virginia.

Chapter 12 - Budgeting and Performance Measurement

Ch. 12, Answers, Question 12-3 (Cont’d)

General Problem Information: Budget calendar Learning Objective: 12-3 Topic: Budgeting Process in a State or Local Government Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 12-4. Illustration 12-3 includes the following sets of potential conflict: advocates vs. conservers; accuracy vs. political expediency; special interests vs. collective interests; bureaucracy vs. democracy; the budget office vs. departments; and public will vs. public welfare. As noted in the chapter, department heads and interest groups may advocate for more funding than they know the budget officials will approve; the public may want something different than officials believe is needed; or special interest groups may command a louder voice than the collective interests of the whole. Instructors may wish to discuss any local budget conflicts that have taken place. Conflicts are generally mediated by the government’s chief executive officer and resolved through the extensive budget process described in the chapter. General Problem Information: Stakeholders in budgeting process Learning Objective: 12-3 Topic: Budgeting Process in State or Local Government Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 12-5. In a number of budgeting approaches, the budget is presented along with performance measures of outputs and outcomes that the governing body can use in determining whether or not to recommend approval of the budget. These same performance measures or targets can be used to evaluate the performance of a program, department, or function. For example, a fire department might request approval for an additional firefighter or an enhanced dispatch system. The fire chief may claim that the additional employee and new system will reduce the average time required to respond to a fire alarm – a key performance indicator. The average response time between the budget year and the prior year can be compared to determine whether the goal of reduced response time was met. This comparison may also impact future budget allocations. General Problem Information: Budget process and performance measurement Learning Objective: 12-4 Topic: Integration of Planning, Budgeting, and Performance Measurement Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Hard

Chapter 12 - Budgeting and Performance Measurement

12-6. Balanced scorecards typically report on performance measures that fall into four categories: financial, customer, internal business processes, and learning and growth (of the employees or the organization). This management tool was designed for the business sector, so governments must adapt these categories to include performance goals appropriate to government, such as the following: (1) Financial—The city will not burden the next generation with the cost for services provided today. (2) Customer—Citizens will be able to conveniently travel from any point in the county to the downtown district. (3) Internal business processes—The state will register vehicles in an efficient and convenient manner. (4) Learning and growth—The school district will support its teachers in maintaining and advancing their academic credentials. (Student examples will vary.) General Problem Information: Balanced scorecards Learning Objective: 12-5 Topic: Managerial Tools to Improve Performance Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Hard 12-7. While the GASB has not issued standards for service efforts and accomplishments (SEA) reporting, it has sponsored and conducted extensive research on SEA measures and provides guidance for governments that voluntarily choose to produce such reports. Concepts Statement No. 2, “Service Efforts and Accomplishments Reporting” (1994) was amended by Concepts Statement No. 5 in 2008. GASB also issued a user guide, Government Service Efforts and Accomplishments Performance Reports: A Guide to Understanding in 2005 as well as Suggested Guidelines for Voluntary Reporting, SEA Performance Information in 2010. These documents provide suggested criteria for use in preparing reports on service efforts and accomplishments measures, describe essential components of an effective SEA report, and identify keys to effective communication. General Problem Information: SEA reporting and GASB Learning Objective: 12-4 Topic: Service Efforts and Accomplishments Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 12-8. Service efforts and accomplishments (SEA) measures include: (1) input measures⎯measures of service efforts, (2) output and outcome measures⎯measures of service accomplishments, and (3) efficiency measures⎯measures that relate efforts to accomplishments.

Chapter 12 - Budgeting and Performance Measurement

Ch. 12, Answers, Question 12-8 (Cont’d)

Examples for a police department might include financial resources dedicated to police services (input measure), number of monthly responses to community calls to the department (output measure), and community satisfaction with police services or average response time after a call is placed (efficiency measure). General Problem Information: Service efforts and accomplishments Learning Objective: 12-4 Topic: Service Efforts and Accomplishments Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 12-9. According to the GFOA’s best practices website on enterprise risk management (ERM), governments face risks in the following areas: physical environment (natural or manmade disasters and infrastructure), legal and ethical environment (laws and legal precedents), operational environment (day-to-day activities and actions within the local government, including services provided and workforce demographics), political environment (legislative activity, elections), social environment (socio-economic composition of the community), economic environment (market trends, interest rates), emerging risks (cybersecurity), and internal environment (the attitude of individuals towards risk). Students may provide specific examples in any of the areas identified. General Problem Information: Enterprise risk management in government Learning Objective: 12-5 Topic: Enterprise Risk Management Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 12-10. The Office of Management and Budget (OMB) issues guidance on cost principles for federal grants in Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. The “super circular,” termed as such since it consolidated and replaced eight circulars previously issued by the OMB, lists allowable and unallowable costs for federal grants and contracts. For example, governments will find that depreciation on equipment used on the grant is an allowable cost, alcoholic beverages are an unallowable cost, and advertising may be an allowable cost under certain restricted conditions. General Problem Information: Federal grant accounting and allowable costs Learning Objective: 12-6 Topic: Budget and Cost Issues in Grant Accounting Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy 12-5 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 12 - Budgeting and Performance Measurement

Solutions to Cases 12-11. a.

There is a list of all state and local governments that are Distinguished Budget Presentation Award winners for the most recent year in the GFOA’s annual report, posted on its website at www.gfoa.org under the “Award Programs” tab and “Distinguished Budget Presentation Award Program” link. Readers will find at least one award-winning municipality for most states and dozens in the largest states. The number of years that the municipality won the award is indicated next to its name, some for all 30+ years that the award program has been in existence.

Student responses will vary. They should list key budgetary priorities and issues for each government and discuss the budgetary trends described in the two budgets. An interesting class discussion might address significant budgetary trends noted within a state.

Student responses will vary. This requirement emphasizes that the students are users of the budget document and their opinions are important. Encourage students to share the feature of the budget presentation that they considered noteworthy and explain why.

General Problem Information: GFOA Distinguished Budget Award Learning Objective: 12-1 Learning Objective: 12-3 Topic: Objectives of Budgeting in the Public Sector Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

12-12. The City of Fort Collins budget website is available at http://www.fcgov.com/citymanager/budget.php. The following answers were obtained for the 2019–2020 biennial budget. a. Under the “Budget Process” tab, the website includes the following responses to “Why are we doing it (i.e., budgeting for outcomes)?” • The Fort Collins economy is changing—the times of rapid, double-digit revenue growth are over. • The old system didn't work—the short-term approach of spending down reserves, freezing employee wages, and not filling vacant positions is not sustainable; that approach only leads to mediocrity. • Budgeting for outcomes better aligns the services delivered by City of Fort Collins with the things that are most important to our community. b. City council, using citizen input, determines the desired community outcomes.

Chapter 12 - Budgeting and Performance Measurement

Ch. 12, Solutions, Case 12-12 (Cont’d)

c. For the 2019–20 budget cycle, the City of Fort Collins has the following target outcomes: • • • • • • •

Neighborhood Livability & Social Health – Fort Collins provides a high-qualitybuilt environment, supports quality, diverse neighborhoods, and fosters the social health of citizens. Culture & Recreation – Fort Collins provides diverse cultural and recreational amenities. Economic Health – Fort Collins has a healthy, sustainable economy reflecting community values. Environmental Health – Fort Collins promotes, protects, and enhances a healthy and sustainable environment. Safe Community – Fort Collins provides a safe place to live, work, learn, and play. Transportation – Fort Collins provides for safe and reliable multi-modal travel to, from, and throughout the City. High Performing Government – Fort Collins exemplifies an efficient, innovative, transparent, effective, and collaborative city government.

d. Since Fort Collins adopts a two-year (biennial) budget the outcomes are reexamined every two years. e. Student answers will vary based upon the offers selected, but this exercise allows them to view the budgeting process of allocating scarce resources firsthand. General Problem Information: Budgeting for outcomes Learning Objective: 12-2 Learning Objective: 12-3 Topic: Budgeting Approaches Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Reflective thinking, AICPA: FN Reporting Level of Difficulty: Medium 12-13. Student memo contents will vary. Some of the similarities and differences between Manhattan’s 2019 budget calendar (for the 2020 fiscal year) and Chesapeake’s 2019–20 budget calendar (for the 2020–21 fiscal year) are noted here. The City of Manhattan has a December 31 fiscal year-end, while the City of Chesapeake has a June 30 year-end, so that must be taken into consideration when comparing the budgets. Planning at the department level, work sessions, and public hearings appear similar; however, Manhattan’s cycle seems a bit more compressed (a 9-month process compared to Chesapeake’s nearly 11-month process). Manhattan’s public hearing is approximately 8 months after the process begins, while Chesapeake’s is approximately 9.5 months into the process. Manhattan clearly includes the capital improvement plan, while Chesapeake only mentions it in the context of setting the tax rates and appropriations. Manhattan’s 12-7 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 12 - Budgeting and Performance Measurement

Ch. 12, Solutions, Case 12-13 (Cont’d)

calendar also mentions reading, certifying, and publishing the budget. Manhattan numerates work sessions. Chesapeake mentions human resource requirements and real estate assessments. In general, the objectives are similar, but the level of detail and timing differs. The instructor may wish to link this case with Problem 12-20, which also references Manhattan’s Budget Book. General Problem Information: Budget calendars Learning Objective: 12-3 Topic: Budgeting Process in a State or Local Government Bloom’s Taxonomy: Compare Accreditation Skills tag: AACSB: Reflective thinking, AICPA: FN Reporting Level of Difficulty: Medium

12-14. The instructor may wish to assign each student a different department from the City of Austin and ask the students to share their memos with the class. Each memo will differ but should address the key indicators or performance measures for their department. As an example, Austin had the following performance measures listed under Emergency Prevention/Outreach and Fire/Emergency Response/ Emergency Operations: 1) Number of free smoke alarms installed, 2) Percent of customers satisfied with the quality of AFD services, 3) Percent of emergency incidents where amount of time between call receipt and arrival of AFD unit is 8 minutes or less, 4) Percent of structure fires confined to room of origin, and 5) Percent of sworn positions fully staffed. The historical data for number of free smoke alarms installed is:

FY 2017 Actual

FY 2018 Actual

FY 2019 Actual

FY 2019 Target

FY 2020 Target

2520

2428

3463

No Goal

3750

The student might note that the department has substantially increased the number of alarms installed over time, and that the department previously did not report an annual goal. The results of this measure would be added to the results of the other four measures to reach an overall assessment of the fire department’s success. General Problem Information: Performance measurement Learning Objective: 12-4 Topic: Integration of Planning, Budgeting, and Performance Measurement Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Reflective thinking, AICPA: FN Reporting Level of Difficulty: Medium

Chapter 12 - Budgeting and Performance Measurement

12-15. Answers will vary depending upon the date information is accessed. The instructor may wish to visit the Commonwealth’s website and present additional questions or simply peruse the website in class to share an example of open data in a large state government. It may also be interesting to compare to a smaller government with an open data portal. a. As of May 16, 2020, the Commonwealth of Massachusetts has spent $55.57 billion dollars on 2.32 million transactions for fiscal year (FY) 2020. The top spending department was the executive office of health and human services. The top vendor was the UMS – summary trust payment for $2.85 billion. b. As this book goes to print, Charles Baker is the governor of Massachusetts and has an annual salary of $185,000. As of May 16, 2020, the Commonwealth’s total payroll for FY 2020 exceeds $2.84 billion. c. In FY 2019 total expenses were $45,228,519,717.40, while the total available for spending was $46,086,392,519.37. Year to date (5/16/2020) FY 2020 expenses totaled $40,695,198,920.92, while available for spending totaled $47,249,200,781.21. d. Total FY 2020 budgeted revenue was $61,185,966,129.12; Capital projects funds revenue was budgeted as $3,534,047,104.20. General Problem Information: Fiscal transparency Learning Objective: 12-5 Topic: Data Analytics Bloom’s Taxonomy: Examine Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Easy

12-16. a. The appropriate document to research the allowability of costs charged to federal grants for a local government is the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards available at https://federalregister.gov/a/2013-30465. b. From the list, items 1, 5 and 6 are allowable. Some are not straightforward, as discussed below: 1. According to Section 200.432, costs of meetings and conferences, the primary purpose of which is the dissemination of technical information, are allowable; however, under Section 200.474, some travel costs are allowable only when the traveler has received prior approval of the awarding agency. 2. Under Section 200.474(c)(2) travel costs for dependents are unallowable, except for travel of duration of six months or more with prior approval of the federal awarding agency.

Chapter 12 - Budgeting and Performance Measurement

Ch. 12, Solutions, Case 12-16 (Cont’d)

3. According to Section 200.442, costs of investment counsel and staff, and similar expenses incurred to enhance income from investments are unallowable except when associated with investments covering pension, self-insurance, or other funds that include specified federal participation. 4. According to Section 200.450, the cost of lobbying activities undertaken to obtain grants, contracts, cooperative agreements, or loans is generally not allowed. 5. Under Section 200.454 costs of membership in business, technical, and professional organizations are allowable. 6. Under Section 200.447, costs of insurance required or approved and maintained, pursuant to the federal award, are allowable. General Problem Information: Federal grant accounting and allowable costs Learning Objective: 12-6 Topic: Budget and Cost Issues in Grant Accounting Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Medium Solutions to Exercises and Problems 12-17. Each student should have a different budget, so answers will vary. For those students who chose a municipality that received the GFOA’s Distinguished Budget Presentation Award, they will find each of the budget documents include, at a minimum, the required criteria noted on the GFOA’s website (and indicated by as asterisk in Illustration 12-1). Class discussion of different practices noted by the students is generally interesting and rewarding. For more information on the criteria used in the GFOA’s Distinguished Budget Presentation Award program, go to www.gfoa.org and see “Award Programs.” If possible, use the Internet in class and project various websites of municipalities to show differences in the budget formats. General Problem Information: Examine the budget Learning Objective: 12-1 Learning Objective: 12-2 Learning Objective: 12-3 Topic: Various Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium

12-18. 1. 2. 3. 4. 5.

b. d. b. a. b.

6. 7. 8. 9. 10.

b. b. d. c. d.

11. a. 12. d. 13. b.

Chapter 12 - Budgeting and Performance Measurement

Ch. 12, Solutions, Exercise 12-18 (Cont'd)

General Problem Information: Various budgeting issues Learning Objective: 12-1 Learning Objective: 12-2 Learning Objective: 12-3 Learning Objective: 12-4 Learning Objective: 12-5 Learning Objective: 12-6 Topic: Various chapter topics Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting Level of Difficulty: Medium 12-19. a. This is a classic example of incremental budgeting. From the perspective of the new town manager, who apparently is interested in applying zero-based budgeting concepts, the police chief’s argument that last year’s budget should be the base, without further justification, is weak and not likely to be accepted. b. Yes, generally speaking, the town manager is attempting to implement a rational budgeting approach. Politics, however, may be more important than economics in this particular case. One would need to know if the town council hired the new town manager to improve the performance of town government, including the budget process, or if the town manager is acting on her own without knowing what support she can expect from the town council. c. As discussed in part b, the town manager would be naive to undertake budgetary reform without the backing of a majority of the town council. If the police chief has held office for a long period and is well respected in the community, the town council may direct the town manager to back off. In this case, the new town manager not only will have lost some credibility with the council but will be less effective in dealing with the police chief, and other town officials as well. d. Based upon the information provided, the town presently uses incremental line-item budgeting, probably organized along department lines. Although the new town manager’s effort to introduce techniques consistent with zero-based budgeting into the budgeting process is laudable, development of a program budget would further enhance the performance of the government. A well-designed program budget would utilize citizen participation to formulate broad goals from which more specific objectives would be derived. A budgetary structure and performance measurement system could then be developed using features from one or more of the approaches discussed in Chapter 12 (PPBS, ZBB, ERM, Balanced Scorecard, or SEA). Such an approach would contribute to more rational allocation of resources, specifically targeted toward attainment of the identified goals and objectives. General Problem Information: Police department budget Learning Objective: 12-1 12-11 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 12 - Budgeting and Performance Measurement

Ch. 12, Solutions, Exercise 12-19 (Cont'd)

Topic: Objectives of Budgeting in the Public Sector, Budgeting Process in a State or Local Government Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Hard 12-20. a. Average city tax bills have increased approximately 7% or $76 over a two-year period. The area of greatest percentage increase has been the fire equipment reserve at 90%. On a dollar basis, the General Fund increased taxes by $27 over the two-year period, while the Employee Benefit Fund accounted for a $26 increase. The $15 or 42% decrease in the Kansas police and firemen (KP&F) amount helped to keep the tax increase reasonable. The overall taxes appear stable, but a taxpayer may question the high percentage increase in the fire equipment reserve. Police services account for over 50% of all taxes. While such services are generally costly, some taxpayers may question the high cost relative to other services. Other citizens may express concern over the decrease in Kansas Police & Fire costs, wondering if the quality of services will diminish. b. As would be expected at the city government level, most revenues come from taxes (state and local, property) and user fees and licenses. The greatest expenditures for Manhattan are related to utilities, public safety, and debt service. The data explain that utilities involve water, wastewater, and stormwater operations. It is interesting that the utility user fees are combined with license fees in the revenue categorization. Separate presentation of utility revenue might prove useful to budget document users, as it might indicate whether the utility is self-sustaining. Debt service is surprisingly high at 15.9% of expenditures, and it approximates public safety amounts. Aside from high debt costs, citizens are generally willing to pay for the public services included in this diagram. Regarding city finances, citizens may question if resources are put aside in a “rainy day” fund, since this balanced budget has expenditures equal to the sum of revenues and fund balance. The budget document explains that: “In accordance with Kansas budget law, all budgeted revenues, plus beginning cash balances, less all budgeted expenditures must reflect a zero balance.” c. Answers will vary according to individual preferences and the number of other budget documents that the students have examined.

Chapter 12 - Budgeting and Performance Measurement

Ch. 12, Solutions, Exercise 12-20 (Cont'd)

General Problem Information: Illustrations within a budget document Learning Objective: 12-1 Learning Objective: 12-3 Topic: Objectives of Budgeting in the Public Sector, Budgeting Process in a State or Local Government Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Medium 12-21. a. The City of Bancroft spends approximately $1,500,000, $1,600,000, and $1,650,000 (calculated as population x cost per capita or total visitations x cost per visit) in the years examined – this represents the input. Number of visits and number of circulations provide a count of activity or output. Customer satisfaction can be considered an outcome. Also, the library performance measures that compare the cost of providing services to some measure of output, such as number of visits or circulations are efficiency ratios. b. The City of Bancroft has a decreasing population and fewer registered cardholders, but the City has provided increased library funding each year. This has led to significant cost per capita increases. Changes to book versus multimedia circulation have also been significant. It appears that additional multimedia circulation in 2021-22 brought the cost per circulation down; however, the cost of electronic versus hard copy library items is unknown. The library will face changes in the upcoming years. Reduced population numbers will eventually impact library funding, and high library costs per capita will likely not be sustained. Surveys and more meaningful performance measures are needed now more than ever to determine the direction of the library. c. Citizens and administrators would require additional information regarding library usage. Why was the annual survey not administered? Is customer satisfaction increasing or decreasing? What is the average age of users? Are reference and other noncirculating materials being used? Does the library provide programs to the public? Are they being attended? Should future (limited) resources focus on multimedia items? Do many citizens think of the library as primarily providing books? Maybe they are not aware of the availability of multimedia items. If they knew such items were available, would the public use them, or is too much already available to the citizens within their home? What should the library look like in the future? Various additional performance measures have been developed by the American Library Association. General Problem Information: SEA Reporting Learning Objective: 12-4 Topic: Service Efforts and Accomplishments Bloom’s Taxonomy: Apply 12-13 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 12 - Budgeting and Performance Measurement

Ch. 12, Solutions, Exercise 12-21 (Cont'd)

Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Medium 12-22. a.

The primary activities of the Orangeville Animal Control Program are complaint response, impounding of dogs, care of dogs that are returned to owners, and care of dogs that are adopted. The activities, resources and cost drivers are shown below. Activities, Resources, and Cost Drivers Activity #1: Resources required:

Cost driver: Activity #2: Resources required: Cost driver:

Responding to a complaint Program director Labor (animal control wardens) Specially equipped vehicles Number of complaints Impounding an animal Labor (animal control wardens) Specially equipped vehicles Number of animals impounded

Activity #3: Resources required: Cost drivers:

Care of impounded animal returned to its owner Contract-specified fee Number of animals impounded Length of stay at kennel

Activity #4: Resources required: Cost drivers:

Care of an impounded animal that is adopted Contract-specified fee Number of animals impounded Length of stay at kennel

b. When answering this question, it is important to recognize that many factors constrain what solutions can be implemented. Public relations, humanitarian, political and regulatory considerations exist; for example, the Orangeville community or the service provider may not accept the euthanizing of unadopted dogs. It is up to local government managers to identify these constraints and make sound financial decisions based on them. Each alternative solution has to be examined carefully and a break-even analysis or other cost analysis has to be performed to assess the financial impact on the overall processes.

Chapter 12 - Budgeting and Performance Measurement

Ch. 12, Solutions, Exercise 12-22, b. (Cont'd)

A large proportion of the animal control program’s budget is comprised of salaries for wardens and administrative personnel, as well as vehicle costs. Salaries are often fixed costs and cannot easily be eliminated. Although the transportation costs involved in this activity have captured the public’s attention, reducing these costs would not greatly affect the overall cost of the program. In fact, these costs will rise should the program become more efficient and more of the calls result in impoundments. Although caring for animals that will be adopted (Activity #4) is more costly per animal than caring for animals that are returned to their owners (Activity #3), expenses for this activity are likely minimal when compared to salary and administrative costs of the program. When searching for ways to reduce the cost of Activities #3 and #4, city officials must remember that Activity #3 is relatively self-funding, given that owners must pay a fine and reimburse the city for boarding expenses to get their animal back. Activity #4—care of an impounded animal that is adopted. As with Activity #3, most of the cost associated with this activity results from the cost for the animal’s stay at Donna’s Kennels. Since this cost is variable, it is a good target for cost reduction. For example, shortening the stay of the animals from an average of 14 to an average of 7 days would save money. This could be done by promoting adoptions or by having the animals put to sleep if they are not adopted within a given time frame. c.

As noted above, transportation costs account for a small part of the animal control budget. Renovation and maintenance of a vacant building would likely be much more substantial an expense and commitment. Adapted from Service Report: Introduction to Activity-Based Costing International City/County Management Association, Vol. 30, No. 2, February 1998, pp. 9-13. Reprinted with permission of the ICMA. All Rights Reserved.

General Problem Information: Activity-based costing Learning Objective: 12-5 Topic: Managerial Tools to Improve Performance Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Hard 12-23. Citizens are typically most concerned with safety and response times. San Diego’s fire rescue meets its goal of 0.25 civilian deaths per 100,000 people; however, their dispatch and emergency response times are higher than targets. The department aims to dispatch responders within 1 minute of a call and have responders arrive within 10:30 minutes. While 911 calls are generally answered within 15 seconds or less, first responders left the station within a minute only 73% of the time in 2018 and 48% of the time in 2019. This led to first responder arrival within 7:30 minutes of a 911 12-15 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 12 - Budgeting and Performance Measurement

Ch. 12, Solutions, Exercise 12-23 (Cont'd)

call 74% of the time in 2018 and 67% of the time in 2019 and effective response force within 10:30 minutes 82% and 81% of the time in 2018 and 2019, respectively. The percentage of structure fires confined to room of origin had a target of 80% with actuals of 71% (2018) and 57% (2019). San Diego’s fire rescue met its goals of fatal drownings and vegetation fire confined to 3 acres or less in both years. It failed to meet targets for percentage of privately-owned parcels subject to brush management inspection in both years and met the percentage of inspections completed within 90 days of annual inspection date in 2019, with an actual close to target in 2018. Citizens of San Diego would likely be concerned that its budget is increasing but performance in key areas is getting worse. Higher performance by the department is in some areas that may not be as critical to life and property. For example, the most worrisome performance measure might be noticeably reduced efficiency and effectiveness in 2019 for rapid dispatch and arrival. This may have reduced the opportunity to confine a fire to the room of origin. Despite this fact, EMS customer satisfaction appears high. General Problem Information: SEA Reporting Learning Objective: 12-4 Topic: Service Efforts and Accomplishments Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Medium 12-24. 1. A, Section 200.461 2. N, Section 200.423 3. A, Section 200.470, (c) 4. N, Section 200.426 5. M, Section 200.463 6. M, Section 200.474 7. N, Section 200.434 8. A, Section 200.457

Chapter 12 - Budgeting and Performance Measurement

Ch. 12, Solutions, Exercise 12-24 (Cont'd)

5 – Recruitment costs are allowable, provided that the size of the staff recruited and maintained is in keeping with workload requirements, costs of ‘‘help wanted’’ advertising, operating costs of an employment office necessary to secure and maintain an adequate staff, costs of operating an aptitude and educational testing program, travel costs of employees while engaged in recruiting personnel, travel costs of applicants for interviews for prospective employment, and relocation costs incurred incident to recruitment of new employees, are allowable to the extent that such costs are incurred pursuant to the nonfederal entity’s standard recruitment program. Exceptions include special fringe benefits, and salary allowances incurred to attract professional personnel that do not meet the test of reasonableness or do not conform to the established practices of the nonfederal entity. Also, where relocation costs incurred incident to recruitment of a new employee have been funded in whole or in part as a direct cost to a federal award, and the newly hired employee resigns for reasons within the employee’s control within 12 months after hire, the nonfederal entity will be required to refund or credit the federal share of such relocation costs to the federal government. 6 – While dependent care costs are generally not allowable, Section 200.474 (c)(1) specifies that temporary dependent care costs above and beyond regular dependent care that directly results from travel to conferences is allowable provided that: (i) the costs are a direct result of the individual’s travel for the federal award; (ii) the costs are consistent with the nonfederal entity’s documented travel policy for all entity travel; and (iii) the costs are only temporary during the travel period. General Problem Information: Allowable Costs under Federal Grants Learning Objective: 12-6 Topic: Budget and Cost Issues in Grant Accounting Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: Critical Thinking Level of Difficulty: Hard

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

CHAPTER 13:

NOT-FOR-PROFIT ORGANIZATIONS— REGULATORY, TAXATION, AND PERFORMANCE ISSUES OUTLINE

Number

Topic

Type/Task

Status (re: 18/e)

Characteristics of not-for-profits State regulation Differences in tax-exempt categories Filing Form 990 Public charities and private foundations Political activity Unrelated business income tax Political action committees Excessive benefits Governing documents Performance measures

Compare Identify Explain

Same Same New

Explain Explain

New Same

Explain Discuss Define, identify Explain Explain Explain

Same Same Same Same Same New

Research Case—Analyzing a NFP Research Case—Unrelated Business Income Tax Research Case—Performance measures Research Case—Evaluating charity organizations Research Case— Performance evaluation of a NFP Research Case— Evaluating the accountability and transparency of a NFP

Analyze Evaluate

New 13-12

Apply, evaluate

Revised 13-13

Evaluate

New

Analyze

Revised 13-15

Analyze

13-16

Exercises/Problems: 13-18 Various

Multiple Choice

13-19 13-20 13-21 13-22 13-23

Apply Identify Categorize Evaluate Compute, analyze

Items 1 and 8 revised. Items 2 and 11 new. Revised Revised Same Same Revised

Questions: 13-1 13-2 13-3 13-4 13-5 13-6 13-7 13-8 13-9 13-10 13-11 Cases: 13-12 13-13 13-14 13-15 13-16 13-17

Public charity Identifying tax-exempt status UBIT Intermediate sanctions Performance measures

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

CHAPTER 13:

NOT-FOR-PROFIT ORGANIZATIONS— REGULATORY, TAXATION, AND PERFORMANCE ISSUES

Answers to Questions 13-1. Not-for-profit organizations differ in nature and purpose from for-profit organizations. In general, characteristics that distinguish not-for-profit organizations from for-profit organizations are as follows: • There is a lack of defined ownership. • The focus is not on profit but the provision of goods/services. • Frequently those providing the majority of the resources are not those receiving the direct benefit of the resources. General Problem Information: Characteristics of not-for-profits Learning Objective: 13-1 Topic: Defining the Not-for-profit Sector Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Easy 13-2

States regulate charities in several ways. States give charities their legal life in the form of a not-for-profit corporation, limited liability company, or in the state’s recognition of a charitable trust. In addition, many states require NFP organizations to obtain a license to solicit charitable contributions. Finally, states regulate the lobbying and political activities of NFPs. Illustration 13-2 provides a more exhaustive list of not-for-profit activities that may be regulated by the states. General Problem Information: State regulation Learning Objective: 13-2 Topic: State regulation Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal Level of Difficulty: Easy

13-3

The types of organizations classified as 501(c)(3) are those that operate for philanthropic, educational, or similar purposes. As such, contributions a donor makes to a 501(c)(3) NFP are generally tax deductible on federal income tax returns. A major difference between 501(c)(3) tax-exempt organizations and other tax-exempt organizations is that contributions to organizations that are not Sec. 501(c)(3) organizations are not tax deductible unless they are determined to be qualified organizations. General Problem Information: Differences in tax-exempt categories Learning Objective: 13-3 Topic: Federal Regulation Bloom’s Taxonomy: Understand

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Ch. 13, Answers, Question 13-3 (Cont’d)

Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal Level of Difficulty: Medium

13-4. The Form 990 provides information to the government and the public concerning the activities of the NFP organizations receiving tax-exempt status. The Form 990 contains financial information (e.g., Balance Sheet, Statement of Revenue, and Statement of Functional Expenses) as well as information on governance and compensation. The NFP would know which form to file based on its size. The filing requirements by size are: (1) Form 990-N or “e-postcard” is filed by NFPs with gross receipts of $50,000 or less per year, (2) Form 990-EZ is filed by NFPs with annual gross receipts of between $50,000 and $200,000, and with less than $500,000 in total assets, and (3) a Form 990 is filed by NFPs with receipts and assets too large to qualify for filing the Form 990-EZ. It should be noted that generally all NFP organizations must file some type of Form 990 with the IRS; some exceptions include religious organizations and governmental NFP organizations. Private foundations are required to file the Form 990-PF. General Problem Information: Filing Form 990 Learning Objective: 13-3 Topic: Federal Regulation Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal Level of Difficulty: Medium 13-5. Public charities are broadly supported by the general public in the form of contributions, dues, or charges for services, which is why the adjective “public” is appropriate. Private foundations are funded by gifts from a small set of donors, usually a family or corporation. A private foundation makes grants to public charities, which then operate programs. Both are tax-exempt under IRC Sec. 501(c)(3), but public charities receive the most preferred tax treatment because it is assumed that the public, both donors and beneficiaries of the programs, will monitor the actions of the organization. A public support test calculates how much of a charity’s total support comes from the public. Public support includes amounts received from governments and contributions made directly or indirectly by the public. Generally, a charity meets the public support test if at least 1/3 of its total support is from the public, with limitations on how much any one individual can contribute toward the 1/3 calculation. The public support test is calculated using a four-year window. It is important for charities to meet the public support test if they want to be classified as a public charity rather than a private foundation. General Problem Information: Public charities and private foundations Learning Objective: 13-3 Topic: Federal Regulation 13-3 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Ch. 13, Answers, Question 13-5 (Cont’d)

Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal Level of Difficulty: Medium

13-6. At the state level the type and amount of political activity an NFP can undertake will vary. However, excessive political activity can result in state sanctions. At the federal level, a charitable NFP organization is prohibited from campaigning on behalf of any candidate for public office. However, NFP organizations do have limited ability to engage in lobbying activity. Examples of allowable limited lobbying activity would include testifying at hearings, corresponding with elected officials, publishing documents that advocate for a specific legislative action, and direct appeals to the general public to contact legislators or take other action on a legislative matter. If an organization chooses to take the Section 501(h) election, the allowable amount that can be spent on lobbying activity is a specified percentage of the NFP’s exempt purpose expenditures, not to exceed $1 million annually. General Problem Information: Political activity Learning Objective: 13-3 Topic: Federal Regulation Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal Level of Difficulty: Medium 13-7. A gift shop that is considered unrelated to the tax-exempt mission of the museum and regularly carries on business activities will be subject to the unrelated business income tax (UBIT) if its net income is greater than $1,000. The UBIT rate is equal to corporate income tax rates. In order to ensure that the museum does not incur a UBIT liability, the managers should carefully review the incorporating documents to determine if the taxexempt mission of the organization includes selling items related to exhibits. The museum can also escape this tax if the gift shop is staffed by volunteers, if the entire inventory is donated, or if its net income is less than $1,000. General Problem Information: Unrelated business income tax Learning Objective: 13-3 Topic: Federal Regulation Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal Level of Difficulty: Medium 13-8. IRC Sec. 527 includes such organizations as political action committees, political parties, and political campaigns. Sec. 527 organizations are considered tax-exempt under the IRC. Campaign finance laws typically have an impact on Sec. 527 organizations. As a result of such laws, organizations that meet the definition of a political organization are required to notify the IRS that they wish to be considered a Sec. 527 tax-exempt 13-4 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Ch. 13, Answers, Question 13-8 (Cont’d)

organization. Additionally, Sec. 527 NFPs must periodically complete Form 8872, notifying the IRS of the names and addresses of persons contributing more than $200 to the NFP, and those persons receiving more than $500 on an annual basis from the NFP. General Problem Information: Political action committees Learning Objective: 13-3 Topic: Federal Regulation Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal Level of Difficulty: Easy 13-9. Excessive benefits refer to amounts or “deals” received by an NFP organization’s officers (i.e., disqualified persons) that are deemed to be unreasonable when compared to similar transactions received by those in comparable positions. Examples of excessive benefits would include excessive compensation, sale of assets to an officer at a bargain price, or entering into leasing arrangements with an officer that would provide the officer with an unreasonable lease benefit. If the NFP knowingly provides excessive benefits, it is subject to intermediate sanctions and possible revocation of its exempt status. The individual receiving the benefit is also subject to intermediate sanctions. Intermediate sanctions refer to the power given to the IRS in Internal Revenue Code Sec. 4958 to assess a tax on excess benefit transactions. The first-tier penalty is a tax of 25 percent of the excess benefit received, which is payable by the individual receiving the benefit. There is also a 10 percent tax on the excess benefit that is assessed on the NFP if it knew the transaction was improper. Subsequent penalties can be assessed if the excessive benefit transaction is not corrected. General Problem Information: Excessive benefits Learning Objective: 13-3 Topic: Federal Regulation Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal Level of Difficulty: Medium

13-10. The articles of incorporation for an NFP state the charitable purpose of the organization. The purpose and mission identified in the articles of incorporation are important for regulatory purposes and the request for federal tax-exempt status. In addition to the charitable purpose, the articles will include information such as name of the organization, address, and the board of directors. The articles of incorporation have an external focus and describe the purpose of the organization without being too restrictive, while the by-laws have an internal focus and describe the functional rules of the organization. A state may require that the by-laws be included with the filing of the articles of incorporation. 13-5 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Ch. 13, Answers, Question 13-10 (Cont’d)

General Problem Information: Governing documents Learning Objective: 13-4 Topic: Governance Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal Level of Difficulty: Medium 13-11. There are several ways donors can evaluate the performance of NFP organizations. In the past, most publicly accessible data focused on not-for-profit financial information. Donors could calculate financial performance ratios utilizing the Form 990 or the audited financial statement. Examples of financial performances ratios can be found on Illustration 13-7. Donors could then compare the financial ratios over time and to peer organizations to assess the financial strength of the NFP organization. Another way donors can evaluate the performance of NFP organizations is to review the websites of third party charity evaluators. Organizations such as Charity Navigator and the BBB Wise Giving Alliance evaluate charities and provide a report on the overall strength of the NFP organization. Beyond financial measures, donors can evaluate nonfinancial measures of performance. While this data is more difficult to collect, initiatives are currently underway to allow interested parties to view nonfinancial performance metrics of NFP organizations. One large scale initiative is Guidestar Platinum. Guidestar Platinum allows NFP organizations to self-report nonfinancial performance information on their Guidestar profile page. General Problem Information: Performance measures Learning Objective: 13-5 Topic: Benchmarking and Performance Measures Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal Level of Difficulty: Easy

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Solutions to Cases 13-12 Note: The answers provided to this case are based on the 2018 integrated annual report of the Association of International Certified Professional Accountants (Association). a.

In the “Top accomplishments” section of the annual report, the Association reports having over 657,000 members and students living in 179 countries and territories.

The Association board is comprised of 38 members from the profession and public. The board is charged with monitoring the external environment for key trends that might affect the future of the profession. Association board members also serve on either the Public Accounting Board or the Management Accounting Board. The Public Accounting Board focuses on issues impacting CPAs and public accounting practice while the Management Accounting Board focuses on issues affecting management accounting.

The Association reported four key performance indicators (KPIs): members and students, net promoter score, total revenue, and net income (loss). Based on the reported 2018 numbers, they were not able to achieve their targeted KPIs. The number of members and students was below its targeted level of 676,000. The Association also missed its target for the net promoter score. Finally, it failed to achieve its total revenue target of $339 million and its net income target of $6 million.

The program expense efficiency ratio is calculated as Program Expenses/Total Expenses. Using the 2018 combined statements of activities found in the annual report for the Association, the following ratio was calculated: Total Program Services Expense / Total Operating Expenses = $298,640 / $340,720 = 88% The Association’s program expense efficiency ratio is higher than five of the ten largest charitable NFPs. The answer to whether the Association should be as efficient will vary by student. Association members pay dues in the expectation that they are receiving value for the dollars paid. Some may argue that because the Association is a membership organization, its administrative costs should be higher due to higher salaries and the perquisites of office. Others will argue that members do not pay dues for such non-value-added services and that the Association efficiency should be similar to other NFPs.

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Ch. 13, Solutions, Case 13-12, d. (Cont’d)

As a caution, the assessment of the performance of any organization should be based on factors other than a single ratio. For example, membership in the Association is voluntary; therefore, much as with for-profit entities, members have the option of not purchasing the services (i.e., not paying dues) offered by the Association if they do not believe they are receiving value for their money. The fact that members continue to pay dues indicates they are at least somewhat satisfied with the services provided by the Association.

General Problem Information: Analyzing an NFP Leaning Objective: 13-4 Leaning Objective: 13-5 Topic: Governance; Benchmarking and Performance Measures Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: BB: Critical Thinking Level of Difficulty: Hard

13-13. a.

The following are questions the executive director of the association should be prepared to answer: • • • • • •

Would the net income derived from the sale of exhibit space be large enough to subject the NFP to UBIT? Does the activity meet any of the exclusions under UBIT, such as volunteer workforce, qualified sponsorship activities, selling donated materials, etc.? Does the sale of exhibit space contribute importantly to promoting the human resources industry or educating attendees about products, services, and/or rules and regulations affecting the human resources industry? Does the sale of the exhibit space help achieve the purpose of promoting and educating about the industry through the design and character of the products displayed? Is the association classified as one of the qualifying organizations under the IRC codes? Does the net income meet the threshold for reporting UBIT (over $1,000)?

Derived from IRS Pub. 598, (February 2019, p. 7). See answer to part b. b.

The IRS Publication 598 “Tax on Unrelated Business Income of Exempt Organizations” will help students identify whether this activity is considered “unrelated business income” subject to a tax. This publication is available at www.irs.gov. Under Chapter 3, “Unrelated Trade or Business,” there is a subsection titled “Excluded Trade or Business Activities” that provides specific

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Ch. 13, Solutions, Case 13-13, b. (Cont’d)

information on “Convention or trade show activity” that can be used to answer the questions of Phyllis Gene. c.

The memo students prepare should incorporate the questions identified in part a taken from the IRS Publication described in part b and any other guidance students can find on the Internet or from other resources. Emphasize to students that, as a board member, Ms. Gene will use their analysis and memo to help her speak to the board as a whole so the board can deliberate how to structure the vendor exhibits to allow the revenues to be excluded from consideration as UBI. Students can suggest an approach, but they should point out that their analysis is derived from publicly available IRS guidance (and cite any other literature they used in their analysis), and that they are not tax professionals, nor do they have expertise in tax-exempt issues.

General Problem Information: UBIT and advertising Leaning Objective: 13-3 Topic: Federal Regulation Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Research Level of Difficulty: Hard 13-14. a.

Students will choose different sets of charities. Websites for the organizations listed on Illustration 13-8 can be readily obtained through a search engine such as Google. The most widely published ratio expected to be available on NFPs’ websites is the percent of total expenses spent on the program as opposed to supporting the program. Generally, organizations strive to have this percentage be between 60% and 90%. The availability of data for calculating ratios will vary by the NFP. Comparing to the 2019 ratios provided in Illustration 13-8, students will probably observe that NFP organizations try to maintain fairly high efficiency ratios.

Readers of financial statements can calculate the ratios presented in Illustration 13-7 from the audited annual financial statements and IRS Form 990. For example, donors can calculate the organization’s fund-raising ratio by looking at the statement of activities to see if the dollars from contributions and support adjusted for fund-raising costs, divided by total contributions and support, is close to one and exceeds a target set by the organization. Generally, a higher ratio is better. The fund-raising efficiency measure can also be calculated from the statement of activities. Liquidity ratios come from the statement of financial position and statement of activities. If the organizations provide financial reports or the Form 990 on their websites, they are generally also providing the reports or forms for several years. The

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Ch. 13, Solutions, Case 13-14, c. (Cont’d)

advantage of having several years of data is that it allows for benchmarking. Donors and others are able to see if an organization’s performance has improved, remained stable, or declined over time. Using one metric at one point in time does not give a perspective on the organization’s performance. d.

Students could present information in this manner:

Performance measures: Liquidity Going concern Leverage Program expense efficiency Debt coverage Fund-raising efficiency Investment performance

Charity 1

Charity 2

Charity 3

Charity 4

Charity 5

Comments:

Students should be cautioned that using ratios for a single year is just a first step in assessing the performance of an organization. A more thorough analysis would include trend information, as well as more comprehensive benchmark data. e.

In addition to assessing financial performance, donors and others are often concerned about the effectiveness of the not-for-profit’s programs. Utilizing nonfinancial metrics such as the number of clients served, or the number of health outcomes improved can provide a richer set of data to assess the overall effectiveness of the NFP. Some NFPs provide nonfinancial data on their websites. In addition, organizations such as Guidestar Inc., display nonfinancial performance data for thousands of nonprofits.

General Problem Information: Performance measures of NFPs Leaning Objective: 13-5 Topic: Benchmarking and Performance Measures Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making Level of Difficulty: Hard

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

13-15. Note: Answers to case 13-15 are based on Internet access dated 1/14/2020 and will likely differ at the time the case is assigned. a. Students will need to visit the Guidestar homepage (www.guidestar.org) and register for a free account. Note: Guidestar merged with the Foundation Center to form Candid. The Guidestar website is now referenced as “Guidestar by Candid”; however, for brevity, we continue to refer to the website as Guidestar. Once registered, students should return to the homepage and go to the search function. (Note: Once in the search function students can search for just organizations that have achieved platinum status utilizing the “organizations” tab.) The search for platinum organizations reveals 10,179 NFPs that have achieved the platinum level of transparency. b. Students’ answers for this part will vary depending on the organizations they use. As an example, one organization students could choose is Thriive. Thriive lists its mission on its Guidestar profile page as: “Thriive’s mission is building prosperity in vulnerable global communities. At Thriive we inspire a culture of philanthropy in challenged communities and offer a sustainable way out of poverty by helping to create new jobs. As we help small businesses grow with needed capital, they pay forward this assistance by donating products, services, and job training to the most vulnerable in their communities. The majority of entrepreneurs are so inspired by the impact their gifts have on others that they continue to give, transforming themselves from someone in need to someone whose donations help fortify their communities and help make them more resilient and self-reliant.” Thriive, as well as the other not-for-profits on Guidestar, report their three most recent Form 990s. Additional Form 990s are available with an upgraded service level (higher service levels may be subject to a fee). c.

Students’ answers for this part will vary depending on the organizations and measures they use. In reference to Thriive’s profile page, five nonfinancial performance indicators are listed: number of people receiving products and/or services donations, number of jobs created and maintained, number of unskilled individuals who received job training, number of individuals who received training to increase their income, and number of borrowers served through the not-for-profit’s programs. Thriive assesses the trend of four of the five metrics as “holding steady,” while noting the metric “number of jobs created and maintained” is “increasing.”

General Problem Information: Evaluating charity organizations Leaning Objective: 13-5 Topic: Benchmarking and Performance Measures Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making Level of Difficulty: Medium

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

13-16. Note: Answers to Case 13-16 are based on Internet access dated 1/14/2020 and may differ slightly at the time the case is assigned. a. The World Resources Institute received an A+ rating. The rating is assigned based on the following criteria: • Program expense efficiency (program expenses / total expenses) — to receive such a high rating, the World Resources Institute would need to have a ratio of 80 percent or greater. This is due to the fact CharityWatch averages the grade from the cost to raise $100 and the grade given to the program expense efficiency. In order to receive at least an A on program expense efficiency, the World Resources Institute would need to report program expense efficiency of at least 80%. • Cost to raise $100 in related contributions (basically fund-raising expenses / public support) — to receive such a high rating, the World Resources Institute would be expending $11 or less on every $100 raised. • A reasonable level of available assets. Too many available assets will result in a lower rating. The World Resources Institute would need to have available assets of less than three years to receive such a high rating. Available assets is the amount of assets (including investments designated by the board) available to cover the current year’s budget. • In addition, in order to receive “Top-Rated Status,” an organization must meet transparency and governance benchmarks. The World Resources Institute receives top-rated status. The A+ grade received by the World Resources Institute indicates that CharityWatch believes the World Resources Institute is performing at a high level in allocating resources to program services without incurring excessive fundraising costs. b.

Yes, the World Resources Institute does meet the BBB’s standards for charity accountability. To do so it must meet all 20 standards on which the BBB rates charities.

According to the BBB website, the World Resources Institute’s program expense efficiency percentage (program expenses / total expenses) was 92 percent, and its fund-raising efficiency percentage (fund-raising expenses / related contributions) was 2 percent. The BBB rule of thumb for program expense efficiency is at least 65 percent and its rule of thumb for fund-raising efficiency is less than 35 percent. Based on the rules of thumb provided by the BBB, the World Resources Institute appears to be operating efficiently with regard to programs and fund-raising expenses.

Yes, based on the limited analysis conducted, it appears the World Resources Institute is performing quite well. Program expense efficiency percentages and the fund-raising efficiency percentages are very good based on the criteria provided

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Ch. 13, Solutions, Case 13-16, d. (Cont’d)

by both CharityWatch and the BBB. BBB data indicate that in addition to only spending 2 percent on fund-raising, only 6 percent is spent on management and general costs. The CharityWatch criteria also indicate that the World Resources Institute is using its available assets for its mission rather than holding assets in investments. General Problem Information: Performance evaluation of a NFP Leaning Objective: 13-5 Topic: Benchmarking and Performance Measures Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making Level of Difficulty: Hard 13-17. Answers for a and b were accessed on 1/14/2020 from the “How Do We Rate Charities'

Accountability and Transparency?” portion of the Charity Navigator website. The answer for c was accessed on 1/14/2020 from the “Accountability and Transparency Ratings Tables” portion of the Charity Navigator website. a. The seventeen categories are as follows: independent board, no material diversion of assets, audited financials prepared by independent accountant with an audit oversight committee, no loan(s) to or from related parties, documents board meeting minutes, provided copy of Form 990 to organization’s governing body in advance of filing, have a conflict of interest policy, have a whistleblower policy, have a records retention and destruction policy, CEO listed on the Form 990 with salary, have a process for determining CEO compensation, board listed/board members not compensated, board members listed on website, key staff listed on website, audited financials available on the charity’s website, Form 990 published on charity’s website, and charity has privacy policy published on its website. b. The first twelve categories are measured from information provided on the Form 990. The last five categories are measured based on a review of the charity’s website. c. Charities begin with a 100-point score for Accountability and Transparency. They then lose points as follows:

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Ch. 13, Solutions, Case 13-17, c. (Cont’d) 1.1.1.1.1.1.1.1.1

Performance Metric

1.1.1.1.1.1.1.1.2

Deductions from Score

1.1.1.1.1.1.1.1.3

Less than 5 independent voting members of the board; or independent members do not constitute a voting majority.

1.1.1.1.1.1.1.1.4

15 points

1.1.1.1.1.1.1.1.5

Material diversion of assets within the last two years, without a satisfactory explanation

1.1.1.1.1.1.1.1.6

15 points

1.1.1.1.1.1.1.1.7

Material diversion of assets within the last year, with a satisfactory explanation

1.1.1.1.1.1.1.1.8

7 points

1.1.1.1.1.1.1.1.9

Audited financial statements are not prepared or reviewed by an independent accountant

1.1.1.1.1.1.1.1.10

15 points

1.1.1.1.1.1.1.1.11

Audited financial statements are prepared or reviewed by an independent accountant, but that accountant is not selected and overseen by an internal committee.

1.1.1.1.1.1.1.1.12

7 points

1.1.1.1.1.1.1.1.13

Loans to or from officers or other interested parties

1.1.1.1.1.1.1.1.14

4 points

1.1.1.1.1.1.1.1.15

Organization does not keep board meeting minutes

1.1.1.1.1.1.1.1.16

4 points

1.1.1.1.1.1.1.1.17

Form 990 not distributed to the board before filing

1.1.1.1.1.1.1.1.18

4 points

1.1.1.1.1.1.1.1.19

No conflict of interest policy

1.1.1.1.1.1.1.1.20

4 points

1.1.1.1.1.1.1.1.21

No whistleblower policy

1.1.1.1.1.1.1.1.22

4 points

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Ch. 13, Solutions, Case 13-17, c. (Cont’d)

1.1.1.1.1.1.1.1.23

No records retention and destruction policy

1.1.1.1.1.1.1.1.24

4 points

1.1.1.1.1.1.1.1.25

Does not properly report CEO compensation on Form 990

1.1.1.1.1.1.1.1.26

4 points

1.1.1.1.1.1.1.1.27

Does not have a process for reviewing and updating CEO compensation

1.1.1.1.1.1.1.1.28

4 points

1.1.1.1.1.1.1.1.29

Fails to report board members and compensation fully on the Form 990, or reports that board members are compensated for their participation

1.1.1.1.1.1.1.1.30

4 points

1.1.1.1.1.1.1.1.31

Does not publish board members on website

1.1.1.1.1.1.1.1.32

4 points

1.1.1.1.1.1.1.1.33

Does not publish senior staff on website

1.1.1.1.1.1.1.1.34

3 points

Does not publish latest audited financial statements on website

4 points

Does not publish latest Form 990 on website

3 points

No donor privacy policy

4 points

Opt-out donor privacy policy

3 points

Once a charity is scored out of 100, they are assigned a star rating as follows:

Ch. 13, Solutions, Case 13-17, c. (Cont’d)

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

1.1.1.1.1.1.1.1.39

Accountabilit y& Transparenc y Rating:

Accountabili ty & Transparenc y Score:

0 S t a r s

1.1.1.1.1.1.1.1.35

1.1.1.1.1.1.1.1.36 1.1.1.1.1.1.1.1.37

1.1.1.1.1.1.1.1.40

≥1.1.1.1.1.1.1.1.41 ≥1.1.1.1.1.1.1.1.42 ≥1.1.1.1.1.1.1.1.43 ≥1.1.1.1.1.1.1.1.44 < 9 0

8 0

1.1.1.1.1.1.1.1.38

7 0

5 5

A four-star rating is the best rating a charity can receive on the accountability and transparency metric, while a zero star is the worst. d. The answer will depend on the charity chosen by the student. Students should be encouraged to discuss the relative importance of each category, as well as the strengths and weaknesses of the scoring methodology.

General Problem Information: accountability and transparency evaluation of a NFP Leaning Objective: 13-3 Leaning Objective: 13-4 Leaning Objective: 13-5 Topic: Federal Regulation; Governance; Benchmarking and Performance Measures Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making Level of Difficulty: Hard

Solutions to Exercises and Problems 13-18. 1. 2. 3. 4. 5.

b. a. c. d. a.

6. 7. 8. 9. 10.

d. d. b. c. d.

11. c.

General Problem Information: Various Learning Objective: 13-1 Learning Objective: 13-2 Learning Objective: 13-3 Ch. 13, Solutions, Exercise 13-18 (Cont’d) 13-16 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Learning Objective: 13-5 Topic: Various Chapter Topics Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Critical Thinking Level of Difficulty: Hard 13-19. a.

United Way support Grant from the state Grant from the city Contributions: small contributions: large contributions: 4 gifts @ $6,380 (the limit)* Public Support

$ 10,000 25,000 10,000 21,000 25,520 $91,520

* total support is $319,000. Since four contributors each provided more than 2% of the total contribution the limit per individual is $319,000 × .02 = $6,380. The answer is based on the revised 2019 IRS publication 557, Chapter 3, Comprehensive Examples, p. 36. b.

The organization is not a public charity because it does not pass the public support test. Less than 1/3 of its revenue comes from the public at large ($91,520 / $319,000 = 28.7%).

No. Now the organization meets the public support test because more than 1/3 of total support ($112,380 / $319,000 = 35.2%) comes from the public at large. United Way support Grant from the state Grant from the city Contributions: small contributions: large contributions: 1 gift @ $6,380 (the limit) Public Support

$ 10,000 25,000 10,000 61,000 6,380 $112,380

Note that a tax-exempt entity in its first five years will not have to prove that it meets the public support test if there is a reasonable expectation it will be met; however, it will need to prove it meets the test in the 6th year. Also, be aware that there are some special considerations that can be taken into account should the 1/3 public support test, as presented in this problem, is not met. Ch. 13, Solutions, Exercise 13-19 (Cont’d)

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

General Problem Information: Public Charity Leaning Objective: 13-3 Topic: Tax-Exempt Categories Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Measurement Level of Difficulty: Hard 13-20. 1. 2. 3. 4. 5. 6. 7. 8.

IRC Sec. 501(c)(3) IRC Sec. 501(c)(6) IRC Sec. 501(c)(19) IRC Sec. 501(k) IRC Sec. 501(c)(6) IRC Sec. 501(c)(3) IRC Sec. 501(c)(7) IRC Sec. 527

General Problem Information: Tax-exempt categories Leaning Objective: 13-3 Topic: Federal Regulation Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal Level of Difficulty: Easy 13-21. Yes – subject to UBIT 1.

2. 3. 4.

Sale of Silverton Symphony Orchestra Concert CDs in the facility’s gift shop. Rental of the facility to the high school drama club. Rental of two apartments in the facility to the symphony. Sale of the season ticket membership list to a local music store. Rental of the facility to the state CPA association for continuing professional education events. Internet sales of books about the community of Silverton with the Silverton Symphony Orchestra logo.

No – not unrelated business income X

X X X

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Ch. 13, Solutions, Exercise 13-21 (Cont’d)

Lease of the facility’s parking lot to the local university on football game days.

Note: From the information provided, we can infer that activities described in #1 and #2 appear to be related to the music and performance activities of the Silverton Symphony Orchestra Hall. Activities described in #3 through #7 are not related to music and performance arts. It should be noted that if the facility was not debt financed, rental of the facility would generally not be subject to UBIT even if the renting of the facility was not related to the mission of the organization. General Problem Information: UBIT Leaning Objective: 13-3 Topic: Federal Regulation Bloom’s Taxonomy: Categorize Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal Level of Difficulty: Medium 13-22.

Yes. This is a classic example of excess economic benefit transactions. Jane is a disqualified person because she is an officer with substantial influence over the organization and she is receiving more than the fair market value for the building. The organization can avoid sanctions by getting other appraisals that document that the building is really worth $250,000, or by purchasing the building for $200,000.

Yes. However, the risk only occurs when the excess benefit is paid. The organization could avoid a problem by putting a limitation on the amount of compensation the president could receive.

No. However, the law is silent on this particular example. She is probably receiving the tickets as a member, if all members receive the same number of admission tickets. If the organization intended it to be compensation, then it needs to be explicitly stated in a board resolution.

Possibly. If the incoming president’s duties are similar to the outgoing president and comparable organizations, then the compensation may be unreasonable. If the duties are similar, however, Joe Curtis is able to perform them more efficiently then the higher salary may be reasonable. The organization should be sure his other offers are written and that he did not influence the other offers so that the offers can substantiate his “worth.” The NFP should also survey for comparable salaries and document the nature of the president’s duties and how the duties may differ from the previous president, as well as any difficulty in finding a candidate as qualified as Joe Curtis.

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Ch. 13, Solutions, Exercise 13-22 (Cont’d)

General Problem Information: Intermediate sanctions Leaning Objective: 13-3 Topic: Federal Regulation Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making Level of Difficulty: Hard 13-23. a.

Ratios Based on the 2018 Form 990 Measure

Calculation (amounts in 000s)

Ratio

$70,483+$29,111+$6,592+$769 $7,013+$5,176+$2,982

7.05

(Revenues-expenses)/expenses (part VIII, line 12 & part IX, line 25)

$2,831,621-2,823,973 $2,823,973

0.003

Program expenses/total expenses (part IX, line 25)

$2,785,029 $2,823,973

0.99

Fund-raising expenses/public support (part IX, line 25, & part VIII, line 1h)

$29,143 $2,756,780

0.01

Current ratio (part X, col. B, lines 1-9, 17-19)

The current ratio indicates that Feeding America is liquid, covering its current liabilities over seven times. It is also able to cover its current expenses with the revenue received in the period, indicating no going-concern issues relative to this indicator. Feeding America appears to be highly effective with 99 percent of expenses related to programs and only 1 percent related to support. Fund-raising efficiency also appears to be good, in that Feeding America is spending $.01 in fund-raising for every dollar of public support received.

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Ch. 13, Solutions, Exercise 13-23 (Cont’d)

b. Ratios Based on the 2019 Audited Financial Statements

Measure

Calculation (amounts in 000s)

Current ratio

$104,216 $15,801

1.1.1.1.1.1.1.1.45

6.60

($2,876,283-$2,871,893)

1.1.1.1.1.1.1.1.48

0.002

(Revenuesexpenses)/ expenses (total support & revenue, and total exp.)

Ratio

1.1.1.1.1.1.1.1.46

Program expenses/total expenses (total program services and total exp.) Fund-raising expenses/public support (fund development & total public support)

1.1.1.1.1.1.1.1.47

$2,871,893

$2,832,802

0.99

$2,871,893

$29,160

0.01

$2,804,595

Although the numbers entering the calculations are different, using audited financial statement information to calculate ratios for Feeding America provides results very similar to those results obtained from Form 990. There is a decrease in the current ratio value. The difference is not large enough to warrant a change in the analysis of Feeding America’s performance for 2019. c.

As a general rule, audited financial statements that conform to generally accepted accounting principles should be preferred to Form 990 information tax return data because of the assurance role that an independent auditor provides. However, the Form 990 has more narrative and qualitative information than does the audited annual financial statements. There is valuable information in each, and a sophisticated reader of financial statements will want to have both on hand. As seen with Feeding America, performance measures can be very similar using either source of data. Feeding America prepares audited financial statements and uses accrual accounting numbers in its Form 990 (see Part XII in the complete filing on the Feeding America website), which results in the similar performance measures calculated in parts a and b. However, it is possible that the measures could be quite different given that the IRS 13-21 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 13 - Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues

Ch. 13, Solutions, Exercise 13-23, c. (Cont’d)

does not require that accrual accounting or audited financial statements be used in preparing Form 990. General Problem Information: Performance measures Leaning Objective: 13-5 Topic: Benchmarking and Performance Measures Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Measurement Level of Difficulty: Hard

Chapter 14 - Accounting for Not-for-Profit Organizations

CHAPTER 14:

ACCOUNTING FOR NOT-FOR-PROFIT ORGANIZATIONS OUTLINE

Number

Type/Task

Status (re: 18/e)

Identify

Same

Compare Explain and distinguish

Same Same

Explain Compare Explain

Revised Revised Same

14-7 14-8 14-9

Standard setting bodies of not-forprofits Operating statement differences Classification of net assets; board designated and net assets with donor restrictions Expense reporting Conditional and unconditional pledges Program services and supporting services Donated services Special collections Joint costs

Explain Explain Define and explain

Same New Same

14-10

NFP mergers and acquisitions

Same

14-11

Conditional donations

Distinguish and explain Explain

Net assets with donor restrictions Research Case—Not-for-profit standard setting 14-14 Not-for-profit or government entity Exercises/Problems: 14-15 Various

Analyze and report Analyze

Revised New

Analyze and explain

Same

Multiple choice

14-16

Classification of revenues and contributions Donated services Gross vs. net reporting Joint costs with a fund-raising appeal Identify departures from GAAP

Classify

Items 1-2, 7-8, 12-13 revised. Items 14-15 new. Same (14-15)

Condition or restriction Statement of activities Recording revenue and expense transactions

Classify Evaluate Apply

Questions: 14-1 14-2 14-3

14-4 14-5 14-6

Cases: 14-12 14-13

14-17 14-18 14-19 14-20 14-21 14-22 14-23

Classify Analyze Analyze Evaluate and discuss

New

Same (14-16) Same (14-17) Same (14-18) Revised (1419) New Same (14-20) Revised (1421)

Chapter 14 - Accounting for Not-for-Profit Organizations

14-24 14-25

Recording and reporting transactions Recording and reporting transactions

Apply Apply

14-26

Identify departures from GAAP

Evaluate

14-27

Prepare all four financial statements

Apply

CHAPTER 14:

Same (14-22) Revised (1423) Revised (1424) Same (14-25)

ACCOUNTING FOR NOT-FOR-PROFIT ORGANIZATIONS

Answers to Questions 14-1

The Financial Accounting Standards Board (FASB) has primary responsibility for providing guidance on generally accepted accounting principles for nongovernmental not-for-profit entities. The Governmental Accounting Standards Board (GASB) is responsible for government organizations including governmental not-for-profit organizations. These lines of responsibility are outlined in FASB Accounting Standards Codification (ASC) 105. The American Institute of Certified Public Accountants (AICPA), the FASB, and the federal Office of Management and Budget (OMB) have made a concerted effort to standardize the accounting, financial reporting, and auditing rules for the diverse set of entities in the not-for-profit sector and reduce the inconsistencies across segments of this sector. The AICPA publishes the Audit & Accounting Guide for Not-For-Profit Entities to provide guidance to preparers and auditors. The FASB has codified accounting and reporting standards specific to nongovernmental not-for-profit organizations under FASB ASC 958. In addition, the Single Audit Act and Uniform Guidance prescribe auditing guidance that applies to government and nongovernmental NFPs expending $750,000 or more in federal awards in a year. General Problem Information: Standard setting bodies of not-for-profits Learning Objective: 14-1 Topic: Standard setting bodies for NFPs Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Easy

14-2

The operating statements for nongovernmental NFPs and governmental NFPs reporting as business-type entities report substantially the same information; the form in which the information is presented has some differences.

