Section 2 - ch5 Flashcards
Assume that a government with a June 30 year-end pays the annual lease on a building. The period of the lease is Jan. 1-Dec. 31 and the amount is $60,000. The lease is paid on Jan. 1.
Purchases method entry
the purchases method is used, the government would recognize an expenditure of $60,000 when the payment is made.
Assume that a government with a June 30 year-end pays the annual lease on a building. The period of the lease is Jan. 1-Dec. 31 and the amount is $60,000. The lease is paid on Jan. 1.
Consumption method entry
If the consumption method is used, the following would be the journal entries.
Capital Outlay Recording in Governmental Funds The acquisition or construction of capital assets requires the use of current financial resources. As a result, an expenditure is recorded in the fund as follows:
(Retainage)
Many governments require a percentage of the progress payments on major construction contracts to be withheld from contractor invoices. This is referred to as retainage. After completion of the project and acceptance by the government, the contractor is paid the amount retained. Retainage does not affect the amount recorded as expenditure for capital outlay.
For example, assume that a contractor submits an invoice for $1.25 million on a project. The government requires a 10 percent retainage. The entry would be:
On the governmental funds operating statement, only capital expenditures of capital projects funds are sub-classified as being within capital outlay. A capital expenditure in any other fund is sub-classified in some other appropriate function or program. For example, if a fire truck is purchased through the general fund, the expenditure would be reported under public protection, fire department, or some other appropriate function.
The amount “consumed” systematically and rationally is commonly referred to as depreciation or amortization. Depreciation is an allocation that is often considered the amount of the capital asset that is “used up” during the operating period. Governments can use various methods to report depreciation. Amortization is the same process, but for an intangible asset.
common depreciation method used by governments is the straight-line method. This method assumes an asset is used equally over its life. For example, a vehicle that costs $15,000, and has a five-year life, would depreciate by $3,000 each year. The formula for the straight-line method is the depreciable basis of the asset, divided by the useful life.
If a salvage value is assumed for the asset at the end of its useful life, the salvage value is deducted from the cost to establish the amount that will be depreciated. Thus, in the above example, if the vehicle is assumed to have a salvage value of $5,000, the depreciable cost is $10,000 and the depreciation expense each year would be $2,000.
If the recipient government records the transaction in a governmental fund, normally, no entry is required since the contribution does not involve a flow of current financial resources. (An “other financing source” would be recorded if the government sold the asset.)
However, for the recipient government, a transaction is required if a proprietary or fiduciary fund is involved. In addition, a transaction is reported at the government-wide level for governmental activities. The assessed value of the contribution is reported on the operating statement, less any amount paid by the proprietary or fiduciary fund to the contributing entity.
For example, if a state donated land to a local government, the entry for the government-wide financial statements of the local government would be:
The transaction also would be reported on the operating statement of a proprietary fund, and the change in fund net position of a fiduciary fund.
If a governmental fund transferred a capital asset to a proprietary fund, the rule is that the asset would be reported in the proprietary fund at the net book value (historical cost, less accumulated depreciation) previously reported for governmental activities. The capital asset should be reported as capital contributions, rather than as a transfer in, as far as the proprietary fund is concerned.
However, on the statement of activities, the same event would be reclassified as a transfer from governmental activities to business-type activities.
Long-Term Obligation-Related Expenditures and Expenses
Long-term obligation-related transactions using modified accrual (current financial resources) are reported as expenditures. Transactions using accrual (economic resources) are reported as expenses.
Principal Payment on Long-Term Obligation
In governmental funds, the repayment of principal requires the use of current financial resources. As a result, the transaction is reported as an expenditure on the operating statement. For example, if the government made a principal-only payment on an outstanding bond, the following journal entry would be made:
For proprietary funds, fiduciary funds, and at the government-wide level, no expense is reported. The transaction results in the reduction of a long-term obligation.
Amortization is related to the liquidation of a debt or liability, and is like depreciation, in that it involves the use of a rational and systematic method to allocate the premium or discount over the life of the issue.
Amortization is related to the liquidation of a debt or liability, and is like depreciation, in that it involves the use of a rational and systematic method to allocate the premium or discount over the life of the issue.
A common method is the straight-line method.
Others include the effective interest rate method and proportionate-to-stated-interest-requirements method.
Revenues
*Revenues
A government may report revenues in 3 ways:
- Report revenues net, showing discounts or allowances in parenthesis
- Examples: Charges for Services (net of bad debts of $5,000) = $325,000
- Report revenues gross, reporting discounts or allowances separately
- Examples: Charges for Services = $345,000 LESS: Bad debts ($20,000)
- Report revenues net and disclose the discounts and allowances in the notes
Governmental Funds: (MA) Record revenue based on receipt of current financial resources
- Recognize revenue when it becomes both “measurable” and “available” (within 60 days of end of year for property tax revenue)
- Revenues not received during “availability period” should be “Deferred” and recognized when they become available… (dr) Property Tax Revenue; (cr) Deferred Revenue.
Proprietary Funds, Fiduciary Funds, and Government-Wide Reporting: (ACCRUAL)
- Government-Wide Statement of Activities and All fund types other than Governmental Funds recognize revenue based on the receipt of resources and record transactions in the period “earned” or when “owed”.
