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19. Governmental Entities:


Proprietary Funds,
Fiduciary Funds, and
Reports

The McGrawHill
Companies, 2005

Chapter Nineteen
Governmental Entities:
Proprietary Funds,
Fiduciary Funds, and
Comprehensive
Annual Financial
Report
Scope of Chapter
In this chapter, the coverage of accounting and reporting for governmental entities is completed with the discussion and illustration of (1) accounting and reporting for proprietary
funds and duciary funds, and (2) the comprehensive annual nancial report (CAFR) currently published by governmental entities other than the federal government.

PROPRIETARY FUNDS
Enterprise funds and internal service funds constitute the proprietary funds of governmental entities. These funds are more similar to business enterprises than are governmental funds or duciary funds (trust funds and agency funds). Enterprise funds sell
services to the citizens, and sometimes to other funds, of the governmental entity, for
amounts designed to produce a net income. Internal service funds, as their title indicates,
sell goods or services to other funds of the governmental entity, but not to the public. Accordingly, earning signicant amounts of net income is not an objective of an internal
service fund.
Both enterprise funds and internal service funds use the accrual basis of accounting and
issue nancial statements similar to those for a nonprot organizationa statement of revenues, expenses, and changes in net assets [which includes an amount labeled increase (decrease) in net assets], a statement of net assets, and a statement of cash ows.
780

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Accounting, Tenth Edition

V. Accounting for
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19. Governmental Entities:


Proprietary Funds,
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Reports

The McGrawHill
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Chapter 19 Governmental Entities: Proprietary and Fiduciary Funds, CAFR 781

The statements of net assets of both types of proprietary funds are classied into current
and noncurrent sections. The plant assets of the two types of proprietary funds are recorded
in their accounting records, and depreciation and amortization expenses are recognized by
each proprietary fund.
Because of the many similarities in the accounting cycle and the nancial statements of
business enterprises and proprietary funds, journal entries for proprietary funds are not illustrated in this section. Instead, the unique features of proprietary funds, including differences from features of business enterprises, are emphasized, and nancial statements for
proprietary funds are illustrated.

Accounting and Reporting for Enterprise Funds


Enterprise funds account for the operations of commercial-type activities of a governmental entity, such as utilities, airports, seaports, and recreational facilities. These commercialtype enterprises sell services to the public (and sometimes to other activities of the governmental entity) at a prot. Consequently, the accounting for enterprise funds is more akin
to business enterprise accounting than the accounting for any other governmental entity
fund. For example, the accrual basis of accounting is used for an enterprise fund, with
short-term prepayments, depreciation expense, and doubtful accounts expense recognized
in the funds accounting records. The enterprise funds accounting records also include the
plant assets owned by the fund, as well as the liabilities for revenue bonds and any general
obligation bonds payable by the fund. (General obligation bonds are a liability of an enterprise fund if their proceeds were used by the enterprise fund for construction of plant assets
or other purposes.) Encumbrance accounting is not used for enterprise funds, and their annual budgets generally are not entered in the accounting records. The net assets of an enterprise fund may be debited with cash remittances for transfers to the general fund, similar
to dividends declared and paid by a corporate enterprise.
However, there are several differences between accounting for an enterprise fund and accounting for a business enterprise. Among these differences are the following:
1. Enterprise funds are not subject to federal and state income taxes. However, an enterprise fund may make payments in lieu of property or franchise taxes to the general fund
and display the payments as expenses in the statement of revenues, expenses, and changes
in net assets. (See page 727 of Chapter 17.)
2. There is no capital stock in an enterprise funds statement of net assets.
3. An enterprise fund has restricted assets, which are segregated from current assets in the
balance sheet. Cash deposits made by customers of a utility enterprise fund, which are
to help assure the customers payment for utility services, are restricted for cash or
interest-bearing investments to offset the enterprise funds liability for the customers deposits. Cash received from proceeds of revenue bonds issued by the enterprise fund is
restricted to payments for construction of plant assets nanced by issuance of the bonds.
Part of the cash generated by the enterprise funds operations must be segregated and
invested for payment of interest and principal of the revenue bonds issued by the enterprise fund.
4. Current liabilities payable from restricted assets are segregated from other current liabilities of an enterprise fund in a section of the balance sheet that precedes long-term
liabilities.
5. A restricted net assets amount generally is displayed in the statement of net assets of an
enterprise fund. The amount is equal to the total of cash and investments restricted to
payment of revenue bond interest and principal.

