Governmental and Nonprofit Accounting, 11th Edition Robert J. Freeman Instructor Manual

Type:

Instructor Manual

Resource:

Governmental and Nonprofit Accounting

Edition:

11th Edition

Author(s):

Robert J. Freeman Craig Shoulders Dwayne McSwain Robert Scott

CHAPTER ONE GOVERNMENTAL AND NONPROFIT ACCOUNTING: ENVIRONMENT AND CHARACTERISTICS (Pages 1–30) CHAPTER ONE OUTLINE 1) Characteristics and types of G&NP organizations a) G&NP sector significance b) The G&NP environment i) Organizational objectives ii) Sources of financial resources iii) Evaluating performance and operating results 2) Objectives of G&NP accounting and financial reporting 3) Authoritative sources of G&NP accounting principles and reporting standards a) The FAF b) The FASB c) FASB-GASB jurisdictions d) “Government” defined e) The GASB f) GAAP hierarchies 4) Concepts and objectives of SLG accounting and financial reporting a) Governmental-type activities i) Purpose ii) Sources of financial resources (1) Taxation (2) Intergovernmental revenues iii) Financial resource allocation mechanisms (1) Restrictions on resource use (2) The budget iv) Accountabilities (1) To whom accountable (2) Accountability focuses v) Reporting issues and problems b) Financial report users c) Financial report uses d) Business-type activities i) The relationship between services received and resources provided by the consumer ii) Revenue-producing capital assets iii) Similarly designed activities and potential for comparison iv) The nature of the political process 1 ..

v) Budgets and fund accounting e) Users and uses of financial reports f) Financial reporting objectives 5) Characteristics of SLG accounting and financial reporting a) Fund accounting b) Budgets and appropriations c) Other distinguishing characteristics d) Commercial accounting comparison 6) Concluding comments 7) Appendix 1-1: Evolution of Accounting Principles and Standards—Prior to the GASB a) Initial evolution (1900–1933) b) National Committees on Municipal and Governmental Accounting (1934–1974) c) National Council on Governmental Accounting (1974–1984) 8) Questions 9) Exercises 10) Problems

CHAPTER LEARNING OBJECTIVES 1.1

Describe the key unique characteristics and major types of government and nonprofit (G&NP) organizations.

1.2

Describe the objectives of G&NP accounting and financial reporting.

1.3

Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides.

1.4

Summarize the key distinguishing characteristics, concepts, and objectives of G&NP accounting and financial reporting.

1.5

Explain the key characteristics of state and local government financial reporting.

2 ..

CHAPTER OVERVIEW AND SYNOPSIS Chapter 1 provides a general overview of the governmental and not-for-profit accounting and financial reporting environment, as follows: •

An introduction to the text.

•

A summary overview of the government and not-for-profit (G&NP) environment—the types of G&NP organizations; their characteristics, growth and importance, and distinguishing characteristics; and how these factors have led to distinctive G&NP accounting and reporting objectives.

•

A discussion of the authoritative sources of G&NP accounting principles and reporting standards—including the standards setting bodies, the types of authoritative pronouncements, and the GAAP “Hierarchy” established in GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, and the guidance for determining which entities are considered governments for purposes of GAAP.

•

A review of G&NP financial report users and uses, as well as an overview of governmental and business-type activities. Students are introduced to the concepts of: o Taxation o Intergovernmental revenues o Resource restrictions

•

Identification of the unique characteristics of state and local government accounting and financial reporting, such as: o Fund accounting o Budgets and appropriations o Measurement focus

•

An appendix with brief discussions of the evolution of accounting principles applicable to state and local governments and of the related standards setting processes that led to the formation of the Governmental Accounting Standards Board.

It should be noted that most of the topics and concepts introduced in this chapter will be addressed in much greater detail later in the text. It is recommended that students be reminded of this several times, especially in classes devoted to the early chapters of this text. This is not only reassuring to those new to the G&NP environment, but also to reinforce that these topics will be more thoroughly studied.

This chapter typically is the basis for part of the orientation lecture during the first class meeting.

Accordingly, it may be assigned for the first class meeting—with students instructed to review it 3 ..

in preparation for the second class meeting. Such review might include scan reading of the first two main topics listed above for their main points with more careful study attention being given to the remaining topics.

CRITICAL OBJECTIVES There are three essential learning objectives for your students in this chapter. Your students should be able to: • • •

Describe the fundamental ways that governments and not-for-profit organizations differ from business enterprises.

Identify whether an entity meets the definition of government in the accounting literature, making it subject to GASB standards instead of FASB standards. (In the text, Illustration 1-1 provides a detailed definition of a government entity—refer to page 8.)

Summarize the role of and application of the government GAAP hierarchy. (Refer to the GAAP Hierarchy as provided on page 11 of the text.)

Quizzes can provide effective motivation for students to learn material that you consider essential to understanding subsequent material or that you otherwise consider essential for them to know. You may want to try telling students very precisely what you will cover on some of your quizzes. For this chapter, you might want to tell students that a quiz on the government GAAP hierarchy will be given at the beginning of the second class meeting.

QUESTIONS/EXERCISES/PROBLEMS — SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises Number of Problems

10 2 (includes 10 multiple-choice questions in one exercise) 4 (includes 2 Internet research problems)

Exercise 1-2 (Expenditures vs. Expenses) Students have some difficulty grasping the differences between expenditures and expenses.

This simple exercise should provide a concrete basis for exposing them to the differences and for discussing the concepts.

Questions 1-6, 1-8, and 1-10 These questions focus a student’s attention on the reasons for and jurisdictions of the two standards setting bodies—the GASB and the FASB. Problem 1-2 This problem provides a good basis for discussing the government GAAP hierarchy and its importance.

4 ..

Problems 1-3 and 1-4 These problems may be used to familiarize students with websites that are useful in G&NP accounting and financial reporting environment.

Additional questions for in-class or homework assignments 1. What characteristics differentiate G&NP organizations from profit-seeking entities?

Suggested Solution The following characteristics differentiate government and nonprofit (or not-forprofit) organizations from profit-seeking (or for-profit) organizations: o Government and nonprofit (G&NP) organizations are service-oriented and there is no profit motive inherent in their inception or operation; o They usually are “owned” collectively, and ownership interests cannot be sold or traded; contributors of financial resources to G&NP organizations do not necessarily receive any direct or proportionate shares of their goods or services; o They often provide goods or services that are not feasibly provided through the private sector; and o Their major policy decisions, and perhaps some operating decisions, typically are made by consensus vote of an elected or appointed governing body whose members serve part-time and have diverse backgrounds, philosophies, capabilities, and interests.

2. List four factors that cause society to subject G&NP organizations to more stringent legal, regulatory, and other controls than it imposes on private businesses.

Suggested Solution o The lack of the profit test as a regulator and control device. o Governments have the power of taxation. o There is no open market for most G&NP organization goods and services. o Resources made available to G&NP organizations often are restricted for specified services.

3. Legal and administrative constraints are society’s tools for directing G&NP institutions in achieving their objectives. This results in an emphasis on control of and accountability for expendable financial resources in G&NP organization accounting and financial reporting rather than on net income determination. Why can’t the profitability measure provide this direction? Identify various legal and administrative control provisions unique to G&NP organizations and explain their impact on accounting and reporting for such organizations.

Suggested Solution G&NP organizations are, by definition, not profit-seeking organizations. Thus, their goal is not to maximize profits, but to provide as many goods and services as possible 5 ..

within the constraints of the resources available to them. Furthermore, many of the goods and services provided by G&NP organizations are not profitable for business organizations to provide.

In the absence of the profit measure and its regulatory benefits, society substitutes alternative controls over G&NP organizations. The two major control devices are funds and the budgetary/appropriations process. Other control devices include restrictions as to their organizational structure, personnel policies and procedures, sources of financial resources, uses of financial resources, accounting, reporting, and auditing. The impact of society’s control devices is seen in the use of fund accounting, budgetary control, and financial reporting emphasizing accountability for financial resources received, used, and held in terms of the constraints within which the G&NP organization functions.

4. Discuss the “funds flow” concept as it applies to the operations of G&NP organizations.

Suggested Solution The focal point of much of G&NP organization accounting and financial reporting is expendable financial resources, accounted for in expendable funds and allocated by the budgetary process. In this context, “funds-flow” refers to the beginning balances, inflows, outflows, and ending balances of the net expendable financial resources of expendable funds. (A narrower type of “funds-flow” statement—a statement of cash flows—is prepared for the “proprietary” funds of G&NP organizations.)

5. Contrast the cost measurement focus used by proprietary (nonexpendable) funds and governmental (expendable) funds.

Suggested Solution The cost measurement focus of proprietary (nonexpendable) funds is expenses.

Expenses are the cost of assets and services that are consumed during a period. This is the cost measurement focus used by businesses. The cost measurement focus of governmental (expendable) funds is expenditures. Expenditures are the amount of financial resources expended for a period for: o Current operations o Capital outlay o Long-term debt principal retirement and interest.

Expenditures decrease net expendable available financial assets.

6. Contrast the following concepts as they are used in commercial and G&NP accounting: a. Accounting entity b. Periodicity c. Matching d. Going concern 6 ..

Suggested Solution a. In G&NP accounting, the accounting entity concept relates to the separate fund and fund type entities, not to the organization as a whole. The organization in its entirety typically is referred to as the “reporting entity.” b. In G&NP accounting, the periodicity concept usually relates to the budgetary period and budgetary comparisons, rather than to income determination. c. The matching concept as understood in commercial accounting is used similarly for commercial-type activities undertaken by G&NP organizations and in governmentwide financial reporting. In all other cases, reference is to matching revenues and expenditures—current (or current operating), capital outlay, and debt retirement— both directly and against budgetary authorizations. Governmental (expendable) fund accounting emphasizes the inflows, outflows, and balances of expendable financial resources rather than the determination of revenues, expenses, and net income. d. The going concern concept is relevant only when commercial-type or self-supporting activities are involved in G&NP organizations and at the government-wide level.

Expendable financial resource funds exist on a year-by-year or project-by-project basis and may be intentionally exhausted and “go out of business.”

7 ..

CHAPTER TWO STATE AND LOCAL GOVERNMENT ACCOUNTING AND FINANCIAL REPORTING MODEL: THE FOUNDATION (Pages 31–68) CHAPTER TWO OUTLINE 1) Overview of the GASB financial reporting model 2) The fundamental features of the SLG accounting and financial reporting model a) GAAP and legal compliance i) GAAP reporting ii) Compliance b) Fund accounting c) Fund categories i) Proprietary funds ii) Governmental funds iii) Deferred outflows of resources and deferred inflows of resources—discussion approach iv) Nonfund accounts v) Fiduciary funds d) Transaction analysis e) Types of funds i) Types of proprietary funds ii) Types of governmental funds iii) Identifying governmental fund types in transaction analysis iv) Types of fiduciary funds v) Summary of types of funds f) Comparative financial statement formats i) Operating statements ii) Balance sheets g) Annual financial reporting i) Individual and combining statements ii) Financial reporting entity and component units iii) Government-wide financial statements 3) Concluding comments 4) Questions 5) Exercises 6) Problems

1 ..

7) Cases

CHAPTER LEARNING OBJECTIVES 2-1

2-2 • • • • •

Visualize, summarize, and discuss the major overall aspects of the GASB state and local government financial reporting model, including the dual perspective of government-wide and fund financial statements.

Explain the fundamental features of the state and local government accounting and financial reporting model, including: Distinguishing the three broad categories of funds—governmental, proprietary, and fiduciary—and the specific types of funds in each fund category.

Identifying and explaining the measurement focus and basis of accounting used for each category of funds and the financial statements required for funds of each category.

Analyzing the effects of transactions on the proprietary fund and governmental fund categories and on the General Capital Assets and General Long-Term Liabilities accounts.

Identifying typical budgetary accounting and reporting requirements.

Explaining the financial reporting requirements for a Government’s basic financial statements and its comprehensive annual financial report.

CHAPTER OVERVIEW AND SYNOPSIS Chapter 2 is a critical chapter. Some consider it the most important in the text for optimizing student success and understanding. The chapter covers the whole breadth of government financial reporting at an introductory level on most topics. The learning objectives for this chapter are voluminous. Certain objectives in this chapter are essential to student understanding of subsequent chapters, while others are not, and will be met more fully in later chapters.

Chapter 2 includes: •

An extensive overview and introduction to the GASB Financial Reporting Model.

In this context, the chapter reviews the most significant characteristics of the SLG environment and the resultant SLG financial reporting objectives established by the GASB.

•

Extensive discussions and illustrations of the fundamental features of the SLG accounting and financial reporting model. It contains an extensive discussion of the basic features of fund accounting, including identifying and understanding fund categories and fund types. Also, the chapter introduces the two newest elements of the financial statements—deferred outflows of resources and deferred inflows of resources.

2 ..

•

An introduction to the measurement focus and basis of accounting used in the different fund categories.

•

Numerous illustrations designed to enhance a student’s understanding of the unique SLG accounting and financial reporting environment.

As was the case in Chapter 1, many of the topics and concepts introduced in this chapter will be reviewed in much greater detail in subsequent chapters. For example, Chapters 3 through 15 in the text address in detail the broad concepts introduced within Chapter 2, as follows: • Chapter 3 • Chapters 4 and 7–12 • Chapters 4–6 and 10–12

Budgeting Fund Accounting Measurement Focus/Basis of Accounting Financial Reporting

• Chapters 13, 14, and 15

CRITICAL OBJECTIVES The primary learning objectives for this chapter include: •

•

• •

Developing an understanding of the focus of the government financial reporting model. Emphasis should be placed on the fundamental differences between the government-wide and the fund financial statements (within the context of framing the model for further discussion in later chapters).

Understanding the nature and differences of governmental funds and proprietary funds. (Illustration 2-10 on page 51 is an excellent resource for this discussion.)

Fiduciary funds are important as well, but focusing student attention at this early stage on the two primary fund categories that they will use most often typically proves beneficial from a learning standpoint. You want students to understand the governmental fund model and the proprietary fund model. This understanding should include the accounting equation for each of these categories of funds, the required financial statements, and the measurement focus and basis of accounting.

Again, Illustration 2-10 should be very useful in this regard. (Illustrations 2-6 and 2-7 are designed to assist students in comparing and contrasting the governmental and proprietary reporting models in a very practical way.)

Understanding the nonfund accounting entity used to account for general capital assets and general long-term liabilities.

Understanding the definitions of and differences between the two types of proprietary funds. Emphasize that the primary difference between the Enterprise Funds and Internal Service Funds is whether the majority of services are provided

3 ..

•

•

• • •

to other departments and agencies of the reporting government (Internal Service Funds) or to outside entities and individuals (Enterprise Funds).

Understanding the definitions of and differences between the various types of governmental funds. Emphasize that the fundamental differences between any two governmental funds is the purpose(s) for which the fund resources are to be used. (Illustrations 2-8 through 2-10 may also be used to emphasize these points.)

Mastering basic transaction analysis for governmental and proprietary funds.

(Illustrations 2-6 and 2-7, Problems 2-1 through 2-4, and Case 2-2 in the text, as well as additional problems supplied within this manual are useful tools for teaching proper transaction analysis in the SLG environment.) Students who become proficient at transaction analysis in this chapter demonstrate a solid understanding of the government accounting and reporting model and thus tend to have a firm basis for mastering future chapters.

Developing a basic understanding of the proprietary fund statement of revenues, expenses, and changes in fund net position (Illustration 2-11).

Developing a basic understanding of the governmental fund statement of revenues, expenditures, and changes in fund balance (Illustration 2-11).

Introducing the annual external financial reporting requirements. (Consider referring students to the financial statement examples in Chapter 13, specifically Illustrations 13-1 through 13-10, and 13-12.) Government-wide reporting should be introduced but should not be emphasized until you reach the reporting chapters—Chapters 13 through 15. (Illustration 14-1 on page 552 of the text may help students better visualize the differences and relationships between the fund financial statements and the government-wide financial statements.)

Teaching Funds, Fund Structure, and Transaction Analysis Students often understand the concepts of fund accounting better if they are carefully led through a logical progression. One possibility is to teach: • What a fund is.

• What a fund category is.

• What the three fund categories are.

• The accounting equation and the measurement focus for the proprietary fund category.

• Transaction analysis for the proprietary fund category (Illustration 2-6 and Exercise 2-10 (1) in the text).

• The accounting equation and the measurement focus for the governmental fund category.

• The absence of general government capital assets and general government longterm liabilities in the governmental funds.

• The use of nonfund general capital assets and general long-term liabilities accounts.

4 ..

• • • •

Transaction analysis for the governmental fund category, along with the General Capital Assets and General Long-Term Liabilities accounts (Illustration 2-7 and Exercise 2-10 (2) in the text).

The two individual types of proprietary funds and how to distinguish between the two.

The five individual types of governmental funds and how to distinguish among them.

Practice transaction analysis using specific fund types (Problems 2-1 through 2-4 in the text).

Financial Statements It is likely that students will be more successful in understanding and preparing the statement of revenues, expenditures, and changes in fund balance and the statement of revenues, expenses, and changes in fund net position if you simply have them memorize the formats for these critical financial statements. (Exercises 2-6 and 2-7 in the text provide students an opportunity to apply their understanding of these two financial statements.)

Have students note that when a transaction causes the fund balance of a governmental fund to change in the transaction analysis, this change must be reflected in the statement of revenues, expenditures, and changes in fund balance in some way. Then note that this statement includes three (or four) categories of increases and three (or four) categories of decreases. Because all but one of the increase categories and all but one of the decrease categories are used to present either a single type or a limited number of types of transactions, a student can become astute in preparing this statement with limited time and effort.

A simplistic way to illustrate the nature of a governmental fund balance sheet and operating statement with the accounting equation is to draw a horizontal box around the accounting equation and explain that this is a balance sheet. (A balance sheet is a detailed presentation of the accounting equation.) A vertical box that encloses fund balance at the top can represent the operating statement.

5 ..

Balance Sheet (Financial Assets (Related Liabilities + − + Deferred Outflows Deferred Inflows of Resources) of Resources) Balance Sheet (Financial Assets (Related Liabilities + − + Deferred Outflows Deferred Inflows of Resources) of Resources)

=

Fund Balance

=

Fund Balance

(1) Beginning balance (2) Operating Statement Includes Increases in Fund Balance Revenues Other Financing Sources Special Items Extraordinary Items AND Decreases in Fund Balance Expenditures Other Financing Uses Special Items Extraordinary Items Some professors prefer to replace “Financial Assets” with “Current Assets” and “Related Liabilities” with “Current Liabilities” in the Balance Sheet equation. This may help students understand the accounting equations for governmental funds although it is not completely accurate.

QUESTIONS/EXERCISES/PROBLEMS — SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises Number of Problems Number of Cases

18 (includes 1 research question) 10 (includes 2 exercises with 10 multiple choice questions each) 6 (includes 4 transactional analysis problems) 2 (includes fund identification and transaction analysis cases) 6 ..

Exercises 2-3 and 2-4 (also refer to additional exercise provided in this manual) These are short exercises that can be used to illustrate fund classification and/or to gauge student understanding of fund classification.

Exercise 2-5 This exercise may be used to discuss the concept of expenditures in governmental funds.

Exercises 2-6 and 2-7 These are brief exercises that focus attention on the operating statements of governmental funds and of proprietary funds. Assigning both may highlight some of the differences between these statements and between reporting the flow of current financial resources versus reporting the flow of economic resources.

Exercises 2-8 and 2-9 These are brief exercises that focus attention on the balance sheets of governmental funds and proprietary funds. Assigning both may highlight some of the differences between these statements and between the current financial resources measurement focus and the economic resources measurement focus.

Exercise 2-10 In addition to being a transaction analysis, this exercise is an effective tool for helping students understand the differences between accounting for governmental funds and the nonfund accounts and accounting for proprietary funds. This is a good introductory assignment to help students understand the nature of a governmental fund versus the nature of a proprietary fund. Students are told to analyze the same set of transactions for a “generic” governmental fund and for a “generic” proprietary fund. For the first five transactions, the effect on fund equity is the same for the governmental fund analysis as it is for the proprietary fund analysis. Capital assets and long-term liabilities are introduced beginning in the sixth transaction. The analysis, therefore, differs considerably between the two categories of funds in several of the subsequent transactions. It follows the format of Illustrations 2-6 and 2-7. Problems 2-1 through 2-4 (also refer to numerous additional problems provided in this manual) These problems reflect a variety of transaction analysis scenarios that require the student to identify the specific fund and/or nonfund accounts affected by each transaction and to explain how the transaction is reported in the appropriate operating statement of each fund affected. Mastering the material of this chapter to the point of being able to successfully analyze a wide variety of transactions is critical for a student’s success and understanding in later chapters. The problems are great learning tools and it is better to assign too many of these problems rather than too few.

7 ..

Problems 2-5 and 2-6 These problems are designed to provide extensive comparisons and contrasts of the differing bases of accounting unique to the fund accounting environment.

Case 2-1 This is a short case that can be used to illustrate fund classification and/or to gauge student understanding of fund classification. Students could look at a recent State of California CAFR to find the answers to this case.

Case 2-2 This case is similar to the transaction analysis Problems 2-1 through 2-4. It should provide students with an opportunity to practice their transaction analysis skills by examining a variety of transactions that occurred at the Humble Independent School District.

Additional questions for in-class or homework assignments 1. What differences would you expect to find between the accounting principles for the General Fund and for Special Revenue Funds?

Suggested Solution There should be no differences between the accounting principles for the General Fund and for Special Revenue Funds. The only difference between the two fund types is the functions or activities they might be used to finance.

While the General Fund can usually be used for any reasonable governmental purpose agreed upon by the governing body, Special Revenue Fund resources are dedicated (usually by law, regulation, or contractual agreement) to one or a few specific purposes or activities.

2. Revenues or expenditures of a specific fund may not represent increases or decreases in the net position of the government as a whole. Why is this true?

Suggested Solution Revenues or expenditures of a specific fund may not represent increases or decreases in the net position of the government as a whole because the focus of municipal accounting is upon the fund entities, not upon the government as an entity. Thus, a fund generally has “revenues” or incurs “expenditures” whenever its net position is increased or decreased, respectively (whether or not there have been increases or decreases in the net position of the government as a whole). However, interfund transfers, reimbursements, and bond issue proceeds do not give rise to fund revenues, expenditures, or expenses. The situation in question arises in cases such as these:

8 ..

o When capital outlay expenditures from a fund result in the acquisition of an asset accounted for through the General Capital Assets and General Long-Term Liabilities accounts, and o When indebtedness previously carried in the General Capital Assets and General Long-Term Liabilities accounts matures and is established as an expenditure and liability of, or is paid from, a specific fund.

3. It has been asserted that terms such as sources and uses should be substituted for revenues and expenditures, respectively, in accounting and reporting for governmental (expendable) funds. Do you agree? Why or why not?

Suggested Solution Yes Inasmuch as expendable fund accounting is concerned principally with the inflows, outflows, and balances of appropriable financial resources—and is thus more akin to “funds flow” than “income determination” accounting—terms such as “sources” and “uses” would be more suitable than “revenues” and “expenditures.” Although not discussed in the textbook, the GASB uses the terms “inflows of resources” and “outflows of resources” instead of “revenues” and “expenditures” in its Concepts Statement No. 4, Elements of Financial Statements. The use of terms, such as “sources” or “inflows of resources,” might reduce the frequent confusion of the terms “expenditures” and “expenses.”

-orNo The terms “revenues” and “expenditures” have long been used in governmental accounting and reporting and do not confuse the knowledgeable reader of governmental fund financial statements.

Inasmuch as they are widely understood, a change of terminology might cause more confusion. Further, the terms “sources” and “inflows of resources” include nonrevenue financing sources, as well as revenues, and the terms “uses” and “outflows of resources” encompass nonexpenditure financing uses as well as expenditures. Thus, “sources” and “uses” are not synonymous with “revenues” and “expenditures,” respectively.

Grader Note: The “Yes” or “No” answer is not important here. What is important is that the student demonstrates an awareness of (1) the similarity of expendable fund accounting of governments and “funds flow” analysis of business enterprises and, perhaps, (2) the other points of the suggested solutions above.

9 ..

4. The principal financial statements of business enterprises are the balance sheet, income statement, and statement of cash flows. What similarities and differences are there between these statements and the operating and position statements of a proprietary fund? A governmental fund?

Suggested Solution Proprietary (nonexpendable) fund accounting and financial statements are quite similar to those of similar business enterprises because of the similarity of the underlying accounting models. The Statement of Net Position (Balance Sheet), Statement of Revenues, Expenses, and Changes in Fund Net Position, and Statement of Cash Flows constitute the principal financial statements of a government's proprietary (nonexpendable) funds. Though similar, there are notable differences between these statements and the corresponding business statements. The equity of a proprietary fund distinguishes the underlying nature of, or restrictions on, net position, not the sources from which the equity was derived. Different classifications and totals are used in the proprietary fund operating statement and cash flow statement.

Governmental (expendable) funds, on the other hand, are comprised of financial assets and related liabilities. Governmental (expendable) fund accounting and reporting is therefore largely concerned with sources, uses, and balances of appropriable financial resources—not income determination—and expenditures are accounted for rather than expenses.

Thus, the operating statement—the Statement of Revenues, Expenditures, and Changes in Fund Balance—somewhat resembles the Statement of Cash Flows of a commercial enterprise. This statement—prepared on both the GAAP basis and the budgetary basis—and the Balance Sheet comprise the principal financial statements prepared for governmental (expendable) funds.

5. Harvey Township budgets its resources on the cash basis in accordance with state laws. State law also requires financial statements prepared on the cash basis. To comply with this requirement, Harvey Township prepares the financial statements in its comprehensive annual financial report (CAFR) on the cash basis rather than on the GAAP basis. a. Discuss the appropriateness of the statements in Harvey Township’s CAFR. b. Explain what, if anything, Harvey Township should change in its CAFR. Suggested Solution a. Harvey Township’s Comprehensive Annual Financial Report (CAFR) complies with the state laws but does not comply with generally accepted accounting principles (GAAP).

10 ..

b. The CAFR should be changed so that the primary financial statements are presented in conformity with GAAP. The budgetary statement(s) would be prepared on the cash basis under GAAP, but the other statements would be prepared under the modified accrual or accrual basis, as appropriate.

State reporting requirements may have to be met by including supplemental schedules in the CAFR or by issuing a special purpose report.

6. The City of Horner’s Corner publishes basic financial statements (BFS) and management’s discussion and analysis (MD&A) but considers it unnecessary to publish a comprehensive annual financial report (CAFR). The city’s only funds are a General Fund, three Special Revenue Funds, two Capital Projects Funds, an Internal Service Fund, and two Enterprise Funds. A citizen has asked you if this practice is appropriate according to GASB principles.

Discuss.

Suggested Solution The basic financial statements and notes—accompanied by Management’s Discussion and Analysis and other required supplementary information— meet the minimum GAAP requirements for general purpose external financial reporting. Therefore, a CAFR is not required by the GASB principles. However, the GASB does recommend that this information be provided within the context of a Comprehensive Annual Financial Report.

7. The clerk of the town of Smallsville is willing to prepare the basic financial statements (BFS) required by the GASB but does not want to prepare the management’s discussion and analysis (MD&A). Is this practice appropriate according to GASB standards?

Suggested Solution No. The GASB identifies the MD&A as part of the minimum requirements for general purpose external financial reporting. The MD&A is required supplementary information.

Additional problems for in-class or homework assignments Problem 2-1 (Fund and Nonfund Accounts Identification) Using the appropriate fund and nonfund accounts abbreviations, indicate which governmental fund(s) and nonfund accounts might be used to account for the following items and give the reasons for your answer(s).

1.

2.

Revenues not restricted as to use Revenues restricted for specified current operating purposes 11 ..

3.

4.

5.

6.

7.

8.

9.

10.

No. Fund(s)

Purchase of equipment, furniture, and fixtures Depreciation of equipment used in general government functions Payment of short-term debt interest and principal Payment of maturing long-term debt interest and principal Construction of a major capital facility or improvement Charges for services Revenues restricted to payment of general obligation long-term debt interest and principal Proceeds of long-term debt issuances Solution Format Accounts to Be Used Reason(s) Fund & Accounts Abbreviations GF General Fund SRF Special Revenue Fund CPF Capital Projects Fund DSF Debt Service Fund GCA/GLTL General Capital Assets and Long-Term Liabilities accounts

Suggested Solution No

Fund(s) to Be Used

Reason (s)

1.

GF

Revenues are unrestricted.

2.

SRF GF

Usually, since restricted to certain operations.

Permitted if no requirement for SRF and management can assure compliance with restrictions in GF.

3.

GF SRF

If recurring, minor capital outlay.

If recurring, minor capital outlay from restricted resources.

A SRF would not be used if the primary purpose of the fund is capital acquisitions.

If part of major capital project.

CPF 4.

None

Depreciation is not an expenditure but will be reported in the government-wide financial statements.

5.

GF

If debt incurred for General Fund operating purposes.

If debt incurred for Special Revenue Fund operating purposes (not if the primary purpose of the fund is debt issuance or repayment).

SRF

12 ..

CPF PF

If debt incurred for a capital project.

If debt incurred for a Permanent Fund.

DSF GF CPF PF

Usually, as is function of DSF. If debt serviced through GF (e.g., capital leases) rather than DSF. If debt service during construction is paid from CPF. If debt is related to a Permanent Fund.

7.

CPF

Usually, as is purpose of CPF.

8.

GF SRF

If revenues unrestricted as to use.

If revenues restricted as to use.

9.

DSF GF

Usually, since DSF is for this purpose.

If no DSF required or used and can effectively control through GF.

10.

CPF DSF GF

If for major capital project.

If to refinance old long-term debt.

If to finance GF deficit or if nonmajor capital project financed through GF.

6.

Problem 2-2 (Transaction Analysis) a. Analyze the effects of the following transactions on the accounting equations of the various funds and nonfund accounts of a state or local government. Identify the fund that typically would be used to record the transaction. b. Indicate how each transaction would be reported in the operating statement for each fund affected.

Example: Cash received for licenses during 20X1, $8,000.

Answer: General Capital Assets and General Long-Term Liabilities Accounts

Governmental Funds No. E.

Fund GF

FA $8,000

–

RL

=

FB $8,000

GCA

–

GLTL

=

NP

GF = General fund

Revenues of $8,000 reported in GF. 1. The government-owned and -operated electric utility billed users $2,000,000 for electricity usage. This included $100,000 billed to General Fund departments for electricity usage.

13 ..

2. $50,000 of General Fund money was loaned to a Capital Projects Fund to allow construction on a project to begin before the related bonds were issued. The loan is to be repaid in 6 months.

3. $1,000,000 of property taxes were levied during the year to provide financing for the budget of the year of levy; $800,000 was collected by year end. Another $85,000 was collected during the first 60 days of the next fiscal year. An additional $100,000 is expected to be collected during the remainder of the second fiscal year and $15,000 is estimated to be uncollectible.

4. The government issued a $7,000,000, 6 percent, 5-year note halfway through the fiscal year to provide partial financing for construction of a bridge.

5. The government issued a $1,000,000, 6 percent, 1-year note halfway through the fiscal year to provide temporary financing for a special program, which will be financed ultimately by reimbursements from a restricted grant awarded to the government for the specific purpose of financing that program. However, no cash has been received from the grantor to date.

6. A truck for a general government department was purchased for $40,000 cash.

7. Repaid outstanding general government bonds, $2,000,000, and paid $100,000 interest.

8. The 1-year note from transaction 5 matured and was paid along with the interest of $60,000.

9. A utility department truck was sold halfway through its useful life for $17,000.

The truck, which originally cost $45,000, had accumulated depreciation of $30,000.

Suggested Solution Problem 2-2(a) General Capital Assets and General Long-Term Liabilities Accounts

Governmental Funds

1

Fund GF and/or SRF

FA

–

RL

100,000 2 2 3 4 5 5

6

7 8

GF* CPF GF CPF SRF SRF yearend accrual GF and/or SRF DSF SRF

50,000 985,000 7,000,000 1,000,000

(40,000) (2,100,000) (1,060,000)

50,000 100,000**

=

FB

GCA

–

GLTL

=

NP

(100,000)

885,000 7,000,000

7,000,000

(7,000,000)

(2,000,000)

40,000 2,000,000

1,000,000

30,000

(30,000)

(1,030,000)

(40,000) (2,100,000) (30,000)

GF = General fund

14 ..

40,000

CF = Capital projects fund DSF = Debt service fund SRF = Special revenue fund *Financial assets decreased (cash) and increased (due from capital projects fund). **Deferred revenue Proprietary Funds 1.

9.

Fund EF EF

CA 2,000,000 17,000

+

–

NCA

CL

–

LTL

=

(15,000)

NP 2,000,000 2,000

EF = Enterprise fund

Problem 2-2(b) 1. Expenditures of $100,000 reported in GF and/or SRF. Revenues of $2,000,000 reported in EF. 2. No effect.

3. Property tax revenues of $885,000 reported in GF. 4. Other financing sources of $7,000,000 reported in CPF. 5. Year-end accrual of interest expenditures of $30,000 reported in SRF. 6. Expenditures of $40,000 reported GF and/or SRF. 7. Expenditures of $2,100,000 ($2,000,000 for bond principal and $100,000 for interest) reported in DSF. 8. Expenditures of $30,000 reported in SRF. (Remember—additional expenditures of $30,000 were reported in entry 5.)

9. Gain on sale of equipment of $2,000 reported in EF.

Problem 2-3 (Transaction Analysis) a. Analyze the effects of each of the following transactions on the accounting equations of any fund or nonfund accounts of Segelquist County affected by the transaction. (Record any interest accruals that Segelquist would be required to make at year end.) b. Also, indicate if and how each transaction would be reported in the operating statement of each of the affected funds. Be specific.

Example: Cash received for licenses during 20X1, $8,000.

Answer: General Capital Assets and General Long-Term Liabilities Accounts

Governmental Funds No. E.

Fund GF

FA $8,000

–

RL

=

FB $8,000

GF = General fund

15 ..

GCA

–

GLTL

=

NP

Revenues of $8,000 reported in GF. 1. Segelquist County issued $5,000,000 of general obligation, 6 percent bonds on November 1, 20X5. Bond interest is payable semiannually on April 30 and October 31. The bonds mature in 20 years. December 31 is the end of the county fiscal year. The bonds were issued to finance construction of a new jail annex.

2. The county paid $4,000,000 to Jailbird Construction Company during November and December 20X5 for construction costs incurred on the jail annex. Jailbird billed Segelquist County another $900,000 upon completion of the jail on December 30, 20X5.

3. The Segelquist County board of supervisors voted to set the unused Jail Annex Bonds proceeds aside for future principal and interest payments on the bonds.

This action complied with a requirement of the bond indenture and was accomplished on December 31, 20X5, in accordance with the board’s directive.

4. The county purchased new furnishings for the jailhouse annex. The total cost of $500,000 was paid from unrestricted resources.

5. The county water and sewer department provides services to county residents at a charge that is established at a level intended to recover the costs of providing the goods and services. If the charges prove inadequate, the county subsidizes operations from unrestricted county resources. The county water and sewer department borrowed $5,000,000 by issuing 6 percent revenue bonds on November 1, 20X5. Bond interest is payable semiannually on April 30 and October 31. The bonds mature in 20 years. The bonds were issued to finance construction of a new water treatment plant.

6. The county made the first semiannual interest payment on the jail bonds at the due date, April 30, 20X6.

Suggested Solution Problem 2-3(a) General Capital Assets and General Long-Term Liabilities Accounts

Governmental Funds

1.

2.

3.

3.

4.

6.

Fund CPF CPF CPF DSF GF DSF

FA $5,000,000 (4,000,000) (100,000) 100,000 (500,000) (150,000)

–

RL $900,000

=

FB $5,000,000 (4,900,000) (100,000) 100,000 (500,000) (150,000)

GCA $4,900,000

NP ($5,000,000) 4,900,000

500,000

500,000

GF = General fund CF = Capital projects fund DSF = Debt service fund SRF = Special revenue fund Proprietary Funds

16 ..

–

GLTL $5,000,000

=

5.

5.

Fund EF EF Yearend accrual

CA $5,000,000

+

–

NCA

CL

–

LTL $5,000,000

=

NP

$50,000*

($50,000)

EF = Enterprise fund *$5,000,000 × 6% × 2/12 = $50,000

Problem 2-3(b) 1. Other financing sources of $5,000,000 reported in CPF. 2. Expenditures of $4,900,000 are reported.

3. Other financing use (transfer out) of $100,000 reported in CPF. Other financing source (transfer in) of $100,000 is reported in the DSF. 4. Expenditures of $500,000 reported in GF. 5. Interest expense of $50,000 reported in EF for accrual of two months of interest expense.

6. Expenditures of $150,000 are reported in DSF.

Problem 2-4 (Transaction Analysis) a. Pavlock County entered into the following transactions. The county’s fiscal year end is December 31. Analyze the effects of each transaction on the accounting equations of each fund or nonfund entity affected by the transaction. (Reflect any interest accruals that Pavlock County would be required to make at year end.) b. Indicate how each transaction would be reported in the operating statement of each fund affected by the transaction.

Example: Cash received for licenses during 20X1, $8,000.

Answer: General Capital Assets and General Long-Term Liabilities Accounts Governmental Funds No. E.

Fund GF

FA $8,000

–

RL

=

FB $8,000

GCA

–

GLTL

=

NP

GF = General fund

Revenues of $8,000 reported in GF. 1. Pavlock County issued $20 million of general obligation, 10 percent, 10-year bonds at par on October 1, 20X8. Bond interest is payable semiannually on March 31 and September 30. The bonds were issued to finance construction of a new county office building.

17 ..

2. The county paid $4 million to Fancy Dan Construction Company during 20X8 for work completed during the year. The company billed the county another $1,000,000 for work performed during 20X8.

3. Reflect any interest accrual required or permitted at year end.

4. The county purchased a truck for a general government department. The truck cost $122,000, which was paid in cash.

5. In 20X9, the county paid $4,000,000 from its General Fund to the fund from which the bonds are to be repaid. The purpose of shifting the resources was to provide for the principal and interest payments to be made during the fiscal year.

6. The county paid the first interest payment on the bonds when due, March 31, 20X9.

Suggested Solution Problem 2-4(a) General Capital Assets and General Long-Term Liabilities Accounts

Governmental Funds

1.

2.

4.

5.

5.

6.

Fund CPF CPF GF GF DSF DSF

FA 20,000,000 (4,000,000) (122,000) (4,000,000) 4,000,000 (1,000,000)

–

RL

=

FB 20,000,000 (5,000,000) (122,000) (4,000,000) 4,000,000 (1,000,000)

1,000,000

GCA

–

GLTL 20,000,000

=

5,000,000 122,000

GF = General fund CF = Capital projects fund DSF = Debt service fund SRF = Special revenue fund

Problem 2-4(b) 1. Other financing sources of $20,000,000 reported in CPF. 2. Expenditures of $5,000,000 reported in CPF. 3. No entry is recorded because no interest expense is accrued on long-term debt in governmental funds.

4. Expenditures of $122,000 reported in GF. 5. Other financing use (transfer out) of $4,000,000 reported in GF. Other financing source (transfer in) of $4,000,000 reported in DSF. 6. Expenditures of $1,000,000 are reported.

18 ..

NP (20,000,000) 5,000,000 122,000

CHAPTER THREE BUDGETING, BUDGETARY ACCOUNTING, AND BUDGETARY REPORTING (Pages 69−106) CHAPTER THREE OUTLINE 1) The government budgetary perspective 2) Budgetary accounting overview a) Budgetary accounting and control i) General ledger ii) Subsidiary ledgers iii) Revenues subsidiary ledgers iv) Expenditures subsidiary ledgers 3) Budgetary reporting overview a) The budgetary basis b) Interim budgetary statements i) Interim revenues statements ii) Interim expenditures statements iii) Interim revenues and expenditures statements c) Annual budgetary comparisons d) Budgetary comparison statement illustrated—budgetary basis differs from GAAP 4) Budgetary planning, control, and evaluation a) Planning b) Control c) Evaluation 5) Basic budgetary terminology a) Capital vs. current budgets b) Tentative vs. enacted budget c) General vs. special budgets d) Fixed vs. flexible budgets e) Executive vs. legislative budgets 6) Budgetary approaches and emphases 7) Budget preparation a) Overview b) Preliminary estimates c) Preparing the budget d) Revenue estimates and requests 1 ..

e) Expenditure estimates and requests f) Expenditure budgeting approaches i) The object-of-expenditure approach (1) Essential elements of the approach (2) Control points ii) Other estimates and requests iii) The budget document 8) Legislative consideration and action 9) Budget execution 10) Concluding comments 11) Appendix 3-1: Classification of Expenditures a) Classification by function or program b) Classification by organization unit c) Classification by activity d) Classification by character e) Classification by object classes 12) Questions 13) Exercises 14) Problems 15) Cases

CHAPTER LEARNING OBJECTIVES 3.1

Explain the basic budgetary accounting and reporting concepts, requirements, and practices, including: • the concept of budgetary control points, and • the differences between “Budgetary Fund Balance” and “GAAP Fund Balance.”

3.2

Explain the role of the budget in governmental fund planning, budgetary control, budgetary accounting, and budgetary reporting.

3.3

Discuss commonly used budgeting terminology, approaches, and recommended practices.

3.4

Discuss the basic procedures involved in preparing and adopting a budget.

2 ..

CHAPTER OVERVIEW AND SYNOPSIS This chapter includes brief discussions and illustrations of: 1. Budgetary accounting and reporting.

2. Budgetary reporting overview, including differences between the “budgetary fund balance” and “GAAP fund balance.”

3. The typical SLG budgetary processes, including: a. b. c. d.

Budgetary planning, control, and evaluation considerations.

Basic budgetary terminology.

Various budgetary approaches and emphases.

Budget preparation, enactment, and execution.

Although the importance attributed to these topics will vary according to the nature of the course, the typical accounting course assignment might have students emphasize (study) the first and second topics and scan the third topic series for the main points.

The “Budgetary Accounting and Reporting” overview section discusses and illustrates the governmental fund General Ledger, Revenues Subsidiary Ledger, and Expenditures Subsidiary Ledger (and their relationships) in a simplified context. Thus, it provides an important foundation for the accounting procedures introduced in Chapter 4. The various types of interim and annual budgetary statements for governmental funds are introduced and illustrated in the “Budgetary Reporting Overview.” We recommend that both of those sections be emphasized in class assignments and during class sessions.

CRITICAL OBJECTIVES • • •

Explain the role of the budget in the state and local governmental environment.

Describe the terminology, approaches, and recommended practices in the budgetary environment.

Summarize the basic budgetary accounting and financial reporting practices. (Illustrations 3-6 and 3-8 are good examples of a typical budgetary environment.)

3 ..

QUESTIONS/EXERCISES/PROBLEMS — SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises

12 9 (includes three exercises, two with 5 multiple choice questions and one with 4 multiple-choice questions) Number of Problems 4 (includes 1 introductory problem with general and subsidiary entries, both budgetary and actual, and a research and analysis problem on common budgetary practices) Number of Cases 3 Questions 3-1, 3-4, 3-5, 3-6, 3-8, and 3-10 These questions focus student’s attention on key aspects of government budgeting and budgetary accounting and reporting. Most are short and simple to answer but highlight important information.

Question 3-11 This question focuses on the differences between “budgetary fund balance” and “GAAP fund balance.”

Exercises 3-1, 3-2, and 3-3 These series of multiple-choice questions address a broad range of budgetary concepts and reporting practices.

Exercise 3-4, 3-5, and 3-6 These exercises provide students the opportunity to practice making budget-related journal entries. Exercises 3-5 and 3-6 integrate budgetary entries and introduce entries that will be discussed in more detail in Chapter 4.

Problems 3-1 and 3-2 These problems should be used to teach the use of budgetary entries and revenues and expenditures subsidiary ledgers.

Problem 3-3 This problem should be used to show how a budgetary comparison statement is prepared.

4 ..

Additional questions for in-class or homework assignments 1. A municipality’s budget is prepared on a cash basis. What basis of accounting would you recommend? Explain.

Suggested Solution Because one of the purposes of accounting is to provide financial information for the preparation and execution of the budget, the accounts should be kept on a cash basis if the budget is prepared on such a basis. While this is necessary to effect a proper budgetary “matching” and to demonstrate compliance with finance-related legal provisions, the municipality also should keep supplemental records of accruals and present Basic Financial Statements on an accrual or modified accrual basis as required by GAAP. 2. Why are General, Special Revenue, and other governmental (expendable) funds typically controlled by fixed budgets integrated within the account structure, whereas Enterprise and other proprietary (nonexpendable) funds may be subject to less formal control through flexible budgets not integrated within the account structure?

Suggested Solution Governmental (expendable) funds (General, Special Revenue, etc.) fiscal management involves allocating fixed amounts of financial resources among competing demands through the budgetary process. Formal appropriations made in fixed dollar amounts may not be exceeded legally, and Appropriations and Encumbrances accounts are integrated within the ledgers to enhance expenditure control by continually making available in the accounts data on the appropriations, actual expenditures to date, and encumbrances outstanding, both in detail and in total. Estimated Revenues accounts are likewise incorporated within the ledgers to continually make data available on both estimated and actual revenues to date, in detail and in total, thereby enhancing revenue management.

Proprietary (nonexpendable) funds (Enterprise, etc.), are established to account for business-type activities in which additional revenues are generated as goods or services are provided. Thus, both the resources available to finance expenses and the expenses vary directly with the demands for the goods or services involved. Flexible budgeting may be more appropriate in this situation. There may be no need to integrate budgetary accounts since these activities may not be subjected to formal appropriations control, and the revenues received usually might be deemed automatically reappropriated for the activity in question.

(It is important to know that many governments budget their proprietary funds using fixed dollar budgets prepared using the same basis of accounting as for the governmental fund budgets. These governments maintain accountability for and control over the budget of a proprietary fund in approximately the same manner as

5 ..

used for governmental funds. Additional information is maintained to permit the proprietary funds to be reported on the required GAAP basis.)

3. A General Fund balanced budget has been amended to increase the total appropriations.

From what sources may the increase be financed?

Suggested Solution If the budget is in balance only in the sense that estimated revenues equal appropriations, then additional appropriations may be financed from: a. any resources carried over from the preceding year, b. deficit spending, presumably financed by loans, or c. increased revenues now estimated to be available.

Only (b) and (c) would be possible if all available resources carried over from prior years, as well as estimated revenues of the current year, had been appropriated previously.

4. What types of budgetary amounts (i.e., column headings) are required in an annual budgetary comparison statement? Governments that present a budget variance column in the annual budgetary statement are disclosing the variance between the actual amount and which budgetary amount?

Suggested Solution The required amounts in the annual budgetary comparison statements and schedules are: • Original Budget • Final (Revised) Budget • Actual Although common, the variance column is an optional presentation. When included, it compares the actual revenues and expenditures on the budgetary basis with the Final (Revised) Budget amounts.

6 ..

Additional problems for in-class or homework assignments Problem 3-1 (Expenditures Subsidiary Ledger) Refer to Illustration 3-9 (page 91) in the text, “Simplified Object-of-Expenditure Budget.”

(1) What would be the minimum number of Expenditures Subsidiary Ledger accounts required for the Police Department if: (a) The council enacted the appropriations ordinance by department? (b) The council enacted the appropriations by department and broad object-ofexpenditure category (e.g., supplies)? (c) Same as (a) except the mayor apportioned the appropriations by broad object-ofexpenditure category? (d) The council enacted appropriations by department and specific object class (e.g., gasoline and oil)? (e) Same as (b) except the controller wants to accumulate accounting data by specific object-of-expenditure classes?

(2) Refer also to Illustration 3-3 (page 76) in the text, “Relationship of General Ledger Appropriations, Expenditures, and Encumbrances Accounts and the Expenditures Subsidiary Ledger Accounts,” and set up the Police Department Expenditures Subsidiary Ledger accounts. Then record the following events directly in the subsidiary ledger: (a) The city council adopted the annual budget. (b) The department ordered supplies and equipment for $800 and $8,400, respectively. (c) The department paid unencumbered expenditures, $97,000 to employees and $1,800 for other services. (d) Goods ordered (see item b above) were received and vouchered for payment. The actual costs for supplies and equipment were $790 and $8,500, respectively. (e) In recent years, the police department has been paying for a crossing guard at the elementary school. However, that positon remains unfilled this year, and a patrol officer has been performing that duty. The police chief has the authority to reallocate the budget within the department and has ordered a $4,800 increase in the Salaries and Wages line item to be taken from the Other Services and Charges account.

Suggested Solution 1. The minimum number of Expenditures Subsidiary Ledger accounts required for the Police Department in each instance is: a. One (1) Police Department b. Four (4)

Police Department—Salaries and Wages Police Department —Supplies 7 ..

Police Department—Other Services and Charges Police Department—Capital Outlay c. Same as (b) d. Eighteen (18); one for each “line item” Police Department— Salaries and Wages, Chief, etc. e. Same as (d) 2. Police Department—Expenditures Subsidiary Ledger Accounts

Accounts Salaries and

Cr. Appropriations (a) 1,181,000

Dr. Encumbrances

Wages

Supplies

Other Services

(c)

97,000

Cr. (Dr.) Unencumbered Balance 1,181,000 1,084,000

(e)

4,800

1,088,800

(a)

114,000

114,000

(a)

(b)

800

(d1)

(800)

113,200 (d2)

790

77,000

113,210 77,000

and Charges

Capital Outlay

Dr. Expenditures

(c)

1,800

75,200

(e)

(4,800)

70,400

(a)

71,000

71,000 (b)

8,400

(d1)

(8,400)

8 ..

62,600 (d2)

8,500

62,500

Problem 3-2 (Research and Analysis) Obtain at least two recent annual operating budgets of similar state or local governments (e.g., two cities or three states) from the governments, a library, your professor, the Internet, or elsewhere. Submit a brief report consistent with these requirements: (1) Describe how the budget documents are similar.

(2) Describe how the budget documents differ.

(3) Submit photocopies or Internet printouts of relevant pages in each budget document to support and illustrate your analysis.

(4) Submit the budget documents if requested by the instructor.

Suggested Solution Summary reports and attachments submitted should be evaluated in terms of the research and analysis requirements specified. The depth of analyses and understanding should be apparent—particularly if several reports are evaluated concurrently.

Problem 3-3 (Research and Analysis) Obtain a recent comprehensive annual financial report (CAFR) of a state or local government from the government, a library, your professor, the Internet, or elsewhere.

(1) Identify and describe each reference to, presentation of, and disclosure of budgetary and budget-related information in the (a) introductory section, (b) financial section, and (c) statistical section. Make photocopies or printouts of the most significant items.

(2) Evaluate and discuss the clarity and usefulness of these references, presentations, and disclosures.

(3) Submit a brief report summarizing your research and analyses. Attach photocopies or printouts of relevant CAFR pages to support and illustrate your report.

Suggested Solution Reports on this research and analysis problem should be evaluated in terms of the specific requirements. The depth of analyses and understanding should be apparent— especially if several reports are evaluated concurrently.

9 ..

CHAPTER FOUR THE GENERAL FUND AND SPECIAL REVENUE FUNDS (Pages 107–170)

CHAPTER FOUR OUTLINE 1) General fund and special revenue funds: Use and measurement focus a) Measurement focus b) Purposes and assumptions of this chapter 2) General fund accounting—illustrative example a) Entries during 20X1 i) Budgetary entry ii) Budget revisions iii) Property tax levy iv) Other revenues billed or accrued v) Encumbrances and related expenditures vi) Unencumbered expenditures vii) Interfund activity (1) Interfund reimbursements (2) Interfund transfers (3) Interfund services (4) Interfund loans viii) Short-term external borrowings ix) Extraordinary and special items x) Other transactions and events b) Year-end adjustments c) Preclosing trial balances d) Illustrative example worksheets e) 20X1 closing entries i) General ledger closing entry ii) Subsidiary ledger closing entries f) Level of detail in subsidiary ledgers g) Postclosing trial balance 3) Balance sheets a) Interim balance sheet b) Year-end balance sheet c) Fund balance d) Fund balance reporting classifications i) Nonspendable fund balance ii) Restricted fund balance iii) Committed fund balance 1 ..

iv) Assigned fund balance v) Unassigned fund balance vi) Order of fund balance reduction for expenditures vii) Fund balance reporting classifications are determined at year end viii) Fund balance reporting illustrated e) Interfund receivables and payables f) Capital assets and long-term liabilities 4) Statement of revenues, expenditures, and changes in fund balances a) Restatements b) Extraordinary items and special items 5) Budget comparison statement or schedule of revenues, expenditures, and changes in fund balance—budget and actual a) Budgetary comparison statement illustrated—budgetary basis same as GAAP 6) Entries during 20X2 7) Classification of expenditures 8) Combining special revenue fund statements 9) Concluding comments 10) Appendix 4-1: General Ledger Worksheet and Subsidiary Ledgers 11) Appendix 4-2: Alternative account structure and entries 12) Appendix 4-3: Budgetary comparison statement illustrated—budgetary basis differs from GAAP 13) Questions 14) Exercises 15) Problems 16) Cases

CHAPTER FOUR LEARNING OBJECTIVES 4.1

Discuss differences and similarities between the General Fund and Special Revenue Funds and explain their measurement focus and basis of accounting.

