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Chapter 20

ACCOUNTING FOR STATE AND LOCAL GOVERNMENTAL UNITS GOVERNMENTAL FUNDS

Questions

1 The governmental fund accounting equation is: Current Assets – Current Liabilities = Fund Balance

2 GASB 54 no longer allows the use of “reserved” or “unreserved” fund balance. The allowable classifications are nonspendable, restricted, committed, assigned and unassigned.

3 Taxpayers are billed the full $200,000. The amount recorded as Revenue would be $194,000 with $6,000 recorded as Allowance for Uncollectible Taxes.

4 Encumbrance means “commitment,” and encumbrance accounting records commitments made for goods on order and for unperformed contracts in order to provide additional control over expenditures.

5 The required governmental fund financial statements include a statement of net position or balance sheet and a statement of revenues, expenditures, and changes in fund balance. The fund financial statements for the governmental funds are prepared on the modified accrual basis of accounting.

6 Capital projects funds are used to account for the financing and acquisition of capital facilities or other capital assets (general fixed assets) of a governmental unit. They are not used to account for the acquisition of capital facilities financed through internal service or

enterprise funds. General fixedassets maybepurchasedthroughthegeneral fundorspecial revenue funds. General fixed assets may be acquired by donation in which case the capital projects fund would not likely be involved.

7 Capital projects funds may receive resources from numerous sources such as the proceeds of general obligation bond issues, state and federal grants, shared revenues, and transfers from other funds. A CPF is terminated when the capital facilities have been acquired and project liabilities settled. This may involve a short period of time in the case of assets acquired by purchase and several years in the case of assets acquired by construction. Assets remaining after a capital project has been completed and paid for are ordinarily transferred to the general fund or to the debt service fund with responsibility for servicing the debt issued to finance the project.

20-2 Accounting for State and Local Governmental Units

8 A government may treat supply acquisitions as expenditures either when purchased (purchases method)orwhen used(consumptionmethod),as longas it reports significant amounts of inventory in the balance sheet. While the consumption method is similar to the manner in which commercial businesses record supplies, the purchases method better allows for comparison of expenditures and appropriations. Under the purchases method, a government with significant inventory balances at year-end will recognize the balances as assets in the fund balance sheet and establish an accompanying fund balance-nonspendable to reflect the fact that the supply amount is not an available financial asset.

9 Debt service funds may be used to account for debt service on any long-term, general government liabilities including debt service on special assessment debt for which the government is obligated in some manner. Debt issued for and intended to be repaid from resources of enterprise, internal service, or trust funds is accounted for in those funds.

10 A transfer of resources by the general fund to the debt service fund to be used to retire all oraportion ofthegeneral long-term debt wouldaffect thegeneral fundand thedebt service fund at the same time. Assuming that the amount of the transfer is $10,000, the entries would be:

11 Special assessment levies are charges made against specific property owners (or citizens) to pay for improvements (or services) that provide special benefits to the property owners. Such improvements are usually requested by those who receive the benefits and agree to pay their share of the cost.

General tax levies are levied against all citizens of the governmental unit on a uniform basis to finance the general cost of government. General tax levies are determined by elected officials, apply to all (or virtually all) property in the jurisdiction, and may have little or no relationship to the actual benefits received by individual taxpayers.

A final difference is that property taxes are levied each year for that year (or sometimes the following year). Special assessment levies often are for amounts to be collected over several years.

Chapter 20 20-3

GF Other financing uses nonreciprocal transfer to debt service fund 10,000 Cash 10,000 DSF Cash 10,000 Other financing sources nonreciprocal transfer from general fund 10,000

12 Capital project funds are used to account for the construction activities of general government special assessment projects and the debt service fund is used to account for the related debt serviceifthe government is obligated in some manner. Debt serviceforspecial assessmentliabilitiesforwhichthegovernmentis not obligated in any manner isaccounted for in agency funds, with the special assessment obligation being disclosed in notes to the financial statements.

13 When governments enter into capital lease agreements, the governmental fund acquiring the general fixed asset records an expenditure and other financing source, as if long-term debt had been issued. At the same time, the town notes a liability (capital lease payable) in the general long-term debt account records for the amount remaining due and adds an asset to the general fixed asset account records at the present value of the minimum lease payments determined by FASB 13 criteria. The asset and liability, as well as associated depreciation, will appear in the government-wide financial statements; however, only an expenditure and other financing source appear in the governmental fund statements. The town may record future capital lease payments as expenditures of principal and interest in the general fund or transfer resources to the debt service fund, which will recognize the expenditures. The notes to the financial statements disclose minimum lease payments for each of the following five years and in five-year increments thereafter.

The closing and reclassification entries will result in a 20,000 decrease in Fund balancenonspendable such as below. Note how the amount of unassigned fund balance that was “used up” in this year is the amount actually spent on supplies ($400,000) while the amount in the expenditures account ($420,000) is the amount consumed during the year. The difference is reflected in the $20,000 decrease in the fund balance-nonspendable account.

15 Governments record details of the planned revenues (such as property taxes, sales taxes, and license revenue) and appropriations (such as police supplies, mayor’s office expenses, and maintenance of the town hall) in subsidiary revenue and expenditure ledgers. The detail allows for better control over expenditures, as appropriations can be compared to expenditures and encumbrances at any time.

20-4 Accounting for State and Local Governmental Units

14 Expenditures 420,000 Supplies Inventory 420,000 To adjust the supplies inventory and supplies expenditures accounts.

Fund balance – nonspendable 20,000 Fund balance – unassigned 400,000 Expenditures 420,000 To close and reclassify supply expenditures.

