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Flashcards in Governmental (State and Local) Accounting Deck (192):
1

Which of the following would not be considered a governmental or not-for-profit organization?

  1. A church
  2. A private foundation established for charitable purposes
  3. A software company that sells educational software exclusively to public elementary schools
  4. A public independent school district

A software company that sells educational software exclusively to public elementary schools

A vendor who specializes in offering goods and/or services exclusively to a governmental or not-for-profit organization is not considered a governmental or not-for-profit entity.

2

Which of the following sources of financial resources is unique to governmental entities?

  1. Proceeds from bonds
  2. Grant proceeds from the federal government
  3. Charges for services
  4. Proceeds from taxation

Proceeds from taxation

One of the unique characteristics of government is its power to force involuntary financial resource contributions through taxation. No other form of organization has this power.

3

Interperiod equity is an objective of financial reporting for governmental entities. According to the Governmental Accounting Standards Board, is interperiod equity fundamental to public administration, and is it a component of accountability?

  • Fundamental to public administration
  • Component of accountability

  • Fundamental to public administration - YES
  • Component of accountability - YES

GASB Concepts Statement No. 1 states that interperiod equity is a basic component of accountability and fundamental to public administration.

4

Which of the following is the paramount objective of financial reporting by state and local governments?

  1. Reliability.
  2. Consistency.
  3. Comparability.
  4. Accountability.

Accountability.

GASB Concept Statement No. 1 defines two paramount objectives for financial reporting in government: (1) Accountability and (2) interperiod equity. Therefore, "Accountabilty" is the correct answer to this question. Concept Statement No. 1 describes six characteristics of effective financial reporting:

  1. understandability,
  2. reliability,
  3. relevance,
  4. timeliness,
  5. consistency, and
  6. comparability

5

The City of Palo Alto's Service Efforts and Accomplishments Report for Fiscal Year 2010 reported that the average response to fire calls within 8 minutes occurred on 90% of the fire calls in 2010. This rate met the benchmark target goal of 90%. According to GASB's conceptual framework, this information is classified as a measure of

  1. Effort.
  2. Output.
  3. Outcome
  4. Efficiency

Outcome.

The example in the question is an outcome measure. Outcome measures indicate the accomplishments or results that occur because of the services provided.

6

Which event(s) is(are) supportive of interperiod equity as a financial reporting objective of a governmental unit?

  • I. A balanced budget is adopted.
  • II. Residual equity transfers out equal residual equity transfers in.

1 ONLY.

The adoption of a balanced budget supports interperiod equity because it is an attempt to ensure that the current generation of citizens does not shift the burden of paying for current-year services to future-years' taxpayers (GASB Concepts Statement 1).

Residual equity transfers are nonrecurring or nonroutine transfers of equity between funds (GASB Codification 1800.102). These transfers occur within one accounting period and do not support interperiod equity as an objective of financial reporting.

7

According to GASB's conceptual framework, the primary users of the general purpose external financial report do not include

  1. Taxpayers.
  2. Bond insurers.
  3. School boards.
  4. Internal managers.

Internal managers.

GASB Concepts Statement No. 1 defines the primary users of the general purpose external financial report as the citizenry (e.g., taxpayers), legislative and oversight bodies (e.g., school boards), and investors and creditors (e.g., bond insurers). Typically, internal managers who have access to information through internal reporting are not considered primary users.

8

Which of the following is voluntary information within a general purpose external financial report?

  1. Basic financial statements
  2. Notes to basic financial statements
  3. Required supplemental information
  4. Supplemental information

Supplemental information

GASB Concepts Statement No. 3, basic financial statements, the accompanying notes to the basic financial statements, and required supplemental information are essential information and therefore required in general purpose external financial reporting. Supplemental information is useful but not required. Service efforts and accomplishment information are classified as supplemental information and are therefore voluntarily reported.

9

According to GASB's conceptual framework, which of the following is not an element of the Statement of Financial Position?

  1. Net position
  2. Net assets
  3. Assets
  4. Liabilities

Net assets

GASB Concepts Statement No. 4 identifies the following five elements of the Statement of Financial Position: (1) assets, (2) liabilities, (3) deferred inflows of resources, (4) deferred outflows of resources, and (5) net position. Since net assets are the difference between assets and liabilities, GASB prefers the term "net position," which is the difference between assets and deferred outflows and liabilities and deferred inflows.

10

Which of the following funds is not a fiduciary fund type?

  1. Police and fire pension trust fund
  2. Motor pool fund
  3. Historical society private-purpose trust fund
  4. County and city tax collection fund

Motor pool fund

A motor pool fund is a type of internal service fund that charges other parts of the government for services provided on a cost-reimbursement basis. An internal service fund is one of the two types of proprietary service funds. Recall the mnemonic "PIPPA" for fiduciary funds - pension trust funds, investment trust funds, private-purpose trust funds, and agency funds.

11

One feature of state and local government accounting and financial reporting is that fixed assets used for general government activities

  1. Often are not expected to contribute to the generation of revenues.
  2. Do not depreciate as a result of such use.
  3. Are acquired only when direct contribution to revenues is expected.
  4. Should not be maintained at the same level as those of businesses so that current financial resources can be used for other government services.

Often are not expected to contribute to the generation of revenues.

General fixed assets are items on which financial resources have been expended and accountability must be maintained; however, their main purpose is NOT the generation of revenues.

12

Which of the following activities would most likely be accounted for in a proprietary fund?

  1. Street, curb, and sidewalk maintenance and repairs
  2. Wastewater and sewerage services
  3. Police Protection
  4. Tax Assessor and Collection Activities

Wastewater and sewerage services

Wastewater and sewerage services are usually provided on a service-fee basis; therefore, they are accounted for in an enterprise fund - one of the two types of proprietary funds. Enterprise funds are also referred to as "business type" funds and use full accrual accounting.

13

Which of the following local government funds uses the accrual basis of accounting?

  1. Enterprise.
  2. Debt service.
  3. Capital projects.
  4. Special revenue.

Enterprise.

Recall the acronym "DRIP-CEG-PIPPA" where the vowels in "DRIP-CEG" represent fund types that use accrual accounting and the consonants use modified accrual accounting. The "I" stands for Internal Service Fund and "E" for Enterprise Funds. This answer is correct.

14

DRIP-CEG-PIPPA"

Governmental Funds (DRIP)

  • Debt Service
  • Special Revenue
  • Internal Service (Accrual)
  • Permanent

Proprietary Funds (CEG)

  • Capital Projects
  • Enterprise (Accrual)
  • General

Fiduciary Funds (PIPPA)

  • Pension Trust
  • Investment Trust
  • Private Purpose Trust
  • Agency

Where the vowels in "DRIP-CEG" represent fund types that use accrual accounting and the consonants use modified accrual accounting. The "I" stands for Internal Service Fund and "E" for Enterprise Funds. This answer is correct.

15

King City Council will be establishing a library fund. Library fees are expected to cover 55% of the library's annual resource requirements. King has decided that an annual determination of net income is desirable in order to maintain management control and accountability over the library. What type of fund should King establish in order to meet their measurement objectives?

  1. Special revenue fund
  2. General fund
  3. Internal service fund
  4. Enterprise fund

Enterprise fund

An enterprise fund is used when services are provided primarily to the public for a charge. Since enterprise funds use accrual accounting, it will provide the determination of net income and other control and accountability that management desires.

16

Which of the following is not a characteristic of a fund?

  1. Fiscal entity
  2. Accounting entity
  3. Separate legal entity
  4. All of the above are characteristics of a fund.

Separate legal entity

A fund is both a fiscal and an accounting entity. A fund is "fiscal" because it has assets, liabilities, revenue, expenditure or expense, and fund balance or other equity accounts. A fund is "accounting" because it has its own ledgers and contains a self-balancing set of accounts. A fund is not a separate legal entity.

17

Kenn City obtained a municipal landfill and passed a local ordinance that required the city to operate the landfill so that the costs of operating the landfill, as well as the capital costs, are to be recovered with charges to customers. Which of the following funds should Kenn City use to report the activities of the landfill?

  1. Enterprise.
  2. Permanent.
  3. Special revenue.
  4. Internal service.

Enterprise.

An Enterprise Fund is commonly used in situations where user fees are the primarily source of revenue and the fee charged is based on an amount sufficient to cover the costs of operations and to provide for capital maintenance, which is the case here. Note that the fee for a service provided and that most of the users are external to the government.

18

Which of the following funds would be reported as a fiduciary fund in Pine City's financial statements?

  1. Special revenue.
  2. Permanent.
  3. Private-purpose trust.
  4. Internal Service

Private-purpose trust.

Recall the acronym "PIPPA" for fiduciary funds. Fiduciary funds include the following 4 types of funds: P ension trust funds, I nvestment trust funds, P rivate- P urpose trust funds, and A gency funds.

19

Fund accounting is used by governmental units with resources that must be

  1. Composed of cash or cash equivalents.
  2. Incorporated into combined or combining financial statements.
  3. Segregated for the purpose of carrying on specific activities or attaining certain objectives.
  4. Segregated physically according to various objectives.

Segregated for the purpose of carrying on specific activities or attaining certain objectives.

Governmental accounting systems are organized and operated on a fund basis. A fund is a fiscal and accounting entity with a self-balancing set of accounts that record cash and other financial resources, along with the related liabilities and residual equities or balances, which are segregated for the purpose of carrying on specific activities or attaining certain objectives. GASB Codification 1100.102

20

Which of the following funds of a governmental unit recognizes revenues in the accounting period in which they become available and measurable?

  • General fund
  • Enterprise fund

  • General fund - YES
  • Enterprise fund - NO

The general fund uses the modified accrual basis of accounting. Under this basis, revenues are recognized in the accounting period when they become available and measurable.

An enterprise fund uses the accrual basis of accounting. Under this basis, revenues are recognized in the period in which they are earned and measurable.

21

Dayne County's general fund had the following disbursements during the year:

  • Payment of principal on long-term debt $100,000
  • Payments to vendors $500,000
  • Purchase of a computer $300,000

What amount should Dayne County report as expenditures in its governmental funds Statement of Revenues, Expenditures, and Changes in Fund Balances?

  1. $300,000
  2. $500,000
  3. $800,000
  4. $900,000

$900,000

On the Statement of Revenues, Expenditures, and Changes in Fund Balances, which reports transactions using the modified accrual basis of accounting, repayment of principal on long-term debt, payments to vendors, and purchases of fixed assets are all reported as expenditures.

22

Oro County's Expenditures control account at December 31, 2005 had a balance of $9,000,000. 
When Oro's books were closed, this $9,000,000 Expenditures control balance should have

  1. Been debited.
  2. Been credited.
  3. Remained open.
  4. Appeared as a contra account.

Been credited.

The Expenditures control account is a temporary account that must be closed at the end of the fiscal year. The Expenditures control account is debited as resources are expended during the year. When the books are closed at the end of the year, this account should be CREDITED for $9,000,000 so that the balance in the account is zero.

23

How should a city's general fund report the acquisition of a new police car in its governmental fund statement of revenues, expenditures and changes in fund balances?

  1. Noncurrent asset.
  2. Expenditure.
  3. Expense.
  4. Property, plant and equipment.

Expenditure.

Governmental fund types use the modified accrual basis of accounting which focuses on the "flow of financial resources." Consequently, the use of financial resources is an expenditure rather than an expense without regard to the character of the expenditure (e.g., operating expense or capital expense). Therefore, as this answer states, the new police car (a long-term asset) is recorded as an expenditure in the period of acquisition because it represents an outflow of financial resources. Since it is an immediate expenditure, the General Fund does not list the car as a noncurrent asset. However, in the government-wide Statement of Net Position (not part of this question) the car would be included in the noncurrent assets and depreciated overtime.

24

When Rolan County adopted its budget for the year ending June 30, 2005, $20,000,000 was recorded for Estimated Revenues Control. Actual Revenues for the year ended June 30, 2005 amounted to $17,000,000.

In closing the budgetary accounts at June 30, 2005,

  1. Revenues Control should be debited for $3,000,000.
  2. Estimated Revenues Control should be debited for $3,000,000.
  3. Revenues Control should be credited for $20,000,000.
  4. Estimated Revenues Control should be credited for $20,000,000.

Estimated Revenues Control should be credited for $20,000,000.

When the budgetary accounts are closed at the end of the fiscal year, the estimated revenues control account will be credited for the amount for which it was debited when the budget was recorded, $20,000,000.

25

On January 1, Fonk City approved the following general fund resources for the new fiscal period:

  • Property taxes $5,000,000
  • Licenses and permits $400,000
  • Intergovernmental revenues $150,000
  • Transfers in from other funds $350,000

What amount should Fonk record as estimated revenues for the new fiscal year?

  1. $5,400,000
  2. $5,550,000
  3. $5,750,000
  4. $5,900,000

$5,550,000

Transfers in from other funds are classified as "Other Financing Sources" and are not revenues. The other three amounts are classified as revenues and, for budget purposes, should be included in determining "estimated revenues." The total is $5,550,000.

26

Harbor City's Appropriations Control Account at December 31, 2005 had a balance of $7,000,000.

When the budgetary accounts were closed at year-end, this $7,000,000 Appropriations Control balance should have:

  1. Been debited.
  2. Been credited.
  3. Remained open.
  4. Appeared as a contra account.

Been debited.

The Appropriations Control account should have been credited for $7,000,000 when the budget was adopted, and it should have been debited for $7,000,000 when the budgetary accounts were closed at the end of the year.

27

Assuming no outstanding encumbrances at year's end, closing entries for which of the following situations would increase the unassigned fund balance at year's end?

  1. Actual revenues were less than estimated revenues.
  2. Estimated revenues exceed actual appropriations.
  3. Actual expenditures exceed appropriations.
  4. Appropriations exceed actual expenditures.

Appropriations exceed actual expenditures.

Assuming that both actual and budgetary transactions are closed to the fund balance, closing appropriations, a credit balance account, would increase the fund balance whereas closing expenditures, a debit balance account, would decrease the fund balance.

Since appropriations were greater than expenditures, the net effect would be to increase the fund balance.

28

Encumbrances would not appear in which fund?

  1. Capital Projects.
  2. Special Revenue.
  3. General.
  4. Enterprise.

Enterprise.

Encumbrance accounting is used for budgetary control and, therefore, is commonly used in Governmental Fund types, including the General, Special Revenue, and Capital Projects Funds. It is usually not used by Debt Service Funds since the terms of the debt control spending. It is rarely used by Proprietary Funds so the Enterprise Fund (answer D) is the best choice for this question.

29

For state and local governmental units, generally accepted accounting principles typically require that encumbrances outstanding at year's end be reported as

  1. Expenditures.
  2. Assigned or committed fund balance.
  3. Deferred liabilities.
  4. Current liabilities.

Assigned or committed fund balance.

The fund balance classification is either restricted, committed, or assigned depending on the level of authority behind the encumbrance. If the government intends to use the resources the specific purposes but is not a constraint imposed by external parties or enabling legislation (i.e., restricted) or by formal action of the government's highest decision making authority (i.e., committed). Assigned fund balances should be used to indicate that a portion of the fund balance is not available for expenditure. The use of reserve for encumbrances indicates that a portion of the fund balance has been segregated for expenditure on vendor performance.

30

Excel City issued $40,000 of purchase orders. Assume that when all the orders were received, the actual cost was $39,100. How much would be recorded as expenditures when the purchase orders were issued?

