Section 2. Chapter 5 - Revenue, Expenditure/Expense and Other Operating Statement Transactions

Question 1

What resources measurement focus and basis of accounting is used at the government fund level and government wide level?

Answer 1

• Government fund level is based on the current financial resources measurement focus and modified accrual basis of accounting
• Government wide level and proprietary and fiduciary fund transactions are based on the economic resources measurement focus in the accrual basis of accounting

Question 2

Regardless of the measurement focus and basis of accounting, how should all revenues be recognized?

Answer 2

All revenues should be recognized net of estimated refunds, discounts, or allowances

Question 3

What are the three ways of government may report revenues?

Answer 3

1. Report revenues net, showing discounts and allowances parenthetically. [Ex: charges for net services (net of bad debts $5000 and discount of $15,000) $350,000]
2. Report revenues gross, reporting discounts and allowances separately. [Charges for services $350,000. Less: bad debt and discounts. $20,000]
3. Report revenues net and disclose the discount and allowances in the notes

Question 4

What do governmental fund operating statements record revenue transactions based on? When do these funds recognize revenue?

Answer 4

The receipt of current financial resources

As a result, these funds recognize revenue in the period when it becomes both measurable and available

Question 5

When is revenue considered available?

Answer 5

If it is received during the current period, or soon thereafter, so it can be used to pay the liabilities of the current period

Question 6

What does GAAP limit the availability period for property tax revenue?

Answer 6

To know more than 60 days after the end of the fiscal year, unless unusual circumstances justify a greater period

If so, this should be disclosed in the notes

Question 7

When is the period of availability for revenues other than property tax revenue?

Answer 7

It may be more than 60 days, but only if it is received soon enough after the year end to pay the reported liabilities

However, governments are encouraged to use the same period of availability for all revenues

Governments also are required to disclose their period of availability

Question 8

How should revenues not received within the availability period be reported and recognized?

Answer 8

As deferred inflow of resources, and recognized in the period when they become available (typically the period when they are received)

Question 9

If the government recognized revenue, when the receivable was established, what journal entry should be made to defer the revenue?

Answer 9

DR: property tax revenue $1000
CR: deferred inflow resources-property tax $1000

Question 10

When do the operating statements of proprietary funds, fiduciary funds, and government wide statement of activities recognize revenue and record revenue?

Answer 10

They recognize revenue, based on the receipt of economic resources and record the transaction in the period they were earned, or when owed to the government

Question 11

How is revenue that has not been earned or is not yet owed to the government reported?

Answer 11

As deferred inflow of resources until it has been earned or is due

Question 12

How do you proprietary funds report revenues?

Answer 12

As either operating or non-operating

Question 13

What are operating revenues?

Answer 13

Those that are directly attributable to the goods and services provided

Question 14

Where are non-operating revenues reported?

Answer 14

Below operating income

Question 15

What do non-operating revenues result from?

Answer 15

Other activities, such as investment revenue, grants, interest expense, and the gain or loss on the sale of assets

Question 16

How are inflows reported as investing or financing activities on the statement of cash flows generally reported as?

Answer 16

Non-operating revenue

Question 17

What are three types of transactions?

Answer 17

1. Exchange transactions.
2. Exchange like transactions.
3. Non-exchange transactions.

Question 18

What are some types of government exchange transactions?

Answer 18

Park and recreation, admittance, copying, registration, and other charges for services

Exchange transactions must have equal value between the government and the other party

Question 19

What type of transactions involved exchange like transactions?

Answer 19

The issuance of a permit, or granting of a license

In an exchange like transaction, there is an identifiable exchange between the reporting government and another party but the values exchanged may not be quite equal, or the direct benefits of the exchange may not be exclusively for the parties in the exchange

Question 20

Under the accrual basis of the accounting, when is revenue from exchange and exchange-like transactions recognized?

Answer 20

In the period the exchange takes place

Under the modified, accrual basis of accounting, the revenue must be available

Question 21

What are non-exchange transactions and what are four ways to classify them?

Answer 21

Transactions that do not involve an exchange

1. Derived tax revenue transactions.
2. Imposed non-exchange revenue transactions.
3. Government mandated non-exchange transactions.
4. Voluntary non-exchange transactions.

Question 22

When do derived revenues result?

Answer 22

They result when a government imposes a tax on an exchange transaction

Question 23

Under the accrual basis of accounting, how and when should derived revenue be recognized?

Answer 23

Net of estimated refunds and estimated uncollectible amount in the period when the exchange takes place, or when resources are received, whichever occurs first

Question 24

Under the modified accrual basis of accounting, when should derived revenue be recognized?

Answer 24

Tax revenue should be recognized in the period. The exchange takes place providing the revenue is available.

Question 25

What type of revenue is income tax?

Answer 25

Derived tax revenue

Question 26

What are the two main sources the government receives income tax?

Answer 26

1. Employers are required to withhold income taxes from the payrolls of employees and remit them to the government on a periodic basis.
2. Estimated payments paid by taxpayers. Some taxpayers make quarterly payments to the government and are required to file a tax return.

Question 27

When we shut the government recognize the drive tax revenue of income tax that employers withhold from employees?

Answer 27

In the period when the employee earns the income

For example, the government requires employers to withhold income taxes for pay period ends December 31. Employer limits the withholding to the government on January 10. The government should recognize the tax revenue in the period that includes December 31. (payments not received within availability period should be reported as a deferred inflow of resources in the government funds.)

Question 28

Which the government recognized derived tax revenue for the quarterly payments?

Answer 28

When the taxpayers earn the underlining income, which typically in the quarter the payments were due

For example, a taxpayer typically required to file estimated income taxes to the state by September 30 for the period July 1-September 30. Payments received after September 30 are recognized as revenue in the fiscal year that includes September 30 (payments not received within the availability period should be reported as deferred inflow of resources in governmental funds.)

Question 29

When are taxpayers required to file tax returns with the state or local government?

Answer 29

April 15

Question 30

What do tax returns show?

Answer 30

The additional amount due, or the amount to be refunded to the employee for the tax year

Question 31

If a government has a December 31 year end,
On an accrual basis, what does the government need to recognize revenue from?