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Answers, Question 14-2 (Cont’d)

For example: Nongovernmental not-for-profits Generally titles the statement the statement of activities Considerable flexibility in formatting the statement Reports changes in the two net asset categories for the reporting period Identifies expenses by their functional classification (e.g., program or supporting) and natural classification (e.g., salaries, rent, interest expense, and depreciation) either in the statement of activities, in the notes to the financial statements, or as a separate financial statement

Governmental not-for-profits Titles the statement the statement of revenues, expenses, and changes in net position Must provide a format that identifies operating and nonoperating activities Reports the changes in total net position for the reporting period No similar requirement

General Problem Information: Operating statement differences Learning Objective: 14-2 Topic: Financial Reporting Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium 14-3. FASB ASC 958-205-45 requires not-for-profit organizations to separate net assets into two categories: net assets without donor restrictions and net assets with donor restrictions. Contributions received without restrictions on their use by donors are classified as without donor restrictions. Contributions or unconditional promises to give for which the donor has imposed restrictions as to the period of use or purpose for which the resources can be used are classified as with donor restrictions. When donor-imposed restrictions have been met, net assets with donor restrictions are decreased and net assets without donor restrictions are increased by reporting the amount as a release of restriction in the statement of activities. Contributions or unconditional promises to give for which the donor requires that the principal amount of the gift be conserved for perpetuity or a set period of time is classified as with donor restrictions. Earnings derived from such a gift can be classified as either with donor restrictions or without donor restrictions, depending on whether the donor imposes restrictions on the earnings.

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Answers, Question 14-3 (Cont’d)

Board designated net assets is a subset of net assets without donor restrictions. Dollars are moved from the net assets without donor restrictions category to board-designated net assets when the board takes action. Action to set aside a portion of net assets for a future purpose is usually reflected in the minutes to a board meeting. Examples might include repair of buildings or expansion of programs. As easily as a board can designate a special purpose for net assets without donor restrictions, it can “undesignate” those net assets, so board designated net assets are classified as net assets without donor restrictions. For an asset to be considered with donor restrictions, the restriction must be imposed by a donor. Net assets with donor restrictions are displayed separately as a category of net assets on the face of the statement of financial position. General Problem Information: Classification of net assets Learning Objective: 14-2 Topic: Financial Reporting Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium 14-4. The FASB requires all not-for-profit organizations to report expenses by function and nature either on the face of the statement of activities, as a separate financial statement, or in the notes to the financial statements. Reporting expenses by function and nature provides an analysis of the costs associated with each of the program services and supporting services. It allows the ratio of program expenses to total expenses and support expenses to total expenses to be computed and compared to other entities. In addition, readers of the financial statements can see the natural line-item, or object of expense; such as salaries, supplies, rent or occupancy costs, and depreciation. Illustration 14-4 in the text provides a reporting of expenses by function and nature that illustrates the relationship between functional expenses and natural classifications of expenses. General Problem Information: Expense reporting Learning Objective: 14-2 Topic: Financial Reporting Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium 14-5. Pledges are promises to give assets to an organization. Pledges may be conditional or unconditional. An unconditional pledge requires only the passage of time or performance on the part of the not-for-profit entity. As a result, unconditional pledges are generally recognized in the year the pledge is made. A conditional pledge, however, depends on the recipient overcoming a barrier (e.g., obtaining matching gifts by the recipient), and must also contain a right of release from obligation if the barrier is not overcome. Since it is unknown whether the conditions imposed on the pledge will be met, a conditional pledge is not recognized at the time the pledge is made, but it is disclosed. The conditional

Chapter 14 - Accounting for Not-for-Profit Organizations

pledge will be recognized when substantially all of the conditions imposed by the donor are met. General Problem Information: Conditional and unconditional pledges Learning Objective: 14-3 Topic: Accounting for NFP Organizations Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium

14-6. Expenses in a not-for-profit organization are divided into functional categories: (1) program services, and (2) supporting services expenses. Program service expenses are those that relate to the programs the NFP offers to the public; for example, the Community Family Service Agency (see Illustration 14-6) reports adoption, counseling, foster home care, and special outreach project as its programs. Supporting services expenses are those that are necessary to make program services possible. These expenses are typically classified into management and general expenses and fund-raising expenses. The time that an executive director spends in overall administration of the organization, with the board of directors, in budgeting and strategic planning meetings, and overseeing accounting and financial reporting is considered general and administrative, and, consequently, is classified as support expenses. However, many executive directors will also spend considerable time in fund-raising, and, particularly in smaller NFPs, on delivering the programs. It is proper, then, to allocate a portion of the executive director’s salary and fringe benefits to the functional categories of fund-raising expenses and program expenses, using an appropriate allocation method. Functional reporting of expenses in this manner is important since oversight bodies and donors place importance on the ratio of program services expenses to total expenses. In other words, they ask, “For every dollar the organization spends, how many cents go to the organization’s programs, rather than to management and general and fund-raising?” General Problem Information: Program services and supporting services Learning Objective: 14-2 Topic: Financial Reporting Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium

14-7. To be recorded as contribution revenue and either an expense or asset, a donated service must (1) create or enhance nonfinancial assets, or (2) require specialized skills that are provided by individuals possessing those skills, and typically would have to be purchased if not provided by donation. A good example of a donated service that meets the first

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Answers, Question 14-7 (Cont’d)

criteria would be an electrician contributing services for the new wing of a not-for-profit elementary school. In such a case the NFP would record a debit to the building account and a credit to a contributions account without donor restrictions for the fair value of the donated services. An example of the second criteria would be medical doctors and nurses who contribute their time to provide medical services that are central to an organization’s mission. In this case, the NFP would record a debit to a program expense account and a credit to a contributions account without donor restrictions for the fair value of the donated services. General Problem Information: Donated services Learning Objective: 14-3 Topic: Accounting for NFP Organizations Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium 14-8. Yes, the museum most likely is following GAAP. FASB standards provide an option for reporting collections which include historical treasures and works of art. Assuming the museum has met the criteria for recognizing its oil painting collection as an asset, the museum has the option of recognizing the collection or reporting the collection in the notes. This option is only available for assets that meet the definition of a collection. To meet the definition of a collection under FASB ASC 958-360-20, the museum must: 1. Hold the collection for public exhibition, education, or research in furtherance of public service rather than financial gain. 2. Protect, keep unencumbered, care for, and preserve the collection. 3. Subject the collection to an organizational policy that requires the proceeds of items that are sold from the collection to be used to acquire other items for the collection, to be used for the direct care of existing collections, or both. Therefore, it is probable the reason the collection is not recognized is because the museum has simply opted not to recognize the collection. General Problem Information: Special collections Learning Objective: 14-3 Topic: Accounting for NFP Organizations Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium 14-9. Joint costs are the expenses incurred when the activities of a not-for-profit organization include a fund-raising appeal with either a program or a management and general function. If it is determined that a bona fide program or management and general function Ch. 14, Answers, Question 14-9 (Cont’d) 14-6 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 14 - Accounting for Not-for-Profit Organizations

has occurred in conjunction with the fund-raising appeal, the joint costs would be allocated in a rational and systematic method with a reasonable amount recorded as a fund-raising expense and the remaining amount recorded as an expense to the appropriate program function or to management and general expenses. FASB standards indicate that for a bona fide program function to exist, the activity must meet the criteria of purpose, audience, and content. If the criteria are not met, all of the joint activity costs must be recorded as fund-raising. General Problem Information: Joint costs Learning Objective: 14-3 Topic: Accounting for NFP Organizations Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium 14-10. A merger occurs when two or more NFPs combine to create a new NFP. At the date of the merger, the new NFP recognizes the assets and liabilities of the merging NFP organizations at the amounts reported on the GAAP prepared financial statements of the merging NFPs. An acquisition occurs when an NFP obtains control of one or more NFP activities or businesses. The assets and liabilities of the acquired activities or businesses are initially recognized in the acquiring NFP financial statements using the acquisition method. This method is basically the same as that used by for-profit entities as outlined in FASB ASC 805. One notable difference is that goodwill created on an acquisition is treated as a charge (i.e., expense) for NFPs reliant on public support, but is an asset for acquisitions made by for-profit businesses. General Problem Information: NFP Mergers and Acquisitions Learning Objective: 14-4 Topic: Consolidations and Combinations Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium 14-11. A donor-imposed condition exists if a right of return or release exists, and the agreement with the donor includes a barrier that must be overcome by the NFP. NFPs should review the agreement with the donor to determine if there are any indicators that would suggest a barrier exists. Examples of indicators include stipulations limiting the discretion a recipient has to conduct an activity (e.g., requirement to follow specific guidelines about incurring qualifying expenses), the inclusion of a measurable performance-related barrier (e.g., the NFP must achieve a specified level of service or a specific outcome), and/or the extent to which the condition is related to the purpose of the donation (e.g., stipulations unrelated to the purpose of the donation, such as the requirement to provide an annual report, would not be a barrier). Ch. 14, Answers, Question 14-11 (Cont’d)

Chapter 14 - Accounting for Not-for-Profit Organizations

General Problem Information: Conditional donations Learning Objective: 14-3 Topic: Accounting for NFP Organizations Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium

Chapter 14 - Accounting for Not-for-Profit Organizations

Solutions to Cases 14-12.

a. An example of an evaluation memo would be as follows. Date: To: Chair, Baytown Area United Way Allocation Panel From: [Your Name], Financial Advisor Re: Analysis of Baytown Rehabilitative Camp for Disabled Children’s financial condition and recommendations for FY 2024 funding As you and the members of the panel may recall, we were quite concerned during the evaluation of this organization for FY 2023 funding that their financial reserves were precariously low. At that time, I raised the issue about the organization’s ability to continue to sustain its program at the budgeted level and recommended that its budget request from the United Way be cut in half until such time as its financial management improved. I also noted that the camp’s FY 2022 statement of activities showed that only 57 percent of its total expenses were incurred for program services. The full panel subsequently decided to send the organization a message about our concerns and reduced the agency’s budget request by $5,000 to $25,000, the amount the United Way Board ultimately approved. During last year’s meeting, the camp’s director and chairman of its board promised to take immediate action to improve the camp’s financial condition, including such actions as more fund-raising activity and, if necessary, cutting support staff at the camp. When I first looked at the FY 2024 budget request and FY 2023 financial statements for the Baytown Rehabilitative Camp, I was very surprised and pleased by the evident improvement the organization had made since last year in its financial situation. After closer inspection, however, I noted a reduction of $31,934 in the amount of the investments the camp has been carrying for several years that are restricted for building expansion, together with an exact amount of decrease in net assets with donor restrictions. What really got my attention was that there was no increase in the balance of the buildings account (the only change in that account was a decrease for depreciation of $7,240). It became apparent that the camp had removed money from restricted investments and used the money to bolster its financial reserves without donor restrictions. When I noted the apparent funds transfer, I contacted the camp’s director who informed me that the original donor, who had contributed $100,000 several years ago for future building expansion, was no longer living. Further, after an exhaustive search she was unable to locate a written agreement regarding the contribution. Upon reporting these facts to the board of directors, a resolution was passed authorizing the use of $37,500 of investments for general operating purposes in FY 2023. She stated that additional transfers could occur in future years, if the need arises.

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Case 14-12, a. (Cont’d)

So that you and the other members of the panel can see the impact this $37,500 transfer has on the camp’s financial position, I have calculated the following key measures both including and excluding the $37,500 amount. Normally, a current ratio over 2.0 and quick ratio over 1.0 are considered reasonable. Three months or more of financial reserves would be considered reasonable. As you can see, the camp’s financial improvement without the $37,500 is minimal. In short, the organization would still be financially distressed without the questionable $37,500 transfer. FY 2023 $37,500 Included $37,500 Excluded

FY 2022

Current Ratio: (current assets/ current liabilities)

$75,681 / $29,141 = 2.60

$38,181 / $29,141 = 1.31

$46,368 / $40,786 = 1.14

Quick Ratio: ((current assets – prepaid assets)/ current liabilities)

$60,122 / $29,141 = 2.06

$22,622 / $29,141 = .78

$28,620 / $40,786 = .70

FY 2023 $37,500 Included $37,500 Excluded Days of expenses covered by financial reserves (((current assets − current liabilities) / total expenses) × 365 days in a year)

(($75,681 − $29,141) / $238,932) × 365 = 71.1 days

(($38,181 − $29,141) / $238,932) × 365 = 13.8 days

FY 2022 12 days, provided in case.

Based on the facts as I know them and the foregoing analysis, I recommend that the United Way have an attorney with experience in such matters look at the situation concerning use of donor-restricted resources for general operating purposes. Respectfully submitted, [Your signature]

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Case 14-12 (Cont’d)

b. The answer to part b will depend on the individual students. Students should be concerned with funding given the camp’s use of donor-restricted funds. Students might raise concerns about ethics and “earnings management.” The following is provided for use in discussion. It appears that the director and board of the Baytown Rehabilitative Camp may have violated their fiduciary duty by using donor-restricted resources for general operating purposes. Why the camp’s independent auditor did not address this issue in its report is puzzling. An independent attorney with experience in this area should be engaged to investigate this situation. If a subsequent investigation determines that the director and board of directors acted in an illegal manner, legal charges could be filed against them. In addition, the heirs of the original donor might consider bringing civil charges against the agency to force reinstatement of the restricted resources. Finally, depending on state regulatory rules and policies, the state could revoke the organization’s charter and force it to liquidate. One possible solution would be for the camp to seek remedy from the courts, perhaps using the argument that they no longer intend to expand the building (although there is no indication that such a policy decision has been made). c. Again, this will depend on the students’ reaction to the activities undertaken by the camp with regard to the use of funds with donor-imposed restrictions. Clearly, performance has the appearance of improving as a result of the use of the restricted assets. General Problem Information: Net assets with donor restrictions Learning Objective: 14-2 Topic: Financial Reporting Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making Level of Difficulty: Hard 14-13. Answers to 14-13 are based on a review of the FASB website on January 27th, 2020. a. Currently there is one project specific to not-for-profit entities on the technical agenda. Not-for-profit reporting of gifts-in-kind is in the exposure draft stage. The objective of the project is to enhance the presentation and disclosure of gifts-in-kind. b. The answer to this question will depend in part on the list of recently completed projects related to not-for-profit entities. Comment letters can be found under the “Projects” tab on the FASB website. An example of a project a student could choose would be the project titled “Presentation of Financial Statements of Not-for-Profit Entities.” The project had 264 comment letters. Stakeholders that commented included academics, foundations, hospital systems, colleges, public accounting firms, and charitable NFP organizations. 14-11 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Case 14-13 (Cont’d)

c. Students can access information on the Not-for-Profit Advisory Committee (NAC) from the FASB website. The NAC consists of 15 to 20 members from industry, public accounting, and academia. The principal responsibilities of the NAC are to help the FASB to prioritize projects, provide feedback on practical and conceptual implications for active projects, and to provide feedback on issues important to the NFP sector. General Problem Information: Research Case—Not-for-profit standard setting Learning Objective: 14-1 Learning Objective: 14-2 Topic: Identify the accounting standard-setting bodies for NFPs, and determine if the NFP is governmental; Financial Reporting Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making Level of Difficulty: Hard 14-14. Issue: Is the Native American Heritage Center and Museum a governmental not-for-profit entity or nongovernmental not-for-profit entity? This is an essential determination because if the museum is governmental, the auditor will need to examine whether the museum’s financial statements are in conformity with GASB standards. If it is nongovernmental, its financial statements must conform to FASB standards. Analysis: There is no evidence to suggest that the Heritage Center and Museum is governmental per se, that is, a “public corporation or body corporate and politic.” Thus, it is necessary to apply the three AICPA criteria listed in the text to determine whether the organization is governmental in character. Only two of the governing board are appointed or approved by any one government entity (Mound City Council); thus, criterion a is not met. There is no evidence that a government has any power to dissolve the museum if it wished to do so, according to the original charter. Additionally, the net assets of the museum are allocated among entities; they do not revert to a government. Thus, it does not appear criterion b is met. It doesn’t appear that the museum has the power to enact or enforce a tax levy (criterion c). Only one of the three criteria needs to be met for the museum to be considered governmental in character. It does not appear, based on the information provided, that any of the criteria have been met. Careful application of the AICPA criteria to the fact situation in this case, leads one to reach the conclusion that the organization is nongovernmental and therefore should conform to FASB financial reporting standards if it expects to receive an unmodified (clean) audit opinion. General Problem Information: Not-for-profit or government entity Learning Objective: 14-1 Topic: Identify the accounting standard-setting bodies for NFPs Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making Level of Difficulty: Hard 14-12 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 14 - Accounting for Not-for-Profit Organizations

Solutions to Exercises and Problems 14-15. 1. 2. 3. 4. 5.

c. a. b. a. c.

6. 7. 8. 9. 10.

d. d. b. c. a.

11. c. 12. d. 13. b. 14. a. 15. d.

General Problem Information: Various Learning Objective: 14-1 Learning Objective: 14-2 Learning Objective: 14-3 Topic: Various Chapter Topics Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Critical Thinking Level of Difficulty: Hard

14-16. 1.

d (conditional promises are not recognized until the condition is met)

d (no indication contributions were received at the fundraising event)

c (endowment and earnings that have a purpose restriction)

General Problem Information: Classification of revenues and contributions Learning Objective: 14-3 Topic: Accounting for NFP Organizations Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium

Chapter 14 - Accounting for Not-for-Profit Organizations

14-17. 1.

General Problem Information: Donated services Learning Objective: 14-3 Topic: Accounting for NFP Organizations Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium 14-18. 1.

The facts suggest the Center for Nonprofit Excellence should report the gross revenues and expenses of the quarterly lunches. The gross revenues from the lunches represent 3.3% of the total revenues for the year. While it is perhaps debatable if 3.3% of revenues is considered significant, the fact that the lunches are held every quarter and are considered by the organization to be an important part of its strategy to improve management and administrative support in the local nonprofit sector suggests gross reporting is appropriate. Based on the information provided, it appears that direct benefit expenses of the flower sale can be netted against the gross revenues. The gross sales of the flower sale represent 2.2% of the total revenue for the year. While it may be debatable whether 2.2% of revenues is considered significant, the other facts of the scenario suggest the flower sale is peripheral to the other activities of the conservatory. Namely, the event is held once a year, there are no plans for a future event, and the sale of flowers is not directly related to the mission of the organization. The special event revenue should be reported gross of the direct benefit costs. For net reporting to be applicable, the events would need to be peripheral or incidental, or Philanthropy First would have to have variance power. The eight events in total represent 20% of We Care’s revenue, suggesting the events are major ongoing activity. In addition, We Care is the owner of “Life Works” and has a contractual right to 20% of the net proceeds, suggesting Philanthropy First does not have variance power. The music concert revenues should be presented gross along with the direct expenses. The fact that 50% of the total revenue for the year comes from the concert makes the event a major event. Although the music concert is only carried on once a year, the amount raised is a major component of the budget. In

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-18 (Cont’d)

addition, the music concert is carried on annually, suggesting Youth Literacy counts on this event as part of its ongoing funding strategy. General Problem Information: Gross vs. Net Reporting of Revenues and Expenses Learning Objective: 14-3 Topic: Accounting for NFP Organizations Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making Level of Difficulty: Hard 14-19. 1. Based on the information provided, it appears that the purpose, audience, and content criteria are met for this activity to be considered a bona fide activity. The joint costs should be allocated between the functional program expenses and support expenses, including fundraising. The purpose of the door-to-door campaign is to help accomplish the entity’s mission—to increase recycling. The audience is targeted because it is not recycling much, rather than because it has a high likelihood of contributing to the organization. The content of the campaign is to motivate the audience to action, specifically to get the audience to recycle more. 2. This activity fails all three criteria to be considered a bona fide activity under FASB ASC 958-720-45. All the costs of the activity should therefore be allocated to fundraising expenses. The purpose of the solicitation campaign is primarily to raise contributions (there is no call to action), not to promote the mission of the organization. The targeted audience is one that is upper-class and likely to contribute; in fact, their children would most likely not qualify to attend the camp. The content of the campaign does not motivate people to action. Simply asking people to read an informational pamphlet is not calling them to act in a way that advances the mission of the organization. 3. Based on the information provided, it appears that the purpose, audience, and content criteria are met for this activity to be considered a bona fide activity. The joint costs should be allocated between the functional program expenses and support expenses, including fund-raising. The purpose of the lecture is to help accomplish the NFP’s mission—to educate the public about the Ridley turtle and to help save it from extinction by increasing the successful hatching of eggs. The audience is targeted because it lives in the coastal area where the turtles nest, and through its activities can either help or harm the successful hatching of turtles. It has not been selected because it has a high likelihood of contributing to the organization. The content of the campaign is to motivate the audience to action, specifically by explaining what the audience members can do to improve the successful hatching of turtles in their area. 14-15 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-19 (Cont’d)

This activity would seemingly pass the three criteria; however, it must be classified as a fund-raising event. It would appear that the purpose of the campaign aligns with the NFP’s mission, which is to support the city’s firefighters. An objective of all firefighters is to prevent fires. The targeted audience is appropriate in that it is composed of homeowners who are being provided with information on how they can reduce the probability of fires in their homes. The audience is not primarily targeted for its high likelihood to contribute. The content of the campaign motivates people to action, since it is recommending that the homeowner take five steps to help reduce the probability of fire. What prevents this activity from being jointly allocated between program and fund-raising is the fact that those conducting the activity will receive a fee equal to 60% of the gross contributions received as compensation. According to FASB standards, compensating the firm based on how much it raises means the purpose criterion is not met and the costs cannot be jointly allocated, but rather all of the costs must be recorded as fundraising.

General Problem Information: Joint costs with a fund-raising appeal Learning Objective: 14-3 Topic: Accounting for NFP Organizations Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making Level of Difficulty: Hard 14-20. a. It appears there are several modifications that should be made to the Life Academy statement of activities. Some problems and recommendations to bring the statement into conformance with FASB standards include: • Special event revenue must be reported at the gross amount, which it appears has been done. However, the FASB also requires that the direct expenses of the special event be separately disclosed (see Illustration 14-2 for an example of how to report). It is not apparent from the statement presentation just what the direct expenses related to the special event were. • Program fees are reported as with donor restrictions. Program fees would be the result of an exchange transaction resulting in exchange revenue, not a contribution (nonexchange revenue). Only contributions restricted by the donor are to be reported as with donor restrictions. • The statement incorrectly includes the label “net position” instead of the appropriate NFP title “net assets.” • Expenses are reported in the with donor restrictions column. Expenses can only be reported in the without donor restrictions column. If the purpose for which net assets have been restricted has been met, the net assets are transferred to the without donor restrictions net asset column and should be shown on a line in the revenue section indicating net assets released from restrictions (see Illustration 14-2 for an example of how to report).

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-20, a. (Cont’d)

• • b.

The statement correctly reports the program function expenses separate from the support function expenses. However, the support function expenses should be separated into management and general, and fund-raising. Depreciation should be allocated to the functional areas.

Since Life Academy’s financial statements are not fairly presented in conformity with GAAP, the auditor would need to issue an adverse opinion unless the statements are revised to conform to FASB standards (ASC 958-205-45) and any FASB pronouncements that may apply. Life Academy will want to take immediate corrective action to bring its statements into conformance prior to the audit. General Problem Information: Identify departures from GAAP Learning Objective: 14-5 Topic: Preparing Journal Entries and Financial Statements Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Reporting Level of Difficulty: Hard

14-21. 1.

a. Conditional (right of return and a measurable barrier)

a. Conditional (right of return and limited discretion on the conduct of the activity)

b. With Donor Restriction

a. Conditional (right of return and a measurable barrier)

b. With Donor Restriction

c. Without Donor Restriction

General Problem Information: Distinguishing condition from restriction Learning Objective: 14-3 Topic: Financial Reporting Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium

Chapter 14 - Accounting for Not-for-Profit Organizations

14-22. a.

No. The presented statement is not in proper form for a statement of activities. A statement of activities should show changes in net assets without donor restrictions and net assets with donor restrictions. Additionally, the statement should either display the expenses by function in addition to nature or note that expenses by function are disclosed in the notes to the financial statements.

Some questions for the controller: 1. Were there no fund-raising expenses related to the solicitation of $111,400 in contributions? 2. Were the contributions of $50,000 for the Abstract Exhibit restricted by the donor, such that the $4,000 excess of revenues over expenses will have to be returned or spent on the program? 3. Should the $5,000 of equipment for the Public Exhibits program, and the $6,500 of equipment for Mgmt. & General be capitalized and depreciated? What is the capitalization policy of the organization?

The directors should apply for grants or solicit contributions of at least $46,000, the total cost of operating a similar program. Too often not-for-profit organizations request only the direct or variable costs of a program and do not ask for indirect cost recovery. Note, however, that if the contributions or grants are restricted for this purpose, then any excess funds would be expected to be returned if not spent on the program, unless the donor agrees to release the restriction.

A donor should request a full set of audited financial statements. A statement of financial position and statement of cash flows will provide additional information about the solvency of the organization and managerial ability of the directors and managers of the organization. In addition, the notes to the financial statements provide valuable information that describes many of the elements of the financial statements, such as contingent liabilities, investments, and volunteer services and in-kind contributions. General Problem Information: Statement of activities Learning Objective: 14-3 Topic: Accounting for NFP Organizations Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making Level of Difficulty: Hard

Chapter 14 - Accounting for Not-for-Profit Organizations

14-23.

THE SHANNON COMMUNITY KITCHEN GENERAL JOURNAL

CASH

Debits 28,000

Credits

CONTRIBUTIONS— WITHOUT DONOR RESTRICTIONS

25,000

CONTRIBUTIONS— WITH DONOR RESTRICTIONS—PROGRAM

PROGRAM EXPENSES

3,000

100

CONTRIBUTIONS— WITHOUT DONOR RESTRICTIONS

100

NO TRANSACTION IS RECORDED – MEAL SERVICE AND PREPARATION DOES NOT REQUIRE A SPECIALIZED SKILL

CASH

5,000

CONTRIBUTIONS— WITH DONOR RESTRICTIONS—PROGRAM

CASH REFUNDABLE ADVANCE

5,000

6,000 6,000

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-23 (Cont’d)

THE SHANNON COMMUNITY KITCHEN GENERAL JOURNAL Debits 6.

PROGRAM EXPENSES

Credits

4,100

CASH

4,100

NET ASSETS RELEASED—SATISFACTION OF PURPOSE RESTRICTION—WITH DONOR RESTRICTIONS

3,000

NET ASSETS RELEASED—SATISFACTION OF PURPOSE RESTRICTION—WITHOUT DONOR RESTRICTIONS

3,000

General Problem Information: Recording revenue and expense transactions Learning Objective: 14-3 Topic: Accounting for NFP Organizations Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard

14-24. a.

INVOLVE GENERAL JOURNAL RENT EXPENSE

Debits 35,000

Credits

CONTRIBUTIONS— WITHOUT DONOR RESTRICTIONS

35,000

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-24, a. (Cont’d)

INVOLVE GENERAL JOURNAL Debits

Credits

CASH 335,000 CONTRIBUTIONS RECEIVABLE

100,000

CONTRIBUTIONS—WITHOUT DONOR RESTRICTIONS

185,000

CONTRIBUTIONS—WITH DONOR RESTRICTIONS—TIME

100,000

CONTRIBUTIONS—WITH DONOR RESTRICTIONS—PROGRAM

SALARIES & BENEFITS EXPENSE

150,000

224,560

CASH

208,560

SALARIES & BENEFITS PAYABLE

16,000

CONTRIBUTIONS RECEIVABLE

100,000

CONTRIBUTIONS—WITH DONOR RESTRICTIONS—TIME

94,260

DISCOUNT ON CONTRIBUTIONS RECEIVABLE

EQUIPMENT & FURNITURE CASH

5,740

21,600 12,000

CONTRIBUTIONS—WITHOUT DONOR RESTRICTIONS

9,600

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-24, a. (Cont’d)

INVOLVE GENERAL JOURNAL Debits 6.

TELEPHONE EXPENSE

5,200

PRINTING & POSTAGE EXPENSE

12,000

UTILITIES EXPENSE

8,300

SUPPLIES EXPENSE

4,300

Credits

CASH

26,200

ACCOUNTS PAYABLE

3,600

NO TRANSACTION IS RECORDED – NO SPECIALIZED SKILL IS REQUIRED.

PROVISION FOR UNCOLLECTIBLE PLEDGES

10,000

ALLOWANCE FOR UNCOLLECTIBLE PLEDGES 10,000 DEPRECIATION EXPENSE

3,360

ALLOWANCE FOR DEPRECIATION—EQUIPMENT & FURNITURE

3,360

(Equipment: $12,000 / 5 years = $2,400; Furniture: $9,600 / 10 years = $960)

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-24, a. (Cont’d)

INVOLVE GENERAL JOURNAL Debits 9.

