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Test Bank for Accounting for

Governmental & Nonprofit Entities, 19th Edition, Jacqueline Reck, Suzanne Lowensohn Daniel Neely

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Student name:__________

TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false.

1) According to the GASB, control of an asset means the government must have the asset in its possession.

true

2) By definition a fiduciary fund that does not meet the definition of a trust fund is a custodial fund.

true

false

3) Resources that are held in trust for the benefit of the government’s own programs or its citizenry should be accounted for using a governmental fund rather than a fiduciary fund.

4) Custodial funds are used only if a government holds resources in a custodial capacity for others.

true

false

5) Unless otherwise prohibited custodial relationships can be reported in the General Fund rather than a custodial fund.

6) The collection of taxes or other revenues by one government for several of the funds it operates and for other governments often results in the creation of a trust fund.

7) Because a government does not have any administrative decision-making responsibility, a custodial fund would not prepare a statement of net position.

⊚ true

⊚ false

8) A custodial fund should be used to account for special assessment billing and collection, and related debt service of special assessment debt, if the government has no responsibility for the debt.

⊚ true ⊚ false

9) It is common for a government that collects taxes on behalf of other governments to be authorized to withhold a certain percentage from the collections for each government. ⊚ true

⊚ false

10) In regard to pass-through grants, a recipient government has administrative involvement if it is responsible for filing paperwork under a grant agreement.

⊚ true

⊚ false

11) On the statement of changes in fiduciary net position, custodial funds need to display on separate lines each type of addition made to the fund. ⊚ true

⊚ false

12) Each trust fund type must be reported in its own column on the fiduciary fund financial statements.

⊚ true

⊚ false

13) An investment pool could be reported as a custodial fund on the fiduciary fund financial statements.

14) When an investment pool is created, the assets of each fund entering the pool should be transferred to the pool at their fair value at the date of the transfer. ⊚ true

⊚ false

15) Investment trust funds and pension trust funds should be accounted for in the same manner as permanent funds.

⊚ true ⊚ false

16) Custodial funds should utilize the modified accrual basis of accounting. ⊚ true ⊚ false

17) Trust funds should utilize the accrual basis of accounting. ⊚ true

⊚ false

18) Pension trust funds should utilize budgetary accounts in the same manner as the General Fund and special revenue funds.

⊚ true

⊚ false

19) Fiduciary activities are reported only in the fiduciary fund financial statements; they have no effect on the governmental or business-type activities of the primary government reported in the government-wide financial statements. ⊚ true

⊚ false

20) Earnings on pooled investments and changes in fair value of investments are allocated to the participants having an equity interest in the pool in proportion to their relative contributions to the pool.

⊚ true

⊚ false

21) Most investment trust funds distribute investment earnings and changes in investment values on a daily basis.

⊚ true

⊚ false

22) A common example of a private-purpose trust fund is a state-sponsored 529 savings plan. These plans allow parents to make after-tax contributions to a state government managed investment fund for their child’s future education.

⊚ true

⊚ false

23) A defined benefit plan specifies the amount or rate of contribution that the employer and employees must contribute to the members’ accounts in the pension plan.

⊚ true

⊚ false

24) Other postemployment benefits (OPEB) include benefits such as health care, life insurance, and long-term care.

⊚ true ⊚ false

25) GASB standards provide comprehensive guidance on pension accounting and financial reporting for defined benefit pension plan employers, but the FASB provides guidance for plan sponsors.

⊚ true

⊚ false

26) When one participant in an investment pool withdraws part of its equity from the pool, that participant’s proportionate interest is decreased and all other participants’ proportionate interests are increased.

⊚ true

⊚ false

27) Defined benefit pension plans are classified as either single-employer pension plans or multiple-employer pension plans.

⊚ true

⊚ false

28) Accounting for other postemployment benefits is similar to accounting for defined contribution pension plans.

⊚ true

⊚ false

29) A government needs to establish an investment policy for its investment trust fund to ensure compliance with the GASB standards.

⊚ true

⊚ false

30) An investment policy should help an investment trust fund achieve maximum returns within the defined boundaries of safety and liquidity.

⊚ true

⊚ false

31) The GASB requires disclosures related to three types of credit risk. ⊚ true

⊚ false

32) The Internal Revenue Service limits the amount of earnings a government can make when investing the proceeds from its general obligation bonded debt. ⊚ true ⊚ false

33) Fiduciary fund financial statements report only on the activities of participants external to the government administering the fiduciary funds.

