18.2

Question 1

Which of the following funds of a local government would report transfers to other funds as an other financing use?

Answer 1

General.

Interfund transfers are one-way asset flows with no repayment required. They must be reported in the basic financial statements separately from revenues and expenditures or expenses. In a governmental fund (e.g., the general fund), a transfer is an other financing use (source) in the transferor (transferee) fund. It is reported after excess (deficiency) of revenues over expenditures in the statement of revenues, expenditures, and changes in fund balances. The general fund reports transfers to other funds as an other financing use.

Question 2

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

Answer 2

Enterprise.

An enterprise fund is a type of proprietary fund. All funds not governmental funds use the accrual basis of accounting.

Question 3

What basis of accounting should be used when preparing a governmental funds statement of revenues, expenditures, and changes in fund balances?

Answer 3

Modified accrual basis of accounting.

The basis of accounting is the timing of the recognition in the financial records of economic events or transactions. The basis of accounting of a fund depends on its measurement focus. The modified accrual basis of accounting is used to report the governmental fund financial statements. The measurement focus is on current financial resources, that is, on determining financial position and changes in it. The reporting elements are sources, uses, and balances of current financial resources.

Question 4

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?

Answer 4

Enterprise.

Enterprise funds are proprietary funds. These funds (1) account for a government’s business-type activities, (2) serve defined customer groups, and (3) are generally financed through fees. Enterprise funds account for business-type activities that benefit outside parties who are willing to pay for them, such as municipal pools, parking garages, and utilities. They are the funds that most closely resemble private businesses.

Question 5

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’s budgetary fund balance is a

Answer 5

$2,100,000 credit balance.

Park City’s budgetary entry for the Year 1 fiscal year:
Estimated revenues: $30,000,000
Appropriations: $27,000,000
Estimated other financing uses – transfer to debt service fund: 900,000
Budgetary fund balance: 2,100,000

Question 6

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

Answer 6

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

Employers that participate in defined contribution plans recognize pension expenditures or expenses for the required contributions to the plan and a liability (asset) for unpaid (overpaid) contributions. Recognition in the fund financial statements is on the modified accrual or accrual basis depending on the reporting fund. The general fund is a governmental fund. Thus, it uses the modified accrual basis of accounting. It recognizes expenditures when the related liabilities are incurred. Expenditures are uses of governmental fund financial resources. They do not arise from interfund transfers. Interfund activity involves internal events. Transactions are external events. Interfund transfers are one-way asset flows with no repayment required. Because they are nonreciprocal, they are analogous to the external events classified as nonexchange transactions. By contrast, an expenditure for a pension contribution is in essence an exchange. The contribution is in exchange for employee services.

Question 7

What information about capital assets should be included in the summary of significant accounting policies in the notes to the financial statements of a state or governmental entity?

Composition:
Depreciation method:

Answer 7

No
Yes

Disclosure of significant accounting policies is required when (1) a selection has been made from existing acceptable alternatives; (2) a policy is unique to the industry in which the government operates, even if the policy is predominantly followed in that industry; and (3) GAAP have been applied in an unusual or innovative way. For example, a depreciation method is a selection from existing acceptable alternatives and should be included in the summary of significant accounting policies. But financial statement disclosure of accounting policies should not duplicate details presented elsewhere in the financial statements, such as the composition of inventories and capital assets.

Question 8

Which of the following is one of the three standard sections of a governmental comprehensive annual financial report?

Answer 8

Statistical.

The three standard sections of a state or local government’s CAFR are the introductory section, the financial section, and the statistical section. The statistical section reports (1) financial trends, (2) revenue capacity, (3) debt capacity, (4) demographic and economic information, and (5) operating information.

Question 9

The budget for the City of Goodville for the year ending December 31 was adopted and recorded on January 2 of the same year. After recording the budget, the accounting records showed a debit balance of $50,000 in the budgetary fund balance account. What does this indicate?

Answer 9

Appropriations are $50,000 greater than estimated revenues.

Budgetary fund balance is the difference between anticipatory (i.e., estimated) assets and anticipatory liabilities of a governmental fund. Estimated revenues is an anticipatory asset (a debit). Appropriations is an anticipatory liability (a credit). It is the amount authorized to be spent by the government for the fiscal period. Accordingly, a debit in the budgetary fund balance indicates the amount by which anticipatory liabilities exceed anticipatory assets. This conclusion assumes that appropriations is the only anticipatory liability and estimated revenues is the only anticipatory asset.

Question 10

Fact Pattern:
Ridge Township’s governing body adopted its general fund budget for the year ended July 31, Year 1, composed of estimated revenues of $100,000 and appropriations of $80,000. Ridge formally integrates its budget into the accounting records.

To record the $20,000 budgeted excess of estimated revenues over appropriations, Ridge should

Answer 10

Credit Budgetary Fund Balance.

Given that estimated revenues exceed appropriations, budgetary fund balance is credited for the difference.

Question 11

Gator City used the following funds for financial reporting purposes:

General fund
Capital projects fund
Internal service fund
Special revenue fund
Airport enterprise fund
Debt service fund
Pension trust fund

How many of Gator’s funds use the accrual basis of accounting to prepare their financial statements?

Answer 11

Three.

Proprietary and fiduciary funds use the accrual basis of accounting to prepare their financial statements. Proprietary funds include enterprise funds and internal service funds. Fiduciary funds include pension (and other employee benefit) trust funds, investment trust funds, private-purpose trust funds, and agency funds. Thus, the internal service fund, airport enterprise fund, and pension trust fund use the accrual basis of accounting to prepare their financial statements.