Answer 31

It must recognize revenue from payroll with holdings and quarterly payments

It also needs to estimate the April 15 adjustment for additional payments and refunds

For example, a government has received $50 million from payable withholdings and quarterly payments, by January 31 pertaining to the year ended December 31. The government has historically received additional 10% in settlements and has made refunds, averaging 4% of the amount received by January 31. For the year December 31, the government would recognize revenue of $53 million dollars ($50 million plus $5 million in addition to settlements plus $2 million in refunds)

Question 32

On a modified accrual basis, when should income tax be recognized?

Answer 32

It should be recognized in this same way as a cruel basis of accounting, except that any amount not received during the availability period, Would be reported as deferred inflow of resources.

If the government has a 90 day availability period, any settlements received after March 31 would be revenue for the subsequent fiscal year, assuming it was received in that year

Question 33

What is done for governments with a June 30 year end?

Answer 33

Accounting is easier. Most additional settlements made after March 31 would be available, and therefore reported as revenue in the current year.

Question 34

What type of tax is tax on sale of goods and services by merchants?

Answer 34

Derived tax revenue

Question 35

The merchant is required to collect tax and remit it to the government. Although revenue should be recognized when the sale takes place, from a practical perspective, when is revenue, often recognized?

Answer 35

It’s often recognized when remittances are received from the merchant if that does not result in a recognition in the wrong period

For example, merchants are required to collect the tax and remitted to government by the end of the month following the month the tax was imposed. Sales taxes collected through December 31 are due to the government by January 31. Some governments allow merchants with collections to remit on a quarterly basis. In this case taxes are due by March 31.

Question 36

For sales tax, when should governments recognize revenue, when using an accrual basis?

Answer 36

In the period, the exchange takes place, net of estimated refunds

Question 37

For sales tax, when should governments recognize revenue, when using a modified accrual basis?

Answer 37

Revenue must be available. In some cases, the merchant files through the document, but does not include full payment, or any payment.

Question 38

How are sales taxes amounts not paid within the availability period reported.?

Answer 38

As a deferred inflow in governmental funds

Question 39

Many states allow local governments to piggyback a locals sales tax with state sales tax. For example, the state imposes a 5% sales, tax and a county within the state imposes of one percent sales tax. The merchant collects a total of 6% and remit it to the state. The state then remit one percent to the county. In this situation, when would the merchant remit the sales tax to the state by?

Answer 39

January 31 for sales made during the month of December. The state distributes the money to the local government by the end of the month following the month the state receives payments (February 28 or 29). The local government should still recognize revenue in the period that includes December 31. (subject to availability in governmental funds.)

Question 40

Governments imposed several other taxes on exchange transactions. What are some examples of these?

Answer 40

• gasoline taxes
• Alcohol and cigarette taxes
• Hotel taxes
• Property taxes

Question 41

When are merchants or distributors required to admit the taxes to the government of other derived taxes?

Answer 41

On a periodic basis, just like sales taxes

Question 42

For other derived taxes, when should the government recognize using an accrual basis, accounting?

Answer 42

In the period, the underline exchange takes place, net of estimated refunds

Question 43

For other derived taxes, when should the government recognize using a modified accrual basis of accounting?

Answer 43

Amounts not received within the availability period are reported as deferred inflow of resources.

Question 44

How are derived local taxes that piggyback to state taxes accounted for?

Answer 44

In the same, same way as local sales taxes

Question 45

What are imposed tax revenues?

Answer 45

Taxes and fines, imposed on an act, committed or omitted such as owning property or breaking the law with an act is not an exchange

Question 46

When are revenues recognized for imposed tax revenues?

Answer 46

They are recognized net of estimated refunds, and estimated uncollectible amounts

Question 47

What is recorded for property tax in the period the government has an enforceable claim — the lien date or assessment date?

Answer 47

A receivable for property tax is recognized

Revenue is recognized in the period the tax is intended to finance

Question 48

When is revenue recognized for property tax?

Answer 48

In the period the tax is intended to finance

Question 49

How are property tax payments that are received in advance of the period benefited recorded?

Answer 49

As a deferred inflow of resources

For example, a government place is a lien on a property on September 1, 2000 and send bills out on December 1, 2000 with a due date of January 15, 2001. Revenue is intended to finance the operation for the period January 1, 2001 to December 31, 2001. For the fiscal year ended on December 31, 2000 the government recognizes a receivable for the property tax levy. However, since the period in which it is intended, to be used is 2001, the revenue is reported as a deferred inflow of resources. The deferred amount is reversed and revenue is recognized on January 1, 2001. 

Question 50

For example, a government place is a lien on a property on September 1, 2000 and send bills out on December 1, 2000 with a due date of January 15, 2001. Revenue is intended to finance the operation for the period January 1, 2001 to December 31, 2001. For the fiscal year ended on December 31, 2000 the government recognizes a receivable for the property tax levy. However, since the period in which it is intended, to be used is 2001, the revenue is reported as a deferred inflow of resources. The deferred amount is reversed and revenue is recognized on January 1, 2001. If a property owner paid the tax on December 30, 2000, the revenue would still be deferred since it is received in advance of the period it is intended to finance.

Question 51

If a property owner paid the tax on December 30, 2000, how would the revenue be recorded?

Answer 51

It would still be deferred, since it is received in advance of the period. It is intended to finance.

Question 52

On an accrual basis, when would the amount be recognized?

Answer 52

The entire amount levied for the year 2001 is recognized (net of estimated refunds and uncollectible amounts) revenue of 2001, regardless of when received

Question 53

On a modified basis, when would revenue be recognized?

Answer 53

What the amount received during the year plus payments received no more than 60 days after the year end. The remainder of the levee is reported as deferred inflow of resources until the payments are available.

For example, the Lebby for fiscal and calendar year 2001 was $20 million; $18 million was received by December December 31, 2001. Another 1 million and $500,000 were received in January and February 2002 respectively. The remaining amount was received in March through May 2002.

The government would recognize tax revenue for 2001 on the statement of activities for $200 million. However, on the government fund, Aubrey statement of 2001, the government would recognize revenue of $19.5 million and would report it as deferred inflow of resources as $500,000 if the government availability period for property taxes was 60 days after the end of the fiscal year

Question 54

Under the modified cruel basis, how would payments be recognized if they are made after March 1, 2002?

