CHAPTER 16 ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS (PART ONE)

Answers to Questions
1. User needs are often complex and contradictory. Specific procedures in the governmental reporting process are an outgrowth of those needs. GASB Concepts Statement No.1, Objectives of Financial Reporting, has identified three primary user groups: citizenry, legislative and oversight bodies, and investors and creditors. The needs of these users are broad and no single set of financial statements and principles can satisfy all expectations. The satisfaction of diverse user needs is a constant focus of governmental accounting. This has lead to the dual-perspective model which leads to the production of two distinct types of financial statements. 2. Accountability and control have been a constant goal of governmental accounting. Governmental accounting provides the citizenry of a democracy with a method for evaluating the governmental actions of raising and allocating resources. Elected and appointed officials have authority over the publics money. They should be held accountable for generating and using these resources wisely in meeting the publics needs. Accounting shoud help citizens in evaluating these officials on their honesty, wisdom, and stewardship. 3. GASB Statement No.34 has refined the reporting of governmental activities by providing information about the government as a whole. Focusing on individual accountability for the various government activities does not necessarily meet all user needs. Reporting under GASB No. 34 still focuses on current financial resources in the fund-based finacial statements, but provides an additional focus on all assets and all liabilities in the government-wide financial statements, thus meeting broader user needs. 4. Two financial statements make up the government-wide financial statements: The Statement of Net Assets and The Statement of Activities. There are a number of fundbased financial statements. The two fundamental financial statements covered here in Chapter 16 were the Balance Sheet for the governmental funds and the Statement of Revenues, Expenditures, and Other Changes in Fund Balances for the governmental funds. 5. In fund-based accounting, governmental funds use the current resources measurement focus and the modified accrual basis for the timing of revenue and expense recognition. The current financial resources focus traditionally includes only assets such as cash, receivables, and investments that can be used for spending purposes and the liabilities to be paid out of these current assets. The modified accrual basis recognizes revenues when they become available and measurable and expenditures when they cause a reduction in current financial resources. Governments must disclose the length of time being used to determine availability. Proprietary and Fiduciary funds generally use the economic resources measurement focus and the accrual basis for the timing of revenue and expense recognition. The economic

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resources measurement focus reports all assets (including capital and other noncurrent assets) as well as all liabilities (including long-term obligations). 6. Government-wide financial statements use the economic resources measurement focus and accrual accounting for the timing of revenue and expense recognition similar to forprofit organizations. 7. Current financial resources are primarily cash, investments, and receivables. These items are expected to be used to meet the current period government spending needs. This category also normally includes inventories and prepaid expenses. 8. Liabilities are recognized under the current financial resources focus when a claim against current financial resources is created. In many cases, that means that payment will be made during the current period or within 60 days of the subsequent period. Disclosure is required for the number of days being applied. 9. Governmental Funds: Account for activities with a service orientation a. General Fund b. Special Revenue Fund c. Capital Projects Fund d. Debt Service Fund e. Permanent Fund Proprietary Funds: Account for functions that are financed (at least in part) by user charges. a. Enterprise Fund b. Internal Service Fund Fiduciary Funds: Account for monies held by the government in a trustee capacity. a. Investment Trust Fund b. Private-Purpose Trust Fund c. Pension Trust Fund d. Agency Fund 10. The following fund types fall within the governmental funds classification: a. The General Fund is used to account for ongoing activities such as public safety and sanitation. More specifically, the General Fund records any activities that do not fall under one of the other fund types. b. Special Revenue Funds account for financial resources that have been restricted as to expenditure for a specified operating purpose. Money can come from sources such as grants, taxes, and gifts. c. Capital Projects Funds account for monies (and their eventual expenditure) to be used in acquiring or constructing government facilities or other capital assets. d. Debt Service Funds account for the accumulation of resources that will be used to pay the principal and interest of long-term debts incurred by the service activities. e. Permanent Funds account for assets contributed to the government by an external donor with the stipulation that the principal cannot be spent but any income can be used within the government, often for a designated purpose. 11. The following fund types fall within the proprietary funds classification:

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a. An Enterprise Fund accounts for any governmental activity that is financed in whole or in part by outside user charges, such as a subway system. b. An Internal Service Fund is used to record any activity that provides service to other departments or agencies within the government on a cost-reimbursement basis. A motor pool, a centralized computer operation, or a print shop can be accounted for as Internal Service Funds if a user fee is charged and they only exist to serve the other functions of government. 12. Fiduciary Funds: Account for monies held by the government in a trustee capacity. a. Investment Trust Fund. Accounts for the outside portion of investment pools where the reporting government has accepted funds from other governments resulting in a larger investment and hopefully a higher return. b. Private-Purpose Trust Fund. Accounts for money held in a trustee capacity, for example, money confiscated from illegal operations. c. Pension Trust Fund. Accounts for the employee retirement system. d. Agency Fund. Accounts for resources held by the government as an agent for individuals, private organizations, or other government units. 13. In government-wide financial statements, financial figures are shown as either governmental activities or business-type activities. All governmental funds and most internal service funds appear in the governmental acitivities. All of the enterprise funds and any remaining internal service funds are lumped into the business-type activities. Fiduciary funds are not shown in the government-wide financial statements. 14. In fund-based financial statements, for the governmental funds, a separate column must be shown for (a) the General Fund, (b) any other fund that qualifies as major, and (c) all other funds accumulated as a whole in a single column. 15. The physical recording of a budget is viewed as a method of expressing public policy and financial intent, providing a financial plan for the period. The budget establishes spending limitations, which enhances financial planning and control. The adoption of the budget for each activity anticipates the inflow of financing resources and sets approved expenditure levels. Subsequently, comparisons can be drawn between actual and budgeted figures at any time during the fiscal period, thus evaluating performance. 16. Comparisons between the original budget, the final budget, and actual figures must be reported in the required supplemental information presented after the notes to the financial information in the comprehensive annual financial report. Alternatively, the information can be presented as a separate statement within the governments fund-based financial statements. 17. An encumbrance is the recording of a purchase commitment (such as a contract or a purchase order). The encumbrance entry is recorded at the time the commitment is made prior to incurring a liability. This recording supports the spending control emphasis of the fund-based financial statements. Reviewing the Expenditures account and the Encumbrances balance provides the total amount of current financial resources spent and committed. Thus, the chance of an over-commitment of resources is decreased. The encumbrance is removed when this commitment becomes a legal liability. Until then, no transaction has taken place so encumbrances are not included in government-wide financial statements.