PUBLIC HEALTH EDUCATION PROGRAM

105,952

COMMUNITY SERVICE PROGRAM

90,816

MANAGEMENT & GENERAL

60,544

FUND-RAISING

45,408

Credits

SALARIES & BENEFITS EXPENSE

224,560

RENT EXPENSE

35,000

TELEPHONE EXPENSE

5,200

PRINTING & POSTAGE EXPENSE

12,000

UTILITIES

8,300

SUPPLIES EXPENSE

4,300

PROVISION FOR UNCOLLECTIBLE PLEDGES

10,000

DEPRECIATION EXPENSE

3,360

ALLOCATION OF NATURAL EXPENSES TO FUNCTIONS Public Health Education

Community Service

Management & General

Fund-raising

Total

Salary & Benefits Expense

$78,596

$67,368

$44,912

$33,684

$224,560

Rent Expense

12,250

10,500

7,000

5,250

35,000

Telephone Expense

1,820

1,560

1,040

780

5,200

Printing & Postage Expense

4,200

3,600

2,400

1,800

12,000

Utilities

2,905

2,490

1,660

1,245

8,300

Supplies Expense Provision for Uncollectible Pledges

1,505

1,290

860

645

4,300

3,500

3,000

2,000

1,500

10,000

Depreciation Expense

1,176

1,008

672

504

3,360

$105,952

$90,816

$60,544

$45,408

$302,720

Total

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-24, a. (Cont’d)

INVOLVE GENERAL JOURNAL Debits 10.

Credits

NET ASSETS RELEASED—SATISFACTION OF PURPOSE RESTRICTION—WITH DONOR RESTRICTIONS

105,952

NET ASSETS RELEASED—SATISFACTION OF PURPOSE RESTRICTION—WITHOUT DONOR RESTRICTIONS

11.

CONTRIBUTIONS—WITHOUT DONOR RESTRICTIONS

105,952

229,600

(trans. 1, 2 and 5) NET ASSETS WITHOUT DONOR RESTRICTIONS

73,120

PUBLIC HEALTH EDUCATION

105,952

COMMUNITY SERVICE

90,816

MANAGEMENT & GENERAL

60,544

FUND-RAISING

45,408

CONTRIBUTIONS—WITH DONOR RESTRICTIONS— PROGRAM

150,000

CONTRIBUTIONS—WITH DONOR RESTRICTIONS— TIME

194,260

(trans. 2 and 4) NET ASSETS WITH DONOR RESTRICTIONS

NET ASSETS WITH DONOR RESTRICTIONS

344,260

105,952

NET ASSETS RELEASED—SATISFACTION OF PURPOSE RESTRICTION—WITH DONOR RESTRICTIONS

105,952

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-24, a. (Cont’d)

INVOLVE GENERAL JOURNAL Debits

Credits

NET ASSETS RELEASED—SATISFACTION OF PURPOSE RESTRICTION—WITHOUT DONOR RESTRICTIONS

105,952

NET ASSETS WITHOUT DONOR RESTRICTIONS b.

105,952

INVOLVE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED DECEMBER 31, 2023

WITHOUT DONOR WITH DONOR RESTRICTIONS RESTRICTIONS TOTAL REVENUE & OTHER SUPPORT: CONTRIBUTIONS

$229,600

$344,260

$573,860

NET ASSETS RELEASED FROM RESTRICTION SATISFACTION OF PURPOSE

105,952 (105,952)

_______

TOTAL REVENUE & OTHER SUPPORT

335,552

238,308

573,860

EXPENSES: PUBLIC HEALTH EDUCATION

105,952

COMMUNITY SERVICES

90,816

MANAGEMENT & GENERAL

60,544

FUND-RAISING

45,408

_______

45,408

TOTAL EXPENSES

302,720

_______

302,720

INCREASE IN NET ASSETS

32,832

238,308

271,140

BEGINNING NET ASSETS

$ 32,832

$238,308

$271,140

ENDING NET ASSETS

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-24 (Cont’d)

INVOLVE STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2023

ASSETS: CASH

$ 88,240

CONTRIBUTIONS RECEIVABLE (less allowance for Uncollectible accounts of $10,000 and discount on contributions receivable of $5,740)

184,260

EQUIPMENT & FURNITURE (less allowance for accumulated depreciation of $3,360) TOTAL ASSETS

18,240 $290,740

LIABILITIES: ACCOUNTS PAYABLE SALARIES & BENEFITS PAYABLE TOTAL LIABILITIES

3,600 16,000 19,600

NET ASSETS: WITHOUT DONOR RESTRICTIONS

32,832

WITH DONOR RESTRICTIONS

238,308

TOTAL NET ASSETS

271,140

TOTAL LIABILITIES AND NET ASSETS

$290,740

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-24 (Cont’d)

INVOLVE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2023

CASH FLOWS FROM OPERATING ACTIVITIES: CASH RECEIVED FROM CONTRIBUTIONS

$335,000

CASH PAID TO EMPLOYEES

(208,560)

CASH PAID TO SUPPLIERS

(26,200)

NET CASH USED FOR OPERATING ACTIVITIES

100,240

CASH FLOWS FROM INVESTING ACTIVITIES: PURCHASE OF EQUIPMENT NET INCREASE IN CASH BEGINNING CASH ENDING CASH

(12,000) 88,240 0 $ 88,240

RECONCILIATION OF CHANGES IN NET ASSETS TO NET CASH USED FOR OPERATING ACTIVITIES: CHANGE IN NET ASSETS

$271,140

ADJUSTMENTS TO RECONCILE CHANGES IN NET ASSETS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION INCREASE IN NET CONTRIBUTIONS RECEIVABLE

3,360 (184,260)

INCREASE IN ACCOUNTS PAYABLE

3,600

INCREASE IN SALARIES PAYABLE

16,000

GIFT OF FURNITURE

(9,600)

CASH PROVIDED BY OPERATING ACTIVITIES

$100,240

NOTE: INVOLVE has elected to prepare the cash flow statement using the direct method and provide an optional reconciliation of changes in net assets to net cash provided by operating activities.

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-24 (Cont’d)

INVOLVE REPORTING OF EXPENSES BY NATURE AND FUNCTION FOR THE YEAR ENDED DECEMBER 31, 2023 PROGRAM SERVICES

SUPPORT SERVICES

Public Health Education

Community Service

Management & General

Fund-raising

TOTAL

33,684

$224,560

Salary & Benefit Expense

78,596

Rent Expense Telephone Expense

67,368

44,912

12,250

10,500

7,000

5,250

35,000

1,820

1,560

1,040

780

5,200

4,200

3,600

2,400

1,800

12,000

2,905

2,490

1,660

1,245

8,300

1,505

1,290

860

645

4,300

3,500

3,000

2,000

1,500

10,000

1,176

1,008

672

504

3,360

45,408

$302,720

Printing & Postage Expense Utilities Supplies Expense Provision for Uncollectible Accounts Depreciation Expense TOTAL

105,952

90,816

60,544

General Problem Information: Recording and reporting transactions Learning Objective: 14-3 Learning Objective: 14-5 Topic: Accounting for NFP Organizations; Preparing Journal Entries and Financial Statements Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard

Chapter 14 - Accounting for Not-for-Profit Organizations

14-25. a. For the volunteers’ time to be recorded as a contribution and related expense, the activities performed by the volunteers would (1) require specialized skill, (2) be provided by someone with the specialized skill, and (3) would generally be purchased by the Art League if not contributed. The problem indicates that the volunteers are greeting visitors, handling security, and the sales of artwork. It would not appear that any of these activities would require a specialized skill, which would be the basis for the auditor’s recommendation not to record the volunteer services. b.

ART LEAGUE GENERAL JOURNAL CASH CONTRIBUTIONS—WITHOUT DONOR RESTRICTIONS GRANTS RECEIVABLE MEMBERSHIP DUES TUITION & FEES COMMISSION REVENUE PAYABLE TO ARTISTS CASH INVESTMENT INCOME—WITHOUT DONOR RESTRICTIONS INVESTMENT INCOME—WITH DONOR RESTRICTIONS—PROGRAMS

Debits 60,730

Credits

20,861 4,600 16,285 6,974 2,402 9,608 1,955 686 1,269

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-25, b. (Cont’d)

ART LEAGUE GENERAL JOURNAL 3. 4.

GRANTS RECEIVABLE GRANT REVENUE

Debits 5,020

Credits 5,020

RENT EXPENSE CONTRIBUTIONS—WITHOUT DONOR RESTRICTIONS

18,000

SALARIES & BENEFITS EXPENSE UTILITIES EXPENSE PRINTING AND POSTAGE EXPENSE MISCELLANEOUS EXPENSE CASH PREPAID EXPENSES ACCOUNTS PAYABLE & ACCRUED EXPENSES (Prepaid Expenses; $1,060 − $840 = $220 decrease: Accounts Payable and Accrued Expenses; $2,746 − $2,649 = $97 increase)

46,900 3,080 1,310 640

CASH SHORT-TERM INVESTMENTS

2,900

EQUIPMENT CASH NET ASSETS RELEASED—SATISFACTION OF PURPOSE RESTRICTION—WITH DONOR RESTRICTIONS NET ASSETS RELEASED—SATISFACTION OF PURPOSE RESTRICTION—WITHOUT DONOR RESTRICTIONS

2,835

18,000

51,613 220 97

2,900

2,835 2,835

2,835

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-25, b. (Cont’d)

ART LEAGUE GENERAL JOURNAL Debits 7.

COMMUNITY ART EDUCATION

Credits

825

CASH

825

NET ASSETS RELEASED—SATISFACTION OF PURPOSE RESTRICTION—WITH DONOR RESTRICTIONS

825

NET ASSETS RELEASED—SATISFACTION OF PURPOSE RESTRICTION—WITHOUT DONOR RESTRICTIONS 8.

DEPRECIATION EXPENSE

825 1,642

ALLOWANCE FOR DEPRECIATION—EQUIPMENT

10.

1,642

EXHIBITION PROGRAM

21,472

COMMUNITY ART EDUCATION PROGRAM

21,472

MANAGEMENT & GENERAL

17,893

FUND-RAISING

10,735

RENT EXPENSE

18,000

SALARIES & BENEFITS EXPENSE

46,900

UTILITIES EXPENSE

3,080

PRINTING AND POSTAGE EXPENSE

1,310

MISCELLANEOUS EXPENSE

640

DEPRECIATION EXPENSE

1,642

PAYABLE TO ARTISTS CASH

9,608 9,608

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-25, b. (Cont’d)

ART LEAGUE GENERAL JOURNAL Debits 11.

CONTRIBUTIONS—WITHOUT DONOR RESTRICTIONS

Credits

38,861

(trans. 1 and 4) MEMBERSHIP DUES

16,285

GRANT REVENUE

5,020

TUITION & FEES

6,974

C OMMISSION REVENUE

2,402

INVESTMENT INCOME—WITHOUT DONOR RESTRICTIONS NET ASSETS WITHOUT DONOR RESTRICTIONS

686 2,169

EXHIBITION PROGRAM

21,472

COMMUNITY ART EDUCATION (trans. 7 and 9)

22,297

MANAGEMENT & GENERAL

17,893

FUND-RAISING

10,735

INVESTMENT INCOME—WITH DONOR RESTRICTIONS— PROGRAMS

1,269

NET ASSETS WITH DONOR RESTRICTIONS— PROGRAMS

1,269

NET ASSETS WITH DONOR RESTRICTIONS— PROGRAMS

3,660

NET ASSETS RELEASED—SATISFACTION OF PURPOSE RESTRICTION—WITH DONOR RESTRICTIONS

3,660

NET ASSETS RELEASED—SATISFACTION OF PURPOSE RESTRICTION—WITHOUT DONOR RESTRICTIONS NET ASSETS WITHOUT DONOR RESTRICTIONS

3,660 3,660

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-25 (Cont’d)

ART LEAGUE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2023

Without Donor With Donor Restrictions Restrictions

Total

REVENUE & OTHER SUPPORT: CONTRIBUTIONS

$ 38,861

MEMBERSHIP DUES

16,285

TUITION & FEES

6,974

GRANT REVENUE

5,020

COMMISSION REVENUE

2,402

INVESTMENT INCOME

686

$ 1,269

3,660

(3,660)

73,888

(2,391)

1,955

NET ASSETS RELEASED FROM RESTRICTION SATISFACTION OF PURPOSE TOTAL REVENUE & OTHER SUPPORT

71,497

EXPENSES: EXHIBITION PROGRAM

21,472

COMMUNITY ART EDUCATION

22,297

MANAGEMENT & GENERAL

17,893

FUND-RAISING

10,735

_______

10,735

TOTAL EXPENSES

72,397

_______

72,397

CHANGE IN NET ASSETS BEGINNING NET ASSETS ENDING NET ASSETS

1,491

(2,391)

(900)

11,811

19,012

30,823

$ 13,302

$ 16,621

$ 29,923

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-25 (Cont’d)

ART LEAGUE STATEMENT OF FINANCIAL POSITION JUNE 30, 2023

ASSETS: CASH (beginning balance, trans. 1, 2, 5, 6, 7, and 10)

$ 3,719

SHORT-TERM INVESTEMENTS (beginning balance and trans. 6)

9,211

GRANTS RECEIVABLE (beginning balance, trans. 1 and 3)

5,020

PREPAID EXPENSE (trans. 5)

840

EQUIPMENT (less allowance for accumulated depreciation of $4,068) (trans 8)

8,112

ASSETS RESTRICTED: FOR ENDOWMENT: INVESTMENTS TOTAL ASSETS

5,767 $32,669

LIABILITIES: ACCOUNTS PAYABLE & ACCRUED EXPENSES (trans. 5) TOTAL LIABILITIES

2,746 2,746

NET ASSETS: WITHOUT DONOR RESTRICTIONS

13,302

WITH DONOR RESTRICTIONS—PROGRAMS

10,854

WITH DONOR RESTRICTIONS—PERMANENT ENDOWMENT

5,767

TOTAL NET ASSETS TOTAL LIABILITIES AND NET ASSETS

29,923 $ 32,669

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-25 (Cont’d)

Some of the corrections or modifications that should be made to the Learning Institute’s statement of financial position include: • Short- and long-term investments should be separated since the FASB indicates that assets should be reported in terms of nearness to cash or by classifying as current/noncurrent. Long-term investments are generally reported in a separate category after current assets and before property, plant, and equipment. • Conditional pledges should not be recognized in the financial statements until the conditions have been met. • Contributions receivable are to be reported at their net value. There is no indication that the receivables have been adjusted for uncollectible amounts or whether some of the receivables are discounted due to the fact they will not be collected within a year. • The FASB indicates that, at a minimum, the statement of financial position should report the total for assets, liabilities, and net assets. Totals have not been reported for liabilities or net assets. • The liabilities are not reported by current/noncurrent, nor are they reported in homogenous groups. The mortgage is reported between two current liabilities. At a minimum, the center would want to report the two current liabilities next to each other; doing so increases the homogeneity and separates the liabilities into current and noncurrent. Based on the reporting of the net assets, it appears that there is a missing classification in the assets section. There are at least $1,225,000 in net assets restricted for permanent endowment that should be classified in the asset section as Assets with Restrictions on Use. These are assets provided by donors, which have a long-term purpose. • The net assets classified as with donor restrictions due to a debt-covenant should be classified as without donor restrictions. Under FASB standards, only those assets with donor-imposed restrictions can be classified as net assets with donor restrictions. • The net assets classified as with donor restrictions due to board designation should be classified as without donor restrictions. Because the board has the ability to reverse any action it takes, the amount designated is not considered to be net assets with donor restrictions.

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-26 (Cont’d)

General Problem Information: Identify departures from GAAP Learning Objective: 14-5 Topic: Preparing Journal Entries and Financial Statements Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Reporting Level of Difficulty: Hard

Chapter 14 - Accounting for Not-for-Profit Organizations

14-27. a.

KARE COUNSELING CENTER STATEMENT OF FINANCIAL POSITION JUNE 30, 2023 ASSETS

CASH

LIABILITIES AND NET ASSETS $ 126,500

ACCOUNTS PAYABLE

$ 20,520

PLEDGES RECEIVABLE ($41,000 less uncollectible pledges of $4,100)

36,900

INVENTORY

2,800

INVESTMENTS (at fair value)

178,000

FURNITURE AND EQUIPMENT,

NET ASSETS:

($210,000 net of Accumulated

WITHOUT DONOR

Depreciation of $120,000)

90,000

RESTRICTIONS

207,080

WITH DONOR RESTRICTIONS— PROGRAMS

66,600

WITH DONOR RESTRICTIONS— PERMANENT ENDOWMENT

140,000

TOTAL NET ASSETS

413,680

TOTAL LIABILITIES AND TOTAL ASSETS

$434,200

NET ASSETS

$434,200

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-27 (Cont’d)

KARE COUNSELING CENTER STATEMENT OF EXPENSES BY NATURE AND FUNCTION YEAR ENDED JUNE 30, 2023 b.

PROGRAM SERVICES

Salaries and Fringe Occupancy and Utility Supplies Printing and Publishing Telephone and Postage Depreciation TOTAL EXPENSES

Counseling Services

Professional Training

Community Services

$115,364 15,360 2,776 1,676 1,400 6,000 $142,576

$57,682 7,680 1,388 838 700 6,000 $74,288

$28,841 3,840 694 419 350 6,000 $40,144

SUPPORTING SERVICES TOTAL

$201,887 26,880 4,858 2,933 2,450 18,000 $257,008

Mgmt & General

$57,682 7,680 1,388 838 700 6,000 $74,288

ALL SERVICES

FundRaising

TOTAL

$28,841 3,840 694 419 350 6,000 $40,144

$86,523 11,520 2,082 1,257 1,050 12,000 $114,432

$288,410 38,400 6,940 4,190 3,500 30,000 $371,440

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-27 (Cont’d)

c. KARE COUNSELING CENTER STATEMENT OF ACTIVITIES YEAR ENDED JUNE 30, 2023 Without Donor Restrictions REVENUES, GAINS, & OTHER SUPPORT: CONTRIBUTIONS INVESTMENT INCOME UNREALIZED GAIN ON INVESTMENTS NET ASSETS WITH DONOR RESTRICTIONS RELEASED FROM RESTRICTIONS TOTAL REVENUES, GAINS & OTHER SUPPORT EXPENSES AND LOSSES: PROGRAM SERVICES: COUNSELING SERVICES PROFESSIONAL TRAINING COMMUNITY SERVICE TOTAL PROGRAM EXPENSES SUPPORT EXPENSES: MGMT & GENERAL FUND-RAISING TOTAL SUPPORT EXPENSES TOTAL EXPENSES & LOSSES CHANGE IN NET ASSETS NET ASSETS, BEGINNING OF YEAR NET ASSETS, END OF YEAR

$348,820 9,200

With Donor Restrictions

$38,100

2,000

Total

$386,920 9,200 2,000

22,000

(22,000)

382,020

16,100

398,120

_ _____

142,576 74,288 40,144

142,576 74,288 40,144 257,008

257,008

74,288 40,144

114,432 371,440

______ 0

114,432 371,440

10,580

16,100

26,680

196,500 $207,080

190,500 $206,600

387,000 $413,680

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-27 (Cont’d)

d. KARE COUNSELING CENTER STATEMENT OF CASH FLOWS YEAR ENDED JUNE 30, 2023 CASH FLOWS FROM OPERATING ACTIVITIES: CASH RECEIVED FROM CONTRIBUTORS CASH RECEIVED AS INVESTMENT INCOME CASH PAID TO EMPLOYEES CASH PAID FOR OPERATING EXPENSES NET CASH USED FOR OPERATING ACTIVITIES

$ 310,800 9,200 (288,410) (86,504) (54,914)

CASH FLOWS FROM INVESTING ACTIVITIES: PURCHASE OF FURNITURE AND EQUIPMENT

(22,000)

CASH FLOWS FROM FINANCING ACTIVITIES: PROCEEDS FROM CONTRIBUTIONS RESTRICTED FOR: INVESTMENT IN CAPITAL ASSETS NET DECREASE IN CASH CASH, BEGINNING OF YEAR CASH, END OF YEAR

38,100 (38,814) 165,314 $ 126,500

RECONCILIATION OF CHANGES IN NET ASSETS TO NET CASH USED FOR OPERATING ACTIVITIES: CHANGE IN NET ASSETS ADJUSTMENTS TO RECONCILE CHANGE IN NET ASSETS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION UNREALIZED GAIN ON INVESTMENTS INCREASE IN NET PLEDGES RECEIVABLE INCREASE IN INVENTORY DECREASE IN ACCOUNTS PAYABLE

$ 26,680

30,000 (2,000) (6,000) (1,000) (102,594)

CASH PROVIDED BY OPERATING ACTIVITIES

$ (54,914)

Chapter 14 - Accounting for Not-for-Profit Organizations

Ch. 14, Solutions, Exercise 14-27 (Cont’d)

General Problem Information: Prepare financial statements Learning Objective: 14-5 Topic: Preparing Journal Entries and Financial Statements Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard

Chapter 15 - Accounting for Colleges and Universities

CHAPTER 15:

ACCOUNTING FOR COLLEGES AND UNIVERSITIES OUTLINE

Number

Topic

Type/Task

Status (re: 18/e)

Questions: 15-1 15-2 15-3 15-4 15-5 15-6 15-7 15-8 15-9 15-10 15-11

Financial statements Net asset categories Bad debts Grant revenue Intentions to give Support functions Split-interest agreements UPMIFA Performance Measures Single Audits Revenue Recognition

Identify Identify Compare Explain Explain Compare Explain Explain Explain Identify Identify

Same Same Revised Same New Same Same Same Same Same New

Annual report Comparison of public to a private college Research Case—Rating college and university performance Research Case—UPMIFA

Apply Analyze

Same Revised

Explain, discuss

Revised

Research, analyze

Same

Exercises/Problems: 15-16 Various

Multiple Choice

15-17 15-18 15-19 15-20 15-21

Classify Apply Apply Apply Apply

Items 3, 6 revised; item 11 new. Revised Revised Revised Same Revised

Apply Apply

Revised Same

Apply

Same

Cases: 15-12 15-13 15-14 15-15

15-22 15-23 15-24

Identifying the appropriate GAAP Private college transactions and FS Private college transactions and FS Public university transactions Public and private university transactions Private university trial balance to FS Computing the CFI for a Private University Public university trial balance to FS

Chapter 15 - Accounting for Colleges and Universities

CHAPTER 15:

ACCOUNTING FOR COLLEGES AND UNIVERSITIES

Answers to Questions 15-1

FASB standards indicate that private colleges and universities are to prepare a statement of financial position or a balance sheet; a statement of activities; and a statement of cash flows. Similar to for-profit entities, private colleges and universities are allowed a great deal of flexibility in preparing statements. For example, private entities can use a multior single-step statement of activities, and they can use the direct or indirect method of preparing the statement of cash flows. GASB standards indicate that public colleges and universities are to prepare a statement of net position or a balance sheet; a statement of revenues, expenses, and changes in net position; and a statement of cash flows. Although the GASB does allow flexibility in preparation of the financial statements it provides more structure than the FASB. For example, public entities are required to identify operating and nonoperating activities on the statement of revenues, expenses, and changes in net position. Additionally, public entities are required to use the direct method when preparing the statement of cash flows. General Problem Information: Financial statements Learning Objective: 15-1 Topic: Accounting and Financial Reporting Standards Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Easy

15-2. The FASB requires that private colleges and universities identify donor/contributor restrictions on net assets as net assets with donor restrictions. The GASB utilizes a similar category, restricted net position. However, the restricted net position category is broader, including not only restrictions by donors, but also creditors, law, or regulation. Within the restricted category of net position, public colleges and universities should identify net position as nonexpendable or expendable. Restricted nonexpendable net position includes those net resources required to be maintained in perpetuity. Restricted expendable net position includes those net resources restricted by external donors/contributors as to time or purpose. General Problem Information: Net asset categories Learning Objective: 15-2 Topic: Financial Reporting Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Easy 15-3

Private colleges and universities follow FASB/NACUBO guidance and record bad debts as an expense. Private colleges and universities would debit Institutional Support expense for the estimated bad debts and credit an account such as Allowance for Doubtful

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Answers, Question 15-3 (Cont’d)

Accounts. In contrast, public colleges and universities use a contra-revenue account, such as Provision for Bad Debts, with a credit to an allowance account. The end result is that for reporting purposes, public entities report a net revenue amount that has been adjusted for bad debts, while for private entities, expenses will be higher, reflecting the amount estimated for bad debt. For both public and private entities, the Tuition and Fees Receivable account would be shown net of the allowance for any uncollectible amounts. General Problem Information: Bad debts Learning Objective: 15-1 Learning Objective: 15-3 Topic: Accounting and Financial Reporting Standards; Reporting and Accounting Issues Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Medium

15-4

Not all grants are recorded as nonexchange transactions or contributions. If the grant requires performance on the part of the college or university that results in commensurate value received by the grantor, the receipt of the grant would be recorded as an exchange or revenue transaction. An example would be a research grant from the federal government in which the government retains the rights to any patents or other products produced by the grant. General Problem Information: Grant revenue Learning Objective: 15-3 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Medium

15-5. Intentions to give, such as naming a university in a will, are not recognized as revenue. In addition, intentions to give are not considered promises to give since the potential donor can change his/her will at any time. If the college had received a promise to give, the promise would have to be unconditional before the college could consider recognizing revenue. General Problem Information: Intentions to give Learning Objective: 15-3 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Medium

Chapter 15 - Accounting for Colleges and Universities

15-6. Although the NACUBO accounts do not clearly identify program and support functions, under FASB standards private colleges and universities are still required to provide program and support information. The FASB allows that if the information about program and support is not provided on the face of the financial statements it should be provided in the notes. NACUBO recommends that those using its accounts disclose information that clearly identifies program and support functions. The GASB has no comparable requirement for public colleges and universities; therefore, they would not need to recognize or disclose expense information by program and support functions. General Problem Information: Support functions Learning Objective: 15-1 Learning Objective: 15-2 Topic: Accounting and Financial Reporting Standards; Financial Reporting Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Medium 15-7. A split-interest agreement is when a donor and a college or university enter into an arrangement whereby the donor (or a designated beneficiary) and the college or university share the benefits from the donor’s gift. Generally, they share in the earnings that result from the donated assets. Such agreements are a planned form of giving that result in the assets and the earnings thereon solely benefitting the college or university upon the donor’s (or designated beneficiary’s) death or after some specified period. As a result, colleges and universities have an interest in such agreements, provided they are appropriately structured to ensure ongoing benefit to the college or university. Donors have a multitude of reasons for entering into such agreements. They are recognized for their donations by the college or university; additionally, they benefit from having their assets managed by the university in such a manner that they receive earnings on the assets during their lifetime (or that of their designated beneficiary). General Problem Information: Split-interest agreements Learning Objective: 15-5 Topic: Issues Related to Colleges and Universities Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Medium 15-8. UPMIFA stands for the Uniform Prudent Management of Institutional Funds Act. The Act provides legal guidance to not-for-profit organizations on the management, investment, and expenditure of funds held by the organizations for what the UPMIFA terms charitable purposes (this includes endowment funds). UPMIFA is important to colleges and universities since they are likely bound by its requirements, given that 49 states have adopted UPMIFA and most colleges and universities have endowment funds and/or are associated with NFP foundations. There are many provisions in UPMIFA that

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Answers, Question 15-8 (Cont’d)

students might identify as being important to colleges and universities. Two rather significant provisions relate to honoring of donor restrictions on contributed assets and spending levels of endowment funds. The Act’s provisions allow for a modification or release of endowment restrictions. For example, the foundation of a college or university can change without court approval a restriction on an endowment if the endowment is small (less than $25,000) or old (over 20 years). Additionally, the Act provides guidance on expenditure provisions for endowment funds, allowing for safeguards against excessive expenditures. No, UPMIFA generally applies to not-for-profit organizations that receive funds for charitable purposes; therefore, many organizations other than colleges and universities are affected by UPMIFA. General Problem Information: UPMIFA Learning Objective: 15-5 Topic: Issues Related to Colleges and Universities Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal Level of Difficulty: Medium

15-9. The performance of colleges and universities can be measured utilizing financial and nonfinancial information. When measuring performance, it is important to take the mission of the college or university into account. For example, while it may take longer for students to graduate from an urban-based university relative to a university based in a college town, the longer duration to completion may be due to the composition of the student body (i.e., more part-time students at the urban-based university) than to the performance of the university. The performance of colleges and universities can be measured in terms of outputs and outcomes. Output measures include graduation statistics, number of graduates, and job placements. Outcomes differ from outputs in that they measure the benefits derived by constituents. In measuring outcomes, relevant information could include performance on nationally ranked exams or results of surveys on student/employer satisfaction with education quality. Tools do exist to assist with comparing the performances of colleges and universities. The college scorecard (https://collegescorecard.ed.gov/) allows for a comparison of public, private, and for-profit two-year and four-year colleges and universities. Performance metrics that can be compared include average annual cost, graduation rate, and salary after attending. The financial health of colleges and universities is also an important consideration when assessing performance. One financial measure that has been designed to assess the financial health of colleges and universities is the composite financial index (CFI). The

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Answers, Question 15-9 (Cont’d)

CFI is composed of four financial ratios: a primary reserve ratio, a viability ratio, a return on net assets ratio, and a net operating revenues ratio. The four ratios are weighted to generate a CFI that ranges from −4 to 10 and provides a general indication of the financial health of the college or university. Colleges and universities with a score of 3 or higher have relatively strong financial health. General Problem Information: Performance measures Learning Objective: 15-5 Topic: Issues Related to Colleges and Universities Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Legal Level of Difficulty: Medium 15-10. Whether a college or university is subject to an audit under Governmental Auditing Standards depends on the amount of federal dollars it has expended. Any college or university (public or private) that expends $750,000 or more in federal funds is subject to the requirements of the Single Audit Act and the provisions of Office of Management and Budget (OMB) Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, 78 FR 78589, § 200.38. General Problem Information: Single audits Learning Objective: 15-5 Topic: Issues Related to Colleges and Universities Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Easy 15-11. Private colleges and universities must comply with FASB ASC 606 when recording tuition revenue. Revenue recognition consists of following a five-step process: 1) Identify the contract with the customer, 2) Identify the performance obligations in the contract, 3) Determine the transaction price, 4) Allocate the transaction price to the performance obligations in the contract, and 5) Recognize revenue as the entity satisfies a performance obligation. Private colleges and universities use contra accounts for the reporting of net tuition and fees on the financial statements. Any tuition waivers received as part of compensation are recorded as an expense rather than a reduction in the transaction price. However, unlike public colleges and universities, private colleges and universities report uncollectible receivables as an expense and not as a reduction of tuition revenue. General Problem Information: Revenue recognition Learning Objective: 15-3 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Easy 15-6 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 15 - Accounting for Colleges and Universities

Solutions to Cases 15-12. a.

