Ch 11 - Acct for State and Local Gov'ts (Part 1)

Question 1

Which of the following is not a government fund?

a) Special Revenue Fund
b) Internal Service Fund
c) Capital Projects Fund
d) Debt Service Fund

Answer 1

b) Internal Service Fund

Question 2

2) What is the purpose of a Special Revenue Fund?

a) To account for revenues legally or externally restricted as an operating expenditure.
b) To account for ongoing activities
c) To account for gifts when only subsequently earned income can be expended
d) To account for the cost of long-lived assets bought with designated funds.

Answer 2

a) To account for revenues legally or externally restricted as an operating expenditure.

Question 3

What is the purpose of Enterprise Funds?

a) To account for operations that provide services to other departments within a government
b) To account for asset transfers
c) To account for ongoing activities such as the police and fire departments
d) To account for operations financed in whole or part by outside user charges.

Answer 3

d) To account for operations financed in whole or part by outside user charges.

Question 4

Which of the following statements is true?

a) There are three different types if proprietary funds.
b) There are three different types of fiduciary funds.
c) There are five different types of fiduciary funds.
d) There are five different types of government funds.

Answer 4

d) There are five different types of government funds

Government funds:

 1) General Fund
 2) Special Revenue Fund
 3) Capital Projects Fund
 4) Debt Service Fund
 5) Permanent Funds

Question 5

What are the five Gov’t Funds?

Answer 5

GSCDP

1) General Fund
2) Special Revenue Fund
3) Capital Projects Fund
4) Debt Service Fund
5) Permanent Fund

Question 6

What are the two Proprietary Funds?

Answer 6

1) Enterprise Funds

2) Internal Service Funds

Question 7

What are the four Fiduciary Funds?

Answer 7

IPPA

1) Investment Trust Funds
2) Private-Purpose Funds
3) Pension Trust Funds
4) Agency Funds

Question 8

A government expects to receive revenues of $400,000 but has approved expenditures of $430,000. The anticipated shortage will have an impact on which of the following terms?

a) Interperiod equity
b) Modified accrual accounting
c) Consumption accounting
d) Account groups

Answer 8

a) Interperiod equity

Question 9

A citizen of the City of Townsend gives a gift of $22,000 in investments. The citizen requires that the investments be held but any resulting income must be used to help maintain the city’s cemetery. In which fund should this asset be reported?

a) Special Revenue Funds
b) Capital Projects Fund
c) Permanent Funds
d) General Fund

Answer 9

c) Permanent Funds

Question 10

Which of the following statements is correct about the reporting of governmental funds?

a) Fund financial statements measure economic resources.
b) Government-wide financial statements measure only current financial resources.
c) Fund financial statements measure both economic resources and current financial resources.
d) Government-wide financial statements measure economic resources.

Answer 10

d) Government-wide financial statements measure economic resources.

Question 11

Which of the following is correct about the reporting of governmental funds?

a) Fund financial statements measure revenues and expenditures based on modified accrual accounting.
b) Government-wide financial statements measure revenues and expenses based on modified accrual accounting
c) Fund financial statements measure revenues and expenses based on accrual accounting.
d) Government-wide financial statements measure revenues and expenditures based on accrual accounting.

Answer 11

a) Fund financial statements measure revenues and expenditures based on modified accrual accounting.

Question 12

During the current year, a government buys land for $80,000. Which of the following is not true?

a) The land could be reported as an asset by the business-type activities in the government-wide financial statements.
b) The land could be reported as an asset by the governmental activities in the government-wide financial statements.
c) The land could be reported as an asset by the proprietary funds in the fund financial statements.
d) The land could be reported as an asset by the governmental funds in the fund financial statements.

Answer 12

d) The land could be reported as an asset by the governmental funds in the fund financial statements.

Explanations:
a) The land could be reported as an asset by the business-type activities in the government-wide financial statements. TRUE STATEMENT

b) The land could be reported as an asset by the governmental activities in the government-wide financial statements. TRUE STATEMENT.
c) The land could be reported as an asset by the proprietary funds in the fund financial statements. TRUE STATEMENT - PROPRIETARY INCLUDES ASSETS AND LIABILITIES

Question 13

Which of the foloowing statements is true concerning the recording of a budget?

a) At the beginning of the year, debit Appropriations
b) At the end of the year, credit Appropriations
c) At the beginning of the year, debit Estimated Revenues
d) At the end of the year, credit Appropriations

Answer 13

c) At the beginning of the year, debit Estimated Revenues

Question 14

The General Fund pays rent for two months. Which of the following is not correct?

a) Rent expense should be reported in the government-wide financial statements.
b) Rent expense should be reported in the General Fund
c) An expenditure should be reported in the fund financial statements
d) If one month of rent is in the first year with the other month in the next year, either the purchases method or the consumption method can be used in fund statements.

Answer 14

b) Rent expense should be reported in the General Fund

Explanation: an expenditure is reported, not an expense in the Fund financial statements

Question 15

A purchase order for $3,000 is recorded in the General Fund for the purchase of a new computer. The computer is received at an actual cost of $3,020. Which of the following is correct?

a) Machinery is increased in the General fund by $3,020.
b) An encumbrance account is reduced by $3,020
c) An expenditure is increased by $3,020
d) An expenditure is recorded for the additional $20

Answer 15

c) An expenditure is increased by $3,020

EXPLANATIONS:

a) Machinery is increased in the General fund by $3,020. INCORRECT, EXPENDITURES ARE INCREASED.
b) An encumbrance account is reduced by $3,020. INCORRECT: BY $3,000
d) An expenditure is recorded for the additional $20. INCORRECT, $3,020.

Question 16

A government buys equipment for its police department at a cost of $54,000. Which of the following is not true?

a) Equipment will increase by $54,000 in the government-wide financial statements.
b) Depreciation in connection with this equipment will be reported in the fund financial statements.
c) The equipment will not appear within the reported assets in the fund financial statements.
d) An expenditure for $54,000 will be reported in the fund financial statements.

Answer 16

b) Depreciation in connection with this equipment will be reported in the fund financial statements.

EXPLANATION: NO DEPRECIATION IS RECORDED BECAUSE IT IS NOT RELEVANT TO THE CURRENT FINANCIAL MEASUREMENT FOCUS OF THE FUND FINANCIAL STATEMENTS.

Question 17

A city acquires supplies for its fire department and uses the consumption method of accounting. Which of the following statements is true for the fund financial statements?

a) An expenditures account was debited at the time of receipt.
b) An expense is recorded as the supplies are consumed
c) An inventory account is debited at the time of the acquisition
d) The supplies are recorded within the General Fixed Assets Account Group

Answer 17

c) An inventory account is debited at the time of the acquisition

EXPLANATION:

a) An expenditures account was debited at the time of receipt. INCORRECT, AN ASSET ACCT IS DEBITED
b) An expense is recorded as the supplies are consumed. INCORRECT, AN EXPENDITURE ACCOUNT AT PERIOD END.
d) The supplies are recorded within the General Fixed Assets Account Group. INCORRECT, INVENTORY OF SUPPLIES ACCOUNT.

Question 18

An income tax is an example of which of the following?

a) Derived tax revenue
b) Imposed non-exchange revenue
c) Government-mandated nonexchange revenue
d) Voluntary nonexchange transaction

Answer 18

a) Derived tax revenue

EXPLANATION:

b) Imposed non-exchange revenue. INCORRECT, this is when the gov’t mandates an assessment, but no underlying transaction occurs. Ex – property taxes, fines & penalties
c) Government-mandated nonexchange revenue. INCORRECT, monies conveyed from one gov’t to another b/c of required program costs
d) Voluntary nonexchange transaction. INCORRECT, money has been conveyed willingly to the state or local government by an individual, another government, or an organization, usually for a particular purpose.

Question 19

A city constructs a special assessment project (a sidewalk) for which it is secondarily liable. The city issues bonds of $90,000. It authorizes another $10,000 that is transferred out of the General Fund. The sidewalk is built for $100,000. The citizens are billed for $90,000. They pay this amount and the debt is paid off. Where is the $100,000 expenditure for construction recorded?

a) It is not recorded by the city
b) It is recorded in the Agency Fund
c) It is recorded in the General Fund
d) It is recorded in the Capital Projects Fund.

Answer 19

d) It is recorded in the Capital Projects Fund.