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18. Encumbrances (commitments) that remain outstanding at the end of a fiscal period are reported within the Equity section as a reserved fund balance. No liability is reported; instead, the need to hold financial resources to satisfy the eventual cost of the commitment is disclosed. 19. Expenditures include outflows or reductions of net current financial resources from the acquisition of goods or services (or the payment of a long-term liability). Modified accrual accounting recognizes these expenditures when a claim against the current financial resources is incurred that will be paid from resources that are available. Fund-based accounting for the governmental funds records expenditures instead of expenses and capital assets. 20. Modified accrual accounting recognizes expenditures when a claim against the current financial resources is incurred that will be paid from resources that are available. Governments must disclose the length of time (often 60 days) used to determine availability. 21. Within the governmental funds, fund-based financial statements focus on expenditures rather than expenses. Expenditures and transfers should be recorded when the liability is incurred. Therefore, the entire cost of capital assets is treated as an expenditure as the liability is incurred. Government-wide financial statements record capital assets in a manner similar to for-profit organizations. Buildings, machines, and other capital assets are capitalized and expensed over their useful lives. 22. Traditionally, the purchase method has been used for prepaid expenses and supplies. The cost is recorded immediately as an expenditure when the liability is incurred or the money is paid. Another method is the consumption method, which is similar to for-profit organization. Supplies and prepayments are recorded as assets when acquired. As they are then consumed, they are recorded as expenditures matching them with the appropriate fiscal period. On fund-based financial statements for the governmental funds, either method can be selected. 23. The four classifications of nonexchange revenues that a state or local government can recognize are: a. Derived tax revenues. A tax assessment is imposed because an underlying exchange takes place. For example, revenues are recognized for a sales tax when a sale occurs and the tax is imposed. b. Imposed nonexchange revenues. An assessment is imposed but no underlying transaction takes place. Examples include property taxes and fines or penalties that are levied. Revenues are recognized in the period when resources are required to be used or the first period that use is permitted. c. Government-mandated nonexchange transactions. Monies are provided from one government to another to help pay for legally required programs or actions. Examples include grants from the federal government to a city that must only be used for a

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mandated legal requirement such as an improvement in the school system. Revenues are recognized when all eligibility requirements have been met. d. Voluntary nonexchange transactions. Monies conveyed willingly to a state or local government by an individual, another government, or an organization usually for a specific purpose but without legally mandated requirements. Revenues are recognized when all eligibility requirements have been met. An example would be money donated to the city for the beautification of the local parks. 24. A receivable is not recorded for property taxes until the demand for money represents an enforceable legal claim, which is normally specified by state law. Many governments encourage the early payment of property taxes (by sending out bills early or by giving some type of a cash discount). Thus, cash can actually be reported before the government even records the initial receivable. The revenue from the property tax should be reported net of estimated uncollectible tax in the period in which it is supposed to be used or the first period in which it can be used. For example, property taxes assessed to finance the government's costs in 2007 should be reported as revenue in 2007. Because the receivable and the revenue recognition are split, it is possible to record the receivable (or cash, if collected early) before the revenue. In that case, a Deferred Revenue account is established. 25. No revenues are recognized in either set of financial statements because the proceeds of bonds must be paid back. In fund-based financial statements, Cash is increased along with an Other Financing Sources figure. For example, if the bonds were issued for a construction project, this entry is recorded in the Capital Project Fund. Payments of both interest and debt are then recorded when they become due, becoming a claim on current financial resources. An Expenditure account is recognized for the debt and related interest and is usually shown in the Debt Service Fund. In government-wide financial statements, the cash and debt are both increased and payment of debt would be similar to for-profit financial statements. 26. A special assessment is an improvement made to property by the government, which is paid for in part or in whole by the owners of the property being benefited. Adding curbing and sidewalks to a local street is an example of a special assessment if the residents of that street are required to pay a portion of the cost. Typically, the government places a lien on the property to insure payment. The accounting for special assessment projects depends on the liability being incurred by the government. If the government is in no way liable for the work done and any debt incurred, an Agency Fund is used to account for the monetary inflows and outflows. The government is simply serving as a conduit to get the project completed and the debt paid. If the government is responsible (even secondarily responsible) for the cost of the project, a more elaborate method of accounting is necessary. In the government-wide financial statements the debt and the infrastructure asset are recorded as in for-profit accounting. The taxes are assessed, reported as revenues, collected, and used to pay the debt.

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The infrastructure asset and long-term debt are not recorded in the fund-based financial statements. Instead, the expenditures for the work are recorded in a Capital Projects Fund while cash collected from citizens is recorded as revenue. 27. In fund-based financial statements, interfund transactions are recorded in both funds simultaneously at the time of authorization. For example, monetary transfers from the General Fund to another fund such as the Debt Service Fund would be recorded in both funds. The recipient records this transfer as an Other Financing Source and the party making the transfer records an Other Financing Use. If the transfer is being made to a proprietary fund, it is often shown in the statement of revenues, expenses, and other changes in net assets as a capital contribution or as a transfer in. 28. Intra-activity transactions occur totally within the governmental activities or totally within the business-type activities so that no net effect is created. Therefore, these transfers are not reported on government-wide financial statements. Interactivity transactions occur between a governmental activity and a business-type activity so that they affect the balances in each. Consequently, they are reported in both columns on the government-wide financial statements but are then offset in the total column. 29. An internal exchange transaction is a transfer within the government that is recorded as if the transaction had actually occurred with an outside party. Such transactions occur between one of the governments activities and an internal service or enterprise fund and are normally to pay for work or services being rendered. These exchanges are reported as revenues and as either expenditures or expenses. An example would be a payment from a police department to the citys motor pool for vehicle maintenance. This exchange would be included by both departments in the fund-based financial statements as if it were a transaction with an outside party. On government-wide financial statements, any such transactions between a government activity and a related internal service fund would be considered an intra-activity transaction because both fund types are classified as government activities and, therefore, there would be no impact on overall figures.