16 Theamount that city officials canorderpriorto yearendis $75,000($250,000 – $175,000). If they have not spent the full $250,000 in appropriations prior to year end, depending on the laws of the Village of Lester, all appropriations lapse at the end of the year for which they are made, with the exception of committed appropriations (encumbrances outstanding), which can continue to serve as authorizations for items on order or under contract. Since governments are no longer allowed to report “reserve for encumbrances” in the financial statements due to GASB 54, the government will need to establish a policy for how to record and report on outstanding commitments at the end of the year. One approach is to reverse all of the encumbrances and related reserve for encumbrances and report the commitments as Fund balance-committed.

17 Permanent funds (PF) account for contributions for which the grantor specifies that a principal amount must be maintained but for which interest accumulation or asset appreciation, or both, are to be used for a specified purpose. Funds that are expendable are accounted for in a special revenue fund. If contributions benefit parties external to the government, they are accounted for in private purpose trust funds.

18 The general fund is always a major fund. Other funds are considered major funds if they meet both of the following criteria:

1. Total assets, liabilities, revenues, or expenditures/expenses (excluding extraordinary items) of that individual governmental or enterprise fund are at least 10% of the corresponding total (assets, liabilities, etc.) for all funds of that category or type.

2. Total assets, liabilities, revenues, or expenditures/expenses (excluding extraordinary items) of that individual governmental or enterprise fund are at least 5% of the corresponding total for all governmental and enterprise funds combined.

19 A budgetary comparison schedule, which is required supplementary information for the general fund and for all special revenue funds with legally adopted budgets, includes columns for the original budget, the final budget, actual balances (on the budgetary basis) and variances (optional). The budgetary comparison schedule includes the same classifications as the GAAP operating statement, however, the amounts reported for revenues, expenditures, and fund balances often differ between the two statements. Differences exist when a government uses a non-GAAP basis of accounting for budgeting purposes. It should be included in a CAFR.

20 Since the government-wide statements are prepared on the accrual basis of accounting while the fund financial statements for the governmental funds are prepared on the modified accrual basis of accounting, governments must convert governmental fund financial information to the accrual basis of accounting for inclusion in the governmentwide statements of activities and net position. A conversion worksheet is an optional tool that facilitates reconciliation of the two statements.

Chapter 20 20-5

21 Examples of items that might appear on the reconciliation between the governmental fund balance sheet and the government-wide statement of net position include:

1. Governmental fund fixed assets are recorded as expenditures in the fund statements and must be recorded at cost in the government-wide statements.

2. The depreciation associated with the governmental fixed assets must be recorded in the government-wide statements.

3. Capital project fund construction expenditures should be recorded as an asset “construction in progress” in the government-wide statements.

Examples of items that might appear on the reconciliation between the governmental fund operating statement and the government-wide statement of activities include:

1. Governments must adjust for instances where revenue recognition differs between the modified accrual and accrual bases of accounting.

2. It is necessary to eliminate interfund balances within the governmental funds.

3. Bondproceedsprovidecurrentfinancialresources inthefundstatement,butissuing debt increases long-term liabilities in the statement of net position.

SOLUTIONS TO EXERCISES

20-6 Accounting for State and Local Governmental Units

Solution E20-1 Solution E20-2 Solution E20-3 [AICPA adapted] 1 a 1 c 2 b 2 d 1 b 3 b 3 a 2 D 4 a 4 b 3 C 5 c 5 b 4 D 5 a Solution E20-4 Solution E20-5 [AICPA adapted] Solution E20-6 [AICPA adapted] 1 a 1 c 1 c 2 c 2 c 2 b 3 d 3 b 3 c 4 a 4 d 4 b 5 b 5 b 5 c

Solution E20-7

1 Journal entries to account for property taxes in the general fund

Chapter 20 20-7

March

2016 Taxes receivable current 2,500,000 Allowance for uncollectible current taxes 50,000 Revenue 2,450,000 To record the property tax levy. May 4, 2016 Cash 1,900,000 Taxes receivable current 1,900,000 To record collection of property taxes. Taxes receivable-delinquent 600,000 Allowance for uncollectible current taxes 50,000 Taxes receivable current 600,000 Allowance for uncollectible delinquent taxes 50,000 To reclassify uncollected taxes as delinquent. May 5-December 31, 2016 Cash 150,000 Taxes receivable delinquent 150,000 To record collection of property taxes. November 1, 2016 Allowance for uncollectible taxes delinquent 5,000 Taxes receivable delinquent 5,000 To write off tax receivable determined to be uncollectible. January 1, 2017 February 28, 2017 Cash 87,750 Taxes receivable delinquent 87,750 To record collection of 2016 taxes.

21,

Solution E20-7 (continued)

2 Jedville Township Partial Balance Sheet

December 31, 2016

Assets

Taxes receivable delinquent (net of $45,000 estimated uncollectible taxes) $ 400,000

3 Revenue would equal tax levy less uncollectible amounts less amounts not collected within 60 day period. Since governmental units rarely complete the closing process within 60 days of year end, the amounts collected within 60 days of year end will be known.

($1,900,000 + $150,000 + $87,750 = $2,137,750)

($2,500,000 - $50,000 - $312,250 = $2,137,750)

20-8 Accounting for State and Local Governmental Units

To close accounts, including the prior year’s reserve for encumbrances.

*assumes the prior year encumbrance was cleared out with the prior year expenditure and that city policy is to continue any outstanding encumbrances from the current year as committed Fund balance

Chapter 20 20-9

Solution E20-8 Closing entries: Fund balance - unassigned 500 Appropriations 17,500 Estimated revenues 18,000

Reserve for encumbrances prior year 2,000 Reserve for encumbrances 1,000 Revenues 17,380 Nonreciprocal transfer in 3,200 Expenditures current year 16,450 Expenditures prior year 1,900 Encumbrances 1,000 Fund balance committed* 1,000 Fund balance unassigned 3,230

To reverse entry to record budget.