Question 20

Cash of $60,000 is transferred from the General Fund to the Debt Service Fund. What is reported on the government-wide financial statements?

a) No reporting is made
b) Other Financing Sources increase by $60,000; Other Financing Uses increase by $60,000
c) Revenues increase by $60,000; Expenditures increase by $60,000
d) Revenues increase by $60,000; Expenses increase by $60,000

Answer 20

a) No reporting is made

Question 21

Cash of $60,000 is transferred from the General Fund to the Debt Service Fund. What is reported on the fund financial statements?

a) No reporting is made
b) Other Financing Sources increase by $60,000; Other Financing Uses increase by $60,000
c) Revenues increase by $60,000; Expenditures increase by $60,000
d) Revenues increase by $60,000; Expenses increase by $60,000

Answer 21

b) Other Financing Sources increase by $60,000; Other Financing Uses increase by $60,000

Question 22

Cash of $20,000 is transferred from the General Fund to the Enterprise Fund to pay for work that was done. What is reported on the government-wide financial statements?

a) No reporting is made.
b) Other Financing Sources increase by $20,000; Other Financing Uses increase by $20,000.
c) Revenues increase by $20,000; Expenditures increase by $20,000
d) Revenues increase by $20,000; Expenses increase by $20,000

Answer 22

d) Revenues increase by $20,000; Expenses increase by $20,000

Question 23

Cash of $20,000 is transferred from the General Fund to the Enterprise Fund to pay for work that was done. What is reported on the fund financial statements?

a) No reporting is made.
b) Other Financing Sources increase by $20,000; Other Financing Uses increase by $20,000.
c) Revenues increase by $20,000; Expenditures increase by $20,000
d) Revenues increase by $20,000; Expenses increase by $20,000

Answer 23

c) Revenues increase by $20,000; Expenditures increase by $20,000

Question 24

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
its measurement objectives?

A. Special revenue fund.
B. General fund.
C. Internal service fund.
D. Enterprise fund.

Answer 24

D. Enterprise fund.

Answer (D) is correct. Enterprise funds may be used for any activities for which fees are charged to external users. Moreover, an enterprise fund (a proprietary fund) reports using the economic resources measurement focus and the accrual basis of accounting. This approach provides longer-term operational accountability information about economic activity. It measures revenues and expenses in the same way as in for-profit accounting. Thus, the enterprise fund’s statement of revenues, expenses, and changes in fund net assets presents amounts for (1) operating income
(loss); (2) income before other revenues, expenses, etc.; and (3) change in net assets. Because the library fund will charge fees and report on the accrual basis, King should account for it using an enterprise fund.

Question 25

Roy City received a gift, the principal of which is to be invested in perpetuity with the income to be used to support the local library. In which fund should this gift be recorded?

A. Permanent fund.
B. Investment trust fund.
C. Private-purpose trust fund.
D. Special revenue fund.

Answer 25

A. Permanent fund.

Question 26

What body primarily determines the measurement focus and basis of accounting standards for governmental financial statements?

A. Governmental Accounting Standards Board.

B. National Council on Governmental Accounting.

C. Governmental Accounting and Auditing Committee of the AICPA.

D. Financial Accounting Standards Board.

Answer 26

A. Governmental Accounting Standards Board.

Question 27

Governmental financial reporting should provide information to assist users in which
situation(s)?

I. Making social and political decisions
II. Assessing whether current-year citizens received services but shifted part of the payment burden to future-year citizens

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

Answer 27

C. Both I and II.

Answer (C) is correct. GASB Concepts Statement 1 states, “Financial reporting by state and local governments is used in making economic, social, and political decisions and in assessing accountability.” It also states that “interperiod equity is a significant part of accountability and is fundamental to public administration.” Thus,
“financial reporting should help users assess whether current-year revenues are sufficient to pay for the services provided that year and whether future taxpayers will be required to assume burdens for services previously provided.”

Question 28

The statement of activities of the government-wide financial statements is designed primarily to provide information to assess which of the following?

A. Operational accountability.
B. Financial accountability.
C. Fiscal accountability.
D. Functional accountability.

Answer 28

A. Operational accountability.

Answer (A) is correct. Fiscal accountability is the responsibility of governments to justify that their actions currently comply with public decisions concerning the raising and spending of public resources in the short term. Operational accountability is a government’s responsibility to report the extent to which it has met accounting
objectives efficiently and effectively, using all resources available, and whether it can continue to do so in the near future. The governmental funds financial statements focus on the fiscal accountability of governmental activities. However, governmentwide financial statements focus on the operational accountability of the governmental and business-type activities of the government as a whole. The financial statements of fiduciary funds and proprietary funds provide information about operational accountability.

Question 29

State and local governments report various funds to the extent their activities meet the fund criteria. Governmental funds include

A. Internal service funds.
B. Nonexpendable trust funds.
C. Enterprise funds.
D. Permanent funds.

Answer 29

D. Permanent funds.

Answer (D) is correct. Governmental funds (the general fund, special revenue funds, capital projects funds, debt service funds, and permanent funds) emphasize sources, uses, and balances of current financial resources, often with use of budgetary
accounts. Expendable assets are assigned to funds based on their intended use, liabilities are assigned to the funds from which they will be paid, and the difference (fund equity) is the fund balance. Permanent funds report resources legally restricted
so that earnings only, not principal, may be expended for the benefit of the government or its citizenry, that is, to support the government’s programs. An example is a perpetual-care fund for a public cemetery. Permanent funds should be
distinguished from private-purpose trust funds.

Question 30

The accounting systems of state and local governmental entities should be organized and
operated using which structure?

A. Proprietary fund.
B. Fiduciary fund.
C. Governmental fund.
D. Fund.

Answer 30

D. Fund.

Answer (D) is correct. An accounting system should permit state and local governments to (1) present fairly and with full disclosure the funds and activities of state and local governments in conformity with GAAP and (2) demonstrate compliance with finance-related legal and contractual provisions. To satisfy these objectives, state and local government accounting systems use funds. A fund is a fiscal and accounting entity with a self-balancing set of accounts. It records
(1) financial resources (including cash), (2) related liabilities, (3) residual equities or balances, and (4) changes in all of the above. Items in a fund are separated because they relate to specific activities or certain objectives that are subject to special
regulations or limitations. The three categories of funds used by state and local governments are governmental, proprietary, and fiduciary.

Question 31

A state or local government may report which fiduciary funds?

A. Private purpose trust funds.
B. Expendable trust funds.
C. Nonexpendable trust funds.
D. Permanent funds.

Answer 31

A. Private purpose trust funds.

Answer (A) is correct. Fiduciary funds include pension (and other employee benefit) trust funds, investment trust funds, private-purpose trust funds, and agency funds. Pension (and other employee benefit) trust funds report resources held for (1) members and beneficiaries of pension plans (defined benefit or contribution), (2) other postemployment benefit plans, or (3) other employee benefit plans. Investment trust funds are used by a sponsoring government to report the external portions of external investment pools. Private-purpose trust funds are used for all other trust arrangements, whether the beneficiaries are individuals, private entities, or other governments.

Question 32

A local governmental unit may use which of the following types of funds?

Fiduciary… Proprietary

A. Yes…No
B. Yes…Yes
C. No…Yes
D. No…No

Answer 32

B. Yes…Yes

Question 33

Cal City maintains several major fund types. The following were among Cal’s cash receipts during the current year:

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?

A. $1,200,000
B. $1,000,000
C. $200,000
D. $0

Answer 33

B. $1,000,000

Answer (B) is correct. The general fund is used to account for all transactions of a governmental unit that are not accounted for in another fund. The interest is accounted for in a pension trust fund. Thus, the general fund accounts for only the $1,000,000 grant.

Question 34

Revenues that are legally restricted to expenditures for specified purposes should be accounted for in special revenue funds, including

A. Resources accumulated for payment of general long-term debt principal and interest.

B. Pension trust fund revenues.

C. Gasoline taxes to finance road repairs.

D. Proprietary fund revenues.

Answer 34

C. Gasoline taxes to finance road repairs.

Answer (C) is correct. Special revenue funds account for restricted or committed proceeds of specific revenue sources. Expenditures must be for a specified purpose (but not debt service or a capital project). Thus, the basis of the fund is a substantial inflow from restricted or committed revenue sources. Gasoline taxes levied to finance road repair are revenues legally restricted to expenditures for specified purposes that should be accounted for in special revenue funds.

Question 35

Bay Creek’s municipal motor pool maintains all city-owned vehicles and charges the various departments for the cost of rendering the maintenance services. In which of the following funds should Bay account for the cost of such maintenance?