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Answers to Problems 1. 2. 3. 4. 5. 6. 7. 8. 9. B A D D A C D A D

10. C 11. B 12. C 13. B 14. B 15. C 16. A 17. C 18. C 19. B 20. A 21. C 22. D 23. C

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24. D 25. A 26. B 27. D 28. C 29. Beginning of Year-Recording of budget GENERAL FUND Estimated Revenues Control......................................... 1,000,000 Estimated Other Financing SourcesBond Proceeds 400,000 Appropriations Control............................................. Appropriations-Other Financing UsesOperating Transfers Out........................................................ (Budgetary) Fund Balance........................................

900,000 300,000 200,000

End of Year-Removal of budget GENERAL FUND Appropriations Control............................................. 900,000 Appropriations-Other Financing UsesOperating Transfers Out........................................................ 300,000 (Budgetary) Fund Balance........................................ 200,000 Estimated Revenues Control.............................. 1,000,000 Estimated Other Financing SourcesBond Proceeds 400,000 30. GOVERNMENT-WIDE FINANCIAL STATEMENTS GOVERNMENT ACTIVITIES Computer Vouchers (or Accounts) Payable Vouchers (or Accounts) Payable Cash

89,400 89,400 89,400 89,400

In the end, the capital assets have gone up by the cost of the computer and cash has been reduced by the same amount.

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FUND-BASED FINANCIAL STATEMENTS GENERAL FUND Encumbrances Control Fund BalanceReserved for Encumbrances Fund BalanceReserved for Encumbrances Encumbrances Control Expenditures Control Vouchers Payable Vouchers Payable Cash

88,000 88,000 88,000 88,000 89,400 89,400 89,400 89,400

On the statement of revenues, expenditures, and other changes in fund balance, an expenditure of $89,400 will be shown. Cash will also decrease by that amount. 31. GOVERNMENT-WIDE FINANCIAL STATEMENTS GOVERNMENT ACTIVITIES (Intra-activity transfer from the General Fund to the Capital Projects Fund is not reported) Issuance of Bonds Cash 1,800,000 Bonds Payable 1,800,000 Completion of Construction Buildings Cash 1,890,000 1,890,000

On the statement of net assets, for the governmental activities, the Buildings account goes up by $1,890,000, the Bonds Payable go up by $1.8 million, and cash goes down by $90,000. FUND-BASED FINANCIAL STATEMENTS To Record Transfer GENERAL FUND Other Financing UsesTransfers Out Cash CAPITAL PROJECTS FUND Cash Other Financing SourcesTransfers In Sale of Bonds Cash Other Financing SourcesBond Proceeds
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90,000 90,000 90,000 90,000

1,800,000 1,800,000

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Completion of Construction Expenditures Cash

1,890,000 1,890,000

On the statement of revenues, expenditures, and other changes in fund balance, the General Fund will report an other financing uses transfer out of $90,000. On its balance sheet, it will report $90,000 less cash. For the capital projects fund, there will be an expenditure of $1,890,000 and two other financing sources: $90,000 as a transfer-in and $1.8 million from bond proceeds. 32. FUND-BASED FINANCIAL STATEMENTS a. General Fund Estimated Revenues Control Estimated Other Financing Sources Control (Budgetary) Fund Balance Appropriations Control b. Capital Projects Fund (could also be recorded in the General Fund with a transfer to the Capital Projects Fund) Cash Other Financing SourcesBond Proceeds c. General Fund Encumbrances Fund BalanceReserved for Encumbrances d. General Fund Fund BalanceReserved for Encumbrances Encumbrances Expenditures Control Vouchers Payable e. General Fund Vouchers Payable Cash f. General Fund Other Financing UsesTransfers OutCapital Projects Due to Capital Projects Fund (Special Assessment) Capital Projects Fund Due from General Fund Other Financing SourcesTransfers InGeneral Fund

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g. General Fund Other Financing UsesTransfers OutMotor Pool Cash Internal Service Fund Cash Contributed Capital h. General Fund Property Taxes Receivable RevenuesProperty Taxes Allowance for Uncollectible Taxes i. The following entries are made on the assumption that the appropriate payment of the supplement is an eligibility requirement for the grant. Special Revenue Fund Cash Deferred Revenue j. ExpendituresSalaries Cash Deferred Revenue RevenuesGrant GOVERNMENT-WIDE FINANCIAL STATEMENTS a. No entry b. Governmental Activities Cash Bonds Payable c. No entry d. Governmental Activities Equipment Vouchers Payable e. Governmental Activities Vouchers Payable Cash f. No entry (it is an intra-activity transfer within the governmental activities) g. No entry (assuming the internal service fund is treated as a governmental activity so that this is an intra-activity transaction)
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h. Governmental Activities Property Taxes Receivable RevenuesProperty Taxes Allowance for Uncollectible Taxes i. Governmental Activities Cash Deferred Revenues j. Governmental Activities ExpensePublic Safety Cash Deferred Revenue Revenue 33. FUND-BASED FINANCIAL STATEMENTS a. General Fund Encumbrances Control Fund BalanceReserved for Encumbrances b. General Fund Expenditures (or Supplies) Due to Internal Service Fund c. Capital Projects Fund Cash Other Financing SourcesBonds Proceeds d. General Fund Other Financing UsesTransfers Out Swimming Pool Cash e. General Fund Fund BalanceReserved for Encumbrances Encumbrances Control Expenditures Vouchers Payable f. General Fund Other Financing UsesTransfers Out Cash 94,000 94,000 1,200 1,200 11,000,000 11,000,000

140,000 140,000

94,000 94,000 96,000 96,000 32,000 32,000

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Capital Projects Fund Cash Other Financing SourcesTransfers In g. Special Revenue Fund Cash Deferred Revenues h. Special Revenue Fund Deferred Revenues Revenues Expenditures Cash GOVERNMENT-WIDE FINANCIAL STATEMENTS a. No entry