20-10 Accounting for State and Local Governmental Units

© 2018 Pearson Education, Inc. Solution E20-9 Millar City General Fund Balance Sheet June 30, 2013 Assets Cash $12,000 Taxes receivable $30,000 Less: Allowance for uncollectible accounts 2,000 28,000 Due from other funds 3,000 Supplies inventory 4,000 Total assets $47,000 Liabilities and Fund Balance Liabilities: Vouchers payable $13,000 Due to other funds 5,000 Total liabilities $18,000 Fund balance: Committed $ 6,000 Nonspendable 4,000 10,000 Unassigned 19,000 Total fund balance 29,000 Total liabilities and fund balance $47,000

Solution E20-10

Total ending fund balance = $32,200 + $4,000 (Fund balance

committed or restricted or assigned…. as a result of encumbrances) = $36,200.

Chapter 20 20-11

Revenues $101,000 Expenditures 98,800 Excess of revenues over expenditures 2,200 Other financing sources (uses): Reciprocal transfers in 27,000 Nonreciprocal transfers out (18,000) Excess of revenues and other financing sources over (under) expenditures and other financing uses $ 11,200 Total fund balance, January 1, 2013 25,000 Total fund balance, December 31, 2013 $ 36,200 Fund Balance - unassigned Estimated revenues $100,000 $ 25,000 Preclosing balance Encumbrances 4,000 95,000 Appropriations Expenditures 94,000 5,000 Reserve for encumbrances prior year Expenditures prior year 4,800 101,000 Revenues Nonreciprocal transfers out 18,000 27,000 Reciprocal transfers in 32,200 Ending balance

Madelyn City General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance for the year ended December 31, 2013

–

20-12 Accounting for State and Local Governmental Units Copyright © 2018 Pearson Education, Inc. Solution E20-11 Journal entries in the general fund: 1 Estimated revenues 250,000 Appropriations 248,000 Fund balance – unassigned 2,000 To record the annual budget. 2 Taxes receivable current 200,000 Revenues 198,000 Allowance for uncollectible taxes Current 2,000 To record tax levy for the year (1% estimated uncollectible). 3 Cash 150,000 Taxes receivable current 150,000 To record tax collections. 4 Due from special revenue fund 15,000 Cash 15,000 To record loan to SRF. 5 Encumbrances 18,000 Reserve for encumbrances 18,000 To encumber orders for supplies. 6 Reserve for encumbrances 18,000 Encumbrances 18,000 To reverse encumbrance entry on receipt of supplies ordered. Expenditures 18,150 Vouchers payable 18,150 To record purchase of supplies. 7 Expenditures 800 Due to stores fund (ISF) 800 To record materials acquired from the stores fund. 8 Other financing uses transfer to DSF 5,000 Cash 5,000 To record payment to DSF for debt service. 9 Expenditures 15,000 Cash 15,000 To record purchase of equipment.

Chapter 20 20-13 Copyright © 2018 Pearson Education, Inc. Solution E20-11 (continued) 10 Cash 3,000 Revenues 3,000 To record collection of license revenue. 11 Taxes receivable delinquent 50,000 Allowance for uncollectible taxes current 2,000 Taxes receivable current 50,000 Allowance for uncollectible taxes delinquent 2,000 To reclassify uncollected current taxes as delinquent. 12 Cash 30,000 Taxes receivable delinquent 30,000 To record collection of delinquent taxes. Revenues ($20,000 - $2,000)/2 9,000 Revenue collected in advance 9,000 To defer revenue recognition on taxes expected to be collected after the 60 day revenue recognition cutoff.

20-14 Accounting for State and Local Governmental Units Copyright © 2018 Pearson Education, Inc. Solution E20-12 1 Cash 75,000 Tax anticipation notes payable 75,000 To record issuance of short-term notes. 2 Encumbrances 33,000 Reserve for encumbrances 33,000 To record order of equipment. 3 Reserve for encumbrances 33,000 Expenditures 33,250 Encumbrances 33,000 Vouchers payable 33,250 To record receipt of equipment. 4 Other financing uses transfer to DSF 200,000 Cash 200,000 To record transfer to debt service fund. 5 Property taxes receivable current 1,000,000 Allowance for uncollectible current Taxes 50,000 Revenue collected in advance 50,000 Revenues 900,000 To record property tax levy. 6 Cash 100,000 Revenue collected in advance $100,000 To record receipt of restricted grant. 7 Expenditures 75,000 Vouchers payable (or cash) 75,000 To record expenditures for grant program. Revenue collected in advance 75,000 Revenues 75,000 To record revenues to date on the grant.

Chapter 20 20-15 Copyright © 2018 Pearson Education, Inc. Solution E20-13 1 CPF Cash 769,000 Other financing sources proceeds from bond issue 769,000 To record issuance of bonds. CPF Other financing uses nonreciprocal transfer to DSF 19,000 Cash 19,000 To transfer the premium to the debt service fund. DSF Cash 19,000 Other financing sources nonreciprocal transfer from CPF 19,000 To record receipt of bond premium. 2 SRF Cash (or Grants receivable) 450,000 Revenue collected in advance 450,000 To record grant revenue. 3 GF Other financing uses (non)reciprocal transfer to CPF 500,000 Cash 500,000 To record transfer to establish CPF. CPF Cash 500,0000 Other financing sources (non)reciprocal transfer from General Fund 500,000 To record the transfer from the GF. 4 PF Cash 10,000,000 Revenue – contribution/endowment 10,000,000 To record a permanent fund contribution. 5 GF Expenditures 375,000 Vouchers payable (or cash) 375,000 To record vehicle purchases.

