19.3 Flashcards
Eureka City should report which of the following funds in a statement of cash flows?
Eukeka City Hall Capital project funds:
Eureka City Hall Enterprise Fund:
No
Yes
Governmental funds (e.g., a capital projects fund) emphasize sources, uses, and balances of current financial resources. The required financial statements are the balance sheet and the statement of revenues, expenditures, and changes in fund balances. The emphasis of proprietary funds (e.g., an enterprise fund) is on operating income, changes in net position (or cost recovery), financial position, and cash flows. The statements required for proprietary funds include (1) a statement of net position; (2) a statement of revenues, expenses, and changes in fund net position; and (3) a statement of cash flows. Thus, the cash flows of an enterprise fund, but not a capital projects fund, must be reported in a separate fund financial statement. Furthermore, the required government-wide financial statements do not include a statement of cash flows.
Which of the following activities should be excluded when governmental fund financial statements are converted to government-wide financial statements?
Fiduciary activities.
Fiduciary funds account for resources held by the government in trust or as an agent for (1) specific individuals, (2) private organizations, or (3) other governments. These resources are not available to finance the government’s programs. Consequently, they are reported only in the fund statements (statements of fiduciary net position and changes in fiduciary net position).
Tadd has incurred the following long-term obligations:
- General obligation bonds issued for the water and sewer fund, which will service the debt
- Revenue bonds to be repaid from admission fees collected from users of the municipal recreation center
These bonds are expected to be paid from enterprise funds and to be secured by Tadd’s full faith, credit, and taxing power.
Which of Tadd’s long-term obligations should be accounted for only in the government-wide financial statements?
General obligation bonds:
Revenue bonds:
No
No
When long-term liabilities are directly related to and expected to be paid from a proprietary fund, such as an enterprise fund, they are not general long-term liabilities and should be reported in the proprietary fund statement of net position and in the government-wide statement of net position. They are specific fund liabilities even though they are backed by the full faith and credit of the governmental unit. The water and sewer fund and the municipal recreation center fund are both enterprise funds.
Which fiduciary fund type may be expendable or nonexpendable?
Private-purpose trust fund.
A private-purpose trust fund may be used for any trust arrangement, other than one reported in a pension (or other employee benefit) trust fund or in an investment trust fund, in which the governmental entity serves as a fiduciary for individuals, private organizations, or other governments. A private-purpose trust fund may be expendable; that is, the principal may be expended to achieve the trust’s purposes. It may also be nonexpendable; that is, earnings only, not principal, may be expended to achieve the trust’s purposes. Prior to the issuance of current guidance, public-purpose and private-purpose trust funds were both classifiable in the expendable trust fund type or in the nonexpendable trust fund type. Under the current guidance, public-purpose expendable trust funds and public-purpose nonexpendable trust funds are classified as special revenue funds and permanent funds, respectively.
If a government reports eligible infrastructure assets using the modified approach,
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 (eligible infrastructure assets) need not be depreciated if the government uses an asset management system with certain characteristics and documents that the assets are being preserved approximately at (or above) a condition level established and disclosed by the government. An asset management system should (1) include an updated inventory of eligible infrastructure assets, (2) perform condition assessments and summarize results using a measurement scale, and (3) make annual estimates of the annual amounts needed to maintain the assets at the established condition level.
During the current year, Vann County’s motor pool internal service fund sold two vehicles for $5,000. The vehicles had a cost of $6,000 and a carrying value of $4,000. How should Vann County’s motor pool internal service fund report this transaction in its fund financial statements?
Gain of $1,000.
Journal entries for proprietary funds (internal service and enterprise funds) are virtually the same as for any business because the accrual basis of accounting and the economic resources measurement focus apply. Thus, a gain should have been accrued for this exchange transaction when it occurred. The entry is
Cash $5,000
Accumulated depreciation 2,000
Motor vehicles $6,000
Gain 1,000
A local government reports the following information about its funds for Year 2:
Pension fund Benefits paid: $600,000 Expenses: $22,000 Contributions: $1,110,000 Appreciation $68,000 Interest; $415,000 Dividends: $38,000 Net position –1/1/Year 2: $3,050,000
Investment trust fund Benefits paid: $60,000 Expenses: $7,500 Contributions: $10,000 Appreciation: $2,400 Interest: $45,000 Dividends: $2,000 Net position –1/1/Year 2: $60,300
The total change in net position of the government’s fiduciary funds was
$1,00,900.
The pension trust and investment trust funds are the only fiduciary funds for which information is presented. (Permanent funds are governmental funds.) The total change in net position for the fiduciary funds was therefore $1,000,900 ($1,009,000 – $8,100).
When a capital lease of a governmental unit represents the acquisition of a general capital asset, the acquisition should be reflected as
Both an expenditure and an other financing source.
General capital assets that are acquired by capital lease are recorded in the same manner as capital assets acquired by outright purchase. The principal amount of the lease is initially debited as an expenditure, and other financing sources – capital lease is credited.