32,000 32,000 30,000 30,000 5,000 5,000 5,000 5,000

b. No entry (Assuming print shop is a governmental activity.) Governmental Activities c. Cash Bonds Payable Governmental Activities d. Transfers OutSwimming Pool Cash Business Type Activities Cash Transfers InGeneral Fund e. Governmental Activities EquipmentTrucks Vouchers or Accounts Payable f. No entry intra-activity transfer g. Governmental Activities Cash Deferred Revenues h. Governmental Activities ExpensePublic Service Cash 30,000 30,000 5,000 5,000 11,000,000 11,000,000 140,000 140,000 140,000 140,000 96,000 96,000

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Deferred Revenues Revenues 34. FUND-BASED FINANCIAL STATEMENTS

5,000 5,000

a. Capital Projects Fund (could also be recorded in the General Fund followed by a transfer into the Capital Projects Fund) Cash 900,000 Other Financing SourcesBonds Proceeds 900,000 b. Capital Projects Fund (this entry depends on whether encumbrances are being recorded in the governments Capital Projects Fund.) Encumbrances 1,100,000 Fund BalanceReserved For Encumbrances 1,100,000 c. General Fund Other Financing UsesTransfers Out Cash Debt Service Fund Cash Other Financing SourcesTransfers In d. General Fund Fund BalanceReserved for Encumbrances Encumbrances Expenditures ControlMachinery and Equipment Vouchers Payable e. General Fund Inventory of Supplies Cash f. Special Revenue Fund Cash Deferred Revenues g. General Fund Taxes Receivable Revenues Property Taxes Allowance for Uncollectible Current Taxes GOVERNMENT-WIDE FINANCIAL STATEMENTS a. Governmental Activities Cash
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130,000 130,000 130,000 130,000 11,800 11,800 12,000 12,000

2,000 2,000 90,000 90,000 600,000 576,000 24,000

900,000
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Bonds Payable b. No entry c. No entry (this is an intra-activity transfer) d. Governmental Activities Machinery and Equipment Vouchers or Accounts Payable e. Governmental Activities Inventory of Supplies Cash f. Governmental Activities Cash Deferred Revenues g. Governmental Activities Taxes Receivable Revenues Property Taxes Allowance for Uncollectible Current Taxes 12,000

900,000

12,000 2,000 2,000 90,000 90,000 600,000 576,000 24,000

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35.

a. As the Appropriations account balance in the General Fund shows a total of $171,000, that amount of money has been authorized for expenditure during this fiscal period. Thus, only that total can be expended or committed. To date, a total of $119,000 has been spent or committed ($110,000 of expenditures and $9,000 in encumbrances). The remaining $52,000 is still available. b. The governmental funds are all designed to monitor current financial resources and their inflows and outflows. Therefore, the Capital Projects Fund records expenditures made in relation to the acquisition and construction of fixed assets. Capital assets are recorded directly in government-wide financial statements. c. The Appropriations balance represents the amount that government officials have authorized to be spent on a particular construction project. d. To alert readers to the commitment that remains outstanding, a yearend reclassification is made to reduce the Fund BalanceUnreserved, Undesignated in order to report a Fund Balance-Reserved for Encumbrances. e. The most likely explanation for the zero balance in the Fund BalanceUnreserved, Undesignated is that this capital project was begun during the current year, and thus, no closing entries have, as of yet, been made. In addition, many governments transfer in to the Capital Projects Fund the exact amount to be spent so that the inflows and outflows always agree and no fund balance is retained. f. Two possible reasons can be put forth for the $150,000 Other Financing Sources balance. First, a bond may have been sold. Since the debt itself is not recorded in the fund-based financial statements, the governmental fund must record the receipt by means of an Other Financing Sources designation. Second, the $150,000 may have come from a transfer (most likely from the General Fund). An operating transfer is not considered revenue by the recipient and, therefore, the inflow of current financial resources is recorded as an Other Financing Source. g. The Debt Service Fund is utilized to accumulate money to pay off the principal and interest of any long-term liability incurred by the governmental funds. The debt itself is maintained in the governmentwide financial statements. Payment of the debt and interest is made from the Debt Service Fund and those payments are recorded as expenditures.

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h. Special assessment projects are undertaken by a government to benefit particular properties with the owners bearing part (or all) of the cost. Curbing, as an example, or the installation of lights usually are special assessment projects. If the government has no responsibility for the costs, recording of all financial resources inflows and outflows is made in an Agency Fund. However, if the government does have some responsibility (if, for example, the government is secondarily liable for any debts incurred), the construction is recorded in a Capital Projects Fund. Thus, the receivable balance shown here would indicate that this project is being recorded in this manner. Collection of the receivable will be made from the citizens being benefited; the money will be used in paying for the construction. i. This designation indicates that the government is reporting an asset that is not free to be spent for future expenditures. In the asset section, a $4,000 balance is being reported as the governments Inventory of Supplies. That figure is being reported but is not available to be spent. j. Budgetary entries are optional for Debt Service Funds but are rarely used. Expenditure levels (for principal and interest) are set contractually by the debt indenture. Thus, additional financial control is not obtained by the inclusion of budgetary amounts. 36. a. Estimated Revenues Appropriations Budgetary Fund Balance $232,000 225,000 $ 7,000

Since estimated revenues exceed the appropriations, a surplus is anticipated which is mirrored through a credit balance in the Budgetary Fund Balance account. b. Initially, all of the school supplies are recorded in an asset account such as Inventory of Supplies. As the supplies are used, the cost is reclassified into an Expenditures account. On the balance sheet, a portion of the Fund Balance figure should be separated and reported as being reserved for Inventory of Supplies to show that this amount of assets is available to be spent. c. When the balance sheet is produced, a Reserved Fund Balance amount will be reported to indicate that this amount of current financial resources must be held to pay off the commitment for the truck when it eventually becomes an actual liability. d. FUND-BASED FINANCIAL STATEMENTS General Fund Fund BalanceReserved for Encumbrances Encumbrances