A. General fund.
B. Internal service fund.
C. Special revenue fund.
D. Special assessment fund.

Answer 35

B. Internal service fund.

Answer (B) is correct. An internal service fund is used when one governmental entity provides goods or services to other subunits of the primary government and its component units or to other governments on a cost-reimbursement basis.
However, if the reporting government is not the predominant participant, the activity should be reported as an enterprise fund.

Question 36

The following equity balances are among those maintained by Cole City:

Enterprise funds $1,000,000
Internal service funds 400,000

Cole’s proprietary equity balances amount to

A. $1,400,000
B. $1,000,000
C. $400,000
D. $0

Answer 36

A. $1,400,000

Answer (A) is correct. Proprietary funds include enterprise funds and internal service funds. Thus, the proprietary equity balances equal $1,400,000 ($1,000,000 + $400,000).

Question 37

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

A. Special revenue funds.
B. General fund.
C. Capital projects funds.
D. Trust funds.

Answer 37

C. Capital projects funds.

Answer (C) is correct. The capital projects fund accounts for resources restricted, committed or assigned to be expended for capital purposes. These resources include general obligation bond proceeds dedicated to the construction of major capital facilities such as schools, bridges, or tunnels. But other capital facilities may be financed through proprietary funds or certain trust funds.

Question 38

A state government had the following activities:

I. State-operated lottery
II. State-operated hospital

Which of the above activities may be accounted for in an enterprise fund?

A. Neither I nor II.
B. I only.
C. II only.
D. Both I and II.

Answer 38

D. Both I and II.

Answer (D) is correct. Enterprise funds may be used to account for any activity of a state or local government that provides goods or services to external users for a fee. Both a state-operated hospital and a state-operated lottery are typical enterprise fund activities.

Question 39

An activity that provides goods to other subunits of the primary government on a cost reimbursement basis should be reported as a(n)

A. Fiduciary fund.
B. Agency fund.
C. Enterprise fund in some cases.
D. Internal service fund in all cases.

Answer 39

C. Enterprise fund in some cases.

Answer (C) is correct. Internal service funds may be used for activities that provide goods and services to other subunits of the primary government and its component units or to other governments on a cost-reimbursement basis. However, if the reporting government is not the predominant participant, the activity should be reported as an enterprise fund.

Question 40

Grants that are to be transferred to secondary recipients by a local government should be accounted for in which fund if the government has no administrative or direct involvement in the program?

A. Investment trust fund.
B. Private-purpose trust fund.
C. Agency fund.
D. Special assessment fund.

Answer 40

C. Agency fund.

Answer (C) is correct. Agency funds may account for certain grants and other financial assistance to be transferred to, or spent on behalf of, secondary recipients (individuals, private entities, or other governments). The agency fund acts purely as a custodian. It receives the grants and passes them through to the ultimate recipients. However, if the recipient government has administrative or direct financial involvement in the program, the pass-through grant is accounted for in an appropriate governmental, proprietary, or trust fund.

Question 41

In which of the following fund types of a city government are revenues and expenditures recognized on the same basis of accounting as the general fund?

A. Private-purpose trust.
B. Internal service.
C. Enterprise.
D. Debt service.

Answer 41

D. Debt service.

Answer (D) is correct. The debt service fund is the only fund listed that is classified as a governmental fund. The other funds are proprietary or fiduciary. Governmental funds use the modified accrual basis, and proprietary and fiduciary funds use the accrual basis.

Question 42

A major exception to the general rule of expenditure accrual for governmental funds of a state or local government relates to unmatured

Principal of General Long-Term Debt…Interest on General Long-Term Debt

A. Yes… Yes
B. Yes… No
C. No… Yes
D. No… No

Answer 42

A. Yes… Yes

Answer (A) is correct. According to the modified accrual basis of accounting, expenditures are recognized when liabilities are incurred. For general long-term debt, however, principal and interest expenditures ordinarily are recognized when payments on the debt are due.

Question 43

When a snowplow purchased by a governmental unit is received, it should be recorded in the general fund as a(n)

A. Encumbrance.
B. Expenditure.
C. General capital asset.
D. Appropriation.

Answer 43

B. Expenditure.

Answer (B) is correct. Governmental funds are accounted for on the modified accrual basis. Accordingly, a general fund normally recognizes an expenditure (a use of financial resources) when the liability is incurred, if measurable. When previously ordered goods are received, the entry in the general fund includes a debit to expenditures for the actual amount to be paid. Thus, an expenditure is recognized when the liability is incurred, that is, when performance of a contract is complete or virtually complete.

Question 44

Governmental expenditures for insurance extending over more than one accounting period

A. Must be accounted for as expenditures of the period of acquisition.

B. Must be accounted for as expenditures of the periods subsequent to acquisition.

C. Must be allocated between or among accounting periods.

D. May be allocated between or among accounting periods or may be accounted for as expenditures of the period of acquisition.

Answer 44

D. May be allocated between or among accounting periods or may be accounted for as expenditures of the period of acquisition.

Answer (D) is correct. Prepaid insurance may be reported by either the purchases method or the consumption method. Under the purchases method, an expenditure is reported when the policy is purchased. Under the consumption method, an expenditure is reported as the asset is consumed.

Question 45

Government-wide financial statements are prepared using the

Economic Resources Measurement Focus…
Current Financial Resources Measurement Focus…
Accrual Basis…
Modified Accrual Basis

A. Yes… No… Yes… No
B. No… Yes… No… Yes
C. Yes… No… No… Yes
D. No… Yes… Yes… No

Answer 45

Answer (A) is correct. Government-wide financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting and should report all of the government’s assets, liabilities, revenues, expenses, gains, and losses. The economic resources measurement focus differs from the shorter-term flow-of-current-financial-resources approach used in governmental funds. It measures revenues and expenses in the same way as in proprietary funds or commercial accounting but does not necessarily emphasize 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. The accrual basis of accounting recognizes most transactions when they occur, regardless of when cash is received or paid.

Question 46

Proprietary fund financial statements are prepared using the

Economic Resources Measurement Focus…
Current Financial Resources Measurement Focus…
Accrual Basis…
Modified Accrual Basis

A. Yes… No… Yes… No
B. No… Yes… No… Yes
C. Yes… No… No… Yes
D. No… Yes… Yes… No

Answer 46

A. Yes… No… Yes… No

Answer (A) is correct. The economic resources measurement focus and the accrual basis of accounting are required in the proprietary fund financial statements. The economic resources measurement focus differs from the shorter-term flow-of-current-financial-resources approach used in governmental funds. It measures revenues and expenses in the same way as in commercial accounting but does not necessarily emphasize 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. The accrual basis of accounting recognizes most transactions when they occur, regardless of when cash is received or paid.

Question 47

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

A. Yes… No… Yes… No
B. No… Yes… No… Yes
C. Yes… No… No… Yes
D. No… Yes… Yes… No

Answer 47

A. Yes… No… Yes… No

Answer (A) is correct. 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 plan’s terms.

Question 48

Which of the following fund types used by a government most likely would have a fund balance designated as non-spendable because of an increase in an inventory of supplies?

A. General.
B. Internal service.
C. Private-purpose trust.
D. Capital projects.

Answer 48

A. General.

Answer (A) is correct. Governmental units normally record the purchases of supplies inventory in an internal service fund or in the general fund. However, an internal service fund is a proprietary fund for which an amount for net assets, not fund balance, is reported. A fund balance is reported for the general fund. In accounting for supplies, the expenditure account may be debited when the materials and supplies are purchased or when they are consumed. Under either method, the inventory of supplies remaining at year end must be reported on the balance sheet as an asset. Under the purchases method, resources have already been deemed to be expended to acquire these supplies. Thus, part of the unassigned fund balance should be reclassified as nonspendable because of an increase in an inventory of supplies. This nonspendable classification must be established (credited) to indicate the unavailability of resources in this amount for other expenditures.

Question 49

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
A. Yes... No
B. No... Yes
C. Yes... Yes
D. No... No

Answer 49

A. Yes… No

Answer (A) is correct. The general fund is accounted for on the modified accrual basis. This basis of accounting recognizes revenues in the period in which they are susceptible to accrual (measurable and available). The enterprise fund is a proprietary fund that is accounted for on the accrual basis. This basis of accounting recognizes revenues in the accounting period in which the exchange occurs.

Question 50

In which situation(s) are property taxes due to a governmental unit recorded as deferred revenue?