  1. $39,100
  2. $40,000
  3. $900
  4. $0

$0

No expenditures are recorded at the time purchase orders were issued. Encumbrances represent a commitment made to the vendor in the form of a purchase order prior to incurring actual expenditures. At the time a purchase order is issued, the encumbrance account is increased by the amount of the purchase orders - in this case, $40,000. Expenditures of $39,100 will be recorded when goods are received along with the invoices, and at that time the $40,000 encumbered will be also be reversed out.

31

Park City uses encumbrance accounting and formally integrates its budget into the general fund's accounting records. For the year ending July 31, 2005, the following budget was adopted:

  • Estimated revenues $30,000,000
  • Appropriations $27,000,000
  • Estimated transfer to debt service fund $900,000

When Park's budget is adopted and recorded, Park's budgetary fund balance would be a

  1. $3,000,000 credit balance.
  2. $3,000,000 debit balance.
  3. $2,100,000 credit balance.
  4. $2,100,000 debit balance.

$2,100,000 credit balance.

Park would credit the budgetary fund balance for $2,100,000 when it makes the following entry to record the budget.

  • Estimated revenues $30,000,000
  • Appropriations $27,000,000
  • Estimated transfers to debt service fund $900,000
  • Budgetary fund balance $2,100,000

32

In Year 20x1 a local government levied $5,000,000 in special assessments. The assessments are due and payable in five equal installments at the beginning of each of the next five fiscal years, starting in Year 20x2. Assume that all installments are collected four months (120 days) into the year that they are due. At the end of Year 20x2, the Special Assessment Debt Service Fund would report the $4,000,000 remaining levy as:

  1. Revenues.
  2. Liabilities.
  3. Deferred inflow of resources.
  4. Deferred outflow of resources.

Deferred inflow of resources.

The remaining levy is measureable and available in Year 20x3 through Year 20x6 and is a deferred inflow of resources in Year 20x2.

33

In Year 20x1 a local government levied $5,000,000 in special assessments. The assessments are due and payable in five equal installments at the beginning of each of the next five fiscal years, starting in Year 20x2. Assume that all installments are collected four months (120 days) into the year that they are due. The Special Assessment Debt Service Fund would report revenues in Year 20x2 in the amount of:

  1. $5,000,000
  2. $4,000,000
  3. $1,000,000
  4. $0

$1,000,000

The Debt Service Fund reports the amount that is measurable and available as revenue, which in Year 20x2 is the $1,000,000 collected

Remember the term "deferred" is limited to specifically outflows and inflows of resources. 

34

In Year 20x1 a local government levied $5,000,000 in special assessments. The assessments are due and payable in five equal installments at the beginning of each of the next five fiscal years, starting in Year 20x2. Assume that all installments are collected four months (120 days) into the year that they are due. The Special Assessment Debt Service Fund would report deferred inflows of resources revenue in Year 20x1 in the amount of:

  1. $5,000,000
  2. $4,000,000
  3. $1,000,000
  4. $0

$5,000,000

Since the entire levy is due starting in Year 20x2, the entire amount is a deferred inflow of resources in Year 20x1.

35

Taxes levied in the Debt Service Fund and due in the Year 20x1 include $200,000 that is not expected to be collected within the first 60 days of the Year 20x2. As of the end of Year 20x1, the $200,000 would be reported as

  1. Revenue.
  2. A liability.
  3. A deferred inflow of resources.
  4. An other financing source.

A deferred inflow of resources.

Since the Debt Service Fund uses the modified accrual basis of accounting, revenues are recognized with measurable and available. The $200,000 is not expected to be available and hence should be reported as a deferred inflow or resources in Year 20x1.

36

In Year 20x1 a local government levied $5,000,000 in special assessments. The assessments are due and payable in five equal installments at the beginning of each of the next five fiscal years, starting in Year 20x2. Assume that all installments are collected four months (120 days) into the year that they are due. The Special Assessment Debt Service Fund would report revenue in Year 20x1 in the amount of:

  1. $5,000,000
  2. $4,000,000
  3. $1,000,000
  4. $0

$0

The Debt Service Fund recognizes revenue when it is measurable and available. Since the first installment will be received 120 days into Year 20x2, no revenue is recognized in Year 20x1.

37

As of the end of the fiscal year, a Capital Projects Fund has material balances of supplies inventory. Which fund balance classification would reflect the inventory of supplies?

  1. Nonspendable.
  2. Restricted.
  3. Committed.
  4. Assigned.

Nonspendable.

According to GASB Statement No. 54, a Nonspendable Fund Balance classification pertains to amounts that cannot be spent either because they are not in a spendable form (e.g., inventory) or are legally or contractually required to be maintained intact.

38

A Special Revenue Fund may report a positive amount in each of the following fund balance classifications except:

  1. Restricted.
  2. Committed.
  3. Assigned.
  4. Unassigned.

Unassigned.

Only the General Fund can report a positive amount in Unassigned Fund Balance. In all other Governmental Fund types (including a Special Revenue Fund), if expenditures exceed amounts restricted, committed, or assigned, it may be necessary to report a negative Unassigned Fund Balance. Should that occur, the Assigned Fund Balance is reduced to eliminate the deficit. If a deficit remains after eliminating Assigned Fund Balance, the negative residual should be classified Unassigned Fund Balance.

39

At December 31, 2005, Alto Township's committed appropriations that had not been expended in 2005 totaled $10,000. The commitment was made by the finance committee. These appropriations do not lapse at year-end. Alto reports on a calendar-year basis.

On its December 31, 2005 Balance Sheet, the $10,000 should be reported as:

  1. Vouchers Payable-prior year.
  2. Deferred Expenditures.
  3. Fund Balance Assigned.
  4. Budgetary Fund balance-reserved for encumbrances.

Fund Balance Assigned.

$10,000 of the fund balance should be assigned to show that those funds are not available for appropriation in the next fiscal year.

40

Which of the following fund balance classifications is used for budgetary accounting but not for GAAP financial statement reporting?

  1. Nonspendable Fund Balance.
  2. Unreserved Fund Balance.
  3. Committed Fund Balance.
  4. Unassigned Fund Balance.

Unreserved Fund Balance.

GASB Statement No. 54 eliminated the use of "reserve" and "unreserved" fund balances. The appropriate fund balance classifications are Nonspendable, Restricted, Committed, Assigned, and Unassigned.

41

Which of the following activities should be excluded when a government's fund financial statements are converted to Government-Wide Financial Statements?

  1. Proprietary Activities.
  2. Fiduciary Activities.
  3. Government Activities.
  4. Enterprise activities.

Fiduciary Activities.

Fiduciary activities are excluded from Government-Wide Financial Statements because the government does not have any "ownership" of "stake" in those activities for which it acts as trustee.

42

The Comprehensive Annual Financial Report (CAFR) of a state or local governmental unit should include fund-level statements for which of the following fund categories:

  • Governmental Funds 
  • Proprietary Funds
  • Fiduciary Funds

ALL THREE.

The CAFR includes Fund statements from all three fund categories. The government-wide statements include data from the Governmental and Proprietary Funds only.

43

The Statement of Activities of the Government-Wide Financial Statements is designed primarily to provide information to assess which of the following?

  1. Operational accountability.
  2. Financial accountability.
  3. Fiscal accountability.
  4. Functional accountability.

Operational accountability.

The Government-Wide Statement of Activities is organized by function, divided into Governmental Activities and Business-Type Activities.
It is designed to show the extent to which the operational expenses of each function are covered by related fees and grants and the extent to which general revenues must be used to cover the expenses. That is, operational accountability.

44

Which of the following statements are required to be presented for special-purpose governments engaged only in business-type activities (such as utilities)?

  1. Statement of Net Position only.
  2. Management's Discussion and Analysis (MD&A) and Required Supplementary Information (RSI) only.
  3. The financial statements required for Governmental Funds, including MD&A.
  4. The financial statements required for Enterprise Funds, including MD&A and RSI.

The financial statements required for Enterprise Funds, including MD&A and RSI.

Special-purpose governments engaged in business-type activities follow the reporting standards required for Enterprise Funds, which are a Statement of Net Position; Statement of Revenues, Expenses, and Changes in Net Position; Statement of Cash Flows; and appropriate disclosures in MD&A, and RSI.

45

Which of the following is a section of a comprehensive annual financial report?

  1. Introductory.
  2. Financial.
  3. Statistical.
  4. All of the above.

All of the above.

The CAFR has three sections: (1) introductory, (2) financial, and (3) statistical.

46

Which of the following is true?

  1. A government can issue its CAFR without its basic financial statements, management's discussion and analysis, and other required supplementary information.
  2. A government can issue its basic financial statements, management's discussion and analysis, and other required supplementary information without its CAFR.
  3. Both A and B are possible.
  4. Neither A nor B is permitted.

A government can issue its basic financial statements, management's discussion and analysis, and other required supplementary information without its CAFR.

The minimum reporting requirement for a government is a General Purpose Financial Statement, which has three main components: (1) management's discussion and analysis, (2) basic financial statements, and (3) required supplementary information.

47

The introductory section of a CAFR typically includes all of the following except:

  1. The letter of transmittal.
  2. An organizational chart.
  3. The independent auditor's opinion.
  4. The table of contents.

The independent auditor's opinion.

The auditor's report is not part of the introductory section of the CAFR. It is part of the financial section of the CAFR.

48

Jonn City entered into a capital lease for equipment during the year. How should the asset obtained through the lease be reported in Jonn City's government-wide Statement of Net Position?

  1. General Capital Asset.
  2. Other Financing Use.
  3. Expenditure.
  4. Not reported.

General Capital Asset.

The Government-Wide Financial Statements will present both the asset and the liability associated with a capital lease asset.

49

If a city government is the primary reporting entity, which of the following is an acceptable method to present component units in its combined financial statements?

  1. Consolidation.
  2. Cost method.
  3. Discrete presentation.
  4. Government-wide presentation.

Discrete presentation.

Two approaches are used for component units: (1) discrete presentation in a separate column of the Government-Wide Financial Statements and (2) blended with the primary government.

50

The Excel City School District has a separate elected governing body that administers the public school system. The district's budget must be approved by the city council of Excel City. The school district's financial activity should be reported in the City's financial statements by:

  1. Discrete presentation.
  2. Blending
  3. Footnote
  4. Not at all

 

Discrete presentation.

The school district is financially accountable to the city and, therefore, is a component of the city. Component units should be discretely presented in the city's financial statements unless its governing body is substantially the same as the governing body of the primary government, if the component unit provides services almost entirely to the primary government. Since neither exception is met in this case, the school should be discretely presented.

51

The Metro Transportation Authority is governed by a seven-member board. Four of the board members are appointed by the town of Metro and the remaining three are appointed by the governing board of Metro County. Neither the town nor the county share in any profits, nor are they required to fund any deficits, of the Authority. The town, however, does approve the Authority's proposed budget. The county may make budgetary recommendations to the Authority, but they are not required to approve the proposed budget. The Authority should be reported as:

  1. A jointly governed organization by both the town and the county.
  2. Discrete component units of both the town and the county.
  3. A blended component unit of the town.
  4. A discretely presented component unit of the town.

A discretely presented component unit of the town.

The Authority is a component unit of the town because it is financially accountable to the town, as evidenced by the town approving the Authority's budget.

52

For general purpose external financial reporting, discrete component unit information:

  1. Is not presented.
  2. Is included in the government-wide statements only.
  3. Is included in the fund financial statements only.
  4. Is included in both the government-wide and the fund financial statements.

Is included in the government-wide statements only.

Discretely presented component units are presented in the Government-Wide Financial Statements only and not in the fund-level statements.

53

Nox City reported a $25,000 net increase in the fund balances for total Governmental Funds. Nox also reported an increase in Net Position for the following funds:

  • Motor pool Internal Service Fund $9,000
  • Water Enterprise Fund $12,000
  • Employee pension fund $7,000

The motor pool Internal Service Fund provides service to the General Fund departments. What amount should Nox report as the Change in Net Position for governmental activities?

  1. $25,000
  2. $34,000
  3. $41,000
  4. $46,000

$34,000

GASB Stmt. #34 requires that Internal Service Funds be included in the Governmental Activities totals on the Government-Wide Statements since Internal Service Funds supply goods or services only to the government entity.

Therefore, the total fund balance for the Governmental Funds in the fund-based statements ($25,000) must be increased by the Net Position of the motor pool ($9,000) when the preparing the Governmental Activities column of the Government-Wide Statement of Net Position ($25,000 + 9,000 = $34,000).

54

Tree City reported a $1,500 net increase in the fund balance for Governmental Funds. During the year, Tree purchased general capital assets totaling $9,000 and recorded a depreciation expense of $3,000.

What amount should Tree report as the Change in Net Position for governmental activities in Tree's Statement of Activities?

  1. ($4,500)
  2. $ 1,500
  3. $ 7,500
  4. $10,500

$7,500

The increase in the fund balance for Governmental Funds is measured on the modified accrual basis, while the Change in Net Position for governmental activities is measure on the full accrual basis. To convert the increase in fund balance to full accrual:

  • Increase in Fund Balance + $1,500
  • Add back the Expenditures related to the purchase of capital assets + 9,000
  • Deduct the depreciation expense not included in Fund Balance - 3,000
  • Change in Net Position = $7,500

55

Which of the following funds should be reported as part of the local government's governmental activities column in its government-wide statements?

  1. Debt Service.
  2. Agency.
  3. Private-Purpose Trust.
  4. Pension Trust.

Debt Service.

Governmental activities reported in the Government-Wide Financial Statements pertain to the Governmental Fund types: General Fund, Special Revenue Funds, Capital Projects Funds, Debt Service Funds, and Permanent Funds. The other three choices in this question are all Fiduciary Fund Types that are not reported in the Government-Wide Financial Statements since the government acts as a fiduciary and has no ownership interest. Fiduciary Funds are reported in the fund-level financial statements of the Comprehensive Annual Financial Report (CAFR).

56

The City of Minton recorded the following transactions in its Special Revenue Fund:

  • Transfer from the General Fund of $400,000 to help finance a fire safety improvement project
  • Transfer of $5,000 from a Capital Projects Fund to pay for office supplies, which the Special Revenue Fund initially paid for in error
  • Federal grant proceeds of $300,000, which can only be used to pay for salary increases for public safety workers

Which of the following is correct regarding the recognition of Revenue and Other Financing Source in the Special Revenue Fund?

  • Revenue
  • Other Financing Sources

  • Revenue $300,000
  • Other Financing Sources $400,000

The $5,000 transferred from the Capital Projects Fund is recognized as an Expenditure Reimbursement (a credit to an expenditure account) rather than a Revenue.

The $400,000 transferred from the General Fund is recorded as an Other Financing Source - Transfer-in.

The federal grant is recognized as revenue immediately (e.g., the existence of a purpose restriction does not delay revenue recognition).

57

Revenues that are legally restricted to expenditures for specified purposes should be accounted for in Special Revenue Funds, including:

  1. Accumulation of resources for payment of general long-term debt principal and interest.
  2. Pension Trust Fund Revenues.
  3. Gasoline taxes to finance road repairs.
  4. Proprietary Fund revenues.

Gasoline taxes to finance road repairs.

A Special Revenue Fund should be used to account for the proceeds of specific revenue sources that are legally restricted to expenditure for specified purposes. 
Since the gasoline taxes are levied to finance road repairs, they should be accounted for in a Special Revenue Fund.

58

In Soan County's General Fund Statement of Revenues, Expenditures, and Changes in Fund Balances, which of the following has an effect on the excess of revenues over expenditures?

