Chapter 28

Question 1

Which of the following would qualify as a merger?
A. Two separate legal entities combine to form an entirely new government.
B. One legal entity absorbs another legal entity.
C. Both A and B

Answer 1

In a merger, two or more legally separate entities are combined and at least one of them ceases to exist as a separate legal entity: either Entity A is combined with Entity B to form a new legal entity that did not exist previously; or Entity A is absorbed by Entity B. [Correct response = C]

Question 2

Which of the following would always involve the exchange of significant consideration?
A. A merger
B. An acquisition
C. A transfer of operations
D. All of the above
E. None of the above

Answer 2

In a merger, there is no exchange of significant consideration. Likewise, in a transfer of operations, a specific operation is reassigned from one entity to another, without the exchange of significant consideration. Conversely, in an acquisition, one entity obtains another entity, or one of its operations, as a result of the exchange of significant consideration. [Correct response = B]

Question 3

Which of the following must be present for a transfer of operations?
A. The operation being transferred comprises an integrated set of activities that provide identifiable services.
B. Services provided after the transfer will be essentially the same as those provided before.
C. Both A and B
D. Either A or B

Answer 3

An operation is “an integrated set of activities conducted and managed for the purpose of providing identifiable services with associated assets or liabilities.” Any true government combination, including a transfer of operations, would always result in the transferred operation continuing to provide essentially the same services it did prior to the transfer. [Correct response = C

Question 4

The merger date is always the date a combination becomes effective.
A. True
B. False

Answer 4

If a merger results in the creation of a new government, the merger date would be the date the combination becomes effective. If the merger results in the merged entity being absorbed by a continuing government, the merger date would be the start of the continuing government’s fiscal period. [Correct response = B]

Question 5

In a merger, assets and liabilities of the merged entity are:
A. Normally reported at carrying value
B. Sometimes reported at carrying value
C. Never reported at carrying value

Answer 5

In a merger, the assets, liabilities, deferred outflows of resources, and deferred inflows of resources of the merged entity are pooled at carrying value with those of the new or continuing government. [Correct response = A]

Question 6

At what value would assets normally be reported in an acquisition?
A. At the amount necessary to acquire similar assets having similar service capacity
B. At the amount a buyer would be willing to pay for them
C. At carrying value

Answer 6

In an acquisition, assets and liabilities generally are reported at their acquisition value. For assets, acquisition value is defined as a “market-based entry price” (that is, the price that would have to be paid to acquire similar assets having similar service capacity as of the acquisition date). [Correct response = A]

Question 7

In an acquisition, how would a difference between the amount of consideration given and the amount of net position acquired be treated?
A. Deferred outflow of resources
B. Contribution
C. Special item
D. Reduction of the value of certain acquired assets
E. All of the above

Answer 7

An excess of consideration over net position acquired would be treated as a deferred outflow of resources. If the seller agreed to accept less consideration than the amount of net position given with the intent of providing economic assistance, the difference would be treated as a contribution; if not, the value reported for noncurrent, nonfinancial assets would be reduced, and any excess remaining would be treated as a special item. [Correct response = E]

Question 8

If an acquisition occurs within the financial reporting entity, acquired assets should be reported at:
A. Acquisition value
B. Carrying value
C. Fair value
D. None of the above

Answer 8

Sometimes acquisitions occur within the same financial reporting entity. In that case, the assets of the acquired entity should continue to be reported at their carrying value. [Correct response = B]

Question 9

Transfers of operations are treated in essentially the same manner as:
A. Mergers
B. Acquisitions
C. Neither A nor B

Answer 9

From the perspective of the government reporting continuing operations, a transfer of operations is accounted for in the same manner as a merger. [Correct response = A]

Question 10

Which of the following should be taken into account in calculating the gain or loss on a disposal of operations?
A. Adjustments
B. Costs associated with normal operating activities up to the measurement date
C. Cost directly associated with the disposal
D. All of the above
E. None of the above

Answer 10

The determination of the amount of the gain or loss on disposal should not include adjustments and costs associated with normal operating activities of the operation up to the measurement date, but should take into account costs directly associated with the disposal. [Correct response = C]

Question 11

Which of the following could be a counterparty in a nonexchange financial guarantee?
A. Another fund of the primary government
B. A blended component unit of the primary government
C. A discretely presented component unit of the primary government
D. All of the above
E. Both B and C

Answer 11

There are always at least three legally separate parties to a nonexchange financial guarantee. By definition, component units, whether discretely presented or blended, are separate legal entities; therefore, a component unit can be a party to a nonexchange financial guarantee involving the primary government. [Correct response = E]

Question 12

Authoritative guidance for nonexchange financial guarantees applies to which of the following?
A. Obligations related to revenue-supported debt
B. Obligations related to special assessments
C. “Joint and several” obligations
D. Both A and B
E. None of the above