If the school is a public college or university, it should follow the GASB standards. There are many ways a student could identify the GASB standards from the financial reports, including the presence of an MD&A; a statement of net position with the net position classifications, net investment in capital assets, restricted, and unrestricted; a statement of revenues, expenses, and changes in net position separated into operating and nonoperating activities; and a statement of cash flows prepared using the direct method and four categories of cash flows. If the school is a private college or university, it should be following FASB standards. Again, there are many ways a student could identify FASB standards from the financial reports, including a statement of financial position with the net asset categories with donor restrictions and without donor restrictions; a statement of activities identifying changes to net asset categories and identifying net assets released from restrictions; and a statement of cash flow prepared using three categories of cash flows.

Again, the answers will vary based on the financial reports reviewed. The answer should generally be yes, reporting standards are being followed. Remember that reporting formats can vary somewhat and still be in compliance with reporting standards. By comparing financial statements to the examples in the chapter, students should be able to identify several instances where the college or university is in compliance with reporting standards.

For an example of how to calculate the percentage of tuition and fees to total revenues, see the solution for Case 15-13. The percentage of student discounts and/or scholarships to tuition and fees should be calculated as student discounts and scholarships divided by gross tuition and fees. The discounts and scholarships should be displayed on the face of the financial statements or in the notes to the financial statements.

This will vary by college and university. Information to calculate the percentage should be found in the statement of revenues, expenses, and changes in net position or the statement of activities. When searching for information to calculate the percentage, it is important to remember that grants and contracts can be operating or nonoperating, and restricted or unrestricted.

This too will vary by college and university. The percentage would be calculated by taking the total of all program expenses and dividing by the total expenses. It is unlikely that program, management and general, and fund-raising expenses will be identifiable on the face of the operating statements, given that most colleges and universities follow NACUBO classifications. If the student has a private college or university report, in accordance with FASB requirements, there should be a note disclosure that separates the expenses into program, management and general, and fund-raising.

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Case 15-12, e. (Cont’d)

It is unlikely that a student with a public college or university will be able to determine the program expense as a percentage of total expenses. This information is not required under the GASB standards. Students should have varying opinions on this. Most students do not select colleges or universities based on the program expense as a percentage of total expenses basis. There are many other considerations that go into the selection; therefore, it is probably not a relevant factor for determining where a student will enroll. Additionally, since colleges and universities are operated somewhat like business-type enterprises, the market should help in determining how many resources are devoted to programs. For stakeholders, such information can be helpful in determining efficiency, and if combined with other relevant indicators, can help in assessing effectiveness. f.

Published annual reports should include an audit of the financial statements or a statement indicating that the financial statements are unaudited.

General Problem Information: Annual report Learning Objective: 15-1 Learning Objective: 15-3 Topic: Accounting and Financial Reporting Standards; Reporting and Accounting Issues Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard 15-13. a.

The private college (Catherine College) has prepared its statements under the FASB standards, while the public college (Midland State College) has prepared its statements under the GASB standards. Catherine College reports its expenses using functional classifications and reports changes in net assets without donor restrictions, and net assets with donor restrictions in two columns. Catherine uses a single-step format, wherein a total for all revenues is adjusted for the total of all expenses. Midland State College reports its expenses using natural classifications and reports changes in total (both unrestricted and restricted) net position, distinguished by operating and nonoperating revenues and expenses. All expenses of Catherine College are presented in the without donor restrictions column, while revenues and expenses of Midland State College are displayed in one column. The proportion of total revenue from tuition and fees, state appropriations, and grants and contributions are calculated below: Catherine College Midland State Tuition and fees 73.01% 42.79% State appropriations 0% 21.44% Grants and contributions 12.29% 18.76%

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Case 15-13, b. (Cont’d)

Calculations: Catherine College Tuition and fees (net): $66,888,492 / $91,614,600 = 73.01% State appropriation: = 0.00% Grants and contributions: $(2,241,863 + $9,020,584) / $91,614,600 = 12.29% Midland State College Tuition and fees (net): $20,071 / $46,908* = 42.79% State appropriation: $(9,382 + $675) / $46,908 = 21.44% Grants and contributions: ($5,173+$2,303+$1,324) / $46,908 = 18.76% *Total revenues: $46,908 = $27,852 + $17,417 + $890[interest expense adjustment] + $675 + 74 Clearly the private college is more dependent on tuition as the primary source of revenue. Since private colleges do not receive state appropriations, another significant source of revenue for Catherine is contributions. Because a major source of income for Midland is state appropriations, dependence on tuition and fees is lower. In general, dependence on state appropriations is decreasing as state institutions seek their own sources of revenues, as shown by the significant amount of grant revenues Midland receives. c.

To some extent, the answer will depend on how students interpret the definition of operating income, which is defined as the revenues and expenses related to the primary activities of the colleges. Here are calculations that can be used for the discussion: Catherine College: $85 / 5,000 students = $0.02 In this calculation, the change in net assets without donor restrictions was used. It could be argued that only the net assets without donor restrictions were used in operating activity, those resources received that were donor restricted were not available for operations in the current period and were not used to operate the college. Conversely, some students may have opted to include donor-restricted revenues stating that if the college was able to meet the restrictions within the year the resources could have been used. Other students may have opted to exclude certain revenues and expenses such as investment income and auxiliary services revenues and expenses saying that these activities are not primary activities of the college. Midland State College: $(18,403) / 6,704 students = $(2.75) or ($(18,403) + 18,182) / 6,704 students = $(0.03) The first calculation is the operating loss divided by the number of students. The second calculation includes noncapital appropriations and grants.

Chapter 15 - Accounting for Colleges and Universities

Ch. 15, Solutions, Case 15-13, c. (Cont’d)

It could be argued that although the appropriations and grants are considered nonoperating revenues for classification purposes under GASB, they are used to support the primary mission of the college, which is education and research. If this is true, they should be considered operating revenues. The private college has a small positive “income” per student using the calculation provided, while the public college has a small negative “income” per student using the second calculation provided. As you can see from the Midland State calculations, depending on how the student calculates the “income” figure, very different answers may result. Some of the issues the students might bring up related to how to determine operating income include 1) no clear definition of what would be considered operating activity, and 2) the lack of detail on the financial statements makes it difficult to clearly identify some of the operating revenue and expenses. For example, it is hard to determine how much of the private college revenue was for capital acquisitions, how much of the expenses were for interest, fundraising, or other nonoperating activities. The same is true of the public college. Although the public college identifies nonoperating activities, it seems that several of the items listed as nonoperating are clearly related to operations and have been classified as nonoperating because it is required by GASB. d.

Students should believe that the Catherine College statement provides more transparency with regard to restrictions. It is easy to see the activity that has occurred in the net assets with donor restrictions classification under the FASB standards. Additionally, year-end balances are provided for net asset classifications. Under the GASB standards, Midland State only provides a change in net position number, it does not indicate how much of the change is related to restricted net position.

General Problem Information: Comparison of public to a private college Learning Objective: 15-1 Learning Objective: 15-2 Learning Objective: 15-3 Topic: Accounting and Financial Reporting Standards; Financial Reporting; Reporting and Accounting Issues Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: BB: Critical Thinking Level of Difficulty: Hard 15-14. a.

The college scorecard provides an average annual cost which is the net price paid after subtracting school, state, and/or federal financial aid. Students’ answers will vary depending on the schools chosen.

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Case 15-14 (Cont’d)

The graduation rate is the share of students who graduated within eight years of entering this school for the first time. For institutions that do not have this data available, they can report the graduation rate as the share of students who graduated within 200 percent of the expected time to graduation (e.g., eight years for four-year degrees, four years for two-year degrees, 18 months for ninemonth certificates). The graduation rate only applies to students studying fulltime who started college at this school. Students’ answers will vary depending on the schools chosen.

The salary after attending is the median earnings of former students’ one year after graduation. Students answers will vary depending on the schools chosen.

Determining which school offers the better “value” is a subjective assessment. Students could compare the average costs, graduation rates, and salaries after attending when making their assessment. In addition, the scorecard provides detailed information on typical total student debt, percentage of students who return after their first year, the size and diversity of the student body, and most popular academic programs. The students may incorporate any of this additional information in their “value” assessment.

Students can be expected to have different views on what they believe to be strengths and weaknesses of the college scorecard. Some possible points include: Strengths – a national system that allows for increased comparability, increased transparency of information, and increased accountability. Weaknesses – the college scorecard cannot consider the different missions of each university, the different funding levels/structures in each state, the quality of individual programs within a school. Additionally, information on graduate and employer satisfaction is not available.

General Problem Information: Rating college and university performance Learning Objective: 15-5 Topic: Issues Related to Colleges and Universities Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Research Level of Difficulty: Hard 15-15. a. b.

Yes, organizations in Minnesota are subject to UPMIFA. The foundation would be subject to UPMIFA since it is located in Minnesota and it is a NFP organization that, according to UPMIFA, manages funds for a charitable purpose. The charitable purpose of the foundation would be to provide for the advancement of education since the sole purpose of the foundation is to benefit the university.

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Case 15-15 (Cont’d)

The spending rate is not set by UPMIFA. UPMIFA allows NFP organizations to establish their own spending rate. However, it does provide guidance in the form of seven criteria that should be considered when determining level of expenditures or spending policies. The criteria from Section 4(a) of the Act (outlined in the chapter) are: 1. 2. 3. 4. 5. 6. 7.

Duration and preservation of the endowment fund. The purposes of the institution and the endowment fund. The general economic conditions. The effect of inflation or deflation. The expected total return from income and the appreciation of investments. Other resources of the NFP. The investment policy of the institution.

Ms. Hernandez might look to criteria 1, 5 and 7 in addressing her concerns. The expected total return is not much higher than the spending rate. If the expectation is that the total return will not increase given the projected general economic conditions and the existing investment policy, perhaps the investment policy needs to be reviewed to see if it allows for appropriate risk taking. Additionally, if changes are not expected in the total return, caution is needed in setting the spend rate to ensure that the duration and preservation of the endowment funds are not jeopardized. d.

The donor is no longer available to release the endowment from the restriction that the income be used to study Lake Superior fossils. However, given that it is impractical for the university to carry out the intent of the restriction on the use of the income, because the paleontology department no longer exists, UPMIFA allows that the university can notify the state regulator of a modification to the restriction that is in line with the donor wishes. For example, one argument that could be made is that allowing the anthropology or the archeology department to benefit from the income would be in line with donor intent. The age of the endowment (50 years) might also be used as reason to allow for the modification of the restriction without going to court. If the endowment is small enough (less than $25,000), the value of the endowment could also be used as a reason to allow for the modification of the restriction without going to court.

General Problem Information: UPMIFA Learning Objective: 15-5 Topic: Issues Related to Colleges and Universities Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: BB: Decision Making Level of Difficulty: Hard

Chapter 15 - Accounting for Colleges and Universities

Solutions to Exercises and Problems 15-16. 1. 2. 3. 4. 5.

d. b. a. d. d.

6. 7. 8. 9. 10.

c. d. c. a. b.

11. c.

General Problem Information: Various Learning Objective: 15-1 Learning Objective: 15-2 Learning Objective: 15-3 Learning Objective: 15-5 Topic: Various Chapter Topics Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Critical Thinking Level of Difficulty: Medium 15-17.

1. 2. 3. 4. 5.

b. c. b. b. a.

6. 7. 8. 9. 10.

a. b. c. b. a.

11. c.

General Problem Information: Identifying the appropriate GAAP Learning Objective: 15-1 Learning Objective: 15-3 Topic: Accounting and Financial Reporting Standards; Reporting and Accounting Issues Bloom’s Taxonomy: Identify Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Easy 15-18. a.

STEINER COLLEGE GENERAL JOURNAL Debits

TUITION AND FEES RECEIVABLE

223,100

TUITION & FEES DISCOUNT AND ALLOWANCES

21,400

TUITION AND FEES—WITHOUT DONOR RESTRICTIONS

TUITION AND FEES—WITHOUT DONOR RESTRICTIONS CASH

Credits

244,500

11,200 11,200

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-18 (Cont’d)

STEINER COLLEGE GENERAL JOURNAL Debits

INSTRUCTION EXPENSE

Credits

17,300

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

17,300

CASH

3,235

PLEDGES RECEIVABLE

550

CONTRIBUTIONS—WITHOUT DONOR RESTRICTIONS

2,080

CONTRIBUTIONS—WITH DONOR RESTRICTIONS—TIME

550

CONTRIBUTIONS—WITH DONOR RESTRICTIONS —ENDOWMENT

335

PLEDGES RECEIVABLE 3.

CASH

820 222,600

TUITION AND FEES RECEIVABLE

DEPOSITS HELD IN CUSTODY FOR OTHERS

222,600

CASH

INSTRUCTION EXPENSE

86,100

ACADEMIC SUPPORT EXPENSE

23,300

STUDENT SERVICES EXPENSE 37,700 INSTITUTIONAL SUPPORT EXPENSE CASH PREPAID ASSETS ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

28,500 170,290 534 4,776

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-18 (Cont’d)

STEINER COLLEGE GENERAL JOURNAL Debits

Credits

NET ASSETS RELEASED FROM RESTRICTIONS— WITH DONOR RESTRICTIONS

7,320

NET ASSETS RELEASED FROM RESTRICTIONS— WITHOUT DONOR RESTRICTIONS

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

7,320

41,271

CASH

41,271

($21,130 BB + $17,300 trans. 1 + $4,776 trans. 5 - $1,935 EB)

CASH

3,960

INVESTMENT INCOME—WITHOUT DONOR RESTRICTIONS

1,890

INVESTMENT INCOME—WITH DONOR RESTRICTIONS —SCHOLARSHIPS 8.

INSTITUTIONAL SUPPORT EXPENSE

2,070 20

ALLOWANCE FOR DOUBTFUL ACCOUNTS

INSTRUCTION EXPENSE

18,480

ACADEMIC SUPPORT EXPENSE

7,920

ACCUMULATED DEPRECIATION

TUITION AND FEES—WITHOUT DONOR RESTRICTIONS DEFERRED REVENUE

26,400

10 10

Chapter 15 - Accounting for Colleges and Universities

Ch. 15, Solutions, Exercise 15-18 (Cont’d)

STEINER COLLEGE GENERAL JOURNAL Debits INVESTMENTS

Credits

4,700

UNREALIZED GAIN ON INVESTMENTS— WITHOUT DONOR RESTRICTIONS

2,300

UNREALIZED GAIN ON INVESTMENTS— WITH DONOR RESTRICTIONS—SCHOLARSHIPS

790

UNREALIZED GAIN ON INVESTMENTS— WITH DONOR RESTRICTIONS—ENDOWMENT 9.

1,610

To close nominal accounts TUITION AND FEES⎯WITHOUT DONOR RESTRICTIONS (trans. 1 & 8) CONTRIBUTIONS⎯WITHOUT DONOR RESTRICTIONS

233,290 2,080

INVESTMENT INCOME—WITHOUT DONOR RESTRICTIONS

1,890

UNREALIZED GAIN ON INVESTMENTS⎯ WITHOUT DONOR RESTRICTIONS

2,300

NET ASSETS—WITHOUT DONOR RESTRICTIONS

1,160

TUITION & FEES DISCOUNT AND ALLOWANCES

21,400

INSTRUCTION EXPENSE (trans. 1, 5 & 8)

121,880

ACADEMIC SUPPORT EXPENSE (trans. 5 & 8)

31,220

STUDENT SERVICES EXPENSE

37,700

INSTITUTIONAL SUPPORT EXPENSE (trans. 5 & 8)

28,520

CONTRIBUTIONS—WITH DONOR RESTRICTIONS —TIME

550

INVESTMENT INCOME—WITH DONOR RESTRICTIONS —SCHOLARSHIPS

2,070

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-18 (Cont’d)

STEINER COLLEGE GENERAL JOURNAL Debits DONOR RESTRICTIONS—SCHOLARSHIPS

Credits

790

NET ASSETS—WITH DONOR RESTRICTIONS

3,410

CONTRIBUTIONS—WITH DONOR RESTRICTIONS —ENDOWMENT

335

UNREALIZED GAIN ON INVESTMENTS—WITH DONOR RESTRICTIONS—ENDOWMENT

1,610

NET ASSETS—WITH DONOR RESTRICTIONS

1,945

To reclassify Net Assets: NET ASSETS—WITH DONOR RESTRICTIONS

7,320

NET ASSETS RELEASED FROM RESTRICTIONS— WITHOUT DONOR RESTRICTIONS NET ASSETS—WITHOUT DONOR RESTRICTIONS

7,320 7,320

NET ASSETS RELEASED FROM RESTRICTIONS— WITH DONOR RESTRICTIONS

7,320

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-18 (Cont’d)

STEINER COLLEGE STATEMENT OF ACTIVITIES YEAR ENDED JUNE 30, 2023

Without Donor Restrictions

Revenues and gains: Student tuition and fees (net)* Contributions Investment income Unrealized gain on investments Net assets released from restrictions Total revenues and gains Expenses and losses: Educational and general expenses: Instruction Academic support Student services Institutional support Total expenses and losses Total change in net assets Net assets, beginning of the year Net assets, end of the year

$211,890 2,080 1,890 2,300 7,320 225,480

121,880 31,220 37,700 28,520 219,320 6,160 104,000 $110,160

With Donor Restrictions

Total

885 2,070 2,400

$211,890 2,965 3,960 4,700

(7,320) (1,965)

0 223,515

(1,965) 229,940 $227,975

121,880 31,220 37,700 28,520 219,320 4,195 333,940 $338,135

* net of $21,400 in Tuition & Fees Discount and Allowances

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-18 (Cont’d)

STEINER COLLEGE STATEMENT OF FINANCIAL POSITION JUNE 30, 2023

Assets Cash and cash equivalents Short-term investments Tuition and fees receivable (net of doubtful accounts of $32) Pledges receivable (net of doubtful pledges of $280) Prepaid assets Property, plant and equipment (net of accumulated depreciation of $130,640) Investments (at fair value, cost of $162,000) Total assets

$ 7,758 7,666 710 5,602 830 255,004 163,100 $440,670

Liabilities and Net Assets Liabilities: Accounts payable and accrued liabilities Deposits held in custody for others Deferred revenue Bonds payable Total liabilities

1,935 690 910 99,000 102,535

Net Assets: Without donor restrictions With donor restrictions Total net assets Total liabilities and net assets

110,160 227,975 338,135 $440,670

General Problem Information: Private college transactions and FS Learning Objective: 15-4 Topic: Transactions and Financial Statements for Private Colleges and Universities Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard

Chapter 15 - Accounting for Colleges and Universities

15-19. a.

ELIZABETH COLLEGE GENERAL JOURNAL Debits

TUITION AND FEES RECEIVABLE

Credits

5,254,000

TUITION & FEES DISCOUNT AND ALLOWANCES

69,600

INSTRUCTION EXPENSE

276,400

TUITION AND FEES—WITHOUT DONOR RESTRICTIONS

5,600,000

TUITION AND FEES—WITHOUT DONOR RESTRICTIONS

101,670

TUITION AND FEES RECEIVABLE

101,670

CASH

2,466,200

INVESTMENTS

1,000,000

CONTRIBUTIONS—WITHOUT DONOR RESTRICTIONS

1,891,000

CONTRIBUTIONS—WITH DONOR RESTRICTIONS —GRANTS

575,200

CONTRIBUTIONS—WITH DONOR RESTRICTIONS —ENDOWMENT

PLEDGES RECEIVABLE

1,000,000

1,090,000

CONTRIBUTIONS—WITH DONOR RESTRICTIONS —CAPITAL CAMPAIGN

573,200

CONTRIBUTIONS—WITH DONOR RESTRICTIONS —TIME

216,800

CONTRIBUTIONS—WITH DONOR RESTRICTIONS —ENDOWMENT

300,000

(Note: pledges are collected in the future; therefore, pledges are subject to a time restriction as well as any identified purpose restriction)

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-19 (Cont’d)

ELIZABETH COLLEGE GENERAL JOURNAL Debits

CASH

Credits

94,370

AUXILIARY ENTERPRISES—WITHOUT DONOR RESTRICTIONS

CASH

94,370

5,080,000

TUITION AND FEES RECEIVABLE

INVESTMENTS

5,080,000

1,000,000

CASH

EQUIPMENT

1,000,000

10,580

CASH 9.

10,580

INSTRUCTION EXPENSE

3,566,040

ADADEMIC SUPPORT EXPENSE

1,987,000

STUDENT SERVICES EXPENSE

87,980

INSTITUTIONAL SUPPORT EXPENSE

501,130

AUXILIARY ENTERPRISES EXPENSE

92,410

CASH

10.

INSTRUCTION EXPENSE

6,234,560

450,000

CASH

450,000

NET ASSETS RELEASED FROM RESTRICTIONS— WITH DONOR RESTRICTIONS

450,000

NET ASSETS RELEASED FROM RESTRICTIONS— WITHOUT DONOR RESTRICTIONS

450,000

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-19 (Cont’d)

ELIZABETH COLLEGE GENERAL JOURNAL Debits

11.

INSTITUTIONAL SUPPORT EXPENSE

7,200

ALLOWANCE FOR DOUBTFUL ACCOUNTS

INVESTMENTS

Credits

7,200

11,540

UNREALIZED GAIN ON INVESTMENTS— WITHOUT DONOR RESTRICTIONS

8,500

UNREALIZED GAIN ON INVESTMENTS— WITH DONOR RESTRICTIONS—ENDOWMENT

3,040

INSTRUCTION EXPENSE

34,750

AUXILIARY ENTERPRISES EXPENSE

41,000

ACADEMIC SUPPORT EXPENSE

12,450

ACCUMULATED DEPRECIATION

88,200

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-19 (Cont’d)

ELIZABETH COLLEGE GENERAL JOURNAL Debits 12.

Credits

To close nominal accounts: TUITION AND FEES⎯WITHOUT DONOR RESTRICTIONS (trans. 1 & 2)

5,498,330

CONTRIBUTIONS⎯WITHOUT DONOR RESTRICTIONS

1,891,000

AUXILIARY ENTERPRISES—WITHOUT DONOR RESTRICTIONS

94,370

UNREALIZED GAIN ON INVESTMENTS⎯ WITHOUT DONOR RESTRICTIONS

8,500

TUITION & FEES DISCOUNT AND ALLOWANCES

69,600

INSTRUCTION EXPENSE (trans. 1 & 9-11)

4,327,190

ACADEMIC SUPPORT EXPENSE (trans. 9 & 11)

1,999,450

STUDENT SERVICES EXPENSE

87,980

INSTITUTIONAL SUPPORT EXPENSE (trans. 9 & 11)

508,330

AUXILIARY ENTERPRISES EXPENSE (trans. 9 & 11)

133,410

NET ASSETS—WITHOUT DONOR RESTRICTIONS

366,240

CONTRIBUTIONS⎯WITH DONOR RESTRICTIONS ⎯GRANTS

575,200

CONTRIBUTIONS⎯WITH DONOR RESTRICTIONS ⎯CAPITAL CAMPAIGN

573,200

CONTRIBUTIONS⎯WITH DONOR RESTRICTIONS ⎯TIME NET ASSETS—WITH DONOR RESTRICTIONS

216,800 1,365,200

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-19 (Cont’d)

ELIZABETH COLLEGE GENERAL JOURNAL Debits

Credits

CONTRIBUTIONS⎯WITH DONOR RESTRICTIONS ⎯ENDOWMENT (trans. 3 & 4)

1,300,000

UNREALIZED GAIN ON INVESTMENTS⎯ WITH DONOR RESTRICTIONS⎯ENDOWMENT

3,040

NET ASSETS—WITH DONOR RESTRICTIONS

1,303,040

To reclassify Net Assets: NET ASSETS—WITH DONOR RESTRICTIONS

450,000

NET ASSETS RELEASED FROM RESTRICTIONS— WITHOUT DONOR RESTRICTIONS NET ASSETS—WITHOUT DONOR RESTRICTIONS

450,000 450,000

NET ASSETS RELEASED FROM RESTRICTIONS— WITH DONOR RESTRICTIONS

450,000

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-19 (Cont’d)

b. ELIZABETH COLLEGE STATEMENT OF ACTIVITIES YEAR ENDED JUNE 30, 2023

Without Donor Restrictions

Revenues and gains: Student tuition and fees (net)* Contributions Auxiliary Enterprises Unrealized gain on investments Net assets released from restrictions Total revenues and gains Expenses and losses: Educational and general expenses: Instruction Academic support Student services Institutional support Total educational and general expense Auxiliary enterprises Total expenses and losses Total change in net assets Net assets, beginning of the year Net assets, end of the year

$5,428,730 1,891,000 94,370 8,500 450,000 7,872,600

With Donor Restrictions

Total

3,040

$ 5,428,730 4,556,200 94,370 11,540

(450,000) 2,218,240

0 10,090,840

$2,665,200

4,327,190 1,999,450 87,980 508,330

6,922,950 133,410 7,056,360 816,240 7,518,000 $8,334,240

6,922,950 133,410 7,056,360 3,034,480 12,718,000 $15,752,480

2,218,240 5,200,000 $7,418,240

* net of $69,600 in Tuition & Fees Discount and Allowances

Chapter 15 - Accounting for Colleges and Universities

15-20 a.

SOUTH STATE UNIVERSITY GENERAL JOURNAL Debits

ACCOUNTS RECEIVABLE—TUITION AND FEES TUITION AND FEES DISCOUNT AND ALLOWANCES

1,250,000 250,000

REVENUES—TUITION AND FEES

UNEARNED REVENUE—TUITION AND FEES

1,500,000

25,000

REVENUES—TUITION AND FEES

Credits

25,000

NO JOURNAL ENTRY IS RECORDED—THE ELIGIBILITY REQUIREMENT HAS NOT BEEN MET.

CASH REVENUES—STATE

3,000,000 APPROPRIATIONS

CAPITAL ASSETS

3,000,000

525,000

CASH

525,000

800,000

REVENUES—GIFTS AND GRANTS 7.

EXPENSES—INTEREST

800,000 48,000

CASH

REVENUES—TUITION AND FEES

48,000

113,000

CASH

CASH ACCOUNTS RECEIVABLE—TUITION AND FEES

113,000

1,471,700 1,320,700

UNEARNED REVENUE

138,000

REVENUES—INVESTMENT INCOME

13,000

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-20 (Cont’d)

SOUTH STATE UNIVERSITY GENERAL JOURNAL Debits 9.

EXPENSES—GENERAL

4,684,000

EXPENSES—RESEARCH

37,000

ACCOUNTS PAYABLE

Credits

4,721,000

4,751,000

CASH

4,751,000

($105,000 + $4,721,000 - $75,000)

GRANT RECEIVABLE

37,000

REVENUES—GIFTS AND GRANTS

10.

ACCRUED LIABILITIES

37,000

40,000

CASH

11.

PROVISION FOR BAD DEBTS

40,000

2,000

ALLOWANCE FOR DOUBTFUL ACCOUNTS

EXPENSES—DEPRECIATION

2,000

90,000

ACCUMULATED DEPRECIATION

INTEREST RECEIVABLE

90,000

1,250

REVENUES—INVESTMENT INCOME

INVESTMENTS

1,250

12,000

REVENUES—CHANGES IN FAIR VALUE OF INVESTMENTS

12,000

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-20 (Cont’d)

SOUTH STATE UNIVERSITY GENERAL JOURNAL Debits 12.

REVENUES—TUITION AND FEES

1,412,000

REVENUES—STATE APPROPRIATIONS

3,000,000

REVENUES—GIFTS AND GRANTS

Credits

837,000

REVENUES—CHANGES IN FAIR VALUE OF INVESTMENTS REVENUES—INVESTMENT INCOME

12,000 14,250

TUITION AND FEES DISCOUNT AND ALLOWANCES

250,000

EXPENSES—DEPRECIATION

90,000

PROVISION FOR BAD DEBTS

2,000

EXPENSES—INTEREST

48,000

EXPENSES—GENERAL

4,684,000

EXPENSES—RESEARCH

37,000

NET POSITION—UNRESTRICTED

164,250

To reclassify Net Position: NET POSITION—UNRESTRICTED

435,000

NET POSITION—NET INVESTMENT IN CAPITAL ASSETS NET POSITION—UNRESTRICTED NET POSITION—RESTRICTED

435,000 205,230 205,230

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-20 (Cont’d)

SOUTH STATE UNIVERSITY STATEMENT OF NET POSITION JUNE 30, 2023 ASSETS

CASH

$ 134,700

ACCOUNTS RECEIVABLE (NET OF DOUBTFUL ACCOUNTS OF $17,000)

297,300

INTEREST RECEIVABLE

1,250

GRANT RECEIVABLE

37,000

INVESTMENTS

262,000

CAPITAL ASSETS

$2,275,000

ACCUMULATED DEPRECIATION

(365,000)

TOTAL ASSETS

1,910,000 2,642,250

LIABILITIES ACCOUNTS PAYABLE

75,000

UNEARNED REVENUE

138,000

BONDS PAYABLE

600,000

TOTAL LIABILITIES

813,000 NET POSITION

NET INVESTMENT IN CAPITAL ASSETS

1,310,000

RESTRICTED

420,230

UNRESTRICTED

99,020

TOTAL NET POSITION

$1,829,250

General Problem Information: Public university transactions Learning Objective: 15-4 Topic: Transactions and Financial Statements for Private Colleges and Universities Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard

Chapter 15 - Accounting for Colleges and Universities

15-21 a.

PRIVATE UNIVERSITY Debits

GRANT RECEIVABLE

Credits

500,000

CONTRIBUTIONS—WITH DONOR RESTRICTIONS —RESEARCH

CASH

500,000

CONTRIBUTIONS—WITH DONOR RESTRICTIONS —ENDOWMENT

TUITION AND FEES RECEIVABLE

500,000

2,500,000

TUITION AND FEES—WITHOUT DONOR RESTRICTIONS

2,500,000

325,000

CASH

TUITION AND FEES DISCOUNTS AND ALLOWANCES

325,000

12,600

TUITION AND FEES RECEIVABLE

LAND IMPROVEMENTS

12,600

1,980,000

CASH

RESEARCH EXPENSE

1,980,000

25,000

CASH

25,000

NET ASSETS RELEASED FROM RESTRICTIONS— WITH DONOR RESTRICTIONS

25,000

NET ASSETS RELEASED FROM RESTRICTIONS— WITHOUT DONOR RESTRICTIONS

25,000

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-21 (Cont’d)

INSTITUTIONAL SUPPORT EXPENSE ALLOWANCE FOR DOUBTFUL ACCOUNTS

Debits 1,670

Credits 1,670

PUBLIC UNIVERSITY Debits Credits The grant must be used in the next fiscal year; therefore, the eligibility requirement related to time has not been met and recognition is deferred. CASH REVENUE—GIFTS AND GRANTS

500,000 500,000

(Note that public colleges and universities do not recognize the restriction in the recording, but would report the $500,000 as restricted net position, nonexpendable.) 3.

