Section 2: Chapter 4 and 5

Question 1

What is custodial credit risk?

Answer 1

The risk that, in the event of the failure of a depository financial institution, a government will not be able to recover deposits or will not be able to recover collateral securities that are in the possession of an outside party.

Question 2

Deposits are exposed to custodial credit risk if they are not covered by depository insurance and the deposits are:

Answer 2

a) uncollateralized;
b) collateralized with securities held by the pledging financial institution; or
c) collateralized with securities held by the pledging financial institution’s trust department or agent, but not in the depositor-government’s name.

Question 3

Cash Deposits with Financial Institutions - Whenever the risk exposures are significantly greater than the deposit and investment risk of the primary government, they should be disclosed. What disclosures should be made?

Answer 3

• legal or contractual provisions for deposits; and

* deposits as of the balance sheet date, and during the period.

Question 4

Investments are exposed to custodial credit risk if:

Answer 4

the securities are uninsured, are not registered in the name of the government, and are held by either:
• the counterparty; or
• the counterparty’s trust department or agent, but not in the government’s name.

Question 5

What is a derivative instrument?

Answer 5

A derivative instrument is a financial instrument or other contract that has all of the following characteristics:
• Settlement factors;
• Leverage;
• Net settlement.

Question 6

What are the note disclosure requirements that should be presented for all hedging derivative instruments?

Answer 6

Objectives, Terms, Risks,

Question 7

What are the four types of nonexchange transactions?

Answer 7

Derived Tax Revenue Transactions (sales tax)
Imposed Nonexchange Revenue Transactions (property tax)
Government-Mandated Nonexchange Transactions (grants)
Voluntary Nonexchange Transactions (donations)

Question 8

What is reciprocal interfund activity?

Answer 8

Reciprocal activity is similar to an exchange transaction. There are two types of reciprocal transactions—interfund loans and interfund services provided and used.

Question 9

What is nonreciprocal interfund activity?

Answer 9

Nonreciprocal activity—interfund transfers and interfund reimbursements.

Question 10

What is the consumption inventory method?

Answer 10

Items purchased are recorded as assets and not reported as an expense until they are consumed.

Question 11

What is the purchases inventory method?

Answer 11

Items purchased are recorded as expenditures when purchased and when consumed.

Question 12

A government purchased salt during the fiscal year and the inventory is significant at year end. How should the government record the transaction?

Answer 12

(DR) Inventory
(CR) Expenditures - public services

(DR) Unassigned fund balance
(CR) Nonspendable fund balance

Question 13

What is the JE to record revenue received prior to the start of the reporting period?

Answer 13

(DR) Cash

(CR) Unearned revenue

Question 14

What are the three types of employer pension plans?

Answer 14

Single, Agent, and Cost-sharing

Question 15

What is the definition of a note?

Answer 15

Notes are short-term financing instruments. They are usually for a period of one year or less.

Question 16

What are the four criteria for a capital lease?

Answer 16

• The lease transfers ownership of the property to the lessee by the end of the lease term.
• The lease contains an option to purchase the leased property at a bargain price.
• The lease term is equal to or greater than 75 percent of the estimated economic life of the leased property.
• The present value of rental, or other minimum lease payments, equals or exceeds 90 percent of the fair value of the leased property, less any investment tax credit retained by the lessor.

Question 17

What are imposed tax revenues?

Answer 17

Taxes and fines imposed on an act committed or omitted by the taxpayer.

Question 18

How are donations valued?

Answer 18

At acquisition value at the date of the acquisition.

Question 19

Describe differences between recognizing revenue for a donation vs. donating to a governmental fund.

Answer 19

If the donation is to a governmental fund, no revenue is recognized. If the donation is of money or current financial resources, revenue is recognized. If the donation involves a proprietary or fiduciary fund, revenue is recorded even if the donation is not of money or current financial resources.

Question 20

If a government received land from a developer, what JE would be made?

Answer 20

(DR) Capital asset - land

(CR) Donated revenue - land

Question 21

An employee earns 80 hours of vacation and takes 64 hours. The employee’s rate is $10 per hour. Associated benefits are 20% or $2. What JE would be made at the end of the year?

Answer 21

(DR) Public service salary expense $960
(CR) Cash $768
(CR) Compensated absences $192

Question 22

An employee takes 16 hours of vacation rolled over from a previous year. What JE would be recorded?

Answer 22

(DR) Compensated absences

(CR) Cash

Question 23

What is the JE for prepaid rent using the consumption method?

Answer 23

(DR) Prepaid rent
(CR) Cash

(DR) Rent expense
(CR) Prepaid rent

Question 24

A contractor submits an invoice for $1.25M on a construction project. What is the JE?

Answer 24

(DR) Capital outlay
(CR) Retainage payable $125,000
(CR) Cash $1,125,000

Question 25

What is the time period necessary to capitalize an asset under the accrual basis of accounting?

Answer 25

The asset value extends beyond one year