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Part Five Accounting for Nonbusiness Organizations

6. Subsidy-type transfers from an enterprise fund to the general fund are displayed below
nonoperating revenues and expenses of the enterprise funds statement of revenues, expenses, and changes in net assets.
7. The form of the statement of cash ows for proprietary funds of governmental entities
was set forth in GASB Statement No. 9, Reporting Cash Flows of Proprietary and
Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting, issued in 1989 by the Governmental Accounting Standards Board.1 Among
the features of an enterprise funds statement of cash ows are the following:
a. There are four categories of cash ows: from operating activities, from noncapital nancing activities, from capital and related nancing activities, and from investing
activities. (The statement of cash ows for a business enterprise has three categories
of cash ows.)
b. In the direct method, operating income, rather than increase (decrease) in net assets,
is reconciled to net cash provided by operating activities. The direct method is
required.
c. Noncapital nancing activities cash ows include operating grants from other governmental entities and transfers to or from other funds of the governmental entity.
d. Temporary investments of cash received from borrowings for plant assets construction are reported with cash ows from capital and related nancing activities, rather
than with cash ows from investing activities.

Financial Statements for Enterprise Fund


Some of the foregoing discussion is illustrated in the following nancial statements of the
Town of Verdant Glen Enterprise Fund (for the towns water utility):
Financial Statements
of a Governmental
Entitys Enterprise
Fund

TOWN OF VERDANT GLEN ENTERPRISE FUND


Statement of Revenues, Expenses, and Changes in Net Assets
For Year Ended June 30, 2006
Operating revenues:
Charges for services
Operating expenses:
Personal services
Contractual services
Supplies
Material
Heat, light, and power
Depreciation
Payment in lieu of property taxes
Total operating expenses
Operating income
Nonoperating revenues (expenses):
Operating grants
Investment revenue and net gains
Interest expense
Fiscal agent fees
Total nonoperating revenues (expenses)

$520,000
$ 82,000
94,000
21,000
75,000
14,000
45,000
40,000
371,000
$149,000
$ 43,000
12,000
(46,000)
(14,000)
(5,000)
(continued)

Codication of Governmental Accounting and Financial Reporting Standards (Norwalk: GASB, 2003),
Sec. 2450.

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Chapter 19 Governmental Entities: Proprietary and Fiduciary Funds, CAFR 783

TOWN OF VERDANT GLEN ENTERPRISE FUND


Statement of Revenues, Expenses, and Changes in Net Assets (concluded)
For Year Ended June 30, 2006
Income before transfers
Transfer (out) to General Fund
Increase in net assets
Net assets, beginning of year
Net assets, end of year

$144,000
(10,000)
$134,000
532,000
$666,000

TOWN OF VERDANT GLEN ENTERPRISE FUND


Statement of Net Assets
June 30, 2006
Assets
Current assets:
Cash
Short-term investments, at fair value
Accounts receivable (net)
Receivable from General Fund
Inventory of supplies, at rst-in, rst-out cost
Short-term prepayments
Total current assets
Restricted assets:
Cash
Short-term investments, at fair value
Total restricted assets
Capital assets:
Land
Buildings
Machinery and equipment
Subtotal
Less: Accumulated depreciation
Net capital assets
Total assets
Liabilities
Current liabilities:
Vouchers payable
Accrued liabilities
Total current liabilities
Liabilities payable from restricted assets:
Interest payable
Current portion of revenue bonds
Customers deposits
Total liabilities payable from restricted assets
Long-term debt:
Revenue bonds, less current portion
Total liabilities