111,000 111,000

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Expenditures Control Vouchers Payable e. General Fund Other Financing UsesTransfers Out Cash Debt Service Fund Cash Other Financing SourcesTransfers In f. REVENUES: Government grant appropriately expended Property taxes to be received Business licenses and parking meters Total revenues g. EXPENDITURES: Salary for police officers Rent on equipment (assuming payments from from current financial resources) City hall acquisition Salary for ambulance drivers Supplies (60% of $16,000) Ambulance acquisition School bus acquisition Total expenditures

120,000 120,000 33,000 33,000 33,000 33,000 $ 24,000 190,000 14,000 $228,000 $ 21,000 3,000 1,044,000 24,000 9,600 120,000 40,000 $1,261,600

h. FUND-BASED FINANCIAL STATEMENTS Capital Projects Fund(or this could have been recorded in General Fund with the money then transferred to the Capital Projects Fund) Cash 300,000 Other Financing Sources 300,000

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37.

FUND-BASED FINANCIAL STATEMENTS a. General Fund Estimated Revenues Control Appropriations Control Estimated Other Financing Uses Operating Transfers Budgetary Fund Balance

834,000 540,000 242,000 52,000

b. Capital Projects Fund (encumbrances for these types of contracts are usually optional but are more likely to be made when budgetary entries are being used) Encumbrances Control 8,000,000 Fund BalanceReserved for Encumbrances 8,000,000 c. Capital Projects Fund Cash Other Financing Sources Control d. Capital Projects Fund Fund BalanceReserved for Encumbrances Encumbrances Control Expenditures Control Contracts Payable Contracts Payable Cash e. General Fund Other Financing Uses Control Cash Debt Service Fund Cash Other Financing Resources f. Debt Service Fund Expenditures ControlBonds Expenditures ControlInterest Cash g. General Fund Property Taxes Receivable Revenues Property Taxes Allowance for Uncollectible Taxes 900,000 100,000 1,000,000 800,000 768,000 32,000 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 1,000,000 1,000,000 1,000,000 1,000,000

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h. Special Revenue Fund Cash Revenues Control i. Permanent Fund Investments Contribution Revenue GOVERNMENT-WIDE FINANCIAL STATEMENTS a. No entry b. No entry c. Governmental Activities Cash Bonds Payable d. Governmental Activities Buildings Cash e. No entry f. Governmental Activities Bonds Payable Interest Expense Cash g. Governmental Activites Proprety Taxes Receivable Revenues Property Taxes Allowance for Uncollectible Taxes

120,000 120,000 300,000 300,000

8,000,000 8,000,000 8,000,000 8,000,000

900,000 100,000 1,000,000 800,000 768,000 32,000

h. This entry is made in the Governmental Activities unless the toll road is reported as an Enterprise Fund in which case it is recorded as a business-type activity. Cash 120,000 RevenuesReserved for Highway Maintenance 120,000

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37.

(continued) i. Government Activities Investments RevenuesDonations 300,000 300,000

38. CITY OF JENNINGS GENERAL FUND Statement of Revenues, Expenditures, and Other Changes in Fund Balance (Condensed) Year Ending December 31, 2007 Revenues $ 740,000 Expenditures (510,000) Excess (deficiency) of revenues over expenditures $ 230,000 Other financing sources (uses): Bond proceeds $300,000 Transfers in 50,000 Transfers out (470,000) Total Other Financing Sources and Uses Change in Fund Balance Fund Balance, Beginning Fund Balance, Ending (120,000) $110,000 170,000 $280,000

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38.

(continued) CITY OF JENNINGS GENERAL FUND Balance Sheet (condensed) December 31, 2007 Assets Cash Investments Taxes receivable Due from Capital Projects Fund Total Assets Liabilities Accounts payable Vouchers payable Contracts payable Due to Debt Service Fund Deferred revenues Total Liabilities Fund Balances Unreserved, undesignated fund balance Total Fund Balance Total Liabilities and Fund Balances 280,000 280,000 $720,000 $ 90,000 180,000 90,000 40,000 40,000 $440,000 $ 30,000 410,000 220,000 60,000 $720,000

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39.

The most difficult aspect of this problem is gathering the information for both the fund-based financial statements and the government-wide financial statements. One way to overcome this difficulty is to make the journal entries for the transactions that are described in the question. Government-wide financial statements: 1 Property Tax Receivable Cash General RevenuesProperty Taxes 2 Salary Expense Rent Expense Equipment Land Maintenance Expense Cash Depreciation Expense Accumulated DepreciationEquipment 3 Building Long-Term Liability 80,000 320,000 400,000 100,000 70,000 50,000 30,000 20,000 270,000 10,000 10,000 200,000 200,000

Neither depreciation nor interest is recognized here since this transaction took place on the last day of the year. 4 Computers Vouchers Payable 8,000 8,000

No depreciation is recognized since this transaction occurred on the last day of the year. 5 Cash Program RevenuesStudent Fees 3,000 3,000

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39.

(continued) Fund-based financial statements: 1 Property Tax Receivable Cash RevenuesProperty Taxes Deferred Revenues 80,000 320,000 370,000 30,000

The $30,000 is not viewed as a revenue in 2007 because it will not be available within 60 days to pay claims against current financial resources. 2 ExpendituresSalaries ExpendituresRent ExpendituresEquipment ExpendituresLand ExpendituresMaintenance Cash 100,000 70,000 50,000 30,000 20,000 270,000

3 No entry is made on the building acquisition since there was no impact on current financial resources. 4 ExpendituresComputer Vouchers Payable 4,000 4,000

The second computer is not included here because payment will not be made within 60 days so there is no impact on current financial resources. 5 Cash RevenuesStudent Fees 3,000 3,000

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39.