Answer 54

Revenue of 2002

This would be a reconciling item between the fund operating statement and the statement of activities

Question 55

When are estate taxes recognized as revenue?

Answer 55

As revenue in the period when the estate settles, subject to deferral in governmental funds, if not available

Question 56

When are fines recognized as revenue?

Answer 56

When the government has established an enforceable claim, or when revenue is received, whichever comes first

For example, an individual received a citation for speeding is given a court date. If the individual pays the fine prior to the court date, revenue is recognized when the fine is paid. If the individual appears in court, revenue is recognized when the case is settled. If the individual does not appear in court, the individual is probably found guilty and revenue is recognized. On the modified accrual basis of accounting, however the government must determine its availability.

Question 57

For some offenses, such as operating a motor vehicle, while intoxicated an individual may be required to pay a bond prior to the court date. Since the government has not yet established illegal claim, what is established for the bond.? What happens when the individual is found guilty?

Answer 57

• A liability is established for the bond
• If the individual is found guilty, the bond may be applied to the fine, and because it is available that portion is reported as revenue

Question 58

When are fines recorded as revenue when using an accrual basis of accounting?

Answer 58

When the government has established the claim

Governments need to establish the allowance for uncollectible fines

Question 59

When do government mandated non-exchange revenues occur?

Answer 59

When the government, at one level, provides resources to a government at another level, and requires that, if a grant is accepted, the latter uses the resources for a specific, purpose or purposes, established in the providers enabling legislationL

Question 60

What do voluntary non-exchange revenues result from?

Answer 60

Legislative or contractual agreements completed willingly by two or more parties

Question 61

What does government mandated and voluntary exchange revenues consist of?

Answer 61

• grants (capital grant, operating grant)
• Entitlements
• Shared revenues
• Payments in lieu of taxes (or fees in lieu of taxes)

Question 62

What is a grant?

Answer 62

A payment of cash, or other assets from another government to be used or expended for specific purpose, activity, or facility

Grants can be received from foundations or other, not for profit organizations

Question 63

What is a capital grant?

Answer 63

A payment of cash or other assets restricted by the grantor for the acquisition or construction of capital assets, including donated capital assets

Question 64

What is an operating grant?

Answer 64

Grants that are intended to finance operations, or that may be used for either operations or capital outlays at the discretion of the grantee

Question 65

What is an entitlement?

Answer 65

The amount of payment to which estate or local government is entitled, as determined by the other government, pursuant to an allocation formula contained in applicable laws

Entitlement may or may not be restricted to use.

The term entitlement can also be used for certain payments made directly to individuals such as SSI and Medicare

Question 66

What is shared revenue?

Answer 66

Revenue levied by one government, but shared on a predetermined basis, often pursuant to an allocation formula, with another government

Question 67

What are payments, in lieu of taxes (or fees, in lieu of taxes)?

Answer 67

Amount paid by not for profit organizations, and perhaps other governments, to another to reimburse it for revenues lost, because the nonprofit organization does not reimburse it for revenues lost, because the not for profit organization does not pay taxes, particularly property taxes 

Question 68

When should government mandated and involuntary non-exchange revenues be reported?

Answer 68

Regardless of the title, the transactions should be reported based on the substance of the transaction not their label

The substance of these transactions is that they are either government mandated non-exchange transactions (provider program) or voluntary non-exchange transactions (recipient government voluntarily accepts payments)

Question 69

Regardless of classification, when is government mandated and voluntary non-exchange revenues recognized revenue?

Answer 69

Revenue is recognized when all eligibility requirements have been met (subject to availability in governmental funds)

Question 70

Grants may have a number of eligibility requirements for compliance purposes, however, for accounting and financial purposes, eligibility requirements are limited to what ?

Answer 70

1. The recipient and secondary recipient must meet characteristics specified by the provider. For example, to receive a law-enforcement grant, the recipient must be a law-enforcement agency.
2. Time requirements, specified by the provider must be met. For example, a federal grant may allow spending to take place starting October 1. Any spending prior to that would not be eligible. if the provider is another government, and the grant does not specify the period of the grant, a grant period is presumed to exist and coincides with the providers fiscal year
3. The provider specifies resources will be provided on a reimbursement basis. This is known as an “expenditure driven” grant.
4. The provider may specify contingencies, such as providing matching funds.

Question 71

How should resources from grants that are transmitted before eligibility requirements have been met be reported?

Answer 71

As assets by the provider and liabilities by the recipient

Question 72

What are purpose restrictions?

Answer 72

Restrictions that a grant provider may also specify

They specify the purpose, for which revenues may be used

Question 73

How do purpose restrictions affect the timing of recognition of the grant

Answer 73

They do not affect the timing of the recognition of a grant

Question 74

What happens if Grant funds were used for purposes other than those specified?

Answer 74

The grantor would disallow the associated costs and request reimbursement

If this was an expenditure driven grant and funds had been received, Grant revenue would have been reduced (or an expense and liability recorded if the grant was reported in the prior year)

For example, funds from law enforcement grant May state that is only to be used for law enforcement purposes. A community development block grant may state it is only to be used to encourage low income housing or improvement blighted areas.

Question 75

At the fund level, how should all grant transactions be recorded?

Answer 75

In a fund

Question 76

What should be done to identify the proper fund?

Answer 76

The purpose and requirements of each grant should be analyzed

It is not necessary to establish a separate fund, provided that applicable legal requirements can be satisfied in an existing fund

Question 77

What are pass-through grants?

Answer 77

Serve as a recipient of grant funds for passing them to the ultimate secondary recipient

Question 78

Do the receipt and disbursement of past due grants affect the operations of the recipient government?

Answer 78

No

However, all cash passed through grants should be reported in its financial statement.

Question 79

How should grants be reported in instances when there were recipient government serves only as a cash conduit?

Answer 79

The grant should be reported in a custodial fund

Question 80

What fun should be used if the recipient government has any administrative involvement, such as monitoring secondary recipients, or determining their eligibility or direct financial involvement, such as grant matching, or being liable for disallowed costs?

Answer 80

A special revenue fund is probably the most appropriate

A custodial fund cannot be used

Question 81

In some instances, a grant may use more than one fund of recipient government. Until the proper fund is determined, where should the resources be reported? Once determined where should they be reported?