2 ..

4.2

Analyze fact situations and prepare journal entries to record most common General Fund and Special Revenue Fund transactions and events.

4.3

Prepare governmental fund balance sheets.

4.4

Prepare governmental fund operating statements.

4.5

Prepare governmental fund budgetary comparison statements.

4.6

Reestablish encumbrances for budgetary control purposes in subsequent years.

4.7

Utilize appropriate expenditure classifications in financial reports.

4.8

Prepare combining financial statements.

CHAPTER OVERVIEW AND SYNOPSIS The basic accounting and reporting provisions for the General Fund and Special Revenue Funds are discussed in Chapter 4 and budgetary accounting and reporting is discussed in Chapter 3. The authors believe that Chapters 3 and 4 are critical to understanding fundamental aspects of state and local government accounting and financial reporting. The chapters are interrelated and should be covered sequentially as one unit.

Chapter 4 discusses and illustrates the basic accounting procedures and financial statements for the General Fund and Special Revenue Funds—and thus for all governmental funds—assuming the fund accounts are maintained on the GAAP basis during the year. Accordingly, its major topics include: 1. Accounting a. General Fund accounting illustrative example, which includes general ledger and subsidiary ledger entries for most usual transactions and events. b. Adjusting entries at year end. c. Closing entries at year end.

2. Financial Statements a. Balance Sheet—including discussions of total fund balance and fund balance classifications, “Due To/From” accounts, “Advance To/From” accounts, and other fund accounts.

3 ..

b. Statement of Revenues, Expenditures, and Changes in Fund Balance—the “GAAP operating statement”—prepared using the format and the total fund balance approach required by GASB Statement No. 34. c. Statement of Revenues, Expenditures, and Changes in Fund Balance—Budget and Actual.

It is within this chapter that the classifications for fund balance as per GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions are introduced. The five classifications—nonspendable, restricted, committed, assigned, and unassigned—are discussed in detail on pages 133–136. Illustration 4-7 on page 134 summarizes each of these classifications based on the nature of the resource constraints.

We recommend that both topics be studied and discussed very thoroughly—and that two or three class meetings be devoted to this chapter—because understanding this material also is essential to understanding Chapters 4 through 15.

CRITICAL OBJECTIVES In Chapter 4, students are asked to apply the foundation learned in Chapter 2. Most Chapter 4 transactions are common, basic governmental fund transactions. It is of particular importance that students understand accounting for certain transactions and events and that they understand the governmental fund financial statements. This knowledge will be useful in several subsequent chapters. Therefore, it is of particular importance that students understand: Recording the adoption of the budget and budgetary revisions (pages 111–113) • • • • • • • • • •

Accounting for the property tax levy and other revenue sources, including the use of the net revenue approach (Transaction and entry 1, page 114).

Recognizing, classifying, and recording interfund activity (Transactions and entries 6, 7, 8, 9, 10, 11, and 12, pages 118–121).

Accounting for short-term notes payable in a governmental fund (Transactions and entries 13 and 14, page 122).

Governmental fund adjusting entries (page 126—A1, A2, and A3).

Governmental fund closing entries (pages 129–130—C1, C2, C3, and C4).

Fund balance classifications—nonspendable, restricted, committed, assigned, and unassigned (pages 133–136).

Accounting for interfund payables and receivables (pages 118–121).

Accounting for general capital assets and general long-term liabilities (pages 117, 123, and 125).

The nature and preparation of a General Fund balance sheet (pages 131–137).

The nature and preparation of a General Fund statement of revenues, expenditures, and changes in fund balance, including the definition and reporting of special items and extraordinary items (pages 137–140).

4 ..

•

The nature and preparation of a General Fund statement (or schedule) of revenues, expenditures, and changes in fund balance—budget and actual (pages 140–142 and Appendix 4-3).

QUESTIONS/EXERCISES/PROBLEMS — SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises

15 8 (includes two exercises with 7 multiple choice questions each, one exercise with 6 multiplechoice questions, one exercise with 5 multiple choice questions, two journal entry exercises, one operating statement preparation exercise, and one extensive exercise dedicated to fund balance classification) 11 (includes several transactional analysis problems with interfund transactions, general and subsidiary ledger journal entries, financial statement preparation, fund balance reporting, as well as an internet research problem) 3 (including the introduction to the Harvey City Comprehensive Case)

Number of Problems

Number of Cases

Chapter 4 contains a wealth of valuable assignment material, ranging from simple exercises that address only one of the key objectives for the chapter to relatively comprehensive problems that require preparation of journal entries for a variety of transactions and/or statement preparation for the fund covered in the problem. The chart below is intended to help you determine which exercises and problems to use in order to meet your various objectives for your students.

Topics Budgetary entries Property taxes Revenue accounting Encumbrance accounting Expenditure accounting Interfund activity Accounting for debt Closing entries Various journal entries Operating statement format/classification Operating statement preparation

Exercise 41 2 3 X X

X X

X

4

5

6

7

Problem 41 2 3

8

X

X X

4 X X X X

5 X X X X

X

X

X

X

6

7

8

9

10

11

Case 41 2

X X X X

X

X

X

X

X X

X

5 ..

X

X

X

X

Balance sheet Fund balance classification Comprehensive Other

X X X X

X

X

X

X

X X

X X

X X

X

We recommend assigning problems (1, 2, 3, 4, or 5) and exercises (5 and 6) to introduce students to making governmental fund journal entries accounting as their understanding of these types of entries is crucial to understanding the remaining governmental fund chapters.

Likewise, we recommend assigning multiple exercises and problems on the statement of revenues, expenditures, and changes in fund balance. This statement is new to students and a key statement that they must understand to master other chapters.

Additional questions for in-class or homework assignments 1. Why is there no chapter in this text devoted to describing operations and accounting procedures of Special Revenue Funds?

Suggested Solution There is no chapter in the text devoted to Special Revenue Funds because the accounting principles and procedures for Special Revenue Funds are identical to those of the General Fund.

2. The budget was assumed to be enacted on the GAAP basis in this chapter. What differences in the General Fund financial statements and disclosures would result from adopting the budget on the cash basis or another non-GAAP basis?

Suggested Solution Financial Statements. Adjustments to the non-GAAP accounting data would be made so that all financial statements would reflect GAAP except for the Statement of Revenues, Expenditures, and Changes in Fund Balance—Budget and Actual. This statement, as its name suggests, would present the annual budget for the General Fund on the budgetary basis, along with “actual” revenues, expenditures, and other changes in fund balance measured according to the unit’s budgetary basis of accounting. Thus, the data in this statement properly would not agree with the data in the GAAP basis operating statement.

Disclosures. The differences between the budgetary basis of accounting and the GAAP basis would be disclosed in the unit’s financial report. This could be done either (1) by including a description of the budgetary basis and a reconciliation of the budgetary data with the GAAP data in the notes to the financial statements or (2) by explaining the budgetary basis in the notes and presenting a reconciliation of the 6 ..

X X

budgetary basis data with the GAAP data on the face of the Statement of Revenues, Expenditures, and Changes in Fund Balance—Budget and Actual.

3. Why does GASB Statement No. 34 permit states and local governments to present the budgetary comparison either as a basic financial statement or as required supplementary information?

Suggested Solution The GASB indicates in the nonauthoritative basis for conclusions of GASB Statement No. 34 that the Board considers reporting the budgetary comparison information as required supplementary information to be preferable to reporting the budgetary comparison in the basic financial statements. The bases for this preference are that: a. In the Board’s view, the budgetary comparison, while essential for meeting some of the objectives of financial reporting, is not essential to users’ understanding of a government's financial position and results of operations. b. The Board does not set standards for budgetary measures but is responsible for setting standards for all other basic financial statements.

Many governments do consider the budgetary comparison information essential and want to present it as part of the basic financial statements. There was sufficient support for this position that the Board allowed presentation of the budgetary comparison in the basic financial statements. These alternatives are equally acceptable under GAAP.

Additional problems for in-class or homework assignments Problem 1 (General Ledger Worksheet or T-Account Entries) The trial balance of the General Fund of the city of Claire on January 1, 20X0, was as follows:

Cash .................................................................................

Taxes Receivable—Delinquent .......................................

Allowance for Uncollectible Taxes—Delinquent ...........

Interest and Penalties Receivable on Taxes ....................

Allowance for Uncollectible Interest and Penalties ........

Accounts Receivable .......................................................

Allowance for Uncollectible Accounts ...........................

Vouchers Payable ............................................................

Fund Balance ...................................................................

7 ..

Dr. $15,000 20,000

Cr.

$ 3,000 1,000 75 10,000

______ $46,000

1,000 20,500 21,425 $46,000

The following transactions and events took place during 20X0: R. Reestablish the encumbrances carried over from the prior year, $10,000.

1. Revenues were estimated at $110,000; appropriations of $108,000 were made.

2. An order for materials placed at the end of the preceding year and estimated to cost $10,000 was received; the invoice indicated an actual cost of $9,500.

3. Taxes of $110,000 accrued; an allowance of 5% was made for possible losses.

4. Collections were made as follows: Current Taxes .........................................................

Delinquent Taxes ...................................................

Interest and Penalties Receivable on Taxes ...........

Accounts Receivable ..............................................

Total

$ 90,000 10,000 300 5,000 $ 105,300

5. Taxes totaling $20,000 have become delinquent; the balance of Allowance for Uncollectible Taxes—Current was reclassified to Allowance for Uncollectible Taxes— Delinquent.

6. Delinquent taxes of $2,000 were written off; interest and penalties receivable on taxes of $20 were also written off.

7. Orders were placed for (a) materials estimated to cost $20,000 and (b) a truck estimated to cost $28,000.

8. Delinquent taxes of $200, which were written off in preceding years, were collected with interest and penalties of $35 ($25 of which had been previously accrued and written off).

9. Payments were made as follows: Vouchers Payable ...................................................

Payrolls ...................................................................

$ 15,500 45,000

10. The materials and truck ordered (in 7) were received; bills for $21,000 and $28,000, respectively, were also received.

11. Operating lease payments of $15,000 were paid.

12. Interest of $600 accrued on delinquent taxes, and an allowance for uncollectible losses thereon of 10% was provided.

13. An order was placed for materials estimated to cost $15,000.

8 ..

(a) Complete a General Ledger worksheet headed as follows: Columns 1–2 3–4 5–6 7–8 9–10

Heading Trial Balance, 1/1/20X0 20X0 Transactions Preclosing Trial Balance, 12/31/20X0 20X0 Closing Entries Postclosing Trial Balance, 12/31/20X0

(b) In lieu of requirement (a) you may 1. Post the opening trial balance to T-accounts 2. Prepare journal entries 3. Post to T-accounts 4. Prepare closing entries 5. Post to T-accounts 6. Prepare a postclosing trial balance at December 31, 20X0

Suggested Solution Problem 1 (b) (1), (b) (3), and (b) (5) (B) (4) (8b) (E)

(B) (8a) (12) (E)

Cash 15,000 105,300 235 120,535 45,035

60,500 15,000

(9) (11)

75,500

Interest and Penalties Receivable on Taxes 1,000 300 25 20 600 25 1,625 345 1,280

Allowance for Uncollectible Accounts 1,000 1,000

Taxes Receivable—Delinquent (B) 20,000 10,000 (4) (5) 20,000 2,000 (6) (8a) 200 200 (8b) 40,200 12,200 (E) 28,000

(4) (6) (8b)

(6)

(B) (E)

(9)

Allowance for Uncollectible Interest and Penalties 20 75 (B) 25 (8a) 60 (12) 20 160 140 (E)

Vouchers Payable 15,500 20,500 9,500 49,000 15,500 79,000 63,500

9 ..

(B) (2) (10) (E)

(6)

(B) (E)

(2) (10) (C1)

Allowance for Uncollectible Taxes—Delinquent 2,000 3,000 (B) 5,500 (5) 200 (8a) 2,000 8,700 6,700 (E)

Accounts Receivable 10,000 5,000 5,000

(4)

Encumbrances Outstanding 10,000 10,000 (R) 48,000 48,000 (7) 15,000 15,000 (13) 53,000 53,000

Fund Balance 13,450 21,425 7,975

(B) (E)

(C1)

Budgetary Fund Balance 2,000 2,000

(1)

(R) (7) (13)

(1)

Estimated Revenues 110,000 110,000

(C1)

(C1)

Appropriations 108,000 108,000

(1)

(3)

(5)

Allowances for Uncollectible Taxes—Current 5,500 5,500

(3)

(2) (9) (10) (11)

(C2)

Expenditures 9,500 45,000 49,000 15,000 118,500 118,500

Encumbrances 10,000 10,000 48,000 48,000 15,000 15,000 57,000 57,000

(2) (10) (C1)

Taxes Receivable—Current 110,000 90,000 20,000 110,000 110,000

(4) (5)

Revenues 104,500 10 540 (C2)

(C2)

105,050

105,050

Problem 1 (b)(2) #

Accounts

Dr.

R. Encumbrances (Materials) ........................................................

Encumbrances Outstanding ................................................

To reestablish the Encumbrances carried over from 20X9 to facilitate budgetary control for 20X0. (Reversing Entry)

10,000

1.

Estimated Revenues ...................................................................

Appropriations ....................................................................

Budgetary Fund Balance ....................................................

To record budget adoption

110,000

Encumbrances Outstanding .......................................................

Expenditures (Materials) ...........................................................

Encumbrances (Materials) .................................................

Vouchers Payable ...............................................................

To record receipt of order

10,000 9,500

Taxes Receivable—Current .......................................................

Allowance for Uncollectible Taxes—Current ....................

Revenues (Property Taxes) .................................................

To record tax levy

110,000

2.

3.

10 ..

Cr.

10,000

108,000 2,000

10,000 9,500

5,500 104,500

(3) (8b) (12)

#

Accounts

Dr.

4.

Cash. ...........................................................................................

Taxes Receivable—Current ................................................

Taxes Receivable—Delinquent ...........................................

Interest and Penalties Receivable on Taxes .......................

Accounts Receivable ...........................................................

To record cash receipts

105,300

5.

6.

90,000 10,000 300 5,000

Taxes Receivable—Delinquent ..................................................

20,000 Allowance for Uncollectible Taxes—Current ............................

5,500 Taxes Receivable—Current ................................................

Allowance for Uncollectible Taxes—Delinquent ...............

To reclassify taxes and related allowances from current to delinquent Allowance for Uncollectible Taxes—Delinquent .......................

Allowance for Uncollectible Interest and Penalties ..................

Taxes Receivable—Delinquent ...........................................

Interest and Penalties Receivable on Taxes .......................

To record write-offs

2,000 20

Encumbrances (Materials, $20,000; Capital Outlay, $28,000) Encumbrances Outstanding ................................................

To record orders placed

48,000

8a. Taxes Receivable—Delinquent ..................................................

Interest and Penalties Receivable on Taxes ..............................

Allowance for Uncollectible Taxes—Delinquent ...............

Allowance for Uncollectible Interest and Penalties ...........

To reinstate receivables previously written off

200 25

8b. Cash ...........................................................................................

Taxes Receivable—Delinquent ...........................................

Interest and Penalties Receivable on Taxes .......................

Revenues (Interest and Penalties) ......................................

To record collection of delinquent taxes, penalties, and interest previously written off

235

7.

9.

Vouchers Payable ......................................................................

Expenditures (Salaries) .............................................................

Cash ....................................................................................

To record cash disbursements

11 ..

Cr.

20,000 5,500

2,000 20

48,000

200 25

200 25 10

15,500 45,000 60,500

#

Accounts

Dr.

10. Encumbrances Outstanding .......................................................

Expenditures (Materials, $21,000; Capital Outlay, $28,000) ..............................................................

Encumbrances (Materials, $20,000; Capital Outlay, $28,000) ...............................................................

Vouchers Payable ...............................................................

To record receipt of materials

48,000

11. Expenditures (Rent) ...................................................................

Cash ....................................................................................

To record lease payment

15,000

12. Interest and Penalties Receivable on Taxes ..............................

Allowance for Uncollectible Interest and Penalties ...........

Revenues (Interest and Penalties) ......................................

To record accrual of interest on delinquent taxes

600

13. Encumbrances (Materials) ........................................................

Encumbrances Outstanding ................................................

To record encumbrances for materials ordered

15,000

Cr.

49,000 48,000 49,000

15,000

60 540

15,000

Problem 1 (b)(4) #

Accounts

Dr.

C1. Encumbrances Outstanding ........................................................

Appropriations ...........................................................................

Budgetary Fund Balance ...........................................................

Encumbrances .....................................................................

Estimated Revenues ............................................................

To close the budgetary accounts at year end

15,000 108,000 2,000

C2. Revenues ....................................................................................

Fund Balance .............................................................................

Expenditures .......................................................................

To close the Revenues and Expenditures accounts at year end

105,050 13,450

12 ..

Cr.

15,000 110,000

118,500

Problem 1 (b)(6) City of Claire General Fund Postclosing Trial Balance December 31, 20X0 Dr. Cash ..................................................................................................

Taxes Receivable—Delinquent .........................................................

Allowance for Uncollectible Taxes—Delinquent ..............................

Interest and Penalties Receivable on Taxes ......................................

Allowance for Uncollectible Interest and Penalties. .........................

Accounts Receivable .........................................................................

Allowance for Uncollectible Accounts ..............................................

Vouchers Payable .............................................................................

Fund Balance ....................................................................................

$45,035 28,000 $ 6,700 1,280 140 5,000

$79,315

13 ..

Cr.

1,000 63,500 7,975 $79,315

Problem 2 (Financial Statements) Instructor’s Note: Problem 2 should be assigned only if Problem 1 above is also assigned.

Based on your solution to Problem 1 above, prepare for the City of Claire General Fund: (a) A statement of revenues, expenditures, and changes in fund balance for the year ended December 31, 20X0. (b) A balance sheet at December 31, 20X0.

Suggested Solution Problem 2 (a) City of Claire General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year Ended December 31, 20X0 Revenues: Taxes ..........................................................................................

Interest and Penalties ................................................................

Total Revenues ........................................................................

Expenditures: Operating: Salaries and Wages .................................................................

Materials .................................................................................

Rent .........................................................................................

Total Operating Expenditures ..............................................

Capital Outlay ...........................................................................

Total Expenditures ..................................................................

$104,500 550 $105,050

45,000 30,500 15,000 90,500 28,000 118,500

Excess (Deficiency) of Revenues Over (Under) Expenditures ..........

(13,450)

Fund Balance, Beginning ..................................................................

Fund Balance, Ending ......................................................................

21,425 $ 7,975

14 ..

Problem 2 (b) City of Claire General Fund Balance Sheet December 31, 20X0 Assets Cash ..................................................................................................

Taxes Receivable—Delinquent .........................................................

Less: Allowance for Uncollectible Taxes—Delinquent .............

Interest and Penalties Receivable on Taxes ......................................

Less: Allowance for Uncollectible Interest and Penalties .........

Accounts Receivable .........................................................................

Less: Allowance for Uncollectible Accounts .............................

Total Assets

$45,035 $28,000 6,700 1,280 140 5,000 1,000

21,300 1,140 4,000 $71,475

Liabilities and Fund Balance Liabilities: Vouchers Payable ......................................................................

$63,500

Fund Balance: Unassigned ........................................................................

Total Liabilities and Fund Balance ..............................

7,975 $71,475

15 ..

Problem 3 (General Ledger Worksheet or T-account Entries) The following is a trial balance of the General Fund of the city of Lynnville as of December 31, 20X0, after closing entries:

Cash ........................................................................

Taxes Receivable—Delinquent ..............................

Allowance for Uncollectible Taxes—Delinquent ..

Accounts Receivable ..............................................

Allowance for Uncollectible Accounts ..................

Vouchers Payable ...................................................

Fund Balance ..........................................................

Dr. $33,600 25,400

Cr.

$ 5,900 15,500

$74,500

2,500 42,000 24,100 $74,500

(Because interest and penalties on taxes are not material, they are not accrued.)

The following transactions took place during 20X1: R. Reestablish the encumbrances carried over from 20X0, $16,000.

1. The budget for the year was adopted. Revenues were estimated at $216,000; appropriations of $229,000 were made, including an appropriation of $16,000 for materials ordered in 20X0.

2. Delinquent taxes of $2,800 were declared uncollectible and written off.

3. Property taxes of $210,000 were levied; a 3% allowance for estimated losses was provided.

4. Uniforms estimated to cost $15,000 were ordered, as was a snowplow estimated to cost $3,500.

5. The materials ordered in 20X0 and set up as an encumbrance of that year for $16,000 was received; the actual cost, $15,000, was vouchered for later payment.

6. Collections were made as follows: Current Taxes ..................................... $182,000 Delinquent Taxes ...............................

8,500 Interest and Penalties on Taxes ..........

200 Accounts Receivable .........................

7,300 Total $198,000 7. Received a bill for $3,000 from the city central printing shop.

8. Payroll vouchers for $100,000 were approved and paid, as was a transfer of $38,000 to a Debt Service Fund to cover serial bond debt service.

9. The uniforms and snowplow (ordered in 4) were received; the invoices were for $16,000 and $3,800, respectively.

10. Delinquent taxes of $350, written off in preceding years, were collected.

11. Current taxes receivable became delinquent.

16 ..

12. Paid $200 to a Special Revenue Fund for supplies acquired for General Fund purposes, but originally paid for from (and recorded as expenditures in) a Special Revenue Fund; and paid $60,000 of vouchers payable.

13. An order was placed for equipment estimated to cost $24,000.

14. Miscellaneous revenues of $5,000 were collected, and $5,000 was received from a discontinued Capital Projects Fund. (a) Complete a General Ledger worksheet headed as follows: Columns 1–2 3–4 5–6 7–8 9–10

Heading Trial Balance, 1/1/20X1 20X1 Transactions Preclosing Trial Balance, 12/31/20X1 Closing Entries 12/31/20X1 Postclosing Trial Balance, 12/31/20X1

(b) In lieu of requirement (a) you may 1. Post the opening trial balance to T-accounts.

2. Prepare journal entries.

3. Post to T-accounts.

4. Prepare preclosing trial balance at December 31, 20X1.

5. Prepare closing entries.

6. Post to T-accounts.

7. Prepare a postclosing trial balance at December 31, 20X1.

Suggested Solution Problem 3 (b)(1), (3), and (6) (B) (6) (10b) (14) (E)

(B) (E)

Cash 33,600 198,000 350 10,000 241,950 43,750

138,000 60,200

(8) (12)

198,200

Accounts Receivable 15,500 7,300 8,200

(6)

Taxes Receivable—Delinquent (B) 25,400 2,800 (2) (10a) 350 8,500 (6) (11a) 28,000 350 (10b) 53,750 11,650 (E) 42,100

Allowance for Uncollectible Accounts 2,500 (B) 2,500 (E)

17 ..

(2)

(12)

Allowance for Uncollectible Taxes—Delinquent 2,800 5,900 (B) 350 (10a) 6,300 (11b) 2,800 12,550 9,750 (E)

Vouchers Payable 60,000 42,000 15,000 19,800 60,000 76,800 16,800

(B) (5b) (9b) (E)

(5a) (9a) (C1)

Encumbrances Outstanding 16,000 16,000 (R) 18,500 18,500 (4) 24,000 24,000 (13) 58,500 58,500

(1)

(C1)

(3)

Appropriations 229,000 229,000

(1)

Taxes Receivable—Current 210,000 182,000 (6) 28,000 (11a) 210,000 210,000

Due to Internal Service Fund 3,000 (7) 3,000 (E)

Problem 3 (b)(2) #

(R) (4) (13)

Fund Balance 24,100 37,900 62,000

(B) (C2) (E)

Budgetary Fund Balance 13,000 13,000

(C1)

Encumbrances 16,000 16,000 18,500 18,500 24,000 24,000 58,500 58,500

Allowance for Uncollectible Taxes—Current (11b) 6,300 6,300

(8)

OFU–Transfer to Debt Service Fund 38,000 38,000

(1)

Estimated Revenues 216,000 216,000

(C2)

Revenues 203,700 200 5,000 208,900 208,900

(5a) (9a) (C1)

(3)

(C2)

Accounts

(5b) (7) (8) (9b) (12)

(C2)

Expenditures 15,000 3,000 100,000 19,800 200 138,000 138,000 OFS–Transfer from Capital Projects Fund 5,000 5,000

Dr.

R. Encumbrances (Materials) ........................................................

Encumbrances Outstanding ................................................

To reestablish encumbrances

16,000

1.

Estimated Revenues ...................................................................

Budgetary Fund Balance ...........................................................

Appropriations ....................................................................

To record budget adoption

216,000 13,000

Allowance for Uncollectible Taxes—Delinquent .......................

Taxes Receivable—Delinquent ...........................................

To record write-off of taxes

2,800

2.

18 ..

Cr.

16,000

229,000

2,800

(C1)

(3) (6) (14)

(C2)

(14)

#

Accounts

Dr.

3.

Taxes Receivable—Current .......................................................

Allowance for Uncollectible Taxes—Current .....................

Revenues (Taxes) .................................................................

To record tax levy

210,000

Encumbrances (Uniforms, $15,000; snowplow, $3,500) ..........

Encumbrances Outstanding ................................................

To record encumbrances for uniforms and snowplow ordered

18,500

5a. Encumbrances Outstanding .......................................................

Encumbrances (Materials) .................................................

To reverse encumbrance entry

16,000

5b. Expenditures (Materials) ...........................................................

Vouchers Payable ...............................................................

To record expenditure for materials

15,000

6.

Cash ...........................................................................................

Taxes Receivable—Current ................................................

Taxes Receivable—Delinquent ...........................................

Revenues (Interest and Penalties) ......................................

Accounts Receivable ...........................................................

To record cash receipts

198,000

Expenditures (Printing Services) ...............................................

Due to Internal Service Fund .............................................

To record expenditures and liability to central printing shop (an interfund services transaction)

3,000

Expenditures (Personal Services) ..............................................

OFU–Transfer to Debt Service Fund ........................................

Cash ....................................................................................

To record payment of payroll and transfer

100,000 38,000

9a. Encumbrances Outstanding .......................................................

Encumbrances (uniforms, $15,000; snowplow, $3,500) ..........................................................

To reverse encumbrance entry for uniforms and snowplow

18,500

9b. Expenditures (uniforms, $16,000; snowplow, $3,800) ..............

Vouchers Payable ...............................................................

To record expenditures for uniforms and snowplow

19,800

4.

7.

8.

19 ..

Cr.

6,300 203,700

18,500

16,000

15,000

182,000 8,500 200 7,300

3,000

138,000

18,500

19,800

#

Accounts

Dr.

l0a. Taxes Receivable—Delinquent ..................................................

Allowance for Uncollectible Taxes—Delinquent ...............

To re-establish taxes receivable previously written off

350

l0b. Cash ...........................................................................................

Taxes Receivable—Delinquent ...........................................

To record collection of taxes previously written off

350

Cr.

350

350

l0. Alternative entry acceptable with assumption that taxpayer ledger account updated for payment of taxes: Cash ...........................................................................................

Allowance for Uncollectible Taxes—Delinquent ...............

To record collection of taxes previously written off Taxpayer ledger account has been updated

350

11a. Taxes Receivable—Delinquent .................................................

Taxes Receivable—Current ................................................

To record taxes becoming delinquent

28,000

11b. Allowance for Uncollectible Taxes—Current ...........................

Allowance for Uncollectible Taxes—Delinquent ...............

To reclassify allowance account as relating to delinquent taxes

6,300

12. Expenditures (Materials) ...........................................................

Vouchers Payable ......................................................................

Cash ....................................................................................

To pay vouchers and reimburse Special Revenue Fund

200 60,000

350

28,000

6,300

l3. Encumbrances (Equipment) .......................................................

24,000 Encumbrances Outstanding.................................................

To record encumbrance for equipment ordered l4. Cash ...........................................................................................

10,000 Revenues (Miscellaneous) ..................................................

OFS–Transfer from Capital Projects Fund ........................

To record collection of various revenues not previously accrued and transfer in

20 ..

60,200

24,000

5,000 5,000

Problem 3 (b)(4) City of Lynnville General Fund Preclosing Trial Balance December 31, 20X1

Accounts

Dr.

Cash ...........................................................................................................

Taxes Receivable–Delinquent ....................................................................

Allowance for Uncollectible Taxes—Delinquent .......................................

Accounts Receivable ..................................................................................

Allowance for Uncollectible Accounts .......................................................

Vouchers Payable ......................................................................................

Encumbrances Outstanding .......................................................................

Fund Balance .............................................................................................

Budgetary Fund Balance ............................................................................

Estimated Revenues ...................................................................................

Appropriations ...........................................................................................

Encumbrances ............................................................................................

Revenues ....................................................................................................

Expenditures ..............................................................................................

Due to Internal Service Fund .....................................................................

OFU–Transfer to Debt Service Fund .........................................................

OFS–Transfer from Capital Projects Fund ...............................................

Cr.

$ 43,750 42,100 $ 9,750 8,200 2,500 16,800 24,000 24,100 13,000 216,000 229,000 24,000 208,900 138,000 3,000 38,000 $523,050

5,000 $523,050

Dr.

Cr.

Problem 3 (b)(5) #

Accounts

C1. Encumbrances Outstanding ........................................................

Appropriations ...........................................................................

Encumbrances .....................................................................

Estimated Revenues .............................................................

Budgetary Fund Balance ....................................................

To close the budgetary accounts at year end

24,000 229,000

C2. Revenues ....................................................................................

OFS–Transfer from Capital Projects Fund ................................

Expenditures .......................................................................

OFU–Transfer to Debt Service Fund .....................................

Fund Balance ......................................................................

To close the Revenues and Expenditure accounts at year end

208,900 5,000

21 ..

24,000 216,000 13,000

138,000 38,000 37,900

Problem 3 (b)(7) City of Lynnville General Fund Postclosing Trial Balance December 31, 20X1 Accounts Cash ......................................................................................

Taxes Receivable—Delinquent .............................................

Allowance for Uncollectible Taxes—Delinquent ..................

Accounts Receivable .............................................................

Allowance for Uncollectible Accounts ..................................

Vouchers Payable .................................................................

Due to Internal Service Fund ................................................

Fund Balance ........................................................................

Dr. $43,750 42,100

Cr.

$ 9,750 8,200

_____ $94,050

2,500 16,800 3,000 62,000 $94,050

Problem 4 (Financial Statements) Instructor’s Note: Problem 4 should be assigned only if Problem 3 above is also assigned.

Based on your solution to Problem 3 above, prepare for the city of Lynnville General Fund (a) A statement of revenues, expenditures, and changes in fund balance for the year ended December 31, 20X1 (b) A balance sheet at December 31, 20X1

Suggested Solution Problem 4 (a) City of Lynnville General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year Ended December 31, 20X1 Revenues: Taxes ..............................................................................

Interest and Penalties ....................................................

Miscellaneous ................................................................

Total Revenues ............................................................

22 ..

$203,700 200 5,000 $208,900

Expenditures: Operating: Personal Services ........................................................

Materials, Supplies, and Uniforms .............................

Printing Services .........................................................

Total Operating Expenditures ..................................

Capital Outlay ...............................................................

Total Expenditures ......................................................

100,000 31,200 3,000 134,200 3,800 138,000

Excess (Deficiency) of Revenues Over (Under) Expenditures Other Financing Sources (Uses): Transfer from Capital Projects Fund .............................

Transfer to Debt Service Fund ......................................

Total Other Financing Sources (Uses) .......................

70,900

5,000 (38,000) (33,000)

Net Change in Fund Balance .................................................

Fund Balance, Beginning ......................................................

Fund Balance, Ending ..........................................................

37,900 24,100 $ 62,000

Problem 4 (b) City of Lynnville General Fund Balance Sheet December 31, 20X1 Assets Cash ...................................................................................................

Taxes Receivable—Delinquent .........................................................

Less: Allowance for Uncollectible Taxes—Delinquent ............

Accounts Receivable .........................................................................

Less: Allowance for Uncollectible Account ..............................

Total Assets Liabilities and Fund Balance Liabilities: Vouchers Payable ......................................................................

Due to Internal Service Fund ....................................................

Total Liabilities ......................................................................

Fund Balance: Unassigned ................................................................................

Total Liabilities and Fund Balance

23 ..

$43,750 $42,100 9,750 8,200 2,500

32,350 5,700 $81,800

$16,800 3,000 $19,800

62,000 $81,800

Problem 5 (GL and SL Entries) Marcus County adopted the following budget for one of its Special Revenue Funds for the 20X9 fiscal year, its first year in operation: Revenues: Property taxes .............................................................

Sales taxes ..................................................................

Federal grants .............................................................

Service charges ..........................................................

Fines ...........................................................................

Other ..........................................................................

Expenditures: Manager .....................................................................

Commission ...............................................................

Roads and bridges ......................................................

Courts .........................................................................

Sheriff ........................................................................

Jail ..............................................................................

Other ..........................................................................

Budgeted Excess of Revenues over Expenditures .....

$500,000 200,000 100,000 80,000 50,000 20,000 $950,000 110,000 90,000 400,000 60,000 180,000 70,000 30,000 $940,000 $ 10,000

The following transactions and events occurred during 20X9: 1. The property taxes were levied, $530,000, of which $25,000 is expected to be uncollectible.

2. Purchase orders and contracts were approved at the following estimated costs: Manager .........................................................

Roads and bridges ..........................................

Sheriff ............................................................

Jail ..................................................................

Total

$ 20,000 200,000 40,000 10,000 $270,000

3. The goods and services ordered on these purchase orders and contracts were delivered at the following actual costs, which were approved as vouchers payable: Manager .........................................................

Roads and bridges ..........................................

Sheriff ............................................................

Jail ..................................................................

Total 24 ..

$ 19,500 200,000 40,300 9,900 $269,700

4. Property taxes collected during 20X9 totaled $503,000.The balance of the uncollected taxes became delinquent.

5. Other cash receipts during 20X9 were: Sales taxes ......................................................

Federal grants .................................................

Service charges ..............................................

Fines ...............................................................

Other ..............................................................

Total

$180,000 106,000 74,000 52,000 18,000 $430,000

6. Cash was disbursed for payroll and other unencumbered expenditures as follows: Manager .........................................................

Commission ...................................................

Roads and bridges ..........................................

Courts .............................................................

Sheriff .............................................................

Jail ..................................................................

Other ..............................................................

Total

$ 88,700 84,300 197,000 56,000 133,000 61,500 29,500 $650,000

Vouchers payable of $260,000 were also paid.

7. Additional purchase orders and contracts were issued at these estimated costs: Commission ...................................................

Roads and bridges ..........................................

Courts .............................................................

Sheriff .............................................................

Total 8. Accrued receivables and payables at year end were a. Revenues receivable: Sales taxes ................................................

Service charges ........................................

Other ........................................................

Total b. Expenditures payable: Manager ...................................................

Commission .............................................

Other ........................................................

Total 25 ..

$ 4,000 2,000 3,700 5,800 $15,500

$19,000 4,000 1,000 $24,000 $

500 1,200 300 $ 2,000

Prepare the journal entries required to record the adoption of the budget and the numbered transactions and events in the General Ledger and in the Revenues and Expenditures Subsidiary Ledgers of the Marcus County Special Revenue Fund for the 20X9 fiscal year. Key the budgetary entry “B” and key the numbered transactions and events by number.

Suggested Solution B = Budgetary entry #

Accounts

Dr.

B. Estimated Revenues ...................................................................

Appropriations ....................................................................

Budgetary Fund Balance ....................................................

To record adoption of the budget Revenues Ledger (Estimated Revenues): Property Taxes ...........................................................................

Sales Taxes .................................................................................

Federal Grants ...........................................................................

Service Charges .........................................................................

Fines ..........................................................................................

Other ..........................................................................................

950,000 940,000 10,000

500,000 200,000 100,000 80,000 50,000 20,000 950,000

Expenditures Ledger (Appropriations): Manager .....................................................................................

Commission ................................................................................

Roads and Bridges .....................................................................

Courts ........................................................................................

Sheriff .........................................................................................

Jail .............................................................................................

Other ..........................................................................................

1.

Taxes Receivable—Current .......................................................

Allowance for Uncollectible Taxes—Current ....................

Revenues .............................................................................

To record property tax levy Revenues Ledger (Revenues): Property Taxes ...........................................................................

26 ..

Cr.

110,000 90,000 400,000 60,000 180,000 70,000 30,000 940,000 530,000 25,000 505,000

505,000

#

Accounts

Dr.

2.

Encumbrances ............................................................................

Encumbrances Outstanding ................................................

To record encumbrances on purchase orders and contracts

270,000

Expenditures Ledger (Encumbrances): Manager .....................................................................................

Roads and Bridges .....................................................................

Sheriff .........................................................................................

Jail .............................................................................................

3a. Encumbrances Outstanding .......................................................

Encumbrances ....................................................................

To reverse the encumbrance entry

270,000

20,000 200,000 40,000 10,000 270,000 270,000 270,000

Expenditures Ledger (Encumbrances): Manager .....................................................................................

Roads and Bridges .....................................................................

Sheriff .........................................................................................

Jail .............................................................................................

3b. Expenditures ..............................................................................

Vouchers Payable ...............................................................

To record expenditures Expenditures Ledger (Expenditures): Manager .....................................................................................

Roads and Bridges .....................................................................

Sheriff .........................................................................................

Jail .............................................................................................

20,000 200,000 40,000 10,000 270,000 269,700 269,700

19,500 200,000 40,300 9,900 269,700

4a. Cash ...........................................................................................

Taxes Receivable—Current ................................................

To record property tax collections

503,000

4b. Taxes Receivable—Delinquent ..................................................

Allowance for Uncollectible Taxes—Current ............................

Taxes Receivable—Current ................................................

Allowance for Uncollectible Taxes—Delinquent ...............

27,000 25,000

27 ..

Cr.

503,000

27,000 25,000

To reclassify property taxes receivable and related allowance as delinquent #

Accounts

Dr.

5.

Cash ...........................................................................................

Revenues .............................................................................

To record revenues received

430,000 430,000

Revenues Ledger (Revenues): Sales Taxes .................................................................................

Federal Grants ...........................................................................

Service Charges .........................................................................

Fines ..........................................................................................

Other . .........................................................................................

180,000 106,000 74,000 52,000 18,000 430,000

6a. Expenditures ..............................................................................

Cash ....................................................................................

To record unencumbered expenditures paid Expenditures Ledger (Expenditures): Manager .....................................................................................

Commission ................................................................................

Roads and Bridges .....................................................................

Courts ........................................................................................

Sheriff .........................................................................................

Jail .............................................................................................

Other ..........................................................................................

650,000

6b. Vouchers Payable ......................................................................

Cash ....................................................................................

To record vouchers paid

260,000

7.

15,500

Encumbrances ............................................................................

Encumbrances Outstanding ................................................

To record encumbrances on purchase orders and contracts issued Expenditures Ledger (Encumbrances): Commission ................................................................................

Roads and Bridges .....................................................................

Courts ........................................................................................

Sheriff .........................................................................................

28 ..

Cr.

650,000

88,700 84,300 197,000 56,000 133,000 61,500 29,500 650,000

260,000

15,500

4,000 2,000 3,700 5,800 15,500

#

Accounts

Dr.

8a. Accrued Receivables ..................................................................

Revenues .............................................................................

To record accrued revenues receivable

24,000 24,000

Revenues Ledger (Revenues): Sales Taxes .................................................................................

Service Charges .........................................................................

Other ..........................................................................................

8b. Expenditures ..............................................................................

Accrued Payables ...............................................................

To record accrued expenditures payable.

Expenditures Ledger (Expenditures): Manager .....................................................................................

Commission ................................................................................

Other ..........................................................................................

Cr.

19,000 4,000 1,000 24,000 2,000 2,000

500 1,200 300 2,000

Problem 6 (GL Worksheet and SL Accounts) Instructor’s Note: This problem may be assigned either as a continuation of or instead of Problem 5 above.

Based on the information about the Marcus County Special Revenue Fund in Problem 5 above: (a) Record the effects of the 20X9 budget adoption and the numbered transactions and events in an appropriate General Ledger worksheet and in Revenues Subsidiary Ledger and Expenditures Subsidiary Ledger accounts. (b) Prepare the entries to close the accounts at the end of 20X9 and record them on the General Ledger worksheet and in the subsidiary ledger accounts.

29 ..

Suggested Solution Problem 6 (a) Marcus County Special Revenue Fund General Ledger Worksheet For the Year Ended 20X9

Accounts

Budgetary, Transaction, and Adjusting Entries Ref Dr. Cr. Ref

Cash

(4a) (5)

503,000 430,000

650,000 260,000

(6a) (6b)

Taxes Receivable— Current

(1)

530,000

503,000 27,000

(4a) (4b)

Allowance for Uncollectible Taxes—Current

(4b)

25,000

25,000

(1)

Taxes Receivable— Delinquent

(4b)

27,000

Allowance for Uncollectible Taxes—Delinquent (8a)

24,000

Vouchers Payable

(6b)

260,000

Accrued Payables

23,000

(4b)

25,000

24,000 269,700

(3b)

9,700

2,000

(8b)

2,000

Fund Balance Budgetary Fund Balance Estimated Revenues

10,000

(B)

(B)

(C1)

940,000

(B)

(C1)

(2) (7)

270,000 15,500

270,000

(3a)

Encumbrances Outstanding

(3a)

270,000

270,000 15,500

(2) (7)

(C1)

15,500

505,000 430,000 24,000

(1) (5) (8a)

(C2)

959,000

Expenditures

(3b) (6a) (8b)

269,700 650,000 2,000

30 ..

(C2)

950,000

(C1)

15,500

(C1)

921,700

(C2)

940,000

Encumbrances

Revenues

37,300 10,000

950,000

Appropriations

Ref

Postclosing Trial Balance Dr. Cr.

27,000

25,000

Accrued Receivables

Ref

Closing Entries Dr. Cr.

37,300

Problem 6 (a) Marcus County Special Revenue Fund Revenues Subsidiary Ledger For the Year Ended 20X9

Accounts Property Taxes

Sales Taxes

Federal Grants

Dr. Estimated Revenues (B) 500,000

(B)

(B)

(Cr.) Revenues (1)

(505,000)

(5) (8a)

(180,000) ( 19,000) (199,000)

200,000

(B)

(B)

(B)

(1,000)

(C3)

100,000 (6,000) 6,000

(106,000)

80,000 6,000 2,000

(74,000) ( 4,000) (78,000) (C3)

(2,000)

(C3)

50,000 (2,000) 2,000

50,000 (5)

Other

(C3)

80,000 (5) (8a)

Fines

200,000 20,000 1,000

100,000 (5)

Service Charges

Dr. (Cr.) Balance 500,000 (5,000) (C3) 5,000

(52,000)

20,000 (5) (8a)

20,000 2,000 1,000

(18,000) ( 1,000) (19,000) (C3)

31 ..

(1,000)

Problem 6 (a) Marcus County Special Revenue Fund Expenditures Subsidiary Ledger For the Year Ended 20X9

Accounts Manager

Cr. Appropriations (B) 110,000

Dr. Encumbrances (2) (3a)

20,000 (20,000)

Dr. Expenditures

(3b) (6a) (8b)

19,500 88,700 500 108,700

Cr. (Dr.) Unencumbered Balance 110,000 90,000 90,500 1,800 1,300 (C4)

Commission

(B)

90,000 (7)

(6a)

84,300

(8b)

1,200 85,500

90,000 5,700 1,700 500

4,000

(C4) Roads and Bridges

(B)

400,000 (2) 200,000 (3a) (200,000)

(7)

Courts

(B)

(3b) (6a)

200,000 197,000 397,000 (C4)

1,000 (1,000)

(C4)

60,000 4,000 300 (300)

60,000 (7)

32 ..

(500) 400,000 200,000 200,000 3,000

2,000

(6a)

(1,300)

56,000

3,700

Cr. Appropriations (B) 180,000

Accounts Sheriff

Jail

(B)

Dr. Encumbrances (2) (3a)

40,000 (40,000)

(7)

5,800

(B)

(3b) (6a)

40,300 133,000 173,300

Cr. (Dr.) Unencumbered Balance 180,000 140,000 139,700 6,700

(C4)

900 (900)

(C4)

70,000 60,000 60,100 (1,400) 1,400

(C4)

30,000 500 200 (200)

70,000 (2) (3a)

Other

Dr. Expenditures

10,000 (10,000)

(3b) (6a)

9,900 61,500 71,400

30,000 (6a) (8b)

29,500 300 29,800

Problem 6 (b) Note: This solution presumes the “reverse the budget—close the actual” approach, which closes the general ledger and subsidiary ledger accounts separately. Other approaches (e.g., the variance and compound approaches) that attain the same results are equally acceptable.

General Ledger C1.

C2.

Dr.

Encumbrances Outstanding ............................................

Appropriations ...............................................................

Budgetary Fund Balance ...............................................

Encumbrances .........................................................

Estimated Revenues ................................................

To close the budgetary accounts at year end

15,500 940,000 10,000

Revenues ........................................................................

Expenditures ...........................................................

Fund Balance ..........................................................

To close the Revenues and Expenditures accounts at year end

959,000

33 ..

Cr.

15,500 950,000

921,700 37,300

Revenues Subsidiary Ledger (Balance):

Dr.

C3. Property Taxes ......................................................................

Sales ......................................................................................

Federal Grants ......................................................................

Service Charges ....................................................................

Fines ......................................................................................

Other .....................................................................................

Proof:

13,000 − 4,000 = 9,000

Compare to General Ledger Accounts: Revenues Estimated Revenues

Cr.

5,000 1,000 6,000 2,000 2,000 – 13,000

1,000 4,000

959,000 950,000 9,000

Expenditures Subsidiary Ledger (Balance): C4. Manager ................................................................................

Commission ...........................................................................

Roads and Bridges ................................................................

Courts ....................................................................................

Sheriff ....................................................................................

Jail .........................................................................................

Other .....................................................................................

Proof:

4,200 – 1,400 = 2,800

Compare to General Ledger accounts: Appropriations Expenditures 921,700 Encumbrances 15,500

940,000 937,200 2,800

34 ..

1,300 500 1,000 300 900 200 4,200

1,400 – 1,400

Problem 7 (Financial Statements; Encumbrances) Instructor’s Note: This problem should be assigned only if Problem 6 above is also assigned.

Based on the solution to Problem 6 above, (a) Prepare the year end 20X9 Balance Sheet and the Statement of Revenues, Expenditures, and Changes in Fund Balances—Budget and Actual for the 20X9 fiscal year for the Marcus County Special Revenue Fund. Assume all of the restricted grant monies were expended. (b) Briefly explain why the actual excess of revenues over expenditures differed from that budgeted. (c) How would the budgetary comparison statement prepared in part (a) differ if the Marcus County commissioners considered encumbrances equivalent to expenditures for budgetary compliance evaluation purposes? (d) Prepare the entry necessary to reestablish the encumbrances in the accounts at the beginning of the next year, 20Y0.

Suggested Solution Problem 7(a) Marcus County Special Revenue Fund Balance Sheet At End of Fiscal Year 20X9 Assets Cash ..................................................................................................

Taxes Receivable—Delinquent .........................................................

Less: Allowance for Uncollectible Taxes—Delinquent ....................

Accrued Receivables .........................................................................

Total Assets

$23,000 $27,000 25,000

2,000 24,000 $49,000

Liabilities and Fund Balance Liabilities: .........................................................................................

Vouchers Payable ......................................................................

Accrued Payables ......................................................................

Total Liabilities Fund Balance: Assigned ............................................................................

Total Liabilities and Fund Balance

35 ..

$ 9,700 2,000 $11,700

37,300 $49,000

Problem 7 (a) Marcus County Special Revenue Fund Statement of Revenues, Expenditures, and Changes in Fund Balance—Budget and Actual (Budgetary Basis is Modified Accrual Basis) For the Fiscal Year Ended 20X9 Original Budget*

Final Budget*

Actual

Variance Favorable (Unfavorable)

Revenues: Property Taxes .......................... $500,000 Sales Taxes ................................ 200,000 Federal Grants .......................... 100,000 Service charges ..........................

80,000 Fines ..........................................

50,000 Other ..........................................

20,000 Total Revenues ......................... 950,000

$500,000 200,000 100,000 80,000 50,000 20,000 950,000

$505,000 199,000 106,000 78,000 52,000 19,000 959,000

$ 5,000 (1,000) 6,000 (2,000) 2,000 (1,000) 9,000

Expenditures: Operating: Manager ................................

Commission ...........................

Roads and bridges .................

Courts ....................................

Sheriff ....................................

Jail .........................................

Other ......................................

Total Operating Expenditures

110,000 90,000 400,000 60,000 180,000 70,000 30,000 940,000

110,000 90,000 400,000 60,000 180,000 70,000 30,000 940,000

108,700 85,500 397,000 56,000 173,300 71,400 29,800 921,700

1,300 4,500 3,000 4,000 6,700 (1,400) 200 18,300

Excess (Deficiency) of Revenues Over (Under) Expenditures ........

10,000

10,000

37,300

27,300

Fund Balance—Beginning of 20X9**

–

–

–

–

$ 10,000

$ 10,000

$ 37,300

$27,300

Fund Balance—End of 20X9 ........ *

The original and final budgets are the same; there were not budget revisions.

Beginning fund balance is zero because 20X9 is the first year of operations.

**

36 ..

Problem 7 (b) The actual excess of revenues over expenditures, $37,300, differed from the budgeted $10,000 excess because revenues were $9,000 more than budgeted and expenditures were $18,300 less than appropriations.

Problem 7 (c) If encumbrances were considered equivalent to expenditures for budgetary compliance accountability purposes, the budgetary comparison statement would present “Expenditures and Encumbrances” rather than only “Expenditures”—and these accounts with encumbrances outstanding would be reported:

Expenditures and Encumbrances

Original Budget

Final Budget

Actual

Variance Favorable (Unfavorable)

Commission ...............................

Roads and bridges .....................

Courts ........................................

Sheriff ........................................

90,000 400,000 60,000 180,000

90,000 400,000 60,000 180,000

89,500 399,000 59,700 179,100

500 1,000 300 900

Thus, the budget-actual comparison for these departmental appropriations would differ. Further, the sum of expenditures and encumbrances would be $15,500 more than expenditures; the excess of revenues over expenditures and encumbrances would be $15,500 lower than the $37,300 reported, or $21,800; and the ending budgetary fund balance would be reported at $15,500 less.

Problem 7 (d) # R.

Accounts Encumbrances .......................................................................

Encumbrances Outstanding ...........................................

To reestablish encumbrances in the accounts at the beginning of 20Y0.

Expenditures Ledger (Encumbrances): Commission ...........................................................................

Roads and Bridges ................................................................

Courts ....................................................................................

Sheriff ....................................................................................

37 ..

Dr. 15,500

Cr. 15,500

4,000 2,000 3,700 5,800 15,500

Problem 8 (GL and SL Entries) The trial balance of the General Fund of Mann Independent School District at the beginning of its 20X5 fiscal year was Dr. Cr. Cash ............................................................................... $20,000 Taxes Receivable—Delinquent .....................................

15,000 Allowance for Uncollectible Taxes—Delinquent ......... $ 8,000 Accrued Receivables .....................................................

43,000 Vouchers Payable ..........................................................

12,000 Accrued Payables ..........................................................

10,000 Fund Balance .................................................................

48,000 $78,000 $78,000 The following transactions and events affected the Mann Independent School District General Fund during 20X5: B.

The annual budget (GAAP basis) adopted provided for: Estimated Revenues: Property taxes .......................................... $400,000 State assistance ........................................

300,000 Federal grants ..........................................

200,000 Other ........................................................

50,000 950,000 Appropriations: Administration .........................................

100,000 Instruction ................................................

700,000 Maintenance ............................................

90,000 Other ........................................................

55,000 945,000 Planned Increase in Fund Balance ...........

$

5,000

1. Property taxes totaling $420,000 were levied; $15,000 were expected to prove uncollectible.

2. Cash receipts during 20X5 and additional accrued receivables at the end of 20X5 were as follows: Accrued Cash at End Receipts of 20X5 Property taxes—Current ................ $391,000 $ — Property taxes—Delinquent ..........