To record the sale of governmental assets. (This is a governmental fund entry. Under accrual accounting, the asset would be removed and a gain on sale recognized.)

20-16 Accounting for State and Local Governmental Units

E20-13 (continued) 6 GF Cash 30,000

assets 30,000

Other financing sources – proceeds from sale of

GF Cash 1,200

Assets 1,200

Other financing sources – proceeds from sale of

8 GF Other financing uses nonreciprocal transfer to DSF 50,000 Cash 50,000 To record transfer to debt service. DSF Cash 50,000 Other financing sources nonreciprocal transfer from General Fund 50,000 To record receipt of transfer from GF. DSF Expenditures 50,000 Cash 50,000 To record interest payment.

Solution E20-14 Trial Balance Adjustments DR CR DR CR Cash $410,000 Investments 300,000 Tax receivable delinquent 150,000 Accounts receivable 30,000 Supplies inventory 60,000 Allowances for uncollectible taxes delinquent 10,000 Vouchers payable 140,000 Revenue collected in advance 40,000 d) 40,000 Note payable (shortterm) 150,000 Fund balance committed 90,000 Fund balance unassigned 520,000 b) 100,000 a) 35,000 c) 75,000 d) 40,000 $950,000 $950,000 Fixed Assets a) 100,000 Accumulated depreciation a) 65,000 Long term debt payable b) 100,000 Capital Lease payable c) 75,000 $315,000 $315,000 Total Net Position

Pearson Education, Inc.

Solution E20-15

Amounts reported for governmental activities in the statement of net assets differ from those in the governmental fund balance sheet because: Governmental funds report capital outlays as expenditures; the assets are capitalized and depreciated in the government-wide statements

Grant revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds 165,000 Debt proceeds provide current financial resources in the fund statement, but issuing debt increases long-term liabilities in the statement of net position

A capital lease is treated as an expenditure in the governmental funds in the year that the lease agreement is entered into; however, it increases long-term liabilities in the statement of net position

* The reconciling difference is $75,000 – $55,000 = $20,000, where fund balance was reduced by the full $75,000 that was properly charged to expenditures for the fund statements while net position will only be reduced by the $55,000 increase in long-term debt that is reported in the government-wide statements.

20-18 Accounting for State and Local Governmental Units

Net change in fund balance

funds $1,408,950

total governmental

(350,000)

225,000

20,000* Change in net position of governmental activities $1,468,950

Chapter 20 20-19

Solution P20-1 City of Orchard Park General Fund Balance Sheet December 31, 2016 Assets Cash $ 40,000 Taxes receivable delinquent (net of $30,000 allowance for uncollectible taxes) 180,000 Accounts receivable (net of $2,000 allowance for bad debts) 23,000 Supplies on hand 3,000 Due from Agency Fund 10,000 Total assets $256,000 Liabilities and Fund Balance Vouchers payable $155,000 Due to Utility Fund 20,000 Taxes received in advance 10,000 Liabilities 185,000 Fund balance – committed 50,000 Fund balance – nonspendable 3,000 Fund balance – unassigned 18,000 Fund balance 71,000 Total liabilities and fund balance $256,000 Supporting computations Adjusting entry: Supplies on hand 3,000 Fund balance – nonspendable 3,000 To record supplies on hand and related reserve. Closing entries Appropriations 900,000 Fund balance – unassigned 10,000 Estimated revenues 910,000 To reverse budget entry. Revenues 910,000 Expenditures 858,000 Encumbrances 50,000 Fund balance – unassigned 2,000

PROBLEMS

Accounting for State and Local Governmental Units

Solution P20-1 (continued)

Ending fund balance:

Fund balance-unassigned = $26,000 (preclosing balance) - $10,000 + 2,000 = $18,000

Fund balance – committed (for encumbrances) = $50,000

Fund balance – nonspendable (for supplies) = $3,000

Total ending fund balance = $18,000 + $50,000 + $3,000 = $71,000

20-20

Solution

P20-2

Chapter 20 20-21

Copyright © 2018 Pearson Education, Inc. City of Batavia General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For the year ended June 30, 2017 Revenues $980,000 Expenditures 940,000 Excess revenues over expenditures 40,000 Other financing sources (uses): Nonreciprocal transfers out (10,000) Excess of revenues and other financing sources over (under) expenditures and other financing uses 30,000 Total fund balance, July 1, 2016 (given) 80,000 Total fund balance, June 30, 2017 $110,000 City of Batavia General Fund Balance Sheet June 30, 2017 Assets Cash $ 80,000 Taxes receivable delinquent $160,000 Less: Allowance for uncollectible taxes 30,000 130,000 Due from County 18,000 Total assets $228,000 Liabilities and Fund Balance Liabilities: Vouchers payable $ 58,000 Notes payable 60,000 Total liabilities 118,000 Fund balance: Fund balance – restricted (* due to enabling legislation) $ 20,000 Fund balance – unassigned 90,000 Total fund balance 110,000 Total liabilities and fund balance $228,000

Solution P20-3

1 Journal entries for the Town of Tyler

((NOTE: this is like General Fund entry #11 in the example in the chapter but is done at beginning of year – it allows the bookkeeper to use encumbrance accounting for all expenditures regardless of the budget or accounting year. If the encumbrance were not re-established, entry “i” below would omit the encumbrance accounts. This is essentially a “reverse” entry and is optional.)) .