⊚ true

⊚ false

34) For a fiduciary fund relationship to exist the administering government cannot control the assets of the fund.

⊚ true

⊚ false

35) For a fiduciary fund relationship to exist the administering government cannot benefit from the assets of the fund.

⊚ true

⊚ false

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.

36) Each of the following are reported as fiduciary funds except:

A) A permanent fund.

B) An investment trust fund.

C) A custodial fund.

D) A private-purpose trust fund.

37) Which of the following statements regarding the financial reporting of custodial funds is not true?

A) Custodial activities are reported only in the fiduciary fund financial statements.

B) Custodial fund financial information is reported in a separate column of the government-wide statement of activities.

C) Custodial funds are included in the statement of changes in fiduciary net position.

D) GASB standards allow reporting on individual custodial funds in a government’s combining fiduciary fund financial statements.

38) The GASB provides three criteria for determining if a fiduciary relationship exists. Which of the following four is not one of the three criteria listed by the GASB?

A) The assets are controlled by the government.

B) The government is not to be involved in administrative decision-making concerning the fund assets.

C) The assets related to the activity of the fund were not generated by the government’s exchange or nonexchange revenues.

D) The government does not receive any benefit from the assets in the fund.

39) Which of the following activities would most appropriately be recorded by a trust fund?

A) Donations collected for improvements to the public library.

B) Deposits held for customers of a municipal-owned electric utility.

C) Assets held for investment, the earnings from which are used for maintenance of the City Cemetery.

D) Assets held for college scholarships to be awarded to the children of city employees.

40) Billing and collection of special assessments and payment of debt principal and interest on special assessment debt for which the city is not obligated in any manner should be recorded in a(n):

A) Debt service fund.

B) Special assessment fund.

C) Capital projects fund.

D) Custodial fund.

41) If special assessment receivables are recorded in the accounts of a custodial fund, the appropriate account(s) to credit upon receipt of assessments from property owners will include:

A) Contributions to Net Position.

B) Revenues and Deferred Revenues.

C) Due to Special Assessment Bondholders Principal.

D) Interfund Transfers In.

42) A city will serve as a conduit for federal grant money, which is sent to the city by the state government and must be remitted to various not-for-profit organizations that will use the money. The ultimate allocation of the money is decided by the state government. Which of the following terms describes the nature of this grant?

A) Agency grant.

B) Fiduciary grant.

C) Pass-through grant.

D) Partial grant.

43) Which of the following activities would most appropriately be recorded by a custodial fund?

A) Donations collected for improvements to the public library.

B) Deposits held for customers of a municipal-owned electric utility.

C) Taxes collected by a county government on behalf of cities within the county.

D) Assets managed by the city for college scholarships to be awarded to the city’s high school students with financial need.

44) Which of the following accounts is least likely to be used by a tax custodial fund?

A) Cash.

B) Revenues.

C) Taxes receivable for other funds.

D) Due to other funds.

45) When a cash and investment pool of a certain city was established, the debt service fund transferred investments to the pool having a cost of $3,000,000 but a current fair market value of $3,100,000. To record this transfer, a single journal entry was made by the debt service fund that included which of the following?

A) A debit to Equity in Pooled Cash and Investments in the amount of $3,000,000.

B) A credit to Revenues Change in Fair Value of Investments in the amount of $100,000.

C) A debit to Investments in the amount of $3,000,000.

D) A credit to Investments in the amount of $3,100,000.

46) When an investment pool of a certain city was established, the debt service fund transferred investments to the pool having a cost of $3,000,000 but a current fair market value of $2,900,000. To record this transaction, a single journal entry was made by the debt service fund that included which of the following?

A) A debit to Equity in Pooled Cash and Investments in the amount of $3,000,000.

B) A debit to Revenues Change in Fair Value of Investments in the amount of $100,000.

C) A debit to Investments in the amount of $2,900,000.

D) A credit to Investments in the amount of $100,000.

47) The cash and investment pool of Lake City allocates dividends, interest, and capital gains and losses on a periodic basis. When the cash and investment pool accrues interest earned on investments in debt securities, pending allocation to participating funds, it would credit which of the following accounts?

A) Interfund Loans.