ACCOUNTS RECEIVABLE—TUITION AND FEES REVENUE—TUITION AND FEES

2,500,000 2,500,000

REVENUE—TUITION AND FEES CASH

325,000

TUITION AND FEES DISCOUNTS AND ALLOWANCES ACCOUNTS RECEIVABLE—TUITION AND FEES

12,600

325,000

12,600

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-21 (Cont’d)

Debits 5.

INFRASTRUCTURE CASH

Credits

1,980,000 1,980,000

(Note that public colleges and universities have a separate capital asset classification for infrastructure.) 6.

RESEARCH EXPENSE CASH

25,000 25,000

(Note that public colleges and universities often use the same NACUBO expense classifications as private colleges and universities. If a natural classification is used, another expense account title might be used, but the accounting for the expense is essentially the same for both institutions. However, public colleges and universities do not record the release of net assets from restrictions. Instead, the net position category is adjusted at year-end to reflect the appropriate balance in restricted net position.) 7.

PROVISION FOR BAD DEBTS 1,670 ALLOWANCE FOR DOUBTFUL ACCOUNTS 1,670 (Note that public colleges and universities typically use a contra-revenue account while private colleges and universities use an expense account for bad debts) General Problem Information: Public and private university transactions Learning Objective: 15-1 Learning Objective: 15-4 Topic: Transactions and Financial Statements for Private Colleges and Universities; Reporting and Accounting Issues Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard

Chapter 15 - Accounting for Colleges and Universities

15-22. a.

ALLEN UNIVERSITY STATEMENT OF ACTIVITIES YEAR ENDED JUNE 30, 2023

Without Donor Restrictions

Revenues and gains: Student tuition and fees (net)* Contributions Grants and contracts Investment income Auxiliary Enterprises Gain on sale of investments Unrealized gain on investments Other revenue Net assets released from restrictions Total revenues and gains Expenses and losses: Educational and general expenses: Instruction Research Academic support Student services Institutional support Total educational and general expense Auxiliary enterprises Total expenses and losses Total change in net assets Net assets, beginning of the year Net assets, end of the year

$ 963,750 310,200 50,500 153,560 70,000

With Donor Restrictions

$327,000 324,000 29,500

Total

$ 963,750 637,200 324,000 80,000 153,560 70,000

125,440 13,250

53,760

179,200 13,250

426,850 2,113,550

(426,850) 307,410

0 2,420,960

1,044,630 571,800 240,560 193,000 203,360

2,253,350 158,700 2,412,050 (298,500)

307,410

2,253,350 158,700 2,412,050 8,910

3,353,110 $3,054,610

1,320,600 $1,628,010

4,673,710 $4,682,620

* net of $327,000 in Tuition & Fees Discount and Allowances.

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-22 (Cont’d)

b. ALLEN UNIVERSITY STATEMENT OF FINANCIAL POSITION JUNE 30, 2023

Assets Cash and cash equivalents Tuition and fees receivable (net of doubtful accounts of $75,600) Pledges receivable (net of doubtful pledges of $79,000) Investments (at fair value) Property, plant and equipment (net of accumulated depreciation of $658,720) Total assets

$ 516,600 296,800 144,000 3,200,000 1,537,440 $5,694,840

Liabilities and Net Assets Liabilities: Accounts payable Accrued liabilities Deposits held in custody for others Deferred revenue Bonds payable Total liabilities

103,000 37,500 17,570 62,150 792,000 1,012,220

Net Assets: Without donor restrictions With donor restrictions Total net assets Total liabilities and net assets

3,054,610 1,628,010 4,682,620 $5,694,840

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-22 (Cont’d)

c. ALLEN UNIVERSITY STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2023

Cash Flows from Operating Activities: Increase in net assets: Adjustments to reconcile increase in net assets to net cash used by operating activities: Increase in tuition and fees receivable (net) Decrease in pledges receivable Decrease in accounts payable Decrease in accrued liabilities Increase in unearned revenue Depreciation Gain on sale of investments Unrealized gain on investments Net cash used by operating activities

8,910

(9,460) 1,560 (2,900) (1,120) 6,200 30,070 (70,000) (179,200) (215,940)

Cash Flows from Investing Activities: Purchase of equipment Purchases of investments Proceeds from sale of investments Net cash provided by investing activities

(33,000) (1,250,000) 1,500,000 217,000

Cash Flows from Financing Activities Repayment of bonds Net cash used for financing activities

(100,000) (100,000)

Net decrease in cash and cash equivalents Cash and cash equivalents, beginning of the year Cash and cash equivalents, end of the year

(98,940) 615,540 $ 516,600

General Problem Information: Private university trial balance to FS Learning Objective: 15-4 Topic: Transactions and Financial Statements for Private Colleges and Universities Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard

Chapter 15 - Accounting for Colleges and Universities

15-23. a. The CFI score is comprised of four ratios as described in Illustration 15-7. Illustration 15-8 and 15-9 provide a template for how to calculate the CFI.

**Note the strength factor was less than the floor range of −4. For purposes of calculating the CFI, Ratio Name Ratio Calculation for Allen University Primary Reserve ((4,682,620 − 1,000,000 − 1,537,440+792,000) / 2,412,050) = 1.22 Net Operating Revenues

−298,500 / 2,113,550 = −14.12%

Return on Net Assets

8,910 / 4,673,710 = 0.19%

((4,682,620 – 1,000,000 − 1,537,440 + 792,000) / 792,000) = 3.71 strength factors can be no higher than 10 and no lower than −4. Viability

Ratio Name

Ratio Value

Ratio Scale

Strength Factor (Ratio Value / Ratio Scale)

Weighting Factor

Score

Primary Reserve

1.22

.133

9.17

35%

3.21

Net Operating Revenues

−14.12%

.7%

−4**

10%

−0.40

Return on Net Assets

0.19%

0.10

20%

0.02

Viability

3.71

.417

8.90

35%

3.12

Total CFI

5.95

b. Based on a CFI score 5.95, Allen University would be considered financially healthy. One potential area of concern is the large deficit in the current year. If Allen University continues to suffer deficits in future years, the financial condition will certainly worsen. c. Financial health is only once aspect of performance. To truly gauge how well a college or university is performing, nonfinancial performance measures must also be considered. For example, are students graduating in a timely fashion? Does the university offer reasonable value when comparing the cost to attend with salaries post-graduation?

Chapter 15 - Accounting for Colleges and Universities

Ch. 15, Solutions, Exercise 15-23 (Cont’d)

General Problem Information: Computing the CFI for a Private University Learning Objective: 15-5 Topic: Issues Related to Colleges and Universities Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard

Chapter 15 - Accounting for Colleges and Universities

15-24. a. WILSON STATE COLLEGE STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION FOR THE YEAR ENDED JUNE 30, 2023 (000s omitted) Revenues: Operating revenues: Student tuition and fees (net of discount & allowances) Grants and contracts Auxiliary enterprises Total operating revenue Expenses: Operating expenses: Academic support Institutional support Scholarships and fellowships expenses Depreciation expense Auxiliary enterprises Total operating expenses Operating loss Nonoperating revenues (expenses): State appropriation Investment income Interest expense Net nonoperating revenues Income before other revenues, expenses, gains or losses Capital appropriations Increase in net position Net position, beginning of the year Net position, end of the year

$ 22,530 18,196 14,595 55,321

58,940 26,268 7,664 5,580 12,197 110,649 (55,328) 44,894 1,745 (378) 46,261 (9,067) 12,785 3,718 285,662 $289,380

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-24 (Cont’d)

WILSON STATE COLLEGE STATEMENT OF NET POSITION AS OF JUNE 30, 2023 (000s omitted) Assets

Current assets: Cash and cash equivalents Investments Accounts receivable (net of allowance for doubtful accounts of $137) Due from state Inventories Total current assets Noncurrent assets: Cash and cash equivalents-restricted Restricted investments Depreciable capital assets (net of accumulated depreciation of $28,850) Nondepreciable capital assets Total noncurrent assets Total assets Liabilities and Net Position Current liabilities: Accounts payable Accrued liabilities Unearned revenue Compensated absences—current portion Total current liabilities Noncurrent liabilities: Compensated absences Bonds Payable Total noncurrent liabilities Total liabilities Net position: Net investment in capital assets Restricted for nonexpendable: Endowment Restricted for expendable: Debt service Capital projects Unrestricted Total net position

3,278 29,387 1,820 79,626 869 114,980 6,716 71,883 155,770 89,481 323,850 438,830

2,306 2,039 13,789 1,538 19,672

37,662 92,116 129,778 149,450 153,135 39,959 1,307 52,272 42,707 $289,380

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-24 (Cont’d)

WILSON STATE COLLEGE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2023 (000s omitted) Cash Flows from Operating Activities Cash received for tuition and fees (net) Grants and contracts Cash received from auxiliary enterprises Payments to employees Payments to vendors Payments for scholarships and fellowships Net cash used in operating activities Cash Flows from Noncapital Financing Activities State appropriations Cash Flows from Capital and Related Financing Activities Capital appropriations Purchases of capital assets Interest paid on capital debt Net cash used in capital and related financing activities Cash Flows from Investing Activities Investment income Net increase in cash Cash and cash equivalents, beginning of the year Cash and cash equivalents, end of the year Reconciliation of Net Operating Revenues (Expenses) to Net Cash Used by Operating Activities Operating loss Adjustments to reconcile net loss to net cash used by operating activities: Depreciation expense Change in assets and liabilities: Accounts receivable, net Due from state Inventories Accounts payable and accrued liabilities Unearned revenue Net cash used in operating activities

$ 23,609 12,940 13,765 (58,220) (21,711) (7,664) (37,281) 39,894 20,540 (20,634) (2,095) (2,189) 1,503 1,927 1,351 $ 3,278

$(55,328)

5,580 (2,551) 14,842 (23) 1,962 (1,763) $(37,281)

Chapter 15 - Accounting for Colleges and Universities Ch. 15, Solutions, Exercise 15-24 (Cont’d)

General Problem Information: Public university trial balance to FS Learning Objective: 15-4 Topic: Transactions and Financial Statements for Private Colleges and Universities Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard

Chapter 16 - Accounting for Health Care Organizations

CHAPTER 16:

ACCOUNTING FOR HEALTH CARE ORGANIZATIONS OUTLINE

Number

Topic

Type/Task

Status (re: 18/e)

Questions: 16-1 16-2 16-3 16-4 16-5 16-6 16-7 16-8 16-9 16-10 16-11

Standards-setting authority Financial statements Primary revenue source Deductions from revenue Performance indicators Patient Protection and Affordable Care Act Premium revenue Operating statements Financial and operational performance Diagnosis-related group Assets limited as to use

Explain List Explain Explain Define Explain Discuss Compare Explain Explain Compare

Revised Same Same New Same 16-10 16-9 16-6 New New 16-8

Evaluate Evaluate

Same Revised

16-14 16-15

Charity care Research Case—Determining Community Benefit Patient Protection and Affordable Care Act Evaluating the quality of health care

Determine Evaluate

Same Revised

16-16

Evaluating the financial condition

Evaluate

Revised

Exercises/Problems: 16-17 Various

Multiple Choice

16-18 16-19 16-20 16-21 16-22

Classify Apply Apply Classify Apply

Items 4, 6, and 7 revised; items 11-12 new. Same Revised New 16-20 16-21 revised

Apply Apply

16-22 revised 16-23 revised

Apply

16-24 revised

Analyze

16-25 revised

Cases: 16-12 16-13

16-23 16-24 16-25 16-26

Revenue classifications Various unrelated transactions—journalize Various unrelated transactions—journalize Performance indicators Revenue and related transactions— journalize Governmental hospital—journalize Not-for-profit hospital—financial statements Not-for-profit hospital—journal entries and financial statements NFP—statement of operations error analysis

Chapter 16 - Accounting for Health Care Organizations

CHAPTER 16: ACCOUNTING FOR HEALTH CARE ORGANIZATIONS Answers to Questions 16-1. Disagree. The FASB is the sole authoritative source of GAAP for nongovernmental NFP and for-profit health care entities. The GASB is the authoritative source of GAAP for government hospitals and health care providers. Given that different authoritative sources of GAAP exist, accounting and reporting rules may differ, depending on whether the health care provider is legally structured as an investor-owned, not-for-profit, or government organization. The textbook discusses some of these differences; for example, unlike investor-owned organizations, NFP organizations receive nonexchange revenues. As a result, the FASB provides a requirement for a performance indicator for NFPs, which tends to be analogous to income from continuing operations for investor-owned organizations. Government health care entities are not specifically required to report a performance indicator, although they are required to report operating income. General Problem Information: Standards-setting authority Learning Objective: 16-1 Topic: GAAP for Health Care Providers Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Medium 16-2. The FASB requires not-for-profit health care entities to issue a statement of financial position, statement of operations, and a statement of cash flows, as well as notes to the financial statements. Additionally, information concerning changes in net assets is to be included in a statement of changes in net assets, which may be combined with the statement of operations or presented separately in a statement of changes in net assets. Considerable discretion is allowed in presenting financial information. Governmental health care organizations that engage in business-type activities provide a statement of net position (balance sheet); a statement of revenues, expenses, and changes in net position; a statement of cash flows; and notes to the financial statements. General Problem Information: Financial statements Learning Objective: 16-2 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Easy 16-3. Health care organizations receive the majority of their revenue in the form of fees for services. The principal sources of service revenue are (1) patient service revenue, (2) premium revenue, and (3) resident service revenue.

Chapter 16 - Accounting for Health Care Organizations

Ch. 16, Answers, Question 16-3 (Cont'd)

Patient service revenues are earned based on services provided to patients. Premium revenue, derived from capitation fees, differs from patient service revenue in that fixed fees per person are paid periodically, regardless of services provided. Resident service fees, such as maintenance or rental fees in an extended care facility, are paid in fixed amounts on a continual basis, regardless of the exact underlying cost incurred. Hence, depending on the health care organizations, they may derive most of their fee revenues based on actual services provided or on a fixed fee basis. General Problem Information: Primary revenue source Learning Objective: 16-2 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Easy 16-4. Government health care entities follow GASB standards, which indicate that patient discounts, contractual adjustments, and bad debts are considered contra-revenue accounts. Discounts and contractual adjustments can be netted against gross patient revenue in arriving at net patient revenue. Charity service is not reported on the statement of operations; however, the amount as well as management’s policies regarding charity service must be disclosed in the notes to the financial statements. The accounting treatment does differ for not-for-profit health care entities in some important respects. Under FASB standards, contractual adjustments are considered explicit price concessions and are netted against gross patient revenue. At the time of revenue recognition, not-for-profit health care entities must determine if uncollectible amounts are either implicit price concessions or bad debts. An implicit price concession exists if it is likely the not-for-profit health care entity will accept a discount or concession to standard pricing before a credit risk assessment can be made. A bad debt occurs when a patient has been determined to have the financial capacity to pay for health care services but is unwilling to settle the claim. Implicit price concessions are treated as a contra-revenue. Bad debts are treated as an operating expense. Under FASB ASC 606, it is expected that a large amount of what previously was considered Bad Debt will now be classified as implicit price concessions. Like government health care entities, not-forprofit health care entities do not report charity services on the face of the financial statements, but rather disclose management’s policies regarding charity services in the notes to the financial statements. General Problem Information: Deductions from revenue Learning Objective: 16-2 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Medium

Chapter 16 - Accounting for Health Care Organizations

16-5. Performance indicators relate to the results of operations. An example of a performance indicator is the excess of revenues and gains over expenses and losses. Items that would be omitted from the performance indicator include unrealized gains/losses on other than trading debt securities, distributions/receipts from owners, and restricted contributions. The performance indicator, excess of revenues and gains over expenses and losses, is intended to be comparable to income after taxes (but before discontinued items) of an investor-owned organization. General Problem Information: Performance indicators Learning Objective: 16-2 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Easy 16-6. The Patient Protection and Affordable Care Act, also referred to as the Affordable Care Act (ACA), is a public law intended to provide health insurance reform and improved health care for Americans. The ACA has had an important impact on the financial reporting and financial condition of health care entities. Several provisions of the act (increased insurance coverage, bundled medical services, and electronic recordkeeping) have had an impact on revenues, and/or costs. The act has impacted the Form 990 filings by NFPs, requiring increased reporting related to a community health needs assessment that must be conducted. General Problem Information: Patient Protection and Affordable Care Act Learning Objective: 16-4 Topic: Other Health Care Issues Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Medium 16-7. Premium revenue is the revenue that a health care entity receives for prepaid health plans such as health maintenance organizations (HMOs) and preferred provider organizations (PPOs). A health care entity recognizes premium revenue as patient service revenue in the period in which members are entitled to receive services, although the entity may not provide the care (incur costs) related to the revenue until a later date. This would seemingly violate the matching concept, as the expenses will not be well matched to the revenues, since the expenses may be incurred over more than one reporting period. General Problem Information: Premium revenue Learning Objective: 16-4 Topic: Other Health Care Issues Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Medium

Chapter 16 - Accounting for Health Care Organizations

16-8. Although there are several similarities in the presentation of the statements, some of the differences in presentation are shown on the table below. Business-Type Governmental Presentation Statement of revenues, expenses, and changes in net position

Item

Not-For-Profit Presentation

Title

Statement of operations

Presentation of operating and nonoperating activities

FASB does not require that revenues and/or expenses be displayed as operating/nonoperating

GASB requires operating and nonoperating activity sections be displayed

Performance indicator

FASB requires an indicator comparable to an investorowned entity’s income from continuing operations measure

GASB does not require such an indicator (however, by construction, a similar type of measure would be displayed)

Net asset/position classifications

Only net assets without donor restrictions activity and net assets released from restrictions are presented. (Note: The statement of changes in net assets shows net assets with donor restrictions activity.)

All operating activity is presented on the statement of revenues, expenses, and changes in net position

Presentation of bad debts

Bad debts that are determined to not be implicit price concessions are accounted for as a bad debt expense and presented as an operating expense.

Is recorded as a contrarevenue account and netted against the revenue account for presentation.

General Problem Information: Operating statements Learning Objective: 16-2 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium

Chapter 16 - Accounting for Health Care Organizations

16-9. Illustration 16-6 lists ten key financial indicators that can be used to assess the financial health of NFP hospitals. Examples of the key financial indicators include operating margin, debt service coverage, current ratio, and capital expense percentage. In addition to financial indicators, other performance metrics that should be reviewed include patient volume and patient and payout mix. General Problem Information: Financial and operational performance Learning Objective: 16-5 Topic: Other Health Care Issues Bloom’s Taxonomy: Identify Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Medium 16-10. The diagnosis-related group (DRG) is a case-mix scheme that is used to determine how much a hospital will receive in payment for services rendered. Services that require more intensive treatment will receive a higher DRG score. For example, the DRG for chest pains might be 0.6, while for a kidney transplant, the DRG might be 3.15. The Centers for Medicare & Medicaid Services (CMS) use the DRG in conjunction with the federal standard rate to set payment amounts. The payment amounts, and not the actual costs incurred by the hospital, impact the patient service revenue. General Problem Information: Diagnosis-related group Learning Objective: 16-2 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Medium

16-11. The FASB recognizes assets limited as to use as unrestricted assets whose use is limited by contract or agreements with outside parties, or by the governing body. Restrictions imposed on assets by donors or grantors are not included in the definition of assets limited as to use. The GASB defines restricted assets as those with restrictions such that the restriction limits the ability of the entity to use the asset to pay current liabilities. Under the GASB definition, a restriction can include contracts or agreements with outside parties and donor or grantor restrictions. General Problem Information: Assets limited as to use Learning Objective: 16-2 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium

Chapter 16 - Accounting for Health Care Organizations

Solutions to Cases 16-12. a. There are no precise guidelines discussed in the text or in Internal Revenue Service announcements regarding the amount of charity care that must be provided in order to retain tax-exempt status. The Burton-Hill Act of 1946 that made construction loans available to hospitals did require that some level of care to indigent patients be delivered; however, the act does not provide any minimum amounts of care. b. The chart shows that if charity care alone is considered, all three hospitals fall short of the estimated taxes the hospitals would pay if they were not tax-exempt. When contractual adjustments are added to the charity care, all three hospitals exceed the estimated taxes the hospitals would pay. However, it should be kept in mind that contractual adjustments are negotiated or agreed to rates in many cases; thus, the question can be raised as to whether the contractual adjustments represent charity or the fair value of the services provided. Teaching and research hospitals that are not fully reimbursed for research or graduate medical education would report the expenses related to this function but would not consider this “charity service.” Students will undoubtedly have different opinions on what should be included in determining if the hospitals have provided “sufficient” charity care to “fulfill their obligations.” Note that this chart was prepared by a reporter and the numbers used may be neither audited nor directly comparable across hospitals. c. The audited annual financial statements of these three hospitals would be useful. The amount of charity care and the hospitals’ policies should be disclosed in the notes to the financial statements. Students could also determine the difference in size and purpose of the hospitals, which may be relevant. Students might also be able to calculate the amount of taxes that would be paid if the organization was not taxexempt. Presumably the reported “estimated taxes” was based on the “excess of revenues over expenses”; however, it is not clear whether all items on a statement of operations would be subject to taxation, or if there are items in the statement of changes in net assets that would be subject to taxation. General Problem Information: Charity care Learning Objective: 16-4 Topic: Other Health Care Issues Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: BB: Legal Level of Difficulty: Medium

Chapter 16 - Accounting for Health Care Organizations

16-13. a. Students’ answers to part a will vary depending on their selection of hospitals. The goal is to get students to look at Schedule H to see the kinds of information required and then relate that information to organizations with which they are somewhat familiar. b. Students’ answers to part b will vary. The authors suggest that grading be done based on the level of thought and analysis demonstrated in the response. The American Hospital Association (AHA) has been reporting the average exempt hospital level of community benefit since 2012. The most recent report available at the time the textbook was published can be found at: https://www.aha.org/guidesreports/2018-1009-results-2016-tax-exempt-hospitals-schedule-h-community-benefit-reports. Instructors can consider retrieving the most recent report and having the students benchmark their chosen hospitals to the exempt hospital averages presented in the report. The 2016 Schedule H results report includes benchmarks by hospital size, location, and type. General Problem Information: Research Case—Determining Community Benefit Learning Objective: 16-4 Topic: Other Health Care Issues Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: BB: Decision Making Level of Difficulty: Hard 16-14. a. The primary purpose of the act is health insurance reform. Reforms required under the act are intended to enhance the quality of health care by holding insurance companies more accountable, lowering health care costs, and guaranteeing more health care choices. b. The act contains numerous provisions. Some of the major coverage provisions of the act include: • an end to pre-existing condition exclusions. • allowing children to remain on a parent’s policy until age 26, under certain conditions. • an end to lifetime limits on coverage. • coverage of certain preventative care costs. c. The Insurance Marketplace is a government website designed to make buying health coverage easier and more affordable. The Marketplace allows individuals to compare health plans, get answers to questions, find out if they are eligible for tax credits for private insurance or health programs, and enroll in a health plan. The Affordable Care Act is not a government insurance program; therefore, the Insurance Marketplace facilitates the purchase of insurance from private insurers. The Insurance Marketplace only allows for the purchase of insurance during an open enrollment period.

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Case 16-14, c. (Cont'd)

The open enrollment period usually runs for about three months starting late in the calendar year. d. The reasons students see the purchase of insurance as controversial should generate a good discussion, given that students tend to be younger and healthier than those who would most immediately benefit from the enactment of the provision (older and less healthy individuals who would see lower premiums). The controversy has generally focused on the government’s right to force individuals to purchase insurance. Some points that can be made related to the controversy include federal versus state powers as outlined in the constitution (generally health care has been a state right); the fact that everyone is already generally required to pay for social security and Medicare; and the idea that health insurance under the act’s provisions is supposed to be provided by a non-government entity, which does make it different (private for-profit entity or insurance pools in which for-profits participate) than paying for social security and Medicare. Note that as of 2019, the individual requirement to have health insurance does not apply at the federal level, but there are a few states that have an individual mandate at the state level. General Problem Information: Patient Protection and Affordable Care Act Learning Objective: 16-4 Topic: Other Health Care Issues Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Medium 16-15. a. The purpose of Hospital Compare is to provide consumers with information about the quality of care for hospitals and other types of health care providers. Information on the site can help consumers make more informed decisions about where they get health care. Additionally, the public nature of the information encourages hospitals and other listed providers to improve the quality of the care they provide. b. Each student will find different data depending on the particular hospital chosen. Students should be surprised to find how complete these data are and how easy it is to access the data. In their overall evaluation (item 4), students will probably assign different weights to measures. For example, some may weight patients’ hospital experience measures more highly than effectiveness measures (emergency room performance), or statistics related to unplanned hospital visits. c. Student explanations will vary depending on the amount of effort and creativity they bring to this analysis. They should be able to appreciate that certain hospitals, such as public hospitals that disproportionately serve an underprivileged populace or hospitals with an unusually large number of Medicare patients, may have different quality of care scores than hospitals with a more affluent, better insured, and younger patient mix. Similarly, wealthier health care organizations are more likely to have state-of-the-art technology and perhaps the most highly qualified medical staff.

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Case 16-15 (Cont'd )

Those hospitals may have a comparative advantage over health care organizations with fewer resources. Finally, research hospitals or those that specialize in difficult or terminal types of conditions (e.g., infectious diseases, cancer, or geriatric specialties) may have different outcome scores. General Problem Information: Evaluating the quality of health care Learning Objective: 16-5 Topic: Financial and Operational Analysis Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: BB: Critical Thinking Level of Difficulty: Medium 16-16 a. Students’ answers to part a will vary depending on the hospital they select. The objective is to get students to review the financial condition of a hospital in line with ratios and statistics widely cited in the health care industry. The benchmark data are sourced from “HFMA Key Hospital Financial Statistics and Ratio Medians 2019,” which compares median statistics from three sources: Optum, Premier, Inc., and HFMA Map App. b. Students’ answers to part b will vary. The authors suggest that grading be done based on the level of thought and analysis demonstrated in the response. Beyond the financial condition assessment, students should note that metrics on quality of care are important to consider when determining the overall hospital performance. If students choose hospitals with different ownership structures (for-profit vs. not-forprofit or government), students could comment on the impact ownership structure has on the financial condition. General Problem Information: Research Case—Evaluating financial condition Learning Objective: 16-5 Topic: Financial and Operational Analysis Bloom’s Taxonomy: Evaluate Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: BB: Decision Making Level of Difficulty: Hard Solutions to Exercises and Problems 16-17. 1. 2. 3. 4. 5.

a. b. c. b. d.

6. 7. 8. 9. 10.

a. c. b. d. c.

11. a. 12. d.

General Problem Information: Various Learning Objective: 16-1

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-17 (Cont'd)

Learning Objective: 16-2 Learning Objective: 16-4 Learning Objective: 16-5 Topic: GAAP for Health Care Providers; Reporting and Accounting Issues; Other Health Care Issues; Financial and Operational Analysis Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium 16-18. 1. a. 2. c. 3. b. 4. e. 5. d.

6. 7. 8. 9. 10.

c. e. d. e. d.

General Problem Information: Revenue classifications Learning Objective: 16-2 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application AICPA: BB: Measurement Level of Difficulty: Medium 16-19. BUSINESS-TYPE GOVERNMENT FACILITY JOURNAL 1. CASH—BOND REPAYMENT

Debits 500,000

CASH

Credits 500,000

(Note the government facility is recording restricted cash and would report it in the restricted asset section of the statement of net position)

2. ACCOUNTS AND NOTES RECEIVABLE CONTRACTUAL ADJUSTMENTS PATIENT SERVICE REVENUE

965,000 535,000 1,500,000

(Note charity care is not recorded in the journal.)

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-19 (Cont'd)

Debits. 3. PROVISION FOR BAD DEBTS ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES

Credits

45,000 45,000

4. A government facility would not record the donated services, since GASB standards do not provide for recognition of donated services. 5. CASH 1,500,000 REVENUE—CONTRIBUTIONS FOR ENDOWMENT 1,500,000 (Note: At the end of the reporting period, the government facility would adjust the account Net Position—Restricted to reflect the increase in the endowment.) 6. INVESTMENTS 32,000 REVENUES—CHANGES IN FAIR VALUE OF INVESTMENTS 32,000 (Note: Changes in fair value are recorded in the same account whether there is an increase or decrease in value. The change in fair value is recognized as a component of investment income on the operating statement.) 7. EQUIPMENT CASH

837,000 837,000

(Note: At the end of the reporting period, the government facility would adjust the account Net Position—Restricted to reflect the decrease in restricted assets as a result of meeting the purpose of the restriction.) General Problem Information: Various unrelated transactions—journalize Learning Objective: 16-3 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application AICPA: BB: Measurement Level of Difficulty: Hard

Chapter 16 - Accounting for Health Care Organizations

16-20. NOT-FOR-PROFIT FACILITY JOURNAL 1. ASSETS LIMITED AS TO USE—CASH

Debits 650,000

CASH

2. PATIENT ACCOUNTS RECEIVABLE

Credits 500,000

2,500,000

PATIENT SERVICE REVENUE

2,500,000

(Note charity care is not recorded in the journal.)

3. CONTRACTUAL ADJUSTMENTS

800,000

IMPLICIT PRICE CONCESSIONS FOR INDIVIDUAL PAYORS

250,000

PATIENT ACCOUNTS RECEIVABLE

4. GENERAL SERVICES EXPENSE

1,050,000

100,000

CONTRIBUTIONS—WITHOUT DONOR RESTRICTIONS

5. CASH

100,000

3,000,000

CONTRIBUTIONS—WITH DONOR RESTRICTIONS

6. INVESTMENTS

3,000,000

75,000

UNREALIZED GAIN—CHANGE IN FAIR VALUE

7. EQUIPMENT

75,000

625,000

CASH

625,000

NET ASSETS RELEASED FROM RESTRICTIONS— WITH DONOR RESTRICTIONS

625,000

NET ASSETS RELEASED FROM RESTRICTIONS— WITHOUT DONOR RESTRICTIONS

625,000

General Problem Information: Various unrelated transactions—journalize 16-13 Copyright ©2022 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-20 (Cont'd)

Learning Objective: 16-3 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application AICPA: BB: Measurement Level of Difficulty: Hard

16-21. 1.

2. 3. 4. 5. 6.

N Y Y Y N

Unrealized gains/losses on only trading debt securities are included in the performance indicator Operating performance relates to net assets without donor restrictions.

“Below the line items” such as discontinued operations and change in accounting principle are not included in the performance indicator. A transfer of cash to the parent is not an operating activity. There is a purpose restriction on the grant.

7. N 8. N 9. Y 10. Y General Problem Information: Performance indicators Learning Objective: 16-2 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Classify Accreditation Skills tag: AACSB: Knowledge Application AICPA: BB: Measurement Level of Difficulty: Medium

Chapter 16 - Accounting for Health Care Organizations

16-22. a.