Question 12

On April 1, Oak County incurred the following expenditures in issuing long-term bonds:

Issue costs: $400,000
Debt insurance: 90,000

When Oak establishes the accounting for operating debt service, what amount should be deferred and amortized over the life of the bonds?

Answer 12

$0

The general long-term debt of a state or local government is reported only in the government-wide statement of net position using the accrual basis of accounting. However, the debt service transactions are reported in a governmental fund, often a debt service fund, on the modified accrual basis. Expenditures are therefore recognized when the liability is incurred, except for the unmatured principal and interest on general long-term debt, which is recognized when due. Accordingly, the modified accrual basis does not allow for amortization of issue costs and debt insurance premiums, which must be recognized in full when the liability is incurred.

Question 13

Wood City, which is legally obligated to maintain a debt service fund, issued the following general obligation bonds on July 1:

Term of bonds: 10 years
Face amount: $1,000,000
Issue price: 101
Stated interest rate: 6%

Interest is payable January 1 and July 1. What amount of bond issuance premium should be amortized in Wood’s debt service fund for the year ended December 31?

Answer 13

$0

The debt service fund of a governmental unit is a governmental fund used to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest. Bond issuance premium is accounted for as an other financing source in the fund out of which the proceeds are spent. Thus, bond issuance premium is not amortized.

Question 14

All of the following statements regarding notes to the basic financial statements of governmental entities are true except

Answer 14

The notes contain disclosures related to required supplementary information.

The notes do not contain disclosures related to required supplementary information (RSI). RSI is presented in a separate section of the CAFR. RSI includes budgetary comparison schedules and information about infrastructure assets.

Question 15

Which of the following statements about the statistical section of the comprehensive annual financial report (CAFR) of a governmental unit is true?

Answer 15

The statistical section is not part of the basic financial statements.

State and local governments are required to prepare and publish a comprehensive annual financial report (CAFR). As a minimum, the CAFR should include (1) an introductory section, (2) MD&A, (3) the basic financial statements, (4) required supplementary information in addition to the MD&A, (5) combining and individual fund statements, (6) schedules, (7) narrative explanations, and (8) a statistical section. The basic financial statements should include (1) government-wide financial statements, (2) fund financial statements, and (3) notes to the financial statements. Thus, the statistical section is not a part of the basic financial statements.

Question 16

Which of the following statements is the most significant characteristic in determining the classification of an enterprise fund?

Answer 16

The pricing policies of the activity establish fees and charges designed to recover its cost.

Enterprise funds account for activities that benefit outside parties who are willing to pay for them. They serve defined customer groups and are generally financed through fees.

Question 17

On March 2, Year 4, the city of Finch issued 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, Year 4, to March 31, Year 5. During the fiscal year ended June 30, Year 4, no resources had been provided to the debt service fund for the payment of principal and interest. On June 30, Year 4, Finch should report the construction in progress for the civic center in the

Capital funds project:
Government-wide Statement of Financial Position:

Answer 17

No
Yes

Expenditures for the construction project but not the resulting general capital assets should be reported in the capital projects fund. The construction in progress is a general capital asset if it results from expenditure of governmental fund financial resources and is not related to activities reported in nongovernmental funds. Ultimately, the completed project should be reported in the government-wide statement of net position at historical cost, including ancillary charges. The expenditures should not be reported in the governmental funds balance sheet.

Question 18

A state or local government that prepares a statistical section should

Answer 18

Report information about the entity’s ability to produce its own revenues but not shared revenues and intergovernmental aid.

The statistical section presents information about financial trends, revenue capacity, debt capacity, demographic and economic factors, and operations. Revenue capacity relates to an entity’s ability to produce own-source revenues (e.g., taxes but not shared revenues). Subcategories are (1) the revenue base (including the total direct rate applied), (2) revenue rates, (3) principal revenue payers for a 10-year period, and (4) property tax levies and collections.

Question 19

The following information pertains to Pine City’s general fund for Year 1:

Appropriations: $6,500,000
Expenditures: 5,000,000
Other financing sources: 1,500,000
Other financing uses: 2,000,000
Revenues: 8,000,000

After Pine City’s general fund accounts were closed at the end of Year 1, the fund balance increased by

Answer 19

$2,500,000

The change in the fund balance during the period is determined by the changes in the operating account balances. Appropriations is a budgetary control account, the balance of which usually does not change except when it is established and closed. Revenues of $8,000,000, plus other financing sources of $1,500,000, equal $9,500,000 of total credits. Thus, the increase in fund balance was $2,500,000 ($9,500,000 – $5,000,000 expenditures – $2,000,000 other financing uses).

Question 20

For the budgetary year ending December 31, Maple City’s general fund expects the following inflows of resources:

Property taxes, licenses, and fines: $9,000,000
Proceeds of debt issue: 5,000,000
Interfund transfers for debt service: 1,000,000

In the budgetary entry, what amount should Maple record for estimated revenues?

Answer 20

$9,000,000

Estimated revenues is an anticipatory asset and is debited for the amount expected to be collected from a governmental body’s main sources of revenue. In the general fund, the main sources of revenue are taxes, fees, penalties, etc. ($9,000,000). Expected proceeds from the issuance of debt is an other financing source. An expected transfer from a different fund is an other financing source.