B) Revenues.

C) Undistributed Earnings on Pooled Investments.

D) Interfund Receivables.

48) Which of these fiduciary fund types is allowed to aggregate its additions and deductions provided resources received are held for no more than three months?

A) Custodial funds.

B) Pension trust funds.

C) Investment trust funds.

D) Private-purpose trust funds.

49) Which of the statements concerning custodial funds is true?

A) Custodial funds use the same basis of accounting as permanent funds.

B) Custodial funds are reported only on the statement of fiduciary net position.

C) Custodial funds use the temporary accounts Additions and Deductions.

D) Custodial funds never receive cash.

50) Which of the following financial statements is prepared by fiduciary funds?

A) Statement of fiduciary net position.

B) Statement of fiduciary activities.

C) Statement of fiduciary cash flows.

D) All of these answers are correct.

51) At the government-wide level, where are fiduciary funds reported?

A) In the Governmental Activities column.

B) In the Business-type Activities column.

C) As an internal balance in the total column.

D) Fiduciary funds are not reported at the government-wide level.

52) A fiduciary fund financial statement should contain columns for which of the following?

A) A single column for custodial funds, a single column for trust funds, and a total column.

B) A single column for custodial funds, a column for each type of trust fund, and a total column.

C) A single column for custodial funds and a column for each type of trust fund.

D) A column for each type of custodial fund and a column for each type of trust fund.

53) Which of the following would not appear on a statement of changes in fiduciary net position?

A) Due to Other Funds.

B) Deductions Administrative Fees.

C) Additions—Investment Earnings.

D) Additions Property Tax Collections for Other Governments.

54) An investment trust fund is used to report the net position available to the:

A) Sponsoring government only.

B) External participants only.

C) Financial institution that acts as custodian for the fund’s investments.

D) All of these answers are correct.

55) A local civic group gave the county government $25,000 cash to be used to pay the utility bills of persons with income below the poverty level. The city should account for the $25,000 contribution in what type of fund?

A) An investment trust fund.

B) The General Fund.

C) A permanent fund.

D) Private-purpose trust fund.

56) An Olympic medalist swimmer who grew up in the city contributed $750,000 to the city requiring that the money be invested and that the earnings from the investments be used for maintenance of the swimming complex. The $750,000 would most appropriately be recorded in a(an):

A) Custodial fund.

B) Permanent fund.

C) Private-purpose trust fund.

D) Investment trust fund.

57) A statement of cash flows should be prepared for which of the following fiduciary fund types?

A) None, fiduciary funds do not provide a statement of cash flows.

B) Custodial.

C) Pension trust.

D) Private-purpose trust.

58) Which of the following is the appropriate basis of accounting for a custodial fund?

A) Cash basis.

B) Modified cash basis.

C) Accrual basis.

D) Modified accrual basis.

59) A donor contributed $500,000 to the city requiring that the money be invested and that the earnings from the investments be used for maintenance of the band shell in the city’s park. The $500,000 would most appropriately be recorded in a(an):

A) Custodial fund.

B) Private-purpose trust fund.

C) Endowment fund.

D) Permanent fund.

60) Fiduciary funds use a basis of accounting similar to which of the following funds?

A) Permanent funds.

B) Special revenue funds.

C) Enterprise funds.

D) Debt service funds.

61) Which of the following is the appropriate measurement focus for custodial funds?

A) Economic resources.

B) Current financial resources.

C) Cash and cash equivalents.

D) Accrual basis.

62) Which of the following activities would be recorded by a trust fund?

A) Deposits held for customers of a city-owned electric utility.

B) Assets passed-through the state government to the local government.

C) Assets held for special assessment bondholders for which the city has no liability.

D) Assets that are used to assist in the preservation of a historical private residence.

63) Depending on the characteristics of the fund, which of the following could be reported as a trust fund or a custodial fund?

A) Investment fund.

B) Special assessment fund.

C) Other postemployment benefit fund.

D) Pass-through fund.

64) A government employer who makes contributions to pension plans for all employees:

A) Reports as part of pension expenditures in the governmental fund the amount paid.

B) Reports as part of pension expense of the proprietary fund the change in net pension liability.

C) Recognizes pension costs in the government-wide statements on the accrual basis of accounting.

D) All of these are correct.