At the beginning of the fiscal year on July 1, 2016, Meen County had a 2-year insurance policy on its equipment for which it paid $2,400,000. On January 1, 2017, Meen County paid $3,600,000 for a 3-year policy on its buildings. The June 30, 2017, fiscal year-end adjusting journal entry to prepare the government-wide statements is
Insurance Expense $1,800,000
Prepaid Insurance $1,800,000
Government-wide statements use the accrual basis of accounting to account for prepaid items. Under this basis, insurance expense (not expenditure) for the 2-year policy is $1,200,000 ($2,400,000 prepaid balance at beginning of fiscal year ÷ 2 years). Insurance expense for the 3-year policy purchased on January 1, 2017, is $600,000 [$3,600,000 prepaid balance × (6 months ÷ 36 months)]. The total is $1,800,000 ($1,200,000 + $600,000).
Government-wide financial statements
Use separate columns to distinguish between governmental and business-type activities.
The basic financial statements include government-wide statements, fund statements, and the notes to the statements. Government-wide statements do not display funds or fund types but instead report information about the overall government. They distinguish between the primary government and its discretely presented component units and between the governmental activities and business-type activities of the primary government.
Which of the following would be reported as program revenues on a local government’s government-wide statement of activities?
Charges for services.
The statement of activities presents operations in a format that displays net (expense) revenue for each function. The purpose is to report the relative financial burden to the taxpayers for that function. The net (expense) revenue for each governmental or business-type function equals expenses (at a minimum, the direct expenses of the function) minus program revenues. Charges for services are program revenues resulting from charges to customers, applicants, or others who directly benefit from what is provided (goods, services, or privileges) or who are otherwise directly affected.
Tree City reported a $1,500 net increase in fund balance for governmental funds for the current year. During the year, Tree purchased general capital assets of $9,000 and recorded depreciation expense of $3,000. What amount should Tree report as the change in net position for governmental activities?
$7,500.
The $1,500 net increase in the fund balance for governmental funds reflects a $9,000 expenditure (modified accrual basis of accounting) for general capital assets. These assets are not reported in governmental funds. The effect of the expenditure is a decrease in current financial resources of $9,000. However, the government-wide statements report an expense of $3,000 (accrual basis of accounting) for depreciation and a depreciated asset with a carrying amount of $6,000 ($9,000 cost – $3,000 depreciation). The effect is a decrease in economic resources of $3,000. Reconciling the net increase in fund balance to the change in net position therefore requires adding $6,000 ($9,000 modified accrual basis expenditure – $3,000 accrual basis expense). The change in net position is $7,500 ($1,500 + $6,000 reconciling item).
A city government reported a $9,000 increase in net position in the motor pool internal service fund, a $12,000 increase in net position in the water enterprise fund, and a $7,000 increase in the employee pension fund. The motor pool internal service fund provides service primarily to the police department. What amount should the city report as the change in net position for business-type activities in its statement of activities?
$12,000.
Governmental activities normally are financed by nonexchange revenues (taxes, etc.). They are reported in governmental and internal service funds. Business-type activities are financed at least in part by fees charged to external parties for goods and services. They are reported in enterprise funds. Thus, the $12,000 increase in net position in the water enterprise fund is reported in the business-type activities section of the government-wide statement of activities. But government-wide statements do not report information about fiduciary activities. They involve assets that cannot be used for the government’s own programs. These assets are held in trust or in an agency capacity for specific (1) individuals, (2) private organizations, or (3) other governments. Because a pension (or other employee benefit trust) fund is a fiduciary fund, its $7,000 increase is not reported in the statement of activities. Furthermore, although internal service funds are proprietary funds, the activities they account for normally are governmental. They should be included in the governmental activities column in the government-wide statement of activities unless enterprise funds are the predominant participants in the funds. Because the motor pool internal service fund provides service primarily to the police department, not to enterprise funds, its $9,000 increase in net position is not reported in the business-type activities section.
On January 2, Basketville City purchased equipment with a useful life of 3 years to be used by its water and sewer enterprise fund. Which of the following is the correct treatment for the asset?
Capitalize; depreciation is required.
An enterprise fund is accounted for on the accrual basis. Capital assets related to proprietary fund activities, such as equipment, are reported in the proprietary fund statement of net position. They must be depreciated over their estimated useful lives unless they are inexhaustible or are infrastructure assets that meet certain requirements.
La Chua County issued bond anticipation notes and recorded the proceeds in the capital projects fund. The county subsequently failed to take the necessary legal steps to refinance the notes. Accordingly, the notes should be reported as a liability in the
Capital Projects fund.
Bond anticipation notes of governmental funds are reported only in the governmental activities column of the government-wide statement of net position if (1) all legal steps have been taken to refinance the notes and (2) the intent is supported by an ability to consummate the refinancing on a long-term basis. If these criteria are not met, the bond anticipation notes must be reported as a short-term liability in the fund in which the proceeds are recorded (as well as in the governmental activities column of the government-wide statement of net position).