EVANSTON GENERAL HOSPITAL GENERAL JOURNAL

1. PATIENT ACCOUNTS RECEIVABLE

Debits 8,222,000

CASH

Credits

928,000

PATIENT SERVICE REVENUE

9,150,000

2. GENERAL EXPENSES

265,000

CONTRIBUTIONS—WITHOUT DONOR RESTRICTIONS

3. CASH CONTRACTUAL ADJUSTMENTS

265,000

5,365,000 2,857,000

PATIENT ACCOUNTS RECEIVABLE

4. CASH

8,222,000

5,000,000

CONTRIBUTIONS—WITH DONOR RESTRICTIONS

5. CASH

5,000,000

965,000

OTHER REVENUES

6. IMPLICIT PRICE CONCESSIONS FOR INDIVIDUAL PAYORS PATIENT ACCOUNTS RECEIVABLE

965,000

1,170 1,170

b. Unrestricted revenues, gains, and other support: Net patient service revenue (note 1)

$6,291,830

Other revenue (note 2)

1,230,000

Total revenues and gains

7,521,830

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-22, b. (Cont'd)

Note 1: Net patient revenue is the $9,150,000 from transaction 1, less the contractual adjustment of $2,857,000 from transaction 3 and the increase in implicit price concessions of 1,170 from transaction 6. Note 2: Other revenue is the sum of the unrestricted contributions of 265,000 from transaction 2 plus the other revenues of 965,000 from transaction 5. c. The $5,000,000 restricted contribution would be reported as part of the statement of changes in net assets, assuming a separate statement is prepared, or optionally as a part of the changes in net assets section of the statement of operations. The amount would not be included in the statement of operations section before the excess of revenues and gains over expenses and losses since it is not part of the performance indicator. General Problem Information: Revenue and related transactions—journalize Learning Objective: 16-3 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application AICPA: BB: Measurement Level of Difficulty: Hard 16-23. a.

MILOS COUNTY HOSPITAL GENERAL JOURNAL

ACCOUNTS AND NOTES RECEIVABLE PATIENT SERVICE REVENUE

Debits 1,664,900

Credits 1,664,900

CASH 295,300 REVENUE—OTHER 295,300 (Note that although this is classified as Other [or Auxiliary] it is still considered an operating revenue)

CONTRACTUAL ADJUSTMENTS 632,000 PROVISION FOR BAD DEBTS 30,200 PATIENT SERVICES REVENUE 261,400 ACCOUNTS AND NOTES RECEIVABLE 893,400 ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS 30,200 (Note that since at the time patient service revenue was recorded the amount of charity care was unknown, a subsequent adjustment must be made to remove charity care from the revenue transaction.) 4. RESEARCH EXPENSES 200,000 CASH 200,000 CASH 200,000 REVENUE—GRANTS & CONTRIBUTIONS

200,000

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-23, a. (Cont'd)

9. 10.

11.

FISCAL AND ADMINISTRATIVE SERVICE EXPENSES GENERAL SERVICES EXPENSES NURSING SERVICES EXPENSES OTHER PROFESSIONAL SERVICES EXPENSES INVENTORY ACCRUED EXPENSES PAYABLE VOUCHERS PAYABLE

194,440 253,100 585,000 185,600 101,200 7,200 1,326,540

CASH ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS ACCOUNTS AND NOTES RECEIVABLE

1,159,000 11,900

VOUCHERS PAYABLE CASH

1,031,200

NURSING SERVICES EXPENSES INVENTORY ACCRUED INTEREST RECEIVABLE INVESTMENT INCOME DEPRECIATION EXPENSE ACCUMULATED DEPRECIATION—BUILDINGS ACCUMULATED DEPRECIATION—EQUIPMENT Closing Entries: PATIENT SERVICE REVENUE INVESTMENT INCOME REVENUE—GRANTS & CONTRIBUTIONS REVENUE—OTHER *NET POSITION—UNRESTRICTED CONTRACTUAL ADJUSTMENTS PROVISION FOR BAD DEBTS RESEARCH EXPENSES FISCAL AND ADMINISTRATIVE SERVICES EXPENSES GENERAL SERVICES EXPENSES NURSING SERVICES EXPENSES OTHER PROFESSIONAL SERVICES EXPENSES DEPRECIATION EXPENSE

*NOTE:

1,170,900 1,031,200 99,770 99,770 800 800 124,000 51,000 73,000 1,403,500 800 200,000 295,300 404,510 632,000 30,200 200,000 194,440 253,100 684,770 185,600 124,000

Although it was not discussed in the chapter (see chapter 7), it would be necessary to adjust Net Position—Unrestricted, Net Position—Restricted, and Net Position—Net Investment in Capital Assets for the effects of depreciation (entry 10). GASB standards require that net position be reported in these three categories: unrestricted; restricted; and net investment in capital assets.

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-23 (Cont'd)

b. Net patient service revenue would be: Patient service revenue adjusted for charity care (transactions 1 and 3) less: Contractual adjustments Provision for bad debts Net patient service revenue

$1,403,500 (632,000) (30,200) $ 741,300

General Problem Information: Governmental hospital—journalize Learning Objective: 16-3 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application AICPA: BB: Measurement Level of Difficulty: Hard 16-24. a.

CHRISTINA REHABILITATION HOSPITAL STATEMENT OF OPERATIONS FOR YEAR ENDED SEPTEMBER 30, 2023 (000s omitted)

REVENUE, GAINS AND OTHER SUPPORT WITHOUT DONOR RESTRICTIONS: NET PATIENT SERVICE REVENUE (note 1) $495,350 OTHER OPERATING REVENUE 11,330 INVESTMENT INCOME 7,300 TOTAL REVENUE AND GAINS 513,980 EXPENSES AND LOSSES (note 2): SALARY EXPENSE $338,520 SUPPLIES EXPENSE 140,610 DEPRECIATION EXPENSE 25,230 INTEREST EXPENSE 5,130 TOTAL EXPENSES AND LOSSES 509,490 EXCESS OF REVENUES AND GAINS OVER EXPENSES AND LOSSES 4,490 NET ASSETS RELEASED FROM RESTRICTIONS: SATISFACTION OF PURPOSE RESTRICTIONS 1,010 INCREASE IN NET ASSETS WITHOUT DONOR RESTRICTIONS $ 5,500

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-24, a. (Cont'd)

CHRISTINA REHABILITATION HOSPITAL STATEMENT OF CHANGES IN NET ASSETS FOR YEAR ENDED SEPTEMBER 30, 2023 (000s omitted)

NET ASSETS WITHOUT DONOR RESTRICTIONS (see part 1 above): EXCESS OF REVENUES AND GAINS OVER EXPENSES AND LOSSES UNREALIZED LOSS ON INVESTMENTS NET ASSETS RELEASED FROM RESTRICTIONS INCREASE IN NET ASSETS WITHOUT DONOR RESTRICTIONS NET ASSETS WITH DONOR RESTRICTIONS: CONTRIBUTIONS FOR PROGRAMS CONTRIBUTIONS FOR ENDOWMENT INVESTMENT INCOME UNREALIZED GAIN ON INVESTMENTS NET ASSETS RELEASED FROM RESTRICTIONS INCREASE IN NET ASSETS WITH DONOR RESTRICTIONS INCREASE IN NET ASSETS NET ASSETS AT BEGINNING OF THE YEAR NET ASSETS AT END OF THE YEAR

4,490 (950) 1,010 4,550 6,540 130 470 590 (1,010)

6,720 11,270 326,815 $338,085

Note 1: Net of contractual adjustments amounting to $550,980, and implicit price concessions for individual payors of $17,030. Note 2: Because the natural classification of expenses is used on the statement, the hospital would disclose the functional classifications in the notes. b.

CHRISTINA REHABILITATION HOSPITAL BALANCE SHEET AS OF SEPTEMBER 30, 2023 (000s omitted)

ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS PATIENT ACCOUNTS RECEIVABLE INVENTORY PREPAID EXPENSES TOTAL CURRENT ASSETS ASSETS LIMITED AS TO USE: INVESTMENTS

$ 45,525 45,300 8,410 6,610 105,845

49,440

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-24, b. (Cont'd)

PLEDGES RECEIVABLE (NET OF DISCOUNT OF $910) INVESTMENTS PROPERTY, PLANT, & EQUIPMENT: LAND BUILDINGS $324,440 LESS: ACCUMULATED DEPRECIATION 142,960 EQUIPMENT 259,160 LESS: ACCUMULATED DEPRECIATION 118,040 TOTAL PROPERTY, PLANT, & EQUIPMENT TOTAL ASSETS

2,910 198,000 $

7,580 181,480 141,120 330,180 $686,375

LIABILITIES AND NET ASSETS CURRENT LIABILITIES: ACCOUNTS PAYABLE ACCRUED PAYABLES INTEREST PAYABLE CURRENT PORTION OF BONDS PAYABLE TOTAL CURRENT LIABILITIES LONG-TERM LIABILITIES: BONDS PAYABLE OTHER LONG-TERM LIABILITIES TOTAL LONG-TERM LIABILITIES TOTAL LIABILITIES NET ASSETS: WITHOUT DONOR RESTRICTIONS WITH DONOR RESTRICTIONS TOTAL LIABILITIES AND NET ASSETS

$ 20,730 26,790 1,070 15,000 63,590

$158,000 126,700 284,700 348,290

225,655 112,430

338,085 $686,375

General Problem Information: Not-for-profit hospital—financial statements Learning Objective: 16-3 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application AICPA: BB: Reporting Level of Difficulty: Hard

Chapter 16 - Accounting for Health Care Organizations

16-25. a.

EDWARDS LAKE COMMUNITY HOSPITAL GENERAL JOURNAL ENTRIES FISCAL YEAR 2023 Debits PATIENT ACCOUNTS RECEIVABLE 2,979,650 CONTRACTUAL ADJUSTMENTS

Credits

1,520,000

PATIENT SERVICES REVENUE

3,500,900

OTHER OPERATING REVENUES

998,750

CASH ASSETS LIMITED AS TO USE⎯CASH

2,960,600 7,350

PATIENT ACCOUNTS RECEIVABLE

2,960,600

INVESTMENT INCOME⎯WITHOUT DONOR RESTRICTIONS

7,350

ADMINISTRATION EXPENSES

446,480

GENERAL SERVICES EXPENSES

524,360

NURSING SERVICES EXPENSES

1,031,800

OTHER PROFESSIONAL SERVICES EXPENSES

342,750

ACCOUNTS PAYABLE

891,000

ACCRUED PAYROLL

1,454,390

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-25, a. (3) (Cont'd)

EDWARDS LAKE COMMUNITY HOSPITAL Debits

Credits

NET ASSETS RELEASED FROM RESTRICTION— WITH DONOR RESTRICTIONS

94,000

NET ASSETS RELEASED FROM RESTRICTION— WITHOUT DONOR RESTRICTIONS

94,000

NURSING SERVICES EXPENSES

140,000

GENERAL SERVICES EXPENSES

140,000

MORTGAGE PAYABLE

500,000

ACCOUNTS PAYABLE

836,800

ACCRUED PAYROLL

1,279,500

CASH

2,896,300

ASSETS LIMITED AS TO USE—INTEREST RECEIVABLE

1,180

INVESTMENT INCOME⎯WITHOUT DONOR RESTRICTIONS

1,180

ADMINISTRATION EXPENSES

49,100

GENERAL SERVICES EXPENSES

49,100

NURSING SERVICES EXPENSES

110,475

OTHER PROFESSIONAL SERVICES EXPENSES

36,825

ACCUMULATED DEPRECIATION⎯BUILDINGS

117,000

ACCUMULATED DEPRECIATION⎯EQUIPMENT

128,500

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-25, a, (Cont'd)

EDWARDS LAKE COMMUNITY HOSPITAL Debits 7(a).

INVENTORY

Credits

2,100

ADMINISTRATION EXPENSES

700

NURSING SERVICES EXPENSES

200

OTHER PROFESSIONAL SERVICES EXPENSES

2,700

GENERAL SERVICES EXPENSES

300

Calculations: 73,100 – 71,000 = 2,100 7,300 – 8,000 = (700) 16,800 – 17,000 = (200) 40,000 – 37,300 = 2,700 9,000 – 8,700 = 300 7(b).

MORTGAGE PAYABLE

500,000

CURRENT PORTION OF MORTGAGE PAYABLE

UNREALIZED LOSS ON INVESTMENTS

500,000

663

ASSETS LIMITED AS TO USE⎯INVESTMENTS

663

Closing Entry: PATIENT SERVICES REVENUE

3,500,900

OTHER OPERATING REVENUES

998,750

INVESTMENT INCOME⎯WITHOUT DONOR RESTRICTIONS

8,530

CONTRACTUAL ADJUSTMENTS

1,520,000

ADMINISTRATIVE EXPENSES

496,280

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-25, a. (9) (Cont'd)

EDWARDS LAKE COMMUNITY HOSPITAL Debits

Credits

GENERAL SERVICES EXPENSES

713,160

NURSING SERVICES EXPENSES

1,282,475

OTHER PROFESSIONAL SERVICES EXPENSES

376,875

UNREALIZED LOSS ON INVESTMENTS

663

NET ASSETS⎯WITHOUT DONOR RESTRICTIONS, UNDESIGNATED

118,727

NET ASSETS⎯WITHOUT DONOR RESTRICTIONS⎯ UNDESIGNATED

7,867

NET ASSETS⎯WITHOUT DONOR RESTRCITIONS⎯ DESIGNATED FOR PLANT

NET ASSETS⎯WITH DONOR RESTRICTIONS

7,867

94,000

NET ASSETS RELEASED FROM RESTRICTION— WITHOUT DONOR RESTRICTIONS NET ASSETS⎯WITHOUT DONOR RESTRICTIONS

94,000 94,000

NET ASSETS RELEASED FROM RESTRICTION— WITH DONOR RESTRICTIONS

94,000

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-25 (Cont’d)

EDWARDS LAKE COMMUNITY HOSPITAL BALANCE SHEET AS OF DECEMBER 31, 2023 ASSETS

CURRENT ASSETS: CASH

$ 323,600

PATIENT ACCOUNTS RECEIVABLE

45,550

INVENTORY

73,100

TOTAL CURRENT ASSETS

442,250

ASSETS LIMITED AS TO USE: CASH

24,490

INTEREST RECEIVABLE

1,180

INVESTMENTS

228,557

TOTAL ASSETS LIMITED AS TO USE

254,227

PROPERTY, PLANT, AND EQUIPMENT: LAND

210,100

BUILDINGS (NET OF ACCUMULATED DEPRECIATION OF $ 1,740,000)

2,776,000

EQUIPMENT (NET OF ACCUMULATED DEPRECIATION OF $1,153,000)

1,730,300

TOTAL PROPERTY, PLANT, AND EQUIPMENT

4,716,400

TOTAL ASSETS

$5,412,877

LIABILITIES AND NET ASSETS CURRENT LIABILITIES: ACCOUNTS PAYABLE

$ 73,400

ACCRUED PAYROLL

219,890

CURRENT PORTION OF MORTGAGE PAYABLE

500,000

TOTAL CURRENT LIABILITIES

793,290

LONG-TERM DEBT—MORTGAGE PAYABLE

2,000,000

TOTAL LIABILITIES

2,793,290

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-25, b. (Cont’d)

NET ASSETS: WITHOUT DONOR RESTRICTIONS, UNDESIGNATED

2,287,620

WITHOUT DONOR RESTRICTIONS, DESIGNATED

254,227

WITH DONOR RESTRICTIONS

77,740

TOTAL LIABILITIES AND NET ASSETS

2,619,587 $5,412,877

EDWARDS LAKE COMMUNITY HOSPITAL STATEMENT OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 2023

REVENUE WITHOUT DONOR RESTRICTIONS: NET PATIENT SERVICE REVENUE (NOTE 1)

$1,980,900

OTHER OPERATING REVENUES

998,750

TOTAL REVENUES

2,979,650

EXPENSES: ADMINISTRATION EXPENSES

$ 496,280

GENERAL SERVICES EXPENSES

713,160

NURSING SERVICES EXPENSES

1,282,475

OTHER PROFESSIONAL SERVICES EXPENSES TOTAL EXPENSES EXCESS OF REVENUES OVER EXPENSES

376,875 2,868,790 110,860

NONOPERATING GAINS (LOSSES) INVESTMENT INCOME—WITHOUT DONOR RESTRICTIONS EXCESS OF REVENUES AND GAINS OVER EXPENSES

8,530 119,390

NET ASSETS RELEASED FROM RESTRICTIONS: SATISFACTION OF PURPOSE RESTRICTIONS INCREASE IN NET ASSETS WITHOUT DONOR RESTRICTIONS

94,000 $ 213,390

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-25 (Cont'd)

EDWARDS LAKE COMMUNITY HOSPITAL STATEMENT OF CHANGES IN NET ASSETS FOR YEAR ENDED DECEMBER 31, 2023

NET ASSETS WITHOUT DONOR RESTRICTIONS (see part 1 above): EXCESS OF REVENUES AND GAINS OVER EXPENSES UNREALIZED LOSS ON INVESTMENTS NET ASSETS RELEASED FROM RESTRICTIONS

$ 119,390 (663) 94,000

INCREASE IN NET ASSETS WITHOUT DONOR RESTRICTIONS

212,727

NET ASSETS WITH DONOR RESTRICTIONS: NET ASSETS RELEASED FROM RESTRICTIONS INCREASE IN NET ASSETS

(94,000) 118,727

NET ASSETS AT BEGINNING OF THE YEAR

2,500,860

NET ASSETS AT END OF THE YEAR

$2,619,587

NOTE 1:

Net of contractual adjustments amounting to $1,520,000.

Chapter 16 - Accounting for Health Care Organizations Ch. 16, Solutions, Exercise 16-25 (Cont'd)

EDWARDS LAKE COMMUNITY HOSPITAL STATEMENT OF CASH FLOWS FOR YEAR ENDED DECEMBER 31, 2023

CASH FLOW FROM OPERATING ACTIVITIES: CHANGE IN NET ASSETS

$118,727

ADJUSTMENTS TO RECONCILE CHANGE IN NET ASSETS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: INCREASE IN PATIENT ACCOUNTS RECEIVABLE

(19,050)

INCREASE IN INTEREST RECEIVABLE

(1,180)

INCREASE IN INVENTORY

(2,100)

INCREASE IN ACCOUNTS PAYABLE

54,200

INCREASE IN ACCRUED PAYABLES

174,890

DEPRECIATION

245,500

UNREALIZED LOSS ON INVESTMENTS NET CASH PROVIDED BY OPERATING ACTIVITIES

663 571,650

CASH FLOWS FROM FINANCING ACTIVITIES: PAYMENT OF BOND PRINCIPAL NET CASH USED IN FINANCING ACTIVITIES

(500,000) (500,000)

NET INCREASE IN CASH AND CASH EQUIVALENTS

71,650

CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR

276,440

CASH AND CASH EQUIVALENTS, END OF YEAR

$348,090

General Problem Information: NFP hospital—journalize and financial statements Learning Objective: 16-3 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application AICPA: BB: Measurement Level of Difficulty: Hard

Chapter 16 - Accounting for Health Care Organizations

16-26. The following is a list of modifications or corrections Danker Community Hospital should make for its statement of operations to comply with FASB standards. • Charity care is never recorded; therefore, it would not be recognized as an adjustment to revenue. • Unrealized gains on equity investments are not part of the performance indicator; therefore, the unrealized gains should be shown below a calculation for excess revenue, gains and other revenue over expenses. • Similar to unrealized gains on equity investments, net assets released from restrictions is not part of the performance indicator; therefore, it should be shown below a calculation for excess revenue, gains and other revenue over expenses. • Contractual adjustments is a contra-revenue account and should be deducted from patient service revenue. • Implicit price concessions for individual payors is a contra-revenue account and should be deducted from patient service revenue. • Note that Danker Community has opted to use the natural classification for expenses. In accordance with FASB standards, it would be required to disclose the functional classification amounts for program and support (management and general, and fund-raising). • Note that Danker Community has opted to use a single step format rather than separate the statement of operations into operating and nonoperating activity; this is an acceptable format under the FASB standards. General Problem Information: Not-for-profit statement of operations error analysis Learning Objective: 16-2 Topic: Reporting and Accounting Issues Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking AICPA: BB: Reporting Level of Difficulty: Hard

Chapter 17 - Accounting and Reporting for the Federal Government

CHAPTER 17:

ACCOUNTING AND REPORTING FOR THE FEDERAL GOVERNMENT OUTLINE

Number

Topic

Type/Task

Status (re: 18/e)

Explain

Same

17-2 17-3 17-4 17-5 17-6 17-7 17-8 17-9 17-10 17-11

Roles of GAO, Treasury, and OMB in federal financial reporting Federal GAAP hierarchy Objectives of federal financial reporting Accounts used in federal accounting Net position and net assets Reporting entity Federal funds Stewardship assets Dual-track accounting Performance accountability report Intended Audience for the U.S. Financial Report

Compare List, explain Compare Compare Compare Identify, compare Define, compare Explain, relate Explain, identify Explain, identify

Same Same Same Same Same Same Same Same Same New

Cases: 17-12 17-13 17-14 17-15

Agency PAR and audit report Research case—FASAB Audit of U.S. Government-wide annual report Analysis of the U.S. Government MD&A

Calculate, explain Explain, discuss Explain, discuss Analyze, evaluate

Revised Revised Revised Revised

Exercises/Problems: 17-16 Various

Multiple Choice

17-17 17-18 17-19 17-20 17-21 17-22 17-23

Identify Compute JE, apply Apply Apply Apply Analysis

17-15. Items 9 and 10 revised; items 12 and 13 new. 17-16 17-17 revised 17-18 revised 17-19 17-20 revised 17-21 17-22 revised

Questions: 17-1

Identifying account types and normal balances Fund balance with U.S. Treasury Agency financial statements, continuation of 17-18 Prepare statement of net cost Prepare statement of budgetary resources Transactions and statement of financing Financial statement analysis

Chapter 17 - Accounting and Reporting for the Federal Government

CHAPTER 17:

ACCOUNTING AND REPORTING FOR THE FEDERAL GOVERNMENT

Answers to Questions 17-1. Each of these three agencies plays a significant role in the financial accounting and reporting of federal agencies. The GAO serves as the independent audit agency for the federal government. It is responsible for the audit of the federal government as a whole. Its reports help ensure that the federal agencies are complying with legal requirements and GAAP reporting requirements. As established by law, the GAO also has responsibility for prescribing accounting standards; this responsibility has been delegated to the FASAB. The Department of Treasury is the primary revenue collecting and cash disbursement department of the federal government. As such, it is charged with maintaining the system of central accounts used by federal agencies. The Department of Treasury maintains the standard general ledger, subject to OMB approval, for both budgetary and proprietary accounts of the federal government. The OMB provides the financial plan for the federal government. Directly related to accounting and financial reporting are several circulars issued by OMB that provide guidance to agencies on how to record and report transactions. Two of the circulars are mentioned in the chapter—Circular A-134, “Financial Accounting Principles and Standards,” and Circular A-136, “Financial Reporting Requirements.” Additionally, the OMB provides approvals on the standard general ledger and provides several cost circulars that help the federal agencies in ensuring that funds disbursed are being used appropriately by subrecipients. General Problem Information: Roles of GAO, Treasury, and OMB in federal reporting Learning Objective: 17-1 Topic: Federal Government Financial Management Structure; GAAP for the Federal Government Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Medium 17-2. The GAAP hierarchies for the federal government and state and local governments are similar but have a few notable differences. One major difference is that federal authoritative guidance comes from the FASAB, while state and local government authoritative guidance is issued by the GASB. There are also some differences in the type of outside guidance accepted as authoritative by the two standard-setting bodies. Both hierarchies have been codified by the respective standard-setting bodies, the FASAB and the GASB.

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Answers, Question 17- 2 (Cont’d)

For federal government GAAP, there are four categories of principles, while the GASB only has two levels in its hierarchy. The highest level (category a) being the statements and interpretations issued by the respective standard-setting bodies. The category b principles include the Technical Bulletins issued by the respective standard-setting bodies. AICPA Industry and Accounting Guides are also considered category b principles if made applicable to federal entities by the FASAB or state and local governments if cleared by the GASB. The GASB can also make AICPA Statements of Position applicable. In addition, the GASB considers the following sources category b: GASB implementation guides and any other literature of the AICPA cleared by the GASB. In addition to categories a and b, the FASAB has categories c and d. Category c principles consist of Technical Releases of the Accounting and Auditing Policy Committee of the FASAB, while category d guidance consists of implementation guides issued by the FASAB, as well as widely accepted practices. All other sources not previously mentioned are non-authoritative. General Problem Information: Federal GAAP hierarchy Learning Objective: 17-1 Topic: Federal Government Financial Management Structure; GAAP for the Federal Government Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Medium 17-3. The four objectives for federal financial reporting as outlined in SFFAC No. 1 are: (1) budgetary integrity, (2) operating performance, (3) stewardship, and (4) adequacy of systems and controls. Budgetary integrity is ensuring that taxes and other monies raised by the federal government are raised in accordance with law and regulation, and that expenditures are made in accordance with law and regulation. Operating performance refers to how efficient, effective, and economical the federal agencies have been in using resources to provide services. Service efforts and accomplishments information is useful in helping to assess operating performance. Stewardship refers to accountability for the general welfare of the country. To assess stewardship, information is needed on how the federal government’s operations and investments for the period have impacted the country, and as a result, how the government’s and country’s financial condition has changed or could change in the future. Ensuring the adequacy of systems and controls is necessary for (1) transactions to be executed in accordance with budget, law, and other requirements; (2) deterrence of fraud, waste, and abuse; and (3) performance measurement information to be adequately supported. In many ways, the objectives are similar, in that both the FASAB and the GASB focus on accountability. However, the focus of the FASAB objectives needs to differ somewhat

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Answers, Question 17- 3 (Cont’d)

from the GASB focus, given that the audiences are somewhat different. The FASAB objectives have a broader focus since the FASAB identifies both external and internal groups as primary users of federal financial reporting. An example of this broader focus is the objective on adequacy of systems and controls. This objective has relevance for the FASAB standard-setters since the standard-setters must consider the needs of internal users when promulgating standards. The GASB identifies external groups as the primary users, specifically excluding internal users from consideration in establishing the objectives for financial reporting. General Problem Information: Objectives of federal financial reporting Learning Objective: 17-2 Topic: Conceptual Framework Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Medium 17-4. The account name Estimated Revenues used by state and local governments is a budgetary account representing the government’s estimate of the amount of revenue expected to be realized during the year. Federal agencies use the account Other Appropriations Realized in their budgetary track to capture the amount Congress has appropriated to an agency for the upcoming year. Other Appropriations Realized is for basic operating appropriations, rather than appropriations designated for specific purposes. Other Appropriations Realized is closer in meaning to Appropriations of state and local governments than it is to Estimated Revenues. A federal agency uses the account Fund Balance with U.S. Treasury in its proprietary track as an asset that represents the balance available to the agency at the Department of Treasury. This account would be most similar to cash and cash equivalents at the state and local government level. Fund Balance with U.S. Treasury will be reduced throughout the year by the dollar value of checks drawn. See Illustration 17-12 for a comparison of these terms. Because they are budgetary accounts, Estimated Revenues and Other Appropriations Realized have more in common with each other than either one does with Fund Balance with the U.S. Treasury. General Problem Information: Accounts used in federal accounting Learning Objective: 17-4 Topic: Required Financial Reporting—Government Agencies Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Medium

Chapter 17 - Accounting and Reporting for the Federal Government

17-5. Agree, in part. The net position account on the balance sheet of a federal agency represents the difference between assets and liabilities, as net position does for a state or local government. However, the net position of a federal agency is classified into two categories—unexpended appropriations and cumulative results of operations—which are different than the classifications of net position for a state or local government. Unexpended appropriations is the amount of the entity’s appropriations represented by undelivered orders and unobligated balances. Cumulative results of operations is measured since the inception of the activity as the net difference between expenses/losses and financing sources, which includes appropriations, revenues, and gains. General Problem Information: Net position Learning Objective: 17-4 Topic: Required Financial Reporting—Government Agencies Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Medium 17-6. The three perspectives from which the federal government can be viewed are the organizational perspective, budget perspective, and program perspective. Organizational perspective is most similar to what you would expect to see in an organizational chart; it contains the department/agencies/commissions of the government. Budget perspective refers to the budgetary account structure. It would be a collection of expenditures/appropriations/funds. Finally, the program perspective refers to the programs/functions/activities of the government. There can be considerable overlap among the perspectives, making it difficult to determine the reporting entity. For example, an organization of government may have several programs; some of the programs may cross organization boundaries and be administered by more than one organization. The budgetary account structure is very broad in scope, with programs frequently being funded by more than one budgetary account and, in some cases, one budgetary account funding a complete organizational unit. General Problem Information: Reporting entity Learning Objective: 17-2 Topic: Conceptual Framework Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Medium

Chapter 17 - Accounting and Reporting for the Federal Government

17-7. The two groups of funds used by federal government entities are federal funds and trust funds. There are three federal fund types—General Fund, special funds, and revolving funds. The General Fund is similar in intent to the General Fund of state and local governments. It receives all revenue and other receipts not designated (or identified) for a specific purpose. General appropriations are made from the General Fund. Special funds are established for a specific non-business-type purpose. These funds are most similar to a special revenue fund used by state and local governments. Revolving funds are established for business-type activities, making them similar to the proprietary funds of state and local governments. The second fund group is trust funds. There are two types of trust funds—trust funds and trust revolving funds. Trust funds are established when a law or statute indicates that funds must be used for a specific purpose. Frequently, the purpose benefits those external to the federal government, similar to trust funds of state and local governments. However, this is not always the case. In some instances, the trust funds of the federal government actually benefit the government, making the funds similar to special revenue funds at the state and local government level. The second type of trust fund is trust revolving funds. Similar to revolving funds, they conduct business-like activities on a continuing basis. The difference between a trust revolving fund and revolving fund is often arbitrary and depends on the law or statute creating the fund. Examples of trust revolving funds include the Veterans Special Life Insurance fund, and the Employees Life Insurance fund. General Problem Information: Federal funds Learning Objective: 17-3 Topic: Funds Used in Federal Accounting Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Medium 17-8. Stewardship assets are of two types—heritage assets and stewardship land. Heritage assets have historical or natural significance; cultural, artistic, or educational significance; or are architecturally significant. Stewardship land is land that is not used by the federal government for operating purposes. General property, plant, and equipment (PP&E) of the federal government is used for operating purposes and, as such, is recorded in the same manner as PP&E of state and local governments, not-for-profit entities, and for-profit entities. The costs of the assets are capitalized and if the asset is depreciable, depreciation expense is recorded periodically. Stewardship assets, however, are not recorded. Rather they are noted on the financial statements with disclosures in the notes to the financial statements. The note disclosure should provide information on major categories of heritage assets, multi-use heritage assets, and stewardship land. Additionally, changes in stewardship assets should