65) In financial reporting for proprietary funds and at the government-wide level, the employer's pension expense for the period is equal to:

A) The employer's contribution.

B) Annual required contribution.

C) The change in the net pension liability adjusted for various factors including amortization of amounts related to changes in pension assumptions and differences between projected and actual earnings.

D) All of these are correct.

66) A single-employer defined benefit plan prepares a number of schedules as required supplementary material under GASB standards. Which of the following is not a required schedule?

A) A 10-year schedule of changes in pension liability.

B) A 10-year schedule of active and retired plan participants.

C) A 10-year schedule of rate of return on pension plan investments.

D) A 10-year schedule of employer contributions, based on the actuarially determined contribution for employer and nonemployer contributing entities.

67) Employer contributions of $600,000 to the pension fund would be recorded using which of the following?

A) A debit to Additions Employer Contributions.

B) A debit to Deductions Employer Contributions.

C) A debit to Cash.

D) A debit to Contributions Receivable.

68) A pension plan made $150,000 in payments to retirees. This would have been recorded using which of the following?

A) A credit to Deductions Annuity Benefits.

B) A debit to Deductions Annuity Benefits.

C) A credit to Due to Beneficiaries.

D) A debit to Expenditures Annuity Benefits.

69) The General Fund made a $70,000 cash contribution to the pension fund. This would have been recorded in the General Fund using which of the following?

A) A credit to Deductions.

B) A debit to Deductions.

C) A credit to Due to Other Funds.

D) A debit to Expenditures.

70) Which of the following statements is true regarding termination benefits?

A) Voluntary termination benefits occur when employers provide an incentive to hasten an employee's voluntary termination of employment, such as a one-time payout.

B) Voluntary terminations relate to layoffs or reductions in workforce.

C) Employers incur expenses related to voluntary terminations but not to involuntary terminations.

D) Expenses related to voluntary terminations may be avoided by hiring replacement employees within 60 days of the terminations.

71) Other postemployment benefits may include which of the following?

A) Health care.

B) Life insurance.

C) Long-term care.

D) All of these answers are correct.

72) In pension accounting, the employer’s net pension liability:

A) Is measured as the total pension liability less the amount of fiduciary net position held for future pension payments.

B) Represents the portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees’ past periods of service.

C) Is the same as the net pension obligation.

D) Is based on actuarial valuations generally required to be performed at least every five years.

73) Which of the following types of risk is related to the financial ability and dependability of the issuer of debt securities?

A) Custodial risk.

B) Concentration risk.

C) Solvency risk.

D) Credit risk.

74) Which of the following statements is true regarding management of investments?

A) Arbitrage rules apply only to general obligation bonds issued by governments.

B) Derivatives are reported at fair value on the financial statements.

C) Total return targets should be determined based solely on maximizing return.

D) A sound investment strategy focuses on long-term returns of the fund.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

75) Select the key term that relates to accounting for pension plans from the list that best matches with the following definition.

A.Agent multiple-employer pension plan

B.Cost-sharing multiple-employer pension plan

C.Covered payroll

D.Defined benefit plan

E.Defined contribution plan

F.Net pension liability

G.Service cost

H.Total pension liability

_____ 1. A pension plan which specifies the amount or rate of contribution that the employer and employees must contribute to the members’ accounts in the pension plan.

_____ 2. The portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees’ past periods of service.

_____ 3. The portion of the actuarial present value of projected benefit payments that is attributed to the current year, interest on the total pension liability, benefit payments, and other changes to the total pension liability.

_____ 4. The pension obligations of many employers are pooled and plan assets can be used to pay the benefits of the employees of any employer that provides pensions through the pension plan.

_____ 5. Plan assets of numerous employers are pooled for investment purposes but accounts are maintained for the individual employer participants.

76) Kirby County established a tax custodial fund to collect property taxes for the County of Kirby General Fund, the City of Denton, and Kirby County Independent School District. Total tax levies of the three governments were $200,000 for the year, of which $60,000 was for the County of Kirby, $40,000 for Denton, and $100,000 for the School District.

The tax custodial fund charges a 2% collection fee that it transfers to the General Fund of the County in order to cover costs incurred for custodial fund operations. During the year the tax custodial fund collected and remitted $150,000 of the $200,000 levies to the various governments. Collection fees associated with the $150,000 were remitted to Kirby County's General Fund prior to yearend.