- Revenue that is “not earned” yet is “Deferred” units it is “earned” or “due”.
Proprietary Funds report revenues as operating and nonoperating.
- Operating Revenue:are directly attributable to goods and services provided.
- Nonoperating Revenue: result from other activities such as investment revenue, grants, interest, gain or loss on sale of assets
Types of Transactions
(Exchange, Exchange-Like, Nonexchange)
Types of Transactions:
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Exchange Transactions (Proprietary Funds):Governments have a large number including park and recreation fees, admittance fee, copying fees.
- Revenue is recognized in the period the exchange takes place.
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Exchange-Like Transactions (Proprietary Funds):Issuing a permit or granting a license — involve unequal benefits.
- Revenue is recognized in the period the exchange takes place.
- Nonexchange Transactions (Governmental Funds)
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*Derived Tax Revenues: Result when a government imposes a tax on an “exchange transaction”
*Derived Tax Revenues: Result when a government imposes a tax on an “exchange transaction”
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Income Taxes:Governments receive in 2 ways:
- Employers are required to withhold income taxes from payrolls; government should recognize revenue in the period “when” earned.
- Estimated payments by taxpayers (filing taxes); government should recognize the revenue in the period “when” the employee earns it, which is typically when the payment is due.
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Sales Taxes: merchant is required to collect and remit to government.
- ACCRUAL: recognize revenue in the period the exchange takes place, net of estimated refunds.
- MOD ACCRUAL:recognize revenue in the period the exchange takes place, if it is “available.”
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Other Derived Taxes:
- ACCRUAL: recognize revenue in the period the exchange takes place, net of estimated refunds.
- MOD ACCRUAL:recognize revenue in the period the exchange takes place, if it is “available.”
Imposed Tax Revenues
*Imposed Tax Revenues:
~tax is imposed on an act committed (owning property) or omitted (breaking the law) and an act does not involve an exchange.
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Property Tax:
- Receivable recognized in the period of an enforceable claim
- Revenue recognized for the period the tax is intended to finance.
- Advance payments are deferred revenue.
- ACCRUAL: Entire amount levied is recognized as revenue of the period, “regarldess of when received” (net of refunds and uncollectible amounts).
- MOD ACCRUAL:Revenue recognized for amount received “during the period” PLUS payments received within 60 days after the end of the year.The remainder of the levy is deferred revenue.
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Estate Tax
- Recognize revenue in the period the estate settles.
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Fines
- Fines are recognized as revenue when the government has established an “enforceable claim”
- ACCRUAL: Revenue is recognized when the government has established a claim.
- MOD ACCRUAL:The payment must be “available”.
Government-mandated and Voluntary Revenues
*Government-mandated and Voluntary Revenues
Government-Mandated Revenue: when a government at one level provides resources to a government at another level and requires the government to use them for specific purposes enabling legislation.
Voluntary Revenues: result from legislative or contractual agreements entered into willingly by 2 or more parties.
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G-M and Voluntary Revenues:
- Grant: resource received for specific resources
- Capital Grant: resource received for construction of capital assets
- Operating Grant: intended to finance operations
- amount of payment to local/state government is entitled as determined by other government pursuant to an allocation formula.
- Shared Revenue: revenue levied by one government but shared on a predetermined basis
- Payments in lieu of taxes: amounts paid by one government to another to reimburse revenues lose because the first government does not pay taxes such as property taxes.
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Eligibility Requirements: Revenue is recognized when met:
- Recipient must meet requirements of provider
- Time requirements must be met
- Provider specifies that resources will be provided on a reimbursement basis
- Provider may specify contingencies, such as “matching” funds or “purpose restrictions”
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Reporting:
- If eligibility requirements have NOT been met = deferred revenue
- G-M and Voluntary Revenues are recognized when both “measurable” and “available”
*Interfund Transactions
(TEST)
*Interfund Transactions
- (TEST) Transfer of resources from the Primary Government to a Discretely presented Component Unit is NOT reported as a transfer. The PG reports a “program expense” and the CU reports a “contribution”.
- If transferring an asset to another “fund” à record at BOOK VALUE
- Interfund Services à Fund providing service = REVENUE; Fund receiving service = Expenditure, Expense as appropriate.
Expenditures v. Expenses
- Modified Accrual -> Expenditures
- Accrual -> Expenses
Expenditures or Expenses
(Examples)
*Expenditures or Expenses
- Transactions that are recorded the same for MA or A.
- Example: Interest Payment on LT Obligations:
- Example: Claims and Judgments: when “estimable” and “probable”
Expenses Only
~Transactions reported as expenses only by Proprietary & Fiduciary Funds and G-W Activities
- depreciation expense is included in “functional expenses”
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Compensated Absences: if leave is related to services already rendered and it is probable the leave will be paid, recognize an expense and liability.
- Vacation Leave: Expense is recorded at the time leave is taken, only the unused portion of leave at the end of the year is recorded as a liability.
- Sick Leave:
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Amortization of Bond Premium/Discount (NOT included in Governmental Funds (5 types))
- If realize more than Face Value= (cr) Bond Premium
- If realize less than Face Value = (dr) Bond Discount
- Must amortize the premium or discount over the life of the issue using either:
- Straight Line
- Effective Interest Method
- Proportionate to stated interest requirements method
- Straight Line:
