Chapter 9

Question 1

What measurement focus (MF) and basis of accounting (BA) are used for governmental funds?
A. Economic resources MF/accrual BA
B. Economic resources MF/modified accrual BA
C. Current financial resources MF/accrual BA
D. Current financial resources MF/modified accrual BA

Answer 1

Governmental funds focus on liquidity (current financial resources), which requires that the accrual basis of accounting be modified. [Correct response = D]

Question 2

Which of the following potential revenue recognition criteria are relevant under the cash basis of accounting?
A. Amounts earned and collected
B. Amounts earned and collectible in the near term
C. Amounts earned and collectible later
D. All of the above
E. Both A and B

Answer 2

Under the cash basis of accounting, nothing less than collection suffices for revenue recognition. [Correct response = A

Question 3

Which of the following potential revenue recognition criteria are relevant under the accrual basis of accounting?
A. Amounts earned and collected
B. Amounts earned and collectible in the near term
C. Amounts earned and collectible later
D. All of the above
E. Both A and B

Answer 3

Under the accrual basis of accounting, revenue is recognized as soon as it is earned, provided that collection ultimately will occur. [Correct response = D]

Question 4

Which of the following best describes revenue recognition under the modified accrual basis of accounting?
A. Amounts earned and collected
B. Amounts collected or collectible in the near term
C. Amounts earned and collected or collectible in the near term

Answer 4

Revenue recognition under the modified accrual basis of accounting requires that revenue be (1) earned and (2) capable of being collected (that is, actually collected or collectible) in the near term. [Correct response = C]

Question 5

Which of the following might be reported at different amounts under the modified accrual basis of accounting than under the accrual basis of accounting?
A. Receivable
B. Revenue
C. Both A and B

Answer 5

Receivable recognition is identical under both the accrual and modified accrual basis of accounting; the difference between the two is whether the receivable thus recognized is matched by revenue or unearned revenue. [Correct response = B]

Question 6

What is the maximum availability period allowed for property taxes?
A. 30 days
B. 45 days
C. 60 days
D. 90 days

Answer 6

GAAP expressly limit the availability period for property taxes to 60 days. [Correct response = C

Question 7

Which of the following circumstances would justify the recognition of revenue collected after the close of the normal availability period?
A. A highly unusual property tax calendar
B. A delay in remittances resulting from a natural disaster
C. Both A and B
D. None of the above

Answer 7

In unusual circumstances, a government can recognize revenue based on its normal collection patterns, even if it means recognizing property tax revenues that become collectible more than 60 days beyond the end of the period. For this purpose, circumstances are considered to be unusual only if they are unlikely to recur for that particular government (thereby distorting revenue trends). Thus, a “highly unusual” property tax calendar would not justify the recognition of revenue beyond the 60-day limit set by GAAP. [Correct response = B

Question 8

How should estimated uncollectibles be treated?
A. As an outflow of economic resources (bad debt expense)
B. As an outflow of current financial resources (bad debt expenditure)
C. As a reduction of revenue
D. Either B or C

Answer 8

There is no equivalent of bad debt expense for governmental funds. Instead, revenues are initially recognized net of any amounts considered ultimately uncollectible. [Correct response = C]

Question 9

As a matter of practical bookkeeping, what credit or credits normally are recorded when a receivable associated with revenue is initially recognized?
A. Revenue
B. Deferred inflow of resources
C. Either A or B
D. A combination of A and B

Answer 9

Typically a government recognizes the entire balance as either revenue or a deferred inflow of resources and then makes the appropriate adjustment at the end of the fiscal period. [Correct response = C]

Question 10

A government levies property taxes near the end of the current fiscal year ($100) to finance the following fiscal year of which a portion is collected in the current year ($60) and the balance early in the following year (within the availability period). How much should be recognized as revenue in the current fiscal year?
A. $0
B. $60
C. $100

Answer 10

No property tax revenue can be recognized prior to the fiscal year it is levied to finance. [Correct response = A]

Question 11

Which of the following is a derived tax revenue?
A. State income tax
B. County sales tax shared with lower-level governments (county perspective)
C. County sales tax shared with lower-level governments (recipient perspective)
D. All of the above
E. Both A and B

Answer 11

The concept of derived tax revenues applies solely to taxes assessed by the government itself. A derived tax revenue that is shared with another government is either a government-mandated nonexchange transaction or a voluntary nonexchange transaction from the vantage point of the recipient. [Correct response = E

Question 12

When should a receivable for property taxes be recognized?
A. When legally enforceable
B. At the start of the period the tax is intended to finance
C. Either A or B, whichever is earlier
D. Either A or B, whichever is later

Answer 12

Normally, a receivable is recognized only when it becomes legally enforceable. However, a receivable for property taxes should be recognized no later than the start of the fiscal year the taxes are intended to finance, even if the receivable is not yet legally enforceable at that time. [Correct response = C]

Question 13

How is the receipt of a payment in lieu of taxes from outside the primary government normally classified?
A. Exchange or exchange-like transaction
B. Voluntary nonexchange revenue
C. Government-mandated nonexchange transaction

Answer 13

Normally the amount of a payment in lieu of taxes is not equivalent to the value of the services provided; therefore, it would not qualify as an exchange or exchange-like transaction. Furthermore, a payment in lieu of taxes is not a “funded mandate.” [Correct response = B

Question 14

When should fines associated with citations (net of estimated uncollectible amounts) be recognized as revenue?
A. When paid voluntarily
B. At the end of the period for challenging the citation
C. When imposed by a court
D. All of the above

Answer 14

Fines are recognized as revenue as soon as they are acknowledged or legally imposed. [Correct response = D]

Question 15

A government that reports escheat property in its general fund ($100) expects ultimately to pay out only a fraction of that amount ($15). What amount should be reported as a liability in the general fund?
A. $0
B. $100
C. $15

Answer 15

A liability should be reported for any amount the government ultimately expects to repay to property owners. [Correct response = C]

Question 16

When is a purpose restriction relevant to revenue recognition?
A. Entitlements and shared revenues (typically formula grants)
B. Expenditure-driven grants (reimbursement-type grants)
C. Both A and B
D. None of the above

Answer 16

Eligibility requirements affect the recognition of revenue. In contrast, purpose restrictions affect only the categorization of fund balance and net position. [Correct response = D

Question 17

A special-purpose government receives a formula grant from the state that has been passed through from the federal government. The grant agreement does not stipulate a time requirement. What is the earliest date at which the special-purpose government could recognize revenue?
A. The start of the recipient government’s fiscal year
B. The start of the immediate provider’s fiscal year
C. The start of the primary provider’s fiscal year
D. None of the above (no time requirement)

Answer 17

When the grantor is a government and no time requirement has been established by the grant contract, the fiscal year of the immediate provider is the point of reference for the time requirement. [Correct response = B

Question 18

Which of the following conditions must be met before revenue can be recognized arising in connection with an expenditure-driven grant that is a voluntary nonexchange transaction?
A. Incurrence of a qualifying expenditure
B. Compliance with contingent requirements (matching)
C. Compliance with administrative requirements (filing of grant report)
D. All of the above
E. Both A and B

Answer 18

All eligibility requirements must be met for revenue recognition (incurrence of a qualifying expenditure/matching), exclusive of purely administrative requirements. [Correct response = E]

Question 19

When should a government that administers a pass-through grant recognize revenue?
A. When there is a legally enforceable commitment from the primary grantor
B. When collected
C. When collected or collectible in the near term
D. When remitted to the secondary recipient

Answer 19

Normally the eligibility requirements for a pass-through grant are met by remitting the resources to the secondary recipient. [Correct response = D]

Question 20

How should on-behalf payments of salaries and benefits be treated by the employer on behalf of whose employees those payments are being made?
A. Note disclosure only
B. Revenue, but only for amounts actually paid to the third party
C. Revenue for amounts paid or due to the third party
D. None of the above

Answer 20

Revenue should be recognized for any amounts paid or due to the third party on behalf of the government’s employees. [Correct response = C]

Question 21

Which of the following would be recognized as revenue in a governmental fund?
A. Food purchases by participants in the federal food stamp program
B. Receipt of agricultural commodities for use in a school lunch program
C. Donation of a capital asset that will be used in operations
D. All of the above
E. Both A and B

Answer 21

In the federal food stamp program, the sponsoring government is charged at the time of the food purchase and then reimbursed electronically by the federal government, making food stamps the functional equivalent of an expenditure-driven grant. Accordingly, participating governments recognize revenue at the time of the food purchase (incurrence of a qualifying expenditure). In the case of donated agricultural commodities, an asset and revenue normally are recognized upon receipt. Governmental funds do not recognize revenue in connection with the donation of capital assets. [Correct response = E

Question 22

When should a receivable for a pending contribution to an endowment be recognized?
A. When receipt of the contribution is determined to be probable
B. When receipt of the contribution is determined to be probable and receipt is expected to occur within the availability period
C. When the pledge becomes legally enforceable
D. None of the above

Answer 22

No receivable is ever recognized in connection with a contribution to an endowment, since eligibility depends on not spending the resources, which presupposes their prior receipt. [Correct response = D

Question 23

When should an increase in the value of an investment reported at fair value in a governmental fund be recognized as revenue?
A. When the increase occurs
B. When the increase occurs, provided the investment is sold within the availability period
C. When the increase occurs, provided the investment is sold prior to the issuance of the financial statements
D. When the increase occurs, provided the government is not committed to holding the investment to maturity

Answer 23

Any increase in the fair value of investments reported in governmental funds is presumed to be available for purposes of revenue recognition, regardless of the government’s desire or ability to sell the investments. [Correct response = A

Question 24

What would occur first, the recognition of a receivable or the recognition of revenue?

Answer 24

Receivable.

Question 25

Which of the following is required criteria for accrual basis of accounting?

A. Earned
B. Earned + collected
C. Earned + collected or collectible (available)

Answer 25

A.

Question 26

Which of the following is required criteria for cash basis accounting?

A. Earned
B. Earned + collected
C. Earned + collected or collectible (available)

Answer 26

B.

Question 27

Which of the following is required criteria for modified-accrual basis accounting?

A. Earned
B. Earned + collected
C. Earned + collected or collectible (available)

Answer 27

C.

Question 28

True or false - governments always recognize a receivable as soon as they have an enforceable legal claim to resources, regardless of whether those resources are considered available?

Answer 28

True. Availability only determines whether an amount is reported as a deferred revenue or as revenue in governmental funds (if it is available).

Question 29

How would a prepayment be treated in governmental funds?

A. Revenue
B. Deferred Inflow
C. Liability

Answer 29

C. Liability. The amounts do not yet qualify as a revenue or deferred inflow because the amounts have not yet been earned, only collected.

Question 30

When should a receivable and revenue/deferred inflow be recorded for expenditure driven grants (voluntary non-exchange transaction).

Answer 30

When a qualifying expenditure is incurred and all requirements are met.

Question 31

When should a receivable and revenue/deferred inflow for entitlements or formula grants be recorded?

Answer 31

As soon as all eligibility requirements have been met. Purpose/use restrictions do not constitute eligibility requirements.

Question 32

What is a time requirement?

Answer 32

A period of time in which an amount can or cannot be spent. For example, a government could meet all eligibility requirements and have received resources, but is not able to spend them until months later according to the agreement.

Question 33

When are increases in the fair value of investments recorded.

Answer 33

When they occur.