6,000 — State assistance ..............................

260,000 38,000 Federal grants ................................

190,000 14,000 38 ..

Other ..............................................

Accrued receivables (beginning) ...

47,000 43,000 $937,000

— — $52,000

3. The uncollected current property taxes became delinquent at year end, and property taxes totaling $16,000 were written off during 20X5 by action of the school board.

4. Purchase orders and contracts were issued and related goods and services were delivered and vouchered as payable as follows: Orders and Goods and Services Contracts Received Encumbered Encumbered Actual For For Cost Administration ........ $ 20,000 $ 15,000 $ 14,800 Instruction ...............

80,000 80,000 79,200 Maintenance ............

50,000 50,000 50,000 Other ........................

25,000 21,000 21,500 $175,000 $166,000 $165,500 5. Cash disbursements—for payroll, other unencumbered expenditures, and vouchers payable—during 20X5 and additional accrued expenditures at the end of 20X5 were as follows: Accrued Cash at End Disbursements of 20X5 Administration ............................... $ 79,000 — Instruction ......................................

617,000 2,800 Maintenance ...................................

38,000 2,700 Other ..............................................

27,000 2,000 Vouchers Payable ..........................

163,000 — Accrued Payables (beginning) .......

10,000 — $934,000 $7,500 Prepare the journal entries to record the numbered transactions and events in the General Ledger, Revenues Subsidiary Ledger, and Expenditures Subsidiary Ledger.

39 ..

Suggested Solution # B.

Accounts

Dr.

Estimated Revenues ..............................................................

Appropriations ...............................................................

Budgetary Fund Balance ...............................................

To record annual budget Revenues Ledger (Estimated Revenues): Property Taxes ......................................................................

State Assistance .....................................................................

Federal Grants ......................................................................

Other .....................................................................................

950,000 945,000 5,000

400,000 300,000 200,000 50,000 950,000

Expenditures Ledger (Appropriations): Administration .......................................................................

Instruction .............................................................................

Maintenance ..........................................................................

Other .....................................................................................

1.

Taxes Receivable—Current Allowance for Uncollectible Taxes—Current ................

Revenues ........................................................................

To record property tax levy

Cr.

100,000 700,000 90,000 55,000 945,000

420,000 15,000 405,000

Revenues Ledger (Revenues): Property Taxes ......................................................................

405,000

Note: One might assume that the budget was revised since actual property taxes revenues apparently will exceed the budget estimate. If so, the entry would be: Estimated Revenues ..............................................................

Budgetary Fund Balance ...............................................

To record increase in estimated property tax revenues Revenues Ledger (Estimated Revenues): Property Taxes ......................................................................

5,000 5,000

5,000

However, the problem does not state that the budget was revised—and this entry is not required.

40 ..

# 2.

Accounts

Dr.

Cash ......................................................................................

Accrued Receivables (ending) ...............................................

Taxes Receivable—Current ...........................................

Taxes Receivable—Delinquent ......................................

Accrued Receivables (beginning) ..................................

Revenues ........................................................................

To record cash receipts

937,000 52,000 391,000 6,000 43,000 549,000

Revenues Ledger (Revenues): State Assistance .....................................................................

Federal Grants ......................................................................

Other .....................................................................................

3a.

3b.

4a.

4b.

298,000 204,000 47,000 549,000

Taxes Receivable—Delinquent .............................................

Allowance for Uncollectible Taxes—Current .......................

Taxes Receivable—Current ...........................................

Allowance for Uncollectible Taxes—Delinquent ...........

To reclassify delinquent taxes receivable and related allowance

29,000 15,000

Allowance for Uncollectible Taxes—Delinquent ..................

Taxes Receivable—Delinquent ......................................

To record write off of uncollectible delinquent taxes

16,000

Encumbrances .......................................................................

Encumbrances Outstanding ...........................................

To record encumbrances incurred

175,000

Expenditures Ledger (Encumbrances): Administration .......................................................................

Instruction .............................................................................

Maintenance ..........................................................................

Other .....................................................................................

Encumbrances Outstanding ..................................................

Encumbrances ................................................................

To reverse encumbrances for goods and services delivered Expenditures Ledger (Encumbrances): Administration .......................................................................

Instruction .............................................................................

Maintenance ..........................................................................

41 ..

Cr.

29,000 15,000

16,000

175,000

20,000 80,000 50,000 25,000 175,000 166,000 166,000

15,000 80,000 50,000

#

Accounts

Dr.

Other .....................................................................................

4c.

Expenditures .........................................................................

Vouchers Payable ..........................................................

To record expenditures Expenditures Ledger (Expenditures): Administration .......................................................................

Instruction .............................................................................

Maintenance ..........................................................................

Other .....................................................................................

5.

Expenditures .........................................................................

Vouchers Payable .................................................................

Accrued Payables (beginning) ..............................................

Accrued Payables (ending) ............................................

Cash ...............................................................................

To record cash disbursements Expenditures Ledger (Expenditures): Administration .......................................................................

Instruction .............................................................................

Maintenance ..........................................................................

Other .....................................................................................

42 ..

Cr. 21,000 166,000

165,500 165,500

14,800 79,200 50,000 21,500 165,500 768,500 163,000 10,000 7,500 934,000

79,000 619,800 40,700 29,000 768,500

Problem 9 (GL Worksheet and SL Accounts) Instructor’s Note: This problem may be assigned either as a continuation of or instead of Problem 8 above.

Based on the information about the General Fund of the Mann Independent School District in Problem 8 above: (a) Prepare an electronic spreadsheet similar to Illustration 4-13 (pages 148–149), and record the beginning trial balance and the numbered transactions and events in the General Ledger worksheet and in the Revenues Subsidiary Ledger and Expenditures Subsidiary Ledger accounts. (b) Prepare the entry or entries to close the accounts at the end of 20X5 and record it (them) on the General Ledger worksheet and in the subsidiary ledger accounts.

Suggested Solution Problem 9 (a) Mann Independent School District General Fund Revenues Subsidiary Ledger For the Year Ended 20X5

Accounts Property Taxes

State Assistance

Federal Grants

Dr. Estimated Revenues (B) 400,000

(B)

(B)

(Cr.) Revenues (1)

(405,000)

(2)

(298,000)

300,000

(B)

(C3)

300,000 2,000 (2,000)

(C3)

200,000 (4,000) 4,000

(C3)

50,000 3,000 (3,000)

200,000 (2)

Other

Dr. (Cr.) Balance 400,000 (5,000) (C3) 5,000

(204,000)

50,000 (2)

43 ..

(47,000)

Problem 9 (a) Mann Independent School District General Fund Expenditures Subsidiary Ledger For the Year Ended 20X5

Accounts Administration

Cr. Appropriations (B) 100,000

Dr. Encumbrances

Dr. Expenditures

(4a) (4b)

(4c)

14,800

(5)

79,000 93,800

20,000 (15,000) 5,000

Cr. (Dr.) Unencumbered Balance 100,000 80,000 80,200 1,200 (C4)

Instruction

(B)

700,000 (4a) (4b)

80,000 (80,000)

(4c) (5)

700,000 620,000 620,800 1,000

79,200 619,800 699,000 (C4)

Maintenance

(B)

90,000 (4a) (4b)

50,000 (50,000)

(4c) (5)

(B)

50,000 40,700 90,700

55,000 (4a) (4b)

25,000 (21,000) 4,000

(4c) (5)

700 55,000 30,000 29,500 500

21,500 29,000 50,500 (C4)

44 ..

(1,000) 90,000 40,000 40,000 (700)

(C4) Other

(1,200)

(500)

Problem 9 (b) Note: This solution assumes the “reverse the budget—close the actual” approach that closes the general ledger and subsidiary ledgers separately. Alternative methods (e.g., variance and compound) that accomplish the same results are acceptable.

General Ledger C1.

C2.

C3.

Dr.

Encumbrances Outstanding ...................................................

Appropriations ......................................................................

Budgetary Fund Balance ......................................................

Encumbrances.................................................................

Estimated Revenues .......................................................

To close the budgetary accounts at year end

9,000 945,000 5,000

Revenues ...............................................................................

Expenditures ..................................................................

Fund Balance .................................................................

To close the Revenues and Expenditures accounts at year end

954,000

Revenues Subsidiary Ledger (Balance): Property Taxes ......................................................................

State Assistance .....................................................................

Federal Grants ......................................................................

Other .....................................................................................

Proof:

9,000 − 5,000 = 4,000

Cr.

9,000 950,000

934,000 20,000

5,000 2,000 4,000 – 9,000

3,000 5,000

Compare to General Ledger Accounts: Revenues 954,000 Estimated Revenues 950,000 4,000 C4.

Expenditures Subsidiary Ledger (Balance): Administration .......................................................................

Instruction .............................................................................

Maintenance ..........................................................................

Other .....................................................................................

Proof:

2,700 – 700 = 2,000

Compare to General Ledger Accounts: Appropriations Expenditures 934,000 Encumbrances 9,000

945,000 943,000 2,000 45 ..

1,200 1,000 500 2,700

700 – 700

Problem 10 (Financial Statements; Encumbrances) Instructors Note: This problem should not be assigned unless Problems 8 and 9 above have been assigned.

Based on the information about Problems 8 and 9 above: (a) Prepare a Statement of Revenues, Expenditures, and Changes in Fund Balances— Budget and Actual—for the General Fund of Mann Independent School District for the 20X5 fiscal year and a Balance Sheet as of the end of 20X5. Assume all of the externally dedicated funds have been expended. (b) How would the Statement of Revenues, Expenditures, and Changes in Fund Balances—Budget and Actual differ from (a) if the Mann Independent School District budgetary basis considered both encumbrances and expenditures to be uses of appropriation authority? (c) Prepare the entry to reestablish encumbrances in the accounts at the beginning of 20X6.

Suggested Solution Problem 10 (a) Mann Independent School District General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance—Budget and Actual (Budgetary Basis is GAAP Basis) For the Year Ended 20X5

Original Budget*

Final Budget*

Actual

Variance Favorable (Unfavorable)

Revenues: Property Taxes .......................... $400,000 State Assistance ......................... 300,000 Federal Grants .......................... 200,000 Other ..........................................

50,000 Total Revenues ......................... 950,000

$400,000 300,000 200,000 50,000 950,000

$405,000 298,000 204,000 47,000 954,000

$ 5,000 (2,000) 4,000 (3,000) 4,000

Expenditures: Operating: Administration .......................

Instruction .............................

Maintenance ..........................

100,000 700,000 90,000

93,800 699,000 90,700

6,200 1,000 (700)

100,000 700,000 90,000 46 ..

Other ......................................

Total Operating Expenditures

55,000 945,000

55,000 945,000

50,500 934,000

4,500 11,000

Excess (Deficiency) of Revenues Over (Under) Expenditures ........

5,000

5,000

20,000

15,000

Fund Balance—Beginning of 20X5

48,000

48,000

48,000

–

Fund Balance—End of 20X5 ........

$ 53,000

$ 53,000

$ 68,000

$15,000

*The original and final budgets are the same; there were not budget revisions.

Problem 10 (a) Mann Independent School District General Fund Balance Sheet At End of 20X5 Fiscal Year Assets Cash ..................................................................................................

Taxes Receivable—Delinquent .........................................................

Less: Allowance for Uncollectible Taxes—Delinquent ....................

Accrued Receivables .........................................................................

Total Assets

$23,000 $22,000 7,000

15,000 52,000 $90,000

Liabilities and Fund Balance Liabilities: Vouchers Payable .......................................................................

Accrued Payables ........................................................................

Total Liabilities Fund Balance: Unassigned ..................................................................................

Total Liabilities and Fund Balance

47 ..

$14,500 7,500 $22,000

68,000 $90,000

Problem 10 (b) The “Expenditures” caption in the statement would be replaced by an “Expenditures and Encumbrances” caption; and the “excess”—retitled “Excess (Deficiency) of Revenues Over (Under) Expenditures and Encumbrances”—would be $9,000 less, as would be the ending budgetary Fund Balance.

The budget-actual comparison would differ wherever encumbrances are outstanding at year end:

Expenditures and Encumbrances

Original Budget

Final Budget

Actual

Variance Favorable (Unfavorable)

Administration ...........................

Other .........................................

100,000 55,000

100,000 55,000

98,800 54,500

1,200 500

Thus, it might yield differing evaluations of budget performance.

Problem 10 (c) # Accounts R. Encumbrances.............................................................................

Encumbrances Outstanding ..................................................

To reestablish encumbrances in the accounts at the beginning of 20X6 Expenditures Ledger (Encumbrances): Administration ...........................................................................

Other ..........................................................................................

48 ..

Dr. 9,000

Cr. 9,000

5,000 4,000 9,000

Problem 11 (GL and SL Entries; Statements) The following financial activities affecting Judbury City’s General Fund took place during the year ended June 30, 20X1: 1. The following budget was adopted: Estimated revenues: Property taxes ................................................................

Licenses and permits .....................................................

Fines ..............................................................................

Total Estimated Revenues

$4,500,000 300,000 200,000 $5,000,000

Appropriations: General government ....................................................

Police services .............................................................

Fire department services ..............................................

Public works services ..................................................

Acquisition of fire engines ..........................................

Total Appropriations

$1,500,000 1,200,000 900,000 800,000 400,000 $4,800,000

2. Property tax bills totaling $4,650,000 were mailed. It was estimated that $300,000 of this amount will be delinquent, and $150,000 will be uncollectible.

3. Property taxes totaling $3,900,000 were collected. The $150,000 previously estimated to be uncollectible remained unchanged, but $750,000 was reclassified as delinquent. It is estimated that delinquent taxes will be collected soon enough after June 30, 20X1, to make these taxes available to finance obligations incurred during the year ended June 30, 20X1. There was no balance of uncollected taxes at July 1, 20X0.

4. Tax anticipation notes in the face amount of $300,000 were issued.

5. Other cash collections were as follows: Licenses and permits .....................................................

Fines ..............................................................................

Sale of public works equipment (original cost, $75,000) .............................................

Total

$270,000 200,000 15,000 $485,000

6. The following purchase orders were executed:

General government ................................

Police services .........................................

Fire department services ..........................

Public works services ..............................

49 ..

Total $1,050,000 300,000 150,000 250,000

Outstanding at 6/30/X1 $ 60,000 30,000 15,000 10,000

Fire engines .............................................

Totals

400,000 $2,150,000

— $115,000

No encumbrances were outstanding at June 30, 20X0.

7. The following vouchers were approved: General government ...............................

Police services ........................................

Fire department services .........................

Public works services .............................

Fire engines ............................................

Total

$1,440,000 1,155,000 870,000 700,000 400,000 $4,565,000

8. Vouchers totaling $4,600,000 were paid. (a) Prepare journal entries to record the foregoing financial activities in the General Fund General Ledger and in the Revenues and Expenditures Subsidiary Ledgers. Ignore interest accruals. (b) Prepare a Statement of Revenues, Expenditures, and Changes in Fund Balance for the General Fund of Judbury City for the fiscal year ended June 30, 20X1.

Assume that the beginning total fund balance was $80,000 (AICPA, adapted).

Suggested Solution Problem 11 (a) # 1.

Accounts Estimated Revenues ..............................................................

Appropriations ...............................................................

Budgetary Fund Balance ...............................................

To record annual budget Revenues Ledger (Estimated Revenues): Property Taxes ......................................................................

Licenses and Permits ............................................................

Fines ......................................................................................

Expenditures Ledger (Appropriations): General Government .............................................................

Police Services ......................................................................

Fire Department Services .....................................................

Public Works Services ...........................................................

Acquisition of Fire Engines ..................................................

50 ..

Dr. 5,000,000

Cr. 4,800,000 200,000

4,500,000 300,000 200,000 5,000,000 1,500,000 1,200,000 900,000 800,000 400,000 4,800,000

# 2.

Accounts Taxes Receivable—Current ..........................

Allowance for Uncollectible Taxes—Current ................

Revenues ........................................................................

To record property taxes receivable

Dr. 4,650,000

150,000 4,500,000

Revenues Ledger (Revenues): Property Taxes ......................................................................

3a.

3b.

4.

# 5.

4,500,000

Cash ......................................................................................

Taxes Receivable—Current ...........................................

To record collection of property taxes

3,900,000

Taxes Receivable—Delinquent .............................................

Allowance for Uncollectible Taxes—Current .......................

Taxes Receivable—Current ...........................................

Allowance for Uncollectible Taxes—Delinquent ...........

To reclassify delinquent taxes and related allowance

750,000 150,000

Cash ......................................................................................

Tax Anticipation Notes Payable ....................................

To record issuance of tax anticipation notes.

300,000

Accounts Cash ......................................................................................

Revenues ........................................................................

Other Financing Sources—Sale of GCA ........................

To record revenue collections

Dr. 485,000

3,900,000

750,000 150,000

300,000

Encumbrances .......................................................................

Encumbrances Outstanding ...........................................

To record encumbrances Expenditures Ledger (Encumbrances): General Government .............................................................

Police Services ......................................................................

Fire Department Services .....................................................

Public Works Services ...........................................................

Acquisition of Fire Engines ..................................................

51 ..

Cr. 470,000 15,000

Revenues Ledger (Revenues): Licenses and Permits ............................................................

Fines ......................................................................................

6a.

Cr.

270,000 200,000 470,000 2,150,000 2,150,000

1,050,000 300,000 150,000 250,000 400,000 2,150,000

# 6b.

Accounts Encumbrances Outstanding ..................................................

Encumbrances ................................................................

To reverse encumbrances for goods and services received

Dr. 2,035,000

2,035,000

Expenditures Ledger (Encumbrances): General Government .............................................................

Police Services ......................................................................

Fire Department Services .....................................................

Public Works Services ...........................................................

Acquisition of Fire Engines ..................................................

7.

Expenditures .........................................................................

Vouchers Payable ..........................................................

To record expenditures vouchers approved Expenditures Ledger (Expenditures): General Government .............................................................

Police Services ......................................................................

Fire Department Services .....................................................

Public Works Services ...........................................................

Capital Outlay—Fire Engines ..............................................

Cr.

990,000 270,000 135,000 240,000 400,000 2,035,000 4,565,000 4,565,000

1,440,000 1,155,000 870,000 700,000 400,000 4,565,000

Note: The fire engines should not be recorded as General Fund assets, but are capitalized in the General Capital Assets and General Long-Term Liabilities accounts.

They are reported only in the government-wide financial statements. # 8.

Accounts Vouchers Payable .................................................................

Cash ...............................................................................

To record payment of vouchers

52 ..

Dr. 4,600,000

Cr. 4,600,000

Judbury City General Fund Revenues Subsidiary Ledger For the Year Ended June 30, 20X1

Accounts Property Taxes

Licenses and Permits

Dr. Estimated Revenues (1) 4,500,000

(1)

(Cr.) Revenues (2)

(4,500,000 )

(5)

(270,000)

Dr. (Cr.) Balance 4,500,000 –

300,000 (C3)

Fines

(1)

200,000 (5)

53 ..

(200,000)

300,000 30,000 (30,000) 200,000 –

Judbury City General Fund Expenditures Subsidiary Ledger For the Year Ended June 30, 20X1

Accounts General Government

Cr. Appropriations (1) 1,500,000

Dr. Encumbrances (6a) (6b)

Dr. Expenditures

1,050,000 (990,000) 60,000 (7)

Police Services

(1)

Cr. (Dr.) Unencumbered Balance 1,500,000 450,000 1,440,000 –

1,440,000

1,200,000 (6a) (6b)

1,200,000 900,000 1,170,000

300,000 (270,000) 30,000 (7)

1,155,000 (C4)

Fire Department Services

(1)

900,000 (6a) (6b)

900,000 750,000 885,000

150,000 (135,000) 15,000 (7)

870,000 (C4)

Public Works Services

(1)

800,000 (6a) (6b)

250,000 (240,000) 10,000 700,000 (C4)

(1)

(400,000) (6a) (6b)

400,000 (400,000) (7)

54 ..

15,000 (15,000) 800,000 550,000 790,000

(7)

Capital Outlay — Fire Engines

15,000 (15,000)

400,000

90,000 (90,000) 400,000 – 400,000 –

Problem 11 (a) Closing Entries—Not Required #

Accounts

Dr.

C1.

Encumbrances Outstanding ...................................................

Appropriations ......................................................................

Budgetary Fund Balance ......................................................

Encumbrances.................................................................

Estimated Revenues .......................................................

To close the budgetary accounts at year end

115,000 4,800,000 200,000

Revenues ...............................................................................

Other Financing Sources—Sale of GCA................................

Expenditures ..................................................................

Fund Balance .................................................................

To close the Revenues and Expenditures accounts at year end

4,970,000 15,000

C2.

C3.

115,000 5,000,000

4,565,000 420,000

Revenues Ledger (Balance): Licenses and Permits ............................................................

Proof:

30,000 30,000

0 – 30,000 = (30,000)

Compare to General Ledger Accounts: Revenues 4,970,000 Estimated Revenues 5,000,000 (30,000) C4.

Expenditures Ledger (Balance): Police Services ......................................................................

Fire Department Services .....................................................

Public Works Services ...........................................................

Compare to General Ledger Accounts: Appropriations Expenditures 4,565,000 Encumbrances 115,000

4,800,000 4,680,000 120,000

55 ..

Cr.

15,000 15,000 90,000 120,000

Problem 11 (b) Judbury City General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year Ended June 30, 20X1 Revenues: Property Taxes ............................................................................

Licenses and Permits ..................................................................

Fines ..........................................................................................

Total Revenues .......................................................................

Expenditures: Operating: General Government ................................................................

Police Services .........................................................................

Fire Department Services ........................................................

Public Works Services ..............................................................

Total Operating Expenditures................................................

Capital Outlay .............................................................................

Total Expenditures .................................................................

$4,500,000 270,000 200,000 $4,970,000

1,440,000 1,155,000 870,000 700,000 4,165,000 400,000 4,565,000

Excess (Deficiency) of Revenues Over (Under) Expenditures ..........

405,000

Other Financing Sources: Proceeds from Sale of General Capital Assets ......................

15,000

Net Change in Fund Balance .............................................................

420,000

Fund Balance—July 1, 20X0 ............................................................

Fund Balance—June 30, 20X1 .........................................................

80,000 $ 500,000

56 ..

Problem 12 (Statement of Revenues, Expenditures, and Changes in Fund Balance) The following information, regarding the fiscal year ended December 31, 20X4, was drawn from the accounts and records of the Reach City General Fund.

Cash Receipts: Taxes ..........................................................................

Licenses and fees .......................................................

Intergovernmental grants ..........................................

Fines and forfeits........................................................

Short-term note issuances ..........................................

Long-term note issuances ..........................................

Collection of interfund advance to other fund ...........

Net assets of terminated Capital Projects Fund .........

Cash Disbursements: Salaries and wages .....................................................

Consulting services ....................................................

Materials and supplies................................................

Equipment purchases .................................................

Short-term note retirements .......................................

Interest on short-term notes .......................................

Interest on long-term notes ........................................

Paid to Debt Service Fund to Provide for required payments for bonded debt ....................................

Purchases of services from Enterprise Fund and Internal Service Fund departments ......................

Payments of compensated absences...........................

$5,000,000 1,000,000 2,000,000 1,000,000 3,000,000 8,000,000 3,500,000 800,000

$4,000,000 750,000 1,000,000 3,500,000 2,800,000 200,000 400,000 1,200,000 2,300,000 1,500,000

Other Information: 1. Taxes receivable decreased by $80,000 during the year. 20X3 taxes of $75,000 were collected in January and February of 20X4; 20X4 taxes of $95,000 were collected in January and February 20X5.

2. Unpaid interest on short-term notes at the end of 20X4 was $18,000; at the end of 20X3, it was $10,000.

3. Unmatured interest incurred to date on long-term notes at the end of 20X4 was $100,000; at the end of 20X3 it was zero.

4. Due to other funds (for services purchased) increased by $50,000 during the year.

5. The liability for compensated absences (all long-term) increased by $900,000 during the year.

6. Salaries and wages payable was $200,000 less at year end than at the beginning of the year.

7. The inventory of materials and supplies did not change during the fiscal year. Accounts payable for materials and supplies increased by $50,000 during the year.

8. The beginning fund balance was $8,500,000. Encumbrances outstanding at the end of the fiscal year amounted to $850,000.

57 ..

Prepare the GAAP-basis Statement of Revenues, Expenditures, and Changes in Fund Balance for the Reach City General Fund for the fiscal year ended December 31, 20X4.The statement should be in proper form, and supporting computations should be included in an easy-to-follow manner.

Suggested Solution Reach City General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year Ended December 31, 20X4 Revenues: Taxes ($5,000,000 − $75,000 + $95,000) .............................

Intergovernmental Grants .....................................................

License and Fees ....................................................................

Fines and Forfeits ..................................................................

Total Revenues ...............................................................

Expenditures: Current Operating: Salaries and Wages ($4,000,000 – $200,000) ..............

Consulting Services ........................................................

Materials and Supplies ($1,000,000 + $50,000) ...........

Intragovernmental Services ($2,300,000 + $50,000) .................................................................

Compensated Absences ..................................................

Total Current Operating Expenditures.......................

Capital Outlay ........................................................................

Debt Service—Interest ($200,000 + $400,000 + ($18,000 – $10,000)) ...................................................

Total Expenditures .........................................................

Excess (Deficiency) of Revenues Over (Under) Expenditures .....

Other Financing Sources (Uses): Long-term note proceeds .......................................................

Transfers In .............................................................................

Transfers Out .........................................................................

Total Other Financing Sources (Uses) ...........................

Net Change in Fund Balance ........................................................

Fund Balance, January 1 ($4,000,000 + $3,500,000 + $1,000,000) ........................................................................

Fund Balance, December 31 ........................................................

58 ..

$5,020,000 2,000,000 1,000,000 1,000,000 $ 9,020,000

3,800,000 750,000 1,050,000 2,350,000 1,500,000 9,450,000 3,500,000 608,000 13,558,000 ( 4,538,000)

8,000,000 800,000 (1,200,000) 7,600,000 3,062,000

8,500,000 $11,562,000

CHAPTER FIVE REVENUE ACCOUNTING—GOVERNMENTAL FUNDS (Pages 171–219) CHAPTER FIVE OUTLINE 1) Revenue definition and recognition 2) Nonexchange transactions 3) Governmental fund and proprietary fund revenue recognition compared 4) Classification of revenue accounts a) General fund revenues b) Other governmental funds revenues 5) Taxes a) Taxpayer-assessed taxes b) Property taxes i) Assessment of property ii) Review of assessment iii) Equalization of assessments iv) Levying the tax (1) Determining the tax rate (2) Determining the amount due from each taxpayer v) Setting up taxes receivable and billing taxpayers (1) The tax roll (2) Recording taxes in the accounts vi) Recording tax collections vii) Collection of a government’s taxes by another unit viii) Taxes levied to finance next year’s budget ix) Taxes collected in advance x) Discounts on taxes xi) Enforcing the collection of taxes (1) Recording interest and penalties on taxes (2) Accounting for tax sales c) Property tax statements/schedules 6) Licenses and permits 7) Intergovernmental revenues a) Intergovernmental revenue classifications b) Intergovernmental revenue accounting i) Fund identification 1 ..

ii) Pass-through grants iii) Revenue recognition (1) Grant received before earned (2) Grant earned before received 8) Charges for services a) Interfund services vs. reimbursements b) Charges for services 9) Fines and forfeits 10) Investment earnings a) Valuation approaches and techniques b) Disclosure of inputs to fair value measurements c) Reporting investments in the financial statements 11) Miscellaneous revenues a) Escheats b) Private contributions 12) Selected nonrevenue fund balance increases a) Capital asset sales/losses b) Internal PILOTs c) Collateralized borrowings 13) Revenue reporting: GAAP vs. budgetary a) Balance sheet reporting related to unrecognized revenues 14) Changes in accounting principles and error corrections a) New GASB standards i) Prospective application ii) Retroactive application b) Error corrections 15) Concluding comments 16) Questions 17) Exercises 18) Problems 19) Cases 20) Harvey City Comprehensive Case 2 ..

CHAPTER LEARNING OBJECTIVES 5.1

Explain the broad revenue recognition guidance for governmental fund revenues.

5.2

Identify the four categories of nonexchange transactions and when to recognize the related assets and revenues.

5.3

Explain key differences between proprietary fund revenue recognition and governmental fund revenue recognition.

5.4

Identify and classify the most common sources of governmental fund revenues.

5.5

Apply the guidance for the levy, collection, revenue recognition, and enforcement of property taxes and other taxes.

5.6

Account for licenses and permits revenues.

5.7

Distinguish and account for the various types of intergovernmental revenues, including pass-through grants and other grants, entitlements, shared revenues, and payments in lieu of taxes.

5.8

Account for charges for services.

5.9

Account for fines and forfeits.

5.10

Account for and report governmental fund investment income in accordance with GASB Statements No. 31 and 72.

5.11

Describe classification of and accounting for various other types of governmental fund revenues.

5.12

Describe and account for other (nonrevenue) financing sources.

5.13

Describe both GAAP and budgetary reporting of revenues.

5.14

Account for and report changes in revenue accounting principles and error corrections.

CHAPTER OVERVIEW AND SYNOPSIS This chapter reviews, expands, and refines the governmental fund revenue accounting discussions of Chapters 2 and 4 and prepares the reader for the revenue accounting aspects of later governmental fund chapters (7 and 8). Accordingly, the chapter coverage includes:

3 ..

1. Revenue Definition and Recognition 2. Classification of Revenues 3. Discussions of Specific Types of Revenues a. Taxes b. Licenses and permits c. Intergovernmental revenues (with an emphasis on grants) d. Charges for services e. Fines and forfeits f. Investment income (e.g., GASB Statements No. 31 and 72) g. Other miscellaneous revenues 4. Other Revenue-Related Transactions, Events, and Entries a. Revenue budget revisions b. Changes in accounting principles Most of these topics can be studied fairly rapidly with emphasis being placed on the new topics and refinements of those introduced earlier. Taxes, intergovernmental revenues, and investment income likely are the topics that will be highlighted most. Indeed, the instructor might well omit certain pages or sections, scan others, and emphasize (study) only selected pages or sections.

CRITICAL OBJECTIVES The most critical learning objectives for this chapter include understanding: • •

• • •

The application of the modified accrual revenue recognition criteria to various types of governmental fund revenues, in both simple and complex situations.

The categories of nonexchange transactions and the general guidance for recognizing nonexchange revenues. (Illustration 5-3 should be helpful, but note that it deals only with classification of the transactions and when assets should be recorded—not with the timing of revenue recognition.)

Property tax accounting, enforcement, and revenue recognition—including interest and penalties and tax liens.

Accounting for and revenue recognition for the various types of intergovernmental revenues—particularly restricted grants.

Accounting for governmental fund investment income. (Illustrations 5-6 and 5-7 should be helpful.)

4 ..

QUESTIONS/EXERCISES/PROBLEMS—SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises Number of Problems

Number of Cases

11 10 (includes two exercises with 10 multiple choice questions each) 7 (includes journal entry problems, changes in accounting principles and error corrections, statement preparation, fair value analysis of investments, and a research/analysis problem) 3 (including Harvey City Comprehensive Case)

Exercises 5-3 and 5-5 These exercises focus on accounting for investment revenue.

Exercises 5-6, 5-7, and 5-10 Exercise 5-6 focuses on the recording of tax liens and the effects of such transactions on the general ledger. Exercises 5-7 and 5-10 are useful for teaching students about basic property tax accounting and revenue recognition (including accounting for discounts on taxes).

Exercise 5-8 Exercise 5-8 focuses on how revenue recognition affects governmental financial statements.

Exercise 5-9 Exercise 5-9 focuses on recording grant-related revenue transactions.

Problem 5-3 This is a comprehensive problem that requires students to apply governmental fund revenue recognition criteria to a wide variety of revenue sources in a number of situations.

It can be very useful in helping students fully understand the impact of the modified accrual revenue recognition criteria.

Problem 5-4 This is a useful problem on grants that illustrates accounting for grants when cash is received in advance (Situation A) and when the grantee is reimbursed by the grantor after incurring expenditures for the purpose of the grant (Situation B).

Problem 5-7 This research problem focuses on revenue-related discussions, financial statement presentations and disclosures, as well as statistical section data.

5 ..

Case 2-1 This is a short case that requires students to make journal entries for the City of Phoenix’s General Fund investments. It highlights fair value accounting for investments.

Case 2-2 This is a case that requires students to make journal entries for property tax–related transactions and to determine the amount of tax revenues and deferred revenues for the City of Des Moines, Iowa.

HARVEY CITY COMPREHENSIVE CASE Several issues regarding the Harvey City case are worth noting, as students are apt to ask questions regarding some of these matters: • • • •

•

•

The General Fund transactions should be completed in the GF worksheet if the student templates are used.

The Addiction Prevention Special Revenue Fund transactions should be completed in the AP SRF worksheet if the student templates are used.

General Fund transaction 22—the only entry required in this chapter is for the General Fund other financing source of $72,000. The information about the cost and accumulated depreciation will be used in Chapters 9 and 14.

General Fund transaction 23—the information about the $14,000 salable value of the property is used to determine that the government does not need to establish an allowance for uncollectible tax liens because the full amount owed, $12,800, should be received upon sale of the property.

General Fund transaction 24a—$144,000 of December 31, 20X4 delinquent taxes receivable and $34,400 of December 31, 20X4 interest and penalties receivable are not expected to be collected in the first 60 days of 20X5 but are expected to be collected at some point after the first 60 days. Therefore, the December 31, 20X4 balance of deferred revenues should be $178,400. The beginning balance was $100,000 per the trial balance and per the information given for transaction 24a.

Addiction Prevention Special Revenue Fund transactions 3 and 6—some students may ask if they should record a receivable and revenue at transaction 3 and record collection of the receivable at transaction 6, or whether they should simply wait until transaction 6 and record revenues when the reimbursement is applied for and received. The latter approach is used in the solution and the template provided, but the former is equally acceptable. Students who use the former approach may have to adjust the formula for computing certain balances in the preclosing trial balance columns of the worksheet.

6 ..

Additional questions for in-class or homework assignments 1. The taxes of the city of A are collected by County C, whereas city B collects its own taxes. In what respects will the tax accounting procedures for the two cities differ?

Suggested Solution City A will not prepare a tax roll and, in all probability, will not keep a record of transactions with individual taxpayers.

2. Distinguish between an entitlement and a reimbursement grant.

Suggested Solution In an entitlement, a government appropriates a fixed amount of money to be allocated among eligible state or local governments using some formula. The allocation of the resources might depend upon relative population of each eligible government relative to the others, for instance. Reimbursement grants are not allocated among governments in any predetermined formula and require that a recipient must first incur qualifying expenditures to be eligible for the grant.

3. The controller of the city of F, who is independent of the chief executive, purposefully underestimates revenues and publishes revenue statements that show actual revenues only. (a) How can one discover the controller’s practice? (b) The controller, when discovered in the practice, points with pride to the city’s solvency and states that his underestimates have kept the city from overspending. Comment.

Suggested Solution a. The controller’s practice may be discovered by comparing his estimates of revenues with the actual revenues. Attention may be called to his practice by the unnecessarily high balance in cash. b. A controller in the position described should not have the responsibility for maintaining the solvency of the city. His position is one of service to the city and he should provide the fullest and most accurate information possible to the chief executive in order that the chief executive may make recommendations and the city council may make decisions as to the level of revenues and expenditures.

4. What purposes do revenue statements serve in the management of a General Fund?

Suggested Solution Revenue statements are useful tools for planning the operations of the governmental unit and for evaluating past estimates and collections by comparisons. In some cases, individual departments are responsible for collections of certain types of revenues, and revenue control is exceedingly important.

7 ..

5. A recently elected city council member of the city of Lynne has returned from a two-day course on governmental accounting that she attended to help her understand the city’s financial statements and budgeting process. She is perplexed by a point the instructor emphasized during the course, however, and asks the city finance officer about it: “Why did the instructor keep harping about the need to distinguish between fund revenues and the revenues of the governmental unit? It seems to me that if the governmental unit as a whole has a net increase in resources, one or more of the funds should recognize net increases totaling the same amount. So, what’s the big problem?” Respond.

Suggested Solution The instructor probably lectured primarily on the need to distinguish transfers and bond issue proceeds from revenues. Also, he or she may have touched on reimbursements and indicated that transactions for interfund services provided and used are the only acceptable situations in which fund revenues and expenditures (or expenses, as appropriate) are reported even though there are no revenues, expenditures, or expenses of the government as a whole. The instructor probably emphasized these points because they are sometimes not applied properly in practice, resulting in recognizing revenues where none exists, and in double-counting existing revenues and expenditures or expenses.

6. What is arbitrage? Why is an awareness of arbitrage important to a government finance officer?

Suggested Solution “Arbitrage” is the excess interest earned when SLGs invest the proceeds of taxexempt debt issues (e.g., bonds) in investments that yield a higher rate of interest than the SLG incurs on its tax-exempt debt.

A government finance officer should be aware of the arbitrage provisions because the excess interest earned may have to be rebated to the federal government. Also, failure to comply with the federal arbitrage provisions could result in a 50% penalty being assessed or even in the SLG’s tax-exempt status being revoked with respect to the debt issue(s) involved.

Additional problems for in-class or homework assignments Problem 1 (Tax Penalties, Interest, and Discounts) Situation A

Interest and penalties assessed on late payments.

1. On January 1, a county levies property taxes for the year of $5,000,000; $50,000 of the property taxes are expected to be uncollectible.

2. Before the due date, the county collects $4,000,000 of taxes. Interest and penalties of 10% are assessed on the uncollected taxes on the due date; 5% of the interest and penalties are expected to be uncollectible.

8 ..

3. The county writes off $50,000 of delinquent taxes and $5,000 of interest and penalties receivable as uncollectible.

4. The remainder of the receivables is collected by year end.

Situation B

Discounts awarded for on-time payments.

1. On January 1, a city levies property taxes for the year of $5,500,000; $55,000 of the property taxes are expected to be uncollectible. Also, property owners who pay on or before the due date receive a discount of one-eleventh of their tax bill. It is expected that 80% of the taxes will be collected by the due date.

2. Taxes receivable of $4,400,000 are collected by the city on or before the due date. The balance of the taxes is declared delinquent.

3. The city writes off $55,000 of the delinquent taxes as uncollectible.

4. The remainder of the taxes is collected by year end.

(a) Prepare the journal entries to record the transactions for each preceding situation. (b) Compute the amount of revenues to be reported for the year for each situation.

Suggested Solution Problem 1(a) Situation A: #

Accounts

1.

Taxes Receivable—Current ...................................................

Allowance for Uncollectible Taxes—Current .................

Revenues—Taxes ............................................................

To record tax levy

5,000,000

Cash .......................................................................................

Taxes Receivable—Current ............................................

To record tax collections

4,000,000

Taxes Receivable—Delinquent ..............................................

Allowance for Uncollectible Taxes—Current ........................

Taxes Receivable—Current ............................................

Allowance for Uncollectible Taxes—Delinquent............

To reclassify delinquent taxes

1,000,000 50,000

Interest and Penalties Receivable on Taxes...........................

Allowance for Uncollectible Interest and Penalties ...............................................................

Revenues—Interest and Penalties...................................

To record assessment of interest and penalties

100,000

2a.

2b.

2c.

Dr.

9 ..

Cr.

50,000 4,950,000

4,000,000

1,000,000 50,000

5,000 95,000

#

Accounts

Dr.

3.

Allowance for Uncollectible Taxes—Delinquent ...................

Allowance for Uncollectible Interest and Penalties ..............

Taxes Receivable—Delinquent .......................................

Interest and Penalties Receivable on Taxes ...................

To write off uncollectible receivables

50,000 5,000

4.

Cash ($5,000,000 – $4,000,000 – $50,000 + $100,000 – $5,000) ...............................................

Taxes Receivable—Delinquent .......................................

Interest and Penalties Receivable on Taxes ...................

To record collections of receivables

Cr.

50,000 5,000

1,045,000 950,000 95,000

Situation B: #

Accounts

1.

Taxes Receivable—Current ...................................................

Allowance for Uncollectible Taxes—Current .................

Allowance for Discounts on Taxes ($5,500,000 × 80%) / 11 ...................................

Revenues—Taxes ($5,500,000 – $55,000 – $400,000) ...

To record tax levy

5,500,000

Cash Allowance for Discounts on Taxes ($4,400,000/11) ..............

Taxes Receivable—Current ............................................

To record tax collections less discounts awarded

4,000,000 400,000

Taxes Receivable—Delinquent ..............................................

Allowance for Uncollectible Taxes—Current ........................

Taxes Receivable—Current ............................................

Allowance for Uncollectible Taxes—Delinquent............

To reclassify delinquent taxes

1,100,000 55,000

Allowance for Uncollectible Taxes—Delinquent ...................

Taxes Receivable—Delinquent .......................................

To write off uncollectible receivables

55,000

Cash ($5,500,000 – $4,400,000 – $55,000)...........................

Taxes Receivable—Delinquent .......................................

To record collections of receivables

1,045,000

2a.

2b.

3.

4.

Dr.

10 ..

Cr.

55,000 400,000 5,045,000

4,400,000

1,100,000 55,000

55,000

1,045,000

Problem 1(b) Situation Collections of Property Taxes Levied for the Year: Before the due date ................................................................

After the due date ...................................................................

Tax Revenues ..................................................................

Interest and Penalties Revenues: Collections of interest and penalties revenues levied for the year ...........................................................

Total Revenues .......................................................................

11 ..

A

B

$4,000,000 950,000 4,950,000

$4,000,000 1,045,000 5,045,000

95,000 $5,045,000

— $5,045,000

Problem 2 (GL and SL Entries; Trial Balance) The city of Coralen’s Corner had the following transactions, among others, in 20X3: 1. The city council estimated that revenues of $212,000 would be generated for the General Fund in 20X3 as follows: Property tax .............................................. $120,000 City sales tax ............................................

40,000 Parking meters .........................................

8,000 Business licenses ......................................

20,000 Amusement licenses.................................

10,000 Fines and forfeitures ................................

12,000 Interest earnings .......................................

2,000 Total $212,000 2. Property taxes of $124,000 were levied by the council; $2,500 of these taxes is expected to be uncollectible and discounts of $1,500 are expected to be taken.

3. The following General Fund collections were made by the city: Property taxes—Current .......................... $105,000 City sales tax ............................................

41,000 Parking meters .........................................

7,900 Business licenses ......................................

29,000 Amusement licenses.................................

7,000 Fines and forfeitures ................................

12,200 Interest earnings .......................................

1,100 Proceeds of 5-year note ............................

25,000 Annual transfer from Special Revenue Fund 12,000 Total $240,200

4. Discounts of $1,400 were taken on property taxes before the discount period lapsed.

Of the remaining balance of 20X3 taxes, $12,000 is expected to be collected by February of 20X4; the remainder is expected to be collected in 20X5 or later, or not collected.

5. A 30-day $3,000 note, dated September 30, 20X3, was issued to provide cash needed temporarily in the General Fund. (a) Prepare general journal entries to record the 20X3 transactions in the General Ledger and in the Revenues Ledger accounts. (b) Prepare a trial balance of the Revenues Ledger after posting the entries in (a). Prove its agreement with the control accounts. (c) Prepare general journal entries to close the revenue accounts in the General Ledger and in the Revenues Ledger at the end of 20X3.

12 ..

Suggested Solution Problem 2(a) City of Coralen’s Corner General Fund General Journal #

Accounts

Dr.

1.

Estimated Revenues ..............................................................

Budgetary Fund Balance ...............................................

To record estimated revenues Revenues Ledger (Estimated Revenues): Property Tax .........................................................................

City Sales Tax .......................................................................

Parking Meters ......................................................................

Business Licenses ..................................................................

Amusement Licenses .............................................................

Fines and Forfeitures ............................................................

Interest Earnings ...................................................................

2.

Taxes Receivable—Current Allowance for Uncollectible Taxes—Current ................

Allowance for Discounts on Taxes ................................

Revenues ........................................................................

To record property tax levy

212,000 212,000

120,000 40,000 8,000 20,000 10,000 12,000 2,000 212,000 124,000 2,500 1,500 120,000

Revenues Ledger (Revenues): Property Tax .........................................................................

3.

Cash ......................................................................................

Taxes Receivable—Current ...........................................

Revenues ........................................................................

Other Financing Sources—Long-Term Notes Payable ..............................................................

Other Financing Sources—Transfer from Special Revenue Fund .................................................

To record cash receipts Revenues Ledger (Revenues): City Sales Tax .......................................................................

Parking Meters ......................................................................

13 ..

Cr.

120,000 240,200 105,000 98,200 25,000 12,000

41,000 7,900

#

Accounts

Dr.

Business Licenses ..................................................................

Amusement Licenses .............................................................

Fines and Forfeitures ............................................................

Interest Earnings ...................................................................

4a.

Allowance for Discounts on Taxes ........................................

Taxes Receivable—Current ...........................................

Revenues ........................................................................

To record discounts taken and correct earlier estimates of discounts and revenues

29,000 7,000 12,200 1,100 98,200 1,500 1,400 100

Revenues Ledger (Revenues): Property Tax .........................................................................

4b.

Revenues ...............................................................................

Deferred Revenues .........................................................

To reclassify as deferred revenues property tax not to be collected until 20X5. Note: These deferred revenues will be reported as Deferred Inflows of Resources in the General Fund Balance Sheet.

Revenues Ledger (Revenues): Property Tax .........................................................................

Calculation: Property Tax Levy .........................................

Less: Collections ..........................................

Discounts Taken .................................

Estimated Uncollectible .....................

Balance .........................................................

Expected to be Collected by February 20X4 Deferred Revenues (Inflows)..........................

5.

100 3,100 3,100

3,100

$124,000 (105,000) (1,400) (2,500) 15,100 12,000 $ 3,100

Cash ......................................................................................

Notes Payable ................................................................

To record issuing short-term note

14 ..

Cr.

3,000 3,000

Problem 2(b) General Fund Revenues Subsidiary Ledger Preclosing Trial Balance (Date, 20X3) Accounts

Dr.

Property Tax .....................................................................................

City Sales Tax ...................................................................................

Parking Meters...................................................................................

Business Licenses ..............................................................................

Amusement Licenses .........................................................................

Fines and Forfeitures ........................................................................

Interest Earnings ...............................................................................

General Ledger Control Accounts: Estimated Revenues ..............................................................

Revenues ...............................................................................

Cr.

3,000 1,000 100 9,000 3,000 200 900 7,000

10,200 3,200 Cr.

212,000 215,200 3,200 Cr.

Revenues Subsidiary Ledger (Not Required)

Property Tax .....................................

City Sales Tax ...................................

Parking Meters...................................

Business Licenses ..............................

Amusement Licenses .........................

Fines and Forfeitures ........................

Interest Earnings ...............................

Dr. Estimated Revenues 120,000 (1) 3,100 (4b) 40,000 (1) 8,000 (1) 20,000 (1) 10,000 (1) 12,000 (1) 2,000 (1)

15 ..

Cr. Revenues 120,000 (2) 100 (4a) 41,000 (3) 7,900 (3) 29,000 (3) 7,000 (3) 12,200 (3) 1,100 (3)

Dr. (Cr.) Balance 3,000 (1,000) 100 (9,000) 3,000 (200) 900 (3,200)

Problem 2(c) City of Coralen’s Corner General Fund General Journal General Ledger Dr. Cr.

Accounts Budgetary Fund Balance ...................................................................

Revenues ...........................................................................................

Estimated Revenues ..............................................................

Fund Balance ........................................................................

To close the revenue-related accounts Revenues Ledger: Property Tax .........................................................................

City Sales Tax .......................................................................

Parking Meters ......................................................................

Business Licenses ..................................................................

Amusement Licenses .............................................................

Fines and Forfeitures ............................................................

Interest Earnings ...................................................................

212,000 215,200 212,000 215,200

3,000 1,000 100 9,000 3,000 200 10,200

Proof:

$10,200 – $7,000 = $ 3,200

Compare to General Ledger Accounts: Revenues $215,200 Estimated Revenues ..

212,000 Difference $ 3 ,200

16 ..

900 7,000

Problem 3 (Tax Liens and Tax Sales) On February 4, 20X6, selected accounts for the town of Haysi General Fund had the following balances: Debit Credit Taxes Receivable—Delinquent ................................. $83,000 Allowance for Uncollectible Taxes—Delinquent $26,500 Interest and Penalties Receivable...............................

4,000 Allowance for Uncollectible Interest and Penalties 1,500 Prepare general journal entries to record the following transactions in the General Ledger of the town of Haysi General Fund: 1. Haysi formalized tax liens against properties with delinquent taxes of $9,000 and related interest and penalties of $1,000. The estimated salable value of the properties was $11,500.

2. Haysi sold the properties at a tax sale for $11,000. Costs of selling property totaled $400.

3. How would your answers to items (1) and (2) differ if the estimated fair value of the properties was $9,000 and the property sold for $9,400?

4. How would your answers to items (1) and (2) differ if the estimated fair value of the property was $9,000 and the city of Haysi decided to use it for a playground development?

Suggested Solution Town of Haysi General Fund General Journal Ref 1.

2.

Accounts

Dr.

Tax Liens Receivable ............................................

Taxes Receivable–Delinquent .......................

Interest and Penalties Receivable .................

To record formalization of tax liens (No Allowance for Uncollectible Tax Liens needs to be established)

10,000

Cash .....................................................................

Tax Liens Receivable ....................................

Cash (Costs of Sale) ......................................

Due to Property Owner/Property Owner Trust Fund ......................................

To record sale of property, selling costs, and amount due original property owner

11,000

17 ..

Cr.

9,000 1,000

10,000 400 600

Ref 3a(1) 3a(2)

3b.

4a.

4b.

Accounts

Dr.

Cr.

Same as (1).

Allowance for Uncollectible Taxes—Delinquent .....................................

Allowance for Uncollectible Interest and Penalties ................................

Allowance for Uncollectible Tax Liens ....................................................

To reclassify allowance accounts to provide for estimated $l,000 loss on tax liens *$44 = $1,000 × (($4,000 ‒ $1,500) ÷ ($83,000 ‒ $26,500)) Cash .....................................................................

Allowance for Uncollectible Tax Liens ................

Tax Liens Receivable ....................................

Cash (Costs of Sale) ......................................

To record sale of property, selling costs, and loss

956 44* 1,000

9,400 1,000 10,000 400

Same as (3)(a)(1) and (3)(a)(2) Expenditures .........................................................

Allowance for Uncollectible Tax Liens ................

Tax Liens Receivable ....................................

To record expenditure for fair market value of tax lien property retained for use by the town for playground development

18 ..

9,000 1,000 10,000

Problem 4 (GL and SL Entries) The following Special Revenue Fund transactions and events occurred in Annette County during 20X1.

1. The annual budget adopted included these estimated revenues: Property taxes................................................. $ 500,000 Payment in lieu of taxes (from the state) .......

200,000 Federal grants .................................................

150,000 State grants .....................................................

50,000 Interest............................................................

10,000 Other ..............................................................

90,000 $1,000,000 2. Property taxes of $520,000 were levied for 20X1. It was estimated that 3% discounts for early payment would total $8,000 and that $12,000 of the taxes would never be collected; but the balance is expected to be available to finance 20X1 expenditures.

3. Property taxes billed at $280,000 in transaction 2 were collected within the 3% discount period.

4. $50,000 cash was received (drawn down) on a restricted federal grant for which no expenditures had been made.

5. A restricted state grant of $60,000 was awarded, but no related expenditures have been made, nor has any grant cash been received.

6. Qualifying expenditures incurred were vouchered: (a) $45,000 for the federal grant program (transaction 4) and (b) $30,000 for the state grant program. The federal grant program reimburses 80% of qualifying costs, whereas the state grant pays cost plus a 20% overhead allowance.

7. An annual payment in lieu of property taxes from the state was received, $300,000.

The property taxes that would be paid if these properties were taxable would be $225,000.

8. The revenue estimates in the original budget adopted (transaction 1) were revised.

The estimate for federal grants was reduced by $5,000 and interest earnings were increased by $2,000.

9. It was discovered that the 20X1 beginning Accounts Receivable balance was overstated by $15,000 and that $4,000 of 20X1 revenues had improperly been credited to the Federal Grants revenue account rather than to the State Grants revenue account.

19 ..

10. At the end of 20X1, the following information was learned in the adjusting entry process: a. Some $30,000 of collectible 20X1 property tax receivables will not be collected until mid-20X2. b. Additional qualifying expenditures of $10,000 on the state grant program (transactions 5 and 6) have been incurred and recorded, but no related revenues have been recognized. c. Unrecorded interest earnings accrued at year end were $1,000.