I. Property taxes receivable are recognized in advance of the year for which they are levied.

II. Property taxes receivable are collected in advance of the year in which they are levied.

A. I only.
B. Both I and II.
C. II only.
D. Neither I nor II.

Answer 50

B. Both I and II.

Answer (B) is correct. Property taxes are recognized on the modified accrual basis in the governmental funds. A property tax assessment is made to finance the budget of a specific period. Hence, the revenue produced should be recognized in the period for which the assessment was levied, provided it meets the criterion of being susceptible to accrual (available and measurable). When property taxes are recognized or collected in advance, they should be recorded as deferred revenue in a governmental fund. They are not recognized as revenue until the year for which they are levied. A property tax assessment is classified as an imposed nonexchange revenue transaction. In such a transaction, assets (not revenues) should be recognized when an enforceable legal claim arises or when resources are received, whichever is earlier. Thus, recognition of a receivable in a year prior to that for which the property taxes were levied implies that, under the enabling statute, the enforceable legal claim arose in that prior year.

Question 51

A public school district should recognize revenue from property taxes levied for its debt service fund when

A. Bonds to be retired by the levy are due and payable.

B. Assessed valuations of property subject to the levy are known.

C. Funds from the levy are measurable and available to the district.

D. Proceeds from collection of the levy are deposited in the district’s bank account.

Answer 51

C. Funds from the levy are measurable and available to the district.

Answer (C) is correct. Debt service funds apply the modified accrual basis of accounting. Thus, revenues are recognized when they are susceptible to accrual (measurable and available). Moreover, assets from imposed nonexchange revenue transactions, such as property tax levies, should be recognized when an enforceable legal claim arises or the resources are received, whichever is earlier. If the legal claim arises in the period after that for which the property taxes are levied, a receivable is recognized when revenues are recognized. Revenues are recognized in the period for which the taxes are levied if the availability criterion is met. For property taxes, this criterion is met if the taxes are collected within the current period or soon enough afterward (not exceeding 60 days) to pay current liabilities.

Question 52

Governmental fund financial statements are prepared using the

Economic Resources Measurement Focus…
Current Financial Resources Measurement Focus…
Accrual Basis…
Modified Accrual Basis

A. Yes… No… Yes… No
B. No… Yes… No… Yes
C. Yes… No… No… Yes
D. No… Yes… Yes… No

Answer 52

B. No… Yes… No… Yes

Answer (B) is correct. The current financial resources measurement focus and the modified accrual basis of accounting are required in the financial statements of governmental funds. The emphasis is on determination of financial position and changes therein (sources, uses, and balances of financial resources). Revenues should be recognized when they become available and measurable; expenditures should be recognized when the fund liability is incurred, if measurable. However, unmatured interest on general noncurrent liabilities is recognized when due.

Question 53

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

A. Buildings.
B. Sewer systems.
C. Roads.
D. Lighting systems.

Answer 53

A. Buildings.

Answer (A) is correct. Infrastructure assets are capital assets that normally are stationary and can be preserved for a longer time than most capital assets, e.g., roads, bridges, water and sewer systems, drainage systems, and lighting systems. However, buildings, other than those that are ancillary parts of a network of infrastructure assets, are not deemed to be infrastructure assets.

Question 54

If a capital asset is donated to a governmental unit, the asset is accounted for in an enterprise fund, and eligibility requirements are met, it should be recorded

A. At the donor’s carrying amount as revenue.
B. At estimated fair value as revenue.
C. At the lower of the donor’s carrying amount or estimated fair value as deferred revenues.
D. As a memorandum entry only.

Answer 54

B. At estimated fair value as revenue.

Answer (B) is correct. The amount to be reported for a capital asset ordinarily is its cost. However, if a capital asset is donated to a governmental unit, it should be recorded at its estimated fair value at the time of acquisition plus any ancillary charges. If the capital asset is accounted for in a proprietary fund, it should be reported in the government-wide statement of net assets and in the proprietary funds statement of net assets. For a voluntary nonexchange transaction, such as a contribution, assets are recognized when all eligibility requirements are met or the resources are provided, whichever is earlier. Revenue is recognized in the government-wide statement of activities and the proprietary funds statement of revenues, expenses, and changes in fund net assets (or fund equity) when eligibility requirements are met. Because an enterprise fund uses the accrual basis of accounting, the resources need not be “available.”

Question 55

The government-wide financial statements report capital assets

A. In the general fixed assets account group.
B. At historical cost, including ancillary charges.
C. Only in the notes if they are donated.
D. At estimated fair value.

Answer 55

B. At historical cost, including ancillary charges.

Answer (B) is correct. Capital assets include land, land improvements, easements, buildings, vehicles, machinery, equipment, works of art, historical treasures, infrastructure, and other tangible and intangible operating assets with useful lives greater than one reporting period. They are reported at historical cost, including ancillary charges necessary to put them in their intended location and condition for use. Ancillary charges, e.g., freight, site preparation, and professional fees, are directly attributable to acquisition of the assets.

Question 56

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 assets for governmental activities?

A. ($4,500)
B. $1,500
C. $7,500
D. $10,500

Answer 56

C. $7,500

Answer (C) is correct. General capital assets are not specifically related to activities reported in nongovernmental funds, usually result from expenditure of governmental fund financial resources, and should be reported at historical cost in the governmental activities column of the government-wide statement of net assets. They are not reported as assets in the fund financial statements. Moreover, capital assets must be depreciated unless they are infrastructure assets that meet certain requirements. The modified accrual basis of accounting is required in the financial statements of governmental funds, and the accrual basis of accounting is required in the government-wide statements. Thus, the calculation of the $1,500 net increase in the fund balance for governmental funds most likely reflects a $9,000 expenditure (modified accrual basis) to acquire the general capital assets. 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) for depreciation and a depreciated asset with a carrying amount of $6,000 ($9,000 cost – $3,000 depreciation). The effect of recognizing depreciation expense is a decrease in economic resources of $3,000. Reconciling the net increase in fund balance for governmental funds to the change in net assets for governmental activities therefore requires adding $6,000 ($9,000 modified accrual basis expenditure – $3,000 accrual basis expense). The change in net assets for governmental activities is $7,500 ($1,500 + $6,000 reconciling item).

Question 57

General capital assets and general noncurrent liabilities must be reported in the

A. Governmental funds financial statements.
B. General account groups.
C. General fund’s balance sheet.
D. Governmental activities column of the government-wide statement of net assets.

Answer 57

D. Governmental activities column of the government-wide statement of net assets.

Answer (D) is correct. General capital assets are not specifically related to activities reported in nongovernmental funds, usually result from expenditure of governmental fund financial resources, and should be reported in the governmental activities column of the government-wide statement of net assets. They are not reported as assets in governmental funds or in a general fixed assets account group. General noncurrent liabilities are not reported as liabilities in governmental funds or in a general noncurrent debt account group. They should be reported in the governmental activities column of the government-wide statement of net assets. General noncurrent liabilities include the unmatured principal amounts of general obligation indebtedness (such as bonds, warrants, and notes); lease-purchase agreements and other commitments not recorded as current liabilities in governmental funds; and the noncurrent portions of liabilities for capital leases, operating leases with scheduled rent increases, compensated absences, claims and judgments, pensions, special termination benefits, and landfill closure and postclosure care.

Question 58

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

A. Complete condition assessments must be performed annually.

B. Expenditures for the assets are capitalized.

C. No depreciation expense is required to be recognized.

D. The assets are not being preserved at or above the established and disclosed condition level.

Answer 58

C. No depreciation expense is required to be recognized.

Answer (C) is correct. 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 include an updated inventory of eligible infrastructure assets, perform condition assessments and summarize results using a measurement scale, and make annual estimates of the annual amounts needed to maintain the assets at the established condition level.

Question 59

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 assets?

A. General capital asset.
B. Other financing use.
C. Expenditure.
D. Not reported.

Answer 59

A. General capital asset.

Answer (A) is correct. In the government-wide financial statements, a capital lease obligation associated with general governmental activities is recorded as a general capital asset and a liability under the accrual basis of accounting. In governmental fund financial statements, the asset financed by a capital lease is debited to an expenditure, and the lease financing is credited to an other financing source under the modified accrual basis of accounting.

Question 60

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?

A. Purchase of fixed assets.
B. Payment to a debt-service fund.
C. Special items.
D. Proceeds from the sale of capital assets.