  1. Purchase of fixed assets.
  2. Payment to a Debt-Service Fund.
  3. Special items.
  4. Proceeds from the sale of capital assets.

Purchase of fixed assets.

Under the modified accrual basis of accounting, the purchase of fixed assets are classified as Capital Expenditures and is one of the expenditure types included in determining the excess (deficiency) of revenues over expenditures. The other three answers are items that appear in different sections of the Statement of Revenues, Expenditures, and Changes in Fund Balance. The payment to a debt service (i.e., a transfer out) is in the Other Financing Sources and Uses section of the statement. Special items include proceeds from the sale of capital assets, which appear below the section for Other Financing Sources and Uses of the statement.

59

Tott City's serial bonds are serviced through a Debt Service Fund with cash provided by the General Fund. In a Debt Service Fund's statements, how are cash receipts and cash payments reported?

  • Cash receipts
  • Cash payments

  • Cash receipts - Operating Transfers
  • Cash payments - Expenditures

The General Fund records the original receipt of cash as Revenues, then transfers the cash to the Debt Service Fund. The Debt Service Fund records this receipt of cash as an operating transfer. The cash payments are recognized as Expenditures by the Debt Service Fund.

60

Excel City had the following cash balances at December 31, 20x9:

  • Under the Asset Forfeiture Act - cash confiscated from illegal activities, which can only be used for law enforcement activities - $500,000.
  • Property taxes collected by Excel to be distributed to other local governmental entities - $700,000.

What amount of cash should Excel report in its Permanent Funds at December 31, 20x9?

  1. $0
  2. $500,000
  3. $700,000
  4. $1,200,000

$0

The cash from the Asset Forfeiture Act should be accounted for by a Special Revenue Fund because the Act does not require that the fund principal remain intact, and the principal may be spent. The property taxes collected for other governments should be accounted for in an Agency Fund.

61

Excel City received a donation of $400,000. The donor stipulated that the money be permanently invested with the investment proceeds being used to provide funding for the community swimming pools. Which of the following best describes the reporting options for this transaction?

  1. The city should record $400,000 as a capital contribution in a Permanent Fund.
  2. The city should record $400,000 as revenue in a Permanent Fund.
  3. The city should record $400,000 as another financing source in a Permanent Fund.
  4. The city should record $400,000 as revenue in the General Fund.

The city should record $400,000 as revenue in a Permanent Fund.

Permanent Funds account for the receipt of the endowment principal that is donated to a government and is to be held in trust for the benefit of the government (or of its citizenry as a whole) as revenue.

62

A Capital Projects Fund for a new city courthouse recorded a receivable of $300,000 for a state grant and a $450,000 transfer from the General Fund. What amount should be reported as revenue by the Capital Projects Fund?

  1. $0
  2. $300,000
  3. $450,000
  4. $750,000

$300,000

The $450,000 transfer from the General Fund is classified as an Other Financing Source-Transfer In, but the $300,000 state grant is recognized as Revenue. Though the grant has not yet been received in Cash, GASB #33 requires that it be recognized as Revenue in the Government-Wide Statements when the receivable is recognized, as long as there are no eligibility restrictions. It would also be recognized as Revenue in the fund statements as long as the cash was received within 60 days of the year end.

63

If cash from the General Fund is transferred to a Debt Service Fund, the entry in the Debt Service Fund would be a debit to cash and a credit to:

  1. Revenues.
  2. Accounts Receivable.
  3. Deferred Revenue.
  4. Other Financing Sources.

Other Financing Sources.

This type of interfund activity is a transfer from one fund to another fund without an equivalent return of assets and without a requirement for repayment. They are classified as Other Financing Sources.

64

Excel City has $1,000,000 of 8%, 10 year general obligation bonds outstanding. The bonds were issue on October 1, 20x8 to finance construction of city park improvements. Interest is payable semiannually on October 1 and April 1. The bonds also require an annual principal payment of $100,000 each April 1. What amount of debt service expenditures should the government report in its Debt Service Fund for the year ended December 31, 20x9?

  1. $76,000
  2. $80,000
  3. $174,000
  4. $176,000

$176,000

Both Interest Expenditures and Principal Expenditures are recognized in the Debt Service Fund. Debt Service Expenditures are usually not accrued at year-end but are recorded as Expenditures when due and payable.

In 20x9 the Debt Service Fund paid a total of $176,000-$40,000 interest and $100,000 principal on April 1 (both Expenditures of the fund) and $36,000 interest on October 1.

65

Sig City used the following funds for financial reporting purposes:

  1. General Fund
  2. Capital Projects Fund
  3. Internal Service Fund
  4. Special Revenue Fund
  5. Airport Enterprise Fund
  6. Debt Service Fund
  7. Pension Trust Fund

How many of Sig's funds use the accrual basis of accounting?

  • Two
  • Three
  • Four
  • Five

Three.

Three of the funds use full accrual basis (Internal Service Fund, Airport Enterprise Fund, and Pension Trust Fund) and four of the funds use modified accrual basis (General Fund, Capital Projects Fund, Special Revenue Fund, and Debt Service Fund).

66

On March 2, 2005, Finch City issued a 10-year general obligation bonds at face amount, with interest payable March 1 and September 1.

The proceeds were to be used to finance the construction of a civic center over the period April 1, 2005 to March 31, 2006.

During the fiscal year ended June 30, 2005, no resources had been provided to the Debt Service Fund for the payment of principal and interest.

Proceeds from the general obligation bonds should be recorded in the:

  1. General Fund.
  2. Capital Projects Fund.
  3. General long-term debt account group.
  4. Debt Service Fund.

Capital Projects Fund.

A Capital Projects Fund is used to account for financial resources to be used for the construction or acquisition of capital assets, except for those to be financed by Proprietary Funds or Trust Funds.

67

On December 31, 2005, Elm Village paid a contractor $4,500,000 for the total cost of a new Village Hall built in 2005 on Village-owned land. 
Financing for the capital project was provided by a $3,000,000 general obligation bond issue sold at face value on December 31, 2005, with the remaining $1,500,000 transferred from the General Fund.

What account and amount should be reported in Elm's 2005 financial statements for the General Fund?

  1. ther Financing Sources control $4,500,000.
  2. xpenditures control $4,500,000
  3. ther Financing Sources control $3,000,000
  4. Other financing uses control $1,500,000

Other financing uses control $1,500,000

This answer is correct because the General Fund should report only the $1,500,000 in the Other Financing Uses Control account as an Operating Transfer. The $3,000,000 in bonds proceeds should be reported in the Capital Projects Fund in the Other Financing Sources Control account.

68

Kew City received a $15,000,000 federal grant to finance the construction of a center for the rehabilitation of drug addicts. The proceeds of this grant should be accounted for in the:

  1. Special Revenue Funds.
  2. General Fund.
  3. Capital Projects Funds.
  4. Trust funds.

Capital Projects Funds.

A Capital Projects Fund should be used to account for financial resources, $15,000,000 federal grant, to be used for the construction or acquisition of major capital facilities, other than those financed by Proprietary Funds and Trust Funds.

69

Which of the following fund types used by a government would most likely have a Nonspendable Fund Balance for its Inventory of Supplies?

  1. General.
  2. Internal service.
  3. Nonexpendable Trust.
  4. Capital Projects.

General.

This answer is correct because the General Fund normally records the purchase of supplies. The supplies must be reported on the General Fund's balance sheet, even though they do not represent current financial resources. In addition, at year end, a portion of the fund balance must be classified as nonspendable for the inventory amount because that amount of resources is not appropriable for future expenditures.

70

Brandon County's General Fund had the following transactions during the year:

  • Transfer to a Debt Service Fund $100,000
  • Payment to a Pension Trust Fund $500,000
  • Purchase of equipment $300,000

What amount should Brandon County report for the General Fund as other financing uses in its Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances?

  1. $100,000
  2. $400,000
  3. $800,000
  4. $900,000

$100,000

Transfers between funds are classified as Other Financing Sources and Uses. The payment to the Pension Trust Fund pertains to employee and employer contributions to the pension plan and is part expenditure (employer share) and liability reduction (employee share that was due to the Pension Trust Fund). Under the modified accrual basis of accounting used by the General Fund, the purchase of the equipment is an expenditure.

71

Cal City maintains several major fund types. The following were among Cal's cash receipts during 2005:

  • Unrestricted state grant $1,000,000
  • Interest on bank accounts held for employees' pension plan $200,000

What amount of these cash receipts should be accounted for in Cal's General Fund?

  1. $1,200,000
  2. $1,000,000
  3. $200,000
  4. $0

$1,000,000

The General Fund should account for the $1,000,000 unrestricted state grant because it accounts for all financial resources except those required to be accounted for in another fund.

The $200,000 interest results from the assets of the employee pension plan, therefore the Pension Trust Fund should account for it.

72

Should a Special Revenue Fund with a legally adopted budget maintain its accounts on an accrual basis and integrate budgetary accounts into its accounting system?

  • Maintain on accrual basis
  • Integrate budgetary accounts

  • Maintain on accrual basis - NO
  • Integrate budgetary accounts - YES

A Special Revenue Fund is a Governmental Fund, therefore it maintains its accounts on the modified accrual basis of accounting, not on the accrual basis.

A Special Revenue Fund, like all Governmental Funds, can integrate its budgetary accounts into its accounting system. Integration is essential in general, special revenue, and other annually budgeted Governmental Funds that have numerous types of revenues, expenditures, and transfers.

73

During the current year, Wythe County levied $2,000,000 in property taxes, 1% of which is expected to be uncollectible. During the year, the county collected $1,800,000 and wrote off $15,000 as uncollectible. What amount should Wythe County report as Property Tax Revenue in its Government-Wide Statement of Activities for the current year?

  1. $1,800,000
  2. $1,980,000
  3. $1,985,000
  4. $2,000,000

$1,980,000

Property taxes are an Imposed Nonexchange Revenue source for which the government receives value without directly giving something in equal value in exchange. In the Government-Wide Financial Statements, a Receivable is recorded when there is an enforceable claim - the property tax levy in this case - and Revenue should be recorded at the amount of Net Estimated Refunds and Estimated Uncollectible Amounts, in the period for which the taxes are levied [GASB Codification Section N50.115]. Given the facts in this question, revenue of $1,980,000 should be recognized ($2,000,000 gross levy less 1%, $20,000, estimated uncollectible amount). Had the question asked about revenue recognition in the General Fund, which uses the modified accrual basis of accounting, the answer would be different. In modified accrual accounting the concept of availability is an aspect of revenue recognition (GASB Codification Section P70.104]. Typically, that means that amounts collected during the year and up to 60 days into the next year are recognized in the current year as revenue. While the facts are incomplete in this question regarding the next year, the implication is that $1,800,000 would be recognized as revenues in the current year and $180,000 as deferred inflow of resources in the current year.

74

The basis of accounting for a Capital Projects Fund is the:

  1. Cash basis.
  2. Accrual basis.
  3. Modified cash basis.
  4. Modified accrual basis.

Modified accrual basis.

A Capital Projects Fund is a type of Governmental Fund. All Governmental Funds and Expendable Trust Funds use a modified accrual basis of accounting.

75

Which format must an Enterprise Fund use to report cash flow operating activities in the Statement of Cash Flows?

  1. Indirect method, beginning with operating income.
  2. Indirect method, beginning with Change in Net Position.
  3. Direct method.
  4. Either direct or indirect method.

Direct method.

According to GASB Codification Section 2450.128, governments are required to use the direct method to report cash flow from operating activities in the Statement of Cash Flows. The government should also report, in an accompanying schedule, the reconciliation between Operating Income and Cash Flow from Operating Activities [GASB Codification Section 2450.129].

76

The following transactions were among those reported by Corfe City's Electric Utility Enterprise Fund for 2005:

  • Capital contributed by subdividers $900,000
  • Cash received from customer households $2,700,000
  • Proceeds from the sale of revenue bonds $4,500,000

In the Electric Utility Enterprise Fund's Statement of Cash Flows for the year ended December 31, 2005, what amount should be reported as cash flows from capital and related financing activities?

  1. $4,500,000
  2. $5,400,000
  3. $7,200,000
  4. $8,100,000

$5,400,000

The statement of cash flows for an Enterprise Fund has four sections: 

  1. cash flows from operating activities, 
  2. cash flows from noncapital financing activities, 
  3. cash flows from capital and related financing activities, and 
  4. cash flows from investing activities. Both capital contributed by subdividers, $900,000, and proceeds from the sale of revenue bonds, $4,500,000, are considered cash flows from capital and related financing activities, therefore $5,400,000 is the correct answer.

The cash received from customer households, $2,700,000, is classified as cash flows from operating activities.

77

At the beginning of the current year, Paxx County's enterprise fund had a $125,000 balance for accrued compensated absences. At the end of the year, the balance was $150,000. During the year, Paxx paid $400,000 for compensated absences. What amount of compensated absences expense should Paxx County's enterprise fund report for the year?

  1. $375,000
  2. $400,000
  3. $425,000
  4. $550,000

$425,000

Enterprise funds use accrual accounting. The amount of compensated absences expense for the current year can be computed as: ending accrued compensated absences ($150,000) plus compensated absences paid ($400,000) less beginning compensated absences ($125,000), which amounts to $425,000.

78

Which of the following fund types or account group should account for fixed assets in a manner similar to a "for profit" organization?

  1. Special Revenue Fund.
  2. Capital Projects Fund.
  3. General fixed assets account group.
  4. Enterprise Fund.

Enterprise Fund.

Proprietary Funds account for the activities of government that are similar to those found in the private sector. These funds use accrual accounting in measuring financial position and operating results. Proprietary Funds account for their own fixed assets in a manner similar to a "for profit" organization.

79

Arlen City's Fiduciary Funds contained the following cash balances at December 31, 2004:

  • Under the Forfeiture Act-cash confiscated from illegal activities; disbursements can be used only for law enforcement activities $300,000
  • Sales taxes collected by Arlen to be distributed to other governmental units $500,000

What amount of cash should Arlen report in its Agency Funds at December 31, 2004?

  1. $0
  2. $300,000
  3. $500,000
  4. $800,000

$500,000

Arlen should report the $500,000 of sales taxes that it has collected on behalf of others in an Agency Fund. The $300,000 cash confiscated from illegal acts, which must be used to support law enforcement activities, a general government function, should be reported in a Special Revenue Fund.

80

Maple City has cash available for investments in several different accounting funds. Maple's policy is to maximize its financial resources.

How may Maple pool its investments?

  1. Maple may not pool its investments.
  2. Maple may pool all investments, but it must equitably allocate realized and unrealized gains and losses among participating funds.
  3. Maple may pool only unrestricted investments, but it must equitably allocate realized and unrealized gains and losses among participating funds.
  4. Maple may pool only restricted investments, but it must equitably allocate realized and unrealized gains and losses among participating funds.

Maple may pool all investments, but it must equitably allocate realized and unrealized gains and losses among participating funds.

Maple may pool all the cash available from all the different accounting funds, irrespective of whether or not they are restricted or unrestricted funds. Realized and unrealized gains and losses must be equitably allocated among the participating funds.

81

Which of the following are reported for a Private-Purpose Trust Fund?

  1. Expenditures.
  2. Expenses.
  3. Deductions.
  4. Both A and C

Deductions.

Private-Purpose Trust Funds report all changes in Net Position, as either additions or deductions.

82

A government establishes an Investment Trust Fund. During 20x9, it receives $1,000,000 to invest from other governmental entities. The Investment Trust Fund should report this activity in the Statement of Changes in Net Position as:

  1. Revenues.
  2. Additions.
  3. Other Financing Sources.
  4. Investment Earnings.

Additions.