Answer 81

• Resources should be reported in the custodial fund until the proper fund is determined
• Once the proper fund is determined, the funds should be transferred to it

Question 82

What should be done to grants, entitlement, or shared revenues that are received before eligibility requirements have been met?

What is done when eligibility requirements are met?

Answer 82

The amount is credited to a deferred inflow of resources account

The deferred amount is reclassified to a revenue account when eligibility requirements have been met

Question 83

When when should grants, entitlements, shared revenues, and all other voluntary and government mandated, non-exchange transactions recorded in governmental funds be recognized as revenues?

Answer 83

In the accounting period when they become both measurable and available, providing that all eligibility requirements have been met

Question 84

For entitlement or shared revenues, what would cause a forfeiture of resources?

Answer 84

Only a failure on the part of the recipient to comply with any prescribed purpose restrictions and eligibility requirements will cause a forfeiture of resources

Question 85

In governmental funds, when should entitlement and shared revenues be recognized?

Answer 85

Revenues should only be recognized when they are measurable and available after eligibility requirements have been met

Question 86

For reimbursement grants, what is the prime factor for determining eligibility?

Answer 86

An allowable expenditure

Question 87

When should reimbursement grant revenue be recognized?

Answer 87

When the expenditure is made

However, if revenue is not available, it should be recorded as a deferred inflow of resources until the period when it becomes available

Question 88

When are revenues recognized if the resources are subject to cost sharing or matching requirements?

Answer 88

Revenue recognition depends on compliance with requirements

Question 89

When should operating grants, entitlement, or shared revenues, recorded in proprietary funds, be recognized as revenues?

Answer 89

When eligibility requirements have been met

Question 90

How should government mandated and voluntary revenue be recognized in the government wide statement of activities?

Answer 90

Revenues should be recognized as program revenues of governmental or business type activities, as appropriate, if they are dedicated to a function or program

Otherwise, they should be reported as general revenues

Question 91

Reimbursement grants are considered, dedicated to the functions and programs they reimburse. When are revenues recognized?

Answer 91

When all eligibility requirements have been met

Question 92

How are donated capital assets, works of art, historical treasures, and other similar assets valued at?

Answer 92

They are valued at their acquisition value on the date of donations (acquisition)

Question 93

What is acquisition value?

Answer 93

The price that would be paid to acquire an asset with equivalent service, potential in an orderly market transaction at the acquisition, date, or the amount at which all liability could be liquidated with the counterparty at the acquisition date

Question 94

If a donation transaction involves a governmental fund, when is revenue reported?

Answer 94

No revenue is reported unless the donation involves a flow of current resources

If the donation is of money or other, current financial resources, then revenue is recognized

If the donation is a capital asset that the government converts to occur financial resources by selling it, then revenue is recognized

If the donations involves a proprietary or fiduciary fund, revenue is recorded, even if the donation is other than money, or a current financial resource

Question 95

How are donations recorded involving a proprietary or fiduciary fund? And why?

Answer 95

Revenue is recorded, even if the donation is of other than money or current financial resource

The reason is that the donation provides economic benefits to the fund. Furthermore, revenue is also recorded at the government wide level.

Question 96

How are donations for a specific program reported?

Answer 96

As program revenue

Question 97

When is a donation made recognized as revenue? What happened if there are eligibility requirements imposed by the provider?

Answer 97

In the year in which the donation was made, the government would recognize that their value of asset as revenue

There are eligibility requirements, imposed by the provider, then revenue is recognized after they had been met

Question 98

What is the journal entry if a government received land from a developer that had an acquisition value of $2 million?

Answer 98

DR: capital asset-land $2 million
CR: donated revenue-Land $2 million

Question 99

How is the transaction that is either unusual in nature, or in frequent and incurrence recorded?

Answer 99

It would be reported as a special item, since the acceptance of a donation is within the control of management

Question 100

Earnings from investments are considered susceptible to accrual. When are interest earnings recorded as revenue under the accrual basis? Under modified accrual basis.?

Answer 100

They are recorded as revenue, when earned under the accrual basis, and when earned and available under the modified accrual basis

Question 101

Some governments have the authority to make loans to individuals or organizations. For example, many states have student loan programs. Some state and local governments provide housing loans and small business loans to individuals or organizations. How are these accounted for?

Answer 101

Accounting may vary. Some governments might record an expenditure or expense, when loan is made to an external party. Other governments might use a balance sheet approach, exchanging one current financial resource, cash, for another, such as a loan receivable.

Regardless of the approach, interest on the loan would be recognized as revenue

Question 102

For proprietary fund and government wide level statements, what is recognized as revenue for loans?

Answer 102

Only the interest on the loan is recognized as revenue

The face amount of the loan is recognized as an asset

Question 103

What is recorded when goods or services are acquired under the current financial resources, measurement focus and modified accrual basis of accounting?

What’s recorded under the economic measurement, focus, and accrual basis?

Answer 103

An expenditure is recorded

An expense is recorded in the period of benefited by the goods or services

Question 104

Which period do many expenses for goods and services benefit, which are acquired in the period, regardless of when payment is required?

Answer 104

Benefit the same period

The same as true, our most, but not all instances for expenditures

A governmental fund liability is normally recorded when it is expected to be liquidated with expendable available financial resources

Question 105

When are payroll costs reported under the accrual and modified accrual bases of accounting?

Answer 105

In the period when the cost is incurred

At the end of the fiscal year, it is common for some of the payroll to be reported in one fiscal year, and the remainder in a new fiscal year

For example, if the pay period covers June 23 to July 7, and the fiscal year ends on June 30, the pay for the period June 23 to June 30, is reported in one fiscal year and the pay period July 1 to July July 7 is in the next fiscal year

Question 106

How are benefits associated with payroll such as the governments contribution to the retirement system reported?

Answer 106

In the same manner as payroll cost

Question 107

How are contributions for healthcare coverage for employees reported?

Answer 107

They are reported different than payroll costs

Healthcare contributions are normally made at the end of the month for coverage that starts at the beginning of the following month. Thus a contribution made in June for coverage that starts on July 1 (the new fiscal year) is a prepaid expense or expenditure

Question 108

What do compensated absences, such as vacation leave and sickleave provide for?