Answer 60

A. Purchase of fixed assets.

Answer (A) is correct. The general fund is a governmental fund. Governmental funds report capital outlays as expenditures. Thus, the purchase of fixed assets affects the excess of revenues over expenditures.

Question 61

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

A. Actual revenues were less than estimated revenues.
B. Estimated revenues exceed actual appropriations.
C. Actual expenditures exceed appropriations.
D. Appropriations exceed actual expenditures.

Answer 61

D. Appropriations exceed actual expenditures.

Answer (D) is correct. Fund balance is a real account. It is the difference between the assets and liabilities of a governmental fund. Appropriations (public funds set aside for a specific purpose) are recognized in the budgetary entry at the beginning of the fiscal period. If they exceed the government’s actual expenditures for the year, fund balance increases unless sufficient encumbrances are carried over to offset the excess.

Question 62

Park City uses encumbrance accounting and formally integrates its budget into the general fund’s accounting records. For the year ending July 31, 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 should have a:

A. $3,000,000 credit balance.
B. $3,000,000 debit balance.
C. $2,100,000 credit balance.
D. $2,100,000 debit balance.

Answer 62

C. $2,100,000 credit balance.

Answer (C) is correct. The initial entry to record the budget consists of a $30,000,000 debit to estimated revenues, a $27,000,000 credit to appropriations, and a $900,000 credit to estimated transfer to debt service fund (an estimated other financing use). The $2,100,000 difference between the debit and the sum of the credits is credited to budgetary fund balance. Some accountants prefer to use budgetary fund balance in the budgetary entry rather than fund balance. Budgetary fund balance is a nominal account that is eliminated at the end of the period. Fund balance is a real (balance sheet) account.

Question 63

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?

A. $9,000,000
B. $10,000,000
C. $14,000,000
D. $15,000,000

Answer 63

A. $9,000,000

Answer (A) is correct. Revenues are recognized in governmental funds when they are susceptible to accrual (measurable and available). They are increases in (sources of) fund financial resources other than from interfund transfers, debt issue proceeds, and redemptions of demand bonds. Interfund transfers-in are classified as other financing sources. Proceeds of long-term debt not recorded as fund liabilities also are classified as other financing sources. The major source classifications are (1) taxes, (2) licenses and permits, (3) intergovernmental revenues, (4) charges for services, (5) fines and forfeits, and (6) miscellaneous revenues. Hence, Maple’s revenues include taxes, licenses, and fines equal to $9 million.

Question 64

In the current year, New City issued purchase orders and contracts of $850,000 that were chargeable against the current year’s budgeted appropriations of $1,000,000. The journal entry to record the issuance of the purchase orders and contracts should include a

A. Credit to vouchers payable of $1,000,000.
B. Debit to encumbrances of $850,000.
C. Debit to expenditures of $1,000,000.
D. Credit to appropriations of $850,000.

Answer 64

B. Debit to encumbrances of $850,000.

Answer (B) is correct. When a purchase order is approved or a contract is signed, an estimated liability is recorded in the encumbrances account for the amount of the purchase order. The entry is a debit to encumbrances and a credit to the appropriate fund balance classification.

Question 65

Which of the following amounts are included in a general fund’s encumbrances account?

I. Outstanding vouchers payable amounts
II. Outstanding purchase order amounts
III. Excess of the amount of a purchase order over the actual expenditure for that order

A. I only.
B. Both I and III.
C. II only.
D. Both II and III.

Answer 65

C. II only.

Answer (C) is correct. The encumbrances account is debited when goods are approved to be purchased, and a purchase order is prepared. When he goods are actually received, it is credited. Thus, the encumbrances account includes only those amounts that represent outstanding purchase orders.

Question 66

Gold County received goods that had been approved for purchase but for which payment had not yet been made. Should the accounts listed below be increased?

Encumbrances… Expenditures

A. No… No
B. No… Yes
C. Yes… No
D. Yes… Yes

Answer 66

B. No… Yes

Answer (B) is correct. The encumbrances account will be decreased when previously ordered goods have been received. Expenditures and vouchers payable will be increased for the actual amount to be paid for the goods.

Question 67

During its fiscal year ended June 30, Cliff City issued purchase orders totaling $5,000,000, which were properly charged to encumbrances at that time. Cliff received goods and related invoices at the encumbered amounts totaling $4,500,000 before year end. The remaining goods of $500,000 were not received until after year end. Cliff paid $4,200,000 of the invoices received during the year. What amount of Cliff’s encumbrances were outstanding at June 30?

A. $0
B. $300,000
C. $500,000
D. $800,000

Answer 67

C. $500,000

Answer (C) is correct. In fund accounting, when a commitment is made to expend monies, the encumbrances account is debited and fund balance-committed (or assigned) is credited. When the goods are received, this entry is reversed. Because goods totaling $500,000 were not received at year end, encumbrances outstanding total $500,000 ($5,000,000 – $4,500,000). Assuming that encumbrances outstanding at year end do not lapse, they should be reported in the appropriate classification of fund balance.

Question 68

Elm City issued a purchase order for supplies with an estimated cost of $5,000. When the supplies were received, the accompanying invoice indicated an actual price of $4,950. Elm accounts for supplies in its general fund using the purchase method. What amount should Elm have debited (credited) to encumbrances after the supplies and invoice were received?

A. $(50)
B. $50
C. $4,950
D. ($5,000)

Answer 68

D. ($5,000)

Answer (D) is correct. Expenditures are actual decreases in net financial resources. They are recognized in the governmental funds when fund liabilities are incurred, if measurable. When goods are received by, or services are rendered to, a governmental unit, a journal entry is made to debit expenditures control and to credit vouchers payable. In addition, a previously recorded encumbrance must be reversed. This entry involves crediting encumbrances and debiting the appropriate classification of fund balance for $5,000.

Question 69

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

A. Yes… Yes
B. Yes… No
C. No… Yes
D. No… No

Answer 69

C. No… Yes

Answer (C) is correct. The current financial resources measurement focus and the modified accrual basis of accounting are required in the financial statements of governmental funds. Because a special revenue fund is a governmental fund, it should maintain its accounts on the modified accrual basis. The integration of budgetary accounts into the formal accounting system is a management control technique used to assist in controlling expenditures and enforcing revenue provisions. The extent to which the budgetary accounts should be integrated varies among governmental fund types and according to the nature of fund transactions. However, integration is considered essential in the general fund, special revenue funds, and other annually budgeted governmental funds with numerous types of revenues, expenditures, and transfers. Thus, a special revenue fund with a legally adopted budget should integrate its budgetary accounts into its accounting system.

Question 70

The following information pertains to Park Township’s general fund at December 31:

Total assets, including $200,000 of cash…$1,000,000
Total liabilities… 600,000
Fund balance – committed… 100,000

At December 31, what amount should Park report as unassigned fund balance for the general fund in its governmental funds balance sheet?

A. $200,000
B. $300,000
C. $400,000
D. $500,000

Answer 70

B. $300,000

Answer (B) is correct. The amount in the unassigned fund balance is equal to the amount of assets available to finance expenditures of the current and succeeding years that is not nonspendable, restricted, committed, or assigned. Unassigned fund balance is the residual classification of the general fund. The fund balance is $400,000 ($1,000,000 assets – $600,000 liabilities). Given that $100,000 is committed, the unassigned fund balance is $300,000 ($400,000 – $100,000). Fund balance is committed to the extent it can only be used for specific purposes determined by formal action of the government’s highest decision maker.

Question 71

A budgetary fund balance encumbered for an amount in excess of a balance of encumbrances indicates

A. An excess of vouchers payable over encumbrances.

B. An excess of appropriations over encumbrances.

C. An excess of purchase orders over invoices received.

D. A recording error.

Answer 71

D. A recording error.

Answer (D) is correct. The entry to record an encumbrance is a debit to encumbrances and a credit to the appropriate classification of fund balance. Thus, the amount by which budgetary fund balance is encumbered should never exceed encumbrances. If it does, a recording error must exist.

Question 72

Encumbrances would not appear in which fund?

A. Capital projects.
B. Special revenue.
C. General.
D. Enterprise.

Answer 72

D. Enterprise.

Answer (D) is correct. Encumbrances are budgetary control accounts. They are used only for internal purposes in governmental funds, especially general and special revenue funds. An enterprise fund is a proprietary fund. The accounts and reports of proprietary funds are maintained and prepared in essentially the same way as in for-profit accounting. Thus, budgetary control accounts are not used in enterprise funds.

Question 73

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?