The funds received from other governmental entities are reported as additions (from contributions) in the Investment Trust Fund Statement of Changes in Net Position.

83

The local school board received a bequest of $1,000,000 to establish a scholarship fund for graduating students. The scholarship is accounted for in a Private-Purpose Trust Fund. The fund would report:

  1. Additions of $1,000,000.
  2. Revenues of $1,000,000.
  3. A transfer of $1,000,000.
  4. Accounts Payable of $1,000,000.

Additions of $1,000,000.

Gifts received by a Private-Purpose Trust fund are accounted for as additions to the fund.

84

n a Tax Agency Fund, revenues must be recognized:

  1. When measurable and available.
  2. On the cash basis.
  3. To extent fund expenditures.
  4. None of the above. Revenues are not reported in Agency Funds.

None of the above. Revenues are not reported in Agency Funds.

Agency Funds act as intermediaries in the process of disbursing monies from one governmental entity to another. The government has no claim on the resources in the Agency Fund and does not recognize revenues when it receives the monies or recognize expenses when the monies are disbursed.

85

The principal of a Private-Purpose Trust Fund:

  1. Must be nonexpendable in nature.
  2. Must be expendable in nature.
  3. Must never fall below a pre-determined threshold that is determined by generally accepted accounting principles.
  4. May be expendable or nonexpendable in nature.

May be expendable or nonexpendable in nature.

A Private-Purpose Trust Fund may be either expendable or nonexpendable. It is expendable if the principal of the trust gift, as well as the earnings, is expendable. A nonexpendable Private-Purpose Trust occurs when the principal must be maintained intact and only the earnings are expendable, or neither the principal nor the earnings are expendable (e.g., loan funds).

86

An Enterprise Fund transfers employer contributions to the Pension Trust Fund. Which of the following best describes the effect of the transaction on each fund?

  1. The Enterprise Fund will report deductions, and the Pension Trust Fund will report additions.
  2. The Enterprise Fund will report transfers out, and the Pension Trust Fund will report transfers in.
  3. The Enterprise Fund will report expenses, and the Pension Trust Fund will report revenues.
  4. The Enterprise Fund will report expenses, and the Pension Trust Fund will report additions.

The Enterprise Fund will report expenses, and the Pension Trust Fund will report additions.

The Enterprise Fund reports expenses related to its contribution toward the employee pension plan. The Pension Trust Fund is a Fiduciary Fund and reports the amounts received from the Enterprise Fund as additions to the fund.

87

Which of the following financial statements are required for a Tax Agency Fund?

  1. Statement of Revenues, Expenditures, and Changes in Fiduciary Net Position.
  2. Statement of revenues, expenses, and changes in Fiduciary Net Position.
  3. Statement of Cash Flows.
  4. None of the above.

None of the above.

Agency Funds prepare a Statement of Net Position and a Statement of Changes in Net Position. Since Agency Fund assets are always completely offset by liabilities, they do not report Net Position (assets - liabilities = 0). Agency Funds collect and distribute funds (e.g., property taxes) and do not recognize either revenues or expenditures.

88

The City of New Hope Rotary Club, a private, not-for-profit organization, recently ended a fund drive that raised $500,000 to be used as a scholarship fund.

The $500,000 is to be used to create an endowment that will be invested and retained in perpetuity and the earnings used to provide college scholarships to outstanding local high school graduates selected by the Rotary Club. The City has agreed to manage the investment and disbursement of these monies on behalf of the Rotary Club.

The City should account for the $500,000 corpus of the endowment in a(n):

  1. Agency Fund.
  2. Private-Purpose Trust Fund.
  3. Permanent Fund.
  4. Special Revenue Fund.

Private-Purpose Trust Fund.

A Private-Purpose Trust Fund is used to account for resources, both expendable and non-expendable, which either must be used for a non-governmental purpose or the earnings from which have to be used for a non-governmental purpose.

As in this case, Private-Purpose Trust Funds usually disburse monies to individuals or organizations outside the governmental entity.

89

The funded ratio of a pension plan compares:

  1. Actual employer contributions to the unfunded actuarial accrued pension liability.
  2. The fair value of plan assets to the actuarial value of plan assets.
  3. Actual employer contributions to the accumulated required employer contributions.
  4. The actuarial value of plan assets to the actuarial accrued pension liability.

The actuarial value of plan assets to the actuarial accrued pension liability.

The funded ratio compares the actuarial value of plan assets to the actuarial accrued pension liability.

90

The City of Macon maintains a defined contribution pension plan for its employees. During the year, the city contributed $5,000,000 to the plan, which represented 100% of its required contribution for the year. City employees contributed $1,800,000 to the plan. In addition, plan assets earned $4,500,000.

What amount should the City report as Additions in its Pension Trust Fund?

  1. $11,300,000
  2. $9,500,000
  3. $6,800,000
  4. $4,500,000

$11,300,000

In addition to the actual earnings on plan assets, both employer and employee contributions are recognized as Additions in the Pension Trust Fund.

91

The debt service fund of a governmental unit is used to account for the accumulation of resources to pay, and the payment of, general long-term debt

  • Principal
  • Interest

  • Principal - YES
  • Interest - YES

Per GASB Codification Section 1300, the debt service fund of a governmental unit is used to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest.

92

The general fund of Miller City levied property taxes of $700,000 for year 1. The city, which reports on a calendar year, expected the taxes to be collected in the following manner:

  • $500,000 during year 1
  • $100,000 during the first 60 days of year 2
  • $90,000 during the remainder of year 2
  • $10,000 is estimated to be uncollectible

On the government-wide Statement of Activities prepared in accordance with GASB 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, what amount should be reported for property tax revenues for the year ended December 31, year 1?

  1. $690,000
  2. $700,000
  3. $500,000
  4. $600,000

$690,000

The use of full accrual accounting in the preparation of the government-wide Statement of Activities results in reporting $690,000 for property tax revenues in year 1. Under full accrual accounting, property tax revenues are reported in the year levied, net of expected refunds and estimated uncollectible taxes. In this question, property tax revenues reported in year 1 would consist of the $700,000 levied minus the $10,000 estimated to be uncollectible. Note that collection of $100,000 of property taxes in year 2 during the first 60 days and the collection of $90,000 during the remainder of year 2 have no effect on the amount of revenue reported in year 1 using full accrual accounting. Under the modified accrual basis of accounting that is used for the governmental fund statements, the date of collection of property tax revenues in the following year had an effect on the amount of revenue reported in the current year.

93

According to the GASB Concept Statements, the primary users of governmental financial reports include all of the following except:

  1. The citizenry.
  2. Government employees.
  3. Legislative and oversight bodies.
  4. Investors and creditors.

Government employees.

Concepts Statement No. 1 identified three primary users of the external state and local governmental financial reports:

  1. The citizenry,
  2. Legislative and oversight bodies, and
  3. Investors and creditors.

94

In Soan County’s general fund statement of revenues, expenditures, and changes in fund balances, which of the following has an effect on the excess of revenues over expenditures?

  1. Purchase of fixed assets.
  2. Payment to a debt-service fund.
  3. Special items.
  4. Proceeds from the sale of capital assets.

Purchase of fixed assets.

Statements required for proprietary funds include (1) Statement of Net Position, (2) Statement of Revenues, Expenses, and Changes in Fund Net Position, and (3)Statement of Cash Flows.

Note that the Statement of Net Position is prepared in the same “Assets + Deferred Outflows of Resources − Liabilities − Deferred Inflows of Resources = Net Position” format as the Statement of Net Position in the government-wide financial statements.  GASB permits the more traditional balance sheet format, “Assets + Deferred Outflows of Resources = Liabilities + Deferred Inflows of Resources + Net Position" for this proprietary funds statement.  The net position category has the same breakdown as the government-wide statement of net position, "net investment in capital assets," "restricted (distinguishing between major categories of restrictions)," and "unrestricted." Note also that the internal service funds are shown separately to the right as a fund type in the proprietary fund financial statements, with all internal service funds grouped together.  A classified format, with current and noncurrent assets and liabilities shown separately, is required by GASB for the proprietary fund statement of net position (or balance sheet).

The Statement of Revenues, Expenses, and Changes in Fund Net Position is an all-inclusive operating statement, with a reconciliation of the beginning and ending fund net position as the last item.  Major enterprise funds are shown, along with a total of all enterprise fund activity, and the total of internal service funds is shown separately.  GASB standards require an operating income figure, with operating revenues and expenses shown separately from nonoperating revenues and expenses.  Capital contributions, transfers, extraordinary items, and special items are to be shown after the nonoperating revenues and expenses.  GASB requires that depreciation be shown separately as an operating expense and that interest be shown as a nonoperating expense.  Interest expense related to fixed assets is capitalized.

 

95

According to GASB Concepts Statements which of the following is an essential characteristic of a liability?

  1. A liability is an obligation that is satisfied by a cash outflow.
  2. A liability involves a consumption of net position by the government.
  3. A liability is a present obligation to sacrifice resources.
  4. A liability involves the use of service capacity.

A liability is a present obligation to sacrifice resources.

GASB Concepts Statement No. 4 establishes definitions for the seven elements of historically based financial statements of state and local governments.  The elements of a statement of financial position are defined as

  1. Assets—resources with present service capacity that the government presently controls.
  2. Liabilities—present obligations to sacrifice resources that the government has little or no discretion to avoid.
  3. Deferred outflow of resources—a consumption of net position by the government that is applicable to a future reporting period.
  4. Deferred inflow of resources—an acquisition of net position by the government that is applicable to a future reporting period.
  5. Net position—the residual of all other elements presented in a statement of financial position.

96

Cash receipts from grants and subsidies to decrease operating deficits should be classified in which of the following sections of the statement of cash flows for governmental, not-for-profit entities?

  1. Operating.
  2. Noncapital financing.
  3. Capital and related financing.
  4. Investing.

Noncapital financing.

 

97

The City of Tyler entered in an agreement with Huffington Company to operate a parking structure owned by the City of Tyler.  Huffington agrees to pay Tyler $10 million to operate the parking garage for the next 20 years.  Which of the following is true about the accounting for this arrangement?

  1. The City of Tyler should discontinue the depreciation on the parking garage for the 20-year period.
  2. When the contract is executed, the City of Tyler should record revenue of $10 million.
  3. When the contract is executed, the City of Tyler should record deferred inflow of resources of $10 million.
  4. When the contract is executed, the City of Tyler should record a deferred outflow of resources in the amount of $10 million.

When the contract is executed, the City of Tyler should record deferred inflow of resources of $10 million.

Service concession arrangements.  A service concession arrangement is an agreement between a government unit and an operator in which

  • The government unit conveys to the operator the right and obligation to provide public services through the operation of a facility (capital asset) in exchange for consideration;
  • The operator collects and is compensated by fees from third parties;
  • The government unit has the ability to modify or approve the services to be provided, to whom the operator is required to provide the services, and the price of the services; and
  • The government unit is entitled to significant residual interest in the facility at the end of the arrangement.

98

Which of the following accounts of a governmental unit is(are) closed out at the end of the fiscal year?

  • Estimated Revenues
  • Fund Balance

  • Estimated Revenues - YES
  • Fund Balance - NO

When the budget is closed, the following entry is made (assume estimated revenues are greater than appropriations):

  • Appropriations xx 
  • Budgetary Fund Balance xx 
    • Estimated Revenues  xx

Note that estimated revenues is a nominal account which is closed out, while fund balance is a real (balance sheet) account which is not closed out.

99

A state government enters into an agreement in which a private company agrees to build a toll road for the state in exchange for the tolls to be collected for the next 30 years.  The toll road has a fair value of $500 million at the time it is put in service.  Which of the following is correct about the accounting for this arrangement?

  1. The state government should record revenue of $500 when the agreement is executed.
  2. The state government should record the toll road on its books at $500 million when the agreement is executed.
  3. The private company should record the toll road on its books for the 30 years in which it collects the revenue.
  4. The state government should record a deferred outflow of resources in the amount of $500 million.

The state government should record the toll road on its books at $500 million when the agreement is executed.

The state government should record the toll road at its fair value and deferred revenue for the same amount.

100

The state of Illinois is obligated to fund the pension plans of certain school districts in the state. Which of the following is true about the accounting for this special funding situation?

  1. The obligations are accounted for as a transfer to the school districts.
  2. The obligations are accounted for as pension expense for the state of Illinois.
  3. The obligations are accounted for as advances to the school districts.
  4. The obligations are accounted for on the financial statements of the state of Illinois.

The obligations are accounted for as pension expense for the state of Illinois.

GASB No. 68 requires the recording of an amount for pension expense that includes recognition of annual service cost and interest on the pension liability along with the effect on the net pension liability of changes in benefit terms.

Other components of pension expense (e.g., changes in economic and demographic assumptions, and differences between assumptions and actual experience) are recognized over a closed period that is determined by the average remaining service period of the plan members. The effects on the net pension liability of differences expected and actual investment returns in recognized in pension expense over a closed period of five-years. 

101

Which of the following will increase the fund balance—unreserved of a governmental unit at the end of the fiscal year, when closing entries are prepared?

  1. Revenues are less than expenditures and fund balance reserved for encumbrances.
  2. Revenues are less than expenditures and encumbrances.
  3. Revenues are less than estimated revenues.
  4. Revenues are more than expenditures and encumbrances.

Revenues are more than expenditures and encumbrances.

if revenues are greater than the expenditures and encumbrances, the closing entry will need a credit (or increase) to fund balance—unreserved.

102

The Critical criteria for identifying a legally separate organization as a component unit of a primary government is that the primary government can impose its will on the unit or the unit is financially dependent on the primary government and

  1. There is a potential for the unit to provide specific benefits to, or burdens on, the primary government.
  2. There are overlapping individuals on the governing board.
  3. The component unit provides services for the primary government.
  4. The component unit uses resources of the primary government.

There is a potential for the unit to provide specific benefits to, or burdens on, the primary government.

The GASB carefully defines the reporting entity in an effort to ensure that all boards, commissions, agencies, etc. that are under the control of the reporting entity are included.  The reporting entity consists of a primary government and appropriate component units.  A primary government is either (1) a state government, (2) a general-purpose local government, or (3) a special-purpose local government that has a separately elected governing body, is legally separate, and is fiscally independent of other state or local governments.  A component unit is a legally separate organization for which the elected officials of a primary government are financially accountable.  As clarified by GASB Statement No. 61, financial accountability for a legally separate organization is assumed in the following circumstances:

  1. The primary government appoints a voting majority of the organization’s governing body and (1) it is able to impose its will on that organization, or (2) there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government.
  2. The organization is fiscally dependent on and there is a potential for the organization to provide specific financial benefits to, or burdens on, the primary government regardless of the primary government’s influence on the governing board.

103

Which of the following should be accrued as revenues by the General Fund of a local government, when using modified accrual accounting?

  1. Sales taxes held by the state which will soon be remitted to the local government.
  2. Parking meter revenues.
  3. Sales taxes collected by merchants.
  4. Income taxes accrued but not paid by citizens.

Sales taxes held by the state which will soon be remitted to the local government.

Under modified accrual accounting, sales taxes are recorded when measurable and available. The amount due from the state is measurable (certain as to amount) and it will soon be available to finance year end liabilities which resulted from expenditures. Other firm commitments from the state or other governmental units for grants, etc. are also recorded.