20-22 Accounting for State and Local Governmental Units

Estimated Revenues 400,000 Appropriations 395,000 Fund Balance – unassigned 5,000 To record the budget for the year July 1, 2016 to June 30, 2017 Encumbrances (prior year) 9,000 Reserve for Encumbrances (prior year) 9,000 To reinstate the prior year encumbrance.

a Taxes Receivable 200,000 Revenue Taxes 198,000 Allowance for uncollectible taxes 2,000 To record tax levy for the year. b Cash 190,000 Taxes Receivable current 176,000 Taxes Receivable delinquent 14,000 To record cash collections for the year. c Allowance for uncollectible taxes delinquent 1,000 Taxes Receivable delinquent 1,000 To record write-off of uncollectible account. d Cash 20,000 Revenues Licenses and Permits 20,000 To record hunting licenses. e Cash 200,000 Miscellaneous Revenues 200,000 To record Miscellaneous revenues. f Expenditures 20,000 Vouchers Payable 20,000 To record salaries for the year. g Encumbrances 15,000 Reserve for encumbrances 15,000

To record order of equipment.

P20-3 (continued)

To record receipt of equipment ordered during the prior year and chargeable against the prior year’s reserve for encumbrances.

* see NOTE for first entry – the encumbrance is optional.

To record the purchase order for operating supplies.

To reverse the encumbrance entry upon receipt of the supplies.

Chapter 20 20-23

h Reserve for encumbrances 15,000 Expenditures 14,000 Encumbrances 15,000 Vouchers Payable 14,000 To record receipt of equipment. i Expenditures–prior year 9,500 Reserve for encumbrance (prior year) * 9,000 Vouchers Payable 9,500 Encumbrances (prior year) 9,000

Solution

j Encumbrances 11,000 Reserve for encumbrances 11,000

Reserve for encumbrances 5,000 Encumbrances 5,000

Supplies inventory 5,000 Vouchers Payable 5,000

k Note Payable 15,000 Cash 15,000

l Expenditures 348,040 Cash 348,040 To record payment of

expenditures. m Expenditures 8,000 Supplies inventory 8,000

To record receipt of operating supplies.

To record payment of note payable.

various

To adjust the supplies inventory & expenditures.

To reclassify Fund Balance accounts

*The FB-committed balance should be $6,000 credit for the outstanding encumbrance of $6,000. The balance is $9,000 credit, so we must debit the fund balance $3,000.

**The FB-nonspendable is equivalent to the supplies balance. The ending supplies are $3,000 so the FB-nonspendable is adjusted from its beginning balance of $6,000 credit.

20-24 Accounting for State and Local Governmental Units

2018 Pearson Education,

n Taxes Receivable–delinquent 24,000 Allowance for uncollectible taxes–current 2,000 Taxes Receivable current 24,000 Allowance for uncollectible taxes–delinquent 2,000 To reclassify past-due taxes receivable as delinquent. Closing Entries o Appropriations 395,000 Fund Balance – unassigned 5,000 Estimated Revenues 400,000 To close the “budgetary” accounts Revenues 418,000 Expenditures 390,040 Expenditures-prior year 9,500 Fund Balance - unassigned 18,460 To close the revenue and expenditure accounts Reserve for Encumbrances 6,000 Encumbrances 6,000 To close encumbrance accounts Fund balance committed* 3,000 Fund balance nonspendable** 3,000 Fund balance unassigned 6,000

Inc. Solution P20-3 (continued)

Solution P20-3 (continued)

Town of Tyler General Fund

Statement of Revenues, Expenditures, and Changes in Fund Balance Budget and Actual (Budgetary Basis) For the year ended June 30, 2017

* Actual expenditures on a budgetary basis includes the $6,000 supplies purchase commitment chargeable against the 2016-17 appropriations, but excludes the $9,500 expenditures chargeable against the prior year’s carryover appropriation.

Chapter 20 20-25

Original Budget Final Budget Actual (Budgetary Basis) Variance Positive (Negative) Revenues Taxes $250,000 $250,000 $198,000 $(52,000) Licenses and permits 20,000 20,000 20,000 0 Miscellaneous revenue 130,000 130,000 200,000 70,000 Total Revenues 400,000 400,000 418,000 18,000 Total expenditures and encumbrances $395,000 $395,000 $396,040* (1,040) Excess of revenues over expenditures and encumbrances 5,000 5,000 21,960 16,960 Budgetary fund balance June 30, 2016 10,000 10,000 10,000 0 Less excess prior year’s actual expenditure over encumbrances (500) (500) Budgetary Fund Balance at June 30, 2017 $ 15,000 $ 15,000 31,460 $ 16,460 Encumbrances outstanding 6,000 Fund balance June 30, 2017 $ 37,460

3. Given the limited information, the reconciling items which are certain include the playground equipment in item h and the other equipment in item i.