(continued)

Part a GOVERNMENT-WIDE FINANCIAL STATEMENTS STATEMENT OF ACTIVITIES Governmental Activities Direct Expenses Program Revenues (net expense) Governmental Activities: School System General Revenues: Property Taxes Change in Net Assets Beginning Net Assets Ending Net Assets STATEMENT OF NET ASSETS Governmental Activities Assets Cash Property Tax Receivable Computers Building Equipment Less: Accumulated Depreciation Land Total Assets Liabilities Vouchers Payable Long-Term Liabilities Net Assets Invested in capital assets, net of debt Unrestricted $53,000 80,000 8,000 200,000 $ 50,000 (10,000) 40,000 30,000 $411,000 $200,000 $3,000 $(197,000) 400,000 $ 203,000 -0$ 203,000

$ 8,000 200,000 $ 78,000 125,000

$208,000

$203,000

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39.

(continued)

Part b FUND-BASED FINANCIAL STATEMENTS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE General Fund Revenues Property Taxes Student Fees Total Revenues Expenditures Salaries Rent Equipment Land Maintenance Computer Total Expenditures Change in Fund Balance Fund BalanceBeginning of Year Fund BalanceEnd of Year BALANCE SHEET General Fund Assets Cash Property Tax Receivable Total Assets Liabilities Voucher Payable Deferred Revenue Total Liabilities Fund Balance Unreserved Total Liabilities and Fund Balance $ 53,000 80,000 $133,000 $ 4,000 30,000 $ 34,000 $ 99,000 $133,000 $370,000 3,000 $373,000 $100,000 70,000 50,000 30,000 20,000 4,000 $274,000 $ 99,000 - 0$ 99,000

40. One way to approach this problem is to make the journal entries for the transactions that are described as the basis for gathering the information needed
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for the financial statement to be produced. In this problem, the journal entries are prepared based on producing fund-based financial statements for the General Fund. a. Cash Property Taxes Receivable RevenuesProperty Taxes Deferred Revenues 700,000 100,000 750,000 50,000

The $50,000 is not viewed as a revenue in 2007 because it will not be available within 60 days to pay claims against current financial resources. b. ExpendituresPolice Cars Cash 200,000 200,000

If previously recorded, an encumbrance would also have to be removed. However, this entry would not affect the statement of revenues, expenditures, and other changes in fund balance. No depreciation is recorded on the police cars because fund-based financial statements are being produced for the General Fund. c. Other Financing UsesTransfers Out 90,000 Cash

90,000

Because the statements being prepared here are only for the General Fund, the entry for the Debt Service Fund is not included. d. Cash 200,000 Other Financing SourcesBond Proceeds

200,000

No interest is accrued because it will not require the use of current financial resources. e. Encumbrances 40,000 Fund BalanceReserved for Encumbrances f. ExpendituresSalaries Cash Salary Payable 40,000 30,000 10,000

40,000

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g. Fund BalanceReserved for Encumbrances Encumbrances ExpendituresComputer Vouchers Payable h. ExpendituresSupplies Cash

40,000 40,000 41,000 41,000 10,000 10,000

i. Supplies 2,000 Fund BalanceReserved for Supplies

2,000

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FUND-BASED FINANCIAL STATEMENTS CITY OF LOST ANGEL STATEMENT OF REVENUES, EXPENDITURES AND OTHER CHANGES IN FUND BALANCE General Fund Revenues Property Taxes $750,000 Total Revenues Expenditures Police cars Salaries Computer Supplies Total Expenditures Excess of revenues over expenditures Other Financing Sources (Uses) Transfer to Debt Service Fund Issued Long-Term Bond Net Other Financing Sources Change in Fund Balance Fund BalanceBeginning of Year Fund BalanceEnd of Year $750,000 $200,000 40,000 41,000 10,000 $291,000 $459,000 $(90,000) 200,000 $110,000 $569,000 180,000 $749,000

41. One way to approach this problem is to make the journal entries for the transactions that are described as the basis for gathering the information for the financial statement to be produced. Here the journal entries are prepared based on the need to create government-wide financial statements for the General Fund (a governmental activity).

a. Cash Property Taxes Receivable

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700,000 100,000
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Property Tax Revenue b. Police Cars Cash Depreciation Expense Accumulated Depreciation 200,000

800,000

200,000 10,000 10,000

c. No entry is needed since there is no change in the total net assets of the governmental activities. d. Cash Bonds Payable Interest Expense Interest Payable 200,000 200,000 10,000 10,000

e. No entrythis is only a commitment and not a transaction. f. Salary Expense Cash Salary Payable g. Computer Vouchers Payable Depreciation Expense Accumulated Depreciation h. Supplies Cash i. Supplies Expense Supplies 40,000 30,000 10,000 41,000 41,000 4,100 4,100 10,000 10,000 8,000 8,000

This problem indicates that the General Fund held $180,000 in cash at the start of the year GOVERNMENT-WIDE FINANCIAL STATEMENTS CITY OF LOST ANGEL

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STATEMENT OF NET ASSETS Governmental Activities Assets Cash Property Tax Receivable Supplies Computers Less: Accumulated Depreciation Police Cars Less: Accumulated Depreciation Total Assets Liabilities Vouchers Payable Salary Payable Interest Payable Bonds Payable $41,000 10,000 10,000 200,000 $840,000 100,000 2,000 $ 41,000 (4,100) 200,000 (10,000) 36,900 190,000 $1,168,900