Answer 108

Time off for employees

Question 109

If the leave is related to services already rendered and it is probable that the leave will be paid, what should the government record?

Answer 109

An expense and a liability

For example, an employee may earn vacation and sickleave for each 80 hour worked during a pay period. An individual receives two weeks of vacation per year a crew 3.077 hours for each 80 hour pay period (assuming an eight hour workday). If the employee can accumulate 15 days of each year. The amount accumulated each pay period would be 4.615 hours.

Question 110

Are governments required to pay accumulated balances of vacation and sickleave?

Answer 110

• Most governments are required to pay accumulated balances of vacation leave for employees
• many also pay at least a portion of accumulated balances of sickleave upon retirement
• Some pay sickleave upon termination

Question 111

If an employee earns 80 hours of vacation during a year, and the employee will be compensated for the hours upon termination, what should be recognized during the year?

Answer 111

An expense for the vacation leave should be recognized during the year

It is usually recorded at the time leave is taken. Only the unused portion of the leave at the end of the year is recorded as a liability.

For example, if the employee earns 80 hours and takes 80 hours and the same year, the employer has no liability, since there is no leave balance that needs to be paid. Furthermore, the payment has been recorded as an expenditure and expense as appropriate.

Question 112

How is it recorded if an employee earns 80 hours it takes 64 hours of leave?

Answer 112

The employer has a liability for 16 hours. However, the entire 80 hours is recorded as an expense of the current year. The 16 hours that was earned but not taken needs to be charged as an expense of some function. However, since financial resources are not required, no expenditure is recorded for the 16 hours.

Question 113

The amount reported for vacation leave is based on the employees pay rate and salary associated fringe benefits such as retirement and Medicare. a public service employee has a rate of $10 per hour and associated benefits are 20% of the rate ($2). what would be the journal entry if the employee has 16 hours of unused vacation leave at the end of the year?

Answer 113

DR: public service salary expense $960
CR: cash $768
CR: compensated absences $192

Government of funds would report only the expenditure of $768 while under accrual basis, the amount earned during the year is the expense

Question 114

What is the journal entry if an employee takes 16 hours of leave in the following year?

Answer 114

There would be no expense charged to the new year for the 16 hours. The journal entry would be:

DR: compensated absences $192.
CR: cash $192

Question 115

What is done if the governments policy of paying only sickleave when the employees ill and does not provide for any payment upon termination?

Answer 115

There is no expense that needs to be reported. Basically whatever balance, the employee has upon termination lapses.

Question 116

What is recorded if the employer has a policy to pay sickleave upon termination?

Answer 116

The expense and liability is determined in the same manner as vacation leave

For example, if the employer pays 1/2 of the sickleave at termination, multiplied by the employees rate plus associated benefits by the available balance and divided by two.

Question 117

If the policy is to pay sickleave upon termination and the employees rate is $10 and associated benefits are 20%, and the employee has rate of 16 hours on termination, what amount would be due?

Answer 117

$96

$12 x 16÷2

Question 118

What needs to be done if the employer has a policy to only pay sickleave upon retirement?

Answer 118

The government first must estimate the number of employees that will retire. This is done by using historical information on retirement and turnover.

For example, if 25% of employees stay until retirement, compute the total value of sickleave by multiplying the accumulated sickleave hours times each employee pay rate. Sum the amount and multiplied by 25%. That would be the expense reported for the compensated absences for sickleave.

Question 119

What methods can be used to determine liability when the policy is to pay sick leave upon retirement?

Answer 119

• payment method
• Vesting method

Question 120

What is reported for operating materials and supplies if a fund liability is incurred?

Answer 120

An expenditure

Question 121

What is incurred as goods and services are provided regardless of when actual payment is made?

Answer 121

A funds liability is incurred

An expense is reported when it is occurred, unless the goods are placed into inventory

For example, if services are delivered prior to the end of the fiscal year, but the obligation is not paid off until the next fiscal year, the expenditure is reported in the year in which the services were delivered, offset by an account payable or accrued liability as appropriate

Question 122

If there is a significant amount of inventory, what methods can governmental funds use for inventories?

Answer 122

• The purchase method
• Consumption method

The government chooses which method it will use

Question 123

If the purchases method is used, when is an expenditure recorded?

Answer 123

When the item is purchased

Question 124

When using the purchases method, what happens when there is significant remaining inventory year end?

Answer 124

It’s recorded as an asset

Question 125

If the consumption method is used, what is the item purchased reported as?

Answer 125

An inventory asset. The expenditure is recorded under the perpetual inventory system, when the item is taken from the inventory and put into service

For example, if a government purchases office supplies for $1000 and uses the consumption method, no expenditure is recorded when the supplies are received. If the government removes $200 from the inventory, the expenditure  is recorded at that time.

Question 126

If using a physical inventory system, when would inventory be reported as an asset?

Answer 126

At the time of purchase

At the end of the reporting., A physical count would be conducted to determine the amount of inventory on hand. The expenditure or expense would be recorded for the amount issued.

Question 127

A government with a June 30 year end pays the annual lease on the building. The period off the lease is June 1- December 31 and the amount is $60,000. The lease is paid on January 1.

If the purchases of method is used, what would the government recognize when the payment is made?

Answer 127

It would recognize an expenditure of $60,000 when the payment is made

Question 128

A government with a June 30 year end pays the annual lease on the building. The period off the lease is June 1- December 31 and the amount is $60,000. The lease is paid on January 1.

What would the journal entry be if the consumption method is used for the initial lease and the payment of rent on January 1?

Answer 128

DR: prepaid rent $60,000
CR: cash $60,000
Rent payment on January 1

DR: expenditure- rent $30,000
CR: prepaid rent $30,000
To recognize rent expenditure for the current fiscal year

The remaining $30,000 would be reported as an asset of the governmental fund

Question 129

What method of accounting is used for the capital related expenditures and expenses?

Answer 129

• Governmental funds record expenditures, using the modified accrual basis of accounting. Only transactions requiring use of financial resources are reported as expenditures in the fund operating statement.
• Proprietary funds, fiduciary, funds, and government wide level statements expenses are reported using the accrual basis of accounting

Question 130

The acquisition or construction of capital assets requires the use of current financial resources. as a result, an expenditure is recorded. What is the journal entry?