Prepare the general journal entries to record these 20X1 transactions and events in the General Ledger, Revenues Subsidiary Ledger, and Expenditures Subsidiary Ledger of the Special Revenue Fund of Annette County.

Suggested Solution Annette County Special Revenue Fund General Journal 20X1 Fiscal Year Ref

Accounts

Dr.

1.

Estimated Revenues .......................................................

Budgetary Fund Balance ........................................

To record budget Revenues Ledger (Estimated Revenues): Property Taxes ...............................................................

Payment in Lieu of Taxes ...............................................

Federal Grants ...............................................................

State Grants ...................................................................

Interest ...........................................................................

Other ..............................................................................

2.

Taxes Receivable—Current ...........................................

Allowance for Discounts on Taxes .........................

Allowance for Uncollectible Taxes—Current ........

Revenues .................................................................

To record property tax levy Revenues Ledger (Revenues): Property Taxes ...............................................................

20 ..

Cr.

1,000,000 1,000,000

500,000 200,000 150,000 50,000 10,000 90,000 1,000,000 520,000 8,000 12,000 500,000

500,000

Ref

Accounts

Dr.

3.

Cash ($280,000 × 97%) .................................................

Allowance for Discounts on Taxes .................................

Revenues ........................................................................

Taxes Receivable—Current ....................................

To record collection of property taxes and reduction of revenue by discounts taken in excess of allowance

271,600 8,000 400

Revenues Ledger (Revenues): Property Taxes ...............................................................

4.

Cash ...............................................................................

Unearned Revenues (Federal Grant) .....................

To record cash drawn down in advance of incurring expenditures

5.

No entry. (The state grant has been awarded but is unearned—no related expenditures have been incurred and no grant cash has been received.)

6a(1)

Expenditures ..................................................................

Vouchers Payable ...................................................

To record federal grant expenditures Expenditures Ledger (Expenditures): Federal Grant ................................................................

6a(2)

Unearned Revenues (Federal Grant) ............................

Revenues .................................................................

To record Federal grant revenues ($45,000 × 80% = $36,000)

280,000

400 50,000 50,000

45,000 45,000

45,000 36,000 36,000

Revenues Ledger (Revenues): Federal Grants ...............................................................

6b(1)

Expenditures ..................................................................

Vouchers Payable ...................................................

To record state grant expenditures Expenditures Ledger (Expenditures): State Grant .....................................................................

21 ..

Cr.

36,000 30,000 30,000

30,000

Ref

Accounts

Dr.

6b(2)

Due from State ...............................................................

Revenues .................................................................

To record state grant revenues earned by Incurring qualifying expenditures ($30,000 × 120% = $36,000)

36,000 36,000

Revenues Ledger (Revenues): State Grant .....................................................................

7.

Cash ................................................................................

Revenues .................................................................

To record payment in lieu of taxes and operating transfer for amount in excess of taxes that would be paid if not exempt

36,000 300,000 300,000

Revenues Ledger (Revenues): Payment in Lieu of Taxes from State ..............................

8.

Estimated Revenues .......................................................

Budgetary Fund Balance ...............................................

Estimated Revenues ................................................

To record revenue estimate revisions Revenues Ledger (Estimated Revenues): Interest ...........................................................................

Federal Grants ...............................................................

9a.

9b.

300,000 2,000 3,000 5,000

2,000 5,000

Prior Year Error Correction .........................................

Accounts Receivable ...............................................

To record correction of accounts receivable overstatement of prior year

15,000

Revenues ........................................................................

Revenues .................................................................

To correct classification error in recording current year revenues

4,000

Revenues Ledger (Revenues): Federal Grants ...............................................................

State Grants ...................................................................

22 ..

Cr.

15,000

4,000

4,000 4,000

Ref

Accounts

Dr.

10a.

Revenues ........................................................................

Deferred Revenues...................................................

To record property tax revenues deferred because of collection delay Note: Deferred (unavailable) Revenues will be reported as Deferred Inflows of Resources on the SRF Balance Sheet.

30,000

Revenues Ledger (Revenues): Property Taxes ...............................................................

10b.

Due from State ...............................................................

Revenues .................................................................

To accrue state grant revenues earned by qualifying expenditures incurred ($10,000 × 120% = $12,000)

30,000

30,000 12,000 12,000

Revenues Ledger (Revenues): State Grants ...................................................................

10c.

Accrued Interest Receivable ..........................................

Revenues .................................................................

To record interest earned Revenues Ledger (Revenues): Interest ...........................................................................

23 ..

Cr.

12,000 1,000 1,000

1,000

Problem 5 (Property Tax Levy Computation) The comptroller of the city of Helmaville recently resigned. In his absence, the deputy comptroller attempted to calculate the amount of money required to be raised from property taxes for the General Fund for the fiscal year ending June 30, 20X7. The calculation is to be made as of January 1, 20X6, to serve as a basis for setting the property tax rate for the following fiscal year. The mayor asked you to review the deputy comptroller’s calculations and obtain other necessary information to prepare a formal statement for the General Fund which will disclose the amount of money required to be raised from property taxes for the fiscal year ending June 30, 20X7. Following are the calculations prepared by the deputy comptroller:

City resources other than proposed tax levy: Estimated General Fund working balance, January 1, 20X6 .............

Estimated receipts from property taxes (January 1, 20X6–June 30, 20X6) Estimated revenue from investments (January 1, 20X6–June 30, 20X7) Estimated proceeds from sale of general obligation bonds in August 20X6

General Fund requirements: Estimated expenditures (January 1, 20X6–June 30, 20X6) ...............

Proposed appropriations (July 1, 20X6–June 30, 20X7) ...................

$ 352,000 2,222,000 442,000 3,000,000 $6,016,000

$1,900,000 4,300,000 $6,200,000

Additional information: 1. The General Fund carryover balance required by the city council at July 1, 20X7, is $175,000.

2. Property tax collections are due in March and September of each year. Your review indicates that during the month of February 20X6, estimated expenditures will exceed available funds by $200,000. Pending collection of property taxes in March 20X6, this deficiency will have to be met by the issuance of 30-day tax anticipation notes of $200,000 at an estimated interest rate of 9% per annum.

3. The proposed general obligation bonds will be issued by the City Water Enterprise Fund and will be used for the construction of a new water-pumping station.

Prepare a statement as of January 1, 20X6, calculating the property tax levy required for the city of Helmaville General Fund for the fiscal year ending June 30, 20X7. (Hint: Requirements ‒ Resources Other Than Property Tax Levy = Amount of the Required Levy.) (AICPA, adapted.)

24 ..

Suggested Solution City of Helmaville General Fund Statement of Property Tax Levy Required For the Fiscal Year Ending June 30, 20X7 As of January 1, 20X6 Requirements: Estimated expenditures (January 1, 20X6–June 30, 20X6) ......................................

Repayment of tax anticipation notes and interest (March 20X6). .......................................................

Proposed appropriations (July 1, 20X6– June 30, 20X7) ....................................................................

General Fund working balance required for July 1, 20X7 ..................................................................

Total requirements ..............................................................

Resources other than property tax levy: Estimated balance in fund January 1, 20X6 ..............................

Estimated receipts from property taxes (January 1, 20X6–June 30, 20X6) ......................................

Estimated revenue from investments (January 1, 20X6–June 30, 20X7) 442,000 Issuance of tax anticipation notes (February 20X6) . ................................................................

Total resources other than property tax levy .............................

Property tax levy required for fiscal year ending June 30, 20X7 ...............................................................

$1,900,000 201,500 * 4,300,000 175,000 $6,576,500

$ 352,000 2,222,000

200,000 * 3,216,000

$3,360,500

*Alternatively, only the $1,500 interest expenditure may be included under “requirements” since the resources from issuance of the TANs offset the requirements for repayment of the TANs. Note: The $3,000,000 bond proceeds are not included in this statement because both the bond proceeds and the bond liability will be accounted for in the City Water Enterprise Fund.

25 ..

CHAPTER SIX EXPENDITURE ACCOUNTING—GOVERNMENTAL FUNDS (Pages 220–258) CHAPTER SIX OUTLINE 1) Expenditure definition and recognition a) Capital outlay expenditures b) Debt service expenditures c) Intergovernmental expenditures d) Current operating expenditures e) Inventories and prepayments f) Expenditure recognition summary 2) Expenditure accounting controls and procedures a) Personal services i) Pension cost and OPEB cost expenditure recognition (1) Defined contribution plans (2) Defined benefit plans b) Materials and supplies i) Accounting for purchases of materials and supplies ii) Accounting for use of materials and supplies iii) Consumption method (1) Perpetual system (2) Periodic system iv) Purchases method c) Other services and charges i) Prepayments ii) Capital leases and certificates of participation 3) Adjusting entries a) Encumbrances b) Debt service c) Claims and judgments i) GASB standards ii) Adjusting entries—claims and judgments iii) Insurance, self-insurance, and no insurance (1) Amount estimable, but settlement delayed (2) Not estimable in 20X1; settled and received in 20X2 (3) Self-insured plans d) Compensated absences i) Adjusting entries—compensated absences ii) Rationale e) Pension/OPEB plan expenditures 1 ..

4) Expenditure reporting: GAAP vs. budgetary 5) Changes in accounting principles a) Alternative principles b) New GASB standards 6) Error correction 7) Concluding comments 8) Questions 9) Exercises 10) Problems 11) Cases 12) Harvey City Comprehensive Case

CHAPTER LEARNING OBJECTIVES 6.1

Define expenditures as used in governmental fund accounting and reporting, and interpret and apply governmental fund expenditure recognition guidance.

6.2

Account for personal services costs, materials and supplies (purchases and consumption methods), prepayments, and capital leases in governmental funds.

6.3

Account for typical debt service and capital outlay expenditures, claims and judgments, compensated absences, and pension and other postemployment benefit expenditures in governmental funds.

6.4

Describe key differences between GAAP-based expenditure reporting and budgetary reporting for expenditures.

6.5

Account for and report changes in expenditure accounting principles and error corrections in governmental funds.

2 ..

CHAPTER OVERVIEW AND SYNOPSIS This chapter reviews, expands, and refines the governmental fund expenditure accounting discussions of Chapters 2 and 4 and prepares the reader for the expenditure accounting aspects of later governmental fund chapters (7 through 8).

Expenditure definition and recognition—both a review of coverage in previous chapters and an introductory overview of this chapter—can be covered rapidly, as can expenditure accounting controls.

Expenditure accounting controls and procedures contains much new and important expenditure accounting coverage—so it will be emphasized by most instructors. Finally, some courses will cover all of the remaining topics thoroughly, whereas other instructors will scan or omit some sections (e.g., classifications, closing entries, continuing appropriations) and emphasize others (e.g., annual appropriations, adjusting entries).

CRITICAL OBJECTIVES The topics likely to require the most attention in this chapter include: • • • •

The basic expenditure recognition rule and exceptions to that rule.

Accounting for inventory under the purchases method and under the consumption method.

Accounting for capital leases.

Accounting for pension/OPEB expenditures, claims and judgments, and compensated absences.

Some specific suggestions for review of the material in this chapter include the following: Accounting for Materials and Supplies Illustration 6-3 should be helpful as you discuss and illustrate this topic. The primary difficulty for most students relates to the requirement that the purchases method requires an asset to be reported for costs that have already been reported as expenditures.

Claims and Judgments, Compensated Absences, and Pensions/OPEB Emphasize that the distinction between the current and noncurrent portion of the liabilities for claims and judgments, compensated absences, and pensions is critical in both General Fund accounting and General Capital Assets (GCA) accounts and General Long-Term Liability (GLTL) accounts accounting for these expenditures and liabilities. Only the portion of the liability that is reported as a fund liability affects expenditure recognition in the current period.

The remainder of the liability is GLTL and is not reported as expenditures in the current period.

Only that portion of the liability that is normally expected to be liquidated with expendable available financial resources (i.e., that mature, or come due for payment during the period) are

3 ..

reported as fund expenditures and fund liabilities. Changes in the GLTL do not affect expenditure recognition for the current period.

Note that this same guidance affects governmental fund accounting for the expenditures and liabilities resulting from OPEB, special termination benefits, and landfill closure and postclosure costs.

The GASB has issued significant new standards on accounting and reporting for defined benefit pension plans and other postemployment benefit (OPEB—primarily retiree healthcare) plans and on government employers’ reporting of related pension and OPEB expenditures, expenses, and liabilities.

These standards replace an accounting and reporting philosophy that was tied directly to a relatively broad subset of specific approaches for pension and OPEB funding by employer governments with one that eliminates this direct tie between the accounting and reporting requirements and a government’s funding (financing) decisions. The new standards specify a specific approach to measuring the net pension liability and net OPEB liability that a government must report, regardless of the funding method used. Likewise, the pension expense and OPEB expense to be reported in government-wide financial statements and in proprietary and fiduciary fund financial statements follow specific guidelines regardless of the funding method used. A government’s actuarially required contribution, or ARC, does not directly affect the measurement of pension and OPEB amounts under the new standards. Also, all defined benefit pension and OPEB plans are subject to essentially the same guidance, whereas different guidance applied in the past for governments participating in certain types of multi-employer-defined benefit plans referred to as cost-sharing plans.

In government-wide, proprietary fund, and fiduciary fund financial statements, most employers must report a net pension liability equal to the difference between their total pension liability and the related pension plan fiduciary net position. The total pension liability is the present value of the future estimated pension benefit payments earned to date by a government’s employees. The liability is measured using the entry age actuarial cost method applied on an individual employee basis and using a level percentage of payment. Fiduciary net position of a pension plan equals the pension plan assets and deferred outflows of resources less the pension plan liabilities and deferred inflows of resources—reported per the guidance in GASB Statement No. 67, as amended, and discussed in Chapter 12. (Measurement of the net OPEB liability, total OPEB liability, and OPEB plan fiduciary net position largely parallel that for the equivalent pension amounts.)

Pension expense is reported in these financial statements equal to the change in the net pension liability during the measurement period reported on for pensions in the financial statements.

However, recognition of changes in the net pension liability are deferred for amounts related to: •

Differences between actual and expected earnings on pension plan assets each year

4 ..

•

Changes in the total pension liability for (a) changes in actuarial assumptions such as mortality rates and employee turnover and (b) differences between such assumptions and actual experience

The total amount of pension expense, net pension liability, and deferred outflows of resources and deferred inflows of resources must be allocated among proprietary funds, fiduciary funds, and general long-term liabilities. This allocation is usually based on the proportions of covered employee payroll for the different activities. (The measurement and reporting of OPEB expense and related deferred amounts largely parallel those for pensions.)

In governmental funds, expenditures are reported for contributions paid to the pension plan adjusted for the change during the year in the amount of net pension liability that is due and payable. Only the portion of the net pension (or OPEB) liability that is considered due and payable1 is reported in these funds. Normally, the due and payable net pension liability is zero for pensions and does not differ from past amounts for either pensions or OPEB. Therefore, in spite of the significant changes to the total liabilities and the expenses that governments report for pensions and OPEB, almost all governments will report the same amounts of pension expenditures and OPEB expenditures and related liabilities in governmental funds under the new standards as under the previous standards.

To illustrate, assume that a government’s net pension liability at the: • •

beginning of the fiscal year, which is also assumed to be the beginning of the government’s measurement period for pensions, is $15 million (total pension liability is $37 million and fiduciary net position is $22 million) and at the end of the fiscal year is $14 million (total pension liability is $39 million and fiduciary net position is $25 million).

Also, assume that contributions to the pension plan from the General Fund for the year were $912,800, that actual earnings on pension plan investments were $1.2 million more than expected, the plan’s actual experience related to actuarial assumptions resulted in liabilities that were $175,000 less than expected, and the total pension liability measurement increased by $830,000 during the year because of changes in benefit assumptions. None of the net pension liability is due and payable—either at the beginning or the end of the year. Also, no pension-related deferred outflows of resources or deferred inflows of resources are reported in governmental funds.

For measuring and reporting pension expenditures in the General Fund, only the two boldfaced sentences in the preceding paragraph have an impact. Pension expenditures will equal the $912,800 of General Fund contributions because the due and payable portion of the net pension 1

A net pension liability (or net OPEB liability) is due and payable only to the extent that pension plan assets (or OPEB plan assets) are less than pension (or OPEB) benefits due and payable. This is extremely unusual for a pension plan. There is a possibility that the GASB will change this determination of the due and payable amount in an Omnibus standard in 2017, however, having zero due and payable net pension liability still would be the norm.

5 ..

liability was zero at both the beginning of the year and the end, which is normal. The General Fund entry to record the payments to the pension plan is: Expenditures ....................................................................

Cash............................................................................

To record pension expenditures.

$912,800 $912,800

The literature does not establish any deferred outflows of resources or deferred inflows of resources that may be reported in governmental funds. In the government-wide financial statement, pension expense, the net pension liability, and related deferred outflows of resources and deferred inflows of resources must be reported as discussed in Chapter 9. Note that given the same information for OPEB as illustrated here for pensions, the reporting would be the same.

Capital Leases Illustration 6-4 should be helpful in explaining capital leases. Also, because accounting for capital leases is to be the same as accounting for an installment purchase of a capital asset, it can be helpful for students to go through an example of issuing a long-term note and a subsequent purchase of a capital asset with the proceeds of the long-term note plus some additional cash.

For example, assume that a government issues a 5-year, 10%, $100,000 note payable to raise $100,000 for a General Fund department. The note requires annual payments of one-fifth of $20,000 principal plus interest at the end of each year. The government uses the $100,000 to help finance the purchase of $120,000 of computers for the department.

The entries are: Cash

................................................................................................

Other Financing Sources—Note Proceeds.............................

100,000

Expenditures—Capital Outlay ...........................................................

Cash........................................................................................

120,000

100,000

120,000

The effects on the financial statements are a $20,000 lower cash balance in the balance sheet, expenditures for capital outlay of $120,000, and other financing sources of 100,000 in the statement of revenues, expenditures, and changes in fund balance.

Capital leases are accounted for in a manner that has the equivalent financial reporting results.

Therefore, if the government entered into a capital lease for computers with a capitalizable cost (present value of minimum lease payments) of $120,000, including an initial down payment of $20,000, the entries are as follows: Expenditures—Capital Outlay ...........................................................

Cash........................................................................................

Other Financing Sources—Capital Leases ............................

6 ..

120,000 20,000 100,000

The cash reported in the balance sheet is reduced by $20,000, and the statement of revenues, expenditures, and changes in fund balance includes capital outlay expenditures of $120,000 and other financing sources of $100,000.

Subsequent payments are debt service on general long-term liabilities in both cases and should be recognized when due.

QUESTIONS/EXERCISES/PROBLEMS/CASES—SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises

Number of Problems

Number of Cases

10 6 (includes one exercise with 8 multiple-choice questions, as well as a case discussion exercise with multiple scenarios for teaching points) 10 (includes one problem with 10 multiple-choice questions, expenditure journal entry problems, and two research and analysis problems) 3 (one case for the State of Alaska related to capital leases and certificates of participation, one case for New York City related to OPEB and claims and judgments, and the Harvey City Comprehensive Case)

The assignment material for Chapter 6 contains exercises or problems addressing each of the key topics of the chapter, as noted below.

Accounting for Materials and Supplies • Exercise 6-6 is a simple exercise that provides a direct comparison of the purchases and consumption methods.

• Problem 6-2 requires the application of the purchases method of accounting for materials and supplies, as well as accounting for capital outlay expenditures.

• Problem 6-3 requires the application of the consumption method of accounting for materials and supplies, as well as accounting for capital outlay expenditures.

• Problem 6-6 includes an overall overview of accounting for materials and supplies.

Accounting for Capital Leases • Exercise 6-4 is a simple exercise that addresses accounting for a capital lease at the inception of the lease and for subsequent lease payments that are reported as debt service expenditures.

• Problem 6-4 includes both a capital lease and purchase of a capital asset by issuing long-term debt. The best solution for recording the purchase of the capital asset by issuing long-term debt (along with a down payment) is to record capital outlay expenditures for the purchase

7 ..

•

price and to report other financing sources equal to the note issued. This parallels accounting for a capital lease.

Problem 6-6 also includes capital lease transactions.

Accounting for Claims and Judgments, Compensated Absences, and Pensions • Exercise 6-5 requires computing pension expenditures in several situations.

• Problem 6-5 requires entries for compensated absence transactions over three years. It emphasizes the need to distinguish between the current and long-term portion of the liability for compensated absences in terms of expenditure recognition. By requiring students to determine what difference it would make if the transactions were claims and judgments transactions or pension transactions, the problem highlights the parallels among these three important topics.

• Problem 6-6 includes transactions involving claims and judgments, as well as pensions.

Problems Addressing Various Expenditure Accounting Topics • Exercise 6-3, Problems 6-1, 6-6, and 6-8 involve accounting and/or reporting for a variety of expenditure transactions.

Problems Requiring Statement Preparation • Problem 6-8 requires the recording of a variety of journal entries, as well as the preparation of financial statements.

HARVEY CITY COMPREHENSIVE CASE Several items of information regarding the case may be useful as students ask questions: 1) General Fund transaction 25—the materials and supplies received were ordered in Transaction 8 in Chapter 4.

2) General Fund transactions 25 and 26—Harvey City uses the consumption method of accounting for materials and supplies, per transaction 5 in Chapter 4.

3) General Fund transactions 27 and 28—General capital assets and general long-term liabilities for these transactions will be recorded in the General Capital Assets accounts and the General Long-Term Liabilities accounts in Chapter 9. Only the General Fund entries are to be recorded at this time.

4) General Fund transaction 29—this is an interfund services transaction, not a transfer.

8 ..

Additional questions for in-class or homework assignments 1. What expenditures-related General Ledger control accounts might be used in the General Fund?

Suggested Solution The expenditures-related control accounts in the General Fund are Vouchers Payable, Appropriations, Expenditures, and Encumbrances. Vouchers Payable may be considered an expenditures-related control account—even though it does not control the Expenditures Subsidiary Ledger accounts—in view of the role of the voucher system in expenditure control.

2. The appropriations of a certain government for current expenditures lapse at the end of the fiscal year, whereas appropriations for capital outlay lapse two years later.

Discuss the desirability of this dual arrangement.

Suggested Solution The purchase or construction of major capital outlay items may require a longer lead time than current expenditure purchases. This lead time may be two or more years.

For this reason, it may be advisable not to have the appropriations for capital outlay lapse at the end of the year. Thus, an arrangement such as described here appears to be reasonable and workable.

3. A governmental unit takes advantage of purchase discounts by paying its bills promptly.

Should the full purchase price be recorded in the records with the discounts treated as revenues, or should the purchases be recorded at their net cost (i.e., after deduction of discounts)? Why? Suggested Solution The discounts should not be shown as revenues—since discounts are not revenues, but are merely a reduction of expenditures. Moreover, the purchases should be recorded at their net cost because otherwise (1) it will be necessary to increase appropriations sufficiently to cover the amount of estimated discounts and (2) both appropriations and expenditures chargeable thereto will be overstated.

4. Some argue that General Fund payments to a pension fund for the city’s share of pension fund contributions should be charged to the departments in which the covered employees work. Do you agree? Explain.

Suggested Solution It is desirable to charge such contributions as expenditures of the departments in which the covered employees work because these contributions are of the same nature as salary expenditures and should therefore be reflected as part of the cost of the particular activities in which the covered employees are engaged. However, because of the additional cost and work involved in making the necessary allocations 9 ..

for this purpose, such allocations may not be made and the municipality’s contributions thus may be shown, instead, as a single amount as a matter of expediency.

5. In one municipality, vouchers must be approved not only by the finance officer but also by the finance committee of the city council. Is the approval of the finance committee desirable? Give reasons.

Suggested Solution The approval of all members of the finance committee is not necessary unless legally required. Ordinarily, the members of the committee do not have the background to determine the propriety of every voucher. Even if they have the background, they usually do not have the time necessary to make an adequate preaudit. Consequently, they rely on the finance officer’s preaudit. The requirement does not provide any additional protection, burdens the committee with unnecessary work, and sometimes leads to misappropriation of funds since some of the audit checks relied on—namely, those of the finance committee—are really not effective and merely give a false sense of security.

6. Explain how you would decide whether to encumber a planned expenditure.

Suggested Solution Encumbering is a process of control to prevent overexpenditure of appropriation authority. If a given type of expenditure is controllable by other means, then no encumbrance recording is necessary. For example, in governmental units there are numerous controls over the personal service expenditures and debt service expenditures. However, there usually are not other controls over purchases of inventories and supplies or contracting for goods and services, so these types of expenditures are controlled by encumbrance procedures.

10 ..

Additional problems for in-class or homework assignments Problem 1 (Budgetary Entries, Balances) The following General Fund appropriations were made for 20X4 by the city of Dulaney: City Council ...............................................................

Mayor .........................................................................

Courts .........................................................................

City Clerk ...................................................................

Department of Finance ...............................................

Department of Police .................................................

Department of Fire .....................................................

Department of Public Works .....................................

Retirement of Long-Term Notes ................................

Interest........................................................................

$ 15,000 15,000 30,000 15,000 30,000 75,000 60,000 30,000 15,000 15,000 $300,000

Estimated revenues are $350,000; the council designated $30,000 for contingencies.

The following appropriations revisions and additional appropriations were subsequently authorized: Reductions (from): City Council City Clerk Finance Department Interest

Increases (to): Fire Department Mayor Public Works Department Courts

Designated for: Police Department Fire Department Courts Public Works Department

Amount $1,500 2,200 750 3,000

Amount $ 750 1,500 1,500 1,000

(a) Prepare the General Fund (GF) journal entry necessary to record (1) the adoption of the budget, showing both the General Ledger and the Expenditures Subsidiary Ledger accounts, and (2) the designation of fund balance for contingencies. (b) Prepare the GF journal entry to record the revised and additional appropriations, showing both the General Ledger and the Subsidiary Ledger accounts involved. (c) Prepare a statement showing the appropriations balances after the appropriations revisions and additional appropriations.

11 ..

Suggested Solution Problem 1 (a) #

Accounts

Dr.

(1)

Estimated Revenues ..................................................

Appropriations ...............................................................

Budgetary Fund Balance ...............................................

To record estimated revenues and appropriations

350,000

Expenditures Ledger (Appropriations): City Council ..........................................................................

Mayor ....................................................................................

Courts ....................................................................................

City Clerk ..............................................................................

Department of Finance .........................................................

Department of Police ............................................................

Department of Fire ...............................................................

Department of Public Works .................................................

Debt Service—Retirement of Long-Term Notes ....................

Debt Service—Interest ..........................................................

(2)

Cr.

300,000 50,000

15,000 15,000 30,000 15,000 30,000 75,000 60,000 30,000 15,000 15,000 300,000

No entry. Governments are not likely to attempt to maintain formal fund balance accounts for each of the fund balance reporting classifications because governments do not utilize the classifications for budgetary control purposes. The amounts to be reported for each classification will be determined by analysis when preparing the financial statements.

Moreover, some governments set aside a portion of their resources in case (1) emergency or other unexpected needs arise or (2) budgeted revenues are not realized. These may be referred to as stabilization arrangements, reserves for contingencies, emergencies, or natural disasters, or various other names. Regardless of what they are called, most stabilization arrangement amounts must be reported as part of unassigned fund balance.

They are disclosed in the notes to the financial statements but can only be included in restricted fund balance or committed fund balance if the government establishes nonroutine and specific criteria for when the resources may be used. “To be used only for emergencies” is not considered specific enough to meet the criteria. Stabilization amounts are never reported as assigned fund balance.

12 ..

Problem 1 (b) Accounts

Dr.

Appropriations ......................................................................

Appropriations ...............................................................

To record transfer of appropriations

4,750

Expenditures Ledger (Appropriations): City Council ..........................................................................

City Clerk ..............................................................................

Finance Department ..............................................................

Debt Service—Interest ..........................................................

4,750

750 1,500 1,500 1,000 4,750

Fire Department.....................................................................

Mayor ....................................................................................

Public Works Department ......................................................

Courts ....................................................................................

750 1,500 1,500 1,000 4,750

Problem 1 (c) City of Dulaney Statement of Appropriations for 20X4 (After Budget Revisions) Organization Unit City Council ..........................................................................

Mayor ....................................................................................

Courts ....................................................................................

City Clerk ..............................................................................

Finance Department ..............................................................

Police Department .................................................................

Fire Department.....................................................................

Public Works Department ......................................................

Debt Service—Retirement of Long-Term Notes ....................

Debt Service—Interest ..........................................................

Total

13 ..

Cr.

Amount $ 14,250 16,500 31,000 13,500 28,500 75,000 60,750 31,500 15,000 14,000 $300,000

Problem 2 (General and Subsidiary Ledger Entries; Reconciliation) The city of Beverly Heights General Fund had the following transactions, among others, in 20X7: 1. Appropriations were made as follows: Personal Services .................................................

Contractual Services ............................................

Materials and Supplies .........................................

Other ....................................................................

Capital Outlay—Patrol Cars ................................

$111,400 8,700 8,500 12,000 21,000 $161,600

2. General Fund cash, $2,000, was paid to a Debt Service Fund to provide for debt service.

3. A long-term note of $8,300, including interest of $1,300, and a short-term note of $2,500 (including $150 interest) came due. The Beverly Heights Council had not made appropriations for these items. The necessary action was taken, and the notes and interest were paid.

4. General Fund cash, $100,000, was paid to an Enterprise Fund to finance construction of a new auxiliary generator, and $50,000 was contributed to establish a central motor pool facility. The Enterprise Fund will repay the General Fund in 10 equal annual installments beginning January 1, 20X9.

5. The council increased the appropriation for personal services by $500.

6. Materials and supplies are accounted for on the purchases method. The beginning inventory was $200; $8,500 of materials and supplies were ordered during the year.

New patrol cars costing $20,000 were also ordered.

7. The following expenditures were made by the city:

Personal Services .................................................

Contractual Services ............................................

Materials and Supplies .........................................

Other ....................................................................

Capital Outlay—New Patrol Cars ........................

Encumbrance Amount – – $ 7,600 – 20,000 $27,600

Actual Cost $111,700 8,700 7,500 11,800 21,200 $160,900

The council passed the amendments to its appropriations necessary to make the foregoing expenditures legal.

14 ..

8. Materials and supplies on hand at year end amounted to $1,000. (a) Prepare and post the general journal entries required to record the transactions in the General Ledger and in the Expenditures Ledger. Assume that there were no outstanding encumbrances at the beginning of 20X7. (b) Prepare a trial balance of the Expenditures Ledger and prove its agreement with the control accounts. (c) Prepare the general journal entries required to close the expenditure accounts in the General Ledger and the Expenditures Ledger. Assume that all appropriations lapse, but a reserve is reported for encumbrances outstanding at year end.

Suggested Solution Problem 2 (a)

# 1.

City of Beverly Heights General Fund General Journal Accounts Budgetary Fund Balance ......................................................

Appropriations ...............................................................

To record appropriations

Dr. 161,600

161,600

Expenditures Ledger (Appropriations): Personal Services ..................................................................

Contractual Services .............................................................

Materials and Supplies .........................................................

Other .....................................................................................

Capital Outlay—Patrol Cars ................................................

2.

3a.

111,400 8,700 8,500 12,000 21,000 161,600

OFU—Transfer to Debt Service Fund ..................................

Cash ...............................................................................

To record interfund transfer

2,000

Budgetary Fund Balance ......................................................

Appropriations ...............................................................

To record additional appropriations

8,450

Expenditures Ledger (Appropriations): Debt Service—Long-Term Note Principal ............................

Debt Service—Interest ..........................................................

15 ..

Cr.

2,000

8,450

7,000 1,450 8,450

#

Accounts

Dr.

3b.

Notes Payable .......................................................................

Expenditures .........................................................................

Cash ...............................................................................

To record payment of notes and interest

2,350 8,450

Expenditures Ledger (Expenditures): Debt Service—Long-Term Note Principal ............................

Debt Service—Interest ..........................................................

4a.

4b.

Advance to Enterprise Fund .................................................

OFU—Transfer to Internal Service Fund .............................

Cash ...............................................................................

To record advance and transfer

Cr.

10,800

7,000 1,450 8,450 100,000 50,000 150,000

No entry. Governments are not likely to attempt to maintain formal fund balance accounts for each of the fund balance reporting classifications because governments do not utilize the classifications for budgetary control purposes. The amounts to be reported for each classification will be determined by analysis when preparing the financial statements.

An amount equal to the advance to the Enterprise Fund, $100,000, will be included in Nonspendable Fund Balance on the balance sheet.

5.

6.

Budgetary Fund Balance ......................................................

Appropriations ...............................................................

To increase personal services appropriation Expenditures Ledger (Appropriations): Personal Services ..................................................................

500

Encumbrances .......................................................................

Encumbrances Outstanding ...........................................

To record encumbrances

28,500

Expenditures Ledger (Encumbrances): Materials and Supplies .........................................................

Capital Outlay—Patrol Cars ................................................

7a.

Encumbrances Outstanding ..................................................

Encumbrances ................................................................

To reverse encumbrances 16 ..

500

500

28,500

8,500 20,000 28,500 27,600 27,600

#

Accounts

Dr.

Cr.

Expenditures Ledger (Encumbrances): Materials and Supplies .........................................................

Capital Outlay—Patrol Cars ................................................

7b.

Expenditures .........................................................................

Vouchers Payable ..........................................................

To record expenditures vouchered.

Expenditures Ledger (Expenditures): Personal Services ..................................................................

Contractual Services .............................................................

Materials and Supplies .........................................................

Other .....................................................................................

Capital Outlay—Patrol Cars ................................................

7c.

Budgetary Fund Balance ......................................................

Appropriations ...............................................................

To record additional appropriation for new patrol cars

7,600 20,000 27,600 160,900 160,900

111,700 8,700 7,500 11,800 21,200 160,900 200 200

Expenditures Ledger (Appropriations): Capital Outlay—Patrol Cars ................................................

8a.

8b.

Inventory of Materials and Supplies .....................................

OFS—Inventory Increase ..............................................

To record increase in inventory from $200 to $1,000

200 800 800

No entry. Governments are not likely to attempt to maintain formal fund balance accounts for each of the fund balance reporting classifications because governments do not utilize the classifications for budgetary control purposes. The amounts to be reported for each classification will be determined by analysis when preparing the financial statements.

An amount equal to the inventory on hand at year end, $1,000, will be included in Nonspendable Fund Balance on the balance sheet.

17 ..

City of Beverly Heights General Fund Expenditures Subsidiary Ledger

Accounts Personal Services

(Cr.) Appropriations (1) (111,400) (5) (500)

Dr. (Cr.) Encumbrances

(1)

(1)

(1)

8,500 (7,600) 900

(7b)

(1)

(21,000) (6) (7a)

Debt Service— Long-Term Note Principal

(7c)

(200)

(3a)

(7,000)

20,000 (20,000)

(7b)

(3b) Debt Service— Interest

(3a)

11,800

(12,000) (200)

(12,000) (7b)

Capital Outlay— Patrol Cars

7,500

(8,500) – (100)

(8,500) (6) (7a)

Other

8,700

(8,700) –

(8,700) (7b)

Materials and Supplies

111,700

Dr. Expenditures

(7b) Contractual Services

Dr. (Cr.) Unencumbered Balance (111,400) (111,900) (200)

21,200

7,000

(7,000) –

1,450

(1,450) –

(1,450) (3b)

18 ..

(21,000) (1,000) 200 –

City of Beverly Heights General Fund

General Ledger Appropriations 161,600 8,450 500 200 170,750

(1) (3a) (5) (7c) (E)

Encumbrances Outstanding 28,500 (6) (7a) 27,600 900 (E)

(3b) (7b) (E)

(1) (3a) (5) (7c) (E)

Cash 2,000 10,800 150,000 162,800

(2) (3b) (4a) (E)

OFU—Transfer to Internal Service Fund (4a) 50,000 (E) 50,000

(3b)

Expenditures 8,450 160,900 169,350

(E)

Encumbrances 28,500 27,600 900

(2) (E)

OFU—Transfer to Debt Service Fund 2,000 2,000

(6)

Budgetary Fund Balance 161,600 8,450 500 200 170,750

(7a)

Notes Payable 2,350 2,350 (B)

Advance to Enterprise Fund (4a) 100,000

Vouchers Payable 160,900 (7b) 160,900 (E)

Inventory of Materials and Supplies (B) 200 (8a) 800 (E) 1,000

OFS—Inventory Increase 800 (8a) 800 (E)

Note: A General Ledger worksheet may be prepared instead of “T” accounts.

19 ..

Problem 2 (b) City of Beverly Heights General Fund Expenditures Ledger Preclosing Trial Balance at End of 20X7 Accounts

Dr.

Personal Services ...................................................................

Contractual Services ..............................................................

Materials and Supplies ..........................................................

Other ......................................................................................

Capital Outlay—Patrol Cars .................................................

Debt Service—Long-Term Note Principal .............................

Debt Service—Interest ...........................................................

Cr. – – – – – – – –

Note: Only accounts with balances need appear in a trial balance. The other accounts are presented here for illustrative purposes only.

Proof:

$500 – $0 = $500

Compare to General Ledger Accounts: Appropriations $170,750 Expenditures $169,350 Encumbrances 900 170,250 Difference $ 500

20 ..

200 – 100 200 – – – 500

Problem 2 (c)

City of Beverly Heights General Fund General Journal Accounts

# (C1)

(C2)

(C3)

Proof:

Dr.

Encumbrances Outstanding ...................................................

Appropriations .......................................................................

Encumbrances ................................................................

Budgetary Fund Balance ...............................................

To close the budgetary accounts at year end

900 170,750

Fund Balance .........................................................................

OFS—Inventory Increase.......................................................

Expenditures ...................................................................

OFU—Transfer to Debt Service Fund ............................

OFU—Transfer to Internal Service Fund.......................

To close the expenditure and other financing sources (uses) accounts at year end

220,550 800

Expenditures Ledger (Balance): Personal Services ...................................................................

Materials and Supplies ..........................................................

Other ...................................................................................... $500 – $0 = $500

Compare to General Ledger Accounts: Appropriations $170,750 Expenditures $169,350 Encumbrances 900 170,250 Difference $ 500

21 ..

Cr.

900 170,750

169,350 2,000 50,000

200 100 200 500

Problem 3 (GL and SL Entries: Errors, Changes, Leases, Pensions, Claims and Judgments, etc.)

The following transactions and events relate to the General Fund of Harmer Township for the 20X8 fiscal year.

1. Early in 20X8 it was discovered that at the end of 20X7 (a) encumbrances recorded for equipment, $30,000, should have been recorded as an expenditure and liability, $31,000, and the liability was vouchered for payment, and (b) interest payable on tax anticipation notes, $16,000, was not accrued.

2. Appropriations were revised as follows: Appropriations Decreased Recreation Department—Salaries ........................

Parks Department—Equipment ...........................

$25,000 30,000

Appropriations Increased Fire Department—Equipment ..............................

70,000

3. The township entered into a capital lease for computer equipment with a fair market value (and net present value) of $500,000.

4. A capital lease payment on the computer equipment, $60,000 (including $40,000 interest), was vouchered for payment.

5. Harmer Township changed its method of materials inventory accounting to the purchases method from the consumption method at the beginning of 20X8.The beginning inventory of materials was $90,000.

6. During the year, it was realized that (a) $44,000 of salaries and wages charged to the General Fund Parks Department appropriation should have been charged to a Special Revenue Fund, and (b) $19,000 charged to Police Department—Equipment should have been charged to the Fire Department.

7. At year end it was determined that the township had estimated liabilities (including legal and related costs and net of insurance recoveries) for unsettled claims and judgments of $700,000, of which $160,000 is considered a current liability. This is the first year the township has recorded such liabilities—they had not been considered reasonably estimable in prior years.

8. An internal audit during the year revealed that $300,000 had been embezzled and the Cash account was overstated by that amount. The insurance company that bonds employees has agreed to reimburse the township $225,000 on this embezzlement.

22 ..

9. Harmer Township paid only $150,000 to the trustee of its defined benefit pension plan during 20X8, even though the net pension liability increase for 20X8 was $400,000. It is uncertain when the remaining pension plan contribution will be paid.

Prepare the journal entries to record these transactions and events in the General Ledger and Expenditures Ledger of the General Fund of Harmer Township for the 20X8 fiscal year.

Suggested Solution Problem 3 Harmer Township General Fund General Journal 20X8 Assuming that reversing entries are made: #

Accounts

Dr.

1a.

Encumbrances Outstanding ..................................................

Correction of Prior Year Error..............................................

Encumbrances ................................................................

Vouchers Payable ..........................................................

To correct prior year encumbrance error

30,000 31,000

Correction of Prior Year Error..............................................

Expenditures ..................................................................

To correct prior year interest accrual omission Expenditures Ledger (Expenditures): Debt Service—Interest ...........................................................

16,000

Appropriations ......................................................................

Budgetary Fund Balance ......................................................

Appropriations ...............................................................

To record appropriations revisions

55,000 15,000

1b.

2.

Expenditures Ledger (Appropriations): Recreation Department—Salaries ........................................

Parks Department—Equipment ............................................

Fire Department—Equipment ...............................................

30,000 31,000

16,000

16,000

70,000

25,000 30,000 55,000

3.

Expenditures .........................................................................

OFS—Capital Leases .....................................................

To record entering capital lease for computer equipment 23 ..

Cr.

70,000 70,000

500,000 500,000

#

4.

Accounts

Dr.

Expenditures Ledger (Expenditures): Capital Outlay—Computer Equipment .................................

500,000

Expenditures .........................................................................

Vouchers Payable ..........................................................

To record capital lease payment Expenditures Ledger (Expenditures): Debt Service—Interest ..........................................................

Debt Service—Principal (Capital Lease) .............................

5a.

5b.

Cumulative Effect of Change in Accounting Principle ................................................

Fund Balance .................................................................

To record inventory accounting policy change from consumption to purchases basis

Cr.

60,000 60,000

40,000 20,000 60,000

90,000 90,000

No entry. Governments are not likely to attempt to maintain formal fund balance accounts for each of the fund balance reporting classifications because governments do not utilize the classifications for budgetary control purposes. The amounts to be reported for each classification will be determined by analysis when preparing the financial statements.

Balance sheet reporting is the same for both the consumption and purchases methods.

Inventory and an equal amount of Nonspendable Fund Balance must be reported for the cost of materials and supplies on hand at year end.

6a.

Due from Special Revenue Fund ...........................................

Expenditures ..................................................................

To record interfund reimbursement

44,000 44,000

Expenditures Ledger (Expenditures): Parks Department—Salaries and Wages ..............................

6b.

Expenditures .........................................................................

Expenditures ..................................................................

To correct recording of expenditures Expenditures Ledger (Expenditures): Fire Department—Capital Outlay—Equipment ...................

Police Department—Capital Outlay—Equipment ................

24 ..

44,000 19,000 19,000

19,000 19,000

#

Accounts

Dr.

7.

Expenditures .........................................................................

Claims and Judgments Payable—Current......................

To record current liability for unsettled claims and judgments at year end

160,000

Expenditures Ledger (Expenditures): Claims and Judgments ..........................................................

8.

Due from Insurance Company ..............................................

Expenditures .........................................................................

Cash ...............................................................................

To record embezzlement loss, net of estimated insurance recovery Expenditures Ledger (Expenditures): Embezzlement (or Theft) Loss ...............................................

9.

Expenditures .........................................................................

Cash ...............................................................................

To record pension plan contributions Expenditures Ledger (Expenditures): Pension Plan Contributions ...................................................

Cr.

160,000

160,000 225,000 75,000 300,000

75,000 150,000 150,000

150,000

None of the $400,000 increase in net pension liability would be due and payable at the end of the year. Therefore, it will be reported as part of general long-term liabilities.

Entries that differ if reversing entries are not made: 1b.

Correction of Prior Year Error .............................................

Accrued Interest Payable. ...............................................

To correct prior year interest accrual error

25 ..

16,000 16,000

CHAPTER SEVEN CAPITAL PROJECTS FUNDS (Pages 259–298) CHAPTER SEVEN OUTLINE 1) Capital projects fund (CPF) operations and accounting standards a) CPF financial resources b) Number of funds c) CPF life cycle d) The budget e) Interim financing f) Project costs i) Overhead ii) Interest g) Intergovernmental revenues h) Recording bond issues 2) Capital projects fund—case illustration begun, 20X1 a) Budgetary entry b) Transaction/event entries c) General ledger worksheets d) Preclosing trial balance e) Closing entries i) Accounts not closed ii) Accounts closed f) Financial statements i) Balance sheet ii) Operating statement 3) Capital projects fund—case illustration concluded, 20X2 a) 20X1 accounts closed b) Case illustration assumptions and entries, 20X2 c) General ledger worksheet d) 20X2 financial statements i) Project operating statement ii) Project budgetary comparison statement 4) Other capital projects fund operations, accounting, and reporting matters a) Bond anticipation notes (BANs) b) Investments and arbitrage c) Remaining fund balance d) Reporting multiple projects e) Combining CPF statements 1 ..

5) Concluding comments 6) Questions 7) Exercises 8) Problems 9) Cases 10) Harvey City Comprehensive Case

CHAPTER LEARNING OBJECTIVES 7.1

Explain the typical capital projects financing sources, the number of Capital Projects Funds required, and the life cycle of a Capital Projects Fund as well as typical budgeting and budgetary reporting issues and the costs charged to Capital Projects Funds.

7.2

Prepare “detailed general ledger” journal entries to record typical Capital Projects Fund transactions and events, and prepare financial statements.

7.3

Describe Capital Projects Fund accounting for general long-term debt issuances, including accounting for bond proceeds (face amount, premiums and discounts, bond issuance costs), bond anticipation notes, and explain what arbitrage is and its potential impact.

CHAPTER OVERVIEW AND SYNOPSIS This chapter focuses on the accounting and financial reporting requirements of a Capital Projects Fund. Brief discussions of Capital Projects Fund operations and accounting standards are followed by a comprehensive two-year Capital Projects Fund illustrative case example and short discussions of selected Capital Projects Fund-related topics.

CRITICAL OBJECTIVES The learning objectives likely to require the most attention in this chapter include: • • •

Explain the basic nature and purposes of CPFs and when CPFs are used.

Describe the typical capital projects financing sources, how many CPFs are required, and the life cycle of a CPF. Determine which costs to charge to a CPF. 2 ..

• • • •

Describe typical budgeting and budgetary reporting issues of CPFs. Explain accounting for CPF related general long-term liability issuances—particularly bonds.

Prepare typical CPF journal entries and CPF financial statements.

Explain accounting and reporting for bond anticipation notes.

This chapter emphasizes that the same principles and reporting requirements apply to CPFs as to the General Fund and Special Revenue Funds. Most of the time spent on this chapter is typically devoted to its unique purpose and usage and to transactions, such as bond issuances, that are common in CPFs but not in the GF and SRFs. Issuing general government bonds at other than face value requires the other financing source (use) to be reported in a way that distinguishes the face value of the bonds from any premium or discount and from the bond issue costs. The following chart may be helpful to students.

Component to Be Reported Face (Par) Value of Bonds (Always) Premium on Bonds (When issue price is greater than par)

Reported as Other Financing Sources—Bonds

Discount on Bonds (When issue price is less than par) Bond Issue Costs (Always)

Other Financing Uses—Bond Discount

Other Financing Sources—Bond Premium

Expenditures—Debt Service—Bond Issue Costs

QUESTION/EXERCISES/PROBLEMS/CASES—SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises Number of Problems

Number of Cases

12 6 (includes one exercise with 8 multiple choice questions and another with 10 multiple choice questions) 7 (includes one problem with 10 multiple choice questions, several transactional analysis and statement preparation problems, a fund balance reporting problem, and a research and analysis problem) 3 (one case from Blue Earth County, Montana, related to common CPF journal entries, one case from Montgomery County, Maryland, related to CPF statements, and the Harvey City Comprehensive Case)

3 ..

The assignment material for this chapter contains questions, exercises, problems, and cases that address the following key objectives: Explain the Basic Nature and Purposes of CPFs and When CPFs Are Used Several of the questions in this chapter require students to discuss and analyze issues regarding the basic nature, purposes, and uses of CPFs. These questions include Questions 7-1 through 7-6.

Determine Which Costs to Charge to a CPF Several of the exercises and problems address different aspects of this issue.

Account for CPF-Related General Long-Term Liability Issuances—Particularly Bonds Exercise 7-4 is the most effective tool for teaching and emphasizing the various aspects of accounting for bond issuances. Students must deal with bond issuance costs and with the assumed issuance of the same or equivalent bonds at par, a premium, and a discount.

Prepare Typical CPF Journal Entries Exercise 7-3 provides simple examples of accounting for common CPF transactions. Problems 72 and 7-4 cover more types of common transactions. At least one of these problems should be assigned unless you want to use the comprehensive case to meet this objective.

Prepare CPF Financial Statements Exercise 7-6 is a moderately complex statement of revenues, expenditures, and changes in fund balance that includes many common fund balance changes of CPFs. It emphasizes the similarity to the GF/SRF statement, and should not require too much time to complete. The exercise contains bond issue costs, a bond premium, and repayment of long-term bond anticipation notes.

Problems 7-2 and 7-4 also involve statement preparation as part of the problem requirements.

Problem 7-6 focuses on classifications of fund balance as per the requirements of GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions.

Bond Anticipation Notes Question 7-9 addresses important aspects of classifying and accounting for bond anticipation notes.

Problem 7-3 is a useful problem on bond anticipation notes that provides a comparison of accounting for BANs that are reported as fund liabilities and those that are reported as GLTL.

4 ..

HARVEY CITY COMPREHENSIVE CASE Students are not likely to have many difficulties with completing the case assignment for this chapter. You may want to use the case problems for this chapter as assignments in lieu of other chapter problems even if you are not having students complete the entire case.

Additional questions for in-class or homework assignments 1. A Capital Projects Fund is, in essence, a special type of Special Revenue Fund. Explain.

Suggested Solution Both Capital Projects Funds (CPFs) and Special Revenue Funds (SRFs) are governmental (expendable) funds whose assets are restricted to expenditure for specified purposes. The permissible expenditures of the CPF are capital outlay project-related, while those of the SRF are primarily for specified operating purposes. Both are required to be reported upon annually–which is natural for the annual operating cycle of the typical SRF, but is artificial when considered in relation to the project-oriented CPF. 2. Must all municipal capital outlays be financed and accounted for through Capital Projects Funds? Explain.

Suggested Solution No. A CPF should be used for “general government” capital projects if it will assist in controlling and accounting for contractor activities or demonstrating stewardship for restricted resources and/or is legally or contractually required. However, use of a CPF is not intended to hamper management flexibility or restrict its prerogatives in financing capital asset acquisitions. Indeed, capital assets of relatively modest cost may be acquired through use of the resources of almost any fund; and major capital assets may be acquired through the General Fund or Special Revenue Funds, as well as through Internal Service Funds and Enterprise Funds.

3. Why are statements for several Capital Projects Funds presented in combining form?

Suggested Solution CPF statements are presented in combining form to focus attention on capital projects both individually and as a whole. Further, this reduces the number of financial statements included in the comprehensive annual financial report (CAFR) of the government compared to the number needed if all presentations were in the form of individual fund financial statements.

5 ..

4. Why would a grantor not permit general municipal overhead to be charged to a capital project financed by its grant or insist that allowable (reimbursable) overhead be calculated by means of a predetermined formula related to direct project costs?

Suggested Solution There are several reasons that a grantor might either: a. Forbid general municipal overhead charges to be charged as a cost of a project it financed, or b. Insist that such charges be calculated by means of a predetermined formula related to direct costs.

1. The grant may be intended to supplement, rather than to supplant, existing municipal efforts and resources. General municipal overhead would continue whether or not the capital project was undertaken, and to charge such costs to the project would constitute supplantation—reducing the municipality’s net contribution to the project and/or subsidizing its other activities.

2. Permitting general overhead to be charged to a specific project might encourage manipulation of the accounting records to maximize grant proceeds. General overhead is, by definition, a residual—the difference between total costs or expenditures incurred and those that are identifiable as being directly related to a specific activity, project, purpose, or object. Hence, managers of a government that received a federal grant for “up to $5,000,000” for a given project or purpose, having accomplished that purpose or project through the expenditure of only $4,000,000, might be tempted to manipulate the accounting records in order to fabricate up to $1,000,000 in applicable “general overhead” charges.

3. Even if general overhead could be acceptably defined and accounted for, there would be the question of determining and verifying the appropriate percentage applicable to a specific purpose or project. (Thus, the amount finally determined might well constitute the allocation of arbitrarily determined amounts of general overhead by an arbitrarily determined percentage, both of which might well be difficult or impossible to support or audit objectively.)