Answer 12

The term nonexchange financial guarantees excludes obligations related to revenue-supported debt and obligations related to special assessments. The term also does not apply to “joint and several” obligations or to obligations that are not legally binding (for example, moral obligation debt). [Correct response = E]

Question 13

At what point should a guarantor recognize a liability for a nonexchange financial guarantee?
A. When it is considered reasonably possible that payments will be made
B. When it is considered more likely than not that payments will be made
C. When it is considered probable that payments will be made
D. When it is considered certain that payments will be made

Answer 13

A guarantor government recognizes a liability as soon as it is considered more likely than not (any likelihood greater than 50 percent) that payments will have to be made pursuant to a nonexchange financial guarantee. [Correct response = B]

Question 14

Which of the following would recognize a receivable in connection with debt guaranteed by the primary government based on the determination that payment was considered to be more likely than not?
A. Blended component unit
B. Discretely presented component unit
C. Both A and B
D. Neither A nor B

Answer 14

Normally the issuer of a guaranteed obligation would not report a receivable to match the liability reported by the guarantor, based on the general prohibition against the recognition of gain contingencies (that is, liabilities must be recognized as soon as they are probable or, in this case, more likely than not to occur, whereas assets cannot be recognized until their occurrence is certain). However, when both parties to a nonexchange financial guarantee are within the same primary government (for example, the primary government and a blended component unit or two blended component units of the same primary government), a corresponding receivable would be recognized to avoid reporting an artificial deficit for the primary government. [Correct response = A]

Question 15

The guarantor’s payment of a guaranteed obligation might be reflected by the issuer of the obligation as:
A. Elimination of the obligation
B. Revenue
C. Reclassification of the obligation
D. All of the above
E. Both A and B

Answer 15

The issuer of a guaranteed obligation must continue to report that obligation as a liability until legally released as an obligor. When that occurs, the decrease in the liability would be reported as revenue. However, governments that benefit from nonexchange financial guarantees frequently are legally obligated to repay the guarantor for payments made on their behalf. If so, the guaranteed obligation would not be eliminated, but instead reclassified as a liability to the guarantor. [Correct response = D]

Question 16

New employees earn one day of vacation leave each month, but their claim to the leave does not vest until they have actually completed nine months of service. At the end of six months of service (fiscal year end), there is a 90 percent chance that Employee A ultimately will complete the nine months of service required for the leave to vest. The current salary rate is $100/day. What would the amount of the related liability be in the government-wide financial statements?
A. $0
B. $540
C. $600

Answer 16

Earned vacation leave should be accrued in full as a liability if it is considered probable that an employee will, in fact, complete the required minimum period of service. [Correct response = C

Question 17

Which of the following statements is true regarding unused sick leave that is reimbursable upon retirement, in financial statements prepared using the economic resources measurement focus?
A. The leave should be accrued as part of the liability for compensated absences.
B. The leave may be accrued as part of the liability for compensated absences.
C. The leave should not be accrued as part of the liability for compensated absences.

Answer 17

Technically speaking, payments for unused sick leave do not constitute sick leave, because they are not contingent upon employee illness or medical necessity. Accordingly, they should be accrued as earned, like vacation leave. [Correct response = A]

Question 18

Which of the following payments, if any, normally would be included as part of the calculation of the liability for compensated absences?
A. Medicare taxes
B. Employer share of social security
C. Healthcare premiums
D. All of the above
E. Both A and B

Answer 18

Payments for compensated absences are not limited to wages and salaries— they typically also include other amounts that are directly and incrementally related to those payments (for example, the employer’s share of social security). Healthcare premiums normally are not incrementally related to wages and salaries. [Correct response = E]

Question 19

An employee has earned ten days of vacation leave. The employee’s current salary rate is $100/day. Following the end of the reporting period, but prior to the issuance of the financial statements, the employee’s salary rate increased to $110/day. Actual future payments are expected to be made at a salary rate of $120/day (present value = $115/day). What amount should be reported for the liability?
A. $1,000
B. $1,100
C. $1,150
D. $1,200

Answer 19

Authoritative accounting standards direct that financial statement preparers use the rates in effect at the end of each reporting period, regardless of subsequent changes prior to the issuance of the financial statements, as a practical surrogate for present value. [Correct response = A]

Question 20

Which of the following methods/approaches typically would be most appropriate for a government with only a few employees for reporting its liability for reimbursable unused sick leave?
A. Vesting
B. Days-paid
C. Dollars-paid
D. None of the above

Answer 20

Financial statement preparers can use either the termination payments method or the vesting method to calculate their liability for reimbursable unused sick leave. The termination payments methods, however, are based on the predictive value of past trend data, and therefore is of limited usefulness to employers with only a small number of employees. [Correct response = A]

Question 21

Which of the following statements is true?
A. Sabbaticals always should be treated as a compensated absence.
B. Sabbaticals sometimes should be treated as a compensated absence.
C. Sabbaticals never should be treated as a compensated absence.