Answer 130

DR: cash outlay
CR: cash

Question 131

What is retainage?

Answer 131

When governments require a percentage of the progress payments on major construction contracts, to be withheld from contractor invoices

After completion of the project and acceptance by the government, the contractor is paid the amount retained. It does not affect the amount recorded as expenditure for capital outlay

Question 132

For example, assume that a contractor submits an invoice for $1.25 million on a project. The government requires a 10% retainage. What would the journal entry be?

Answer 132

DR: capital outlay $1,250,000
CR: retainage payable $125,000
CR: cash $1,125,000

Question 133

On the governmental fund operating statement, what are funds are subclassified as being within capital outlay?

Answer 133

Only capital expenditures of capital project funds

A capital expenditure in any other fund is classified in some other appropriate function or program

For example, if a firetruck is purchased through the general fund, the expenditure would be reported under public production, fire department, or some other appropriate function

Question 134

How are assets having a value extending beyond one year capitalized?

Answer 134

Capitalized under the accrual basis of accounting

Question 135

How is the portion of the asset that is consumed during the year reported?

Answer 135

An expense on the operating statement of proprietary and fiduciary funds and on the government wide statement of activities

Question 136

What is the consumed amount?

Answer 136

Depreciation or amortization

Question 137

What is depreciation?

Answer 137

Allocation that is often considered the amount of asset that is used up during operating period

Question 138

What is the purpose of reporting depreciation in the government?

Answer 138

To determine the cost of providing a service

If an asset is being used, it should not be fully depreciated. Governments should not use schedules of accelerated useful wives, developed for tax purposes by the IRS; the useful life should be determined based on the government experience

Question 139

If a salvage value is assumed for the asset at the end of its useful life, how should the value be treated?

Answer 139

Salvage Value is deducted from the cost to establish the amount that will be depreciated

Question 140

What costs are included in the cost of the asset?

Answer 140

All ancillary charges necessary to place the asset into service at its location

Question 141

What do ancillary charges include?

Answer 141

• freight and transportation charges
• Site preparation fees
• Legal fees
• Engineering
• Installation
• Handling
• Labor
• Architectural fees
• Inspections

Question 142

At the government, wide level, depreciation and amortization are included in what?

Answer 142

Depreciation and amortization expense is included in other functional expenses

Question 143

Where should depreciation associated with shared functions be included on the government wide financial statements?

Answer 143

They should be included based on the amount used by each function

Question 144

How should depreciation for assets serving all functions be reported on the government wide statements?

Answer 144

Separately as an allocated depreciation, or included with general government, or a similar function

Question 145

When are governments not required to depreciate infrastructure assets?

Answer 145

When they use the modified approach

Question 146

How can depreciation be calculated?

Answer 146

• A class of assets
• A network of assets
• A subsystem of a network
• Individual assets

Composite method may also be used for similar assets of the same class

Question 147

What are some examples of capital contributions?

Answer 147

The federal government may make surplus assets available to a state or local government. State government may give land or other assets to local government. In addition, governments may receive capital assets from private parties, such as infrastructure donated by a developer.

Question 148

When does the recipient government of a capital contribution record an entry?

Answer 148

If the recipient government records the transaction in a governmental fund, no entry is normally required since the contribution does not involve a flow of current financial resources

A transaction is required, if a proprietary or fiduciary fund is involved

A Transaction is reported at the government wide level for governmental activities

Question 149

How are contributions recorded on the government wide financial statements?

Answer 149

The assessed value of the contribution is reported in the operating statement, less any amount paid by the proprietary or fiduciary fund of the contributing entity

Question 150

What would be the entry for the government wide financial statements of a local government be if a state donated land to local government??

Answer 150

DR: capital asset- Land
CR: contributed capital

The transaction would also be reported on the operating statement of a proprietary fund and change in fund net position of a fiduciary fund

Question 151

What is the rule if a governmental fund transferred a capital asset to upper primary fund?

Answer 151

The asset would be reported in the proprietary fund at the netbook value (historical cost minus accumulated depreciation) previously reported for governmental activities

The capital should be reported as capital contributions rather than as a transfer in as far as the proprietary fund is concerned

On the statement of activities of the government wide statements, it would be reclassified as a transfer from governmental activities to business type activities

Question 152

How are long-term obligation related transactions using modified accrual (current financial resources) reported?

Answer 152

As Expenditures

Question 153

How are long-term obligation related transactions using accrual (economic resources) reported?

Answer 153

As expenses

Question 154

In governmental funds, what measurement focus is used for the repayment of principal on long-term obligations?

Answer 154

Current financial resources

Question 155

How and where is repayment of principal on long-term obligations reported in governmental funds?

Answer 155

As an expenditure on the operating statement

Question 156

If the government made a principal only payment to an outstanding bond, what journal entry would be made? (for governmental funds)

Answer 156

DR: expenditure-debt service-principal
CR: cash

Question 157

If the government made a principal only payment to an outstanding bond, what journal entry would be made? (for proprietary funds, fiduciary funds, and government wide level)

Answer 157

No expense is reported

The transaction results in the reduction of a long-term obligation

Question 158

When do governmental funds report debt service (principal and interest expenditures)?

Answer 158

When the payment is due

For example, a government has a due date for principal of December 1, and pay interest on June 1 and December 1. The government fiscal year end is December 31. Recorded on December 1 consist of principal that is due plus interest from June 1 to November 30. There is no expenditure recorded in the funds for the interest that accrues from December 1 to December 31

Question 159

When do proprietary funds, fiduciary, funds, and government wide statement of activities, report interest, expense

Answer 159

May report interest expense for the period January 1 to December 31. Plus there would be an accrued expense reported for December 1 to December 31 along with an associated liability.

Question 160

The government fiscal year is January 1 to December 31. Interest is paid on June 1 and December 1. The following payments were due:
- Interest payment from Dec 1 2021 to May 31 2022 $30,000
- interest payment from June 1 to November 30, 2022 $30,000
- Principal payment on November 30, 2022 $150,000
- interest payment from December 1, 2022 to May 31, 2023 $29,000

For governmental funds (modified accrual)…What are the entries to record the payment of interest on June 1, 2022 ? And record service payment on December 1, 2022?