104

Which of the following would be included in the Budgetary Comparison Schedule in the comprehensive annual financial report (CAFR) of a governmental unit?

  • Enterprise fund
  • Pension trust fund

  • Enterprise fund - NO
  • Pension trust fund - NO

The Budgetary Comparison Schedule should include general and major special revenue fund types for which annual budgets have been legally adopted. The Enterprise Fund and the Pension Trust Fund are generally not required to report budgetary compliance.

105

What is the major difference between an exchange transaction and a nonexchange transaction for governmental units?

  1. The relationship between the amount of value given and received.
  2. Time requirements and whether the transaction is required by law.
  3. Purpose restrictions placed upon fund balances.
  4. Whether resources acquired can be further exchanged.

The relationship between the amount of value given and received.

In an exchange transaction goods or services of equal or near equal value exchanged. In a nonexchange transaction one party provides value for no direct benefit.

106

What are the GASB Concept Statements intended to establish?

  1. Generally accepted accounting principles for state and local governments.
  2. Fundamentals on which governmental accounting and reporting standards will be based.
  3. Interpretations of GASB Statements.
  4. The hierarchy of sources of generally accepted accounting principles for state and local governments.

Fundamentals on which governmental accounting and reporting standards will be based.

GASB Concept Statements are much like the FASB Concepts Statements in that they set forth fundamentals on which governmental accounting and reporting standards will be based.

107

The following data relates to Lely Township:

  • Printing and binding equipment used for servicing all of Lely’s departments and agencies, on a cost-reimbursement basis$100,000
  • Equipment used for supplying water to Lely’s residents900,000
  • Receivables for completed sidewalks to be paid for in installments by affected property owners950,000
  • Cash received from federal government, dedicated to highway maintenance, which must be accounted for in a separate fund995,000

How much could be accounted for in an Enterprise Fund?

  1. $100,000
  2. $900,000
  3. $950,000
  4. $995,000

$900,000

An Enterprise Fund is used to account for the activities of a governmental unit to which the government provides goods and services which are

  1. rendered primarily to the general public,
  2. financed substantially or entirely through user charges, and
  3. intended to be self-supporting.

Of the choices, only the equipment used for supplying water ($900,000) would be classified in an Enterprise Fund.

108

An expenditures account appears in

  1. The Government-wide statements.
  2. The Proprietary fund statements.
  3. The Governmental fund statements.
  4. The Fiduciary fund statements.

The Governmental fund statements.

The expenditures account appears in the governmental fund Statement of Revenues, Expenditures, and Changes in Fund Balances.

Two governmental fund financial statements are required: (1) Balance Sheet and (2) Statement of Revenues, Expenditures, and Changes in Fund Balances. Both of these are illustrated in this module.  Governmental fund financial statements are prepared on the current financial resources measurement focus and modified accrual basis of accounting. GASB 54 provides guidance on how fund balances should be segregated in the financial statements. Note that fund balances are segregated into nonspendable, restricted, committed, assigned and unassigned balances.  The nonspendable fund balances classification includes amounts that cannot be spent because they are either not in spendable form, or they are legally or contractually required to be maintained intact. Items that are not in spendable form are those that are not expected to be converted to cash, such as inventories and prepaid amounts.  It also includes the noncurrent portion of long-term receivables and property held for resale unless proceeds are restricted, committed, or assigned, and amounts that must be maintained intact legally or contractually, such as the principal of a permanent fund. Restricted fund balances are those restricted by agreement with creditors, grantors, or by law and regulation. Committed fund balances are those that can only be used for specific purposes based on action by the government’s highest level of decision-making authority. The assigned category includes amounts that are constrained by the government’s intent to be used from the general fund for a specific purpose but are neither committed nor restricted.  It also includes any positive amounts that are not classified as nonspendable, restricted or committed in funds other than the general fund.  Finally, the unassigned fund balance is the residual classification for the general fund.  The balance sheet or the notes to the financial statements would have to show the details of the items in each of the five categories of funds.  Note in the Statement of Revenues, Expenditures, and Changes in Fund Balances that revenues are reported by source, expenditures are reported by character (current, debt service, capital outlay) and then by function (general government, public safety, etc.).  The category “other financing sources and uses” includes transfers between funds and proceeds from the sale of long-term debt and proceeds from the sale of fixed assets.  Special and extraordinary items are reported in this statement in the same manner as in the government-wide Statement of Activities, and a reconciliation between the beginning and ending fund balance completes the statement.  Interest related to fixed assets is notcapitalized.

109

A county’s balances in the general fund included the following:

  • Appropriations $435,000
  • Encumbrances $18,000
  • Expenditures $164,000
  • Vouchers payable $23,000

What is the remaining amount available for use by the county?

  1. $230,000
  2. $248,000
  3. $253,000
  4. $271,000

$253,000

The available funds are equal to appropriations minus expenditures and encumbrances, or $253,000 ($435,000 − $164,000 − $18,000).

110

When goods which have been previously approved for purchase are received by a governmental unit but not yet paid for, what account is credited?

  1. Reserve for Encumbrances.
  2. Vouchers Payable.
  3. Expenditures.
  4. Appropriations.

Vouchers Payable.

When goods have been approved for purchase, an “Encumbrances” account is debited and a Reserved for Encumbrances” account is credited for the estimated cost of the goods. As the goods are received, the following entries are recorded:

  • Reserved for Encumbrances xx 
    • Encumbrances xx
  • Expenditures xx 
    • Vouchers payable (cash) xx

The first entry records the receipt of the goods, and the second entry reverses the original encumbrance that was set up when the goods were initially approved.

111

When the budget of a governmental unit is adopted and the estimated revenues exceed the appropriations, the excess is

  1. Credited to Budgetary Fund Balance.
  2. Debited to Budgetary Fund Balance.
  3. Credited to Reserved for Encumbrances.
  4. Debited to Reserved for Encumbrances.

Credited to Budgetary Fund Balance.

The solutions approach is to prepare the correct budgetary entry:

  • Estimated Revenues xx 
    • Appropriations xx
    • Budgetary Fund Balance xx

Therefore, Budgetary Fund Balance is credited, not debited, when estimated revenues exceed the appropriations.

112

King City Council will be establishing a library fund. Library fees are expected to cover 55% of the library’s annual resource requirements. King has decided that an annual determination of net income is desirable in order to maintain management control and accountability over the library. What type of fund should King establish in order to meet their measurement objectives?

  1. Special revenue fund.
  2. General fund.
  3. Internal service fund.
  4. Enterprise fund.

Enterprise fund.

An enterprise fund is used to provide goods or services to external users for a fee.

Proprietary funds focus on total economic resources, income determination, and cash flow presentation.  Proprietary funds include internal service funds (which are reported as governmental activities in the government-wide financial statements) and enterprise funds (which are considered business-type activities in the government-wide financial statements).  

Internal service funds report any activity that provides goods or services to other funds of the primary government on a cost-reimbursement basis.  Examples might include print shops, motor pools, and self-insurance activities.  Internal service funds may incidentally provide services to other governments on a cost-reimbursement basis.  

Enterprise funds  may be used to provide goods or services to external users for a fee.  Enterprise funds must be used if (1) the activity is financed with debt that is secured solely by a pledge of the net revenues from fees and charges of that activity, (2) laws or regulations require that the activity’s cost of providing services be recovered with fees and charges, rather than from taxes or similar revenues, or (3) the pricing policies of the activity establish fees and charges designed to cover its costs including capital costs (e.g., depreciation and debt service).  Examples of enterprise funds would include water utilities, airports, and swimming pools.

113

n accordance with GASB 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, which of the following funds should be classified as governmental funds?

  1. Private-purpose trust funds.
  2. Agency funds.
  3. Permanent funds.
  4. Pension trust funds.

Permanent funds.

GASB 34 defines governmental funds to include the general fund, special revenue, capital projects, debt service, and permanent funds. Permanent funds report resources that are legally restricted in that the earnings, not principal, may be expended, and for purposes that benefit the government and its citizens. Private-purpose, agency, and pension trust funds are all fiduciary funds.

114

Brandon County’s general fund had the following transactions during the year:

  • Transfer to a debt service fund $100,000
  • Payment to a pension trust fund $500,000
  • Purchase of equipment $300,000

What amount should Brandon County report for the general fund as other financing uses in its governmental funds statement of revenues, expenditures, and changes in fund balances?

  1. $100,000
  2. $400,000
  3. $800,000
  4. $900,000

$100,000

The only use of funds for financing is the transfer to the debt service fun.

The Statement of Cash Flows is prepared in accord with the requirements of GASB Statement No. 9, as modified by GASB Statement No. 34, and contains several major differences from the familiar business cash flow statement required by FASB. 

  1. First, only the direct method is acceptable, and reconciliation is required. 
  2. Second, the reconciliation is from operating income to net cash flow from operating activities, not from net income as required by FASB. 
  3. Third, GASB has four categories instead of the three required by FASB.  The four categories of activities used are operating, noncapital financing, capital and related financing, and investing. 
  4. Fourth, cash receipts from interest are classified as investing, not operating activities. 
  5. Fifth, cash payments for interest are classified as financing (either noncapital or capital and related), not as operating activities. 
  6. Finally, purchases of capital assets (resources provided by financing activities) are considered financing, not investing, activities.d.

115

Which of the following funds of a governmental unit uses the same basis of accounting as an Enterprise Fund?

  1. Special Revenue.
  2. Internal Service.
  3. Permanent.
  4. Capital Projects.

Internal Service.

Per GASB Codification Section 1300, the Enterprise and Internal Service Funds are both proprietary funds that recognize revenues and expenses on an accrual basis (Section 1600).

116

On the government-wide Statement of Net Position, prepared in accordance with GASB 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, net position is reported in which of the following categories?

  • I.Net investment in capital assets, net of current liabilities.
  • II.Restricted.
  • III.Unrestricted.
  1. I, II, and III.
  2. II and III.
  3. I and II.
  4. I and III.

  • I.Net investment in capital assets, net of current liabilities. - NO
  • II.Restricted. - YES
  • III.Unrestricted. - YES

One of the categories of net position is "net investment in capital assets." One of the categories listed in the question states,"invested in capital assets, net of current liabilities," which is not a correct category.

117

On the government-wide Statement of Net Position, prepared in accordance with GASB 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, internal service fund activities are normally reported in

  1. Business-type activities.
  2. Governmental activities.
  3. Either business-type or governmental activities.
  4. Neither business-type nor governmental activities.

Governmental activities.

According to GASB 34, internal service fund activities are normally reported in governmental activities on the government-wide Statement of Net Assets.

Proprietary funds focus on total economic resources, income determination, and cash flow presentation. Proprietary funds include internal service funds (which are considered governmental activities in the government-wide statements) and enterprise funds (which are considered business-type activities in the government-wide statements). Internal service funds report any activity that provides goods or services to other funds of the primary government on a cost-reimbursement basis. Examples might include print shops, motor pools, and self-insurance activities. Internal service funds may incidentally provide services to other governments on a cost-reimbursement basis. Enterprise funds may be used to provide goods or services to external users for a fee. Enterprise funds must be used if (1) the activity is financed with debt that is secured solely by a pledge of the net revenues from fees and charges of that activity, or (2) laws or regulations require that the activity’s cost of providing services be recovered with fees and charges, rather than from taxes or similar revenues. Examples of enterprise funds would include water utilities, airports, and swimming pools. 

118

If a state or local government files for bankruptcy under Chapter 9 of the US Bankruptcy Code, accounts payable should be

  1. Retained at recorded value.
  2. Remeasured to fair value.
  3. Remeasured based on the Plan of Adjustment.
  4. Not remeasured until paid.

Remeasured based on the Plan of Adjustment.

GASB Statement No. 58, Accounting and Financial Reporting for Chapter 9 Bankruptcies, provides accounting and financial reporting guidance when a governmental unit has been granted relief under the provisions of Chapter 9 of the US Bankruptcy Code.  The standard provides that assets and liabilities should be remeasured in accordance with the court’s Plan of Adjustment.  In addition, the statement requires disclosure of the details of the bankruptcy and how users can obtain a copy of the Plan of Adjustment.

119

Gem City's Internal Service Fund received a residual equity transfer of $50,000 cash from the General Fund.

This $50,000 transfer should be reported in Gem's Internal Service Fund as a credit to:

  1. Revenues.
  2. Other Financing Sources.
  3. Accounts Payable.
  4. Transfers.

Transfers.

A residual equity transfer of $50,000 to the Internal Service Fund should be recorded as a debit to Cash and a credit to Transfers. 

Transfers are reported on a separate line in the Statement of Revenues and Expenses for the fund, immediately after the line item: Operating Income/Loss before Transfers and Additions.

Internal Service Fund journal entry:

  • dr. Cash,
    • cr. Transfer-in,

and General Fund journal entry:

  • dr. Transfer out,
    • cr. Cash

120

If a local government reports eligible infrastructure assets using the modified approach,

  1. Maintenance and repair expenditures for the assets are capitalized.
  2. The assets are not being preserved at or above the established and disclosed condition level.
  3. No depreciation expense is required to be recognized.
  4. Complete condition assessments must be performed every year.

No depreciation expense is required to be recognized.

Under the modified approach, infrastructure assets that are part of a network or subsystem of a network need not be depreciated if the government uses an asset management system that documents that the assets are being preserved approximately at (or above) a condition level established and disclosed by the government.

121

A government may elect not to report depreciation expense in its government-wide statement of activities on which type of capital assets?

  1. Capital assets with original useful lives in excess of 20 years.
  2. Infrastructure capital assets.
  3. Capital assets acquired by the General Fund.
  4. Donated capital assets.

Infrastructure capital assets.

A government that elects to use the modified approach in accounting for infrastructure (e.g., sewer systems, roads, lighting systems) will report expenses necessary to maintain the condition of infrastructure and will not depreciate infrastructure assets.

122

Which of the following capital assets are least likely to be considered infrastructure assets of a local government?

  1. Roads.
  2. Buildings.
  3. Sewer system.
  4. Lighting system.

Buildings.

Infrastructure assets are capital assets that are normally stationary and can be preserved for a longer time than most capital assets. Common infrastructure assets include roads, bridges, sewer systems, lighting systems, and drainage. Buildings are not infrastructure assets.

123

The General Fund pays an invoice for telecommunications that includes charges owed by the Water Utility Enterprise Fund. The Enterprise Fund subsequently remits its share of the telecommunications charges to the General Fund. The General Fund records the amount received from the Enterprise Fund as:

  1. An increase to revenue.
  2. An increase to Operating Transfers In.
  3. A decrease in expenses.
  4. A decrease in Expenditures.

A decrease in Expenditures.

Interfund Reimbursements are Nonreciprocal Transactions in which a government determines that an expenditure or expense was initially recorded in one fund and should be accounted for and reported as an expenditure or expense in another fund. In this example, the General Fund paid and recorded as an expenditure all of an invoice that included a portion that pertained to another fund. The reimbursement from the Enterprise Fund should be recorded as a decrease in expenditures in the General Fund, to offset that portion previously recognized as an expenditure in the General Fund that was attributable to the Enterprise Fund. The Enterprise Fund should record an increase in expense at the time the reimbursement is made.

124

The General Fund makes a short-term loan to an Enterprise Fund. The General Fund should record the loan as a(n):

  1. Operating Transfer.
  2. Due from Enterprise Fund.
  3. Advance to Enterprise Fund.
  4. Accounts Receivable.

Due from Enterprise Fund.

Short-term interfund loans are recorded in accounts titled "Due from" (receivable) and "Due to" (payable).