Accounting for State and Local Governmental Units

20-26

Solution P20-4 Statement of Statement of Statement of Statement of Adjustments Adjustments Activities Activities Net Position Net Position DR CR DR CR DR CR DR CR Cash and cash equivalents 541,100 541,100 Investments 520,000 520,000 Taxes receivable 520,000 520,000 Accounts receivable 187,500 187,500 Due from other governments 364,970 364,970 Supplies inventory 290,000 290,000 Vouchers payable 379,500 379,500 Contracts payable 47,500 47,500 Revenue collected in advance 55,000 6) 55,000 0 Fund balance/Net Position, beg 912,720 2) 30,000 942,720 Revenues 3,507,450 6) 55,000 3,562,450 Expenditures 3,043,600 1) 9,000 3,014,600 3) 20,000 OFS Bond proceeds 500,000 4) 500,000 0 OFS Capital lease 65,000 5) 65,000 0 OFS Transfers in 75,250 7) 75,250 0 OFU Transfers out 75,250 7) 75,250 0 5,542,420 5,542,420 Fixed Assets 1) 9,000 104,000 2) 95,000 Accumulated Depreciation 2) 65,000 65,000 Construction in Progress 3) 20,000 20,000 Bonds Payable 4) 500,000 500,000 Capital leases payable 5) 65,000 65,000 819,250 819,250 2,547,570 1,999,720 Change in net position 547,850 547,850 2,547,570 2,547,570

a) Assume no depreciation in the first year, since no depreciation policy is provided.

Solution P20-5 [AICPA adapted]

20-27 Accounting for State and Local Governmental Units

Transactions July 1, 2015 June 30, 2016 a Estimated revenues 3,000,000 Appropriations 2,980,000 Fund balance – unassigned 20,000 To record the budget for the year. b Taxes receivable 2,870,000 Revenues taxes 2,800,000 Estimated uncollectible taxes 70,000 To record tax levy for the year. c Estimated uncollectible taxes 40,000 Taxes receivable 40,000 To write-off uncollectible taxes. d Cash 2,940,000 Taxes receivable 2,810,000 Miscellaneous revenues 130,000 To record cash collections for the year. e Vouchers payable 2,640,000 Cash 2,640,000 To record cash payments for the year. f Encumbrances 2,700,000 Reserve for encumbrances 2,700,000 To record encumbrances. g Reserve for encumbrances 2,700,000 Encumbrances 2,700,000 To reverse encumbrances. h Expenditures 2,700,000 Vouchers payable 2,700,000 To record vouchers for payment of current operations. i Expenditures prior year 58,000 Vouchers payable 58,000 To record expenditures for prior year.

Oslo School District General Fund

NOTE: we usually see encumbrances and reserve for encumbrances in the same entry. In the closing entries the encumbrances will be closed and a debit to Fund balance

unassigned (this makes sense as there is less fund balance available due to the commitment)

20-28 Accounting for State and Local Governmental Units

j Fund balance committed 60,000 Expenditures prior year 58,000 Fund balance - assigned 2,000 To close excess reserve to fund balance. k Due to other funds 210,000 Vouchers payable 210,000 To record vouchers for payment to other funds. l Expenditures 142,000 Due to other funds 142,000 To record expenditures for amounts due other funds. m Encumbrances 91,000 Fund balance committed 91,000 To record commitment for new contract.

Inc. Solution P20-5 (continued)

–

Solution P20-6 [AICPA adapted]

* This shows the approach to encumbrances/commitments by making entries during the accounting period directly into the fund balance account. The advantage of this method is that the fund balance account will be more accurate throughout the year. The disadvantage is that tradition is to offset Encumbrances with Reserve for Encumbrances.

Solution P20-6 (continued)

Chapter 20 20-29

Journal entries for the City of Lahti General Fund 1 Estimated revenues 2,000,000 Appropriations 1,940,000 Fund balance - unassigned 60,000 To record the budget. 2 Taxes receivable 1,870,000 Revenues 1,860,000 Allowance for uncollectible taxes 10,000 To record the property tax levy. 3 Allowance for uncollectible taxes 8,000 Taxes receivable 8,000 To write off uncollectible taxes receivable. 4 Cash 1,820,000 Taxes receivable 1,820,000 To record property tax collections. 5 Encumbrances 1,070,000 Fund balance committed* 1,070,000 To record purchase commitments.

6 Fund balance committed 1,000,000 Expenditures 1,840,000 Encumbrances 1,000,000 Vouchers payable 1,840,000 To record actual expenditures. 7 Vouchers payable 1,852,000 Cash 1,852,000 To record payment of vouchers. 8 Revenues 1,860,000 Fund balance - unassigned 140,000 Estimated revenues 2,000,000 To close revenues accounts.

20-30 Accounting for State and Local Governmental Units Copyright © 2018 Pearson Education, Inc. 9 Appropriations 1,940,000 Expenditures 1,840,000 Encumbrances 70,000 Fund balance - unassigned 30,000 To close expenditure related accounts

Solution P20-7

Note: The short-term note affects only the balance sheet. The interfund collection affects the balance sheet only.

Chapter 20 20-31

Volendam County General Fund

the year ended

Revenues: Taxes $10,000,000 Licenses and permits 2,000,000 Intergovernmental grants 300,000 Total revenues $12,300,000 Expenditures: Current operating: General government $ 8,000,000 Public safety 1,500,000 Judicial 1,000,000 Health and welfare 1,200,000 Total current operating 11,700,000 Capital outlay 600,000 Total expenditures 12,300,000 Excess of revenues over expenditures 0 Other financing sources (uses): Operating transfer to debt service fund (320,000) Residual equity transfer from other fund 2,000,000 Excess (Deficiency) of revenues and other sources over expenditures and other uses 1,680,000 Fund balance, January 1, 2016 3,130,000 Fund balance, December 31, 2016 $4,810,000

Statement of Revenues, Expenditures, and Changes in Fund Balance For

December 31, 2016

20-32 Accounting for State and Local Governmental Units

Solution P20-8 1 Cash ($3,000,000  .06  .5) 90,000 OFS - Nonreciprocal transfer from GF 90,000 To record transfer from general fund. 2 Expenditures interest 90,000 Cash 90,000 To record interest payment. 3 Cash 1,090,000 OFS - Nonreciprocal transfer from GF 1,090,000 To record transfer from general fund. 4 Expenditures interest 90,000 Expenditures principal retirement 1,000,000 Cash 1,090,000 To record payment of principal and interest. 5 None. 6 Cash ($2,000,000  .06  .5) 60,000 OFS - Nonreciprocal transfer from GF 60,000 To record transfer from general fund. 7 Expenditures interest 60,000 Cash 60,000 To record interest payment.