A. Derived tax revenue.
B. Imposed nonexchange revenue.
C. Government-mandated transaction.
D. Voluntary nonexchange transaction.

Answer 73

A. Derived tax revenue.

Answer (A) is correct. Derived tax revenues are assessments on exchange transactions, for example, income, sales, and, in this case, hotel room rentals. The government recognizes assets when the underlying exchange occurs (or when resources are received, if earlier). Revenues (net of estimated refunds) are recognized when the underlying exchange occurs. The requirements to use the proceeds for promotion of tourism is a purpose restriction, and the resulting net assets, equity, or fund balance is restricted until used.

Question 74

Resources received as a result of revenue-generating activities, such as interest and rents, are recognized as revenues in a governmental fund when they are measurable and available. Revenues received as a result of an imposed nonexchange transaction, such as property taxes or fines, are recognized when the

A. Resources to be received are measurable and available.

B. Governmental body has a legally enforceable right to the resources.

C. Time period in which the resources can be used begins.

D. Resources are received.

Answer 74

C. Time period in which the resources can be used begins.

Answer (C) is correct. A governmental fund is accounted for on the modified accrued basis. Thus, revenues are recognized when the resources to be received are susceptible to accrual (measurable and available). Furthermore, imposed non-exchange revenues also cannot be recognized until (1) the period in which the resources must be used or (2) the first period in which use is permitted. But a receivable may be accrued when the governmental body has a legally enforceable right to the resources.

Question 75

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?

A. $0
B. $300,000
C. $450,000
D. $750,000

Answer 75

B. $300,000

Answer (B) is correct. Governmental fund revenues are increases in fund financial resources other than from interfund transfers, debt issue proceeds, and redemptions of demand bonds. Thus, revenues of a capital projects fund include grants. The grant (a voluntary nonexchange transaction) is recognized when all eligibility requirements, including time requirements, have been met. When modified accrual accounting is used, as in a capital projects fund, the grant must also be “available.” Other financing sources include proceeds from bonds and interfund transfers.

Question 76

The renovation of Fir City’s municipal park was accounted for in a capital projects fund. Financing for the renovation, which was begun and completed in the same year, came from the following sources:

Grant from state government… $400,000
Proceeds from general obligation bond issue…500,000
Transfer from Fir’s general fund… 100,000

In its governmental funds statement of revenues, expenditures, and changes in fund balances for the year, Fir should report these amounts as

Revenues… Other Financing Sources

A. $1,000,000… $0
B. $900,000… $100,000
C. $400,000… $600,000
D. $0… $1,000,000

Answer 76

C. $400,000… $600,000

Answer (C) is correct. Governmental fund revenues are increases in fund financial resources other than from interfund transfers, debt issue proceeds, and redemptions of demand bonds. Thus, revenues of a capital projects fund include grants. The grant (a voluntary nonexchange transaction) is recognized when all eligibility requirements, including time requirements, have been met. When modified accrual accounting is used, as in a capital projects fund, the grant also must be “available.” Other financing sources include proceeds from bonds and interfund transfers. Thus, Fir reports revenues of $400,000 and other financing sources of $600,000 ($500,000 + $100,000) in its governmental fund statement of revenues, expenditures, and changes in fund balances.

Question 77

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 with the balance expected to be incurred in Year 2.

When should the bond proceeds be recorded in a capital projects fund?

A. $5,000,000 in Year 1.
B. $5,000,000 in Year 2.
C. $1,000,000 in Year 1 and $4,000,000 in Year 2.
D. $1,000,000 in Year 1 and in the general fund for $4,000,000 in Year 1.

Answer 77

A. $5,000,000 in Year 1.

Answer (A) is correct. The general obligation debt will be reported as a general noncurrent liability in the governmental activities column of the government-wide statements of net assets, and expenditures will be recorded in Year 1 and Year 2. The face amount of long-term debt, issuance premium or discount, certain payments to escrow agents for bond refundings, transfers, and sales of capital assets not qualifying as special items are reported as other financing sources and uses in the governmental funds statement of revenues, expenditures, and changes in fund balances. Thus, the entry in the capital projects fund in Year 1, the year of receipt, to record the bond proceeds is a debit to cash and a credit to other financing sources - bond issue proceeds for $5,000,000.

Question 78

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

A. The relationship between the amount of value given and received.

B. Time requirements and whether the transaction is required by law.

C. Purpose restrictions placed upon fund balances.

D. Whether resources acquired can be further exchanged.

Answer 78

A. The relationship between the amount of value given and received.

Answer (A) is correct. In a nonexchange transaction, a government either gives or receives value without directly receiving or giving equal value in return.

Question 79

During the year, Public College received the following:

An unrestricted $50,000 pledge to be paid the following year
A $25,000 cash gift restricted for scholarships
A notice from a recent graduate that the college is named as a beneficiary of $10,000 in that graduate’s will

What amount of contribution revenue should Public College report in its statement of activities?

A. $25,000
B. $35,000
C. $75,000
D. $85,000

Answer 79

C. $75,000

Answer (C) is correct. The private donations are voluntary nonexchange transactions. These arise from legislative or contractual agreements, other than exchanges, entered into willingly by the parties (e.g., certain grants and private donations). Revenues are recognized by recipients when all eligibility requirements are met. Thus, a recipient debits an asset or a liability and credits revenue. Eligibility requirements are that (1) the recipient has certain characteristics (e.g., it is a public college); (2) any time requirements are satisfied (e.g., use in a given period); (3) the donation is on an expenditure-driven basis, and the recipient has incurred costs; and (4) a contingent recipient action required by the provider has occurred. In the case of the contributions to Public College, only the first requirement applies, and it has been satisfied. The promise of $50,000 in cash to be paid the following year is recognizable as a receivable and a revenue in the current year if, in addition to meeting eligibility requirements, (1) the promise is verifiable and (2) the resources are measurable and probable of collection. The $25,000 of restricted cash already
received also should be treated as revenue. The testamentary gift is not recognized as revenue because of verifiability and collectibility issues. For example, the gift may not be received for many years if the recent graduate is young, and the will may be changed.

Question 80

What is MD&A?

Answer 80

Management’s Discussion & Analysis

Question 81

What is RSI?

Answer 81

Required Supplementary Information

Question 82

Financial reporting by general-purpose governments includes presentation of MD&A as

A. Required supplementary information after the notes to the financial statements.

B. Part of the basic financial statements.

C. A description of currently known facts, decisions, or conditions expected to have significant effects on financial activities.

D. Information that may be limited to highlighting the amounts and percentages of change from the prior to the current year.

Answer 82

C. A description of currently known facts, decisions, or conditions expected to have significant effects on financial activities.

Answer (C) is correct. Management’s discussion and analysis (MD&A) is required supplementary information (RSI) that precedes the basic financial statements and provides an analytical overview of financial activities. It is based on currently known facts, decisions, or conditions and includes comparisons of the current and prior years, with an emphasis on the current year, based on government-wide information. Currently known facts are those of which management is aware at the audit report date.

Question 83

Users of a government’s financial statements should be able to distinguish between the primary government and its component units. Furthermore, an overview of the discretely presented component units should be provided. Accordingly,

A. The government-wide statements provide discrete presentation of component unit data, including data for fiduciary component units.

B. Condensed financial statements for major component units must be presented in the notes to the basic statements.

C. Information about each major component unit must be provided in the reporting entity’s basic statements.

D. Major component unit information must be provided in the form of combining statements.

Answer 83

C. Information about each major component unit must be provided in the reporting entity’s basic statements.

Answer (C) is correct. To provide an overview of component units, discrete presentation of component unit data is required in the government- wide statements, but fiduciary component units are included only in the fund statements. Blended component units are reported in accordance with GASB guidance. Each major component unit should be reported in the basic statements by presentation (1) in a separate column in the government-wide statements, (2) in combining statements of major component units after the fund statements, or (3) of condensed statements (a statement of net assets and a statement of activities) in the notes. The aggregated total component unit information should be the entity totals derived from the component units’ statements of net assets and activities. However, major component unit information is not required for fiduciary component units.

Question 84

Government-wide financial statements

A. Display individual funds.

B. Display aggregated information about fund types.

C. Exclude information about discretely presented component units.

D. Use separate columns to distinguish between governmental and business-type activities.

Answer 84

D. Use separate columns to distinguish between governmental and business-type activities.

Answer (D) is correct. The basic financial statements include government-wide financial statements, fund financial statements, and the notes to the financial statements. Government-wide financial 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 by reporting such information in separate rows and columns.