General Fund journal entry:

  • dr. Due from Enterprise Fund,
    • cr. Cash, and Enterprise Fund,
  • dr. Cash,
    • cr. Due to General Fund

125

The billings for water services provided to other governmental units are recorded in the Enterprise Fund as:

  1. Intergovernmental transfers.
  2. Estimated Revenues.
  3. Reimbursements.
  4. Operating Revenues.

Operating Revenues.

Services provided by one governmental unit to other units within the government in exchange for a fee are referred to as "quasi-external transactions." They result in recognizing revenues and expenditures or expenses by the funds involved. The Water Utility Enterprise Fund will recognize revenues for the water services billed to other units in the government. The units receiving water services will recognize expenditures (in the case of Governmental Fund types) or expenses (in the case of Proprietary and Fiduciary Funds).

Enterprise Fund journal entry:

  • dr. Accounts Receivable,
    • cr. Revenue

126

A city's General Fund contributes $150,000 to its Debt Service Fund to meet upcoming debt service requirements for a general obligation serial bond. The General Fund should report this as a(n):

  1. Expenditure of $150,000.
  2. Capital Contribution of $150,000.
  3. Operating Transfer of $150,000.
  4. Interfund Loan of $150,000.

 

Operating Transfer of $150,000.

General Fund transfers to the Debt Service Fund to provide for the servicing of debt is an example of a regular, routine, reoccurring transfer of resources between funds to subsidize current activities that are classified as Operating Transfers.

127

In 2011, Kameron City received $4,000,000 from the sale of general obligation bonds to be used for major street and bridge renovations. $3,000,000 is expected to be spent in 2011, and the remainder will be spent in 2012. When will Kameron report bond proceeds as an other financing source in its Capital Projects Fund?

  1. $4,000,000 in 2011.
  2. $4,000,000 in 2012.
  3. $3,000,000 in 2011 and $1,000,000 in 2012.
  4. $0, the bond proceeds are not considered to be an other financing source.

$4,000,000 in 2011.

The Capital Project Fund records the entire amount of the bond proceeds as an Other Financing Source in the year that the proceeds are received. Even though the expenditures are to occur over two years, under modified accrual accounting, the entire amount of the proceeds are recorded as a resource of the fund when received. Answer A is correct.

128

The City of Curtain had the following interfund transactions during the month of May:

  • Billing by the internal service fund to a department financed by the general fund, for services rendered in the amount of $5,000.
  • Transfer of $200,000 from the general fund to establish a new enterprise fund.
  • Routine transfer of $50,000 from the general fund to the debt service fund.

What was the total reciprocal interfund activity for Curtain during May?

  1. $ 5,000
  2. $ 55,000
  3. $200,000
  4. $255,000

$5,000

There for five types of interfund transactions:

  1. loans,
  2. reciprocal quasi-external transactions,
  3. reimbursements,
  4. residual transfers, and
  5. operating transfers.

A reciprocal transaction occurs from doing business with one another, such as the billing of services by an internal service fund to other funds/departments in the government.

129

Excel City's Water Utility Enterprise Fund issues $10,000,000 in 20-year serial revenue bonds to finance a major expansion of one of its water treatment plants. $500,000 in bonds mature each year. As a result of this transaction, the year-end long-term liability in the governmental activities section of the government-wide financial statements accounts will reflect:

  1. $0
  2. An increase of $9,500,000.
  3. An increase of $10,000,000.
  4. A decrease of $500,000.

$0

The Water Utility Enterprise Fund uses full accrual accounting and will account for and report on the bonds in the Enterprise Fund. Therefore, this liability appears in the business-type activity section of the government-wide financial statements and not in the governmental activity section.

130

A government has the following debt:

  • Capital lease liabilities that mature in more than one year (General Fund department leases)-$2,000,000.
  • Net pension liability associated with general government employees-$4,000,000.
  • General government bonds that mature in the next fiscal year-$14,000,000.

What amount of debt should be reported in the long-term liabilities in the government-wide financial positions?

  1. $2,000,000
  2. $6,000,000
  3. $18,000,000
  4. $20,000,000

$20,000,000

All of the items listed are Unmatured Long-Term Liabilities of the general government that will not be recorded in any of the Governmental Funds but will appear as liabilities in the Government-Wide Statement of Net Position.

131

Big City recently lost a lawsuit relating to an incident involving one of their police officers. A judgment was rendered against the city, and, immediately prior to the current fiscal year end, the city was ordered to pay a total of $500,000. $100,000 is due immediately and the remaining is to be paid in installments of $100,000 per year for an additional four years. How will the external financial statements of the city be affected in the year the court case was settled?

  1. The General Fund statements should report both expenditures and a claims and judgments liability of $500,000.
  2. The General Long-Term Liabilities accounts should report a $500,000 liability.
  3. The General Fund statements should report expenditures and a current liability of $100,000, and the Agency Fund should report a liability of $400,000.
  4. The General Fund statements should report expenditures and a current liability of $100,000, and the government-wide statements should report a long-term liability of the present value of the $400,000.

The General Fund statements should report expenditures and a current liability of $100,000, and the government-wide statements should report a long-term liability of the present value of the $400,000.

The $100,000 portion of the judgment due in the current year is reported in the General Fund and will appear as expenditures in the fund-level statements. The unmatured $400,000 portion is reported in the Government-Wide Statements as a liability at present value. The long-term portion of the liability is RECORDED in the Schedule of General Long-term Debt.

132

Chase City imposes a 2% tax on hotel charges. Revenues from this tax will be used to promote tourism in the city.

Chase should record this tax as what type of NonExchange Transaction?

  1. Derived Tax Revenue.
  2. Imposed Nonexchange Revenue.
  3. Government-Mandated Transaction.
  4. Voluntary NonExchange Transaction.

Derived Tax Revenue.

GASB Stmt. #33 defines derived tax revenues as Nonexchange Revenues that are based on (or derived from) Exchange Transactions. Other examples of derived non-Exchange Transactions include sales taxes and income taxes.

133

In which fund would "Supplies Expenditure" appear?

  1. Agency Fund.
  2. General Fund.
  3. Internal Service Fund.
  4. Enterprise Fund.

General Fund.

"Expenditure" is a term reserved for funds using the modified accrual basis of accounting. Governmental Fund types, including the General Fund, use the modified accrual basis of accounting.

134

"Supplies" is an expenditure classified at the _________ level.

  1. Fund.
  2. Function.
  3. Character.
  4. Object.

Object.

"Supplies" is one of the object classes of expenditures, which describe the type of item purchased or service obtained.

135

In which fund would "Salaries Expense" appear?

  1. Water Utility Fund.
  2. General Fund.
  3. Pension Trust Fund.
  4. Capital Projects Fund.

Water Utility Fund.

"Expense" is a term reserved for funds that use full accrual accounting. A Water Utility Fund is an Enterprise Fund type using full accrual accounting.

136

Which of the following revenues can be recorded when bills are mailed rather than when they are actually received?

  1. Property taxes.
  2. Licenses and Permits.
  3. Fines and Forfeits.
  4. Service Charges.

Property taxes.

Property taxes are both objectively measurable and available to financ

137

Which account should Excel City credit when it issues a purchase order for supplies?

  1. Appropriations control.
  2. Encumbrance Control.
  3. Vouchers Payable.
  4. Budgetary Fund Balance.

Budgetary Fund Balance.

The entry to record a purchase order is a debit Encumbrances and a credit to Budgetary Fund Balance.

138

Which of the following is not one of the five information classification sections that must be included in the Statistical Section of the CAFR?

  1. Operating information.
  2. Demographics information.
  3. Revenue Capacity information.
  4. Fund Balance information.

Fund Balance information.

GASB Statement No. 44 requires that statistical information be presented in five categories - Financial Trends Information, Revenue Capacity Information, Debt Capacity Information, Demographic and Economic Information, and Operating Information. Fund balance information is not one of the five categories, but for Governmental Funds, Fund Balance Information is required as part of the financial trends information category.

139

In January 2010, Blue County acquired the right to draw water from a lake on the property of a privately owned ranch in exchange for a cash payment of $20 million. The annual volume of water that can be drawn is unlimited. The county's rights under the contract expire in 10 years; however, the contact provides the opportunity to renew the water rights for an additional 10 years for an additional payment of $10 million, if the county chooses . The county believes that it will request the renewal. The county expects the other party to agree to the renewal since the ranch is a significant user of the county's water supply and is a major employer of Blue County residents. The county operates on a calendar fiscal year. The county should recognize in its 2010 Government-Wide Financial Statements an annual amortization rate of:

  1. $20 million in its Statement of Activities.
  2. $2 million in its Statement of Activities.
  3. $1.5 million in its Statement of Activities.
  4. $30 million in its Statement of Activities.

$2 million in its Statement of Activities.

The county would recognize in its Government-Wide Statement of Net Position a capital asset of $20 million for the acquisition of the water rights in 2010. A capital outlay expenditure of $20 million would be recorded in the county's Capital Projects Fund Statement of Revenues, Expenditures, and Changes in Net Position. Because the county would be required to make an additional payment to execute the 10-year renewal period, this period is not considered as part of the useful life acquired in exchange for the $20 million payment. The useful life of the water rights is 10 years. Using straight-line amortization, annual amortization expense of $2 million ($20 million over 10 years) would be recorded in the county's Government-Wide Statement of Activities starting in 2010.

140

Lily City uses a pay-as-you-go approach for funding postemployment benefits other than pensions. The city reports no other postemployment benefits (OPEB) liability at the beginning of the year. At the end of the year, Lily City reported the following information related to OPEB for the water enterprise fund:

  • Benefits paid $100,000
  • Annual required contribution $500,000
  • Unfunded actuarial accrued liability $800,000

What amount of expense for OPEB should Lily City's water enterprise fund report in its fund level statements?

  1. $100,000
  2. $500,000
  3. $600,000
  4. $1,400,000

$500,000

GASB Statement No. 45 was issued, in part, to address the pay-as-you-go financing approach for OPEB used by many local governments. Prior to GASB No. 45, Lily City could have reported the amount of benefits paid ($100,000) as OPEB expense. GASB No. 45 requires that the annual OPEB expense to be equal to the annual required contribution (ARC) to the plan for that year with adjustments depending on whether the plan is under or overfunded. The ARC is based on the actuarial present value of total project benefits. Since Lily City had no OPEB liability at the beginning of the year, perhaps because it started its OPEB program in the current year, the OPEB cost is the ARC of $500,000.

141

A government has an investment derivative instrument that is considered effective. The fair value of this derivative instrument has increased by $100,000 in the current period. The change in fair value should be reported as:

  1. Investment Revenue in the Statement of Activities.
  2. Deferred Credit in the Statement of Net Position.
  3. Holding Gain in Fund Balance.
  4. Should not be reported.

Investment Revenue in the Statement of Activities.

GASB Statement No. 53 requires changes in the fair value of Derivative Instruments used for investment purposes to be reported within the Investment Income classification of the Statement of Activities. Changes in the fair value of Hedging Derivative Instruments are reported as Deferred Outflow or Deferred Inflow of Resources in the Statement of Net Position.

142

In accordance with GASB 33, Accounting and Financial Reporting for Nonexchange Transactions, personal income taxes are an example of what type of nonexchange transaction?

  1. Government-mandated.
  2. Voluntary.
  3. Imposed.
  4. Derived.

Derived.

According to the guidance provided by GASB 33, personal income taxes are an example of a derived tax revenue. Derived tax revenues result from taxes assessed by government on exchange transactions. The taxes are "derived" from the underlying exchange transactions. In the case of personal income taxes, exchange transactions between employers and employees cause employees to owe income taxes to the government.

Close

Derived tax revenues result from taxes assessed by governments on exchange transactions. Examples include sales taxes, income taxes, and motor fuel taxes. Receivables and revenues are to be recognized when the underlying transaction (the sale, the income, etc.) takes place.  For example, under accrual accounting, if a state imposed a sales tax of 6%, the state would record a revenue of $6 when a merchant recorded a sale of $100. If resources are received before the underlying transaction takes place, then the asset would be offset by revenues received in advance, a liability.

143

Park City uses encumbrance accounting and formally integrates its budget into the general fund’s accounting records.  For the year ending July 31, year 1, the following budget was adopted:

  • Estimated revenues $30,000,000
  • Appropriations $27,000,000
  • Estimated transfer to debt service fund $900,000

When Park’s budget is adopted and recorded, Park’s budgetary fund balance would be

  1. Credited for $3,000,000.
  2. Debited for $3,000,000.
  3. Credited for $2,100,000.
  4. Debited for $2,100,000.

In certain governmental funds, such as the general fund, an annual budget is recorded in the accounts. The entry to record Park City’s fiscal year 1 budget is as follows:

  • Estimated Revenues $30,000,000 
    • Estimated Other Financing Uses $900,000
    • Appropriations $27,000,000
    • Budgetary Fund Balance $2,100,000

When Park’s budget is adopted and recorded, Budgetary Fund Balance is credited for $2,100,000.

144

Which of the following funds of a governmental unit records depreciation?

  1. Capital projects fund.
  2. Debt service fund.
  3. Internal service fund.
  4. Special revenue fund.

Internal service fund.

Which funds use accrual accounting? The Proprietary funds - business like funds. 

Accounting for Proprietary Funds 
Internal service funds are established to account for the provision of goods and services by one department of the government to other departments within the government, generally on a cost-reimbursement basis. Uses of internal service fund services are budgeted through the budgets of the user departments.  Internal service funds are normally established for the following types of activities:  central garages, motor pools, central printing and duplicating, stores departments, self-insurance, etc.Enterprise funds, on the other hand, account for activities for which the government provides goods and services that are (1) rendered primarily to the general public, (2) financed substantially or entirely through user charges, and (3) intended to be self-supporting. Enterprise funds are usually established for public utilities, airports, toll roads and bridges, transit systems, golf courses, solid waste landfills, etc.
 

145

Harbor City’s appropriations control account at December 31, year 1, had a balance of $7,000,000.  When the budgetary accounts were closed at year-end, this $7,000,000 appropriations control balance should have

  • Been debited.
  • Been credited.
  • Remained open.
  • Appeared as a contra account.

Been debited.

Appropriations is a budgetary account which represents the total authorized expenditures for the current period. Appropriations is recorded at the beginning of the period in the budget entry, as a credit, as in the following example:

  • Estimated Revenues xx 
    • Appropriations xx
    • Budgetary Fund Balance xx

When the accounts are closed at the end of the period, the budget entry is reversed, and the appropriations account would be debited as follows:

  • Budgetary Fund Balancexx 
  • Appropriationsxx 
    • Estimated Revenues Control xx

146

Tang City received land from a donor who stipulated that the land must remain intact, but any income generated from the property may be used for general government services. In which fund should Tang City record the donated land?

  1. Special revenue.
  2. Permanent.
  3. Private-purpose trust.
  4. Agency.

Permanent.

Permanent funds are used to report resources that are legally restricted to the extent that only earnings, and not principal, may be used to support governmental programs.

147

Which of the following is a required financial statement for an investment trust fund?

  1. Statement of revenues, expenditures, and changes in fiduciary net position.
  2. Statement of activities.
  3. Statement of revenues, expenses, and changes in fiduciary net position.
  4. Statement of changes in fiduciary net position.

Statement of changes in fiduciary net position.

The required statements for an investment trust fund include the statement of fiduciary net position and the statement of changes in fiduciary net position.

148

GASB 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, requires a Statement of Net Position and a Statement of Activities, both of which are government-wide financial statements. Which of the following activities are reported on these financial statements?