261,000

Net Assets Invested in capital assets, net of debt $226,900 Unrestricted 681,000

$907,900

The total net asset figure of $907,900 can be found by taking the opening balance of $180,000 and then adding the revenues for the period and subtracting the expenses. 42. A. TrueThe initial approval of spending was $380,000 and that amount should be recorded immediately. The budgetary entry debits Estimated Revenues and credits Appropriations. B. FalseThe budgetary information is normally presented as required supplemental information in the comprehensive annual financial report. However, it can also be shown as a separate statement within the fund-based financial statements. The government has that choice. C. TruePrior to GASB 34, only the final budget and the actual figures for the period were reported. That was considered somewhat misleading since the budget could be revised near the end of the year to establish agreement. GASB 34 required the original budget also to be disclosed. D. FalseA Budgetary Fund Balance account does have to be set up as part of the budget entry to indicate that a surplus (or deficit) is anticipated. However, an expected surplus requires a credit to the Budgetary Fund Balance rather than a debit.
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E. FalseBudgetary information only relates to fund-based financial statements and has no impact on the government-wide financial statements. 43. A. FalseRevenue should be recognized when all eligibility requirements have been met. Here, the eligibility requirements, if any, could have been met during 2007. It is likely that the eligibility requirements have not been met but that is not necessarily the case. B. FalseIf there are no eligibility requirements, the revenue should be recognized immediately in December 2007 when the award is made. C. FalseA grant is a government-mandated nonexchange transaction when the award was made to help the recipient government meet legal requirements. That is not specified here. However, if the state government had passed a law that all school children had to receive hot lunches and had then furnished this grant to help meet that requirement, it would have been a government-mandated nonexchange transaction. D. TrueThe cash is recognized because it had been received but no revenue can be reported because all eligibility requirements have not yet been met. Thus, a deferred revenue should be established for the amount received. E. FalseRevenue recognition rules for nonexchange transactions were set up by GASB Statement No. 33. 44. a. Fund-based financial statements the fund balance goes up by $6 million because of the inflow of current financial resources. Government-wide financial statements the net asset balance does not change. Both assets (cash) and liabilities (bonds payable) go up by the same $6 million amount. b. Fund-based financial statements the fund balance goes down by $149,000 because of the outflow of current financial resources. Government-wide financial statements the net asset balance does not change. One asset (truck) goes up while a second asset (cash) goes down. a. Fund-based financial statements the fund balance goes down for the General Fund by $17,000 because of the outflow of current financial resources.

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Government-wide financial statements the net asset balance does not change. This is an internal exchange transaction within the governmental activities so that no net change is created. b. Fund-based financial statements the fund balance is not affected because the resources will not be collected quickly enough to be available in the current period. An asset (receivable) is recognized along with a liability (deferred revenue) so that the size of the fund balance is not affected. Government-wide financial statements A $75,000 receivable is recognized so that the net asset balance goes up by that amount. c. Fund-based financial statements the fund balance is not affected. The money is not recognized as a revenue until all eligibility requirements have been met. Since that does not appear to be the case, the cash will go up along with a liability for the deferred revenue. Government-wide financial statements the net asset balance does not change. The accounting is the same as explained for the fund-based financial statements. d. Fund-based financial statements the fund balance should go up by $1 million. The sale took place in the current year and the resources will all be received within the 75 day period being used to define available resources. Government-wide financial statements the net asset balance goes up by $1 million because the sale was made in the current period. e. Fund-based financial statements the fund balance is not affected. Although an encumbrance may be recorded to avoid spending more than the appropriated amount, that has no impact on the fund balance. Government-wide financial statements a purchase order or other commitment has no impact on the net asset balance. f. Fund-based financial statemetns the fund balance goes down by $18,000 because the transfer has been approved and will remove current financial resources. Government-wide financial statements there is no impact on the net asset balance of the governmental activities because this is an intraactivity transfer from one Governmental Fund to another. There is no net effect. 45.
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A. FalseA transfer out will be shown by the governmental activities and a transfer in will be reported by the business-type activities. Those two figures will be netted together so that no overall impact is shown in the total column for the government. However, both figures do appear in their own separate columns. B. TrueBecause only governmental activities are involved, the transfer creates no difference in the overall total. This is an intra-activity transfer. C. TrueThe General Fund reports the resource outflow as an other financing use. The resources were reduced but it was not for an expenditure. D. FalseThe General Fund will report the transfer out as an other financing use and the column for "all other funds" will show the transfer-in as an other financing source. E. FalseThe General Fund does not report expenses in the fund-based financial statements but rather expenditures.

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46.

A. Correct change is $40,000 increaseAccording to the preliminary information, the Capital Projects Fund reported an increase in its fund balance for the year of $40,000. In arriving at those figures, a $10,000 revenue and the related expenditure were recorded in that fund for this sidewalk construction. Because the government had no obligation, these cash flows should actually have all been reported in the Agency Fund. The auditing firm should remove both the revenue of $ 10,000 and the expenditures of $10,000 from the Capital Projects Fund. Because they are of the same amount but have an opposite effect on current financial resources, this removal leaves the overall change in the fund balance at $40,000. B. Correct change is $140,000 increaseAccording to the preliminary information, the overall change in the net assets of the city on the government-wide financial statements was a $150,000 increase. Here, a revenue of $10,000 was reported within the government-wide statements. However, because the city had no obligation, that revenue should have been in an Agency Fund. Removing this revenue (and the asset that was recorded at the same time) reduces the net asset increase for the city from $150,000 to $140,000.

47.

Correct change is a $10,000 increaseAccording to the preliminary information, the General Fund reported an increase in its fund balance for the year of $30,000. However, this particular $20,000 should have been reported as a debt since it is due in 60 days rather than as an other financing source (which serves to increase the fund balance). Reclassifying the $20,000 to a debt leaves the overall increase in the fund balance for the period as only $10,000. A. Correct change is a $66,000 increaseAccording to the preliminary information, the General Fund reported an increase in its fund balance during the year of $30,000. However, the $9,000 revenue and $45,000 in expenditures were erroneously recorded in that fund. Together, those transactions had caused the fund to go down by a net of $36,000. Removing them (to record them within an enterprise fund) will remove this $36,000 reduction from the General Fund and cause the increase in the fund balance to rise from $30,000 to $66,000.

48.