Question 85

During the year just ended, Todd City received two state grants: one to buy a bus and one for bus operation. During the year, 90% of the capital grant was used for the bus purchase, but 100% of the operating grant was disbursed. Todd accounts for its bus operations in an enterprise fund. Todd is liable for general obligation bonds issued for the water and sewer fund, which will service the debt, and for revenue bonds to be repaid from admission fees collected from users of the municipal recreation center. Both issues are expected to be paid from enterprise funds and to be secured by Todd’s full faith and credit, as well as its taxing power. Which of Todd’s noncurrent obligations should be accounted for only in the government-wide financial statements?

General Obligation Bonds… Revenue Bonds

A. Yes… Yes
B. Yes… No
C. No… Yes
D. No… No

Answer 85

D. No… No

Answer (D) is correct. Noncurrent liabilities directly related to and expected to be paid from a proprietary fund, such as an enterprise fund, are not general noncurrent liabilities. They should be reported in the proprietary fund statement of net assets as well as the government-wide statement of net assets. 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.

Question 86

The government-wide statement of activities reports

A. Activities accounted for in governmental funds by segment.
B. Activities accounted for in enterprise funds at the fund level of detail.
C. Net (expense) revenue for each function equal to expenses minus program revenues.
D. Net (expense) revenue for each function equal to expenses minus general revenues.

Answer 86

C. Net (expense) revenue for each function equal to expenses minus program revenues.

Answer (C) is correct. The statement of activities presents operations in a format that displays net (expense) revenue for each function, thereby reporting 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, i.e., charges or fees and fines deriving directly from the function or program, and contributions that are restricted to the function or program.

Question 87

Which of the following activities should be excluded when fund financial statements are converted to government-wide financial statements?

A. Proprietary activities.
B. Fiduciary activities.
C. Government activities.
D. Enterprise activities.

Answer 87

B. Fiduciary activities.

Answer (B) is correct. 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 assets and changes in fiduciary net assets). Moreover, fund receivables from, or payables to, fiduciary funds are treated in the government-wide statement of net assets as amounts arising from transactions with external parties, not as internal balances. Thus, they are reclassified, not eliminated in the preparation of the government-wide statements.

Question 88

Tott City’s serial bonds are serviced through a debt service fund with cash provided by the general fund. In the financial statements of the governmental funds, how are cash receipts and cash payments reported?

Cash Receipts… Cash Payments

A. Revenues… Expenditures
B. Revenues… Interfund transfers
C. Interfund transfers… Expenditures
D. Interfund transfers… Interfund transfers

Answer 88

C. Interfund transfers… Expenditures

Answer (C) is correct. Cash receipts of a debt service fund provided by the general fund are interfund transfers (other financing sources), not revenues. The cash receipts are interfund transfers because they are nonreciprocal activities with no repayment required. Cash payments made to retire principal and interest payments of serial bonds are recorded as expenditures of the governmental unit’s resources. An expenditure is recognized in a governmental fund when the liability is incurred, if measurable, except for the unmatured principal and interest on general long-term debt (e.g., the serial bonds), which are recognized when due.

Question 89

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 of the year of issue?

A. $1,000
B. $500
C. $250
D. $0

Answer 89

D. $0

Answer (D) is correct. The debt service fund of a governmental unit is a governmental fund that accounts for resources restricted, committed, or assigned to paying principal and interest. But these funds do not account for the debt itself. They also account for resources being accumulated for future principal and interest payments. Bond issuance premium may be recorded as an other financing source in the debt service fund. However, because this fund has a current financial resources measurement focus, that is, a focus on fiscal accountability for current spendable resources, premium is not amortized in the debt service fund.

Question 90

In connection with Albury Township’s long-term debt, the following cash accumulations are available to cover payment of principal and interest on

Bonds for financing of water treatment plant construction… $1,000,000
General long-term obligations… 400,000

The amount of these cash accumulations that should be accounted for in Albury’s debt service funds is:

A. $0
B. $400,000
C. $1,000,000
D. $1,400,000

Answer 90

B. $400,000

Answer (B) is correct. A debt service fund is used to account for resources restricted, committed, or assigned to paying principal and interest. But these funds do not account for the debt itself. They also account for resources being accumulated for future principal and interest payments. Water treatment plants and other utilities are customarily accounted for in enterprise funds because they tend to be financed and operated in the same manner as private businesses. Cash accumulations to cover payment of principal and interest on enterprise fund obligations are accounted for in the enterprise fund itself. Hence, only the $400,000 of proceeds from general long-term obligations should be accounted for in the debt service funds.

Question 91

Dale City is accumulating financial resources that are legally restricted to payments of general long-term debt principal and interest maturing in future years. At December 31 of the current year, $5,000,000 has been accumulated for principal payments, and $300,000 has been accumulated for interest payments. These restricted funds should be accounted for in the

Debt Service Fund… General Fund

A. $0… $5,300,000
B. $300,000… $5,000,000
C. $5,000,000… $300,000
D. $5,300,000… $0

Answer 91

D. $5,300,000… $0

Answer (D) is correct. Debt service funds account for resources restricted, committed, or assigned to paying principal and interest. But these funds do not account for the debt itself. They also account for resources being accumulated for future principal and interest payments. The general fund does not account for these transactions, except to record transfers to the debt service fund.

Question 92

The focus of certain fund financial statements is on major funds. Accordingly,

A. Major internal service funds must be presented separately in the statement of net assets for proprietary funds.

B. The main operating fund is always reported as a major fund.

C. Combining statements for nonmajor funds are required.

D. Enterprise funds not meeting the quantitative criteria are not eligible for presentation as major funds.

Answer 92

B. The main operating fund is always reported as a major fund.

Answer (B) is correct. The focus of governmental and enterprise fund financial statements is on major funds. Major fund reporting is not required for internal service funds. Each major fund is presented in a separate column and nonmajor funds in one column. Combining statements are not required for nonmajor funds. The main operating fund (e.g., the general fund) is always reported as a major fund,
and any governmental or enterprise fund believed to be particularly important to users may also be reported in this way. Other individual governmental or enterprise funds must be reported as major if they meet the quantitative thresholds.

Question 93

A fund must be reported as major if

A. Total assets of that fund are at least 10% of the total assets of all governmental funds.

B. Total expenditures of that fund are at least 10% of the total expenditures of all governmental funds and enterprise funds combined.

C. Total liabilities of that fund are 10% of the total liabilities of all governmental funds and 5% of the total liabilities of all governmental and enterprise funds combined.

D. Total revenues of that fund are 10% of the total revenues of all governmental funds and 3% of the total revenues of all enterprise funds.

Answer 93

C. Total liabilities of that fund are 10% of the total liabilities of all governmental funds and 5% of the total liabilities of all governmental and enterprise funds combined.

Answer (C) is correct. The main operating fund (e.g., the general fund) is always reported as a major fund, and any governmental or enterprise fund believed to be particularly important to users also may be reported as a major fund. Moreover, any
fund must be reported as major if revenues, expenditures/expenses, assets, or liabilities (excluding revenues and expenditures/expenses reported as extraordinary items) of the fund are (1) at least 10% of the corresponding element total for all funds of the same category or type, that is, for all governmental or all enterprise funds, and (2) the same element that met the 10% criterion is at least 5% of the corresponding element total for all governmental and enterprise funds combined.

Question 94

Which financial statement must be presented for governmental funds?

A. A statement of activities.
B. A statement of cash flows.
C. A statement of revenues, expenses, and changes in fund net assets.
D. A financial statement in balance sheet format.

Answer 94

D. A financial statement in balance sheet format.

Answer (D) is correct. A balance sheet is required for governmental funds. It should be in balance sheet format (assets = liabilities + fund balances) with a total column and segregation of fund balances into reserved and unreserved amounts.

Question 95

A statement of revenues, expenditures, and changes in fund balances must be reported for governmental funds. In that statement,

A. Debt refundings are treated as extraordinary items.

B. Revenues are classified, at a minimum, by function.

C. Proceeds of long-term debt should be reported in the other financing sources and uses classification.

D. Expenditures are classified by major expenditure source.

Answer 95

C. Proceeds of long-term debt should be reported in the other financing sources and uses classification.

Answer (C) is correct. A statement of revenues, expenditures, and changes in fund balances is required for governmental funds. It reports inflows, outflows, and balances of current financial resources for each major fund, for nonmajor funds in the aggregate, and in a total column. In this statement, the other financing sources and uses classification appears after excess (deficiency) of revenues over expenditures. Other financing sources and uses include the face amount of long-term debt, issuance premium or discount, some payments to escrow agents for bond refundings, transfers, and sales of most capital assets.