  • Governmental activities
  • Fiduciary activities

  • Governmental activities - YES
  • Fiduciary activities - NO

Under GASB 34, the Statement of Net Position and the Statement of Activities, prepared on a government-wide basis, should report governmental activities. In addition to governmental activities, government-wide financial statements should also report business-type activities and the activities of component units. Fiduciary activities are not reported on the government-wide financial statements. There are separate financial statements that report the activities of fiduciary funds.

149

The following balances are included in the subsidiary records of Burwood Village’s Parks and Recreation Department at March 31, year 2:

  • Appropriations—supplies $7,500
  • Expenditures—supplies $4,500
  • Encumbrances—supply orders $750

How much does the Department have available for additional purchases of supplies?

  1. $0
  2. $2,250
  3. $3,000
  4. $6,750

$2,250

 

This answer is correct. GASB 1 states that appropriations constitute maximum expenditure authorizations during the fiscal year and cannot legally be exceeded unless subsequently amended by the legislative body. An encumbrance reduces appropriation authority and is formally recorded in the accounting records.

150

Which of the following is not included in the elements of service efforts and accomplishments reporting?

  1. Measures of service effort.
  2. Estimates of accomplishments values.
  3. Measures of service accomplishments.
  4. Measures that relate service efforts to service accomplishments.

Estimates of accomplishments values.

Service Efforts and Accomplishments Reporting (SEA Reporting)

a.GASB Concepts Statement No. 2 (as amended by Concepts Statement No. 5) describes the objective, elements and characteristics of SEA reporting.  The objective of SEA Reporting is to provide more complete information about a governmental entity’s performance than can be provided by traditional financial statements and schedules.  Such information is necessary for assessing accountability and making informed decisions.

b.Ideally a governmental entity should: (1) establish and communicate clear, relevant goals and objectives, set measurable targets for accomplishment, and develop and report indicators that measure it progress.  The elements of SEA reporting include measures of service effort, measures of service accomplishments (output and outcome measures), measures that relate service efforts to service accomplishments (efficiency and cost-outcome measures) and narrative or explanatory information.

151

On January 2, Basketville City purchased equipment with a useful life of three years to be used by its water and sewer enterprise fund. Which of the following is the correct treatment for the asset?

  1. Record the purchase of the equipment as an expenditure.
  2. Capitalize; depreciation is optional.
  3. Capitalize; depreciation is required.
  4. Capitalize; depreciation is not permitted.

Capitalize; depreciation is required.

Proprietary funds use the accrual basis of accounting and are nonexpendable; capital is to be maintained. Revenues and expenses are recorded generally as they would be in commercial enterprises.  Fixed assets are recorded in proprietary funds, and depreciation expense is deducted from revenues.  These funds also report their own long-term liabilities. The GASB has provided a special rule regarding the use of FASB pronouncements in enterprise funds of state and local government. That rule has two parts.
 

 1.Enterprise funds should follow FASB pronouncements issued prior to November 30, 1989, unless those FASB pronouncements conflict with GASB pronouncements.

 2.Enterprise funds may or may not follow FASB pronouncements issued after November 30, 1989, that do not conflict with GASB pronouncements.  The decision regarding whether or not to follow such FASB pronouncements must be applied consistently to all FASB pronouncements, and the choice must be disclosed.

152

In year 1, Beech City issued $400,000 of bonds, the proceeds of which were restricted to the financing of a capital project.  The bonds will be paid wholly from special assessments against benefited property owners.  However, Beech is obligated to provide a secondary source of funds for repayment of the bonds in the event of default by the assessed property owners.  In Beech’s basic financial statements, this $400,000 special assessment debt should

  1. Not be reported.
  2. Be reported in the General Fund.
  3. Be reported in the government-wide statements only.
  4. Be reported in an agency fund.

Be reported in the government-wide statements only.

According to GASB Codification Section S40, if a government is obligated in some manner to assume the payment of related debt service in the event of default by property owners, all transactions related to capital improvements financed by special assessments should be reported. These transactions should be reported in the same manner, and on the same basis of accounting as any other capital improvement and financing transaction. Therefore, the debt related to Beech’s capital project is treated as general obligation debt and should be reported as any other general obligation debt (i.e., in the government-wide statements only).

153

In accordance with GASB 33, Accounting and Financial Reporting for Nonexchange Transactions, which of the following items is classified as a derived tax revenue?

  1. Property taxes.
  2. Fines.
  3. Grants.
  4. Motor fuel taxes.

Motor fuel taxes.

According to the guidance provided by GASB 33, motor fuel taxes are an example of a derived tax revenue. Derived tax revenues result from taxes assessed by governments on exchange transactions. The taxes are "derived" from the underlying exchange transactions. In the case of motor fuel taxes, exchange transactions between the service station and consumers provide the basis for the collection of the motor fuel taxes.

154

According to the GASB Concepts Statements, governmental financial reports are primarily used to do all of the following except to

  1. Compare actual financial results with budgets.
  2. Assist in evaluating effectiveness and efficiency.
  3. Assess financial condition and results of operations.
  4. Evaluate the value of assets and liabilities.

Evaluate the value of assets and liabilities.

Government financial reports are primarily used to compare actual financial results with budgets, to assess financial condition and results of operations, to assist in determining compliance with finance-related laws and regulations, and to assist in evaluating effectiveness and efficiency.

155

The city accountant for a newly established municipality is setting up the new fund structure for the city's accounting system. How many funds should the accountant establish for the city?

  • Two, a general fund and a special revenue fund as required by GAAP.
  • Two, a special revenue fund and a general fund as required by the city manager.
  • The minimum number of funds consistent with the needs of the city accountant.
  • The minimum number of funds consistent with legal requirements and sound financial administration.

The minimum number of funds consistent with legal requirements and sound financial administration.

In addition to government-wide statements, governmental accounting standards require a number of fund financial statements. Most governments use fund accounting internally and prepare the government-wide statements with worksheet adjustments from this fund accounting base.

156

The general fund of Karsten City received a $30,000 unrestricted grant from the State on June 12, year 1. The cash was received by the general fund on June 12 and was used to pay for capital expenditures that were incurred on June 29. Accounts payable related to the capital expenditures were paid in July year 1.  Karsten City’s fiscal year ends on June 30.

What account should be credited in the general fund on the date the grant was received?

  1. Deferred inflow of resources. 
  2. Unreserved fund balance.
  3. Revenue.
  4. Fund balance restricted for capital expenditures.

Revenue.

The general fund of Karsten should record the receipt of the unrestricted grant as revenue. The grant was used to pay for expenditures incurred during the year ended June 30, year 1. Under the modified accrual basis of accounting, the grant was both measurable and available during the year ended June 30, year 1.Accounting for Special Revenue Funds 

Special revenue funds 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.  The specific revenue is then used to finance various authorized expenditures.  For example, a city might place its share of the state’s gasoline tax revenues into a State Gasoline Tax Fund, which could then be used to maintain streets. Note that a governmental unit has some discretion in terms of how many special revenue funds it creates. Sometimes separate funds are required by law or grant requirements. Many federal and state grants are reported in special revenue funds.

The accounting for special revenue funds parallels that of the general fund. One type of transaction that often takes place in a special revenue fund is a “reimbursement” grant from a federal or state government.  GASB Statement No. 33 lists reimbursement grant requirements as one of the conditions that must be satisfied before a revenue can be recognized, either for accrual or modified accrual accounting.  With a reimbursement grant, the granting government will not provide resources unless the receiving government provides evidence that an appropriate expenditure has taken place; GASB Statement No. 33 requires that the expenditure must be recognized prior to the revenue being recognized.

157

Reserved for Encumbrances account of a governmental fund type is increased when

  1. A purchase order is approved.
  2. Supplies previously ordered are received.
  3. Appropriations are recorded.
  4. The budget is recorded.

A purchase order is approved.

“Reserved for Encumbrances” is a budgetary account. When goods or services are ordered (purchase order approved), appropriations are encumbered, or restricted from use, in the amount of the estimated purchase cost.  The following entry is made which increases reserved for encumbrances:

  • Encumbrances xx 
    • Reserved for Encumbrances xx

158

Which of the following should be included in the introductory section of a local government's comprehensive annual financial report?

  1. Auditor's report.
  2. Management letter.
  3. Engagement letter.
  4. Letter of transmittal.

Letter of transmittal.

The introductory section includes a letter of transmittal, organization chart, and list of principal officers.

159

When a purchase order is released, a commitment is made by a governmental unit to buy a computer to be manufactured to specifications for use in property tax administration.  This commitment should be recorded in the general fund as a(n)

  1. Appropriation.
  2. Encumbrance.
  3. Expenditure.
  4. Fixed asset.

Encumbrance.

When a purchase order is issued by the General or another governmental fund, the journal entry is

  • Encumbrances xx
    • Reserved for Encumbrances xx

160

Which of the following transactions is an expenditure of a governmental unit’s general fund?

  1. Contribution of enterprise fund capital by the general fund.
  2. Operating subsidy transfer from the general fund to an enterprise fund.
  3. Routine employer contributions from the general fund to a pension trust fund.
  4. Transfer from the general fund to a capital projects fund.

Routine employer contributions from the general fund to a pension trust fund.

Employer accounting for defined benefit plans is the same, regardless of whether or not the government is the trustee for the pension plan. Expenditures (or expenses) are charged in the appropriate funds (especially the general, special revenue, and enterprise funds) in an amount equal to the amount provided to the pension plan. The pension trust fund (or statewide PERS) would record those contributions as additions. Other additions for the pension trust fund would include employee contributions, investment income, and gains in the market value of investments. Deductions would include retirement benefit payments, disability payments, refunds to terminated (nonvested) employees, and losses in the market value of investments.

161

Premiums received on general obligation bonds are generally transferred to what fund?

  1. Debt Service.
  2. Internal Service.
  3. General.
  4. Special Revenue.

Debt Service.

The Debt Service Fund usually handles the repayment of General Long-Term Debt and the payment of interest on General Long-Term Debt. The premiums received on general obligation bonds are usually transferred from the recipient fund to the Debt Service Fund, because the premium represents an adjustment of the interest cost.

162

Which of the following items is an example of imposed nonexchange revenue for a governmental entity?

  1. Personal income taxes.
  2. Retail sales tax.
  3. Federal grant money.
  4. Property taxes.

Property taxes.

Imposed nonexchange revenue is derived from taxes and other assessments by governments that are not derived from underlying transactions. Property taxes are examples of such a revenue source.

163

According to GASB 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, which of the following categories of required supplementary information should be disclosed in the financial reports of state and local governments?

  • Information about infrastructure assets reported using the modified approach
  • Budgetary comparison schedules

  • Information about infrastructure assets reported using the modified approach - YES
  • Budgetary comparison schedules - YES

Both information about infrastructure assets reported using the modified approach and budgetary comparison schedules are required supplementary information in the financial statements of state and local governments under GASB 34.

GASB 34 requires five categories of required supplementary information.  These five categories are

  • Management’s Discussion and Analysis;
  • Schedule of Funding Progress and Schedule of Employer Contributions (these schedules relate to pension disclosures);
  • Budgetary Comparison Schedules (this disclosure is for governmental funds)
  • Information about Infrastructure Assets Reported Using the Modified Approach; and
  • Certain information about Risk Financing Activities.

164

In accordance with GASB 35, a public college or university that chooses to report only business-type activities should prepare which of the following financial statements?

  • Statement of cash flows
  • Statement of revenues, expenses, and changes in net position

BOTH.

According to GASB 35, public colleges and universities that choose to report only business-type activities should report (1) a statement of net position, (2) a statement of revenues, expenses, and changes in net position, and (3) a statement of cash flows. In this question, public colleges and universities should prepare a statement of cash flows and a statement of revenues, expenses, and changes in net position.

165

In accordance with GASB 33, Accounting and Financial Reporting for Nonexchange Transactions, how is each of the following items classified?

  • Fines (imposed or derived?)
  • Corporate income taxes (imposed or derived?)

  • Fines - Imposed
  • Corporate income taxes - Derived

According to the guidance provided by GASB 33, fines are an example of an imposed nonexchange revenue, while corporate income taxes are an example of a derived tax revenue.

166

During the current year Knoxx County levied property taxes of $2,000,000, of which 1% is expected to be uncollectible.  The following amounts were collected during the current year:

  • Prior year taxes collected within the 60 days of the current year $50,000
  • Prior year taxes collected between 60 and 90 days into the current year $120,000
  • Current year taxes collected in the current year $1,800,000
  • Current year taxes collected within the first 60 days of the subsequent year $80,000

What amount of property tax revenue should Knoxx County report in its entity-wide statement of activities?

  • $1,800,000
  • $1,970,000
  • $1,980,000
  • $2,000,000

$1,980,000

Property tax revenue should be equal to the total taxes levied for the year less the estimate of uncollectible amounts, or $1,980,000 [$2,000,000 − ($2,000,000 × 1%)].

167

On December 31, year 1, Madrid Township paid a contractor $2,000,000 for the total cost of a new firehouse built in year 1 on Township-owned land.  Financing was by means of a $1,500,000 general obligation bond issue sold at face value on December 31, year 1, with the remaining $500,000 transferred from the general fund.  What should be reported on Madrid’s year 1 financial statements for the Capital Project Fund?

  1. Revenues, $1,500,000; Expenditures, $1,500,000.
  2. Revenues, $1,500,000; Other financing sources, $500,000; Expenditures, $2,000,000.
  3. Revenues, $2,000,000; Expenditures, $2,000,000.
  4. Other financing sources, $2,000,000; Expenditures, $2,000,000.

Other financing sources, $2,000,000; Expenditures, $2,000,000.

The capital projects fund uses modified accrual accounting.  Recall that modified accrual accounting does not recognize revenues if funds are transferred between various governmental funds.  Also, the sale of bonds is another financing source, not a revenue.​

Per Section 1800 of the GASB Codification, neither proceeds from a general obligation bond nor transfers from the general fund are revenues. Rather they are recognized as "other financing sources" when they become measurable and available as net current assets. Section 1600 states that expenditures of Governmental Funds are generally recognized in the accounting period in which the fund liability is incurred, which is the current year in this question.

168

Which of the following accounts of a governmental unit is credited to close it out at the end of the fiscal year?

  1. Appropriations.
  2. Revenues.
  3. Fund Balance-Assigned.
  4. Encumbrances.

Encumbrances.

The solutions approach is to prepare a typical closing entry:

  • Appropriations xx 
    • Expenditures xx
    • Encumbrances xx
    • Budgetary Fund Balance xx

The encumbrances account is credited in the above entry.

169

When a capital project is financed entirely from a single bond issue, and the proceeds of the bond issue equal the par value of the bonds, the Capital Projects Fund would record this transaction by debiting cash and crediting

  1. Other Financing Sources—Bond Issue Proceeds.
  2. Fund Balance.
  3. Appropriations Control.
  4. Bonds Payable.

Other Financing Sources—Bond Issue Proceeds.

Per GASB Codification Section 1500, the proceeds of long-term debt issues not recorded as fund liabilities (for example, proceeds of bonds or notes expended through capital projects funds) should be reported as bond issue proceeds.

170

Park City uses encumbrance accounting and formally integrates its budget into the general fund’s accounting records.  For the year ending July 31, year 1, the following budget was adopted:

  • Estimated revenues $30,000,000
  • Appropriations $27,000,000
  • Estimated transfer to debt service fund $900,000

Park should record budgeted appropriations by a

  1. Credit to appropriations, $27,000,000.
  2. Debit to estimated expenditures, $27,000,000.
  3. Credit to appropriations, $27,900,000.
  4. Debit to estimated expenditures, $27,900,000.