4. If general overhead charges to a capital project were permitted on other than the basis of a predetermined formula related to direct project cost (a) the problems in (3) above would also be audit problems, and (b) the grantor might be forced to audit the entire municipality in order to determine the reasonableness and/or propriety of the overhead charged. Thus, the formula approach materially lessens the grantor's need to audit—or require an audit—beyond the boundaries or scope of the Capital Projects Fund.

6 ..

5. Proceeds of certain general obligation long-term debt issues are not accounted for through Capital Projects Funds. When is this the case? Through which funds or fund types are such debt proceeds accounted for?

Suggested Solution 1. Situations where debt issue

2. Funds through which such

proceeds are NOT accounted for through Capital Projects Fund(s):

proceeds ARE accounted for:

a.

b. c.

Refunding issues (to retire existing general obligation debt) Enterprise Fund debt issues Debt issues for current operating purposes (disaster relief, to finance operating deficit, etc.)

a.

Debt Service Funds

b. c.

Enterprise Funds General, Special Revenue, and/or Capital Projects Funds, as appropriate

6. Bond anticipation notes (BANs) may properly be accounted for either as liabilities of the Capital Projects Fund or as general long-term liabilities—with the proceeds considered a nonrevenue financing source of the Capital Projects Fund—depending on the circumstances. Explain and illustrate with journal entries, using amounts.

Suggested Solution Whether bond anticipation notes (BANs) are accounted for as Capital Projects Fund (CPF) liabilities or as general long-term liabilities (in the General Long-Term Liabilities, GLTL, accounts) depends on whether the BANs are considered “current” or “noncurrent” under the GASB Codification criteria. “Current” BANs are accounted for as CPF liabilities since their payment at maturity may require use of CPF assets. “Noncurrent” BANs are accounted for as noncurrent liabilities in the GLTL accounts—since they will assuredly be repaid from bond issue proceeds, not other CPF assets—and their proceeds are reported as an “Other Financing Source” in the CPF. At maturity, noncurrent BAN retirement payments are recorded as an “Other Financing Use” in the CPF, DSF, or other governmental fund from which they are paid and the BAN liability is removed from the GLTL accounts. To illustrate, using assumed amounts and omitting formal entry explanations:

7 ..

Transaction or Event BANs Issued

Bonds Issued

BANs Retired

“Current BANs Cash 100,000 BANs Payable

Cash Other Financing Sources—Bonds

100,000

BANs Payable Interest Expenditures Cash

100,000 5,000

100,000

100,000

105,000

Noncurrent BANs Cash 100,000 Other Financing Sources—BANs

100,000

Cash Other Financing Sources—Bonds

100,000

Other Financing Uses BAN Retirement Interest Expenditures Cash

100,000

100,000 5,000

7. A county reported another financing use for the retirement of bond anticipation notes. It also reports expenditures for the retirement of a five-year note payable. What does this reporting imply? Why are the two retirements reported differently?

Suggested Solution General long-term liability principal retirements normally are reported as expenditures. The GASB requires retirements of bond anticipation notes that are classified as general long-term debt and are retired from bond proceeds to be reported as other financing uses. The GASB view essentially is that such retirements (which are a form of debt refundings, discussed in Chapter 8) are substitutions of new debt for old debt—similar to refinancing a mortgage on a home—not actual debt reductions. The GASB requires the other financing use presentation to distinguish these “substitution” retirements from normal debt retirement transactions.

Additional problems for in-class or homework assignments Problem 1 (General Ledger Entries; Statements) The following transactions took place in Mills County during 20X4.

1. A bond issue of $5,000,000 was authorized for the construction of a bridge, and the estimated bond issue proceeds and appropriations were recorded in the General Ledger accounts of a new Bridge CPF. 2. One half of the bonds were sold at par.

3. The cost of issuing the bonds, $7,000, was paid from the Capital Projects Fund.

8 ..

105,000

4. A contract was entered into with White & Company for the construction of the bridge at a cost of $4,200,000.

5. A bill for $1,750,000 was received from White & Company for work done on the bridge to date.

6. Salaries of state engineers amounting to $53,500 were paid to the state. (a) Prepare CPF General Ledger entries. (b) Post to detailed General Ledger accounts or to T-accounts. (c) Prepare CPF financial statements as of December 31, 20X4.

Suggested Solution Problem 1 (a) Mills County Bridge Capital Projects Fund General Journal 20X4 #

Accounts

Dr.

(1)

Estimated Bond Issue Proceeds ............................................

Appropriations ...............................................................

To record authorizations for bridge construction and the bond issue to finance it

5,000,000

Cash ......................................................................................

Other Financing Sources—Bonds ..................................

To record sale of one half of authorized bonds

2,500,000

Expenditures—Debt Service—Bond Issue Costs ..................

Cash ...............................................................................

To record cost of issuing bonds

7,000

Encumbrances .......................................................................

Encumbrances Outstanding ...........................................

To record encumbrances for contract

4,200,000

Encumbrances Outstanding ..................................................

Encumbrances ................................................................

To record reversal of a part of the encumbrances for the contract

1,750,000

(2)

(3)

(4)

(5a)

9 ..

Cr.

5,000,000

2,500,000

7,000

4,200,000

1,750,000

#

Accounts

Dr.

(5b)

Expenditures—Capital Outlay ..............................................

Contracts Payable .........................................................

To record contract expenditures and liability

1,750,000

Expenditures—Capital Outlay ..............................................

Cash ...............................................................................

To record state engineer salary costs

53,500

Encumbrances Outstanding ...................................................

Appropriations ......................................................................

Encumbrances.................................................................

Estimated Bond Issue Proceeds .....................................

To close the budgetary accounts at year end

2,450,000* 5,000,000**

Other Financing Sources—Bonds..........................................

Expenditures—Capital Outlay .......................................

Expenditures—Debt Service—Bond Issue Costs ............

Fund Balance ..................................................................

To close the actual expenditures and other financing source accounts

2,500,000

(6)

(C1)

(C2)

Cr.

1,750,000

53,500

2,450,000 5,000,000

1,803,500 7,000 689,500

*Note: Encumbrances do not affect fund balance reporting in a CPF. The appropriated encumbrances outstanding, $2,450,000 ($4,200,000 ‒ $1,750,000), will be disclosed in the notes to the financial statements. **Note: Governments often do not close the CPF accounts at fiscal year end. If the CPF accounts are not closed, a worksheet (like the worksheet in Illustration 7-4 on page 272) giving effect to pro forma (“as if”) closing entries is prepared. The pro forma closing entries are not journalized or posted to the accounts in this approach. Rather, the information is used to prepare the CPF financial statements.

Regardless of whether the accounts are closed or not, the amounts to be reported for each classification of fund balance at year end will be determined by analysis when preparing the financial statements.

10 ..

Problem 1 (b) Mills County Bridge Capital Projects Fund 20X4 Cash (2)

(E)

2,500,000 – 2,500,000 2,439,500

(3) (6)

Contracts Payable (5b)

1,750,000

Fund Balance (C2)

689,500

(1)

Estimated Bond Issue Proceeds 5,000,000 (C1)

(C1)

5,000,000

(4)

(5a) (C1)

4,200,000 – 4,200,000

7,000 53,500 60,500

Appropriations (1) Encumbrances (5a) (C1)

Encumbrances Outstanding 1,750,000 (4) 2,450,000 4,200,000

5,000,000

5,000,000

1,750,000 2,450,000 4,200,000

4,200,000 – 4,200,000

Expenditures—Capital Outlay (5b) (6)

(3)

(C2)

1,750,000 53,500 1,803,500

(C2)

1,803,500 1,803,500

Expenditures—Debt Service—Bond Issue Costs 7,000 (C2) 7,000 Other Financing Sources—Bonds 2,500,000 (2)

11 ..

2,500,000

Problem 1 (c) Mills County Bridge Capital Projects Fund Balance Sheet December 31, 20X4 Assets Cash ............................................................................................

Total Assets ..............................................................................

$2,439,500 $2,439,500

Liabilities and Fund Balance Liabilities: Contracts Payable .......................................................................

$1,750,000

Fund Balance: Restricted (Note 1) ......................................................................

689,500

Total Liabilities and Fund Balance ........................................

$2,439,500

(Note not required)

Note 1 [to the financial statements]. The voters of Mills County have authorized the sale of $5,000,000 of bonds to finance this project. Since only a portion of the expenditures were planned to be made by December 31, 20X4, only $2,500,000 of the authorized bonds have been sold as of December 31, 20X4. The county has entered into a contract of $4,200,000 for construction of the bridge; progress payments of $1,750,000 have been billed under the contract.

12 ..

Mills County Bridge Capital Projects Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For Year Ended December 31, 20X4 —

Revenues ............................................................................................

$

Expenditures: Capital Outlay............................................................

Debt Service—Bond Issue Costs ................................

Total Expenditures .........................................................................

1,803,500 7,000 1,810,500

Excess (Deficiency) of Revenues Over (Under) Expenditures ...........

(1,810,500)

Other Financing Sources—Bonds......................................................

Net Change in Fund Balance .............................................................

Fund Balance—Beginning of 20X4 ...................................................

2,500,000 689,500 —

Fund Balance—End of 20X4 .............................................................

$ 689,500

Problem 2 (GL or GL and SL Entries; Statement) Minars County undertook a major highway improvement project during 20X7, using both independent contractors and its own Highway Department. The following transactions and events affected the related Capital Projects Fund.

1. The county commission approved the following financial plan and appropriations: Financial Plan Bond issue proceeds .......................................

Federal grant ..................................................

State grant ......................................................

Transfer from General Fund ..........................

Appropriations Contract #1 .....................................................

Contract #2 .....................................................

Contract #3 .....................................................

Highway Department .....................................

13 ..

$ 4,000,000 3,000,000 2,000,000 1,000,000 $10,000,000

$ 3,500,000 2,700,000 1,300,000 2,500,000 $10,000,000

The federal grant is for 30% of the actual allowable costs incurred, up to a maximum of $3,000,000, whereas the state grant is a fixed sum grant of $2,000,000.

2. The county commission let highway construction contracts as follows: Contract #1 .....................................................

Contract #2 .....................................................

Contract #3 .....................................................

$ 3,300,000 2,800,000 1,300,000 $ 7,400,000

The contract appropriations were revised accordingly. Also, the county Highway Department ordered materials estimated to cost $1,100,000.

3. Expenditures vouchered during 20X7 included: Contract #1 .....................................................

Contract #2 .....................................................

Contract #3 .....................................................

Highway Department .....................................

$ 3,350,000 2,800,000 1,325,000 1,475,000 $ 8,950,000

A billing for $50,000 of supplies for the Highway Department also was received from an Internal Service Fund. No encumbrances were outstanding at year end.

The county retains 5% of contract billings pending final inspection and approval of contract projects, and it revised the contract project appropriations to authorize the approved additional work reflected in the contractor billings.

4. Cash receipts during 20X7 included: Bond issue proceeds (including $100,000 bond premium) .......

Federal grant ..................................................

State grant ......................................................

Transfer from General Fund ..........................

$ 4,100,000 2,600,000 2,000,000 800,000 $ 9,500,000

5. Cash disbursements during 20X7 included: Vouchers payable ...........................................

Transfer of bond premium to Debt Service Fund....................................

Highway Department payroll .........................

Internal Service Fund .....................................

14 ..

$ 8,576,250 100,000 730,750 50,000 $ 9,457,000

6. Expenditures for bond issue costs, $85,250, recorded previously in the General Fund were found to relate to Highway Department CPF activities. The expenditures were not reimbursed, but were recorded as an in-substance operating transfer to the CPF from the General Fund.

7. The federal government was billed for its remaining share of the total project costs.

8. The final federal grant payment was received as billed, except for an $1,800 reimbursement disallowed because $6,000 of project costs incurred were unallowable under terms of the grant.

9. The highway improvement projects were inspected, approved, and accepted by the county commission. Accordingly, the retained percentages were paid to the contractors, and the remaining balance of the CPF was transferred to a Debt Service Fund.

10. The Capital Projects Fund accounts were closed, and the fund was terminated. (a) Prepare the journal entries to record the budgetary and actual transactions and events that affected the Minars County Highway Improvement Capital Projects Fund during 20X7 in the CPF detailed General Ledger accounts or in the CPF General Ledger, Revenues Ledger, and Expenditures Ledger. (b) Prepare a Statement of Revenues, Expenditures, and Changes in Fund Balance—Budget and Actual—for the Minars County Highway Improvement Capital Projects Fund for 20X7.

Suggested Solution Problem 2 (a) Minars County Capital Projects Fund General Journal Entries 20X7 #

Accounts

Dr.

(1)

Estimated Other Financing Sources—Transfers In ..............

Estimated Other Financing Sources—Bonds.........................

Estimated Revenues ..............................................................

Appropriations ...............................................................

To record project budget

1,000,000 4,000,000 5,000,000

15 ..

Cr.

10,000,000

#

Accounts

Dr.

Revenues Ledger (Estimated Revenues): Federal Grant .......................................................................

State Grant ............................................................................

3,000,000 2,000,000 5,000,000

Expenditures Ledger (Appropriations): Contract #1 ...........................................................................

Contract #2 ...........................................................................

Contract #3 ...........................................................................

Highway Department ............................................................

(2a)

Encumbrances .......................................................................

Encumbrances Outstanding ...........................................

To record encumbrances incurred Expenditures Ledger (Encumbrances): Contract #1 ...........................................................................

Contract #2 ...........................................................................

Contract #3 ...........................................................................

Highway Department ............................................................

(2b)

Appropriations ......................................................................

Budgetary Fund Balance ...............................................

Appropriations ...............................................................

To record appropriation revisions Expenditures Ledger (Appropriations): Contract #1 ...........................................................................

Contract #2 ...........................................................................

(3a)

Encumbrances Outstanding ..................................................

Encumbrances ................................................................

To reverse encumbrances Expenditures Ledger (Encumbrances): Contract #1 ...........................................................................

Contract #2 ...........................................................................

Contract #3 ...........................................................................

Highway Department ............................................................

16 ..

Cr.

3,500,000 2,700,000 1,300,000 2,500,000 10,000,000 8,500,000 8,500,000

3,300,000 2,800,000 1,300,000 1,100,000 8,500,000 200,000 100,000 100,000

200,000 100,000 8,500,000 8,500,000

3,300,000 2,800,000 1,300,000 1,100,000 8,500,000

#

Accounts

Dr.

(3b)

Expenditures ..........................................................................

Contracts Payable—Retainage ......................................

Due to Internal Service Fund ........................................

Vouchers Payable ..........................................................

To record expenditures

9,000,000

Expenditures Ledger (Expenditures): Contract #1 ...........................................................................

Contract #2 ...........................................................................

Contract #3 ...........................................................................

Highway Department ............................................................

(3c)

Budgetary Fund Balance ......................................................

Appropriations ...............................................................

To record appropriations revisions

373,750 50,000 8,576,250

3,350,000 2,800,000 1,325,000 1,525,000 9,000,000 75,000 75,000

Expenditures Ledger (Appropriations): Contract #1 ...........................................................................

Contract #3 ...........................................................................

(4)

Cash ......................................................................................

Revenues .........................................................................

Other Financing Sources—Bonds .................................

Other Financing Sources—Bond Premium ...................

Other Financing Sources—Transfer from General Fund ....................................................

To record cash receipts

50,000 25,000 75,000 9,500,000 4,600,000 4,000,000 100,000 800,000

Revenues Ledger (Revenues): Federal Grant .......................................................................

State Grant ............................................................................

(5)

Vouchers Payable .................................................................

Other Financing Uses—Transfer to Debt Service Fund .............................................................

Due to Internal Service Fund ................................................

Expenditures .........................................................................

Cash ...............................................................................

To record cash disbursements 17 ..

Cr.

2,600,000 2,000,000 4,600,000 8,576,250 100,000 50,000 730,750 9,457,000

#

(6)

Accounts

Dr.

Expenditures Ledger (Expenditures): Highway Department ............................................................

730,750

Expenditures .........................................................................

Other Financing Sources—Transfer from General Fund .............................................................

To record expenditures and transfer (reimbursement approach) Expenditures Ledger (Expenditures): Highway Department (Bond Issue Costs) .............................

(7)

Due from Federal Government .............................................

Revenues ........................................................................

To record billing for additional grant revenues earned

85,250 85,250

85,250 344,800 344,800

Revenues Ledger (Revenues): Federal Grant .......................................................................

Calculation: Total project costs incurred ..........................

Federal grant share (30%) ...........................

Total Federal grant earned ...........................

Less: Federal grant received to date ............

Federal grant revenue receivable .................

(8)

(9b)

344,800

$9,816,000 × .3 2,944,800 2,600,000 $ 344,800

Cash ......................................................................................

Revenues ................................................................................

Due from Federal Government ......................................

To record final cash receipts on grant, net of unallowed costs Revenues Ledger (Revenues): Federal Grant .......................................................................

(9a)

343,000 1,800 344,800

1,800

Contracts Payable—Retainage .............................................

Cash ...............................................................................

To record payment of retained percentages

373,750

Other Financing Uses—Transfer to Debt Service Fund .......

Cash ...............................................................................

To record transfer to DSF at conclusion of project

12,250

18 ..

Cr.

373,750

12,250

#

Accounts

Dr.

(10)

Other Financing Sources—Transfer from General Fund ....................................................................

Revenues ................................................................................

Appropriations ......................................................................

Budgetary Fund Balance ......................................................

Other Financing Sources—Bonds..........................................

Other Financing Sources—Bond Premium ..........................

Estimated Other Financing Sources—Bonds .................

Estimated Other Financing Sources—Transfers In ........

Estimated Revenues ........................................................

Expenditures ..................................................................

Other Financing Uses—Transfers to Debt Service Fund .....................................................

To close the accounts at the conclusion of the project Revenues Ledger (Balance): Federal Grant .......................................................................

(Proof: $5,000,000 – $4,943,000 = $57,000) Expenditures Ledger (Balance): Highway Department ............................................................

(Proof: $9,975,000 – $9,816,000 = $159,000)

19 ..

Cr.

885,250 4,943,000 9,975,000 25,000 4,000,000 100,000 4,000,000 1,000,000 5,000,000 9,816,000 112,250

57,000

159,000

Problem 2 (b) Minars County Capital Projects Fund Statement of Revenues, Expenditures, and Changes in Fund Balance—Budget and Actual for 20X7 Fiscal Year Original Budget

Revised Budget

Actual

Variance— Favorable (Unfavorable)

$ 3,000,000 2,000,000 5,000,000

$ 3,000,000 2,000,000 5,000,000

$2,943,000 2,000,000 4,943,000

$ (57,000) — (57,000)

4,000,000 1,000,000 5,000,000

4,000,000 1,000,000 5,000,000

4,100,000 885,250 4,985,250

100,000 (114,750) (14,750)

10,000,000

10,000,000

9,928,250

(71,750)

3,500,000 2,700,000 1,300,000 2,500,000 10,000,000

3,350,000 2,800,000 1,325,000 2,500,000 9,975,000

3,350,000 2,800,000 1,325,000 2,341,000 9,816,000

— — — 159,000 159,000

Other Financing Uses: Transfer to Debt Service Fund ...

Total Expenditures and Other Uses ........

— 10,000,000

— 9,975,000

112,250 9,928,250

(112,250) 46,750

Excess (Deficiency) of Revenues and Other Financing Sources Over (Under) Expenditures and Other Uses .................................

Fund Balance—Beginning of 20X7.........

Fund Balance—End of 20X7 ..................

— — —

25,000 — 25,000

— — —

(25,000) — $ (25,000)

Revenues: Federal grant ............................

State grant .................................

Other Financing Sources: Bond proceeds............................

Transfer from General Fund .....

Total Revenues and Other Financing Sources ..........

Expenditures—Capital Outlay: Contract #1 ...............................

Contract #2 ...............................

Contract #3 ...............................

Highway Department ................

$

$

$

Note: A government may use its budget format to present the statement of revenues, expenditures, and changes in fund balances—budget and actual—as presumed here.

This format is a common budget format. The solution is equally acceptable in the GAAP format illustrated in other solutions.

20 ..

CHAPTER EIGHT DEBT SERVICE FUNDS (Pages 299–339)

CHAPTER EIGHT OUTLINE 1) Debt service fund environment, financing, and expenditure recognition a) Long-term liabilities b) Fixed vs. variable rates c) Debt service payments d) Bonds and fiscal agents e) Required debt service fund reserves f) Bond ratings g) Bond insurance h) Sources of financing i) Debt service fund investments j) Debt service fund expenditure recognition 2) Debt service fund for serial bond issue: Case illustration a) Illustrative entries b) Financial statements 3) Special assessment debt service funds a) Illustrative entries b) Illustrative financial statements 4) Other conventional debt service fund considerations a) Nonaccrual of interest b) Combining balance sheet c) Combining operating statement 5) Debt service fund for a term bond issue 6) Debt service funds for deep discount issues 7) Refundings a) Reasons for refundings b) Refundings defined c) Defeasance of debt i) Legal defeasance ii) In-substance defeasance iii) Nondefeasance

1 ..

8) Debt service funds for refundings a) Current refunding b) Advance refunding c) Debt and nondebt financing d) Reporting refundings e) Advance refunding disclosures i) In the year of the advance refunding (1) General description (2) Difference in debt service requirements (3) Economic gain or loss ii) As long as in-substance defeased debt is outstanding (1) Amount of in-substance defeased debt outstanding 9) Concluding comments 10) Questions 11) Exercises 12) Problems 13) Cases 14) Harvey City Comprehensive Case

CHAPTER LEARNING OBJECTIVES 8.1

Summarize the basic Debt Service Fund environment, sources of financing, and expenditure recognition for debt service on general long-term liabilities (GLTL).

8.2

Record debt service transactions and prepare Debt Service Fund financial statements.

8.3

Explain unique aspects of special assessment Debt Service Funds.

8.4

Describe the conditions permitting accrual of GLTL principal and interest expenditures.

8.5

Discuss the basic accounting and reporting requirements for debt service on GLTL term bonds.

8.6

Discuss the basic accounting and reporting requirements for debt service on GLTL deep discount debt.

8.7

Explain debt refundings and defeasance of debt as well as the common reasons for refundings.

2 ..

8.8

Record and report refundings of GLTL.

CHAPTER OVERVIEW AND SYNOPSIS This chapter includes discussions and illustrations of: 1.

The “general government” debt service environment, financing methods, and expenditure recognition—including related terminology. (Note that this chapter deals most directly with the major governmental fund expenditure recognition exception— debt service expenditures on general long-term liabilities.)

2.

Debt service accounting for: a. b. c. d.

Special assessment debt issues Refundings and in-substance defeasances Serial debt issues Term debt issues

The debt service environment discussions should be relatively comfortable for students at this point so that attention can be focused primarily on the second main topical area—accounting for debt service. Special assessment debt issues and refunding transactions probably should be covered reasonably well. Further, more attention should be given to serial bonds Debt Service Funds than to term bond Debt Service Funds since most recent bond issues (with the exception of “deep discount” issues) have been serial bond issues.

CRITICAL OBJECTIVES In addition to understanding the basic nature, purpose, and usage of Debt Service Funds, key objectives of this chapter include: • Understanding recognition of debt service expenditures—including both the normal nonaccrual of general long-term debt service and the conditions under which governments are permitted to accrue those debt service expenditures.

• Understanding the criteria for and accounting for in-substance defeasances of general longterm liabilities and accounting for refunding transactions.

• Accounting for typical debt service transactions and preparing DSF financial statements.

• Accounting for special assessment debt service transactions.

The most troublesome topic for students in this chapter will most likely be accounting for refundings. Illustration 8-8 in the text (page 319) is a good visual representation of this transaction. In a current refunding, the only uniqueness is that the retirement is reported as other

3 ..

financing uses, not as expenditures. In advance refundings, an additional complication is that the old debt is not actually retired. However, it is treated as if it has been retired.

Illustration 8-9 on page 322 of the text emphasizes that other financing uses are reported only if part of the money paid to defease or retire debt is borrowed for that purpose. If there is not any refunding issuance, there cannot be any other financing use.

When discussing this with students, always focus on the amount of the old debt being retired. For some reason, even students who tell you that the amount of borrowed resources used in a refunding determines the amount of the other financing use tend to think that the amount of debt that is retired or defeased can affect the other financing use.

For example, if students are told that a government issued $5 million of refunding bonds at par and paid $7 million to defease in-substance $6.2 million of old bonds, some will incorrectly think that the other financing use is $6.2 million, not $5 million. It may require multiple examples to get the point across. One way to avoid this is to use one set of refunding proceeds and payment amounts and change the amount of old debt defeased. Students can then see that the other financing use remains the same regardless of the amount of old debt that is defeased.

QUESTIONS/EXERCISES/PROBLEMS/CASES—SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises Number of Problems

Number of Cases

16 8 (includes one exercise with 8 multiple choice questions and one exercise with 10 multiple choice questions) 8 (includes one problem with 10 multiple choice questions, several transactional analysis problems, a specific statement preparation problem, and two research and analysis problems) 3 (one case for Milwaukee, Wisconsin, on the preparation of a DSF’s operating statement, one case for Hawaii County, Hawaii, with journal entries and the preparation of the required financial statements, and the Harvey City comprehensive case)

Exercise 8-3 This exercise provides a good basis for discussing when Debt Service Funds are required and when they are optional.

Exercises 8-4 and 8-5 These exercises are simple refunding problems that can be used for the initial discussion and illustration of accounting and reporting for refundings. For slightly more involved problem of this nature, refer to Problem 8-4.

4 ..

Problems 8-2, 8-3, and 8-5 These transactional analysis problems require entries (and is some cases statements) to record typical debt service transactions.

Problem 8-6 This problem focuses on the preparation of a Debt Service Fund statement of revenues, expenditures, and changes in fund balances.

HARVEY CITY COMPREHENSIVE CASE The City Hall Bond Debt Service Fund problem is on accounting and reporting for a bond refunding.

The General Debt Service Fund involves more typical debt service transactions. It may serve as a useful review of accounting for property tax revenues as well. Transaction 8 is the most likely source of questions from students regarding this fund. You may want to refer them to General Fund transaction 24a in Chapter 5.

Additional questions for in-class or homework assignments 1. A sinking fund was established for the purpose of retiring Dorchester Street Bridge bonds, which have a 20-year maturity. In the fifth year, $10,000 of Dorchester Street Bridge bonds were acquired by the Debt Service Fund. Should these bonds be retired or should they be held alive until maturity? Why? Suggested Solution Treasury bonds should be retired (or canceled) because: a. They are not assets of the governmental unit, and b. The SLG cannot logically owe, or pay interest to, itself. There are practical arguments for holding treasury bonds “alive,” however, which may be done if immaterial amounts are involved.

If the bonds are kept alive in the fund, with the governmental unit paying interest to itself, the planned accumulation is not affected by the purchase. If the bonds are canceled, future debt service requirements are reduced. But retirement takes assets originally intended to be held to maturity of the debt issue and hence removes some of the fund’s earning capacity. This in turn requires recalculating the accumulation schedule and, usually, an increase in the annual revenues (other than earnings on investments) or transfers. The decision to retire or not to retire immaterial amounts of treasury bonds should be made by balancing the costs of keeping the bonds alive in the fund with the costs of recalculating the accumulation schedule and changing the annual revenues or transfers required to finance the fund. But material amounts of treasury bonds must be canceled.

5 ..

2. What factor determines whether retirement of general long-term liability principal amounts are reported as expenditures or as other financing uses?

Suggested Solution Retirement of general long-term debt principal is reported as expenditures unless the source of financing is refunding bond proceeds. Essentially, the source of the financing for the retirement (borrowings vs. other) determines whether the retirement should be reported as another financing use or as an expenditure.

3. What is unique about special assessment Debt Service Funds?

Suggested Solution The primary uniqueness of the typical special assessment Debt Service Fund is that a portion of the Special Assessments Receivable (the amount not currently due) represents a noncurrent receivable—which are not common in governmental funds.

The availability criterion typically is not met for this portion of special assessments, and revenue recognition must be deferred until the availability criterion is met.

4. Describe the note disclosures related to advance refunding transactions that a government is required to make.

Suggested Solution Three advance refunding-related disclosures are required in the year an advance refunding occurs.

1. The government is required to disclose a general description of the advance refunding transaction, including: • • • • •

The debt issue refunded Face amounts refunded The source(s) of financing for the refunding Whether the defeasance was a legal defeasance or an in-substance defeasance The name of the institution serving as the escrow agent’s trustee

2. The difference between the total debt service requirements remaining on the old debt and the total debt service requirements of the new debt (adjusted for additional cash paid or received) must be disclosed.

3. Finally, the government must disclose the economic gain or loss on the advance refunding transaction. This gain or loss is defined as the difference between (1) the present value of the new advance refunding debt issue debt service requirements (discounted at the net effective rate of the new refunding issue and adjusted for any additional cash paid or received in the refunding transaction)

6 ..

and (2) the present value of the old defeased debt’s remaining debt service requirements (discounted at the net effective rate of the new refunding issue).

In subsequent years, the amount of any debt defeased in-substance that is still outstanding must be disclosed.

Additional Problems for in-class or homework assignments Problem 1 (Special Assessment DSF; Entries and Statements) On September 30, 20X3, Duncan Township issued $100,000 of 5-year, 6%, Zachary Addition Special Assessment Bonds to finance construction of storm sewers in the Zachary Addition.

Duncan Township guarantees the bonds in the event that collections of the special assessments are inadequate to service the debt. Interest and $20,000 of principal are due and payable each September 30 beginning September 30, 20X4. The Duncan Township fiscal year ends on December 31.

The following transactions related to servicing the Zachary Addition bonds occurred in 20X4 and 20X5.

1. On January 1, 20X4, Duncan Township levied special assessments totaling $100,000 on properties in the Zachary Addition Special Assessment District. Interest of 7% on the unpaid balance at the beginning of each year and $20,000 of principal are due each June 30.

2. Between January 1 and June 30, 20X4, Duncan Township collected $24,300 from the special assessments, including interest of $6,300. Uncollected current assessments became delinquent.

3. The town collected one half of the delinquent assessments and interest on September 30, 20X4. The balance should be collected in the first month of 20X5.

4. Duncan Township loaned $1,000 from its General Fund to the Zachary Addition DSF on September 30, 20X4. Repayment is due in 9 months.

5. The bond principal and interest, along with $100 of fiscal agent fees, were paid to the township’s fiscal agent on September 30, 20X4.

6. In May and June 20X5 the town collected: Current assessments Delinquent assessments Interest on assessments Total

$19,000 1,000 5,740 $25,740

Uncollected current assessments became delinquent.

7. The amount borrowed from the General Fund was repaid on June 30, 20X5.

7 ..

8. The bond principal and interest, along with $100 of fiscal agent fees, were paid to the township’s fiscal agent on September 30, 20X5. (a) Prepare the journal entries required in the Zachary Addition DSF to record the preceding transactions, assuming that the fiscal agent paid all principal and interest on the debt when it matured. (b) Prepare the 20X4 financial statements for the Zachary Addition DSF.

Suggested Solution Problem 1 (a) Duncan Township Zachary Addition Debt Service Fund General Journal Entries 20X4-20X5 #

Accounts

Dr.

January 1, 20X4 (1) Assessments Receivable—Current ........................................

Assessments Receivable—Noncurrent ..................................

Revenues—Assessments .................................................

Deferred Revenues—Assessments .................................

To record levy of special assessments January 1–June 30, 20X4 (2a) Cash ......................................................................................

Assessments Receivable—Current .................................

Revenues—Interest ........................................................

To record collection of current assessments and interest June 30, 20X4 (2b) Assessments Receivable—Delinquent ...................................

Assessments Receivable—Current .................................

To record reclassification of assessments now delinquent September 30, 20X4 (3) Cash ......................................................................................

Assessments Receivable—Delinquent ............................

Revenues—Interest ........................................................

To record collection of one half of delinquent assessments and related interest 8 ..

Cr.

20,000 80,000 20,000 80,000

24,300 18,000 6,300

2,000 2,000

1,350 1,000 350

#

Accounts

Dr.

June 30, 20X4 (4) Cash ......................................................................................

Due to General Fund ......................................................

To record short-term loan from the General Fund September 30, 20X4 (5a) Expenditures—Debt Service—Principal ...............................

Expenditures—Debt Service—Interest ..................................

Expenditures—Debt Service—Fiscal Agent Fees .................

Cash ...............................................................................

To record annual debt service payment December 31, 20X4 (5b) Interest Receivable on Assessments .......................................

Revenues—Interest .........................................................

To accrue interest due on assessments and expected to be collected in the first month of 20X5 January 2, 20X5 (6a) Assessments Receivable—Current ........................................

Deferred Revenues—Assessments .........................................

Assessments Receivable—Noncurrent ...........................

Revenues—Assessments .................................................

To reclassify assessment receivables and recognize revenue for current assessments May–June, 20X5 (6b) Cash ......................................................................................

Assessments Receivable—Current .................................

Assessments Receivable—Delinquent ............................

Interest Receivable on Assessments ................................

Revenues—Interest ........................................................

To record collection of assessments receivable May–June, 20X5 (6c) Assessments Receivable—Delinquent ....................................

Assessments Receivable—Current .................................

To record reclassification of assessments now delinquent June 30, 20X5 (7) Due to General Fund .............................................................

9 ..

Cr.

1,000 1,000

20,000 6,000 100 26,100

350 350

20,000 20,000 20,000 20,000

25,740 19,000 1,000 350 5,390

1,000 1,000

1,000

#

Accounts

Dr.

Cash ................................................................................

To record repayment of loan from General Fund September 30, 20X5 (8) Expenditures—Debt Service—Principal ...............................

Expenditures—Debt Service—Interest ..................................

Expenditures—Debt Service—Fiscal Agent Fees .................

Cash ...............................................................................

To record payment of annual debt service December 31, 20X5 Interest Receivable on Assessments .......................................

Revenues—Interest .........................................................

To accrue uncollected interest due at year end.

Revenue is recognized under the assumption that the receivable will be collected by the end of January 20X6, consistent with the assumption at the end of the prior year.

Computation: Total interest for 20X5 = $81,000 × 7% = $5,670 Less: 20X5 interest collected (Entry 6b) 5,390 Interest accrual required $ 280

10 ..

Cr. 1,000

20,000 4,800 100 24,900

280 280

Problem 2 (b) Duncan Township Zachary Addition Debt Service Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year Ended December 31, 20X4 Revenues: Assessments ................................................................................

Interest on assessments ..............................................................

Total Revenues ...............................................................................

$20,000 7,000

Expenditures—Debt Service: Principal retirement ...................................................................

Interest .......................................................................................

Fiscal agent fees ........................................................................

Total Expenditures ........................................................................

20,000 6,000 100

$27,000

26,100

Excess of Revenues Over Expenditures ............................................

900

Net Change in Fund Balance .............................................................

Fund Balance—January 1, 20X4 ......................................................

900 —

Fund Balance—December 31, 20X4 .................................................

11 ..

$

900

Duncan Township Zachary Addition Debt Service Fund Balance Sheet December 31, 20X4 Assets Cash ..................................................................................................

Assessments receivable—Noncurrent ...............................................

Assessments receivable—Delinquent ................................................

Interest Receivable on Assessments ...................................................

Total Assets ................................................................................

$

550 80,000 1,000 350 $81,900

Liabilities, Deferred Inflows of Resources, and Fund Balance Liabilities: Due to General Fund .....................................................................

$1,000

Deferred Inflows of Resources: Deferred Assessment Revenues .....................................................

80,000

Fund Balance: Assigned ........................................................................................

Total Liabilities and Fund Balance ...........................................

900 $81,900

12 ..

Duncan Township Zachary Addition Debt Service Fund Worksheet—20X4 Not Required 20X4 Transactions Dr. Cr. Assessments Receivable —Current

(1)

20,000

Assessments Receivable —Noncurrent

(1)

80,000

80,000 20,000 (1)

Deferred Revenues —Assessments

80,000 (1) (2a) (3) (4)

24,300 1,350 1,000

20,000

80,000

26,100 (5a)

Revenues—Interest

6,300 (2a) 350 (3) 350 (5b)

Due to General Fund

1,000 (4)

550

7,000

1,000

Expenditures—Debt Service—Principal

(5a)

20,000

20,000

Expenditures—Debt Service—Interest

(5a)

6,000

6,000

Expenditures—Debt Service—Fiscal Agent Fees

(5a)

100

100

Assessments Receivable —Delinquent

(2b)

2,000

(5b)

350

Interest Receivable on Assessments

Postclosing Trial Balance 12/31/20X4 Dr. Cr.

18,000 (2a) 2,000 (2b)

Revenues—Assessments

Cash

Closing Balance Dr. Cr.

1,000 (3)

1,000 350 27,000

26,100

27,000

900 27,000

Assigned Fund Balance

13 ..

81,900

900 81,900

Problem 2 (Advance Refunding) The city of Andrew had outstanding $1,000,000 par of 12% Series A bonds issued several years ago when interest rates were high. The finance officer proposes to refinance the issue with a new 8% Series B issue and some cash to be transferred from the General Fund. Because the Series A bonds are now selling at a substantial premium, and in any event, it does not appear feasible to buy all of them back, the finance officer proposed to place sufficient monies in an irrevocable trust and meet all other conditions as set forth in the Internal Revenue Code and Regulations and in the GASB standards to achieve an in-substance defeasance. The council approved the plan and the following transactions occurred during 20X8: 1. A new 8% Series B serial bond issue was sold at par, $1,000,000.

2. A General Fund transfer of $145,000 was made to the DSF. 3. It was determined that the amount that must be placed in the irrevocable trust to service the Series A issue until maturity and pay the principal at that time was $1,140,000. The payment to the trustee was made, as were payments of $5,000 of consultation fees and travel costs necessary to consummate the transaction. (a) Prepare the general journal entries required in the Debt Service Fund to record the transactions and events described previously. (b) Assume, instead, that the trust did not meet the conditions of the GASB defeasance insubstance standards.

(1) Prepare the general journal entries to record the preceding transactions and events under this assumption.

(2) Identify any differences in the accounting and reporting for the preceding transactions and events in the various governmental funds and other accounts under these two differing assumptions.

14 ..

Suggested Solution Problem 2 (a) City of Andrew Debt Service Fund General Journal 20X8 #

Accounts

Dr.

(1)

Cash ......................................................................................

Other Financing Sources—Refunding Bonds ........

To record proceeds of Series B issue for use in advance refunding of Series A issue

1,000,000

Cash ......................................................................................

Other Financing Sources—Transfer from General Fund ....................................................

To record receipt of transfer

145,000

(2)

(3)

Other Financing Uses—Payment to Refunded Bonds Escrow Agent .........................................................

Expenditures—Debt Service—Payment to Refunded Bond Escrow Agent ...........................................

Cash ...............................................................................

To record payment to trustee to consummate advance refunding of Series A bonds, including related fees

15 ..

Cr.

1,000,000

145,000

1,000,000 145,000 1,145,000

Problem 2 (b)(1) City of Andrew Debt Service Fund General Journal # (1)

(2)

(3)

Accounts Cash ......................................................................................

Other Financing Sources—Proceeds of Series B Bond Issue ....................................................

To record sale of 8% Series B bonds at par

Dr. 1,000,000

Cash .......................................................................................

Other Financing Sources—Transfer from General Fund ....................................................

To record transfer

145,000

Expenditures—Debt Service—Fiscal Agent (Trustee) Fees ..

Investments (with Fiscal Agent) ............................................

Cash ...............................................................................

To record cash paid to trustee for investment for debt service of 12% Series A bonds

5,000 1,140,000

Cr.

1,000,000

145,000

1,145,000

Problem 2 (b)(2) If the trust did not meet the GASB in-substance defeasance standards: 1. The transactions are viewed as “borrow and invest” rather than “borrow and repay debt” events; 2. Accordingly, no debt extinguishment is reported—only an investment and related expenditures—and the new debt proceeds are not reported as “refunding” proceeds.

16 ..

Problem 3 (Detailed General Ledger or Summary General Ledger and Subsidiary Ledger Entries; Statements) A serial Debt Service Fund of the state of Texona had the following postclosing trial balance at September 30, 20X7, the end of its fiscal year: State of Texona Serial Debt Service Fund No. 2 Postclosing Trial Balance September 30, 20X7 Cash............................................................................

Investments ................................................................

Matured Bonds Payable .............................................

Matured Notes Payable ..............................................

Matured Interest Payable ...........................................

Restricted for Bond Debt Service ..............................

Assigned Fund Balance..............................................

$10,600,000 7,600,000

$18,200,000

$ 5,000,000 2,000,000 3,500,000 6,000,000 1,700,000 $18,200,000

The Debt Service Fund is financed by a share of state sales tax revenues, transfers from other funds, and interest earnings. Significant debt service payments fall due on October 1 each year and are provided for in the appropriations of the previous year. The following transactions and events affected the State of Texona Serial Debt Service Fund No. 2 during the 20X7–X8 fiscal year: 1. The matured bonds, notes, and interest payable were paid.

2. State sales taxes collected for the Debt Service Fund totaled $12,000,000.

3. All but $10,000 of the cash was invested.

4. The reserve for Bond Debt Service was increased to $7,000,000, as required by the bond indenture.

5. Debt service maturities on April 1, 20X8 were: Bonds .............................................................

Notes ..............................................................

Interest............................................................

$5,000,000 2,000,000 3,000,000

6. Temporary investments of $9,200,000 were liquidated to pay the debt service due; the proceeds were $10,500,000. (Accrued interest receivable is debited to the Investments account at year end.)

17 ..

7. The debt service payments due were made.

8. A $1,400,000 transfer was received upon termination of Debt Service Fund No. 6.

9. An $8,000,000 transfer was received from the General Fund.

10. A capital lease obligation, $1,500,000, was paid (includes $600,000 interest).

11. Debt service maturities at year end, on which payment is due October 1, 20X8, were: Bonds .............................................................

Notes ..............................................................

Interest............................................................

$5,000,000 2,000,000 2,500,000

12. Accrued interest receivable on investments at year end was $900,000. (a) Prepare DSF general journal entries to record the preceding transactions and events in the detailed General Ledger accounts or in the General, Revenues, and Expenditures Ledgers. (b) Prepare a preclosing trial balance for the Debt Service Fund at September 30, 20X8. (c) Prepare DSF closing entries at September 30, 20X8. (d) Prepare a balance sheet for the Debt Service Fund at September 30, 20X8. (e) Prepare a statement of revenues, expenditures, and changes in fund balances for the Debt Service Fund for the 20X7–X8 fiscal year. (f) Alternatively, in lieu of requirements (a)–(d), prepare a worksheet headed as follows: Columns 1–2 3–4 5–6 7–8

Heading Postclosing Trial Balance, 9/30/20X7 20X7–X8 Transactions Closing Entries, 9/30/20X8 Postclosing Trial Balance, 9/30/20X8

18 ..

Suggested Solution Problem 3 (a) State of Texona Serial Debt Service Fund No. 2 General Journal 20X7-X8 Fiscal Year #

Accounts

Dr.

(1)

Matured Bonds Payable ........................................................

Matured Notes Payable .........................................................

Matured Interest payable ......................................................

Cash ...............................................................................

To record payment of matured bonds, notes, and interest payable

5,000,000 2,000,000 3,500,000

Cash .......................................................................................

Revenues .........................................................................

To record sales tax collections

12,000,000

(2)

10,500,000

12,000,000

Revenues Ledger (Revenues): Sales Taxes .............................................................................

(3)

(4)

(5)

12,000,000

Investments ............................................................................

Cash ................................................................................

To record cash investment

12,090,000

Assigned Fund Balance .........................................................

Restricted for Bond Debt Service ...................................

To increase bond debt service restriction

1,000,000

Expenditures. .........................................................................

Matured Bonds Payable ................................................

Matured Notes Payable ..................................................

Matured Interest Payable ...............................................

To record bond, note, and interest maturities

10,000,000

Expenditures Ledger (Expenditures): Bond Principal .......................................................................

Note Principal .......................................................................

Interest ...................................................................................

19 ..

Cr.

12,090,000

1,000,000

5,000,000 2,000,000 3,000,000

5,000,000 2,000,000 3,000,000 10,000,000

#

Accounts

Dr.

(6)

Cash ......................................................................................

Investments ....................................................................

Revenues ........................................................................

To record liquidation of investments to pay debt service due

10,500,000 9,200,000 1,300,000

Revenues Ledger (Revenues): Interest ..................................................................................

(7)

(8)

(9)

(10)

(11)

1,300,000

Matured Bonds Payable ........................................................

Matured Notes Payable .........................................................

Matured Interest Payable .....................................................

Cash ...............................................................................

To record payment of matured bonds, notes, and interest payable

5,000,000 2,000,000 3,000,000

Cash ......................................................................................

Other Financing Sources—Transfer from Debt Service Fund No. 6 ............................................

To record transfer from terminated Debt Service Fund

1,400,000

Cash .......................................................................................

Other Financing Sources—Transfer from General Fund ....................................................

To record transfer from General Fund

8,000,000

Expenditures .........................................................................

Cash ...............................................................................

To record payment of capital lease obligation

1,500,000

Expenditures Ledger (Expenditures): Capital Lease Principal ........................................................

Interest. ..................................................................................

Expenditures .........................................................................

Matured Bonds Payable ................................................

Matured Notes Payable .................................................

Matured Interest Payable ..............................................

To record bond, note, and interest maturities

20 ..

Cr.

10,000,000

1,400,000

8,000,000

1,500,000

900,000 600,000 1,500,000 9,500,000 5,000,000 2,000,000 2,500,000

#

Accounts

Dr.

Expenditures Ledger (Expenditures): Bond Principal ......................................................................

Note Principal .......................................................................

Interest ..................................................................................

(12)

Investments ............................................................................

Revenues ........................................................................

To record accrued interest receivable on investments Revenues Ledger (Revenues): Interest ..................................................................................

21 ..

Cr.

5,000,000 2,000,000 2,500,000 9,500,000 900,000 900,000

900,000

Problem 3 (b) State of Texona Serial Debt Service Fund No. 2 Preclosing Trial Balance September 30, 20X8 Accounts

Dr.

General Ledger: Cash ..................................................................................................

Investments ........................................................................................

Matured Bonds Payable ....................................................................

Matured Notes Payable .....................................................................

Matured Interest Payable .................................................................

Restricted for Bond Debt Service ......................................................

Assigned Fund Balance .....................................................................

Revenues ...........................................................................................

Expenditures ......................................................................................

Other Financing Sources—Transfer from Debt Service Fund No. 6 ................................................................

Other Financing Sources—Transfer from General Fund .................

8,410,000 11,390,000 5,000,000 2,000,000 2,500,000 7,000,000 700,000 14,200,000 21,000,000

40,800,000 Revenues Ledger: Sales Taxes ........................................................................................

Interest ..............................................................................................

Expenditures Ledger: Bond Principal ..................................................................................

Note Principal ...................................................................................

Interest ..............................................................................................

Capital Lease Principal ....................................................................

22 ..

Cr.

1,400,000 8,000,000 40,800,000 12,000,000 2,200,000 14,200,000

10,000,000 4,000,000 6,100,000 900,000 21,000,000

Problem 3 (c) Closing Entry(ies) General Ledger: Revenues ...........................................................................................

Other Financing Sources—Transfer from Debt Service Fund No. 6 ...............................................................

Other Financing Sources—Transfer from General Fund .................

Expenditures ..............................................................................

Assigned Fund Balance .............................................................

To close the accounts at year end Revenues Ledger (Balance): Sales Taxes ........................................................................................

Interest ...............................................................................................

Expenditures Ledger (Balance): Bond Principal ..................................................................................

Note Principal ...................................................................................

Interest ..............................................................................................

Capital Lease Principal ....................................................................

14,200,000 1,400,000 8,000,000 21,000,000 2,600,000

12,000,000 2,200,000 14,200,000 10,000,000 4,000,000 6,100,000 900,000 21,000,000

Problem 3 (d) State of Texona Serial Debt Service Fund No. 2 Balance Sheet September 30, 20X8 Assets Cash ...........................................................................................................

Investments .................................................................................................

Total Assets ..........................................................................................

$ 8,410,000 11,390,000 $19,800,000

Liabilities and Fund Balance Liabilities: Matured Bonds Payable ......................................................................

Matured Notes Payable .......................................................................

Matured Interest Payable ....................................................................

Total Liabilities .............................................................................

$ 5,000,000 2,000,000 2,500,000 9,500,000

Fund Balance: Restricted for Bond Debt Service ........................................................

Assigned ...............................................................................................

Total Fund Balance .......................................................................

7,000,000 3,300,000 10,300,000

Total Liabilities and Fund Balance .....................................................

$19,800,000

23 ..

Problem 3 (e) State of Texona Serial Debt Service Fund No. 2 Statement of Revenues, Expenditures, and Changes in Fund Balance For the 20X7-X8 Fiscal Year Revenues: Sales Taxes .........................................................................

Interest ...............................................................................

Total Revenues ..........................................................

$12,000,000 2,200,000

Expenditures—Debt Service: Bond Principal ..............................................................

Note Principal ...............................................................

Capital Lease Principal ................................................

Interest ..........................................................................

Total Expenditures ....................................................

10,000,000 4,000,000 900,000 6,100,000

Excess (Deficiency) of Revenues Over (Under) Expenditures (6,800,000) Other Financing Sources: Transfer from General Fund .........................................

Transfer from Debt Service Fund No. 6 ........................

Total Other Financing Sources ..................................

$14,200,000

21,000,000 …

8,000,000 1,400,000 9,400,000

Net Change in Fund Balance .....................................................

Fund Balance—Beginning of Year ...........................................

2,600,000 7,700,000

Fund Balance—End of Year ..................................................

$10,300,000

24 ..

CHAPTER NINE GENERAL CAPITAL ASSETS; GENERAL LONG-TERM LIABILITIES; PERMANENT FUNDS: INTRODUCTION TO INTERFUND-GCA-GLTL ACCOUNTING (Pages 340–391)

CHAPTER NINE OUTLINE 1) Overview of general capital assets and general long-term liabilities accounting procedures 2) General capital assets a) General capital assets defined b) Initial valuation i) Cost ii) Estimated cost iii) Gifts, foreclosures, eminent domain, and escheat c) Classification d) Capitalization policy i) Legal compliance ii) Intangible assets iii) Reporting works of art and historical treasures iv) Materiality and control consideration e) Property records f) Capital assets inventory g) Additions, betterments, and renewals h) Depreciation/accumulated depreciation i) Modified approach i) Updating general capital asset accounts i) Assets financed from the general fund or special revenue funds ii) Assets financed through capital projects funds and special assessments iii) Assets acquired through foreclosure iv) Assets acquired through gifts j) Recording depreciation k) Sale, replacement, or retirement i) Sale ii) Replacement (trade-in) iii) Retirement l) Intragovernmental transactions i) Intragovernmental sale ii) Intragovernmental “transfer” (1) General government transfer (2) Proprietary fund–general government transfer (3) General government–proprietary fund transfer 1 ..

m) Impairment i) Indicators of impairment ii) Tests of impairment iii) Applying impairment standards iv) Impairment measurement v) Measurement—assets continue to be used (1) Restoration cost approach (2) Service units approach (3) Deflated depreciated replacement cost approach vi) Measurement—assets no longer used vii) Reporting impairment losses n) Insurance recoveries o) Damage or destruction p) Reporting and disclosures 3) General long-term liabilities a) CPF – DSF – GLTL b) Serial debt c) Special assessment debt d) Other government liabilities e) Pensions and OPEB f) Interest-related adjustments g) Defaulted bonds h) In-substance defeasance i) General long-term liability records j) General long-term liability reporting and disclosures 4) Permanent funds 5) Introduction to interfund-general capital assets-general long-term liabilities accounting 6) Concluding comments 7) Questions 8) Exercises 9) Problems 10) Cases 11) Harvey City Comprehensive Case

2 ..

CHAPTER LEARNING OBJECTIVES 9.1

Describe how governments maintain the general capital assets (GCA) and general longterm liabilities (GLTL) information that governments need for managerial, accountability, and government-wide financial reporting purposes.

9.2

Recognize, account for, and determine the reporting effects of transactions affecting general capital assets.

9.3

Recognize, account for, and determine the financial reporting effects of transactions affecting general long-term liabilities, including liabilities for pension and other postemployment benefits.

9.4

Identify circumstances requiring use of Permanent Funds and account for and report those funds.

9.5

Account for transactions that affect both governmental funds and the General Capital Assets and General Long-Term Liabilities accounts.

CHAPTER OVERVIEW AND SYNOPSIS This chapter concludes the “general government” accounting section of the text. Accordingly, the major topics are: 1. General Capital Assets 2. General Long-Term Liabilities 3. Permanent Funds 4. Introduction to Interfund-General Capital Assets-General Long-Term Liability accounting (GCA-GLTL) The GCA-GLTL accounts were noted in the “Principles” discussions in Chapter 2. Many instructors will have discussed (and perhaps illustrated) these accounts while teaching governmental fund accounting (Chapters 4 through 8), whereas others will defer such discussions until this chapter. Thus, some will consider this a one-day “review and refinement” chapter, whereas others will devote a day and a half or two days to the chapter. In any event, by this point students should begin to gain competence in transactions and entries involving more than one fund and/or the GCA-GLTL accounts, as well as in those involving only individual funds.