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Answers, Question 17-8 (Cont’d)

be provided, including physical units added and withdrawn during the year; methods of acquisition and withdrawal; and condition information. General Problem Information: Stewardship assets Learning Objective: 17-3 Topic: Required Financial Reporting—Government Agencies Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Medium 17-9. The two tracks in the dual-track system are the budgetary accounts track and the proprietary track. The purpose of the budgetary accounts track is to (1) ensure that available budgetary resources and authority are not over expended or over obligated, and (2) facilitate standardized budgetary reporting requirements. Proprietary track accounts provide information for management on the cost of operating the entity. Federal budgetary accounts capture the legally approved budget and help ensure that entities do not exceed budgetary authority. The purpose of the budgetary accounts track is similar to the governmental fund accounting track at the state and local level; wherein, the government records the approved budget to ensure that budget authority is not exceeded. However, the federal budgetary accounts track records only budgetary accounts, while the state and local governmental fund accounting track records the budgetary accounts, as well as the sources and uses of funds during the period (modified accrual accounting). The proprietary track at the federal level uses the accrual basis of accounting, as does the governmental activities track for state and local governments. (Note that state and local governments also have proprietary funds that utilize only one track since all of their accounting is on an accrual basis; there is no recording of the budget.) General Problem Information: Dual-track accounting Learning Objective: 17-5 Topic: Dual-track Accounting System Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Medium

Chapter 17 - Accounting and Reporting for the Federal Government

17-10. The PAR contains several components including: • An agency head message—analogous to a transmittal letter. • A management’s discussion and analysis. • Performance report—provides information on the agency’s success in achieving the goals in its strategic plan and performance budget. • Financial statements—there are seven reports, two (statement of social insurance and statement of net changes in social insurance amounts) of which are only prepared by a limited number of agencies. The other five statements are the balance sheet, statement of net costs, statement of changes in net position, statement of budgetary resources, and statement of custodial activity. • Other accompanying information—includes summary statements and information from the Inspector General concerning any serious management and performance challenges. A federal agency would use OMB Circular A-136 as guidance in preparing its PAR. The circular, available on the OMB website, is updated annually. General Problem Information: Performance accountability report Learning Objective: 17-4 Topic: Required Financial Reporting—Government Agencies Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Medium 17-11. The intended audience for the consolidated financial report of the U.S. government includes (1) citizens, (2) citizen intermediaries, (3) Congress, (4) federal executives, and (5) program managers. The FASAB suggests the first two, citizens and their intermediaries, are the primary audiences. In general, the consolidated financial report should be a general purpose report that can be easily understood by the average citizen. A review of the financial report by citizens is helpful to inform the public about the financial condition of the U.S. government which can provide insights into how federal policies might change in the future (e.g., policy change to increase tax revenues). General Problem Information: Intended Audience for the U.S. Financial Report Learning Objective: 17-2 Topic: Conceptual Framework Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry Level of Difficulty: Medium

Chapter 17 - Accounting and Reporting for the Federal Government

Solutions to Cases 17-12. The answers to the questions will vary by the agencies the students choose. The Department of Defense (DOD) has consistently received a disclaimer of opinion while Housing and Urban Development (HUD) received a qualified opinion for FY 2019. Instructors looking for variation in the audit opinions might direct students to either the DOD or HUD. In addition to financial information, reports will contain other accompanying information. This includes summary statements and information from the Inspector General concerning any major management and performance challenges. For example, the 2019 agency financial report for the Department of the Interior identifies the following six major challenges: 1) Financial management, 2) Workplace culture and human capital, 3) Responsibility to American Indians, 4) Energy management, 5) Information technology (IT) security, and 6) Water programs. General Problem Information: Agency PAR and audit Learning Objective: 17-4 Topic: Required Financial Reporting—Government Agencies Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN: Research Level of Difficulty: Medium 17-13. The information provided in the solution is current as of April 24, 2020. a. According to the FASAB website, the mission of the FASAB is to “serve the public interest by improving federal financial reporting through issuing federal financial accounting standards and providing guidance after considering the needs of external and internal users of federal financial information.” The purpose of the FASAB mission is to support public accountability through the issuance of GAAP. b. There are nine members of the FASAB. Three of the members represent the FASAB sponsors (principals), coming from the Government Accountability Office (GAO), Department of Treasury, and Office of Management and Budget (OMB). Each sponsor selects its own representative. The other six members are nonfederal individuals from the general financial community, accounting and auditing community, or academia. Nonfederal members are appointed by the sponsors. The chair of the FASAB is a nonfederal member appointed by the sponsors. c.

The FASAB is funded by legislative appropriation through the budgets of the three sponsors.

d. Given the funding source and the method of selecting members, it could be argued that the FASAB is not structurally independent. The sponsors are affected by the decisions of the FASAB, and as members of the FASAB, the sponsors are in a position to influence the standards issued. Influence is also exerted through the ability of the sponsors to appoint the nonfederal members of the board.

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Case 17-13, d. (Cont’d)

To pass a standard, two-thirds of the board members must approve. Technically, the composition of the board makes it possible for the nonfederal members to override the decisions of the sponsors; however, all nonfederal members would need to be in agreement. Finally, two of the sponsors (principals), the Comptroller General and the Director of the Office on Management and Budget, have veto power over any FASAB statement if they act within the 90-day review period for final statements. In contrast, the FASB and the GASB are primarily funded by fees paid by publicly traded companies (in the case of the FASB) and municipal bond broker and dealers (in the case of the GASB). In addition, all FASB and GASB board members are appointed by the Financial Accounting Foundation (FAF). To further ensure their independence, FASB board members are required to sever connections with the firms or institutions they served prior to joining the board. e. The answer to this assignment will change, given that the project agenda is ongoing. The following information was taken directly from the FASAB website, accessed on April 24, 2020. One of the FASAB projects relates to an evaluation of existing standards. The goal of the project is to clarify and make changes to existing standards to ensure the benefits of standards clearly exceed cost. Several other projects on the agenda include the following. • Accounting and Reporting of Government Land Project. Implementation of SFFAS No. 29 requires certain disclosures for “stewardship land.” This has led to significant differences in accounting for land that is considered general PP&E versus stewardship land. The purpose of this project is to better understand this diversity in reporting and to recommend recognition and disclosure requirements. •

Leases. This project is being undertaken by the board primarily because the current lease accounting standards, SFFAS No. 5 and No. 6, have been criticized because they do not make meaningful distinctions between capital and operating leases regarding the substance of lease transactions. Federal lease standards are based on the FASB standard, which has recently been revised.

•

DOD Implementation Guidance Request Project. The FASAB will assist DOD by providing guidance to assist the DOD in resolving long-standing barriers to complying with GAAP.

•

Public-Private-Partnerships. The FASAB is considering the appropriate recognition, measurement and disclosure of public-private-partnerships.

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Case 17-13, e. (Cont’d)

•

Reporting Model-Phase II. This project is considering the needs of users for integrated budget, cost, and performance information. The project involves considering improving guidance, as well as the formatting of existing reports to improve the presentation of budget information.

f. FASAB standards are not proprietary. Anyone can access the standards at the FASAB website, www.fasab.gov. This is unlike the FASB Codification, which beyond a basic view is accessed through subscription, or the GASB Codification, which can be purchased in hardcopy or electronic form. g. The Accounting and Auditing Policy Committee (AAPC) is a permanent committee authorized to improve federal financial reporting through the timely identification, discussion, and recommendation of solutions to accounting and auditing issues. Implementation guidance in the form of Technical Releases is developed by the AAPC and must be reviewed by the FASAB before being issued. The AAPC may not amend existing standards nor promulgate new standards. General Problem Information: Research case—FASAB Learning Objective: 17-1 Topic: Federal Government Financial Management Structure and GAAP for the Federal Government Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN: Research Level of Difficulty: Medium 17-14. The FY 2019 report for the U. S. government is available at https://www.gao.gov/assets/710/704983.pdf. The answers to these questions are based on the FY 2019 (i.e., October 1, 2018–September 30, 2019) report. a. The Comptroller General of the GAO was not able to render an opinion; therefore, he reported a disclaimer of opinion because he was unable to determine the reliability of significant portions of the consolidated financial statements due to “Certain material weaknesses in internal control over financial reporting and other limitations affecting the reliability of these financial statements and the scope of our work…” (pg. 234) b. Several material weaknesses in internal control were cited as contributing factors to GAO’s inability to provide an opinion. It should be noted that most of these weaknesses are ongoing and have been cited repeatedly over the years. The following list of weaknesses was taken from the page 235 of the Fiscal Year 2019 Financial Report of the U.S. Government.

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Case 17-14, b. (Cont’d)

Specifically, these weaknesses concerned the federal government’s inability to: • satisfactorily determine that property, plant, and equipment and inventories and related property, primarily held by the Department of Defense (DOD), were properly reported in the accrual-based consolidated financial statements; • reasonably estimate or adequately support amounts reported for certain liabilities, such as environmental and disposal liabilities, or determine whether commitments and contingencies were complete and properly reported; • support significant portions of the reported total net cost of operations, most notably related to DOD, and adequately reconcile disbursement activity at certain federal entities; • adequately account for and reconcile intragovernmental activity and balances between federal entities; • ensure that the federal government’s accrual-based consolidated financial statements were (1) consistent with the underlying audited entities’ financial statements, (2) properly balanced, and (3) in accordance with U.S. generally accepted accounting principles; and • ensure the information in the (1) Reconciliations of Net Operating Cost and Budget Deficit and (2) Statements of Changes in Cash Balance from Budget and Other Activities is complete and consistent with the underlying information in the audited entities’ financial statements and other financial data. c. Social insurance statements received a disclaimer of opinion. Significant uncertainties primarily related to the achievement of projected reductions in Medicare cost growth prevented the comptroller from expressing an opinion on the statements. d. The following list of long-term fiscal challenges was taken from page 239 of the Fiscal Year 2019 Financial Report of the U.S. Government. • For the 2019 projections, debt-to-gross domestic product (GDP) at the end of the 75-year projection period was 474 percent. • The budget deficit increased for the fourth consecutive year in fiscal year 2019 and is projected to continue to grow in almost all of the next 75 years. • Spending for the major health and retirement programs is expected to increase more rapidly than GDP in the coming decades, in part because of an aging population and projected continued increases in health care costs. • Based on the 2019 Financial Report projections, spending on net interest (primarily interest on debt held by the public) will surpass Social Security spending and becomes the largest category of spending in 2035. Overall, absent policy changes, the federal government’s fiscal path is unsustainable. Note to Instructor: The annual report of the U.S. government is certainly provocative and likely to result in a spirited discussion among students. We suggest

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Case 17-14, d. (Cont’d)

you focus on the tremendous accounting challenges in auditing the largest organization in the world and stress the positive aspects of how far federal agencies have come in the years since audit requirements were enacted. General Problem Information: Audit of U.S. government-wide annual report Learning Objective: 17-4 Topic: Required Financial Reporting—U.S. Government-wide Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Communication, AICPA: FN: Research Level of Difficulty: Medium 17-15. The answers provided below are based on information from the Fiscal Year 2019 Financial Report of the U.S. Government. If subsequent reports are used, the numbers will vary. The information to answer a-d was obtained from the Management’s Discussion and Analysis (MD&A) section of the Financial Report for the U.S. Government. Instructors may consider supplementing these questions with additional questions to take advantage of the rich information provided in the MD&A. a. The budget deficit is measured as the amount by which the outlay of resources exceeded the cash receipts of the government. The deficit calculation is budgetary based and thus is more like modified accrual accounting than accrual accounting. The net operating cost is from the financial report of the government, and it represents the amount by which government costs (incurred but not necessarily paid) exceeded revenues (collected or expected to be collected). The net operating cost is an accrual type measure. The budget deficit in 2019 was $984; 2018 was $779; and 2017 was $666 in billions. The operating cost for 2019 was $1,445; 2018 was $1,159; and 2017 was $1,154 in billions. While both measures are increasing over the last three years, the net operating cost measure shows a consistently larger deficit. b. In 2019 the five largest components of net cost were Department of Health and Human Services (24%), Social Security Administration (22%), Department of Defense (18%), Department of Veteran Affairs (8%), and Interest on Treasury Securities Held by the Public (8%). The Department of Defense had the largest increase in net cost ($210 billion increase). c. In 2019 the amount of federal debt held by the public as a percentage of GDP was 79%. The 2019 debt level is above the historical average of 47.8% (based on data going back to 1940). Notably, the highest level since 1940 was 106% in 1946, which coincided with the conclusion of World War II.

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Case 17-15 (Cont’d)

d. In 2019, real GDP growth was 2.1%, while the growth in the consumer price index was 1.7%. Real disposable personal income increase was even higher at 3.3% indicating relatively strong personal income growth.

General Problem Information: Analysis of the U.S. Government MD&A. Learning Objective: 17-4 Topic: Required Financial Reporting—U.S. Government-wide Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical thinking, AICPA: Research Level of Difficulty: Hard

Chapter 17 - Accounting and Reporting for the Federal Government

Solutions to Exercises and Problems 17-16.

1. 2. 3. 4. 5.

a. d. c. d. a.

6. 7. 8. 9. 10.

a. a. c. b. b.

11. c. 12. d. 13. b.

General Problem Information: Various topics Learning Objective: 17-1 Learning Objective: 17-2 Learning Objective: 17-3 Learning Objective: 17-4 Learning Objective: 17-6 Topic: Various chapter topics Bloom’s Taxonomy: Understand Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level of Difficulty: Medium 17-17.

1. 2. 3. 4. 5.

P P B B P

Cr Dr Cr Cr Cr

6. 7. 8. 9. 10.

P B P P P

Dr Dr Cr Cr Cr

General Problem Information: Identifying account types and normal balances Learning Objective: 17-5 Topic: Dual-track Accounting System Bloom’s Taxonomy: Remember Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Easy

Chapter 17 - Accounting and Reporting for the Federal Government

17-18.

SAVE OUR RESOURCES COMMISSION

a. COMPUTATION OF MISSING AMOUNTS:

Debits

Credits

PROPRIETARY ACCOUNTS ACCOUNTS PAYABLE

$ 230,000

ACCUMULATED DEPRECIATION

4,800,000

APPROPRIATIONS USED

4,500,000

OPERATING MATERIALS AND SUPPLIES

63,000

CUMULATIVE RESULTS OF OPERATIONS⎯2022 OPERATING/PROGRAM EXPENSES DEPRECIATION AND AMORTIZATION PLANT AND EQUIPMENT UNEXPENDED APPROPRIATIONS⎯2023 TOTAL AMOUNTS GIVEN FUND BALANCE WITH TREASURY⎯2023 TOTALS⎯PROPRIETARY ACCOUNTS

1,009,000 2,150,000 750,000 7,400,000 410,000 10,363,000

10,949,000

586,000

__________

$10,949,000

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Exercise 17-18, a. (Cont’d)

SAVE OUR RESOURCES COMMISSION Debits

Credits

BUDGETARY ACCOUNTS EXPENDED AUTHORITY⎯2023

$ 4,500,000

ALLOTMENTS⎯2023

100,000

UNDELIVERED ORDERS⎯2023

310,000

TOTAL AMOUNTS GIVEN OTHER APPROPRIATIONS REALIZED⎯2023 TOTALS⎯BUDGETARY ACCOUNTS

-0-

4,910,000

________ _

$ 4,910,000

Note: Unexpended Appropriations ($410,000) + Expended Authority ($4,500,000) = $4,910,000 (original appropriation) Appropriations Used ($4,500,000) + Unexpended Appropriations ($410,000) = $4,910,000 (original appropriation) b. APPROPRIATIONS USED DURING FY 2023

$4,500,000

TOTAL EXPENSES DURING FY 2023 (Note A)

2,900,000

NET INCREASE IN CUMULATIVE RESULTS OF OPERATIONS$1,600,000 (Net increase in cumulative results of operations is the same as net increase in assets other than fund balance with treasury if appropriations is the only financing source) (Note A: Total expenses is the sum of Operating/Program Expenses of $2,150,000 and Depreciation and Amortization of $750,000.) c.

Closing entries

Debits

Credits

BUDGETARY EXPENDED AUTHORITY⎯2023 ALLOTMENTS⎯2023 OTHER APPROPRIATIONS REALIZED⎯2023

4,500,000 100,000 4,600,000

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Exercise 17-18, c. (Cont’d)

SAVE OUR RESOURCES COMMISSION Debits

Credits

PROPRIETARY CUMULATIVE RESULTS OF OPERATIONS

2,900,000

OPERATING/PROGRAM EXPENSES

2,150,000

DEPRECIATION AND AMORTIZATION

APPROPRIATIONS USED

750,000

4,500,000

CUMULATIVE RESULTS OF OPERATIONS

4,500,000

General Problem Information: Fund balance with U.S. Treasury Learning Objective: 17-5 Topic: Dual-track Accounting System Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Hard 17-19 a.

SAVE OUR RESOURCES COMMISSION STATEMENT OF BUDGETARY RESOURCES FOR THE YEAR ENDED SEPTEMBER 30, 2023

BUDGETARY RESOURCES: BUDGETARY AUTHORITY

$4,810,000

STATUS OF BUDGETARY RESOURCES: NEW OBLIGATIONS & UPWARD ADJUSTMENTS (Note A) TOTAL STATUS OF BUDGETARY RESOURCES

$4,810,000 $4,810,000

Note A: New obligations and upward adjustments is the expended authority of current year of $4,500,000 plus $310,000 for undelivered orders.

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Exercise 17-19 (Cont’d)

SAVE OUR RESOURCES COMMISSION STATEMENT OF CHANGES IN NET POSITION FOR THE YEAR ENDED SEPTEMBER 30, 2023 CUMULATIVE RESULTS OF OPERATIONS

BEGINNING BALANCE PRIOR PERIOD ADJUSTMENTS BEGINNING BALANCE, ADJUSTED

$1,009,000

UNEXPENDED APPROPRIATIONS $

1,009,000

BUDGETARY FUNDING SOURCES: APPROPRIATIONS RECEIVED APPROPRIATIONS USED

4,810,000 4,500,000

(4,500,000)

TOTAL FINANCING SOURCES

5,509,000

310,000

NET COST OF OPERATIONS

2,900,000

$2,609,000

$ 310,000

OTHER FINANCING SOURCES

ENDING BALANCES

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Exercise 17-19 (Cont’d)

SAVE OUR RESOURCES COMMISSION BALANCE SHEET AS OF SEPTEMBER 30, 2023 ASSETS

INTRAGOVERNMENTAL: FUND BALANCE WITH TREASURY⎯2023

586,000

GOVERNMENTAL: OPERATING MATERIALS AND SUPPLIES

63,000

PLANT AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION OF $4,800,000) TOTAL ASSETS

2,600,000 $3,249,000

LIABILITIES ACCOUNTS PAYABLE

$ 230,000

NET POSITION UNEXPENDED APPROPRIATIONS

410,000

CUMULATIVE RESULTS OF OPERATIONS

2,609,000

TOTAL NET POSITION

3,019,000

TOTAL LIABILITIES AND NET POSITION

$3,249,000

General Problem Information: Federal agency financial statements Learning Objective: 17-5 Topic: Dual-track Accounting System Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Hard

Chapter 17 - Accounting and Reporting for the Federal Government

17-20. RURAL ASSISTANCE AGENCY STATEMENT OF NET COST FOR THE YEAR ENDED SEPTEMBER 30, 2023 FOOD BANK COSTS

$ 9,632,800

LESS: EARNED REVENUE

2,611,900

NET COST

7,020,900

HOUSING SERVICES COSTS

7,438,500

LESS: EARNED REVENUE

1,237,400

NET COST

6,201,100

CREDIT COUNSELING COSTS LESS: EARNED REVENUE NET COST

2,391,000 87,000 2,304,000

TOTAL COSTS

19,462,300

LESS: EARNED REVENUE

3,936,300

NET COST OF OPERATIONS

$15,526,000

General Problem Information: Statement of net costs Learning Objective: 17-5 Topic: Dual-track Accounting System Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium

Chapter 17 - Accounting and Reporting for the Federal Government

17-21.

FEDERAL ANTIQUITIES ADMINISTRATION STATEMENT OF BUDGETARY RESOURCES FOR THE 11 MONTHS ENDED AUGUST 31, 2023

BUDGETARY RESOURCES: BUDGET AUTHORITY (Note A): APPROPRIATIONS RECEIVED (Note A) TOTAL BUDGETARY RESOURCES

$5,465,975 $5,465,975

STATUS OF BUDGETARY RESOURCES: NEW OBLIGATIONS & UPWARD ADJUSTMENTS (Note B) UNOBLIGATED BALANCES (Note C) TOTAL STATUS OF BUDGETARY RESOURCES Note A: Note B: Note C:

$4,715,975 750,000 $5,465,975

Total budgetary resources are given by the balance of Other Appropriations Realized of $5,465,975. Expended authority of current year of $4,051,844 plus $664,131 obligated budgetary authority for undelivered orders at 8/31/23. Unobligated balances is the sum of allotments and commitments.

General Problem Information: Statement of budgetary resources Learning Objective: 17-5 Topic: Dual-track Accounting System Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting Level of Difficulty: Medium

Chapter 17 - Accounting and Reporting for the Federal Government

17-22. a.

FLOOD CONTROL COMMISSION GENERAL JOURNAL Debits

Credits

BUDGETARY OTHER APPROPRIATIONS REALIZED⎯2023

7,000,000

UNAPPORTIONED AUTHORITY⎯2023

7,000,000

PROPRIETARY FUND BALANCE WITH TREASURY⎯2023

7,000,000

UNEXPENDED APPROPRIATIONS⎯2023

7,000,000

BUDGETARY UNAPPORTIONED AUTHORITY⎯2023

7,000,000

APPORTIONMENTS⎯2023

7,000,000

BUDGETARY APPORTIONMENTS⎯2023

1,000,000

ALLOTMENTS⎯2023

1,000,000

BUDGETARY ALLOTMENTS⎯2023

970,000

UNDELIVERED ORDERS⎯2023

970,000

BUDGETARY UNDELIVERED ORDERS⎯2023 EXPENDED AUTHORITY⎯2023

170,000 170,000

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Exercise 17-22, a. (5) (Cont’d)

FLOOD CONTROL COMMISSION GENERAL JOURNAL Debits

Credits

PROPRIETARY OPERATING/PROGRAM EXPENSES

170,000

DISBURSEMENTS IN TRANSIT⎯2023

170,000

FUND BALANCE WITH TREASURY⎯2023

UNEXPENDED APPROPRIATIONS⎯2023

170,000

APPROPRIATIONS USED

170,000

BUDGETARY UNDELIVERED ORDERS⎯2023

395,000

EXPENDED AUTHORITY⎯2023

395,000

PROPRIETARY FURNITURE AND EQUIPMENT

180,000

OPERATING MATERIALS AND SUPPLIES

175,000

OPERATING/PROGRAM EXPENSES

40,000

ACCOUNTS PAYABLE

UNEXPENDED APPROPRIATIONS⎯2023

395,000

APPROPRIATIONS USED

395,000

BUDGETARY UNDELIVERED ORDERS⎯2023 EXPENDED AUTHORITY⎯2023

183,000 183,000

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Exercise 17-22, a. (7) (Cont’d)

FLOOD CONTROL COMMISSION GENERAL JOURNAL Debits

Credits

PROPRIETARY OPERATING/PROGRAM EXPENSES

183,000

ACCRUED FUNDED PAYROLL AND BENEFITS

UNEXPENDED APPROPRIATIONS⎯2023

183,000

APPROPRIATIONS USED

183,000

PROPRIETARY ACCOUNTS PAYABLE

189,000

ACCRUED FUNDED PAYROLL AND BENEFITS

183,000

DISBURSEMENTS IN TRANSIT⎯2023

372,000

FUND BALANCE WITH TREASURY⎯2023

372,000

BUDGETARY UNDELIVERED ORDERS⎯2023

40,000

EXPENDED AUTHORITY⎯2023

40,000

PROPRIETARY OPERATING/PROGRAM EXPENSES

40,000

ACCRUED FUNDED PAYROLL AND BENEFITS

30,000

ACCOUNTS PAYABLE

10,000

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Exercise 17-22, a. (9) (Cont’d)

FLOOD CONTROL COMMISSION GENERAL JOURNAL Debits

OPERATING/PROGRAM EXPENSES

60,000

OPERATING MATERIALS AND SUPPLIES

DEPRECIATION AND AMORTIZATION

60,000

2,500

ACC. DEPRECIATION⎯FURN. & EQUIP.

UNEXPENDED APPROPRIATIONS⎯2023

2,500

40,000

APPROPRIATIONS USED

10.

Credits

40,000

BUDGETARY EXPENDED AUTHORITY⎯2023

788,000

OTHER APPROP. REALIZED⎯2023

788,000

PROPRIETARY CUMULATIVE RESULTS OF OPERATIONS

495,500

OPERATING/PROGRAM EXPENSES

493,000

DEPRECIATION AND AMORTIZATION

APPROPRIATIONS USED CUMULATIVE RESULTS OF OPERATIONS

2,500

788,000 788,000

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Exercise 17-22 (Cont’d)

FLOOD CONTROL COMMISSION BALANCE SHEET OCTOBER 31, 2023 ASSETS

INTRAGOVERNMENTAL: FUND BALANCE WITH TREASURY⎯2023

$6,458,000

GOVERNMENTAL: OPERATING MATERIALS AND SUPPLIES

115,000

FURNITURE AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION OF $2,500 TOTAL ASSETS

177,500 $6,750,500

LIABILITIES ACCOUNTS PAYABLE

$ 216,000

ACCRUED FUNDED PAYROLL AND BENEFITS

30,000

TOTAL LIABILITIES COVERED BY BUDGETARY RESOURCES

246,000

NET POSITION UNEXPENDED APPROPRIATIONS CUMULATIVE RESULTS OF OPERATIONS

6,212,000 292,500

TOTAL NET POSITION

6,504,500

TOTAL LIABILITIES AND NET POSITION

$6,750,500

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Exercise 17-22 (Cont’d)

FLOOD CONTROL COMMISSION STATEMENT OF CHANGES IN NET POSITION FOR THE MONTH ENDED OCTOBER 31, 2023 CUMULATIVE RESULTS OF OPERATIONS

BEGINNING BALANCES

UNEXPENDED APPROPRIATIONS $

BUDGETARY FINANCING SOURCES: APPROPRIATIONS RECEIVED

7,000,000

APPROPRIATIONS USED

788,000

(788,000)

TOTAL FINANCING SOURCES

788,000

6,212,000

NET COST OF OPERATIONS (Note A)

(495,500)

_________

$ 292,500

$6,212,000

ENDING BALANCES

Note A: Operating/program expenses of $493,000 + depreciation and amortization of $2,500.

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Exercise 17-22 (Cont’d)

FLOOD CONTROL COMMISSION STATEMENT OF BUDGETARY RESOURCES FOR MONTH ENDED OCTOBER 31, 2023

BUDGETARY RESOURCES: BUDGET AUTHORITY (Note A)

$7,000,000

STATUS OF BUDGETARY RESOURCES: NEW OBLIGATIONS & UPWARD ADJUSTMENTS (Note B)

$ 970,000

UNOBLIGATED BALANCES AVAILABLE (Note C)

6,030,000

TOTAL STATUS OF BUDGETARY RESOURCES

$7,000,000

Note A: Note B:

Note C:

Total budgetary resources are the total appropriations for the year, or $7,000,000. New obligations and upward adjustments equals expended budgetary authority of $788,000 (see Entry 10) plus the remaining balance of Undelivered Orders⎯2022 of $182,000 ($970,000 − $788,000), or $970,000. In this case, since the Flood Control Commission obligates prior to all expenditures of budgetary authority, the amount incurred also is simply the amount obligated by the credit to Undelivered Orders⎯2023 (see Entry 4). Total budgetary resources of $7,000,000 less amount obligated of $970,000 (see Note B) equals $6,030,000.

General Problem Information: Transaction analysis and statements Learning Objective: 17-5 Topic: Dual-track Accounting System Bloom’s Taxonomy: Apply Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Measurement Level of Difficulty: Hard

Chapter 17 - Accounting and Reporting for the Federal Government

17-23. a.

FINANCIAL CAPABILITY (1)

INDIVIDUAL INCOME TAXES/TOTAL REVENUES:

80.3%

($2,906.2 / $3,621)

(2)

304.83%

FINANCIAL PERFORMANCE (1)

DEBT SERVICE ($10,732.1 + $305.7 / $3,621):

INTERPERIOD EQUITY ($3,621 / $5,067.7):

71.5%

FINANCIAL POSITION (1)

NON-DEDICATED COLLECTIONS FUNDS/TOTAL REVENUES:

−7.31

(−$26,469.9 / $3,621) (2)

QUICK RATIO ($524.6 / $98) or ($524.6 / [$98 + $223.6])*:

(3)

CAPITAL ASSET CONDITION ($1,332.9 / $2,246.5)**:

5.35 or 1.63 59.33%

* Since it is difficult to identify current portions of long-term debt, only somewhat identifiable current liabilities were used in the calculation. Just Accounts Payable was used in the first calculation and Accounts Payable plus Benefits Due and Payable were used in the second calculation. ** Capital asset condition is calculated as the total accumulated depreciation divided by the gross depreciable capital asset value. The total gross capital asset value ($2,439.8) was adjusted for the non-depreciable asset balances of the construction in progress and land. d.

Most of the measures indicate that the federal government is in poor financial condition. The quick ratio is a notable positive, measuring well over one using just the Accounts Payable value in the calculation, and remains over one when Benefits Due and Payable is included in the calculation. The capital asset condition ratio is also a positive measure. At 59.3% it indicates that there is sufficient life remaining in capital assets.

Chapter 17 - Accounting and Reporting for the Federal Government

Ch. 17, Solutions, Exercise 17-23, d. (Cont’d)

The federal government relies heavily on individual income taxes (80.3%). Debt service is extremely high by any benchmark used. Illustration 10-3 indicates that for local governments a service requirement greater than 20% is a warning sign. Interperiod equity is poor, given that only 71.5% of net costs are covered by current period revenues. Finally, the negative net position indicates that there are no reserves on which to draw to help address the interperiod equity situation. The financial statements of the federal government reflect the financial concerns expressed by Congress, the President, Watchdog groups, and citizens. General Problem Information: Financial statement analysis of the federal government Learning Objective: 17-4 Topic: Required Financial Reporting—U.S. Government-wide Bloom’s Taxonomy: Analyze Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making Level of Difficulty: Hard