For the Kirby County Tax Custodial Fund, prepare the journal entries to record the tax levy, taxes collected during the year, and the remittances made to participating governments. Also prepare a table showing the distribution of taxes and fees to participating governments. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

77) On January 1, Forrester County is holding investments for Tinsel Town valued at $500,000 in an investment pool, accounted for in an investment trust fund. On January 1, Valley School District invests $1,500,000 in the pool. Earnings on pooled investments for the six months ended June 30 totaling $300,000 were received in cash.

1) What percentage interest in the pool is held by the town and the school district?

2) (a) Show the entry in the Investment Trust Fund to record the School District's investment in the pool. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

(b) Show the entry in the Investment Trust Fund to summarize the collection of interest for the six-month period. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

(c) Show the entry in the Investment Trust Fund to record the distribution of the interest earned on pooled investments, assuming that the interest will be reinvested by the town and school district. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

78) If a city has a responsibility for endowed resources, how would city management decide whether to account for the resources in a permanent fund or a trust fund? How does financial reporting of the funds differ?

79) Briefly explain the difference between a custodial fund and a trust fund.

80) Explain the purpose of the account "undistributed change in fair value of investments" used in an investment pool.

81) Describe the types of pension plans most often found in governments and the differences between them.

Answer Key

Test name: Governmental 8

1) FALSE

2) TRUE

3) TRUE

4) TRUE

5) TRUE

6) FALSE

7) FALSE

8) TRUE

9) TRUE

10) FALSE

11) FALSE

12) TRUE

13) TRUE

14) TRUE

15) FALSE

16) FALSE

17) TRUE

18) FALSE

19) TRUE

20) TRUE

21) FALSE

22) TRUE 23) FALSE 24) TRUE 25) FALSE 26) TRUE

77) 1) The town's interest in the pool is 25% ($500,000 / [$500,000 + $1,500,000]); the school district's interest is 75%.

78) If resources entrusted to a government are specified for public purposes that benefit the general citizenry (for example, to maintain parks and cemeteries or to acquire art for public buildings), they are considered governmental rather than fiduciary activities under GASB standards. Thus, public-purpose endowments are accounted for as permanent funds. Endowments set aside for private purposes are accounted for as private-purpose trust funds. A fiduciary trust relationship exists if the assets are administered through a trust agreement that benefits recipients in accordance with the trust agreement, rather than benefits the administering government. The principal financial reporting difference is that financial information for a private-purpose trust is reported in the statement of fiduciary net position and statement of changes in fiduciary net position, whereas that for a permanent fund is reported in the balance sheet governmental funds and statement of revenues, expenditures, and changes in fund balances governmental funds.

79) Before a fund can be considered either a custodial or a trust fund it must meet the definition of a fiduciary fund. The three general criteria for determining a fiduciary relationship are (1) the assets related to the activity are controlled by the government, (2) the assets related to the activity were not generated by the government’s exchange or nonexchange revenues (with the exception of pass-through grants), and (3) the government does not benefit from the assets. Once a fiduciary relationship is established it is determined if the fund is a custodial or a trust fund. The GASB defines a custodial fund as any fiduciary fund that does not meet the definition of a trust fund. To be a trust fund the GASB indicates the fund must (1) be administered through a trust agreement, (2) the assets of the trust are only used to provide benefits to the recipients in accordance with terms of the trust agreement, and (3) the assets are legally protected from the government’s creditors. 80) The account "undistributed change in fair value of investments" is used in a cash and investments pool trust fund to accumulate the unrealized and realized gains and losses on investments that arise when investments in the pool are revalued to fair value or sold. This is a liability account that is distributed to pool participants when a distribution to a pool participant is made.

81) Pension plans are of two general types, defined contribution plans and defined benefit plans. A defined contribution plan specifies the amount or rate of contribution, often a percentage of covered salary that the employer and employees must contribute to the members’ accounts in the pension plan. The level of benefits payable upon retirement is determined by the total amount of contributions to a member’s account and earnings on investments. Defined benefit pension plans provide a specified amount of benefits to a retiree based on a formula that may include factors such as age, salary, and years of employment. They are classified as either single-employer pension plans (pensions are provided only to employees of the employer) or multiple-employer pension plans (pension benefits are provided to the employees of more than one employer). Multiple employer plans can be further designated as agent or cost-sharing.