3 ..

The discussion and illustration of Permanent Funds was deferred to this chapter for the simple reason that these funds do not fit well into the governmental fund model and would have unnecessarily complicated earlier discussion. They are illustrated briefly here. Most municipalities will not have Permanent Funds. Where present, these funds may be significant in size, however, relative to many more common governmental funds.

CRITICAL OBJECTIVES The primary focuses should be the students’ understanding of: • • • • • •

The GCA-GLTL accounting equation, including an introduction to the three classes of net position reported in the government-wide financial statements.

When GCA-GLTL entries are required and how to make those entries.

The types of transactions and events that affect the GCA-GLTL accounts but do not have corresponding current period affects in any fund.

The unique aspects of accounting for general infrastructure capital assets, including the modified approach and the conditions for its use.

The nature, use, and accounting for Permanent Funds.

Interfund-GCA-GLTL relationships and accounting.

Several things are worth noting with respect to GCA-GLTL accounting: • • •

•

Illustrations 9-1 (page 342) and 9-2 (page 349) may prove very helpful to students in mastering this chapter.

A key point to emphasize is that GCA-GLTL are not reported in separate GCA-GLTL financial statements or in any fund financial statements. They are reported only as part of governmental activities in the government-wide financial statements.

The approach presented in the chapter is not mandated by GAAP. GCA-GLTL accounting entities and entries will vary in practice. For instance, a government might use separate GCA and GLTL nonfund accounts that are much like the separate general fixed asset and general long-term debt account groups that were required by GAAP prior to the adoption of GASB Statement No. 34.

The entries made in the GCA-GLTL accounts, as well as additional ones not recorded therein, are included in the worksheet to derive governmental activities data for the government-wide financial statements—as discussed and illustrated in Chapter 14.

Claims and Judgments, Compensated Absences, and Pensions/OPEB Emphasize that the distinction between the current and noncurrent portion of the liabilities for claims and judgments, compensated absences, and pensions is critical in both General Fund accounting and General Capital Assets accounts and General Long-term Liability accounts (GCA-GLTL) accounting for these expenditures and liabilities. Only the portion of the liability that is reported as a fund liability (current) affects expenditure recognition in the current period.

The remainder of the liability is GLTL and is not reported as expenditures in the current period.

4 ..

Only that portion of the liability that is normally expected to be liquidated with expendable available financial resources (i.e., that mature, or come due for payment during the period) are reported as fund expenditures and fund liabilities. Changes in the GLTL do not affect expenditure recognition for the current period.

Note that this same guidance affects governmental fund accounting for the expenditures and liabilities resulting from OPEB, special termination benefits, and landfill closure and postclosure costs.

The GASB has issued significant new standards on accounting and reporting for defined benefit pension plans and other postemployment benefit (OPEB—primarily retiree healthcare) plans and on government employers’ reporting of related pension and OPEB expenditures, expenses, and liabilities.

These standards replace an accounting and reporting philosophy that was tied directly to a relatively broad subset of specific approaches for pension and OPEB funding by employer governments with one that eliminates this direct tie between the accounting and reporting requirements and a government’s funding (financing) decisions. The new standards specify a specific approach to measuring the net pension liability and net OPEB liability that a government must report, regardless of the funding method used. Likewise, the pension expense and OPEB expense to be reported in government-wide financial statements and in proprietary and fiduciary fund financial statements follow specific guidelines regardless of the funding method used. A government’s actuarially required contribution, or ARC, does not directly affect the measurement of pension and OPEB amounts under the new standards. Also, all defined benefit pension and OPEB plans are subject to essentially the same guidance, whereas different guidance applied in the past for governments participating in certain types of multi-employer defined benefit plans referred to as cost-sharing plans.

In government-wide, proprietary fund, and fiduciary fund financial statements, most employers—those participating in a plan administered through a trust or similar qualifying arrangement—must report a net pension liability equal to the difference between their total pension liability and the related pension plan fiduciary net position. The total pension liability is the present value of the future estimated pension benefit payments earned to date by a government’s employees. The liability is measured using the entry age actuarial cost method applied on an individual employee basis and using a level percentage of payment. Fiduciary net position of a pension plan equals the pension plan assets and deferred outflows of resources less the pension plan liabilities and deferred inflows of resources—reported per the guidance in GASB Statement No. 67, as amended, and discussed in Chapter 12. (Measurement of the net OPEB liability, total OPEB liability, and OPEB plan fiduciary net position largely parallel that for the equivalent pension amounts.)

Pension expense is reported in these financial statements equal to the change in the net pension liability during the measurement period reported on for pensions in the financial statements.

However, recognition of changes in the net pension liability is deferred for amounts related to:

5 ..

• •

Differences between actual and expected earnings on pension plan assets each year Changes in the total pension liability for (a) changes in actuarial assumptions such as mortality rates and employee turnover and (b) differences between such assumptions and actual experience (called experience gains and losses)

The total amount of pension expense, net pension liability, and deferred outflows of resources and deferred inflows of resources must be allocated among proprietary funds, fiduciary funds, and general long-term liabilities. This allocation is usually based on the proportions of covered employee payroll for the different activities. (The measurement and reporting of OPEB expense and related deferred amounts largely parallel those for pensions.)

In governmental funds, expenditures are reported for contributions paid to the pension plan adjusted for the change during the year in the amount of net pension liability that is due and payable. Only the portion of the net pension (or OPEB) liability that is considered due and payable1 is reported in these funds. Normally, the due and payable net pension liability is zero for pensions and does not differ from past amounts for either pensions or OPEB. Therefore, in spite of the significant changes to the total liabilities and the expenses that governments report for pensions and OPEB, almost all governments will report the same amounts of pension expenditures and OPEB expenditures and related liabilities in governmental funds under the new standards as under the previous standards.

To illustrate, assume that a government’s net pension liability at the: • beginning of the fiscal year, which is also assumed to be the beginning of the government’s measurement period for pensions, is $15 million (total pension liability is $37 million and fiduciary net position is $22 million) • and at the end of the fiscal year is $14 million (total pension liability is $39 million and fiduciary net position is $25 million).

Also, assume that contributions to the pension plan from the General Fund for the year were $912,800, that actual earnings on pension plan investments were $1.2 million more than expected, the plan had an experience gain of $175,000, and the total pension liability measurement increased by $830,000 during the year because of changes in benefit assumptions.

None of the net pension liability is due and payable—either at the beginning or the end of the year. Also, no pension-related deferred outflows of resources or deferred inflows of resources are reported in governmental funds.

For measuring and reporting pension expenditures in the General Fund, only the two boldfaced sentences in the preceding paragraph have an impact. Pension expenditures will equal the $912,800 of General Fund contributions because the due and payable portion of the net pension

1

A net pension liability (or net OPEB liability) is due and payable only to the extent that pension plan assets (or OPEB plan assets) are less than pension (or OPEB) benefits due and payable. This is extremely unusual for a pension plan. There is a possibility that the GASB will change this determination of the due and payable amount in an Omnibus standard in 2017, however, having zero due and payable net pension liability still would be the norm.

6 ..

liability was zero at both the beginning of the year and the end, which is normal. The General Fund entry to record the payments to the pension plan is: Expenditures—Operating—(Various Functions) ............

Cash............................................................................

To record pension expenditures.

$912,800 $912,800

The General Long-Term Liabilities accounts entry is: Net Pension Liability ....................................................... $1,000,000 Deferred Outflows of Resources— Assumption Changes ..............................................

830,000 Deferred Inflows of Resources—Investment Gains ..

Deferred Inflows of Resources—Experience Gains ..

Net Position................................................................

To record the decrease in the net pension liability during the year.

$1,200,000 175,000 455,000

Deferrals resulting from differences between expected and actual plan investment income must be amortized over a closed 5-year period, beginning in the year that the difference arises.

Therefore, 20% of the deferred gains ($240,000) must be amortized in the current year. Most other pension-related deferred outflows of resources and deferred inflows of resources must be amortized over a closed period equal to the average remaining service lives of plan participants.

If we assume this average life is 8 years for plan participants in the example, $103,750 of the deferred outflows for assumption changes must be amortized in the current year ($830,000/8 years), and $21,875 of the deferred inflows for the experience gain must be amortized in the current year ($175,000/8 years). The entry for this amortization is: Deferred Inflows of Resources—Investment Gains ........

Deferred Inflows of Resources—Experience Gain..........

Deferred Outflows of Resources— Assumption Changes ..............................................

Net Position................................................................

To record the amortization of current period deferrals.

$240,000 21,875 $103,750 158,125

Pension expense for general government activities can be calculated as follows: Change in net pension liability ..............................................

Add: Contributions to pension plan ..........................................

Increases in deferred inflows for: Investment gains ...........................................................

Experience gains ...........................................................

Amortization of deferred outflows for assumption changes .................................................

7 ..

$(1,000,000) $ 912,800 1,200,000 175,000 103,750

2,391,550 1,391,550

Less: Increase in deferred outflows for assumption changes ....

Amortization of deferred inflows for: Investment gains ...........................................................

Experience gains ...........................................................

Pension Expense ....................................................................

830,000 240,000 21,875

1,091,875 $ 299,675

The literature does not establish any deferred outflows of resources or deferred inflows of resources that may be reported in governmental funds. In the government-wide financial statement statements, pension expense, the net pension liability, and related deferred outflows of resources and deferred inflows of resources must be reported. Note that given the same information for OPEB as illustrated here for pensions, the reporting would be the same.

QUESTIONS/EXERCISES/PROBLEMS/CASES—SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises Number of Problems Number of Cases

18 11 (includes three multiple choice exercises, two with ten questions each and one with eight questions) 9 (includes seven extensive transactional analysis problems and two research and analysis problems) 3 (two transactional cases—one for the State of Delaware and one for Greene County, Ohio—and the Harvey City comprehensive case)

Many transactions that have been studied in the context of various governmental funds also affect the GCA-GLTL accounts. Therefore, most of the transactions in the GCA-GLTL require related entries in one or more funds. In particular, when capital outlay expenditures, other financing sources for general capital asset sale proceeds, other financing sources for bond issuances, GLTL principal retirement expenditures, or other financing uses are recorded, students need to recognize that these transactions affect and require entries in the GCA-GLTL accounts as well. The interfund-GCA-GLTL problems in the chapter are excellent for reinforcing this.

However, students often find it beneficial to work some problems that require only the GCAGLTL entries to be made, allowing them to focus on how these accounts are used.

Exercises 9-4 and 9-5 These exercises focus on solely on the recording of transactions in the GCA-GLTL accounts. Problems 9-1 and 9-2 represent more extensive problems that simply affect these accounts.

8 ..

Exercises 9-6 and 9-7 These exercises expand the focus all funds that are affected by transactions, not just the GCA-GLTL accounts. For more extensive problems of this nature, refer to Problems 9-3, 9-4, 9-5, 9-6, and 9-7.

Refer to the chart below for a summary of specific topics covered by certain exercises and problems in this chapter.

Topics Covered in Specific Exercises and Problems EXERCISE 94 5 6 7 10 X X

TOPIC Land Equipment purchase Building construction Asset sale X Depreciation Reclassifications to/from proprietary funds Capital lease— X X inception Capital lease X payments Bond/Note issuance Bond/Note maturity/retirement Bond/Note interest Refundings/BANs Claims and X judgments OPEB Pensions Internal Services Other

PROBLEM 911 1 2 3 4 X X

X

X

5

7 X

X

X

6 X

X X

X X

X

X

X

X

X

X

X

X

X

X

X X

X

X

X

X

X

X

X

X

X X

X

X

X

X X

X

X X

9 ..

X

X

X

X X

HARVEY CITY COMPREHENSIVE CASE Students may have numerous questions regarding the Harvey City case transactions and events that they must record in this chapter. Items that may generate questions include: •

Certain transactions from prior chapters that do not require entries in the GCA-GLTL accounts are included in the information provided in this chapter. Students need to understand that transactions such as the order of equipment and signing of construction contracts do not affect the GCA-GLTL accounts. These transactions include transactions 4-10 and 7-5 for the Parks and Recreation CPF.

•

A few transactions result in gains or losses or expenses (expense reductions) being recorded in the GCA-GLTL accounts. These include transactions involving the sale of GCA, bond premium amortization, and depreciation. These temporary accounts are then closed to the Net Position accounts.

•

Also, note that interest payable is not accrued using the approach presented in the chapter, while premiums and discounts are amortized. The former does not relate directly to the carrying value of the liability whereas the latter items are directly related to the carrying value of the bonds themselves. (Interest payable will be recorded on the worksheet used to derive government-wide financial statement data, which is explained in Chapter 14.)

Additional questions for in-class or homework assignments 1. Distinguish between interfund transactions and interfund relationships.

Suggested Solution Interfund transactions are those transactions between or among departments (or activities) financed from different funds or transfers from one fund to another. For example, a transfer of resources from the General Fund to a Debt Service Fund is an interfund transaction, as is one in which the city’s share of the cost of a special assessment project is established in the accounts of both the General Fund and a Capital Projects Fund.

Interfund relationships, on the other hand, are the amounts receivable or payable between or among funds at a balance sheet date. Short-term interfund relationships are commonly evidenced by Due To (name) Fund and Due From (name) Fund accounts, whereas longer term (noncurrent) interfund relationships are indicated by Advance To (name) Fund and Advance From (name) Fund accounts.

2. A municipality owns a fire station and is required to pay assessments of $10,000 as an owner of property in the benefited area. As a result of the improvements, the property in

10 ..

the benefited area has risen in value by 15%. Should the asset be written up, and if so, by how much?

Suggested Solution Yes, the asset should be written up by $10,000. The municipality incurred an expenditure of $10,000 and should add it to the cost of the property. It would be improper to increase the valuation of the property by 15% because the accounts for capital assets should show the cost or appraised value of the assets at the time of their acquisition plus any additional expenditures incurred for betterments and other improvements.

3. Records of capital assets owned by Lucas County have never been maintained in a systematic manner. The auditor has recommended that an inventory be taken and that General Capital Assets accounts be established and maintained. The governing board agrees that it needs better capital asset control but has tentatively concluded that no action will be taken in this regard because the appraisal fee estimates provided by reputable appraisal firms far exceed the amount of resources available for such an undertaking.

What suggestions or comments, if any, would you offer if your advice were sought by members of the board?

Suggested Solution An inventory of capital assets should be taken, and a General Capital Assets accounts should be established and maintained, whether or not the asset costs can be determined objectively or independent appraisals are made.

General Capital assets accounts serve the purposes of: a. Unit control and accountability, and b. Cost recording and historical dollar accountability, c. Providing general capital asset data required in the government-wide GAAP financial statements.

When the costs of items may be readily determined from records available, they should be recorded in the General Capital Assets accounts. Otherwise, estimated original costs may be recorded so long as the fact that they have been estimated is clearly disclosed. Appraised values are not the only acceptable estimates. The current appraised value is not an appropriate amount to record for a capital asset—it should be the estimated value when acquired. Thorough searches of government minutes and other archived documents as well as local newspapers may provide valuable information for establishing appropriate estimates of capital asset values. Over a period of years, the cost data will become increasingly more accurate as the estimated costs are removed when the old assets are disposed of and the actual costs of newly acquired items are entered therein.

11 ..

4. The GASB Statement No. 34 reporting model requires state and local governments to report general government capital outlay expenditures, costs of using capital assets, and gain or loss upon disposition of capital assets. Explain why this is so.

Suggested Solution General government capital outlay represents a use of general government current financial resources—the measurement focus for governmental fund reporting. The cost of using capital assets (depreciation or the modified approach measurement) represents a use of economic resources—the measurement focus for government-wide financial reporting. Likewise, the gain or loss on the disposition of capital assets is required when reporting under the flow of economic resources measurement focus and accrual basis of accounting.

Because the GASB requires general government activities to be reported under these two different measurement focuses (perspectives), all three of these capital asset related information elements are required.

Additional problems for in-class or homework assignments Problem 1 (Interfund-GCA-GLTL Entries) Record the following transactions in all the affected funds and/or GCA-GLTL accounts of a county. Reflect all required accruals as well.

1. A county transferred $2,000,000 of general revenues to the fund to be used to pay principal and interest on its outstanding bonds.

2. Principal of $10,000,000 and interest of $2,000,000 became due and payable on the bonds referred to in the preceding transaction. Only the interest was paid.

3. The government sold a building that has been used to house government offices. The building, which originally cost $1,500,000 (accumulated depreciation $1,400,000), was sold for $2,000,000.

4. The county entered into a capital lease for police vehicles. The capitalizable cost of the vehicles was $550,000, including a $50,000 down payment. The lease was initiated at mid-year and the first annual payment is due in the next year. The implicit interest rate on the lease was 20 percent.

5. In the next year, the county paid the first annual lease payment, $250,000.

6. The county contributed $1,000,000 to its pension plan for its general government employees. There was a $2,000,000 increase in the net pension liability. There was no due and payable liability to the pension plan—either at the beginning or the end of the 12 ..

year. Also, there were no pension-related deferred outflows or deferred inflows of resources—either at the beginning or the end of the year.

7. The county completed construction of a general government building at a total cost of $18,000,000; all but 10 percent of which has been paid. Construction billings for the current year totaled $10,000,000.

Suggested Solution #

Accounts

Dr.

(1)

General Fund OFU—Transfer to DSF..........................................................

Cash ................................................................................

To record transfer to DSF Debt Service Fund Cash .......................................................................................

OFS—Transfer from GF .................................................

To record transfer from GF

(2)

Debt Service Fund Expenditures—Debt Service—Interest...................................

Expenditures—Debt Service—Principal ................................

Cash ................................................................................

Defaulted Bonds Payable ...............................................

To record matured principal and interest expenditures and default of bond principal General Long-Term Liabilities accounts Bonds Payable .......................................................................

Net Position ....................................................................

To record maturity of bonds

(3)

General Fund Cash .......................................................................................

OFS—Sale of General Capital Assets ............................

To record proceeds from sale of general capital asset General Capital Assets accounts Net Position............................................................................

Accumulated Depreciation—Buildings..................................

Buildings .........................................................................

To remove building from the accounts upon its sale 13 ..

Cr.

2,000,000 2,000,000

2,000,000 2,000,000

2,000,000 10,000,000 2,000,000 10,000,000

10,000,000 10,000,000

2,000,000 2,000,000

100,000 1,400,000 1,500,000

#

Accounts

(4)

General Fund Expenditures—Capital Outlay ...............................................

Cash ................................................................................

OFS—Capital Leases Payable .......................................

To record general government capital lease

(4)

(5)

Dr.

General Long-Term Liabilities accounts Capital Leases Payable..........................................................

Net Position ....................................................................

To record reduction in capital lease liability (6)

General Fund Expenditures—Operating—Pension Contributions ...............

Cash ................................................................................

To record pension contribution General Long-Term Liabilities accounts Net Position............................................................................

Net Pension Liability ......................................................

To record unfunded pension contributions

(7)

550,000 50,000 500,000

General Capital Assets and General Long-Term Liabilities accounts Leased Vehicles ......................................................................

550,000 Capital Leases Payable ..................................................

Net Position ....................................................................

To record capital lease General Fund Expenditures—Debt Service—Interest...................................

Expenditures—Debt Service—Principal ................................

Cash ................................................................................

To record capital lease payment

Capital Projects Fund Encumbrances Outstanding ...................................................

Encumbrances.................................................................

To reverse encumbrances (contract assumed signed) Expenditures—Capital Outlay ...............................................

Cash ................................................................................

Contracts Payable—Retainage .......................................

To record current period construction costs

14 ..

Cr.

500,000 50,000

100,000 150,000 250,000

150,000 150,000

1,000,000 1,000,000

2,000,000 2,000,000

10,000,000 10,000,000

10,000,000 9,000,000 1,000,000

#

Accounts

Dr.

General Capital Assets accounts Buildings ................................................................................

Construction in Progress ................................................

Net Position ....................................................................

To record building upon completion

Cr.

18,000,000 8,000,000 10,000,000

Problem 2 (Interfund-GCA-GLTL Entries—Review) The following selected transactions and events (among others) affected the Vatexona Independent School District during the 20X8 and 20X9 fiscal years: 20X8 Transactions and Events 1. A $1,000,000 serial bond issue was issued at 102 during 20X8 to partially finance a new elementary school building that is expected to cost, and be financed, as follows: Bond issue ......................................................

State grant ......................................................

General Fund transfer ....................................

$1,000,000 400,000 200,000 $1,600,000

(Assume that project appropriations and estimated financing sources were authorized previously, but budgetary accounts other than Encumbrances are not recorded in the CPF accounts.)

2. The bond premium was immediately transferred to the Debt Service Fund for the bond issue and was ordered to be fully reserved for debt principal retirement.

3. Capital outlay expenditures incurred for the new elementary school building during 20X8 of $1,000,000, as encumbered, were vouchered for payment net of a 10 percent retained percentage.

4. The state grantor agency was billed for its share of the 20X8 elementary school building expenditures (25 percent) on the expenditure-driven reimbursement grant.

(The billing is expected to be collected in 30 to 45 days.)

5. Transfers were made from the General Fund during 20X8 as follows: Debt Service Fund For bond principal retirement ........................

For interest and fiscal agent charges ..............

15 ..

$ 50,000 65,000 115,000

Capital Projects Fund For elementary school building (only $80,000 paid during 20X8) ............................

200,000 $315,000

6. Debt Service Fund expenditures paid during 20X8 on the elementary school building bonds were: Bond principal ................................................

Interest and fiscal agent charges ....................

$ 50,000 64,000 $114,000

7. The Capital Projects Fund and Debt Service Fund accounts were closed at the end of 20X8.

20X9 Transactions and Events 8. The elementary school building was completed during 20X9. The remaining state grant was billed and received; the contractor was paid in full, as was the General Fund transfer; and all other preclosing transactions and events were recorded. After all of these transactions and events were properly recorded (do not record them), the preclosing balances of the CPF at the end of 20X9 included Cash, Unreserved Fund Balance, and these operating amounts: Revenues—State Grant ..................................

Expenditures—Capital Outlay .......................

$145,000 580,000

The remaining Capital Projects Fund balance was transferred to the Debt Service Fund and the CPF accounts were closed.

9. The Vatexona Independent School District estimates that it had these unrecorded, estimated liabilities at the end of 20X9:

Claims and judgments ....................................

Vacation and sick leave .................................

Total $300,000 450,000

Current Portion $50,000 80,000

None of these amounts related to prior years, during which related amounts had been properly recorded. The current portion will be paid from the General Fund.

Prepare the entries required to record these transactions and events in the general ledger accounts of the affected funds and GCA-GLTL accounts of Vatexona Independent School District.

Assume that an appropriate series of Revenues, Expenditures, General Capital Assets, and 16 ..

General Long-Term Liabilities accounts is used in the general ledgers of the funds and the GCAGLTL accounts.

Suggested Solution Vatexona Independent School District General Ledger Journal Entries (Selected) 20X8 and 20X9 Fiscal Years # Accounts 20X8 Transactions and Events (1)

Capital Projects Fund Cash ......................................................................................

OFS—Bonds ..................................................................

OFS—Bond Premium .....................................................

To record bond issue proceeds General Long-Term Liabilities accounts Net Position............................................................................

Serial Bonds Payable .....................................................

Premium on Serial Bonds ...............................................

To record bond liability

(2)

Capital Projects Fund OFU—Transfer to Debt Service Fund ...................................

Cash ...............................................................................

To record transfer of bond premium to Debt Service Fund Debt Service Fund Cash ......................................................................................

OFS—Transfer from Capital Projects Fund .................

To record transfer of bond premium from Capital Projects Fund

(3)

Dr.

1,020,000 1,000,000 20,000

1,020,000 1,000,000 20,000

20,000 20,000

20,000

Capital Projects Fund Expenditures—Capital Outlay ..............................................

1,000,000 Encumbrances Outstanding ..................................................

1,000,000 Contracts Payable—Retainage ......................................

Vouchers Payable ..........................................................

Encumbrances ................................................................

To record reversal of encumbrances entry and vouchering capital outlay expenditures incurred during 20X8, net of retained percentage

17 ..

Cr.

20,000

100,000 900,000 1,000,000

Accounts

Dr.

General Capital Assets accounts Construction in Progress ......................................................

Net Position ....................................................................

To record construction in progress (4)

(5)

Debt Service Fund Cash ......................................................................................

OFS—Transfer from General Fund ...............................

To record transfer from General Fund Capital Projects Fund Cash ......................................................................................

Due from General Fund ........................................................

OFS—Transfer from General Fund ...............................

To record transfer from General Fund (6)

1,000,000 1,000,000

Capital Projects Fund Due from State Government ..................................................

250,000 Revenues—State Grant ..................................................

To record billing for state grant share of 20X8 capital expenditures General Fund OFU—Transfer to Debt Service Fund ..................................

OFU—Transfer to Capital Projects Fund ............................

Cash ...............................................................................

Due to Capital Projects Fund .........................................

To record transfers to Debt Service Fund and Capital Projects Fund

Debt Service Fund Expenditures—Debt Service—Principal ...............................

Expenditures—Debt Service—Interest ..................................

Cash ...............................................................................

To record serial bond debt service payments General Long-Term Liabilities accounts Serial Bonds Payable ............................................................

Net Position ....................................................................

To record payment of serial bond principal from Debt Service Fund

18 ..

Cr.

250,000

115,000 200,000 195,000 120,000

115,000 115,000

80,000 120,000 200,000

50,000 64,000 114,000

50,000 50,000

#

Accounts

Dr.

(7)

Capital Projects Fund OFS—Bonds ..........................................................................

OFS—Bond Premium ............................................................

OFS—Transfer from General Fund ......................................

Revenues—State Grant .........................................................

OFU—Transfer to Debt Service Fund ...........................

Expenditures—Capital Outlay .......................................

Fund Balance .................................................................

To close the accounts at the end of 20X8 Debt Service Fund OFS—Transfer from General Fund ......................................

OFS—Transfer from Capital Projects Fund .........................

Expenditures—Debt Service—Principal .......................

Expenditures—Debt Service—Interest ..........................

Fund Balance .................................................................

To close the accounts at the end of 20X8 General Long-Term Liabilities accounts The bond discount would be amortized at year end as follows: Expenses—Interest .................................................................

Bond Discount ................................................................

Cr.

1,000,000 20,000 200,000 250,000 20,000 1,000,000 450,000

115,000 20,000 50,000 64,000 21,000

XXX XXX

20X9 Transactions and Events (8)

Capital Projects Fund OFU—Transfer to Debt Service Fund ..................................

Cash ...............................................................................

To record transfer of net assets at conclusion of capital project Revenues—State Grant .........................................................

Fund Balance ........................................................................

Expenditures—Capital Outlay .......................................

OFU—Transfer to Debt Service Fund ...........................

To close the accounts and terminate the fund General Capital Assets accounts Buildings ...............................................................................

Construction in Progress ...............................................

Net Position ....................................................................

To record completion of building 19 ..

15,000 15,000

145,000 450,000 580,000 15,000

1,580,000 1,000,000 580,000

#

Accounts

(8)

Debt Service Fund Cash ......................................................................................

OFS—Transfer from Capital Projects Fund .................

To record transfer from Capital Projects Fund being terminated

(9)

Dr.

General Fund Expenditures—Operating—Claims and Judgments .............

Expenditures—Operating—Compensated Absences ............

Claims and Judgments Payable .....................................

Vacation and Sick Leave Payable ..................................

To record the “current” portion of CJCA liabilities General Long-Term Liabilities accounts Net Position............................................................................

Claims and Judgments Payable .....................................

Vacation and Sick Leave Payable ..................................

To record “noncurrent” portion of CJCA liabilities

Cr.

15,000 15,000

50,000 80,000 50,000 80,000

620,000 250,000 370,000

Problem 3 (Net Pension Liability and All Funds/GLTL Entries) The following pension plan information was assembled by the finance director for the City of Fairfield for the fiscal year ended June 30, 20X8. The City of Fairfield does not have any Enterprise or Fiduciary Funds.

• • • • • • • •

The total pension liability is $22,125,000 at the beginning of the fiscal year, which is also the beginning of the government’s measurement period for pensions, and $25,625,000 at the end of the fiscal year.

The pension plan fiduciary net position is $21,600,000 at the beginning of the fiscal year and $24,775,000 at the end of the fiscal year.

Contributions to the pension plan from the General Fund for the year were $6,000,000.

Pension plan investment income was $1,000,000 less than expected.

The total pension liability measurement increased by $2,000,000 during the year because of assumption changes.

Average service life of plan participants is 10 years.

None of the net pension liability is due and payable—either at the beginning or the end of the year.

There are no deferred outflows of resources or deferred inflows of resources balances from prior years.

20 ..

1. Calculate the City’s net pension liability at the beginning and end of the 20X8 year, as well as the change in net pension liability for the fiscal year.

2. Prepare the General Fund entry to record the contributions payment to the pension plan for 20X8.

3. Prepare the GLTL entry to record the change in the City’s net pension liability for 20X8.

4. Prepare the GLTL entry to record the amortization of any current period deferred outflows/inflows of resources from requirement 3.

5. Calculate the amount of pension expense the city would report for governmental activities in its government-wide statement of activities.

Suggested Solution 1.

Net Pension Liability Calculation: Total Pension Liability

Plan Fiduciary Net Position

Net Pension Liability

Balances at 6/30/20X7

$22,125,000

$21,600,000

$525,000

Balances at 6/30/20X8

$25,625,000

$24,775,000

$850,000

Net Change

$325,000

#

Accounts

2.

General Fund Expenditures—Operating—(Various Functions) .....................

Cash ....................................................................................

To record pension expenditures (detailed by function).

3.

Dr.

GLTL accounts Deferred Outflows of Resources—Investment Losses ..............

Deferred Outflows of Resources— Assumption Changes .............................................................

Net Pension Liability ..........................................................

Net Position.........................................................................

To record the increase in the net pension liability 21 ..

Cr.

6,000,000 6,000,000

1,000,000 2,000,000 325,000 2,675,000

# 4.

during the year.

Accounts

Dr.

GLTL accounts Net Position...............................................................................

Deferred Outflows of Resources—Investment Losses ........

Deferred Outflows of Resources— Assumption Changes ........................................................

To record the amortization of current period deferrals.

Cr.

400,000 200,000 200,000

Note: • Deferrals resulting from differences between expected and actual plan investment income must be amortized over a closed 5-year period, beginning in the year that the difference arises. $200,000 = $1,000,000 / 5 years • Most other pension-related deferred outflows of resources and deferred inflows of resources must be amortized over a closed period equal to the average service lives of plan participants. $200,000 = $2,000,000 / 10 years • The net pension liability of $850,000 and deferred outflows of resources of $2,600,000 ($1,000,000 + $2,000,000 ‒ $200,000 ‒ $200,000) are reported in the governmentwide statement of net position.

5.

Increase in Net Pension Liability......................

Add: Contributions ........................................

Amortization of unrecognized investment losses for the year ...........

Amortization of unrecognized assumption loss for the year .............

Less: Unrecognized investment losses for the year .............................

Unrecognized assumption loss for the year .................................

Pension expense ................................................

22 ..

$ 325,000 $6,000,000 200,000 200,000

6,400,000 6,725,000

1,000,000 2,000,000

3,000,000 $3,725,000

Problem 4 (Net OPEB Liability and All Funds/GLTL Entries) Waco County provides healthcare and vision benefits for retirees and their dependents through a defined benefit other postemployment benefits plan (Waco County Retiree Benefits Plan— WCRBP). The WCRBP is a single-employer plan and the full cost of the benefits is covered by the plan. The WCRBP is administered through a trust and benefits are provided by a third-party insurer. The following OPEB plan information was provided for the fiscal year ended August 31, 20X9: • • • • • • •

The county’s total OPEB liability was $2,298,198 and $2,087,528 at the beginning and end of the current fiscal year, respectively.

The OPEB plan fiduciary net position was $2,260,448 at the beginning of the fiscal year and $2,055,328 at the end of the fiscal year.

The County contributed $196,610 to the WCRBP from the General Fund.

Actual investment earnings on the WCRBP were $7,050 less than expected.

The County did not have any proprietary or fiduciary activities related to the WCRBP. None of the net OPEB liability is due and payable—either at the beginning or the end of the year.

There are no deferred outflows of resources or deferred inflows of resources balances from prior years.

1. Calculate the County’s net OPEB liability at the beginning and end of the 20X9 year, as well as the change in net OPEB liability for the fiscal year.

2. Prepare the General Fund entry to record the contributions payment to the WCRBP for the current year.

3. Prepare the GLTL entry to record the change in the County’s net OPEB liability at year end.

4. Prepare the GLTL entry to record the amortization of any current period deferred outflows/inflows of resources from requirement 2.

5. Calculate the amount of OPEB expense the county would report for governmental activities in its government-wide statement of activities.

23 ..

Suggested Solution

1.

Net OPEB Liability Calculation: Total OPEB Liability

Plan Fiduciary Net Position

Net OPEB Liability

Balances at 8/31/20X8

$2,298,198

$2,260,448

$37,750

Balances at 8/31/20X9

$2,087,528

$2,055,328

$32,200

Net Change

$ (5,550)

#

Accounts

2.

General Fund Expenditures—Operating—(Various Functions) .....................

Cash ....................................................................................

To record OPEB expenditures (detailed by function).

3.

4.

Dr.

GLTL accounts Net OPEB Liability ...................................................................

Deferred Outflows of Resources—Investment Losses ..............

Net Position.........................................................................

To record the decrease in the net OPEB liability during the year.

GLTL accounts Net Position...............................................................................

Deferred Outflows of Resources—Investment Losses ........

To record the amortization of current period deferrals.

Cr.

196,610 196,610

5,550 7,050 12,600

1,410 1,410

Note: • Deferrals resulting from differences between expected and actual plan investment income must be amortized over a closed 5-year period, beginning in the year that the difference arises. $1,410 = $7,050 / 5 years • Most other OPEB-related deferred outflows of resources and deferred inflows of resources must be amortized over a closed period equal to the average service lives of plan participants (active employees and inactive employees).

• The net OPEB liability of $32,200 and deferred outflows of resources of $5,640 ($7,050 ‒ $1,410) are reported in the government-wide statement of net position.

24 ..

#

Accounts

Dr.

5. Decrease in Net OPEB Liability ...........................

Add: Contributions ........................................

Amortization of unrecognized investment losses for the year ...........

Less: Unrecognized investment losses for the year ........................................

OPEB Expense ..................................................

25 ..

$ (5,550) $196,610 1,410

198,020 192,470 7,050 $185,420

Cr.

CHAPTER TEN ENTERPRISE FUNDS (Pages 392–442)

CHAPTER TEN OUTLINE 1) Common characteristics and principles of proprietary funds a) Accounting equation b) Accounting principles c) Financial statements 2) Enterprise funds defined 3) Enterprise fund accounting illustrated a) Budgeting and appropriations b) Interfund activity c) Intergovernmental grants d) Interest capitalization e) Establishment of fund and acquisition of plant f) Accounting for routine operating transactions i) Unbilled receivables ii) Net pension liabilities and related amounts iii) Accounting for extraordinary and special items g) Preclosing trial balance and financial statements—basic example i) Statement of net position (1) Net investment in capital assets (2) Restricted net position (3) Unrestricted net position (4) Net position components compared at year end ii) Statement of revenues, expenses, and changes in fund net position iii) Statement of cash flows (1) Cash flows from operating activities (2) Cash flows from noncapital financing activities and cash flows from capital and related financing activities (3) Cash flows from investing activities 4) Enterprise fund accounting—extended illustration a) Long-term debt refundings b) Refunding transactions for extended example c) Accounting for restricted asset accounts d) Restricted asset transactions and relationships for extended example i) Customer deposits trust or agency subfund ii) Construction financed by bond issue (capital projects fund subfund) 1 ..

iii) Debt service and related accounts e) Preclosing trial balance—extended example f) Closing entries 5) Enterprise fund reporting—extended example a) Statement of net position b) Statement of revenues, expenses, and changes in fund net position c) Statement of cash flows 6) Combining enterprise fund financial statements 7) Concluding comments 8) Questions 9) Exercises 10) Problems 11) Cases 12) Harvey City Comprehensive Case

CHAPTER LEARNING OBJECTIVES 10.1

Describe the characteristics and accounting principles of proprietary funds.

10.2

Determine what activities should be reported using Enterprise Funds.

10.3

Demonstrate the fundamentals of proprietary fund accounting and financial reporting, including: • Summarize proprietary fund reporting for intergovernmental grant revenues and debt refundings.

• Prepare journal entries for typical proprietary fund transactions.

• Prepare the proprietary fund financial statements.

10.4

Account for and report proprietary fund refunding transactions and restricted assets.

10.5

Describe combining Enterprise Fund financial statements.

2 ..

CHAPTER OVERVIEW AND SYNOPSIS This chapter discusses and illustrates the common characteristics of proprietary funds, as well as the basic accounting procedures and financial statements for Enterprise Funds. Several specific topics for which the accounting treatment differs from that for governmental funds or for businesses are presented. The financial statements required for proprietary funds are unique compared to the similar business financial statements and require careful attention. This chapter also explains the applicability of GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements.

CRITICAL OBJECTIVES Chapter 10 is an important chapter. It provides the basis for understanding the accounting and reporting model for both Enterprise Funds and Internal Service Funds, which is the topic of Chapter 11. Students will need little time to master Chapter 11, “Internal Service Funds,” if they are successful here. Likewise, understanding Chapter 10 well will help students better understand government-wide financial reporting requirements and how to derive government-wide financial statement data for governmental activities. Key objectives include understanding: • • • •

The unique formats and classifications used in each of the proprietary fund financial statements.

How to compute the proper balances of each component of net position.

The classification and reporting of proprietary fund intergovernmental grants.

How to account for proprietary fund debt refundings.

The following narrative summarizes some of the more complex concepts of this chapter and provides suggestions on how to convey the necessary points to the students as effectively as possible.

Refunding Transactions The logic that the GASB applies to refunding transactions is that the “form” of debt is changed, not the amount. In the context of a proprietary fund accounting equation, this should mean that after accounting for both the issuance of refunding bonds and the use of the refunding proceeds to retire or defease outstanding debt, there is no change in total carrying value of assets or liabilities and no change in net position. Therefore, the gain or loss on early retirement of debt that a business would recognize (or that a proprietary fund would recognize if the early retirement or defeasance were not financed by refunding proceeds) must be deferred. The deferred amount becomes part of the carrying value of the refunding debt and must be amortized and either charged to or credited to interest expense in the future years.

One difficulty for many students is simply that they may be uncomfortable with bond retirement transactions in general. You may find that they are more successful in mastering accounting for proprietary fund debt refundings if you first remind them how a business would account for the 3 ..

same transaction. This must assume that the transaction is actually a retirement, not an insubstance defeasance.

For example, in discussing one or more of the exercises or problems on bond refundings, have students assume that the transaction is a business transaction and that the old bonds are actually retired. For example, assume the following facts for a true business operation: • Issued refunding bonds at par, $4,050,000. The refunding bonds have an interest rate of 7% annually. The term of the bonds is 8 years, and a portion of the principal is to be repaid each year, beginning in the third year of the bond term.

• Paid the proceeds of the refunding bonds to an escrow agent to defease other outstanding bonds. The bonds that are defeased have a par value of $4,200,000, 4 years remaining to maturity, no unamortized premium or discount, and an interest rate of 6% payable annually.

• Paid interest on the refunding bonds, $283,500.

Thus, a business would make the following entries under those assumptions: Cash........................................................................................

Bonds Payable (new) ....................................................

4,050,000

Bonds Payable (old) ...............................................................

Cash...............................................................................

Extinguishment Gain on Early Retirement of Bonds ...

4,200,000

Interest Expense .....................................................................

Cash...............................................................................

283,500

4,050,000

4,050,000 150,000

283,500

In evaluating the effect of these transactions on the business’s accounting equation, note that while assets remain the same after the first two transactions, the liabilities are reduced and equity therefore increases by the amount of the extinguishment gain.

These changes in the amount of liabilities and equity are not consistent with the philosophy that in a refunding new debt is simply substituted for old debt. The entries required for a government Enterprise Fund in the refunding for these same facts would be: Cash........................................................................................

Bonds Payable (new) .........................................................

Note: This is the same as for a business.

4,050,000

Bonds Payable (old) ...............................................................

Cash ...................................................................................

Deferred Interest Expense Adjustment—

4,200,000

4 ..

4,050,000

4,050,000

Refunding Bonds ...........................................................

150,000

Note: In this example, the Deferred Interest Expense Adjustment account ($150,000) is an adjunct account (just like a bond premium) and must be added to the balance of the refunding bonds ($4,050,000) to get the carrying value of the refunding bonds ($4,200,000). Therefore, the carrying value of the refunding bonds immediately after the retirement or defeasance using refunding proceeds ($4,200,000) is the same as the carrying value of the original bonds immediately before the refunding (also $4,200,000).

The deferred interest expense adjustment on refunding bonds will be amortized to interest expense in a manner similar to a bond premium. The shorter of the remaining term of the refunded (old) bonds or the term of the refunding (new) bonds is used for the amortization period—in this case 4 years.

Interest Expense .....................................................................

Cash ...................................................................................

Deferred Interest Expense Adjustment— Refunding Bonds ($150,000 / 4 years) ..............................

Interest Expense .............................................................

283,500 283,500

37,500 37,500

At the end of 4 years, the government will have fully amortized the deferred interest expense adjustment, leaving the carrying value of the refunding bonds equal to their par value in this case. The government will have recognized $150,000 less interest expense over that 4-year period than would a business that had reported an extinguishment gain on the early retirement.

Net Position Components One area that students are apt to find challenging is the computation of net position. Illustration 10-3 (page 406) summarizes what assets and liabilities should be assigned to each component.

However, other valuable points to add to their understanding of this computation are: •

Not all capital asset–related debt is deducted from Net Investment in Capital Assets. The terminology in GASB Statement No. 34 describing this net position component only refers to borrowings. Therefore, for instance, Interest Payable on bonds issued to finance construction of capital assets is deducted from Unrestricted Net Position (or from Restricted Net Position if payable from resources restricted for that purpose). Interest Payable is not deducted from Net Investment in Capital Assets.

•

The restriction on assets must be more limiting than just that the resources are limited for the use of the enterprise activity being reported on to be included in the Restricted Net Position of the Enterprise Fund. (This type restriction would cause these assets to be part of Restricted Net Position reported for Business-Type Activities in the government-wide financial statements.)

5 ..

QUESTIONS/EXERCISES/PROBLEMS/CASES — SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises Number of Problems

Number of Cases

17 8 (includes one exercise with 10 multiple-choice questions and several cash flow and operating statement preparation exercises) 8 (includes one problem with 10 multiple-choice questions, several transactional analysis problems, and a financial reporting essay) 3 (one case for Anchorage, Alaska, related to financial statement Classifications, one case for DuPage County, Illinois, focusing on financial statement preparation, and the Harvey City Comprehensive Case)

The exercises and problems provided at the end of this chapter provide excellent mechanisms for illustrating and/or reinforcing each of the key topics to be studied in this chapter, as summarized below: Statement of Revenues, Expenses, and Changes in Net Position Exercises 10-7 and 10-8, as well as Problem 10-2, focus strictly on this operating statement and its unique nature. Problem 10-3 also requires formal preparation of this statement as part of the more comprehensive problem.

Statement of Cash Flows Exercise 10-5 and Problem 10-4 are relatively simple (classification only) problems on the statement of cash flows. For a focus on the preparation of a statement of cash flows, refer to Problem 10-4, Part (b).

Statement of Net Position The most unique aspect of the statement of net position is the computation of the net position components at year end. This is required in Problems 10-3 and 10-5. Exercise 10-2 should be very useful in helping students understand the impact of various transactions on both total net position and the components of net position, as well as on the operating statement. Students should better understand why the components are not tracked in the accounts but are computed at year end after working and discussing this exercise.

Refunding Transactions Exercise 10-3 is a relatively advanced refunding problem that has an unamortized bond discount associated with the bonds being defeased. Bond issue costs are ignored. For a more difficult and extensive refunding problem, refer to Problem 10-6, which also includes other types of transactions.

6 ..

Comprehensive Problems Problems 10-3 and 10-5 require students to prepare journal entries for an Enterprise Fund for a year and also to complete a worksheet and/or financial statements. The Harvey City Comprehensive Case problem may also be used very effectively for this purpose.

HARVEY CITY COMPREHENSIVE CASE The comprehensive case problem is fairly straightforward and not likely to generate many questions. Some students may have questions about the presentation of the financial statements and classification of certain items—particularly with respect to the computation of the components of net position.

Additional questions for in-class or homework assignments 1. How should one determine whether to use an Enterprise Fund to account for a particular activity?

Suggested Solution The first step in determining whether an activity should be accounted for using an Enterprise Fund is to determine whether user fees charged to external users of goods and services are a principal revenue source of the activity. If so, use of Enterprise Fund accounting is permitted, and it may be required. Enterprise Fund accounting is required for activities for which user charges to external users of goods and services are a principal source of revenues if one or more of the following are true: a. The activity is financed with debt that is secured solely by a pledge of the net revenues from fees and charges of the activity. Debt that is secured by a pledge of net revenues from fees and charges and the full faith and credit of a related primary government or component unit—even if that government is not expected to make any payments—is not payable solely from fees and charges of the activity.

(Some debt may be secured, in part, by a portion of its own proceeds but should be considered as payable “solely” from the revenues of the activity.) b. Laws or regulations require that the activity’s costs of providing services, including capital costs (such as depreciation or debt service), be recovered with fees and charges, rather than with taxes or similar revenues. c. The pricing policies of the activity establish fees and charges designed to recover its costs, including capital costs (such as depreciation or debt service).

2. How does one distinguish between an Internal Service Fund and an Enterprise Fund?

Suggested Solution An Internal Service Fund has as its clientele other departments or agencies of the government and perhaps other governmental units, whereas an Enterprise Fund renders its services or sells its products primarily to the general public.

7 ..

3. Compare the effects on Enterprise Fund reported income of the current year and of future years of (a) reporting a gain on early extinguishment of debt and (b) deferring recognition of that amount as required in a refunding transaction.

Suggested Solution (a) Nonrefunding: When the early extinguishment of proprietary fund debt does not involve a refunding (“new” debt), an ordinary, nonoperating gain or loss is recognized in the period that the debt is retired. Recognizing a gain on early extinguishment of debt increases the change in net position in the Statement of Revenues, Expenses, and Changes in Fund Net Position. (b) Refunding: When refunding (“new” debt) proceeds are used in the early extinguishment of proprietary fund debt, the refunding debt issue is viewed as a continuation of the original debt issue (“old” debt). No gain or loss from the retirement of debt is reported in the period that the debt is retired. However, the difference between the acquisition price and the carrying value of the retired debt is deferred. The deferred amount is reported in the Statement of Net Position as a deferred outflow of resources if it is a debit amount and as a deferred inflow of resources if it is a credit amount. The deferred amount must be amortized as a component of interest expense over the shorter of the remaining term of the old debt or the term of the refunding issue.

Given the fact pattern in question 3, interest expense will be reduced by the amortization of the Deferred Interest Expense Adjustment each year during the life of the refunding issue or the remaining term of the refunded issue, whichever is shorter.

This means that each year during that time period, net nonoperating income or loss will be more positive by the amount of the amortization as will the income before other revenues, expenses, and transfers and the change in net position.

4. It is sometimes claimed that to include depreciation among the expenses and to provide money out of earnings to retire bonds that were used to finance the acquisition of the assets being depreciated is to overcharge the current generation of customers. Through retiring the debt, the customers are paying for the old plant, and through depreciation charges they are paying for a new plant. Is this claim correct? Explain.

Suggested Solution Without attempting to define the members of a “generation,” one may observe that double charging may be necessary in some cases. Customers of a utility are normally expected to provide for continuity of its operations by paying rates based on income for which depreciation charges have been treated as an expense. This practice helps assure that the capital of a utility will be maintained, at least as far as accounting can provide such assurance. If one assumes that rates should be based on costs of operation, then higher rates would, to some degree, constitute “double charging.”

8 ..

5. Why does the GASB recommend the modified accrual basis of accounting for some funds and the accrual basis for others? Is this not inconsistent?

Suggested Solution In governmental fund activities there typically is no direct relationship between the revenues used to finance a service or activity provided and the quantity of each particular service provided. Rather, decisions as to the level, quality, and types of services provided result from the political and budgetary processes and typically are framed in terms of the amounts of financial resources to be used for various activities. Thus, the primary accountability focus of such funds is whether the financial resources are used in accordance with the decisions resulting from the political and budgetary processes. The flow of current financial resources measurement focus and modified accrual basis is designed to provide information on the sources, uses, and balances of financial resources and is therefore consistent with the accountability focus of governmental funds.

The level, type, and quantity of proprietary fund services, on the other hand, usually are determined primarily by the demand for the services accounted for through such funds. Too, the activities are normally expected to be self-sustaining and a direct relationship does exist between the services provided and the revenues used to finance those services. The primary accountability focus for these funds tends to be the extent to which revenues cover costs (expenses) of providing services. This accountability focus is most consistent with the flow of economic resources measurement focus and the accrual basis of accounting. The inconsistency of the bases of accounting as among the various funds, each of which is a separate entity, is usually thought to be of less consequence in the governmental accounting environment than assuring the relevance of the accounting data of governmental and proprietary funds.

6. A city controller has expressed his desire to convert the city’s fund and GCA–GLTL records, now maintained in separate ledgers, to a system in which all accounts would be maintained within a single general ledger. Is this permissible? Explain.

Suggested Solution Yes, accounts for a local governmental unit may be maintained on an intrafund or “funds within a fund” basis in a single ledger so long as the fund and nonfund entities are distinguished through an appropriate account classification code. The substance is what matters, not the form. In fact, there may be no “hard copy” ledger in computer systems, the balances being read out and/or printed when desired.

9 ..

Additional problems for in-class or homework assignments Problem 1 (Cash Flow Statement) The following information was derived from the accounts, financial statements, and related data for the Hestand County Electric Services Enterprise Fund for 20X2: Sales of services to public ..........................................

Cost of electricity purchases paid ..............................

Sales of services to other county departments ...........

Salaries and wages paid .............................................

Purchases of supplies .................................................

Annual transfer from General Fund received ............

Transfer paid to help establish a Central Equipment Fund, the sole purpose of which is to finance capital asset purchases ..........

Proceeds from sale of capital assets ...........................

Investment purchases .................................................

Interest received from investments ............................

Interest paid on bonds issued to finance plant construction .................................................

Retirement of six-month note issued to relieve cash shortfall: Principal .........................................................

Interest............................................................

Decrease in receivables from customers ....................

January 1 unrestricted cash balance ...........................

January 1 restricted cash balance ...............................

$800,000 500,000 100,000 150,000 35,000 53,000

212,000 37,000 25,000 10,000 33,000

75,000 3,750 150,000 200,000 7,200

Prepare the 20X2 statement of cash flows for the Hestand County Electric Service Enterprise Fund. (Exclude accompanying schedules for which you do not have sufficient information.)

10 ..

Suggested Solution Hestand County Electric Service Enterprise Fund Statement of Cash Flows For the Year Ended December 31, 20X2 Cash flows from operating activities: Cash received from sales to public .........................................

Cash received from sales to other county departments ..........

Cash paid for electricity ..........................................................

Cash paid for salaries and wages ...........................................

Cash paid for supplies .............................................................

Net cash provided by operating activities ...........................

$950,0001 100,000 (500,000) (150,000) ( 35,000) 365,000

Cash flows from noncapital financing activities: Transfer from General Fund ...................................................

Transfer to Central Equipment Fund ......................................

Cash paid to retire notes .........................................................

Cash paid for interest ..............................................................

Net cash used by noncapital financing activities ................

53,000 (212,000) ( 75,000) ( 3,750) (237,750)

Cash flows from capital and related financing activities: Proceeds from sales of capital assets ......................................

Cash paid for interest on construction bonds .........................

Net cash provided by capital and related financing activities ...........................................................

37,000 ( 33,000) 4,000

Cash flows from investing activities: Cash paid for investments .......................................................

Cash received from investment earnings ................................

Net cash used by investing activities ...................................

( 25,000) 10,000 ( 15,000)

Net increase in cash and cash equivalents ..................................

Cash and cash equivalents at beginning of year ........................

116,250 207,200

Cash and cash equivalents at end of year ....................................