Question 96

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?

A. $100,000
B. $400,000
C. $800,000
D. $900,000

Answer 96

A. $100,000

Answer (A) is correct. Other financing sources and uses are reported in the governmental funds statement of revenues, expenditures, and changes in fund balances. They include (1) the face amount of long-term debt, (2) issuance premium or discount, (3) some payments to escrow agents for bond refundings, (4) interfund transfers, and (5) sales of capital assets. Accordingly, the only item reported in the general fund as other financing uses is the $100,000 transfer to a debt service fund.

Question 97

Nox City reported a $25,000 net increase in the fund balances for total governmental funds. Nox also reported an increase in net assets 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 assets for governmental activities?

A. $25,000
B. $34,000
C. $41,000
D. $46,000

Answer 97

B. $34,000

Answer (B) is correct. Separate rows and columns are used in the government-wide financial statements to distinguish between governmental and business-type activities of the primary government. Governmental activities are normally reported in governmental funds and internal service funds. Proprietary funds consist of enterprise and internal service funds. Business-type activities are usually reported in enterprise funds. Thus, the change in net assets for governmental activities is $34,000 ($25,000 net increase for all governmental funds + $9,000 net increase for the internal service funds). Fiduciary activities, such as those of an employee pension fund, are reported only in the fiduciary fund financial statements because their resources are not available for the government’s programs.

Question 98

The statement of revenues, expenses, and changes in fund net assets for proprietary funds

A. Combines special and extraordinary items in a subtotal presented before nonoperating revenues and expenses.

B. Must report revenues at gross amounts, with discounts and allowances disclosed parenthetically.

C. Distinguishes between operating and nonoperating revenues and expenses.

D. Must define operating items in the same way as in the statement of cash flows.

Answer 98

C. Distinguishes between operating and nonoperating revenues and expenses.

Answer (C) is correct. A statement of revenues, expenses, and changes in fund net assets or fund equity (either label may be used) is the required operating statement for proprietary funds. Operating and nonoperating revenues and expenses should be
distinguished, with separate subtotals for operating revenues, operating expenses, and operating income.

Question 99

In a statement of net assets or balance sheet for proprietary funds,

A. Net assets must be reported in two components: restricted or unrestricted.

B. Capital contributions must be reported in a separate component of net assets.

C. Designations must be shown on the face of the statement.

D. Assets and liabilities must be classified.

Answer 99

D. Assets and liabilities must be classified.

Answer (D) is correct. A statement of net assets or balance sheet is required for proprietary funds, and assets and liabilities must be classified as current or noncurrent. Either a net assets format (assets – liabilities = net assets) or a balance sheet format (assets = liabilities + net assets) may be used. Furthermore, net assets should be reported in three components (invested in capital assets, net of related debt; restricted; and unrestricted), capital contributions should not be displayed as a separate component, and designations should not be shown on the face of the statements.

Question 100

The debt service transactions of a special assessment bond issue for which the government is not obligated in any manner should be reported in a(n)

A. Agency fund.
B. Enterprise fund.
C. Special revenue fund.
D. Debt service fund.

Answer 100

A. Agency fund.

Answer (A) is correct. The debt service transactions of a special assessment issue for which the government is not obligated in any manner should be reported in an agency fund rather than a debt service fund. This treatment reflects the limitation of the government’s duty to act as an agent for the assessed property owners and the bondholders.

Question 101

Items reported only in the fund financial statements of a general-purpose government are those arising from

A. Proprietary activities.
B. Fiduciary activities.
C. Exchange-like transactions.
D. Nonexchange-like transactions.

Answer 101

B. Fiduciary activities.

Answer (B) is correct. The resources of fiduciary activities are not available to finance the government’s programs. Thus, they are reported only in the fund financial statements. Fiduciary activities are reported in or with the fiduciary funds of the primary government. Fiduciary component units are reported with the primary government’s fiduciary funds only in the fund financial statements.

Question 102

Which financial statements must be reported for fiduciary funds?

I. Statement of fiduciary net assets
II. Statement of changes in fiduciary net assets
III. Statement of revenues, expenditures, and changes in fund balances
IV. Statement of cash flows

A. I and II only.
B. I, II, and III only.
C. II, III, and IV only.
D. I, II, III, and IV.

Answer 102

A. I and II only.

Answer (A) is correct. Fiduciary fund financial statements include information about all fiduciary funds and similar component units. The statements report information in a separate column for each fund type but not by major fund. The notes present financial statements for individual pension plans and postemployment healthcare plans unless separate GAAP reports have been issued. A statement of fiduciary net assets (equivalent to the statement of plan net assets required for defined benefit pension plans) is required for fiduciary funds. It reports assets, liabilities, and net assets for each fiduciary fund type but does not present the three components of net assets reported in the government-wide statement of net assets or in the proprietary fund statement of net assets. A statement of changes in fiduciary net assets (equivalent to the statement of changes in plan net assets required for defined benefit pension plans) is required for fiduciary funds. It reports additions to, subtractions from, and the annual net change in net assets for each fiduciary fund type.

Question 103

On December 31 of the current year, Elm Village paid a contractor $4,500,000 for the total cost of a new Village Hall built during the current year on Village-owned land. Financing for the capital project was provided by a $3,000,000 general obligation bond issue sold at face amount on December 31 of the current year, with the remaining $1,500,000 transferred from the general fund. What account and amount should be reported in Elm’s current-year financial statements for the general fund?

A. Other financing sources control $4,500,000
B. Expenditures control $4,500,000
C. Other financing sources control $3,000,000
D. Other financing uses control $1,500,000

Answer 103

D. Other financing uses control $1,500,000

Answer (D) is correct. Accounting for state and local governments requires that transfers be reported as other financing sources by the governmental fund receiving the transfer and other financing uses by the governmental fund making the transfer. However, the bond issue proceeds and the cost of construction will be accounted for in the capital projects fund. Accordingly, the general fund should record only the interfund transfer out. The appropriate entry is to debit other financing uses control – interfund transfer for $1,500,000 and to credit a liability. The capital projects fund should credit other financing sources – interfund transfer for $1,500,000 and debit a receivable.

Question 104

During the current year, a city’s electric utility, which is operated as an enterprise fund, rendered billings for electricity supplied to the general fund. Which of the following accounts should be debited by the general fund?

A. Appropriations.
B. Expenditures.
C. Due to electric utility enterprise fund.
D. Other financing uses – interfund transfer-out.

Answer 104

B. Expenditures.

Answer (B) is correct. Enterprise funds are used to account for operations similar to those of private businesses. This rendition of services by the enterprise fund to the general fund is presumably at prices equivalent to external exchange values. Thus, it is classified as an interfund service provided and used. The result is revenue to the seller (the enterprise fund) and an expenditure to the buyer (the general fund). Unpaid amounts are interfund receivables or payables. The entry is to debit expenditures control and credit due to enterprise fund.

Question 105

The following pertains to Grove City’s interfund receivables and payables at December 31:

Due to special revenue fund from general fund $10,000 Due to agency fund from special revenue fund 4,000 How should Grove report these interfund amounts for the special revenue fund in its governmental fund balance sheet at December 31?

A. As an asset of $6,000.
B. As a liability of $6,000.
C. As an asset of $4,000 and a liability of $10,000.
D. As an asset of $10,000 and a liability of $4,000.

Answer 105

D. As an asset of $10,000 and a liability of $4,000.

Answer (D) is correct. In a special revenue fund, funds due to the special revenue fund are receivables (assets), and funds due to another fund from the special revenue fund are payables (liabilities). Thus, Grove should report a $10,000 asset and a $4,000 liability in the special revenue fund.

Question 106

An internal service provided and used

A. Is the internal counterpart to a nonexchange transaction.

B. Results in expenditures or expenses to buyer funds and revenues to seller funds.

C. Normally is accounted for as a reimbursement.

D. Requires recognition of an other financing source by the transferee fund and an other financing use by the transferor fund.

Answer 106

B. Results in expenditures or expenses to buyer funds and revenues to seller funds.

Answer (B) is correct. Interfund services provided and used are transactions at prices equivalent to external exchange values. They result in revenues to seller funds and expenditures or expenses to buyer funds. Unpaid amounts are interfund receivables or payables.