Answer 160

DR: expenditures-debt service-interest $30,000
CR: cash $30,000

DR: expenditure-debt service-principal $150,000
DR: expenditure-debt service-principal $30,000
CR: cash $180,000

Question 161

The government fiscal year is January 1 to December 31. Interest is paid on June 1 and December 1. The following payments were due:
- Interest payment from Dec 1 2021 to May 31 2022 $30,000
- interest payment from June 1 to November 30, 2022 $30,000
- Principal payment on November 30, 2022 $150,000
- interest payment from December 1, 2022 to May 31, 2023 $29,000

For proprietary funds, fiduciary funds, government, wide statements (accrual)…What are the entries to record the payment of interest on June 1, 2022 ? And record service payment on December 1, 2022?

Answer 161

DR: interest expense, $25,000
CR: accrued interest payable $5000
CR: cash $30,000
(to record interest payment due June 1, 2022)

The accrued interest payable is a liability attributed to December of the previous fiscal year

DR: Bonds payable $150,000
DR: interest expense $29,500
CR: cash $179,500
(to record, principal and interest payment on December 1 2022)

DR: interest expense $4833
CR: accrued interest payable $4833
(Record interest expense for December 1, due December 31, 2022)

The total interest expensive for the year is $59,333. a result, the amount accrued for the period December one due December 31, 2022 will be a reconciling item between governmental funds and government activities

Question 162

How are payments made on a lease reported in the following circumstances:
1. For governmental funds.
2. Payments involving a capital project fund.
3. Payments involving any other governmental fund.

Answer 162

1. Expenditure is reported when a payment is made on the lease.
2. It’s reported as a capital outlay
3. It’s reported with the appropriate program.

Question 163

What do components are involved in the transaction of leases for proprietary funds, fiduciary funds, and a government wide level?

What is an example?

Answer 163

Expense for the interest portion of the lease, and the reduction of the long-term lease liability for the principal component

DR: lease payable $100,000
DR: Interest expense $$29,500
CR: cash $129,500

Question 164

What funds report claims and judgments?

Answer 164

Claims and judgments are like interest as they reported by all funds, but the amounts reported may not be the same

Question 165

When do the following report on claims and judgments? What do they report?
1. Governmental funds.
2. Proprietary, fiduciary government wide statements

Answer 165

1. Governmental funds report expenditures on claims and judgments when current resources will be used to pay the liability
2. Proprietary, fiduciary and government wide statements, report and expense for claims and judgments in the period the claim was incurred

Question 166

In FY 2021, government incurred a claim involving compensation to an injured worker. The claim was estimated to be $80,000. Payments were made as follows:
FY21 $5000
FY22 $25,000
FY23 $25,000
FY24 $25,000

What are the entries for governmental funds (modified accrual)?

What are they for accrual?

Answer 166

DR: expenditure for claims $5000
CR: cash $5000
(to record claim expenditure in FY 21)

DR: expenditure for claims $25,000
CR: cash $25,000
(to record claim expenditure in FY 22)

Similar entries would be made in 23 and 24

DR: Claims expense $80,000
CR: claims payable $75,000
CR: cash $5,000
To claim expense and payment FY 20X1

DR: cash payable $25,000
CR: cash $25,000
To record payment is n claims 20X2. Similar entries made in 20X3 and 20X4

Question 167

What’s the difference between how claimx are recorded in governmental funds vs other fund types and government wide statements?

Answer 167

Governmental funds record only an expenditure in the year. The claim was incurred $5000. Other fund types and government wide statements record in expense of $80,000. Furthermore, governmental funds do not report any liability for the claim it will be due in future years.

This result in a reconciling item between governmental funds and governmental activities

Question 168

My other areas are recorded using entries similar to judgements and claims?

Answer 168

• Compensated absences
• Landfill closure and post closure cost
• Lottery payments
• Pollution remediation outlays
• Special termination benefits

Question 169

When may there be a premium or discount on a bond?

Answer 169

There is no premium or discount on an issue bond if the interest rate paid by the investor is the same as the interest rate offered by the issuer.

If the government solicit bids on the securities market, there may be a premium or discount

Question 170

When is a premium received?

Answer 170

When governments realize more than the face value (they receive a premium)

For example, if the government has issued $50 million received 50.25 million, $250,000 is a premium. Which is an amount above the face value.

Question 171

When is a discount accepted?

Answer 171

When the government realizes less than the face amount of the bond

For example, if the government issued $50 million sales the bond at $49.8 million, they sold it at a discount of $200,000

Question 172

What does the premium or discount affect?

Answer 172

The proceeds of the bond and additional accounting entries

Question 173

When does amortization increase the effective interest rate?

Answer 173

When the bond is sold at a discount, since the interest l the government is paying in cash is based on the bonds stated rate, which is less than the market interest rate was at the time the bonds were sold

Question 174

When does amortization reduce the effective interest rate?

Answer 174

When bonds are sold for premium. Interest is paid in cash is based on the bonds stated rate which is more than the market interest rate was at the time the bonds were sold

Question 175

What method can be used to amortize the premium or discount of a bond? Which is most common?

Answer 175

• Straight line method (most common)
• Effective interest method
• Proportionate to stated interest requirements method

Question 176

What is the journal entry for a government issues $50 million in general obligation bond to mature in 20 years. They are also sold at a discount of $200,000 and straight line amortization is done on the discount?

What is the entry for the amortization?

Answer 176

To record the bond at a discount:
DR: cash $49,800,000
DR: bond discount $200,000
CR: on payable $500,000,000

Amortization entry:
DR: interest expense $10,000
CR: bond discount $10,000

Question 177

What is the journal entry for a government issues $50 million in general obligation bond to mature in 20 years. They are also sold at a discount of $200,000 and straight line amortization is done on the discount?

What is the entry for the amortization?

Answer 177

To record the bond at a discount:
DR: cash $49,800,000
DR: bond discount $200,000
CR: on payable $500,000,000

Amortization entry:
DR: interest expense $10,000
CR: bond discount $10,000

Question 178

What is the journal entry for a government issues $50 million in general obligation bond to mature in 20 years. They are also sold at a premium of $200,000 and straight line amortization is done on the discount?

What is the entry for the amortization?