Answer 21

Some sabbaticals are based upon the expectation of employee service during the sabbatical. In that case, payment during the sabbatical is just as much a form of ongoing compensation as regular salary payments. Other sabbaticals involve no such expectation of service. This latter type of sabbatical is, in substance, a form of vacation leave, and so needs to be accrued during the period that it is earned, just like any other compensated absence. [Correct response = B]

Question 22

An employee who works for a department reported in the general fund has earned $1,000 of compensated absences. It is anticipated that $300 of that amount will be paid out within 12 months. What amount, if any, should be reported as a fund liability?
A. $0
B. $300
C. $1,000

Answer 22

No expenditure is recognized in a governmental fund for the unpaid balance of compensated absences for employees still in active service as of the end of the reporting period. [Correct response = A]

Question 23

Which of the following is essential to revenue recognition for an expenditure-driven grant?
A. Incurrence of a qualifying expenditure
B. Compliance with matching requirements
C. Compliance with filing requirements
D. All of the above
E. Both A and B

Answer 23

Purely administrative requirements (filing reports with the grantor) have no effect on revenue recognition. [Correct response = E]

Question 24

A provider appropriates $20,000 for the biennium for entitlements. How much revenue should be recognized by the recipient at the start of the first year of the biennium, assuming that all eligibility requirements have been met?
A. $0
B. $10,000
C. $20,000

Answer 24

When the provider of an entitlement or shared revenue is a government that budgets on a biennial basis, each year of the biennium should be treated separately. That is, revenues related to the second year could not be recognized prior to the start of the second year. [Correct response = B

Question 25

Which of the following is essential to revenue recognition for entitlements and shared revenues?
A. Compliance with the relevant time requirement
B. Compliance with purpose restrictions
C. Both A and B
D. Neither A nor B

Answer 25

Eligibility requirements (such as time requirements) affect revenue recognition, whereas purpose restrictions do not. [Correct response = A

Question 26

A government has received a legally binding pledge for a $1 million contribution to an existing endowment that it reports in a permanent fund. The contribution will not actually be received until eight months following the close of the reporting period. What should the government report in the permanent fund as of the end of the reporting period?
A. Receivable $1 million/revenue $1 million
B. Receivable $1 million/deferred inflow of resources $1 million
C. Neither A nor B

Answer 26

Contributions to endowments, like other grants, cannot be recognized as revenue until all eligibility requirements have been met. In the case of an endowment, the eligibility requirement is to preserve (that is, not spend) the resources received; therefore, revenue related to contributions to an endowment cannot be recognized prior to receipt. Neither can a receivable be recognized prior to that time. [Correct response = C]

Question 27

Which of the following is a true statement regarding research grants?
A. Research grants are exchange or exchange-like transactions.
B. Research grants are non-exchange transactions.
C. Either A or B

Answer 27

Research grants that do not convey any rights to the grantor are properly considered non-exchange transactions. However, not infrequently, research grants entitle the private-sector provider to certain rights in relation to the resulting work product. If so, the portion of the “grant” equivalent to the estimated fair value of the work product should be treated as an exchange or exchange-like transaction, rather than as a nonexchange transaction. [Correct response = C]

Question 28

When should donated commodities be recognized as expenditures in a governmental fund?
A. When received
B. When consumed
C. Either A or B
D. Neither A nor B

Answer 28

Because commodities qualify as an inventory of supplies, they may be reported in governmental funds using either the consumption method (initially recognize an asset and then recognize expenditures as supplies are consumed) or the purchases method (recognize an expenditure at the same time revenue is recognized). [Correct response = C]

Question 29

Which of the following would disqualify a pass-through grant from being classified as a pure cash conduit?
A. Responsibility for eligibility determination
B. Responsibility for monitoring subrecipient compliance
C. Matching requirements
D. All of the above
E. Either A or B

Answer 29

A government’s administrative involvement (including responsibility for determining eligibility or monitoring subrecipient compliance) or direct financial involvement (matching requirements) would prevent the government from being considered a pure cash conduit. [Correct response = D]

Question 30

When, if ever, should on-behalf benefits be recognized as revenue by the employer (benefitting) government?
A. When salary and benefits are earned by employees
B. When payments are made or due to the third party
C. Never

Answer 30

The benefitting government should recognize on-behalf benefit payments as revenue in the period when payments are made or due to the third party. [Correct response = B]