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B. Correct change is a $150,000 increaseAccording to the preliminary information, the overall change in the net assets of the city during the year (on the government-wide financial statements) was a $150,000 increase. An error has been made in that this display was reported in the governmental activities (General Fund) rather than the business-type activities (Enterprise Fund). That increases one column in the statement of assets (the business-type activities) and decreases the other (the governmental activities) by exactly the same amount. So, moving the transactions does not change the overall records for the government as a whole. C. Correct change is a $54,000 increaseAccording to the preliminary information, the overall change in the net assets of the Enterprise Fund on the fund-based financial statements was a $60,000 increase. However, the art display was not included as it should have been. Adding in the $9,000 revenue and the $15,000 expense creates a $6,000 net reduction that drops the positive change from $60,000 to $54,000. 49. A. Correct change is a $42,000 increaseAccording to the preliminary information, the overall change in the net assets of the city on the government-wide financial statements was a $150,000 increase. The government, though, has recognized a revenue for the amount received in the current period. The amount received should have been $300,000 times 40% or $120,000. However, the discount reduces that figure by $12,000 to $108,000. That money cannot be spent until 2008 and, so, must be reported in 2007 as a deferred revenue and not as a revenue. Removing this revenue reduces the overall increase in net assets by $108,000 from $150,000 to $42,000. B. Correct change is a $78,000 decreaseAccording to the preliminary information, the General Fund reported an increase in its fund balance for the year of $30,000. The government, though, had recognized a revenue for the amount of cash received. The amount received should have been $300,000 times 40% or $120,000. However, the discount reduces that figure by $12,000 to $108,000. That money cannot be spent until 2008 and, so, must be reported in 2007 as a deferred revenue and not as a revenue. Removing this $108,000 revenue reduces the overall change in net assets from an increase of $30,000 to a decrease of $78,000.

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50.

A. Correct change is a $42,000 increaseAccording to the preliminary information, the overall change in the net assets of the city on the government-wide financial statements was a $150,000 increase. However, as shown above in 49 (part A), $108,000 was received that should have been recorded as a deferred revenue until the period when it can be used (2008). Incorrectly, the city recorded the $108,000 as a revenue. When removed, the increase in net assets drops from $150,000 to $42,000. Recognition (and the removal) of the receivable and the deferred revenue cause no change in net assets since one is an asset and the other is a liability. B. Correct change is a $78,000 decreaseAccording to the preliminary information, the General Fund reported an increase in its fund balance for the year of $30,000. However, as shown above, $108,000 was received that should have been recorded as a deferred revenue until the period when it can be used (2008). The city incorrectly recorded the $108,000 as a revenue. When removed, the increase in net assets drops from an increase of $30,000 to a decrease of $78,000. Recognition of the receivable and the deferred revenue cause no change in net assets since one is an asset and the other a liability.

51.

A. Correct change is $290,000 decreaseAccording to the preliminary information, the General Fund reported an increase in its fund balance for the year of $30,000. However, $320,000 was recognized here as a revenue although an eligibility requirement does remain (lowering air pollution by 25 percent). No revenue can be recognized until all eligibility requirements have been met. Changing the $320,000 from a revenue to a deferred revenue reduces the $30,000 increase in the fund balance to a $290,000 decrease. B. Correct change is a $170,000 decreaseAccording to the preliminary information, the change in net assets of the city on government-wide financial statements was a $150,000 increase. However, $320,000 was recognized as a revenue although an eligibility requirement remains (lowering air pollution by 25 percent). No revenue can be recognized until that time. Changing $320,000 from a revenue to a deferred revenue reduces the $150,000 increase in the fund balance to a $170,000 decrease. Depreciation of the machine is being handled properly.

52.

A. Correct change is a $150,000 increaseAccording to the preliminary information, the overall change in the net assets of the city on the government-wide financial statements was a $150,000 increase. Changing a revenue from a general revenue to a program revenue does not affect the overall change in net assets. B. Correct amount of net expenses is $90,000According to the preliminary information, the parks reported net expenses of $100,000.

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The net expense figure is computed as direct expenses less any program revenues. The $10,000, though, should have been a program revenue. If this revenue had been appropriately included, net expenses would have only been $90,000 rather than $100,000.

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Excel Case 1 This type of spreadsheet would appear to be very helpful in budget planning because city officials could plug in various increase and decrease rates and see the impact on the fund balance over time. There are a number of different ways that a spreadsheet could be created to solve this particular problem. Here is one possible approach: Create Column Headings: In Cell A4, enter label text "Year" In Cell B4, enter label text "Revenue Change" In Cell C4, enter label text "Revenues" In Cell D4, enter label text "Expenditures Change" In Cell E4, enter label text "Expenditures" In Cell F4, enter label text "Ending Fund Balance" In Cell G4, enter label text "Projected Change in Revenue" In Cell H4, enter label text "Projected Change in Expenditures" Click and drag across Cells A4 to H4. Select Format, Cells, Alignment, and click the "Wrap Text" box. Click OK. If needed, place the cursor on the line between the Column Letters and drag the boundary on the right side of the column headings until the columns are the width you want. In Cell A5, enter label text "2006" for first year. In Cell C5, enter Revenues of $1,400,000. In Cell E5, enter Expenditures of $1,480,000. In Cell F5, enter beginning Fund Balance of $400,000 In Cell G5, enter -2% for Projected Change in Revenue Per Year. In Cell H5, enter +3% for Projected Change in Expenditures Per Year. In Cell A6, enter label text "2007." Perform Calculations: In Cell B6, enter formula to calculate Revenue Change (Revenue times Projected Revenue Change): =+C5*$G$5. Note here that adding the $ symbol to Column and Row addresses creates an "absolute" reference which will remain static throughout the spreadsheet. In Cell C6, enter formula to adjust Revenues by Revenue Change: =+C5+B6 In Cell D6, enter formula to calculate Expenditures Change (Expenditures times Projected Expenditures Change): =+E5*$H$5 In Cell E6, enter formula to change Expenditures by Expenditures Change: =+E5+D6 In Cell F6, enter formula to calculate the new ending Fund Balance (initial Fund Balance plus Revenue minus Expenditures): =+F5+C6-E6 Copy formulas to adjacent rows: Click and drag across Cells A6 through F6 and release. Place cursor on Fill Handle (small black box in lower right corner of selection box) and click and drag down through Row 8.
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At that point, you should see that the city will have a negative fund balance of $277,539 at the end of 2009. Simply, by changing cells G5 and H5, the impact of any different level of rate changes can be ascertained. For example, if revenues decrease 5% and expenditures decrease 3% each year, changing those two cells will show that the fund balance will be a positive $14,937 at the end of 2009. Or, by assuming revenues increase by 4% and expenditures increase by 7%, the fund balance will be a negative $146,066 at the end of 2009. Any other combination of changes can be examined in the same way.

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