Inc.

Chapter 20 20-33 Copyright © 2018 Pearson Education, Inc. Solution P20-9 1 October 1, 2016 GF OFU – nonreciprocal transfer to CPF 200,000 Cash 200,000 To record transfer of cash to CPF. CPF Cash 200,000 OFS – Nonreciprocal transfer from gen fund 200,000 To record receipt of cash from GF. 2 November 1, 2016 CPF Encumbrances 580,000 Reserve for encumbrances 580,000 To record encumbrances for the amount of the contract. 3 April 15, 2017 CPF Cash 401,000 Other financing sources Proceeds from bond issue 401,000 To record sale of bonds. CPF OFU - nonreciprocal transfer to debt service fund 1,000 Cash 1,000 To transfer bond premium to the DSF. DSF Cash 1,000 OFS - nonreciprocal transfer from CPF 1,000 To record receipt of bond premium. 4 May 2, 2017 CPF Expenditures capital outlay 580,000 Contracts payable 580,000 To record expenditures on the municipal building project. Reserve for encumbrances 580,000 Encumbrances 580,000 To remove encumbrances when construction is complete.

20-34 Accounting for State and Local Governmental Units

2018 Pearson Education,

5 May 12, 2017 CPF Contracts payable 580,000 Cash 580,000 To record payment to Crooked Construction for building contract. CPF Other financing uses transfer to general fund 20,000 Cash 20,000 To record transfer to general fund. CPF OFS - nonreciprocal transfer from general fund 200,000 Other financing sources Proceeds from bond issue 401,000 Expenditures 580,000 Other financing uses transfer to general fund 20,000 OFU - nonreciprocal transfer to DSF 1,000 To close the books of the CPF. GF Cash 20,000 Other financing sources transfer from CPF 20,000 To record receipt of cash from CPF.

Inc. Solution P20-9 (continued)

Chapter 20 20-35 Copyright © 2018 Pearson Education, Inc. Solution P20-10 1 Journal entries for Malmo City July 1, 2016 CPF Encumbrances 480,000 Reserve for encumbrances 480,000 To encumber the construction contract. CPF Cash 255,000 OFS - Proceeds from bond issue 255,000 To record proceeds of bond issue. CPF OFU - nonreciprocal transfer to debt service fund 5,000 Cash 5,000 To transfer premium to the DSF. (This premium transfer is commonly presumed in problems.) DSF Cash 5,000 OFS - nonreciprocal transfer from CPF 5,000 To record receipt of premium transferred from CPF. December 20, 2016 CPF Reserve for encumbrances 160,000 Encumbrances 160,000 To reduce encumbrances for work completed. CPF Expenditures 160,000 Contracts payable 160,000 To record expenditures for one-third of Gunnarsson contract.

Solution P20-10 (continued)

payment on the

*Since there is a deficit – we use the unassigned category outside of the general fund. As also noted below, the deficit will be covered by issuing the additional $250,000 in bonds.

20-36 Accounting for State and Local Governmental Units

January 1, 2017 CPF Contracts payable 160,000 Contracts payable retained percentage 16,000 Cash 144,000 To record partial

contract. GF OFU - nonreciprocal

to debt service fund 2,500 Cash 2,500 To

DSF Cash ($250,000

2,500 OFS - nonreciprocal

2,500 To receive funds

January

interest

DSF Expenditures–interest 7,500 Cash 7,500 To record

January

6% 

June 30, 2017 CPF Encumbrances 160,000 Reserve for encumbrances 160,000 To reduce encumbrances for

completed. CPF Expenditures capital outlay 160,000 Contracts payable 144,000 Contracts payable retained percentage 16,000 To record billing for work completed.

Copyright © 2018 Pearson Education, Inc. CPF OFS - Proceeds from bond issue 255,000 Fund balance – unassigned* 230,000 Reserve for encumbrances 160,000 Fund balance - restricted 160,000 Expenditures–capital outlay 320,000 Encumbrances 160,000 OFU - nonreciprocal transfer to DSF 5,000 To close the books of CPF at end of fiscal year.

transfer

transfer funds to DSF for January 1, 2017 interest payment.

 .06  .5) - $5,000

transfer from GF

from GF for the

1, 2017

payment.

the

1, 2017 interest payment on the 6% serial bonds ($250,000 

1/2 year).

work

2 Closing entry

Solution P20-10 (continued)

At June 30, 2017 the balance sheet of the CPF would appear as follows:

* This deficit will be provided for by issuing the additional $250,000 of bonds.