Question 31

A government could be which of the following in a single irrevocable split-interest agreement?
A. A lead beneficiary and a remainder beneficiary
B. A lead beneficiary and an intermediary
C. A remainder beneficiary and an intermediary
D. Any of the above
E. B and C only

Answer 31

A government could be either a lead or remainder beneficiary of an ISA. A government might also be the intermediary administering the ISA. [Correct response = E

Question 32

A government that is both a remainder beneficiary and an intermediary will recognize which of the following upon inception of an ISA?
A. An asset and a liability only
B. An asset and a deferred inflow of resources only
C. An asset, a liability, and a deferred inflow of resources
D. An asset, a liability, and a deferred outflow of resources
E. An asset, a liability, a deferred inflow of resources, and a deferred outflow of resources

Answer 32

A government that is a remainder beneficiary and the intermediary of an ISA would recognize an asset for the ISA resources, a liability for the lead interest beneficiary’s interest, and a deferred inflow for its own remainder interest, at the inception of the agreement. [Correct response = C]

Question 33

How does the presence of a fiscal funding/cancellation clause in a lease contract affect the lease term?
A. The clause always should be factored into the length of the lease term.
B. The clause may be factored into length of the lease term.
C. The clause never should be factored into the length of the lease term

Answer 33

A fiscal funding/cancellation clause may be factored into the length of the lease term only if the chance of the clause being invoked is reasonably certain. [Correct response = B

Question 34

Which financial statement elements will a government lessee report in its government-wide financial statements?
A. Tangible capital asset
B. Intangible asset
C. Lease liability
D. None of the above
E. B and C

Answer 34

A lessee would report both an intangible right-to-use asset and a lease liability in a government lease transaction. [Correct response = E

Question 35

Which financial statement elements will a government lessor report in its government-wide financial statements?
A. Capital asset
B. Lease receivable
C. Deferred inflow of resources
D. All of the above
E. B and C

Answer 35

A lessor would record a lease receivable and a deferred inflow of resources at the inception of the lease. The lessor would also continue to report the underlying asset as its own capital asset and recognize depreciation expense on the asset. [Correct response = D]

Question 36

How should special assessment debt be reported?
A. Special assessment debt with governmental commitment
B. General obligation debt
C. Not reported
D. Any of the above, depending on the circumstances

Answer 36

(A) Governments are required to report a liability for special assessment debt with government commitment for any portion of special assessment debt that is expected to be repaid from property owners, unless it is clear that the government is not obligated in any manner for the repayment of the debt. (B) Any portion of the debt that the government intends to repay from sources other than assessments from the property owners should be reported simply as general obligation debt. (C) No-commitment special assessment debt is not reported as a liability. [Correct response = D]

Question 37

A government enters into an agreement to sell ten years of future revenues and the transaction meets the criteria for classification as a sale. How would the receipt of the proceeds of the transaction normally be reported in the government-wide financial statements?
A. Cash + revenue
B. Cash + deferred inflow of resources
C. Either A or B

Answer 37

In the case of a sale of future revenues, the amount received would need to be offset by a deferred inflow of resources (the sale of a future revenue stream may not result in the recognition of revenue earlier than would have been the case without the sale). [Correct response = B]

Question 38

Which of the following describes an arrangement that would qualify as a joint venture were it not for the absence of an ongoing financial interest/responsibility?
A. A jointly governed organization
B. An undivided interest
C. A cost-sharing agreement
D. All of the above

Answer 38

Jointly governed organizations meet most or all of the criteria to be classified as a joint venture except that they do not create an ongoing financial interest or financial responsibility. [Correct response = A]

Question 39

How would a pension fund that has a majority equity interest in another entity that is used exclusively to generate income for the fund, report the interest in its financial statements?
A. As a component unit of the pension fund
B. As a capital asset of the pension fund, with the value determined using the equity method
C. As an investment, with the value determined using the equity method
D. As an investment, with the value determined using fair value

Answer 39

The pension fund is holding a majority equity interest that meets the definition of an investment. The pension fund, a fiduciary fund, is required to report any majority equity interests held as investments at fair value. [Correct response = D]

Question 40

How would a government that has a majority equity interest in another entity that provides services to the government’s residents report the interest in its financial statements, assuming that a governmental fund acquired the majority equity interest?
A. As a component unit of the government
B. As an asset of the governmental fund, with the reported value limited to amounts that are reported under the current financial resources measurement focus
C. As an investment of the governmental fund, the value determined using the equity method
D. As an investment of the governmental fund, the value determined using fair value
E. Both A and B

Answer 40

An MEI that does not meet the definition of an investment should be reported as a component unit. The MEI would also be reported as an asset of the governmental fund with the reported value limited to amounts that are reported under the current financial resources measurement focus. [Correct response = E]