Answer 178

To record the bond at a discount:
DR: cash $49,800,000
CR: bond premium $200,000
CR: bond payable $500,000,000

Amortization entry:
DR: bond premium $10,000
CR: interest expense $10,000

Question 179

What are debt issue costs? How are they reported?

Answer 179

Cost associated with issue.
- legal fees to bond council
- underwriting fees
- printing fees

They are normally paid from the proceeds of the bond, but are expenditures/expenses and should be reported simply as period costs. They are reported with the debt service function on the operating statement of governmental funds

They reported as an expense in the period incurred for proprietary funds, fiduciary funds, and at the government wide level

Question 180

What does GAAP require for zero coupon bonds? What’s the journal entry?

Answer 180

Even though interest is not paid annually and expense is required to be recognized each year because the interest is a period expense. Thus the interest is amortized over the life of the issue.

DR: interest expense
CR: accrued interest payable

There is no entry for governmental funds

Question 181

How is a gain or loss on sale of an asset recorded proprietary, fiduciary fund, government wide level? How is it recorded for governmental funds?

Answer 181

The gainer loss is on the operating statement and it’s the difference between the carrying value and the proceeds of the sale.

The loss would be reported as an expense. A gain would be an asset

For governmental funds , it would be reported as an other financing spurces

Question 182

What would the journal entry be if a government sells a vehicle for $2000? The carrying value of the ass is $3000 representing a cost of $4000 and accumulated depreciation $1000

Answer 182

DR: cash $2000
DR: accumulated depreciation $1000
DR: loss on sale of asset $1000
CR: capital assets $4000

Question 183

What does the government need to amortize for a current or advanced refunding?

What is the amortization period

Where is the amortization reported?

Answer 183

The difference between acquisition Price in the carrying amount of the old debt

The period of amortization is the remaining life of the old debt or the life of the new debt, whatever is shorter

The amortization is reported as component of interest expense using a systematic and rational method such as straight line

No entries are made for governmental funds

Question 184

For a current refunding or advanced refunding, how should the difference between the reacquisition Price in the net carrying amount of the old debt be reported?

Answer 184

Either as a deferred inflow of resources or deferred outflow of resources

It should be recognized as a component of interest in a systematic and rational manner over the remaining life of the old debt or the life of the new deck whatever is shorter

No entries are made for governmental funds

Question 185

What do long-term obligations represent for governmental funds? Where are long-term obligations reported?

Answer 185

They represent an inflow of financial resources

They are not revenues in our reported separately in governmental funds as an other financing source

Question 186

What would the journal entry be for a governmental fund who issues a 20 year $25 million general obligation bond. The issue cost $300,000 in the sold a premium for $250,000.

Answer 186

DR: cash $24,950,000
DR: expenditure— bond issuance costs $300,000
CR: other financing sources— bond premium $250,000
CR: other financing sources— face value of bond issue $25,000,000

Question 187

When are premiums and issue costs recognized for governmental funds?

Answer 187

They involved the flow of current financial sources so they are recognized when the transaction occurs

Question 188

What is the journal entry for a governmental fund that enters into a five-year agreement with a company to lease equipment and the present value of the minimum lease payments was $250,000?

Answer 188

At least does not involve a lot of resources. is the same as borrowing from a third-party. Both transactions are treated the same. Governmental fund other financing source and an expenditure.

DR: expenditures— capital outlay $250,000
CR: other financing source— lease $250,000

Question 189

What is the journal entry for a governmental fund that has an option and sells several vehicles and the proceeds from the sale are $50,000?

Answer 189

The sale of assets results in an inflow of resources to a governmental fund. Assets are not capitalized in the funds so there is no need to compare the value of the asset to the proceeds. The proceeds from the sale reported as other financing source.

DR: cash $50,000
CR: other financing sources— sale of capital assets $50,000

Question 190

How do you governmental funds record the proceeds from refunding?

Answer 190

Refunding is reported as an other financing source

The use of the proceeds is reported as another financing use. The use would indicate if the proceeds were used immediately (other financing use— current refunding) or turned over to an escrow agent (other financing use— payment to escrow agent)

Question 191

How are interfund services provided and used recorded?

Answer 191

The transactions are recognized like any other exchange transaction— the fund, providing the goods or services recognizes revenue, and the fund receiving the goods or services recognizes an expenditure or expense as appropriate

The internal service fund records revenue in the other unit records, an expense or expenditure

Question 192

How are transfers into or out of proprietary funds reported? How are they reported on government wide statements?

Answer 192

They are reported after nonoperating income (expense)

On government wide statements , transfers between governmental, and business type activities should equal transfer in and transfer out amounts

Question 193

How is the transfer of resources from the primary government to a discreetly presented component unit recorded?

Answer 193

The primary government reports the program expense and the component unit reports a contribution

Question 194

What does interfund reimbursements involve?

Answer 194

The repayment to a fund for expenditures or expenses paid on another funds behalf

As a result, this is the difference from interference services provided and use

Question 195

The general fund has an app appropriation to pay an employer share of retirement for all funds. Other funds, then reimbursed the general fund. Assume the amount paid by the general fund was $100,000. Of this amount, $15,000 was billed to special revenue funds and $10,000 was billed to enterprise funds.

What does the special revenue fund and the enterprise fund record? What does the general fund record?

Answer 195

The special revenue fund records expenditures of $15,000 in the enterprise fund records expenses of $10,000. The general fund does not record revenue of $25,000. Instead, record the reduction of the expenditure sense of $25,000 did not involve the general fund.

If the general fund recorded revenue of 25,000 reported by the pension expenditures would have been $125,000 — overstatement pension cost $25,000

Question 196

The general fund has an app appropriation to pay an employer share of retirement for all funds. Other funds, then reimbursed the general fund. Assume the amount paid by the general fund was $100,000. Of this amount, $15,000 was billed to special revenue funds and $10,000 was billed to enterprise funds.

What does the special revenue fund and the enterprise fund record? What does the general fund record?

Answer 196

The special revenue fund records expenditures of $15,000 in the enterprise fund records expenses of $10,000. The general fund does not record revenue of $25,000. Instead, record the reduction of the expenditure sense of $25,000 did not involve the general fund.

If the general fund recorded revenue of 25,000 reported by the pension expenditures would have been $125,000 — overstatement pension cost $25,000