Chapter 20 20-37

Assets Cash $106,000 Total assets $106,000 Liabilities Contracts payable $144,000 Contracts payable retained percentage 32,000 $176,000 Fund balance Restricted $160,000 Unassigned* (230,000) (70,000) Total liabilities and fund balance $106,000

20-38 Accounting for State and Local Governmental Units

2018 Pearson Education, Inc.

1 City of Cerone Civic Center Construction Fund General Journal July 1, 2016 (1) Cash 500,000 Due to general fund 500,000 To record the loan from the general fund. (2) Expenditures 320,000 Cash 320,000 To record payment of engineering and planning costs. December 1, 2016 (3) Cash 10,100,000 OFS - Proceeds from bond issue 10,100,000 To record receipt of proceeds from 6% bond issue. OFU - nonreciprocal transfer to DSF 100,000 Cash 100,000 To transfer bond premium to debt service fund. March 15, 2017 (4) Encumbrances 12,000,000 Reserve for encumbrances 12,000,000 To record construction commitment to Candu Construction Company. (5) Encumbrances 55,000 Reserve for encumbrances 55,000 To record commitment for materials on order. April 1, 2017 (6) Cash 2,500,000 Grant revenue 320,000 Revenue collected in advance 2,180,000 To record receipt of state grant. Expenditures of $320,000 to date. (7) Expenditures 51,000 Reserve for encumbrances 55,000 Vouchers payable 51,000 Encumbrances 55,000 To record receipt of materials and elimination of encumbrances. Vouchers payable 51,000 Cash 51,000

Solution P20-11 [AICPA adapted]

To record payment of voucher.

Chapter 20 20-39

Solution P20-11 (continued)

Note that the entry recognizing grant revenue presumes that the first $5 million of expenditures will be recoverable from the state. In some cases, the grantor only agrees to pay a certain percentage of the cost, up to some maximum. If this were the case in this problem, the amount of revenue recognized would be one-third of $2,371,000, or approximately $790,000.

20-40 Accounting for State and Local Governmental Units

June 15, 2017 (8) Expenditures 2,000,000 Contracts payable current 1,880,000 Contracts payable retained percentage 120,000 To record progress billing on contract with a 6% retained percentage. Reserve for encumbrances 2,000,000 Encumbrances 2,000,000 To reduce encumbrances for amounts billed. (9) Due to general fund 500,000 Cash 500,000 To record repayment of initial financing to the general fund. June 30, 2017 Revenue collected in advance 2,051,000 Revenue 2,051,000 To recognize grant revenue earned.

Closing entries Revenue 2,371,000 OFS - Proceeds from bond issue 10,100,000 Reserve for encumbrances 10,000,000 Fund balance - restricted 10,000,000 Expenditures 2,371,000 OFU - nonreciprocal transfer to DSF 100,000 Encumbrances 10,000,000 To close the books at June 30, 2017.

Chapter 20 20-41

2 City of Cerone Civic Center Construction Fund Balance Sheet June 30, 2017 Assets Cash $12,129,000 Total assets $12,129,000 Liabilities and Fund Balance Revenue collected in advance $129,000 Contracts payable current 1,880,000 Contracts payable retained percentage 120,000 Total liabilities $2,129,000 Fund balance: Restricted $10,000,000 Total fund balance 10,000,000 Total liabilities and fund balance $12,129,000

Solution P20-11 (continued)

20-42 Accounting for State and Local Governmental Units Copyright © 2018 Pearson Education, Inc. Solution P20-12 1 CPF Cash 510,000 OFS - Proceeds from bonds 510,000 To record issuance of bonds at a premium. CPF OFU - nonreciprocal transfer to debt service fund 10,000 Cash 10,000 To record transfer of bond premium to DSF. DSF Cash 10,000 OFS - nonreciprocal transfer from CPF 10,000 To record transfer of bond premium. 2 CPF Encumbrances 960,000 Reserve for encumbrances 960,000 To encumber contract awarded for construction. 3 CPF Reserve for encumbrances 320,000 Encumbrances 320,000 To reduce encumbrances for work completed. Expenditures 320,000 Contracts payable 320,000 To record expenditures for work completed. 4 CPF Contracts payable 320,000 Contracts payable retained percent 32,000 Cash 288,000 To record partial payment on construction contract. 5 GF OFU - nonreciprocal transfer to DSF 30,000 Cash 30,000 To record transfer to DSF. DSF Cash 30,000 OFS - nonreciprocal transfer from GF 30,000 To record transfer from GF. 6 DSF Expenditures–interest 20,000 Cash 20,000 To record payment of interest (500,000  .08  .5).

Chapter 20 20-43 Copyright © 2018 Pearson Education, Inc. Solution P20-12 (continued) 7 CPF Reserve for encumbrances 320,000 Encumbrances 320,000 To reduce encumbrances for work completed. Expenditures 320,000 Contracts payable 288,000 Contracts payable retained percentage 32,000 To record expenditures for work completed. 8 GF OFU - nonreciprocal transfer to DSF 90,000 Cash 90,000 To record transfer to DSF. DSF Cash 90,000 OFS - nonreciprocal transfer from GF 90,000 To record transfer from GF. 9 DSF Expenditures interest 20,000 Expenditures principal retirement 50,000 Cash 70,000 To record debt service payment. 10 CPF Cash 500,000 OFS - Proceeds from bonds 500,000 To record issuance of bonds.

20-44 Accounting for State and Local Governmental Units

(continued) 2

Statement of Revenues, Expenditures, and Changes in Fund Balance for the year ended June 30, 2017 Expenditures: Capital outlay $640,000 Deficiency of revenues over expenditures ($640,000) Other financing sources and uses: OFS Proceeds from bonds $1,010,000 OFU - nonreciprocal transfer out (10,000) Total other financing sources and uses 1,000,000 Excess of revenues and other financing sources over expenditures and other financing uses 360,000 Fund balance, July 1, 2016 0 Fund balance June 30, 2017 $360,000 City of Catalina Capital Projects Fund Balance Sheet June 30, 2017 Assets Cash $ 712,000 Total assets $ 712,000 Liabilities and Fund Balance Liabilities: Contracts payable $288,000 Contracts payable retained percentage 64,000 $ 352,000 Fund balance: Restricted $320,000 Committed 40,000 360,000 Total liabilities and fund balance $ 712,000

City of Catalina Capital Projects Fund