$323,450

1

Sales + decrease in receivables = Cash received from customers $ 800,000 + $ 150,000 = $ 950,000

11 ..

Problem 2 (Cash Flow Statement) Using the following information, prepare a formal statement of cash flows for the Tignor County Water and Sewer Enterprise Fund for the year ended December 31, 20X6. Schedules that would normally accompany the financial statements are not required. (Numbers given are in thousands.)

Cash received from current year’s sales .................... $3,000 Collections of prior year accounts receivable ............

300 Accounts receivable balance, December 31, 20X6 ...

150 Cash purchases of inventory items ............................

1,200 Increase in inventory ..................................................

— Cash paid for salaries and wages ...............................

500 Increase in accrued salaries payable ..........................

50 Payment in lieu of taxes (no services received) to General Fund....................................................

75 Depreciation of capital assets.....................................

200 Transfer (annual operating subsidy) to General Fund 180 Transfer from General Fund for purpose of financing half the cost of expanding the sewer treatment plant .....................................................

5,000 Construction costs billed to the fund, half of which were paid ..............................................................

7,500 Issuance of bonds to finance construction costs ........

5,000 Federal capital grant received to assist in financing plant expansion and modernization ($2,500 of the 7,500 of construction costs billed are reimbursable under this grant) .............................

5,000 EPA grant received for purpose of improving water quality 800 Expenditure of EPA grant funds to purchase water quality monitoring equipment ....................

350 Expenditure of EPA grant resources to pay new water quality monitor’s salary and benefits (not included in salary payments listed above) ....

85 Issuance of nine-month note to provide for cash shortage 600 Retirement of bonds (originally issued to finance capital asset acquisition) ..................................................

500 Payment of interest on the retired bonds....................

25 Accrual of interest on nine-month note .....................

15 Accrual of interest on Sewer Plant Bonds .................

100 Proceeds from sale of investment (Investment was sold to provide cash to pay construction costs.) ..........

1,000 Cash received for interest on investments .................

275 Loss on sale of investments .......................................

35 Unrestricted cash balance (beginning of year)...........

100 Restricted cash balance (beginning of year) ..............

700 12 ..

Suggested Solution Tignor County Water and Sewer Enterprise Fund Statement of Cash Flows For the Year Ended December 31, 20X6 Cash flows from operating activities: Cash received from customers ($3,000 + 300) .......................

Cash paid to suppliers .............................................................

Cash paid to employees ($500 + 85) ......................................

Net cash provided by operating activities ...........................

Cash flows from noncapital financing activities: Cash paid for transfers ($180 + 75) ........................................

Cash received from operating grants ......................................

Cash received from issuance of notes .....................................

Net cash flows from noncapital financing Activities ............................................................................

$ 3,300 (1,200) (585) 1,515

(255) 800 600 1,145

Cash flows from capital and related financing activities: Cash received from transfers ..................................................

Cash received from bond issuance ..........................................

Cash received from capital grants ..........................................

Cash paid for equipment .........................................................

Cash paid for construction ......................................................

Cash paid to retire bonds ........................................................

Cash paid for interest on bonds ..............................................

Net cash flows from capital and related financing activities ...........................................................

10,375

Cash flows from investing activities: Proceeds from sale of investments ..........................................

Cash received from interest income ........................................

Net cash flows from investing activities ..............................

1,000 275 1,275

Net increase in cash ......................................................................

Cash, January 1 ($700 + 100) .....................................................

14,310 800

Cash, December 31 ......................................................................

$15,110

13 ..

5,000 5,000 5,000 (350) (3,750) (500) (25)

Problem 3 (Worksheet and Financial Statements) The following information pertains to the operation of the Water Fund of the City of Marion.

Included in the operations of this fund are those of a special Replacement Fund for the Water Department, the accounts of which are a part of the accounts of the Water Fund. The balances in the accounts of this fund on January 1, 20X5, were as follows: Cash............................................................................ $ 6,126 Accounts Receivable (net of $1,200 estimated to be uncollectible) ...........

7,645 Stores Inventory .........................................................

13,826 Investments—Replacement Fund ..............................

21,700 Property, Plant, and Equipment .................................

212,604 Accumulated Depreciation.........................................

50,400 Vouchers Payable.......................................................

4,324 Customer Deposits* ...................................................

1,500 Replacement Fund Reserve........................................

21,700 Bonds Payable............................................................

60,000 Net Position................................................................

123,977 *No restrictions are placed on deposits received or investment income thereon; interest is not paid on deposits.

The following items represent all transactions of the fund for the year ended December 31, 20X5: 1. Services billed ......................................................

2. Accounts collected ...............................................

3. Uncollectible accounts: a. of prior years written off .................................. b. current provision made ....................................

4. Invoices and payrolls approved and vouchered for current expense ...............................................

5. Invoices approved and vouchered for water department stores purchased ................................

6. Stores issued for use in operation ........................

7. Supplies secured from General Fund stores and used in operations (cash paid to General Fund) ...

8. Vouchers approved for payment of annual serial bonds maturity, including interest of $3,000 9. Depreciation (replacement reserve and assets adjusted also to fully reserve and fund the accumulated depreciation) ...................................

10. Deposits: a. Received ........................................................... b. Refunded ..........................................................

14 ..

$146,867 147,842 1,097 750 69,826 31,424 32,615 7,197 23,000

10,600 400 240

11. Invoices approved and vouchered for replacement of fully depreciated equipment which had cost $6,200..........................................

12. Invoices approved and vouchered for additions to plant .................................................................

13. Interest received on investments; none is accrued at year end ............................................................

14. Purchased securities as necessary to fully invest the Replacement Fund to the nearest whole $100 15. Paid approved vouchers (general) ........................

16. Stores inventory per physical count at December 31, 20X5 (any shortages or overages are assumed to be related to operating expenses)

7,800 12,460 1,102 compute 110,316

11,820

(a) Prepare a worksheet analysis of the beginning trial balance, transactions and adjustments during 20X5, revenues and expenses, and postclosing trial balance at December 31, 20X5, of the Water Fund of the City of Marion. (b) Prepare a Statement of Net Position of the Water Fund as of December 31, 20X5. (c) Prepare a Statement of Revenues, Expenses, and Changes in Fund Net Position for the Water Fund for the year ended December 31, 20X5 (AICPA, adapted).

Suggested Solution (b) City of Marion Water Enterprise Fund Statement of Net Position December 31, 20X5 Assets Current Assets: Cash .................................................................

Accounts Receivable .......................................

Less: Allowance for Uncollectibles .........

Stores Inventory ...............................................

Replacement Fund (Restricted Assets): Cash .................................................................

Investments ......................................................

Plant and Equipment: Property, Plant, and Equipment .....................

Less: Accumulated Depreciation ............

Total Assets 15 ..

$ 3,015 $ 6,773 853

5,920 11,820

$ 20,755

7,802 25,600

33,402

226,664 54,800

171,864 226,021

Liabilities and Net Position Liabilities: Current: Vouchers Payable ....................................

Bonds Payable .........................................

Replacement Fund: Vouchers Payable ....................................

Other: Customer Deposits ..................................

Long-Term: Bonds Payable (noncurrent portion) ......

Total Liabilities ....................................

$ 7,718 20,000

27,718 7,800 1,660 20,000 57,178

Net Position: Net Investment in Capital Assets .....................

Restricted—Replacement Reserve for Plant and Equipment .............................

Unrestricted .....................................................

Total Net Position ........................................

$131,864 25,602 11,377 $168,843

(b) Computation of Components of Net Position:

Asset/Liability Cash Accounts Receivable Stores Inventory Investments Capital Assets, net Vouchers Payable Customer Deposits Payable Bonds Payable Totals

Net Investment in Capital Assets

Restricted $7,802

Unrestricted $3,015 5,920 11,820

25,600 $171,864

(40,000) $131,864

16 ..

(7,800)

(7,718) (1,660)

$25,602

$11,377

(c) City of Marion Water Enterprise Fund Statement of Revenues, Expenses, and Changes in Net Position For the Year Ended December 31, 20X5 Operating Revenues .............................................................................

Operating Expenses: Operating .................................................................................

Depreciation ............................................................................

Total Operating Expenses ....................................................

$146,117

$110,453 10,600 121,053

Operating Income .................................................................................

Nonoperating Revenues and (Expenses): Interest Expense .......................................................................

Interest Revenue .......................................................................

Total Nonoperating Revenues and Expenses ...................

25,064

(3,000) 1,102 ( 1,898)

Change in Net Position ........................................................................

Net Position, January 1, 20X5 .............................................................

23,166 145,677

Net Position, December 31, 20X5 ........................................................

$168,843

17 ..

CHAPTER ELEVEN INTERNAL SERVICE FUNDS (Pages 443–473) CHAPTER ELEVEN OUTLINE 1) Overview of accounting principles a) Initial establishment 2) Pricing policies and methods a) Pricing methods b) Relation to budget c) Financial statements 3) Internal service fund accounting illustrated a) Automotive equipment unit 4) Financial statements—Basic example a) Central stores fund i) Inventory acquisition ii) Perpetual inventory procedures iii) Billing rates iv) Inventory issued v) Overhead expenses vi) Physical inventory vii) Closing entries viii) Entries in other funds 5) Self-insurance fund i) Use of self-insurance internal service funds ii) Accounting for self-insurance internal service funds (1) Revenues (2) Expenses iii) Illustrative transactions and entries 6) Disposition of increase or decrease in net position 7) Dissolution of an internal service fund 8) Combining internal service fund financial statements 9) Concluding comments 10) Questions 1 ..

11) Exercises 12) Problems 13) Cases 14) Harvey City Comprehensive Case

CHAPTER LEARNING OBJECTIVES 11.1

Describe the nature and usage of Internal Service Funds.

11.2

Summarize the accounting principles that apply to Internal Service Funds.

11.3

Describe the pricing policies and methods that are used in Internal Service Funds.

11.4

Prepare basic journal entries for various types of Internal Service Funds.

11.5

Prepare Internal Service Fund financial statements.

11.6

Explain the unique aspects of accounting for self-insurance Internal Service Funds.

11.7

Account for disposition of changes in net position.

11.8

Account for dissolution of an Internal Service Fund.

11.9

Prepare Internal Service Fund combining financial statements.

CHAPTER OVERVIEW AND SYNOPSIS This chapter focuses on the unique nature of Internal Service Funds (ISF). The chapter begins with brief discussions of the nature and establishment of Internal Service Funds and the pricing of ISF services, followed by illustrations of accounting and reporting for two traditional ISFs and one nontraditional ISF. The chapter concludes with short discussions of other selected ISF topics. Thus, the major topics include: 1. Nature and creation of ISFs 2. ISF accounting illustrations: • Central Automotive Equipment Fund • Central Stores Fund 2 ..

• Self-Insurance Fund 3. Other selected topics Students who have successfully completed the Enterprise Fund coverage should find the ISF material to be relatively easy. Others may find that studying this chapter enables them to go back and better understand Enterprise Fund accounting. Self-insurance is the one particular topic that should be addressed in more depth in this chapter.

CRITICAL OBJECTIVES The primary learning objectives of this chapter include: • • • • •

The nature and usage of Internal Service Funds.

Comparing and contrasting the accounting and financial reporting principles for Internal Service Funds (as well as Enterprise funds) to governmental funds.

A focus on the pricing theories and policies that are incorporated in most Internal Service Funds.

The unique nature of self-insurance Internal Service Funds.

Dealing with significant increases or decreases in total net position of an Internal Service Fund.

The following is a summary of key learning points that should be emphasized during discussions of Internal Service Funds: • • • • • •

ISFs are essentially internal cost allocation mechanisms.

Use of ISFs is optional. The activity can be accounted for in the General Fund using interfund reimbursement transactions to allocate costs in most cases.

ISFs are theoretically break-even entities (per their focus on cost reimbursement).

Governments that bill ISF services at more than cost should be careful not to overcharge grant and similar programs that provide for reimbursement of costs.

Self-insurance ISFs are common but somewhat unique, and require more effort to understand than others.

For government-wide reporting, each ISF will be classified as either part of governmental activities or of business-type activities depending upon whether the majority of its services are provided to departments and agencies included in governmental activities, or to those included in business-type activities.

3 ..

QUESTIONS/EXERCISES/PROBLEMS/CASES— SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises Number of Problems Number of Cases

14 3 (includes two exercises with 10 multiple-choice questions each) 6 (includes three extensive transactional analysis problems) 3 (one case for the County of San Luis Obispo, California, related to financial statement classifications, one for Great Falls, Montana, focusing on financial reporting, and the Harvey City Comprehensive Case)

Exercise 11-3 and Problems 11-3, 11-4, and 11-5 This exercise and these problems provide varying degrees of transactional analysis opportunities. Problem 11-5 includes both transactional analysis and a focus on the components of net position for an Internal Service Fund.

Problems 11-1 and 11-6 These problems focus on the statement of cash flows. Problem 11-1 reiterates the classification of cash flows, while Problem 11-6 provides an opportunity for the preparation of a statement of cash flows.

Problem 11-2 The unique nature of self-insurance Internal Service Funds is highlighted in this transactional analysis problem.

HARVEY CITY COMPREHENSIVE CASE It is likely that the case assignment for this chapter will not raise significant questions from students. It should be noted that the majority of services are provided to general government departments. This will affect the classification of the Internal Service Fund as part of governmental activities when government-wide financial statements are prepared (Chapter 14).

This will also affect the governmental activities capital assets disclosure information (Chapter 9).

4 ..

Additional questions for in-class or homework assignments 1. Internal Service Funds are proprietary (nonexpendable) funds. How does this cause Internal Service Fund accounting to differ from that for governmental (expendable) funds?

Suggested Solution The nature of proprietary funds is that their capital is to be maintained intact.

Therefore, revenues and expenses (income and flow of economic resources) are the primary measurements in accounting for such activities rather than revenues and expenditures (funds flow or flow of current financial resources). The primary focus of accountability is upon the long-run causes of net position increases and decreases rather than on sources and uses of financial resources.

2. Many governments use titles such as “Billings to Departments” and “Excess of Net Billings to Departments over Costs” in Internal Service Fund accounting and reporting rather than more familiar titles such as “Sales” and “Operating Income.” Why? Suggested Solution There are both semantic and psychological reasons underlying the general use of terms such as “Billings to Departments” and “Excess of Billings to Departments over Costs” rather than “Sales” and “Operating Income” in Internal Service Fund accounts and reports. Some accountants and public administrators believe the terms used are more descriptive of the manner in which Internal Service Funds typically operate, usually on a break-even basis over a span of years. Others feel the terms “sales” and “operating income” have profit-seeking connotations that are unacceptable either semantically or psychologically to user departments or to users of the financial reports of the governmental unit.

3. Accounting for an Internal Service Fund that is controlled by a fixed budget may be referred to as double accounting. Why? Suggested Solution Accounting for an Internal Service Fund that is controlled by a fixed budget is often called “double accounting.” This type of control involves a dual budgetary and proprietary accounting system in which (1) a single transaction often necessitates that both budgetary and proprietary entries be made, while (2) other transactions or events require entries in only one or the other type of accounts.

4. Why are predetermined price schedules or overhead rates commonly used in Internal Service Fund billings to user departments?

Suggested Solution Predetermined price schedules or overhead rates (estimated) are commonly used in Internal Service Fund billings to user departments so that: 5 ..

a. The user departments may know the costs to them of goods or services received on a current basis rather than only at year end. This facilitates cost and budgetary accounting in the user departments and permits them to charge those using their services, where appropriate, on an accurate basis. b. The Internal Service Fund may be reimbursed promptly for goods or services provided and therefore minimize its working capital needs. The alternative is for the Internal Service Fund to charge user departments annually, semiannually, quarterly, or monthly based on actual costs. Annual or semiannual billings are too infrequent in many situations, and quarterly or monthly cost determinations may be excessively troublesome or expensive and/or result in Internal Service Fund users during certain months or quarters bearing an undue portion of unusual, nonrecurring costs incurred during the period.

5. A city operates a motor pool as an Internal Service Fund. List and evaluate the ways in which over- or under-absorbed overhead may be treated.

Suggested Solution The presence of the over-applied (over-absorbed) or under-applied (under-absorbed) overhead indicates that total actual overhead costs incurred differed from the total of those charged to the departments. The over- or under-applied overhead ordinarily is closed at year end and affects operating income and changes in net position determinations for the period and the ending balance of the Net Position account.

Alternatively, it may be the basis for supplemental billings or rebates (credits) to the user departments.

6. How should overtime premiums incurred in the conduct of Internal Service Fund activities be charged to user departments when Internal Service Fund charges are based on direct cost plus overhead? (AICPA, adapted) Suggested Solution The manner in which overtime premiums should be charged to user departments is determined by the factors giving rise to the overtime premiums: a. Where overtime premiums result from a special good or service being provided to a user department on a “rush” basis, they should be charged as a direct cost of the goods or services provided that department. b. Whereby the nature of the Internal Service Fund activity overtime premiums are expected to be incurred occasionally and are not attributable to a specific good or service provided a specific user department, the premiums should be charged to the Overhead account in the Internal Service Fund. These costs should enter the determination of overhead rates charged all departments throughout the year.

6 ..

They should not be charged to the user department that was being served (merely by coincidence) when the overtime premiums were incurred. c. When the overtime premiums result from poor scheduling or other mismanagement of the Internal Service Fund activities, they should be charged to an appropriately titled Expense account rather than to a specific job or to the general Overhead account. Such losses should enter the income determination process and will ultimately affect Net Position but should not be the basis for current period charges to user departments—though they may affect overhead estimates in the long run to the extent that losses of this nature may be expected to recur periodically in the normal operation of the Internal Service Fund activity.

Additional problems for in-class or homework assignments Problem 1 (Transaction and Adjusting Entries) 1. Frederic County established a Central Data Processing Internal Service Fund in 20X7.

Data processing services had previously been financed via General Fund appropriations.

To establish the fund, $750,000 (original cost) of computers and peripheral equipment were provided to the Internal Service Fund from general capital assets. Accumulated depreciation was $220,000; the fair value was $600,000. Also, computer paper and other supplies costing $32,000 were transferred to the Internal Service Fund from the General Fund. General Fund inventories are accounted for on the consumption basis. In addition, $65,000 of General Fund cash was contributed to the Central Data Processing Fund to provide needed working capital.

2. Electric bills of $17,000 and payrolls of $41,000 were paid.

3. Insurance premiums of $6,400 were paid for a policy covering, both the current fiscal year and the next fiscal year.

4. Supplies purchased on account cost $65,000.

5. Cost of supplies used was $72,000.

6. Billings to departments for data processing services were $260,000.

7. Vouchers payable of $57,000 were paid.

8. Depreciation on equipment was recorded at $100,000.

9. Collections of amounts due from other funds for billings were $235,000.

10. Other information: 7 ..

a. Salaries and wages payable at year end were $1,100. b. Inventory of supplies on hand at year end was $24,700.

Prepare the general journal entries required to record all transactions and adjustments for the Central Data Processing Fund for 20X7.

Suggested Solution #

Accounts

1a.

Equipment .................................................................................

Accumulated Depreciation—Equipment ..........................

Revenues—Capital Contributions ....................................

To record transfer of equipment from GCA-GLTL accounts

750,000

Supplies Inventory.....................................................................

Cash...........................................................................................

Transfer from GF ..............................................................

To record supplies and cash contributed from GF resources to establish the IS Fund

32,000 65,000

Salaries and Wages Expense ....................................................

Utilities Expense .......................................................................

Cash ...................................................................................

To record payment of payroll and utilities

41,000 17,000

Prepaid Insurance ....................................................................

Insurance Expense ....................................................................

Cash ...................................................................................

To record payment of two-year premium

3,200 3,200

Supplies Inventory.....................................................................

Vouchers Payable..............................................................

To record purchase of supplies on account

65,000

Supplies Expense.......................................................................

Supplies Inventory .............................................................

To record cost of supplies used

72,000

Due from Other Funds ..............................................................

Revenues—Billings to Departments .................................

To record billings to departments for services rendered

260,000

1b.

2.

3.

4.

5.

6.

Dr.

8 ..

Cr.

220,000 530,000

97,000

58,000

6,400

65,000

72,000

260,000

#

Accounts

Dr.

7.

Vouchers Payable .....................................................................

Cash ...................................................................................

To record payment of vouchers payable

57,000

Depreciation Expense—Equipment .........................................

Accumulated Depreciation—Equipment ..........................

To record depreciation on equipment

100,000

Cash...........................................................................................

Due from Other Funds ......................................................

To record collection of interfund receivables

235,000

Salaries and Wages Expense ....................................................

Salaries and Wages Payable.............................................

To accrue salaries and wages payable at year end

1,100

Inventory Shortage....................................................................

Supplies Inventory .............................................................

To record shortage in ending inventory

300

8.

9.

10a.

10b.

Cr.

57,000

100,000

235,000

1,100

300

Problem 2 (Leases and Claims and Judgments) Prepare the journal entries required for the following selected transactions of the Reese County Central Data Processing Internal Service Fund.

1. The county entered into a long-term capital lease to purchase equipment midway through its fiscal year. The capitalizable cost of the equipment was $500,000. An initial payment of $100,000 was made at the inception of the lease. The implicit rate of interest on the lease is 10%, and lease payments are to be made from the resources of the Central Data Processing Fund.

2. The county paid the semiannual lease payment of $100,000 and recorded depreciation for the leased equipment. Assume the equipment has an economic useful life of 5 years and zero salvage value.

3. The county Central Data Processing Fund has had a $300,000 claim filed against it. It is probable that the claim will have to be paid by the county Central Data Processing Fund, but it is expected to be 2 years or more before payment is required. The county does not have a self-insurance Internal Service Fund.

9 ..

Suggested Solution #

Accounts

1.

Equipment under Capital Lease ...............................................

Cash ..................................................................................

Capital Leases Payable .....................................................

To record capital lease at inception

500,000

Interest Expense ($400,000 × 10% × 6/12) ............................

Capital Leases Payable ($100,000 – 20,000) ..........................

Cash ..................................................................................

To record semiannual lease payment

20,000 80,000

Depreciation Expense ($500,000 × 1/5 × 6/12) ......................

Accumulated Depreciation................................................

To record depreciation of leased asset

50,000

Losses from Claims and Judgments .........................................

Claims and Judgments Payable—Long-Term ..................

To accrue liability for loss contingency

300,000

2a.

2b.

3.

Dr.

10 ..

Cr.

100,000 400,000

100,000

50,000

300,000

CHAPTER TWELVE TRUST AND AGENCY (FIDUCIARY) FUNDS: SUMMARY OF INTERFUND-GCA-GLTL ACCOUNTING (Pages 474–509) CHAPTER TWELVE OUTLINE 1) The accountability focus 2) Agency funds a) Simpler agency funds b) Tax agency funds c) Special assessment agency funds 3) Trust funds a) Private-purpose trusts b) Investment trusts c) Pension trusts i) Accounting standards ii) Retirement fund example iii) Employer government/employer fund reporting 4) Combining trust and agency fund financial statements 5) Additional interfund-general capital asset-general long-term liability accounting illustrations 6) Concluding comments 7) Questions 8) Exercises 9) Problems 10) Cases 11) Harvey City Comprehensive Case

1 ..

CHAPTER LEARNING OBJECTIVES 12.1

Summarize and discuss the circumstances in which fiduciary funds are used to report assets held by governments in fiduciary relationships.

12.2

Define Agency Funds and prepare basic journal entries and financial statements for such funds.

12.3

Define Trust Funds and prepare basic journal entries and financial statements for these fund types.

12.4

Describe combining financial statements for Trust and Agency Funds.

12.5

Account for common transactions that affect more than one fund and/or general capital assets and general long-term liabilities.

CHAPTER OVERVIEW AND SYNOPSIS This chapter discusses and illustrates the accounting and reporting for the various types of Trust Funds and the Agency Fund. The chapter’s major topics include: 1. Agency Fund accounting and reporting (with emphasis on accounting for Tax Agency Funds).

2. Accounting and reporting for Private-Purpose Trust Funds and Investment Trust Funds.

3. Accounting and reporting for Pension Trust Funds under GASB Statement No. 67 4. Employer government accounting and reporting for pensions, including the basic approach required in GASB Statement No. 68.

5. Accounting and reporting for other postemployment benefits (OPEB) for both OPEB plans and employers that offer them as required in GASB Statement Nos. 74 and 75.

6. Interfund-General Capital Assets-General Long-Term Liability accounting.

It is critical that students understand the nature of fiduciary funds. Unlike Permanent Funds, the resources of these funds do not benefit the government in any way. The government is serving as a trustee or agent for resources that will be used for (or invested for) the benefit of others.

Students with a clear understanding of the nature of these funds will be more likely to understand and accept the exclusion of fiduciary funds from the government-wide financial statements.

2 ..

Pension Trust Fund accounting and reporting is an important topic. It is often useful to highlight the simplicity of the accounting and of the financial statements. It is also important to emphasize the important role of the notes to the financial statements and schedules that must be included as required supplementary information. (For agent plans, actuarial information is not included in the notes or required supplementary information because in substance an agent plan is a cooperative arrangement of individual pension plans.) These notes and schedules are used to present information on total pension liabilities and net pension liabilities of the plan. The Pension Trust Fund financial statements only communicate the amount of net position available to provide for future benefit payments. They are not designed to indicate whether that amount is adequate to provide for the benefits promised through the plan.

CRITICAL OBJECTIVES The most critical areas to deal with in this chapter are: • • • • •

When trust and agency funds are used.

The requirement that only assets held for outsiders be reported in these funds, even if they are used to account for some internal resources.

Accounting and reporting for Tax Agency Funds (accounting for other agency funds typically is simple by comparison).

Trust Fund Financial Statements.

Accounting and reporting for Pension Trust Funds, including required actuarial schedules.

UPDATE NOTE: The GASB adopted GASB Statement No. 84, “Fiduciary Activities,” in January 2017. Among other significant changes, Statement No. 84 will eliminate agency funds and establish a fund type called custodial funds. Custodial funds will include agency funds as well as some fiduciary activities previously most likely to have been reported in a trust fund.

This statement first becomes effective for financial statement issued for the 2019 calendar year end.

QUESTION/EXERCISES/PROBLEMS/CASES — SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises

Number of Problems

15 5 (includes 2 exercises with 10 multiple choice questions each, 2 simple transactional analysis exercises, and an exercise that requires simple statement preparation) 8 (includes multiple transactional analysis and financial statement preparation with varying degrees of difficulty and 2 research problems) 3 ..

Number of Cases

3 (1 case for Rockville, Maryland, focusing on pension trust fund entries and financial statements, 1 case for Wilmington, Delaware, related to financial statement preparation for fiduciary funds, and the Harvey City Comprehensive Case)

Tax Agency Funds Exercise 12-4 This is both a simple and quick Tax Agency Fund exercise, which has the advantage of requiring presentation of a statement of net position for the fund. It can be used to make the point that the assets of the collecting government that are accounted for in the collecting government’s Agency Fund cannot be reported as Agency Fund assets (and liabilities) in GAAP financial statements.

Problem 12-2 This is a somewhat more involved Tax Agency Fund problem in that it requires students to make the necessary entries in the other governments and the other funds whose taxes are being collected through the Agency Fund. A GAAP-based statement of net position also is required.

Private-Purpose Trust Funds Problem 12-1 This is an excellent problem that requires students to both make journal entries for a simple private-purpose trust and to prepare the fund financial statements. The problem still requires only a limited amount of time. Exercise 12-3 requires only journal entries for a private-purpose trust. (It is recommended that statement preparation be assigned because the trust fund financial statements are different from others that students have prepared in prior chapters.)

Pension Trust Fund Accounting for Pension Trust Funds is probably the single most important topic in the chapter.

Exercise 12-5 This exercise provides students with a Pension Trust Fund trial balance from which the Pension Trust Fund financial statements must be prepared.

Problems 12-3 and 12-4 These problems require Pension Trust Fund journal entries only (Problem 12-3), as well as both journal entries and financial statements (Problem 12-4).

4 ..

HARVEY CITY COMPREHENSIVE CASE The fiduciary fund used in the case is a Pension Trust Fund. As with Chapters 10 and 11, you are not apt to get many questions—assuming the students have mastered the chapter material reasonably well.

Additional questions for in-class or homework assignments 1. Compare the primary forms of accountability among (a) the General Fund and Special Revenue Funds, (b) Capital Projects Funds, and (c) Trust and Agency Funds.

Suggested Solution a. The accountability focus in General and Special Revenue Fund accounting is primarily on current period revenues, expenditures, other financing sources and uses, and operating budget compliance within a specified time period. b. The accountability focus for Capital Projects Funds is, according to the GASB Codification, is also on time periods. In addition, the capital program or budget (the project) is also emphasized. c. The accountability focus in Trust and Agency Funds is upon the manner in which the government fulfilled its fiduciary responsibilities during a specified period of time and the unfulfilled responsibilities remaining at the end of the period.

2. Is it possible and/or permissible to account for more than one type of trust or agency relationship within a single Trust Fund or Agency Fund? Explain.

Suggested Solution Yes, this is not only possible and permissible but is common in practice. Such “funds within a fund” (or within a single fund ledger) procedures require only that the asset, liability, net position, addition, and deduction accounts be appropriately and distinctively titled so that the balances applicable to each of the constituent “funds” are readily determinable at all times.

3. How could internal (interfund or intragovernmental) Agency Funds be used to facilitate a governmental unit’s financial management and accounting processes?

Suggested Solution Internal (interfund or intragovernmental) Agency Funds may be useful in alleviating some of the awkwardness occasioned by fund accounting and in establishing

5 ..

clear-cut audit trails where a single transaction affects several funds. For example, Agency Funds may be helpful: a. when a government receives a grant, entitlement, or shared revenue that may be used at its discretion for programs or projects financed through more than one fund (the funds not yet having been identified), or b. when a grant, entitlement, or shared revenue must be accounted for in a prescribed way that differs from GAAP. In this last case, the resources may be initially accounted for in the Agency Fund as prescribed; then the resources may be accounted for in conformity with GAAP in the funds that they finance. Note that these internal Agency Funds are not reported as fiduciary funds in the GAAP financial statements.

Additional problems for in-class or homework assignments Problem 12-1 (Tax Agency Fund Entries) Prepare the journal entries required in a county tax agency fund to record the following transactions: 1. Levy of taxes for the various taxing units, $3,000,000; 1% is expected to be uncollectible; 10% is expected to be collected after the cut-off date for revenue recognition.

2. Collection of taxes during the year, $2,600,000.

3. Write-off of taxes receivable of $12,000.

4. Remittance of amounts due to various taxing units, $2,600,000

Suggested Solution #

Accounts

1.

Taxes Receivable for Taxing Units...........................................

Due to Taxing Units ..........................................................

To record tax levy

3,000,000

Cash...........................................................................................

Taxes Receivable for Taxing Units ...................................

To record collection of taxes for taxing units

2,600,000

2.

Dr.

6 ..

Cr.

3,000,000

2,600,000

#

Accounts

Dr.

3.

Due to Taxing Units ..................................................................

Taxes Receivable for Taxing Units ...................................

To write off uncollectible taxes

12,000

Due to Taxing Units ..................................................................

Cash ...................................................................................

To record remittance of collections to taxing units

2,600,000

4.

Cr.

12,000

2,600,000

Problem 12-2 (Tax Agency Fund) The following is a trial balance of the Tax Agency Fund of Cranor City as of June 30, 20X0: Cash............................................................................

Taxes Receivable for Teekell County ........................

Taxes Receivable for Cranor City General Fund .......

Taxes Receivable for Bonham School District ..........

Due to Teekell County ...............................................

Due to General Fund ..................................................

Due to Bonham School District .................................

$ 90,000 22,500 48,000 69,000 $ 37,500 78,000 114,000 $229,500

The following transactions took place: 1. Cash, $89,600, was paid as follows:

Unit Teekell County Cranor City General Fund Bonham School District

Amount Due $15,000 30,000 45,000

Collection Fee $100 — 300

2. The collection fees were paid to the General Fund.

3. Taxes were levied as follows:

Unit Teekell County Cranor City General Fund Bonham School District

Amount Levied $ 50,000 100,000 150,000 7 ..

Amount Paid Over $14,900 30,000 44,700

$229,500

(a) Prepare journal entries. (b) Post to T-accounts. (c) Prepare a GAAP-based Statement of Net Position as of June 30, 20X1.

Suggested Solution Problem 12-2(a) #

Accounts

Dr.

1.*

Due to Teekell County .............................................................

Due to General Fund ...............................................................

Due to Bonham School District ...............................................

Cash ..................................................................................

Due to General Fund .......................................................

To record paying amounts due taxing units after deduction of collection fees

15,000 30,000 45,000

Due to General Fund ...............................................................

Cash ..................................................................................

To record payment of collection fees to GF

400

Taxes Receivable for Teekell County ......................................

Taxes Receivable for Cranor City General Fund ...................

Taxes Receivable for Bonham School District .......................

Due to Teekell County ......................................................

Due to General Fund .......................................................

Due to Bonham School District .......................................

To record taxes placed in the tax rolls

50,000 100,000 150,000

2.

3.

*Note: Whether both general and subsidiary ledgers are used (as in the text illustration) or all accounts are maintained in the general ledger (as in this problem) is a matter of professional judgment and preference in the circumstances. Either approach is acceptable.

8 ..

Cr.

89,600 400

400

50,000 100,000 150,000

Problem 12-2(b) Cash (B)

90,000

Taxes Receivable for Teekell County (B) 22,500 (3) 50,000 (E) 72,500

89,600 (1) 400 (2)

Taxes Receivable for Cranor City General Fund (B) 48,000 (3) 100,000 (E) 148,000

(1)

(1)

Due to Teekell County 15,000 37,500 (B) 50,000 (3) 72,500 (E)

Taxes Receivable for Bonham School District (B) 69,000 (3) 150,000 (E) 219,000

(1) (2)

Due to General Fund 30,000 78,000 400 400 100,000 148,000

Due to Bonham School District 45,000 114,000 (B) 150,000 (3) 219,000 (E)

Problem 12-2(c) Cranor City Tax Agency Fund Statement of Net Position June 30, 20X0 Assets Taxes Receivable for Taxing Units: For Teekell County ..................................................................

For Bonham School District ....................................................

$ 72,500 219,000 $291,500

Liabilities Due to Taxing Units: Teekell County .........................................................................

Bonham School District ...........................................................

9 ..

$ 72,500 219,000 $291,500

(B) (1) (3) (E)

CHAPTER THIRTEEN FINANCIAL REPORTING: THE BASIC FINANCIAL STATEMENTS AND REQUIRED SUPPLEMENTARY INFORMATION (Pages 510–550) CHAPTER THIRTEEN OUTLINE 1) Basic financial statements overview 2) Fund financial statements a) Major fund reporting i) Major fund statement formats ii) Identifying major funds b) Fund-based financial statements i) Governmental funds financial statements ii) Proprietary funds financial statements iii) Fiduciary funds financial statements 3) Government-wide financial statements a) Statement of net position b) Statement of activities c) Measurement focus d) Reporting expenses e) Program vs. general revenues i) Program revenues ii) General revenues iii) Reporting contributions to term and permanent endowments, special and extraordinary items, and transfers f) Internal service funds g) Infrastructure capital assets 4) Note disclosures 5) Required supplementary information a) Management’s discussion and analysis b) Other RSI c) Special purpose governments 6) Concluding comments 7) Questions 8) Exercises

1 ..

9) Problems 10) Cases 11) Harvey City Comprehensive Case

CHAPTER LEARNING OBJECTIVES 13.1

Identify a government’s basic financial statements.

13.2

Describe the format and content of the fund financial statements, identify a government’s major funds, and explain how to prepare the fund financial statements.

13.3

Describe the format and content of the government-wide financial statements, including: • The difference between program revenues and general revenues.

• The unique reporting provisions for infrastructure capital assets.

Identify the types of notes to the financial statements required for governments.

13.4 13.5

Explain the required supplementary information (RSI) required to accompany a government’s basic financial statements, including: • The required information components of Management’s Discussion and Analysis (MD&A) and identify • The reporting requirements for special purpose governments.

CHAPTER OVERVIEW AND SYNOPSIS Chapter 13 is a critical chapter. It discusses the minimum financial statements and other information required by GAAP for general purpose external financial reporting. Although students will find the fund financial statements comfortable and familiar, the government-wide financial statements will be completely new to them and require students to understand several topics and issues addressed in prior chapters. The chapter addresses several major topics, including: 1. The composition of the basic financial statements.

2. The focus, content, and presentation of government-wide financial statements.

3. The focus, content, and presentation of each of the three sets of fund financial statements.

4. Management’s Discussion and Analysis and other required supplementary information.

2 ..

Illustrations 13-10, 13-11, and 13-12 should be reviewed carefully with students in class. The basic format and purpose of these government-wide financial statements should be discussed extensively. It is critical they learn and understand the formats required for these statements.

Program Revenues vs. General Revenues One of the most important topics that students must master to succeed in understanding the government-wide statement of activities is the distinction between general revenues and program revenues. The definition of program revenues is helpful but students will probably benefit from the classification of revenues presented in Illustration 13-13. The chart on the next page also may help students understand the distinctions between program and general revenues.

3 ..

Program vs. General Revenues Is the revenue a tax of the reporting government?

Yes

General Revenues

Yes

Program Revenues

Yes

Reported similar to General Revenues (Not a Program Revenue)

Yes

General Revenues

Yes

Program Revenues

No

General Revenues

No Is the revenue a charge for services—including items such as license and permit fees and fines?

No Is the revenue a gift of endowment principal?

No Is the revenue (presumably grants, contributions, or related investment income) unrestricted?

No Is the revenue (presumably grants, contributions, or related investment income) restricted to use for a single function or program?

No Are specific amounts required to be used for each of the multiple functions or programs?

Yes Program Revenues 4 ..

Identifying Major Funds In discussing major fund identification, it should be emphasized that a fund does not have to meet the GASB size criteria to be treated as a major fund. Indeed, it is best if governments tentatively determine which funds to treat as major funds before applying the size test. The size test should then be applied to see if any other funds must be reported as major funds because they meet the size test. In Practice 13-1 (page 522) presents a good example of applying the major funds tests.

One way to explain the size test for determining major funds is to view it as four separate tests of size for identifying major governmental funds and four separate tests of size for identifying major Enterprise Funds. Any governmental fund that meets one or more of the four governmental fund tests is a major governmental fund. Any Enterprise Fund that meets one or more of the Enterprise Fund tests is a major Enterprise Fund. Internal Service Funds and Fiduciary Funds are only reported by fund type, cannot be major funds, and are not included in the size tests.

SIZE TESTS FOR MAJOR GOVERNMENTAL FUNDS Assets and Deferred Outflows Test Step Calculate the larger 1 of: (a) 10% of the sum of the assets and deferred outflows of all governmental funds and (b) 5% of the sum of the assets and deferred outflows of all governmental funds and all Enterprise Funds

Liabilities and Deferred Inflows Test Calculate the larger of: (a) 10% of the sum of the liabilities and deferred inflows of all governmental funds and (b) 5% of the sum of the liabilities and deferred inflows of all governmental funds and all Enterprise Funds

5 ..

Revenues Test Calculate the larger of: (a) 10% of the sum of the revenues of all governmental funds and

Expenditures Test Calculate the larger of: (a) 10% of the sum of the expenditures of all governmental funds and

(b) 5% of the sum of the revenues of all governmental funds and all Enterprise Funds

(b) 5% of the sum of the expenditures of all governmental funds and the sum of the expenses of all Enterprise Funds

Step Compare the assets 2 and deferred outflows of each individual governmental fund with the result of Step 1. If the individual fund assets and deferred outflows are larger, the fund is a major governmental fund

Compare the liabilities and deferred inflows of each individual governmental fund with the result of Step 1. If the individual fund liabilities and deferred inflows are larger, the fund is a major governmental fund

Compare the revenues of each individual governmental fund with the result of Step 1. If the individual fund revenues are larger, the fund is a major governmental fund

SIZE TESTS FOR MAJOR ENTERPRISE FUNDS Assets and Liabilities and Deferred Outflows Deferred Inflows Revenues Test Test Test Step Calculate the larger Calculate the larger Calculate the larger 1 of: of: of: (a) 10% of the sum (a) 10% of the sum (a) 10% of the sum of the assets and of the liabilities and of the revenues of deferred outflows of deferred inflows of all Enterprise Funds all Enterprise Funds all Enterprise Funds and and and (b) 5% of the sum of (b) 5% of the sum of (b) 5% of the sum of the assets and the liabilities and the revenues of all deferred outflows of deferred inflows of governmental funds all governmental all governmental and all Enterprise funds and all funds and all Funds Enterprise Funds Enterprise Funds Step Compare the assets Compare the Compare the 2 and deferred liabilities and revenues of each outflows of each deferred inflows of individual individual each individual Enterprise Fund Enterprise Fund Enterprise Fund with the result of with the result of with the result of Step 1. If the Step 1. If the Step 1. If the individual fund individual fund individual fund revenues are larger, assets/deferred liabilities and the fund is a major outflows are larger, deferred inflows are Enterprise Fund. the fund is a major larger, the fund is a Enterprise Fund major Enterprise Fund 6 ..

Compare the expenditures of each individual governmental fund with the result of Step 1. If the individual fund expenditures are larger, the fund is a major governmental fund

Expenses Test Calculate the larger of: (a) 10% of the sum of the expenses of all Enterprise Funds and (b) 5% of the sum of the expenditures of all governmental funds and the sum of the expenses of all Enterprise Funds Compare the expenses of each individual Enterprise Fund with the result of Step 1. If the individual fund expenses are larger, the fund is a major Enterprise Fund

MD&A and Financial Statements Finally, careful review of the fund financial statements, as well as the government-wide financial statements, is helpful in preparing for the next chapter. It is difficult to give students a full appreciation of the potential value of Management’s Discussion and Analysis in the context of a chapter in a textbook. Illustration 13-15 (page 540) provides a detailed list of what the MD&A includes, but having students acquire and analyze the MD&A of a state or local government is a valuable research assignment (refer to Problem 13-6).

CRITICAL OBJECTIVES Students must understand thoroughly several different issues, reporting requirements, and techniques to master the Basic Financial Statements at an appropriate level, including: • • • • • • • •

Management’s Discussion and Analysis.

The statements that comprise the Basic Financial Statements, the measurement focus and basis of accounting required in each, and the reporting formats and classifications.

The computation and presentation of the components of net position reported in the government-wide Statement of Net Position.

How to distinguish program revenues from general revenues.

Allocation of expenses to functions.

Treatment of infrastructure capital assets.

How to identify major funds.

Major fund reporting.

QUESTIONS/EXERCISES/PROBLEMS/CASES — SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises Number of Problems

Number of Cases

12 5 (includes 2 exercises with 10 multiple-choice questions each) 7 (includes 1 problem focusing on equity reporting, 2 problems focusing on preparation of a statement of activities, 1 focusing on major fund reporting, and 3 research questions dealing with various aspects of financial reporting) 3 (1 case for Chattanooga, Tennessee, on identifying major funds, 1 case for Ashland, Oregon, related to the calculation of net position and the preparation of a statement of activities, and the Harvey City Comprehensive Case)

Given the importance of the material in this chapter, it is recommended that assignments be fairly extensive. In addition to material included in the text, there are additional questions and problems included within this instructor’s manual.

7 ..

The question material in this chapter can be very useful in focusing students’ attention on key topics that they must understand to comprehend and prepare the Basic Financial Statements. The chart below identifies the topics covered by each question to help you select the questions that you assign.

No. 1 2 3 4 5 6 7 8 9 10 11 12

Primary Topic Covered by Question Basis of accounting for governmental activities in government-wide financial statements List the required Basic Financial Statements Minimum net position classifications Major fund reporting Identification of major funds Distinguishing governmental activities and business-type activities General revenues vs. program revenues Minimum classifications for program revenues Functional identification for program revenues Minimum level of functional detail in statement of activities Expenses to be reported as separate line items in statement of activities Government-wide reporting requirements for pension and OPEB plans

Each of the exercises and problems in the chapter addresses one or more topics of major importance to students. The following summarizes the key areas: Classification of Program vs. General Revenues Exercises 13-3 and 13-4 require students to classify revenues as either program revenues or general revenues. Students tend to understand this distinction better after attempting to apply it to specific revenues and discussing those classifications.

Fund Financial Statements One primary difference between the financial statements of the various funds studied in the previous chapters and the fund financial statements in the Basic Financial Statements is the presentation of major funds in individual columns accompanied by a column that contains all the nonmajor funds and a total column (for governmental funds) or by these and an ISF fund type column for proprietary funds. Exercise 13-5 requires students to identify the columns that would be needed in the fund financial statements of a county government given a hypothetical fund structure and a listing of major funds.

Net Position Components Problem 13-1 is an excellent problem for discussing the classification of net position into the three required categories.

Major Fund Identification Problem 13-2 requires students to identify a government’s major funds based on the GASB’s size criterion. It is critical that students be able to master this problem.

8 ..

Statement of Activities Problems 13-3 and 13-4 require the preparation of a statement of activities—the most unfamiliar of the Basic Financial Statements. Students should complete both of these problems.

HARVEY CITY COMPREHENSIVE CASE The case may generate many questions from students for this chapter. Most will likely center on the determination of major funds because only the fund financial statements have to be prepared for Chapter 13. The government-wide statements will be prepared for Chapter 14 after students have derived the needed data. Note that because Harvey City has very few funds, most of them do meet the size criteria for treatment as major funds.

Additional questions for in-class or homework assignments 1. What is Management’s Discussion and Analysis? Does it include management projections?

Suggested Solution Management’s discussion and analysis (MD&A) is required supplementary information that precedes the financial statements. The GASB prescribes a detailed list of issues and information that must be covered in the (MD&A). (See Illustration 13-15 on page 540 of the textbook.) It is important to note that the MD&A: a. b. c. d.

Is not a forecast Is based on currently known facts, decisions, or conditions Introduces the government’s basic financial statements Provides an analytical overview of the government's activities

Management’s discussion and analysis is essentially a highly-structured version of a transmittal letter. It differs from a transmittal letter in that it (a) relates only to the basic financial statements, not to the entire CAFR, (b) is limited to the topics of discussion required in GASB Statement No. 34, and (c) is based solely on currently known facts, decisions, or conditions.

2. How are capital grants reported under Statement 34 in the government-wide financial statements?

Suggested Solution Capital grants are considered capital contributions and are treated as revenues in GASB Statement No. 34. They are not included in either operating revenues or nonoperating revenues in the proprietary fund statement of revenues, expenses, and changes in net position. Instead, they are reported after nonoperating revenues—in the same area of the statement as special items, extraordinary items, and transfers.

9 ..

The government-wide statement of activities includes a column in the upper part of the statement for capital grants and contributions. When the grant conditions are met, the capital grants should be reported in this column by function (to which their use is restricted) and deducted from the expenses of that function in deriving the net expense or revenue and changes in net position of the various functions.

3. What is meant by reporting activities by function?

Suggested Solution The GASB Codification indicates that the function classification provides information on the overall purposes or objectives of expenditures (or expenses). Functions group related activities that are aimed at accomplishing a major service or regulatory responsibility. Reporting expenses by function, rather than by natural classification or department, should report what it is costing to accomplish the major objectives of the government. Common function classifications for general government activities include such classifications as general government, public safety, public works, health and welfare, education, culture and recreation, and so on. More detailed subfunction classifications are widely used as well and may be presented in the financial statements.

4. Must the tax revenues reported in the governmental funds Statement of Revenues, Expenditures, and Changes in Fund Balances equal the tax revenues reported in the government-wide Statement of Activities? Why or why not?

Suggested Solution No. Indeed, the tax revenues reported in the governmental funds statement of revenues, expenditures, and changes in fund balances for a year and the tax revenues reported in the statement of activities for governmental activities in the same year typically will not match. The availability criterion applies in the governmental funds statement but does not apply in the government-wide statement of activities.

5. Explain the budgetary comparison reporting requirements of GASB Statement No. 34.

Include the amounts to be reported in various columns of the statement or schedule, the funds or fund types to be included, and the location of the budgetary comparisons.

Suggested Solution GASB Statement No. 34 requires a budgetary comparison statement only for the General Fund and for each major Special Revenue Fund that has a legally adopted annual budget. Additionally, this comparison may be presented as a schedule in the required supplementary information instead of as a statement in the basic financial statements. The comparison must (1) be presented using the budgetary basis of accounting and (2) include a column presenting the original budget in addition to the columns required prior to GASB Statement No. 34. Hence, the statement of revenues, expenditures, and changes in fund balance—budget and actual—typically will have the following column headings: 10 ..

Original Budget

Revised Budget

Actual (Budgetary Basis)

Variance

6. What are the four reporting focuses that are required in government-wide financial statements?

Suggested Solution The four reporting focuses (or reporting units) required in the government-wide financial statements are: 1.

2.

3.

4.

Governmental activities Business-type activities Primary government totals Discretely presented component units

7. What are “internal balances” that are reported in the government-wide statement of net position? Distinguish internal balances from interfund payables and receivables reported in the fund financial statements.

Suggested Solution The internal balances reported in the government-wide financial statements are the net payable and receivable amounts between governmental activities and businesstype activities. These are the balances of interfund payables and receivables remaining after eliminating interfund payables and receivables among all of the funds used to account for activities included in the governmental activities classification and after eliminating interfund payables and receivables among all of the funds used to account for activities included in the business-type activities classification. Thus, interfund payables and receivables between the General Fund and a typical Special Revenue Fund, Capital Projects Fund, or Debt Service Fund would be eliminated in determining if there were any internal balances between governmental activities and business-type activities. Interfund payables between the General Fund and an Enterprise Fund would not be eliminated. The amount of this interfund payable and receivable would be reported as an internal balance.

The difference between internal balances and interfund payables and receivables then is that internal balances are amounts owed between governmental activities and business-type activities while interfund payables and receivables are balances owed between funds.

8. Explain why the restricted net position reported for business-type activities may be greater than the restricted net position reported for the government’s Enterprise Funds even when Enterprise Fund activities are the only business-type activities of a government.

11 ..

Suggested Solution To be included in the computation of restricted net position, the use of resources must be more restrictive than simply that it must be used for the purpose of the particular activity being reported upon. The business-type activities reporting focus, by definition, is broader than the reporting focus of any one of several Enterprise Funds included in a government's business-type activities (assuming the government has more than one Enterprise Fund). Therefore, assets that are restricted for the use of a particular Enterprise Fund (but for any legitimate purpose of that fund) would be included in unrestricted net position of the Enterprise Fund but in restricted net position of business-type activities (because the resources are restricted to only one of several of the activities reported in business-type activities).

9. What impact, if any, do restrictions on the use of resources have on the classification of revenues as program revenues or general revenues?

Suggested Solution All user charge revenues are program revenues regardless of restrictions on their use. Taxes are general revenues regardless of restrictions on their use. Most revenue sources (grants and contributions and investment income) are program revenues if restricted to a specific program or function and general revenues if not. Restrictions determine the classification of the revenues as program or general in these latter cases.

Additional problems for in-class or homework assignments Problem 13-1 (Capital Leases) Explain the effect that the following transactions would have (a) on a government’s governmental funds balance sheet and statement of revenues, expenditures, and changes in fund balances and (b) on its government-wide statement of net position and statement of activities for the 20X3 and 20X4 calendar years.

1. At June 30, 20X3, the town of Heidi entered into a 5-year capital lease for its 911 system equipment. The capitalizable cost of the equipment was $13,800,000, and the town made a 10% down payment at the inception of the lease. The effective interest rate implicit in the lease is 10%, compounded annually.

2. The town paid its first annual lease payment of $3,280,000 when due on June 30, 20X4.

12 ..

Suggested Solution

20X3

20X4

(a) GOVERNMENTAL FUNDS Statement of Revenues, Expenditures, and Changes in Fund Balance Sheet Balances Cash is Expenditures for reduced by the capital outlay of $1,380,000 $13,800,000 and down payment other financing and fund sources (increase in balance is capital lease $1,380,000 liabilities) of less $12,420,000 reported

Cash and fund balance are $3,420,000 less because of the lease payment

Expenditures— Interest of $1,242,000 and Expenditures— Principal retirement of $1,998,000 ($3,240,000 – $1,242,000) are reported

(b) GOVERNMENT-WIDE

Statement of Net Position Cash is reduced by the $1,380,000 down payment.

Leased equipment ($13,800,000 less accumulated depreciation of $1,380,000) is reported in capital assets.

Long-term liabilities of $10,442,000 ($12,420,000 – $1,998,000) and current liabilities of $2,619,000 (interest payable of $621,000 and the maturing portion of the capital lease liability of $1,998,000) are reported.

Cash is reduced $3,420,000 by the payment.

