19.1 Flashcards
The City of Bell entered into a capital lease agreement on December 31, Year 4, to acquire a capital asset. Under this agreement, Bell is to make three annual payments of $75,000 each on principal, plus interest of $22,000, $15,000, and $8,000 at the end of Year 5, Year 6, and Year 7, respectively. At the beginning of the lease, what amount should be debited to expenditures control in Bell’s general fund?
$225,000
General capital assets that are acquired by capital lease are recorded in the same manner as those acquired by outright purchase. The asset is reported only in the governmental activities column of the government-wide statement of net position. It is measured in accordance with nongovernmental GAAP. In the general fund, when a capital lease represents the acquisition of a general capital asset, the transaction is reported by debiting an expenditure and crediting an other financing sources – capital lease at the present value of the minimum lease payments ($75,000 annual principal repayment × 3 years = $225,000).
How should a state or local governmental unit that sponsors an external investment pool report the external portion of the pool?
Fund:
Measurement Focus:
Basis of Accounting:
Investment trust fund.
Economic resources.
Accrual.
An investment trust fund (a fiduciary fund) is used by a sponsoring government to report the external portion of an external investment pool (the portion belonging to legally separate entities not part of the sponsor’s reporting entity). Moreover, the sponsor should report each external pool as a separate fund. Transactions and balances are reported on the accrual basis with an economic resources measurement focus. This measurement focus differs from the shorter-term current-financial-resources approach used in governmental funds, which emphasizes fiscal accountability for expendable, available financial resources. The economic resources approach provides operational accountability information about economic activity by measuring revenues and expenses in the same way as in commercial accounting but without necessarily emphasizing net income. Instead, the emphasis is on a longer-range measure of revenues earned or levied (and accrued immediately if measurable). Moreover, the economic resources model focuses on cost of services.
Harland County received a $2,000,000 capital grant to be equally distributed among its five municipalities. The grant is to finance the construction of capital assets. Harland had no administrative or direct financial involvement in the construction. In which fund should Harland record the receipt of cash?
Agency Fund.
Agency funds are fiduciary funds that may account for certain grants and other financial assistance to be transferred to, or spent on behalf of, secondary recipients (individuals, private organizations, or other governments). The agency fund acts purely as a conduit. It receives the resources and passes them through to the ultimate recipients. However, if the recipient has administrative or direct financial involvement in the program, the pass-through grant is accounted for in an appropriate governmental, proprietary, or trust fund. However, Harland County is merely a conduit for the grant, not a trustee. Thus, it should account for the monies in an agency fund.
At the beginning of the current year, Sac County’s enterprise fund had a $125,000 balance for accrued compensated absences. During the year, Sac paid $500,000 for compensated absences and reported $550,000 for compensated absences expense. What amount should Sac County’s enterprise fund report for accrued compensated absences at the end of the year?
$175,000.
Enterprise funds use the accrual method of accounting. Thus, the accrual is calculated using the same method used for business entities. The entity paid $500,000 for compensated absences and reported $550,000 for compensated absences expense. Accordingly, it must report $175,000 ($125,000 beginning balance + $550,000 expense – $500,000 paid) for accrued compensated absences.
Liabilities of a defined benefit pension plan for benefits and refunds are reported in a state or local government’s fiduciary fund financial statements using the
Economic Resources Measurement Focus:
Current Financial Resources Measurement Focus:
Accrual Basis:
Modified Accrual Basis:
Yes
No
Yes
No
The economic resources measurement focus and the accrual basis of accounting are required in the fiduciary fund financial statements. Liabilities of defined benefit pension plans and of postemployment benefit plans other than pensions are recognized on the accrual basis, that is, when the transaction or event occurs. For plan liabilities for benefits and refunds, the transaction occurs when the benefits and refunds become due and payable under the terms of the plan.
Unrestricted net position in the government-wide statement of net position
May include internal commitments or assignments not reported on the financial statements.
Net position includes (1) net investment in capital assets, (2) restricted net position, and (3) unrestricted net position. Unrestricted net position includes items that may be internally committed or assigned. However, the designation is not reported on the financial statements.
Nack City received a donation of a valuable painting. Nack planned to add the painting to its collection and display it in the protected exhibition area of city hall. Nack had a policy that if such donated art works were sold, the proceeds would be used to acquire other items for its collections. Which of the following would be correct regarding the donated painting?
May be capitalized, but it is not required, and depreciation is not required.
Individual items or collections of works of art, historical treasures, and similar assets ordinarily must be capitalized. However, if a collection is (1) held in furtherance of public service and not for gain; (2) protected, preserved, cared for, and kept unencumbered; and (3) subject to a policy that sale proceeds are to be used to obtain other collection items, capitalization is not required. If capitalized collections or individual items are exhaustible, for example, because their useful lives are reduced by display, educational, or research uses, they must be depreciated.
On March 1, Wag City issued $1,000,000, 10-year, 6% general obligation bonds at par with no bond issue costs. The bonds pay interest September 1 and March 1. What amount of interest expense and bond interest payable should Wag report in its government-wide financial statements at the close of the fiscal year on December 31?
Interest expense, $50,000; interest payable, $20,000.
The accrual basis of accounting is used to report the government-wide financial statements. Accordingly, interest expense and interest payable are accrued in the same way as in commercial accounting. The interest expense is reported for 10 months (March 1 through December 31), and the interest payable is reported for the 4 months (September 1 through December 31) following the first interest payment date. Moreover, interest expense equals the cash paid because the bonds were issued at par (no premium or discount). Thus, interest expense is $50,000 [($1,000,000 × 6%) × (10 ÷ 12 months)], and interest payable is $20,000 [($1,000,000 × 6%) × (4 ÷ 12 months)].
Land and other real estate held as investments by endowments in a government’s permanent fund should be reported at
Fair Value.
With certain exceptions, e.g., (1) money market investments, (2) external investment pools, (3) life insurance contracts, and (4) equity-method investments in common stock, investments should be measured at fair value. Thus, land and other real estate held as investments by (1) endowments, including permanent endowments and term endowments, and (2) permanent funds should be reported at fair value at the reporting date. Changes in fair value should be reported as investment income. Fair value is an exit price. It is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
The following information pertains to a computer properly classified as a general capital asset that Pine Township leased from Karl Supply Co. on July 1:
Karl’s cost: $5,000 Fair value at July 1: $5,000 Estimated economic life: 5 years Fixed noncancelable term: 30 months Rental at beginning of each month: $135 Guaranteed residual value: $2,000 Present value of minimum lease payments at July 1, using Pine’s incremental borrowing rate of 10.5%: $5,120 Karl’s implicit interest rate of 12.04%: $5,000
On July 1, what amount should Pine capitalize for this leased computer?
$5,000.
Leased capital assets are initially measured in accordance with GAAP regardless of which funds account for the lease transaction. Thus, the capital asset could be accounted for in the proprietary or fiduciary funds or as a general capital asset reported only in the government-wide statement of net position. This lease qualifies for capitalization as a capital lease by the lessee because the present value of the minimum lease payments calculated using the lower of the lessee’s incremental borrowing rate or the lessor’s rate implicit in the terms of the lease is at least 90% of the computer’s fair value ($5,000) at the inception of the lease. Consequently, the leased computer should be capitalized as a general capital asset at the lesser of (1) the present value of the minimum lease payments ($5,120 based on the lessee’s incremental borrowing rate, which is less than the rate implicit in the lease) or (2) the fair value of the leased property ($5,000) at the inception of the lease.
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?
$425,000.
Enterprise funds use the accrual method of accounting. Thus, the expense is calculated using the same method used for business entities. The entity paid $400,000 for compensated absences, and the balance for accrued compensated absences (a liability) increased by $25,000. Accordingly, it must report an expense for compensated absences of $425,000.
Meen County issued a $50,000,000 bond at its face amount and received a $1,000,000 grant for improving parks. What is the net effect on the reconciliation of (1) the net change in governmental fund balances to (2) the change in net position of governmental activities in the government-wide statement of activities?
$50,000,000 decrease.
The first step in preparing government-wide financial statements is to convert the modified accrual data in the governmental fund financial statements. The conversion is performed at the total governmental fund summary level, not at the individual fund level. Bond proceeds increase current financial resources in the governmental funds. However, issuing debt increases long-term liabilities in the statement of net position with no effect on the statement of activities. Also, grant receipts are reported in the same way in governmental fund financial statements and government-wide financial statements. Thus, the change in net position of governmental activities in the government-wide statement of activities is $50,000,000 less than the net change in governmental fund balances.
Grove County collects property taxes levied within its boundaries and receives a 1% fee for administering these collections on behalf of the municipalities located in the county. In the current year, Grove collected $1 million for its municipalities and remitted $990,000 to them after deducting fees of $10,000. In the initial recording of the 1% fee, Grove’s agency fund should credit
Due to Grove County general fund, $10,000.
Agency fund assets should equal liabilities in the statement of fiduciary net position. Hence, Grove County should record in its agency fund a liability to its general fund for the 1% fee that is owed to it by the various municipalities. It also debits its liability for the tax collections owed to the municipalities and credits cash. The general fund credits revenues for the fees due.
On September 1, Meen County’s enterprise fund issued a $12,000,000, 10%, 2-year note to finance the construction of a building. Assuming interest is accrued only when the year ends on September 30, the journal entry to prepare the enterprise fund’s operating statement is
Interest Expense $10,000
Interest Payable $10,000
An enterprise fund is a proprietary fund that uses the accrual basis of accounting. Its operating statement is the statement of revenues, expenses, and changes in fund net position. Consequently, interest expense is debited (accrued) and interest payable is credited (accrued) for $100,000 [($12,000,000 × 10%) × (1 month ÷ 12 months)].
Meen County paid $60,000 for office supplies and debited office supplies (supplies inventory) for the full amount. The amount of supplies at the end of the accounting period is $12,000. The adjusting journal entry for the preparation of the government-wide financial statements is
Office Supplies Expense $48,000
Office Supplies $48,000
In the government-wide financial statements, the accrual method is used to account for supplies and prepaid items. An asset is recognized at the time of purchase, and an expense is recognized for the usage of the asset or the passage of time. Accordingly, the use of supplies is expensed. Office supplies expense is therefore $48,000 ($60,000 beginning balance – $12,000 ending balance).