Credit to appropriations, $27,000,000

Park City would record the following entry in the general fund when the budget is adopted:

  • Estimated Revenues 30,000,000 
    • Estimated Other Financing Uses 900,000
    • Appropriations 27,000,000
    • Budgetary Fund Balance 2,100,000

171

On January 2, City of Walton issued $500,000, 10-year, 7% general obligation bonds. Interest is payable annually, beginning January 2 of the following year. What amount of bond interest is Walton required to report in the statement of revenue, expenditures, and changes in fund balance of its governmental funds at the close of this fiscal year, September 30?

  1. $0
  2. $17,500
  3. $26,250
  4. $35,000

$0

General obligation bonds are accounted for in debt service funds, which use the modified accrual basis of accounting. Only the interest cost actually paid in the period is included in interest expense. Accordingly, this answer is correct. Since no interest was paid during the year, interest expense is $0.

172

The Town of Boyd Electric Utility Fund, which is an Enterprise Fund, had the following:

  • Prepaid insurance paid in December year 1 $43,000
  • Depreciation for 2012 $129,000
  • Provision for doubtful accounts for year $114,000

What amount should be reflected in the Statement of Revenues, Expenses and Changes in Fund Net Position of the Town of Boyd Electric Utility Fund for the above items?

  1. $0
  2. $ 43,000
  3. $129,000
  4. $143,000

$143,000

Enterprise Funds use the same accrual accounting system and procedures as for-profit enterprises. Thus, year 1 depreciation ($129,000) and year 1 bad debts expense ($14,000) would appear in the revenues and expenses statement. The prepaid insurance would be deferred in the statement of net position.

173

A city council designates funds in the enterprise fund for future equipment replacement. The enterprise fund should report this as:

  1. A restricted component of net position.
  2. A net investment in capital assets.
  3. A designated component of net position.
  4. An unrestricted component of net position.

An unrestricted component of net position.

The fund should be presented as an unrestricted component of net position. To be presented as restricted the fund must be externally restricted by creditors, or restricted by law.

174

The following proceeds received by Grove City in year 1 are legally restricted to expenditure for specified purposes:

  • Donation by a benefactor mandated to a permanent fund to provide funds, the income of which is to provide meals for the needy (a government program) $300,000
  • Sales taxes to finance the maintenance of tourist facilities in the shopping district $900,000

What amount should be accounted for in Grove’s special revenue funds?

  1. $0
  2. $300,000
  3. $900,000
  4. $1,200,000

$900,000

Per GASB Codification Section 1300, special revenue funds account for the proceeds of specific revenue sources that are legally restricted to expenditures for specified purposes. Therefore, only the $900,000 of sales tax proceeds received to finance the maintenance of tourist facilities in the shopping district would be accounted for in Grove’s special revenue funds. The $300,000 donation to a permanent fund would be accounted for by a separate governmental (permanent) fund.

175

In year 1, Menton City received $5,000,000 of bond proceeds to be used for capital projects.  Of this amount, $1,000,000 was expended in year 1.  Expenditures for the $4,000,000 balance were expected to be incurred in year 2.  These bond proceeds should be recorded in capital projects fund for

  1. $5,000,000 in year 1.
  2. $5,000,000 in year 2.
  3. $1,000,000 in year 1 and $4,000,000 in year 2.
  4. $1,000,000 in year 1 and in the general fund for $4,000,000 in year 1.

$5,000,000 in year 1.

Per GASB Codification Section 1300, the objective of a capital projects fund is to account for the financial resources to be used for the acquisition or construction of major capital facilities. The inflow of bond proceeds should be accounted for in the year received, regardless of when the bond proceeds are expended. Therefore, the $5,000,000 of bond proceeds should be recorded in the capital projects fund in year 1, the year received.

176

Which of the following accounts should Moon City close at the end of its fiscal year?

  1. Vouchers Payable.
  2. Expenditures.
  3. Fund balance—Unreserved.
  4. Fund balance-Assigned.

Expenditures.

When closing its books for the fiscal year-end, Moon City should close all temporary accounts and not balance sheet accounts. This answer, Expenditures, is a temporary account. Balance sheet accounts include Cash Investments, Payables, Fund Balances and Fund Balances Reserved for Encumbrances.

Appropriate closing entries are made.

  • Budgetary Fund Balance 10,000 
  • Appropriations 240,000 
  • Estimated Other Financing Uses 50,000 
    • Estimated Revenues 300,000

The above entry reverses the entry to record the budget 

  • Revenues305,000 
    • Expenditures 216,800
    • Encumbrances 16,500
    • Other Financing Uses—Transfers Out 50,000
    • Fund Balance—Unreserved 21,700

The above entry indicates that the unreserved fund balance increased by $21,700 since actual revenues exceeded expenditures, encumbrances and other financing uses.

177

Taxes collected and held by Eldorado County for a school district would be accounted for in which of the following funds?

  1. Trust.
  2. Agency.
  3. Special Revenue.
  4. Internal Service.

Agency.

Agency Funds are used to account for assets held by a governmental unit as an agent for individuals, private organizations, other governmental units, or other funds. In this case, Eldorado County would hold taxes for a school district in an Agency Fund.

Agency funds are used to account for activities where the government is acting as an agent for others. Agency funds have only assets and liabilities; no fund equity, revenue, or expenditure accounts are used. The GASB requires the use of agency funds for special assessments where the government is not liable in any way for the debt.

Another common use of agency funds is to account for property taxes.  Property taxes are usually remitted to a county treasurer who places the monies in a county Tax Agency Fund.  The taxes are held until such time as they are remitted to each of the other local governments located within the county.  Often, a fee is charged, which decreases the amount that is distributed to the other local governments and increases the amount that is distributed to the County General Fund.

178

The Highwood School District participates in a cost-sharing defined benefit plan. What is the amount of expense and liability that it should record?

  1. The amount of contributions or credits to employees' accounts.
  2. The amount of interest on its share of the unfunded net liability.
  3. The total amount of the pension liability and expense for the plan.
  4. Its proportionate share of the collective net pension liability and expense for the plan.

Its proportionate share of the collective net pension liability and expense for the plan.

If the entity has a single-employer defined benefit plan or an agent defined benefit plan, the state or local government should report, in the statement of net position, a net pension liability, which is measured as the portion of the actuarial present value of projected benefit payments attributable to past periods of employee service minus the pension plan's fiduciary net position. The net pension liability should be measured as of a date (the measurement date) which should be no earlier than the end of the employer's prior fiscal year, consistently applied from year to year. 

179

In accordance with GASB 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, what should be the measurement focus for government-wide financial statements?

  • Current financial resources
  • Economic resources

  • Current financial resources - NO
  • Economic resources - YES

GASB 34 requires that the government-wide financial statements use full accrual accounting and the economic resources measurement focus. The economic resources measurement focus is consistent with the use of full accrual accounting. For example, the reporting of capital assets on the Statement of Net Position is consistent with the economic resources measurement focus. The current financial resources measurement focus is consistent with the modified accrual basis of accounting. Under the current financial resources measurement focus, capital assets are not reported on the balance sheet because they are not financial resources. Financial resources consist of cash and items expected to be realizable into cash.

180

Assume fixed assets purchased from General Fund revenues are received; what account, if any, should be debited in the General Fund?

  1. No journal entry should be made in the General Fund.
  2. Expenditures Control.
  3. Fixed Assets.
  4. Asset Expense.

Expenditures Control.

Per GASB Codification Section 1400, general fixed assets do not represent financial resources available for expenditure, but are items for which financial resources have been used. Therefore, when a general fixed asset is purchased, expenditures would be debited and accounts payable would be credited.

181

When a truck is received by a governmental unit, the truck should be recorded in the General Fund as a debit to

  1. Appropriations.
  2. Encumbrances.
  3. A Fixed Asset.
  4. Expenditures.

Expenditures.

When the truck was ordered, the Encumbrance Account was debited for the estimated price of the truck by making the following entry:

  • Encumbrancesxx 
    • Fund Balance—Reserved for Encumbrances xx

When the truck is received, the above entry is reversed for the original amount, and the actual expenditure is recorded using the actual amount.  The following entries would be made when the order is received:

  • Reserved for Encumbrances xx 
    • Encumbrances xx
  • Expenditures xx 
    • Vouchers payable (cash) xx

182

Which of the following types of revenue would generally be recorded directly in the General Fund of a governmental unit?

  1. Receipts from a city-owned parking structure.
  2. Property taxes.
  3. Interest earned on investments held for retirement of employees.
  4. Revenues from Internal Service funds.

Property taxes.

Accounting for the General Fund 

The general fund is the most significant governmental fund.  It accounts for all transactions not accounted for in any other fund.  Revenues come from many sources (taxes, licenses and permits, fines and forfeits, charges for services, etc.), and the expenditures cover the major functions of government (public safety, highways and streets, education, etc.).

183

Revenues of a municipality should be recognized in the accounting period in which they become available and measurable for a

  • Governmental fund
  • Proprietary fund

  • Governmental fund - YES
  • Proprietary fund - NO

Governmental funds use the modified accrual basis of accounting while proprietary funds use full accrual. Under the modified accrual basis, revenues are recognized in the period in which they are both measurable and available, while under the full accrual basis they are recognized when measurable and earned.

184

Which of the following terms refers to an actual cost rather than an estimate?

  1. Expenditure.
  2. Appropriation.
  3. Budget.
  4. Encumbrance.

Expenditure.

 

185

Which of the following is the measurement focus and basis of accounting for the government-wide financial statements?

  • Measurement focus
  • Basis of accounting

  • Measurement focus - Economic resources
  • Basis of accounting - Accrual

The government-wide statements include the Statement of Net Position and the Statement of Activities, both of which are reproduced in this module. The government-wide statements are prepared on the economic resources measurement focus and accrual basis of accounting. All activities of the primary government are included, with the exception of fiduciary activities, as well as discretely presented component units.

186

The following items were among Wood Township’s expenditures from the general fund during the year ended June 30, year 1:

  • Furniture for Township Hall $10,000
  • Minicomputer for tax collector’s office $15,000

The amount that should be classified as fixed assets in Wood’s general fund balance sheet at June 30, year 1, is

  1. $25,000
  2. $15,000
  3. $10,000
  4. $0

$0

Fixed assets other than those accounted for in proprietary funds are general fixed assets. General fixed assets are reported in the governmental activity column in the government-wide Statement of Net Position rather than in governmental funds. General fixed assets do not represent financial resources available for expenditure, but are items for which financial resources have been used and for which accountability should be maintained. Their inclusion in the financial statements of a governmental fund would increase the fund balance, which could mislead users of the fund balance sheet. Therefore, none of the items listed would be classified as fixed assets in the general fund balance sheet.

187

Dayne County’s general fund had the following disbursements during the year:

  • Payment of principal on long-term debt $100,000
  • Payments to vendors $500,000
  • Purchase of a computer $300,000

What amount should Dayne County report as expenditures in its governmental funds statement of revenues, expenditures, and changes in fund balances?

  1. $300,000
  2. $500,000
  3. $800,000
  4. $900,000

$900,000

All payments are part of governmental expenditures, $900,000 ($100,000 + $500,000 + $300,000).

188

A component unit is a legally separate organization for which the elected officials of the primary government:

  1. Rely upon for services.
  2. Are financially accountable.
  3. Have a reciprocal relationship.
  4. Provide funds.

Are financially accountable.

The GASB carefully defines the reporting entity in an effort to ensure that all boards, commissions, agencies, etc. that are under the control of the reporting entity are included.  The reporting entity consists of a primary government and appropriate component units.  A primary government is either (1) a state government, (2) a general-purpose local government, or (3) a special-purpose local government that has a separately elected governing body, is legally separate, and is fiscally independent of other state or local governments.  A component unit is a legally separate organization for which the elected officials of a primary government are financially accountable.  As clarified by GASB Statement No. 61, financial accountability for a legally separate organization is assumed in the following circumstances:

  1.  1.The primary government appoints a voting majority of the organization’s governing body and (1) it is able to impose its will on that organization, or (2) there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government.
  2.  2.The organization is fiscally dependent on and there is a potential for the organization to provide specific financial benefits to, or burdens on, the primary government regardless of the primary government’s influence on the governing board.

A component unit is also one in which the nature and significance of their relationships with a primary government is such that omission would cause the primary government’s financial statements to be misleading.  Generally, the financial statements would be misleading if they excluded organizations that are closely related to, or financially integrated with, the primary unit.

189

Which of the following accounts of a governmental unit is credited when the budget is recorded?

  1. Encumbrances.
  2. Estimated expenses.
  3. Estimated Revenues.
  4. Appropriations.

Appropriations.

when the budget is recorded the following entry is made (assuming a surplus):

  • Estimated Revenues xx 
    • Appropriations xx
    • Budgetary Fund Balance xx

Therefore, appropriations, which represent maximum expenditure authority (i.e., future liabilities), is credited when the budget is recorded.

190

The general fund of Karsten City received a $30,000 unrestricted grant from the State on June 12, year 1. The cash was received by the general fund on June 12 and was used to pay for capital expenditures that were incurred on June 29. Accounts payable related to the capital expenditures were paid in July year 1.  Karsten City’s fiscal year ends on June 30. Answer the question below based upon the guidance provided in GASB 33, Accounting and Financial Reporting for Nonexchange Transactions.

The grant from the state is an example of what type of nonexchange transaction?

  1. Government-mandated.
  2. Voluntary.
  3. Imposed.
  4. Derived.

Voluntary.

According to the guidance provided by GASB 33, the grant is an example of voluntary nonexchange transactions. Voluntary nonexchange transactions include grants and entitlements from one government to another where the providing government does not mandate the program covered by the grant. Voluntary nonexchange transactions also include voluntary contributions from individuals and other nongovernmental entities.

Voluntary nonexchange transactions include grants and entitlements from one government to another where the providing government does not impose specific requirements (mandate the program) upon the receiving government.  It also includes voluntary contributions from individuals and other entities to governments.  An example of this type of transaction would be the gift of funds from an individual to a school district or a college. Voluntary nonexchange transactions may or may not have purpose restrictions. The recognition of assets and revenues would be when all eligibility requirements have been met, the same as government-mandated nonexchange transactions.

191

In addition to governmental activities, what other activities may be reported on the government-wide Statement of Net Position prepared in accordance with GASB 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments?

  • Business-type activities
  • Discretely presented component units

  • Business-type activities - YES
  • Discretely presented component units - YES

In addition to governmental activities, both business-type activities and discretely presented component units may be reported on the government-wide Statement of Net Position prepared in accordance with GASB 34.

192

Brockton City serves as collecting agency for the local independent school district and for a local water district.  For this purpose, Brockton has created a single agency fund and charges the other entities a fee of 1% of the gross amounts collected. (The service fee is treated as general-fund revenue.)  During the latest fiscal year a gross amount of $268,000 was collected for the independent school district and $80,000 for the water district.  As a consequence of the foregoing, Brockton’s General Fund should

  1. Recognize receipts of $348,000.
  2. Recognize receipts of $344,520.
  3. Record revenue of $3,480.
  4. Record encumbrances of $344,520.

Record revenue of $3,480.

The Agency Fund collected $348,000 during the last fiscal year. Therefore, the General Fund would recognize $3,480 ($348,000 × .01) as revenue.