Leased equipment ($13,800,000 less accumulated depreciation of $4,140,000) is reported in capital assets.

Long-term liabilities of $8,246,200 ($10,442,000 – ($3,240,000 – $1,044,200)) and current liabilities of $2,717,900 (interest payable of $522,100 and the maturing portion of the capital lease liability of $2,195,800) are reported.

13 ..

Statement of Activities Expenses include depreciation of $1,380,000 ($13,800,000 divided by 5 years × .5) and interest of $621,000 ($12,420,000 × 10% × .5)

Expenses include depreciation of $2,760,000 ($13,800,000 divided by 5 years) and interest of $1,143,100 ($621,000 for the first half year and $522,100, or $10,442,000 × 10% × .5, for the last half year)

Problem 13-2 (Interest) A government issued $8,000,000 of general government bonds for $8,080,000 on April 1, 20X2.

The bonds have a 5-year life and bear interest of 6% annually, payable each March 31.

1. Prepare a schedule showing the amount(s) that the government should report associated with the bonds in its governmental funds Statement of Revenues, Expenditures, and Changes in Fund Balances for the fiscal years ending December 31, 20X2, 20X3, and 20X4.

2. Prepare a schedule showing the amount(s) that the government should report associated with the bonds in its government-wide statement of activities for the fiscal years ending December 31, 20X2, 20X3, and 20X4.

Suggested Solution 1. Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balance 20X2 Other financing sources: Bonds .........................................................................................

Bond premium ...........................................................................

$8,000,000 80,000

$8,080,000

20X3 Expenditures—Debt Service— Interest ($8,000,000 × 6% × 12/12) .........................................

480,000

20X4 Expenditures— Debt Service— Interest ($8,000,000 × 6% × 12/12) .........................................

480,000

2. Government-Wide Statement of Activities 20X2 Interest expense computation: Cash interest ($8,000,000 × 6% × 9/12) .....................................

Premium amortization ($80,000 / 5 years × 9/12) ......................

Interest expense .........................................................................

20X3 Interest expense computation: Cash interest ($8,000,000 × 6% × 12/12) ...................................

Premium amortization ($80,000 / 5 years × 12/12) ....................

Interest expense .........................................................................

14 ..

$360,000 (12,000) $348,000

$480,000 (16,000) $464,000

20X4 Interest expense computation: Cash interest ($8,000,000 × 6% × 12/12) ...................................

Premium amortization ($80,000 / 5 years × 12/12) ....................

Interest expense .........................................................................

15 ..

$480,000 (16,000) $464,000

CHAPTER FOURTEEN FINANCIAL REPORTING: DERIVING GOVERNMENT-WIDE FINANCIAL STATEMENTS AND REQUIRED RECONCILIATIONS (Pages 551–617) CHAPTER FOURTEEN OUTLINE 1) Deriving governmental activities data 2) Deriving government-wide financial statement data for governmental activities—a worksheet-based approach a) The conversion worksheets b) Balance sheet conversion worksheet adjustments i) GCA balance adjustments ii) GLTL-related balance adjustments iii) Other balances, deferred outflows/inflows of resources, and interfund items adjustments c) Farley County balance sheet conversion i) GCA balances ii) GLTL-related balances iii) Other balances, deferred ouflows/inflows of resources, and interfund items iv) Government-wide statement of net position information d) Operating statement conversion worksheet conversion adjustments i) GCA changes ii) GLTL-related changes iii) Other changes and interfund items e) Farley County operating statement conversion i) GCA changes ii) GLTL-related changes iii) Other changes, deferred outflow/inflows of resources, and interfund items iv) Reconciliation: Change in fund balances with change in net position 3) Deriving business-type activities data 4) Preparing government-wide financial statements a) Statement of net position b) Statement of activities c) Reconciliations 5) Concluding comments 6) Appendix 14-1: A two-worksheet approach to deriving governmental activities data: an adjusting entry presentation a) Farley County Balance Sheet Conversion Worksheet Adjustments 1 ..

i) GCA balances ii) GLTL-related balances iii) Other balances, deferred outflows of resources, deferred inflows of resources and interfund items iv) The government-wide statement of net position information v) Reconciliation: total fund balances to total net position b) Farley County Operation Statement Conversion Worksheet Adjustments i) Change in net position as a worksheet account ii) GCA changes iii) GLTL-related changes iv) Other balances, deferred outflows of resources, deferred inflows of resources, and interfund items v) The government-wide statement of activities information vi) Reconciliation: change in fund balances with change in net position 7) Appendix 14-2: a one-worksheet approach to deriving governmental activities data a) GCA-GLTL adjustments i) Elimination and capitalization of capital outlay expenditures ii) Sale of general capital assets iii) Depreciation expense iv) General long-term debt issuance v) General long-term debt principal retirement vi) Converting interest expenditures to interest expenses b) Basis of accounting adjustments i) Convert claims and judgments expenditures to expenses ii) Convert compensated absences expenditures to expenses iii) Convert OPEB and pension expenditures to expenses iv) Convert revenues from modified accrual to accrual c) Eliminating interfund transactions d) Completing the worksheet 8) Questions 9) Exercises 10) Problems 11) Cases 12) Harvey City Comprehensive Case

2 ..

CHAPTER LEARNING OBJECTIVES 14.1

Summarize and explain the types of worksheet adjustments needed to derive governmental activities data for the government-wide financial statements from governmental funds financial statement data.

14.2

Describe both the two-worksheet approach (chapter) and the one-worksheet approach (Appendix 14-2) to deriving governmental activities data.

14.3

Summarize and explain the types of worksheet adjustments needed to derive businesstype activities data for the government-wide financial statements from Enterprise Funds financial statement data.

14.4

Prepare the government-wide financial statements and the required reconciliations of fund financial statements to government-wide financial statements using information derived in the conversion worksheets.

CHAPTER OVERVIEW AND SYNOPSIS Governments must prepare and present government-wide financial statements, but governments do not record government-wide financial statement data directly in their accounts. The information required in these statements is very different from the information that governments use on a day-to-day basis. The overall purpose of this chapter is to teach students how governments derive the data needed for government-wide financial statements from the fund accounting information—specifically from the fund financial statements. The goal of the chapter is to help students understand the differences in the fund financial statement data and the government-wide statement data at a level that permits them to understand the changes necessary to convert the fund financial statement information to what is required for the government-wide financial statements. Most of the modifications that are required in practice are discussed and illustrated in the chapter.

Most of the chapter is devoted to the illustration and discussion of worksheet adjustments required to convert governmental fund financial statement data to government-wide financial statement data for governmental activities. The government-wide financial statements for the illustrative government, the reconciliation between the fund financial statement data, and the government-wide financial statements are presented.

It is strongly recommended that the many illustrations in Chapter 14 be used as teaching tools.

Illustration 14-1 is a good visualization of the process explained in the chapter and provides students with a valuable context for where the information on a conversion worksheet comes from and where the output goes. Illustrations 14-2 and 14-7 help students understand the need for the various conversion entries.

3 ..

CRITICAL OBJECTIVES The primary learning objectives in this chapter include: • • • • • •

Understanding conversion worksheet adjustments necessary to derive governmental activities data in the government-wide financial statements from the governmental fund data in the fund financial statements.

Understanding the conversion worksheet adjustments necessary to derive business-type activities data in the government-wide financial statements from the enterprise funds’ data in the fund financial statements.

Preparation of a user-friendly conversion worksheet.

Preparation of government-wide financial statements.

Addressing the reporting of Internal Service Fund data as either governmental activities or business-type activities in the government-wide financial statements.

Understanding the reconciliations necessary between the fund financial statement data and the government-wide financial statement data.

QUESTION/EXERCISES/PROBLEMS/CASES — SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises

Number of Problems

Number of Cases

11 6 (includes 2 exercises with 10 multiple-choice questions each, as well as various exercises addressing conversion worksheet adjustments) 8 (includes several conversion worksheet preparation problems of varying difficulty, as well as financial statement preparation problems) 4 (1 case for Corona, California, that addresses a governmental funds’ operating statement reconciliation, 1 case for Carrollton, Texas, that addresses the governmental funds’ balance sheet reconciliation, another case for Carrollton, Texas, that addresses the governmental funds’ operating statement reconciliation, and the Harvey City Comprehensive Case)

Each of the exercises and problems in the chapter either require students to convert one or more fund financial statement elements into the data required in the government-wide financial statements or requires conversion of a set of fund financial statements to government-wide financial statement data. The focus of each exercise and problem is summarized as follows: Exercise 14-3 This exercise focuses on the conversion of capital outlay expenditures and other financing sources from a bond issuance.

4 ..

Exercise 14-4 The elimination of interfund payables and receivables is addressed in this exercise.

Exercise 14-5 The determination of and the related conversion of governmental funds tax revenues to governmental activities tax revenues is the primary focus of this exercise.

Exercise 14-6 This exercise addresses the conversion of governmental funds claims and judgments expenditures.

Problem 14-1 This first problem addresses adjustments for several governmental funds accounts and general capital assets. The conversion components include materials and supplies, capital outlay expenditures, bond issuance, capital lease, interest, and depreciation.

Problem 14-2 This problem highlights rather extensively the full conversion of Enterprise Funds data to business-type activities data.

Problem 14-3 This extensive problem focuses on the identification of significant problems that exist in a fictional statement of net position.

Problem 14-4 This problem addresses the balance sheet conversion worksheet.

Problem 14-5 This relatively comprehensive problem focuses on the preparation of a balance sheet conversion worksheet. Problem 14-6 deals with preparation of the related operating statement conversion worksheet.

Problem 14-6 This is a continuation of Problem 14-5 that requires the completion of an operating statement conversion worksheet.

Problem 14-7 The preparation of a balance sheet conversion worksheet addressed in this problem is one of the most comprehensive problems in this chapter. Problem 14-8 addresses the preparation of the related operating statement conversion worksheet.

Problem 14-8 This a continuation of Problem 14-7 that requires the completion of an operating statement conversion worksheet.

5 ..

HARVEY CITY COMPREHENSIVE CASE The worksheet conversion required for the case is quite comprehensive. However, it follows the chapter relatively closely. Students should be encouraged to begin early, as this will be one of the longer and more difficult case assignments. The value that the case adds to students’ understanding of this important chapter and their understanding of government-wide financial statements should be immense.

Additional questions for in-class or homework assignments 1. Governmental activities and governmental funds both report general government activities. In what way(s) does reporting general government activities in the fund financial statements differ from reporting general government activities in the government-wide financial statements?

Suggested Solution Reporting governmental activities in the government-wide financial statements and reporting general government (typically the same as governmental activities) activities in the fund financial statements differ in several significant ways. The most significant differences are that governmental fund reporting entails reporting for general government activities in a disaggregated manner using funds, does not include general capital assets and general long-term liabilities, and uses the flow of current financial resources measurement focus and modified accrual basis of accounting. Additionally, no Internal Service Fund activities are reported in these funds. On the other hand, government-wide reporting of governmental activities entails reporting governmental activities as a single aggregated reporting unit including general capital assets and general long-term liabilities as well as appropriate Internal Service Fund activities. Government-wide reporting is based on the flow of economic resources measurement focus and the accrual basis of accounting.

2. Why must capital outlay expenditures be eliminated to convert governmental funds data into government-wide, governmental activities data?

Suggested Solution In the flow of current financial resources measurement focus of governmental funds, acquisition costs incurred for capital assets are uses of current financial resources and are reported as expenditures of the fund from which the cost was financed. In the flow of economic resources measurement focus used for governmental activities, purchase of a capital asset does not reduce economic resources. It simply changes the form of those resources. As in business, capital outlay expenditures result in capital assets being reported under the flow of economic resources approach. Therefore, capital (asset) outlay expenditures must be replaced by capital assets to change or convert the current financial resources information to flow of economic resources 6 ..

information. Economic resources decrease over the period of use for depreciable capital assets—as represented by depreciation.

3. When should an Internal Service Fund be included as part of business-type activities? As part of governmental activities?

Suggested Solution Any Internal Service Funds that provides the majority of its services to governmental fund departments should be included in governmental activities. An Internal Service Fund that provides the majority of its services to Enterprise Fund departments should be included in business-type activities.

4. What are internal balances? Is it possible for a receivable between the General Fund and a Special Revenue Fund to be reported as an internal balance? Why or why not?

Suggested Solution “Internal balances” is the terminology that the GASB uses to refer to amounts payable and receivable between governmental activities and business-type activities.

Interfund payables between the General Fund and a Special Revenue Fund are not amounts owed from governmental activities to/from business-type activities except in an extremely rare circumstance. Therefore, such payables and receivables will not be reported as “internal balances” in the government-wide statements. They will be eliminated in deriving government-wide governmental activities from the governmental funds financial statement data.

5. Why do most worksheet adjustments to eliminate internal profits of Internal Service Funds reduce net position?

Suggested Solution The initial entry recording Internal Service Fund assets and liabilities (either as governmental activities assets and liabilities or as business-type activities assets and liabilities) includes a balancing credit (or debit) to net position. If there is internal profit in the ISF, the amount of net position being added to governmental (or business-type) activities is overstated by the amount of the internal profit. Likewise, the expenses of governmental (or business-type) activities are overstated and/or the transfers in understated by amounts equaling, in total, the internal profit.

6. Explain the adjustments that are needed to convert the reporting of a capital lease in the governmental funds financial statements to the appropriate amounts to be reported for governmental activities in the government-wide financial statements.

Suggested Solution To convert the data reported in governmental funds for a capital lease to the data reported in the government-wide financial statements requires several adjustments:

7 ..

In the year that the government enters into the capital lease, it must: • •

Eliminate the capital outlay expenditures on the lease and record that amount as a leased asset.

Eliminate the other financing source for the capital lease and record the lease liability.

In each year of the lease, the government must: • •

Eliminate any capital lease principal retirement expenditures and reduce the lease liability by that amount.

Record depreciation on the leased asset.

7. Explain how to convert governmental funds expenditures for pension contributions, claims and judgments, and compensated absences to expenses for governmental activities.

Suggested Solution Converting expenditures for pensions, claims and judgments, or compensated absences to expenses entails increasing expenditures for the increase in the related long-term liability account or decreasing expenditures for the decrease in the related long-term liability account.

8 ..

CHAPTER FIFTEEN FINANCIAL REPORTING: THE COMPREHENSIVE ANNUAL FINANCIAL REPORT AND THE FINANCIAL REPORTING ENTITY (Pages 618–652) CHAPTER FIFTEEN OUTLINE 1) The comprehensive annual financial report a) The introductory section b) The financial section i) The auditor’s report ii) The basic financial statements and required supplementary information iii) The combining and individual fund statements and schedules c) The statistical section i) Financial trends information ii) Revenue capacity information iii) Debt capacity information iv) Demographic and economic information v) Operating information 2) Supplemental and special purpose reporting 3) Financial reporting—complex entity structure a) Reporting entity definition b) Reporting entity disclosures 4) Integrating component units into the reporting entity a) Blending b) Discrete presentation c) Dual reporting entity model d) Other issues 5) Separate issuance of primary government financial statements 6) Related organizations, joint ventures, and jointly governed organizations 7) Concluding comments 8) Questions 9) Exercises 10) Problems

1 ..

11) Cases 12) Harvey City Comprehensive Case

CHAPTER LEARNING OBJECTIVES 15.1 15.2 15.3 15.4

Identify and describe the nature and contents of the three major sections of a Comprehensive Annual Financial Report.

Explain how to determine whether a government should treat an associated entity as a component unit.

Determine which component units should be blended and which should be discretely presented.

Explain the differences between and among the reporting requirements for related organizations, jointly governed organizations, and joint ventures.

CHAPTER OVERVIEW AND SYNOPSIS This chapter has two key objectives. The first is to provide a meaningful understanding of the nature and composition of a Comprehensive Annual Financial Report (CAFR) and to help the student understand the purposes of and interrelationships among the various components of a CAFR. The second major purpose is to address and explain the unique reporting issues faced by a government whose reporting entity must include organizations that are not part of its legal entity. We refer to such governments as governments with complex reporting entities. Both determining the organizations to be reported as component units of a government’s reporting entity, and how to incorporate component unit data in a government's financial report, are covered in the chapter.

Therefore, the major topics of the chapter are: 1. The nature and components of a Comprehensive Annual Financial Report.

2. Financial reporting in a complex entity context, including: a. b. c. d.

Defining the government reporting entity Blending (when and how) Discrete presentation (when and how) Related organizations, joint ventures, and jointly governed organizations

The first topic, though very significant, can be covered quickly. The illustrations in the chapter are designed to help students “visualize” a CAFR as best possible, but are no substitute for studying or reviewing an actual CAFR. Therefore, we recommend that instructors make copies

2 ..

of one or more current CAFRs available to their students and/or have students search for CAFRs available on the Internet.

The second topic (the financial reporting entity) is an important GAAP issue that affects both the Basic Financial Statements and the CAFR. Although some may not have time to cover it, we recommend highly that it be covered.

Illustration 15-9 is an excellent visual of the relationship of accounting and transactional data and required external financial reporting. This illustration can be used very effectively to reiterate the relationship of this data and the chronology of financial statement preparation.

This chapter includes a complete summary of the requirements of a statistical section of a CAFR in accordance with GASB Statement No. 44.

QUESTIONS/EXERCISES/PROBLEMS/CASES—SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises Number of Problems

Number of Cases

17 5 (includes 2 exercises with 10 multiple choice questions) 10 (includes 1 problem related to note disclosures, 1 problem focusing on CAFR analysis techniques, 4 problems focusing on component unit identification and reporting, 2 problems focusing on sections of the Comprehensive Annual Financial Report, and 2 research and analysis problems) 3 (2 cases, 1 for Myrtle Beach, South Carolina, and 1 for St. Louis, Missouri, focus on the identification of component units and defining the reporting entity, and the third case is the Harvey City Comprehensive Case)

The following is a summary of the main topics covered in the assignment material: Understanding the CAFR Assignment material that is directed toward understanding the CAFR, its components, and the relationships between those components include Exercises 15-3 and Problem 15-2.

Reporting Entity Definition Exercise 15-5 and Problem 15-4 focus primarily on reporting entity definition. Problem 15-4 also requires determining if component units should be blended or discretely presented.

Use of Blending vs. Discrete Presentation Exercise 15-4 and Problem 15-3 relate to whether a component unit must be blended or discretely presented in various situations. Exercise 15-4 is the more effective teaching tool.

3 ..

HARVEY CITY COMPREHENSIVE CASE The case is not likely to present major problems for the students in this chapter. You should point out that the requirements in Chapter 13 provided additional governmental funds for Harvey City and required the identification of major funds. Harvey City has only one fund of each type except for governmental funds. Therefore, the only required combining financial statements for the city are the combining financial statements for nonmajor governmental funds.

Additional questions for in-class or homework assignments 1. Why is a good transmittal letter essential to the Comprehensive Annual Financial Report (CAFR)?

Suggested Solution A good transmittal letter in the CAFR, in conjunction with the MD&A, highlights the major events of the year, the overall financial condition at the end of the year, and significant factors that changed the financial condition during the year. Many users of the CAFR may be served by the transmittal letter both (1) as an information source itself—it can put things in perspective and inform—and (2) as an introduction to the financial statements in the CAFR. 2. Referring to the auditor’s report in Illustration 15–2, which data are (a) included fully in the auditor’s scope and depth of examination, (b) included in the scope but reported on only in relationship to the data in (a), and (c) excluded from the auditor’s scope?

Suggested Solution a. The basic financial statements and notes b. Management’s Discussion and Analysis, combining financial statements, and other required supplementary information c. The introductory section and the statistical section 3. When and why are funds of various types included in a single combining financial statement?

Suggested Solution Combining financial statements supporting the “Other Governmental Funds” columns of the governmental funds financial statements are apt to include individual funds of various types. One purpose of this combining statement is to provide the individual fund detail behind the data aggregated in the “Other Governmental Funds” column. Because the column in a governmental funds financial statement will aggregate all nonmajor funds—regardless of type—this set of combining statements will likewise include individual funds of different types.

4 ..

4. The finance officer of the city of Beamstown is concerned about whether to include the City School District, the Beamstown Transit Authority, and the Beamstown–Thais County Regional Airport in the city’s reporting entity. Explain how the finance director should determine which, if any, of these related entities should be included in the city’s reporting entity.

Suggested Solution The relationships between the City of Beamstown and the other entities should be evaluated using the reporting entity criteria set forth in the GASB Codification.

According to the Codification, if these related organizations meet the criteria for being considered primary governments they will not be included in the City’s reporting entity. Therefore, a first step is to determine if any of the organizations are primary governments. To be a primary government, special purpose organizations must have separately elected governing bodies, have separate legal standing, and be fiscally independent. Any organization that is not a primary government must be included in the City's reporting entity if the city is financially accountable for that organization. The city is financially accountable for any organization that is fiscally dependent on the city or that meets both of the following conditions: 1. The city either appoints a voting majority of the potential component unit’s governing body or it can unilaterally abolish the other organization.

AND 2. The city either (a) has the ability to impose its will on the organization or (b) has the potential to receive specific financial benefits from, or be subject to, specific financial burdens because of the organization.

5. When are combining component unit financial statements required?

Suggested Solution Combining component unit financial statements are needed when two or more discretely presented component units are combined in the discretely presented component units column of the government-wide financial statements (or possibly in the fiduciary fund financial statements).

6. What are the disclosure requirements for major component units?

Suggested Solution The minimum disclosure requirements for major discretely presented component units are a condensed statement of net position and a condensed statement of activities as well as related party transaction information related to transactions with the primary government or with other discretely presented component units. The minimum detail to be reported in the condensed statements is listed in Illustration 158 on page 638 of the text.

5 ..

CHAPTER SIXTEEN NON-SLG NOT-FOR-PROFIT ORGANIZATIONS (Pages 653–691) CHAPTER SIXTEEN OUTLINE 1) Classification of organizations a) Voluntary health and welfare organizations b) Other not-for-profit organizations 2) Classes of net assets 3) Non-GAAP accounting and reporting requirements 4) Basis of accounting 5) Financial statements a) Statement of financial position (Balance sheet) i) Investments ii) Pledges iii) Fixed assets iv) Collections v) Trusts and similar agreements b) Statement of activities (Operating statement) i) Revenues and expenses reported at gross amounts ii) Contributions iii) Pledges, membership dues, and other fees iv) Special fund-raising events v) Investment income and gains/losses vi) Donated materials, facilities, and services vii) Net assets released from restrictions viii) Expenses (1) Program services (2) Supporting services (a) Management and general costs (b) Fund-raising and other supportive services c) Statement of cash flows d) Statement of functional expenses 6) Nongovernment VHWO and ONPO accounting and reporting illustration a) Transactions and entries b) Illustrative financial statements i) Balance sheet ii) Operating statement 1 ..

iii) Statement of cash flows iv) Statement of functional expenses 7) Concluding comments 8) Questions 9) Exercises 10) Problems

CHAPTER LEARNING OBJECTIVES 16.1

Distinguish voluntary health and welfare organizations from other not-for-profit organizations and explain the two net asset classes used in reporting nongovernment notfor-profit organizations.

16.2

Explain the basis of accounting (timing of revenue and expense recognition) and the financial statements required for nongovernment not-for-profit organizations.

16.3

Prepare journal entries for common transactions of nongovernment not-for-profit organizations—including restricted contributions and restricted investment income—and prepare nongovernment not-for-profit organization financial statements.

CHAPTER OVERVIEW AND SYNOPSIS The purpose of this chapter is to discuss and illustrate the principles of accounting and reporting both for nongovernment voluntary health and welfare organizations (VHWOs) and for other nongovernment not-for-profit organizations (ONPOs). Accounting and reporting for nongovernment and for government entities of these types differ. Nongovernment VHWOs and ONPOs are required to apply FASB Accounting Standards Codification (ASC) Topic 958, which government VHWOs and ONPOs are prohibited from applying. This chapter discusses and illustrates the requirements of ASC 958 in detail.

After the discussion of nongovernment VHWO and ONPO accounting and reporting principles and financial statements, a comprehensive nongovernment VHWO/ONPO journal entry (transactional analysis) and financial statement illustration is presented. Major topics include: • • •

The differing standards that apply to government and to nongovernment entities of these types The nature and classification of VHWOs and ONPOs The classes of net assets

2 ..

• •

The major nongovernment entity financial statements with discussions of the accounting and reporting principles that apply to each major financial statement Nongovernment VHWO/ONPO accounting and reporting illustration—including a comprehensive transactional analysis and financial statement illustrations

CRITICAL OBJECTIVES The primary learning objectives include: • • • • • • • •

Understanding the sources of GAAP for nongovernment not-for-profit organizations Being able to explain the basis of accounting and the financial statements required for nongovernment not-for-profit organizations Distinguishing between the two net asset classes Understanding the timing of recognition and the classification of revenues and expenses of nongovernment not-for-profit organizations Understanding the reporting of restricted contributions and restricted investment income Accounting for and reporting the satisfaction of donor-imposed temporary restrictions on the use of resources Preparing journal entries for common transactions of nongovernment not-for-profit organizations Preparing nongovernment not-for-profit organization financial statements.

QUESTIONS/EXERCISES/PROBLEM — SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises

17 7 (includes 2 exercises with 10 multiple-choice questions each) Number of Problems 10 (includes multiple transactional analysis problems of varying degrees of difficulty as well as several statement preparation problems)

Exercises 16-3, 16-4, 16-5, and 16-6 These exercises provide a variety of transactional analysis reviews including pledges and gifts and restricted gifts.

Exercises 16-7 This exercise provides practice in converting to different acceptable formats for the statement of activities.

3 ..

Problems 16-1, 16-2, 16-5, and 16-10 These problems provide a wide variety of transactional analyses.

Problem 16-4 This problem focuses on the classification of net assets.

Problems 16-3, 16-6, 16-7, 16-8, and 16-9 These problems provide a variety of opportunities for statement preparation.

Additional questions for in-class or homework assignments 1. Neither VHWOs nor ONPOs are required to use fund accounting. The accountants for a newly established ONPO have asked your advice in establishing an accounting system.

Specifically, they ask, “What is fund accounting and how do we know if we should use it?” Respond.

Suggested Solution In fund accounting for VHWOs and ONPOs, assets restricted to use for specific purposes are accounted for in separate, distinct accounting entities called funds. A separate fund is used to account for unrestricted net current assets.

Fund accounting is used by many VHWOs and ONPOs even though it is not required for either. Generally, it is considered most useful when an entity has significant amounts of restricted assets and/or fixed assets. Also, for some types of organizations fund accounting is a well-established “industry practice” and may be used to enhance inter-entity comparisons. Nongovernment VHWOs and ONPOs may report information disaggregated by fund, but they must present aggregated data as well— with all interfund transactions and relationships eliminated.

2. Prepare a “skeleton” format of a statement of activities that shows the three major subdivisions of the statements and the key items to be reported in each major subdivision.

Suggested Solution Organization Name Statement of Activities For (Period) Changes in net assets without donor restrictions: Revenues and gains: By source (contributions, membership fees, and special events) Gains (may be reported net) Total revenues and gains without donor restrictions

4 ..

Net assets released from restrictions (always an increase): By type of restriction satisfied (e.g., program restrictions, fixed asset acquisition restrictions, and time restrictions) Total net assets released from restrictions Total revenues, gains, and other support without donor restrictions Expenses and losses: Program Services (by function) Supporting Services: Management and General Fund raising Membership development Direct benefits provided to donors Losses (may be reported net) Total expenses and losses Increase (Decrease) in net assets without donor restrictions Changes in net assets with donor restrictions: Restricted contributions (support) Restricted income, gain, or loss on investment of net assets with donor restrictions Net assets released from restrictions (always a decrease) Increase (Decrease) in net assets with donor restrictions Increase (Decrease) in total net assets Net Assets, Beginning Net Assets, Ending

5 ..

CHAPTER SEVENTEEN ACCOUNTING FOR COLLEGES AND UNIVERSITIES (Pages 692–730) CHAPTER SEVENTEEN OUTLINE 1) Classification as “engaged only in business-type activities” 2) GAAP reporting requirements a) Statement of net position b) Statement of revenues, expenses, and changes in net position i) Tuition and fee revenues ii) Restricted gifts and grants iii) Revenue and expense classifications c) Statement of cash flows 3) Case illustration—a government university a) Transactions and entries—general operations b) Transactions and entries—restricted gifts for operations and plant purposes c) Other resources i) Loan funds ii) Endowment and similar gifts (1) Determining and reporting income (2) Transactions and entries—endowment gifts a) Preclosing trial balance and closing entries b) Financial statements i) Statement of net position ii) Statement of revenues, expenses, and changes in net position iii) Statement of cash flows 4) Annuity and life income gifts a) Annuity gifts b) Life income gifts 5) Colleges and universities engaged in both governmental and business-type activities 6) Nongovernment not-for-profit university reporting 7) Concluding comments 8) Questions 9) Exercises

1 ..

10) Problems

CHAPTER LEARNING OBJECTIVES 17.1

Explain why most government colleges and universities choose to report as “businesstype only” special-purpose governments.

17.2

Describe unique aspects of college and university reporting such as recognition of tuition and fee revenue, operating versus nonoperating revenue classifications, expense classifications, and scholarship allowances.

17.3

Prepare journal entries consistent with government college and university financial reporting requirements and prepare government college and university financial statements.

17.4

Explain the accounting and reporting for a basic split-interest gift agreement.

17.5

Identify the financial statements required for a government college or university engaged in both governmental and business-type activities.

17.6

Describe the principal differences between reporting government and nongovernment not-for-profit colleges and universities.

CHAPTER OVERVIEW AND SYNOPSIS This chapter discusses and illustrates the basic principles of government college and university accounting and financial reporting. The chapter focuses on accounting and reporting for government colleges and universities that report as entities “engaged only in business-type activities.” Reporting for such entities is essentially the same as reporting for an Enterprise Fund, but with some special transactions such as tuition and fee revenues to consider and an increased emphasis on restricted gifts and grants in the proprietary environment.

The chapter includes a fairly comprehensive illustration of accounting and reporting for a government college or university engaged only in business-type activities. This illustration is followed by a brief discussion of reporting for government colleges and universities engaged in both governmental and business-type activities.

Accounting and reporting for nongovernment, not-for-profit colleges and universities (following FASB Accounting Standards Codification Topic 958) is the final topic in the chapter. The key differences in reporting government colleges and universities and nongovernment, not-for-profit colleges and universities are outlined briefly. Then, financial statements for a nongovernment, not-for-profit university are presented that are based upon the same information used in the

2 ..

government college and university illustration, permitting a direct comparison of the reports with those of a government college.

CRITICAL OBJECTIVES Students should be quite comfortable with the basic principles and statements required for government colleges and universities because of their study of Enterprise Funds in Chapter 10.

Some of the key additional areas that they will need to understand about college and universities are: • • • • • •

Recognition of tuition and fee revenues, including the identification and treatment of scholarship allowances.

Expense classifications used in colleges and universities.

Reporting auxiliary enterprises.

Reporting net position of colleges and universities.

Classification of college and university revenues and expenses as operating vs. nonoperating.

Accounting and reporting for restricted gifts (including deferred gifts) and grants in Enterprise Fund financial statements.

Additionally, students need to know how to report nongovernment, not-for-profit colleges and universities.

Students’ understanding of this chapter depends heavily on their understanding of Enterprise Fund accounting and reporting (Chapter 10) and not-for-profit organization reporting (Chapter 16). It is best to encourage students to review those chapters thoroughly in preparation for both Chapter 17 and Chapter 18.

The financial statement examples in the figures in this chapter can serve as an effective tool for facilitating student mastery of this chapter.

QUESTIONS/EXERCISES/PROBLEMS — SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises Number of Problems

12 6 (includes 1 exercise with 10 multiple-choice questions) 8 (includes 1 problem with 10 multiple-choice questions and several transaction analysis and statement preparation problems)

3 ..

The topics covered in the exercises and problems are summarized below:

E 17-1 E 17-2 E 17-3 E 17-4 E 17-5 E 17-6 P 17-1 P 17-2 P 17-3 P 17-4 P 17-5 P 17-6 P 17-7 P 17-8

Topics Covered Various multiple-choice Tuition and fees Various transactions—tuition and fees, auxiliary enterprise revenues, debt service, restricted contributions, and capital outlay Government grants Term endowment gift Financing and construction of plant Various multiple-choice Journal entries for basic operations of a government college Receipt and use of restricted gifts and grants Various endowment gifts “Loan fund” gifts and operation Various capital asset and long-term debt related transactions Preparation of a statement of revenues, expenses, and changes in net position (relatively complex) Journal entries for a nongovernment, not-for-profit university

4 ..

CHAPTER EIGHTEEN ACCOUNTING FOR HEALTH CARE ENTITIES (Pages 731–761) CHAPTER EIGHTEEN OUTLINE 1) Funds—government hospitals a) Basic principles 2) Unique measurement and display features a) Distinguishing primary activities b) Classes of revenues c) Gains d) Donations e) Expense classification f) Restricted assets g) Property, plant, and equipment 3) Illustrative case a) Summary of transactions and events 4) Financial statements a) Statement of net position b) Operating statement c) Statement of cash flows 5) Nongovernment not-for-profit hospital reporting 6) Concluding comments 7) Questions 8) Exercises 9) Problems CHAPTER LEARNING OBJECTIVES 18.1

Explain the basic internal fund structure used by many health care entities and the broad approach to reporting government health care entities.

18.2

Account for unique hospital revenue sources such as patient service revenues.

18.3

Prepare journal entries for hospital transactions.

1 ..

18.4

Prepare government hospital financial statements.

18.5

Understand the key differences between accounting and reporting for government and nongovernment not-for-profit hospitals and prepare nongovernment not-for-profit hospital financial statements.

CHAPTER OVERVIEW AND SYNOPSIS This chapter discusses the basics of government health care accounting and financial reporting in depth, including revenue, gain, expense, and loss classification and recognition, as well as government health care organization financial statements. (Nongovernment not-for-profit health care financial reporting is discussed and illustrated briefly at the end of the chapter. The ASC 958 guidance discussed in Chapter 16 applies to these nongovernment entities as well as guidance from ASC 954, Health Care Entities.) The major topics include: 1. Income Determination and Asset Valuation Features—includes distinguishing revenues and expenses from gains and losses, revenue recognition for patient service revenues and restricted revenues, and the treatment of bad debts, contractual adjustments, charity services, and so on. (Much of this guidance other than revenue recognition for restricted contributions is applicable to nongovernment not-for-profit health care entities also.)

2. Illustrative Transactions and Entries for a Government Hospital—demonstrates the similarity of accounting and reporting for most government health care entity transactions and events, assets, liabilities, and net positon to accounting and reporting for other government enterprise activities.

3. Financial Statements for a Government Hospital: a. Statement of Net Position b. Statement of Revenues, Expenses, and Changes in Net Position c. Statement of Cash Flows 4. Nongovernment, Not-for-Profit Hospital Financial Reporting

CRITICAL OBJECTIVES As with government colleges and universities, students should be quite comfortable with the basic principles and statements required for government health care organizations because of their study of Enterprise Funds in Chapter 10. Some of the key additional areas that they will need to understand about government health care organizations are:

2 ..

• • • •

Accounting for patient service revenues, including deductions from patient service revenues and charity services.

Accounting for premium fees.

Balance sheet classification of restricted assets, including assets limited as to use.

Classification of hospital expenses.

Additionally, students need to know how to report nongovernment, not-for-profit health care organizations.

As with Chapter 17, students’ understanding of this chapter depends heavily on their understanding of Enterprise Fund accounting and reporting (Chapter 10) and not-for-profit organization reporting (Chapter 16). It is best to encourage students to review those chapters thoroughly as they study Chapter 18.

The financial statement examples in the figures in this chapter can serve as an effective tool for facilitating student mastery of this chapter.

QUESTIONS/EXERCISES/PROBLEMS—SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises Number of Problems

14 (includes 1 extensive matching question on classification of revenue) 4 (includes 2 exercises with 10 multiple-choice questions each) 7 (includes 1 problem focusing on statement preparation and numerous transactional analysis problems)

Several topics in this chapter are new to students, although much of the material will seem familiar. Exercise 18-3 (Asset Restrictions and Designations) and Problems 18-2 and 18-3 (Capital Asset–Related Entries and Patient Service Revenues and Related Deductions) address two of the new topics covered in the chapter.

Exercise 18-4 and Problem 18-4 Both the exercise and the problem reiterate the accounting for restricted gifts.

Problem 18-6 This problem requires the preparation of a government hospital statement of revenues, expenses, and changes in net position.

Problems 18-5 and 18-7 Both of these problems require journal entries for a variety of transactions. Each requires accounting for patient service revenues. It should also be noted that Problem 18-6includes premium fees and restricted contributions.

3 ..

Additional questions for in-class and homework assignments 1. Diagnostic and analysis equipment developed by the federal government at a cost of $1,000,000 per unit was donated to Peoples’ Hospital for medical and research use.

Similar equipment is available from a commercial supplier at a cost of $600,000 new or for $400,000 if used and of about the same age as that received. The hospital will use the equipment extensively, but the administrator doubts that it will be replaced when it is worn out or obsolete due to its high cost. (a) Should the contribution be accounted for as either revenue or gain by the hospital? Explain. (b) Should depreciation be recorded and, if so, on what cost basis?

Suggested Solution a. Yes, the contribution should be recorded at the acquisition value of the equipment upon donation (approximately $400,000). The revenue is reported as a capital contribution. b. Yes, depreciation should be charged based on the acquisition value of the equipment upon donation (about $400,000) regardless of the source of the asset or whether or not it will be replaced. The cost of operating the hospital includes depreciation of all depreciable assets used.

2. Certain financial resources are required to be used to acquire or construct a capital asset.

When the asset has been completed and placed in service, what is the impact on the Statement of Revenues, Expenses, and Changes in Net Position? If the hospital were a nongovernment not-for-profit hospital, what would be the effect on the Statement of Operations?

Suggested Solution If the financial resources of a government hospital were made available under a government reimbursement grant or a private grant with equivalent eligibility requirements, revenues should be recognized as qualifying costs are incurred. If the resources were made available through a grant or donation without such reimbursement or other eligibility requirements, the revenues would have been recognized when received. In this case, the resources would have been reflected in restricted net position until the qualifying costs were incurred. The only reporting effect from incurring qualifying costs in this scenario is that the capital asset is reflected as Net Investment in Capital Assets at that point instead of as Restricted Net Position.

In a nongovernment, not-for-profit organization, the restricted gift or grant should be recognized as revenues upon receipt—even if it is a government grant. The resources will increase Net Assets with Donor Restrictions. Upon placing the asset in service,

4 ..

net assets released from restrictions are reported, reducing Net Assets with Donor Restrictions and increasing Net Assets without Donor Restrictions.

Additional problem for in-class or homework assignments Problem 18-1 (Operating Statement) The following selected information was taken from the books and records of Glendora Hospital (a government hospital) as of and for the year ended June 30, 20X2: •

• • • • • • • •

Patient service revenues totaled $16,000,000, with associated allowances for contractual adjustments ($2,400,000) and uncollectible accounts ($1,000,000). Other operating revenues aggregated $346,000, and included $160,000 of federal reimbursement grant revenues. Revenue of $6,000,000 recognized under cost reimbursement agreements is subject to audit and retroactive adjustments by third-party payers. Estimated retroactive adjustments under these agreements have been included in allowances.

Unrestricted gifts and bequests of $410,000 were received.

Unrestricted income from endowments totaled $170,000.

Income from board-designated funds aggregated $82,000.

Operating expenses totaled $13,270,000, and included $500,000 for depreciation computed on the straight-line basis.

Capital asset acquisitions during the year totaled $1,300,000.

Endowment earnings restricted to artificial heart implant research were $250,000.

Also included in operating expenses are pension costs of $100,000, in connection with a noncontributory pension plan covering substantially all of Glendora’s employees.

Net position at June 30, 20X1 was $22,000,000.

Prepare a formal statement of revenues, expenses, and changes in net position for Glendora Hospital for the year ended June 30, 20X2 (AICPA, adapted).

5 ..

Suggested Solution

Glendora Hospital Statement of Revenues, Expenses, and Changes in Net Position Year Ended June 30, 20X2

Net patient service revenue .......................................................

Other operating revenue ($346,000 – $160,000).....................

Total operating revenue .............................................

$12,600,000 186,000 12,786,000

Operating expenses: (Detailed by function) .......................................................

Depreciation expense .......................................................

Total operating expenses ..........................................

12,770,000 500,000 13,270,000

Loss from operations .................................................

(484,000)

Nonoperating gains: Federal operating grants ...................................................

Unrestricted gifts and bequests ........................................

Investment income ($170,000 + $82,000 + $250,000) ...........................

Total nonoperating gains ..........................................

502,000 1,072,000

Change in net position ..............................................................

588,000

Net Position, July 1, 20X1 .........................................................

Net Position, June 30, 20X2 ......................................................

22,000,000 $22,588,000

6 ..

160,000 410,000

CHAPTER NINETEEN FEDERAL GOVERNMENT ACCOUNTING (Pages 762–798) CHAPTER NINETEEN OUTLINE 1) The federal financial management environment a) Financial accounting responsibilities i) Department of the Treasury ii) Office of Management and Budget (OMB) iii) Government Accountability Office (GAO) iv) Federal Accounting Standard Advisory Board (FASAB) v) Federal agencies b) Overview 2) The budgetary process a) The budget cycle i) Preparation and approval ii) Execution (1) Warrants (2) Apportionment (3) Allotment (4) Commitment (5) Obligation (6) Expended appropriations (7) Expired authority iii) Reporting b) Exceeding budget authority 3) Accounting principles and standards for federal agencies a) The federal model i) Cash and disbursements ii) Net position (1) Cumulative results of operations (2) Unexpended appropriations iii) Changes in net position (1) Enacting appropriations (2) Incurring expended appropriations (3) Incurring unfunded (or future funded) expenses b) Standard general ledger c) Federal fund structure d) Financial reporting i) Agency level ii) Government-wide statements 1 ..

4) Federal agency accounting and reporting illustrated a) A case illustration b) Maintaining budgetary control c) Maintaining proprietary accounts d) Other transactions and entries e) Closing entries i) Budgetary accounts ii) Proprietary accounts f) Reporting 5) Concluding comments 6) Questions 7) Exercises 8) Problems

CHAPTER LEARNING OBJECTIVES 19.1

Describe the federal financial management environment, including the roles and responsibilities of various federal organizations.

19.2

Explain the basic budgetary process and terminology used by the federal government.

19.3

Identify the sources of GAAP for the federal government financial report and explain the federal accounting model, including the financial statements presented for the U.S. government as a whole.

19.4

Prepare basic budgetary accounting entries and basic proprietary accounting entries for a federal agency as well as the financial statements for a simple federal agency.

CHAPTER OVERVIEW AND SYNOPSIS This chapter provides an overview of the federal financial management structure and environment and of federal government accounting and reporting. Accordingly, the major topics are: 1. The federal financial management environment.

2. The federal budgetary process.

2 ..

3. Proprietary accounting principles and standards for federal agencies.

4. Federal agency accounting and reporting illustrated.

Some instructors find that they do not have time to cover this chapter in a one-semester course.

Most instructors who cover this chapter will want to emphasize the last two topics.

CRITICAL OBJECTIVES This chapter has several key objectives, including: • • • • • • •

Understanding the federal financial management environment.

Understanding the sources of federal government GAAP. Mastering the federal accounting model.

Understanding the components of net position and the transactions that cause changes in net position.

Being able to make basic budgetary accounting entries—both for the various allocations of budget authority that occur prior to expenditure and for expenditure of appropriation authority.

Being able to make basic proprietary accounting entries for a federal agency.

Understanding the financial statement requirements for both federal agencies and the federal government as a whole.

One problem for students in covering a major topic, such as federal government accounting and reporting in a short time frame, is being able to visualize what is happening. We have attempted to design illustrations in the chapter to help with this problem. You may find the following illustrations useful as teaching aids for this chapter: No. Illustration Title/Content 2 Components of Net Position of a Federal Agency 3 Changes in Components of Net Position of a Federal Agency 4 Interrelationship of Net Position of U.S. Government Components (for agency financed solely by annual appropriations) 5 The Use of Budget Authority and Closings of Budget Accounts 6 Overview of the Federal Government Proprietary Accounting Equation 7 Effects of Transactions on Budgetary and Proprietary Accounts 9 Maintaining Budgetary Accountability for a Federal Agency

3 ..

QUESTIONS/EXERCISES/PROBLEMS — SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises Number of Problems

9 5 (1 exercise with 10 multiple-choice questions) 6 (includes various transactional analysis problems, 1 financial statement preparation problem, and 1 research problem)

Virtually every major topic covered in this chapter will either be completely new to students or a significant variation of accounting and reporting practices that they have studied in other contexts. Therefore, each of the exercises or problems in the chapter is designed to help students gain experience with one or more of these practices.

Exercise 19-1 This exercise contains multiple-choice questions covering a variety of topic areas.

Problem 19-1 This problem covers budgetary accounting entries from the initial granting of appropriation authority by Congress through the incurrence of expenditures by an agency.

Proprietary entries are to be made as well when appropriate.

Problem 19-2 The focus of this problem is on accounting for expended appropriations and net position.

It requires year-end adjustments and closing entries to be prepared.

Problem 19-3 This extensive transactional analysis problem requires preparation of journal entries— both budgetary and proprietary—for a variety of common transactions of federal agencies.

Problems 19-4 and 19-5 Both of these problems together provide a comprehensive problem that parallels the illustrative case in the chapter and requires preparation of journal entries for the agency during the year (Problem 19-4) and preparation of agency financial statements at year end (Problem 19-5).

Problem 19-6 This research problem requires students to access and evaluate the most recent U.S. Government Financial Report.

4 ..

CHAPTER TWENTY AUDITING GOVERNMENTS AND NOT-FOR-PROFIT ORGANIZATIONS (Pages 799–844) CHAPTER TWENTY OUTLINE 1) Overview 2) What is an audit? a) Classifications of audits b) Sources of auditing standards c) External auditor classifications 3) The financial statement audit a) GAAS and GAGAS i) Independence (1) Threats and safeguards (2) Prohibitions within certain nonaudit services ii) Continuing professional education (CPE) requirements b) Audit materiality and early reporting of deficiencies c) Additional audit reporting requirements d) Planning the financial statement audit i) Engagement letter ii) Understanding the entity, its environment, and its internal control e) Determining materiality in government f) Performing the audit g) Audit procedures i) Evaluating misstatements ii) Inquiring of legal counsel iii) Management’s representations iv) Related party, going concern, and subsequent events v) Analytical procedures, required communications, and audit documentation h) Reporting i) The audit report i) Report on internal controls over financial reporting and on compliance and other matters j) Required communications and the management letter 4) The single audit a) Purposes and recent reforms b) Applicability c) Definitions d) Objectives e) Overview f) Auditee responsibilities 1 ..

g) Auditor responsibilities h) Sources of guidance for the Single Audit i) Cognizant agency responsibilities j) Major FFA programs k) Findings and questioned costs l) Illegal acts m) Subrecipients n) Auditor reports—Single Audit o) Auditee reporting responsibilities 5) Concluding comments 6) Appendix 20-1—Glossary 7) Appendix 20-2—Data Collection Form for Reporting on Audits of States, Local Governments, and Nonprofit Organizations 8) Questions 9) Exercises 10) Problems 11) Cases

CHAPTER LEARNING OBJECTIVES 20.1

Describe the different types of government and not-for-profit organization audits, including: • Identify the sources of standards for government and not-for-profit organization auditing—and the relationships between and among generally accepted auditing standards (GAAS), generally accepted government auditing standards (GAGAS), and the Single Audit standards.

• Differentiate between the basic aspects of an audit of government or not-for-profit organization financial statements under GAAS and GAGAS in comparison to privatesector entities.

• Recognize the SLG “reporting units” and “major fund” approaches to judging materiality quantitatively as well as the concept of qualitative materiality.

20.2

Explain the Single Audit—in terms of when a Single Audit is required, its role, and its relationship to the financial statement audit, as well as: • Determine which federal programs should be treated as major programs in a Single Audit of a government or not-for-profit organization.

2 ..

• •

Explain the responsibilities of both the auditor and the audited government or not-forprofit organization under Single Audit requirements.

Identify and understand the audit reports required by a single audit and who is to receive the audit reports.

CHAPTER OVERVIEW AND SYNOPSIS This chapter provides an introduction to and overview of governmental auditing, including notfor-profit auditing. The nature of governmental auditing, the sources of governmental auditing standards, a summary of the standards, and the requirements and structure for a “Single Audit” are discussed. Accordingly, the major topics include: 1. Overview of governmental auditing—including a discussion of the various types of audits (financial audits, economy and efficiency audits, and program audits).

2. Auditing standards—including brief discussions and summaries of both the AICPA standards and generally accepted government auditing standards.

3. The Single Audit—covers the basic requirements and structure of a single audit, including the financial statement audit and the required internal control and compliance work.

Many instructors will choose to cover this chapter because governmental and not-for-profit organization auditing in general and the generally accepted government auditing standards and the single audit in particular typically are not covered in university auditing courses. Most will place particular emphasis on the single audit, but students should become familiar with the standards as well—particularly the differences between the AICPA standards and generally accepted government auditing standards.

The Government Auditing Standards: 2011 Revision (Yellow Book) can be found at www.gao.gov/govaud/iv2011gagas.pdf.

The Data Collection Form for Reporting on Audits of States, Local Governments, and Nonprofit Organizations found in Appendix 20-2 is for single audits completed under the previous guidance of OMB Circular A-133. Since the writing of this chapter, the data collection form has been updated and finalized to conform to the new OMB Uniform Guidance. The new form for audits with fiscal periods beginning on or after December 26, 2014, can be found at https://harvester.census.gov/facides/Files/2015_2018%20Checklist%20Instructions%20and%20 Form.pdf

3 ..

CRITICAL OBJECTIVES The most critical knowledge for a student to gain from this chapter concerns the unique aspects of government and not-for-profit auditing, including: • • • • • • • •

The role and significance of generally accepted auditing standards.

The unique nature and requirements of a single audit.

When a single audit is required.

The key components of a single audit.

How to determine which programs to treat as major programs.

The responsibilities of the various parties involved in a single audit, including the grantor agency, pass-through governments, the auditee, the cognizant agency, and the auditor.

The audit reports required by a single audit.

Judging materiality based on reporting units and major programs.

Many of the illustrations in Chapter 20 should be useful as a basis for discussing the key topics of the chapter. The following chart identifies the topics covered by each illustration.

No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Illustration Title The Audit Process Sources of Auditing Standards Overview of Reporting Units and Opinion Units Illustrative Auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters GAAS-GAGAS-Single Audit Relationships Applicability of the Single Audit Act and OMB Uniform Guidance Audit and Reporting Requirements under the Single Audit Act and OMB Uniform Guidance GAAS, Governmental Auditing Standards, and Single Audits Levels of Reporting Single Audits Schedule of Expenditures of Federal Awards Risk-Based Approach to Major Program Determination Criteria for Assessing Federal Program Risk AICPA Illustrative Auditor’s Report on Compliance Audit Findings Detail: Single Audit Single Audit Reports

4 ..

QUESTIONS/EXERCISES/PROBLEMS — SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises

Number of Problems Number of Cases

18 4 (includes 2 exercises with 10 multiple-choice questions each, and 2 exercises with extensive matching questions on government auditing terms and organizations) 8 (includes 4 major fund determination problems and 4 research analyses) 2

The questions in this chapter are a useful tool for getting students to review key aspects of government auditing. The topics of each question are summarized in the chart below.

No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Topic(s) Responsibility for the financial statements Discussion of awarding audit to low bidders Discussion of need for external audit Responsibilities of auditee for the Single Audit reports Nature of a Single Audit When is a Single Audit required Effect of program size and related risk factors on major program determination Criteria for and advantages of being a low-risk auditee Importance of distinction between major and nonmajor federal assistance programs and how to classify programs as major or nonmajor Management’s assertions in different audits Implications of making state auditor the state’s chief accounting officer as well Required Single Audit reports and materiality thresholds Definition and responsibilities of cognizant agencies Nature and purpose of the OMB Compliance Supplement Internal control evaluations for major and nonmajor programs Compliance audit requirements for major and nonmajor programs Types of audit findings in a Single Audit Summarize the GAGAS “independence” standards (Research question)

5 ..

Problems 20-1, 20-2, 20-3, and 20-4 Each of these problems relates in some way to major program determination in a single audit and the level of compliance work and internal control work required for those programs.

Case 20-1 This case considers the selection of an auditor for a medium-sized government by analyzing the pros and cons of proposing firms.

Case 20-2 This case uses a schedule of findings and questioned costs to check students’ understanding of terminology and concepts commonly found in such reports.

6 ..