62,000
120,000
56,000
5,000
18,000
2,000
$ 263,000

22,000
145,000
$ 167,000

$ 192,000
1,285,000
347,000
1,824,000
748,000
1,076,000
$1,506,000

$ 144,000
82,000
$ 226,000
$

20,000
50,000
44,000
$ 114,000
500,000
$ 840,000
(continued)

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The McGrawHill
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Part Five Accounting for Nonbusiness Organizations

TOWN OF VERDANT GLEN ENTERPRISE FUND


Statement of Net Assets (concluded)
June 30, 2006
Net Assets
Net assets:
Invested in capital assets, net of related debt
Restricted for debt service
Unrestricted
Total net assets

$526,000 (a)
103,000 (b)
37,000 (c)
$666,000

(a) $1,076,000 $50,000 $500,000


(b) $167,000 $20,000 $44,000
(c) $1,506,000 $840,000 $526,000 $103,000, OR $263,000 $226,000

TOWN OF VERDANT GLEN ENTERPRISE FUND


Statement of Cash Flows
For Year Ended June 30, 2006
Net cash provided by operating activities (Exhibit 1):
Cash receipts from customers
Cash receipts from interfund services provided
Total cash receipts
Cash payments to employees for services
Cash payments to other suppliers of goods or services
Cash payment in lieu of property taxes to General Fund
Other operating cash payments
Total cash payments
Net cash provided by operating activities
Cash ows from noncapital nancing activities:
Payment of principal ($50,000) and interest ($2,000) of
note payable to bank
Operating grants from state government
Transfer (out) to General Fund
Net cash used in noncapital nancing activities
Cash ows from capital and related nancing activities:
Acquisition of machinery and equipment
Payment of serial maturity of revenue bonds ($50,000) and
annual interest on the bonds ($44,000)
Payment of scal agent fees
Deposits received from customers
Net cash used in capital and related nancing activities
Cash ows from investing activities:
Revenue and net gains from short-term investments
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year

$782,000
87,000
$869,000
$314,000
203,000
40,000
108,000
665,000
$204,000

$ (52,000)
43,000
(10,000)
(19,000)
$ (41,000)
(94,000)
(14,000)
10,000
(139,000)
12,000
$ 58,000
291,000
$349,000
(continued)

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Chapter 19 Governmental Entities: Proprietary and Fiduciary Funds, CAFR 785

TOWN OF VERDANT GLEN ENTERPRISE FUND


Statement of Cash Flows (concluded)
For Year Ended June 30, 2006
Exhibit 1 Cash ows from operating activities:
Operating income
Adjustments to reconcile operating income to net cash
provided by operating activities:
Depreciation expense
Decrease in accounts receivable (net)
Increase in receivable from General Fund
Increase in inventory of supplies
Decrease in short-term prepayments
Increase in vouchers payable
Decrease in accrued liabilities
Net cash provided by operating activities

$149,000

45,000
3,000
(5,000)
(4,000)
1,000
21,000
(6,000)
$204,000

The following four aspects of the nancial statements for the Town of Verdant Glen
Enterprise Fund should be noted:
1. The payment in lieu of property taxes, $40,000, and the transfer out, $10,000, in the
statement of revenues, expenses, and changes in net assets are counterparts of the
amounts recorded by the Town of Verdant Glen General Fund in journal entry no. 9 on
page 727 of Chapter 17.
2. The receivable from General Fund, $5,000, in the statement of net assets is the counterpart of the related payable to Enterprise Fund in the General Fund trial balance on
page 729 of Chapter 17.
3. The $103,000 net assets restricted for revenue bonds retirement in the statement of net
assets may be veried as follows:
Total restricted assets
Less: Total liabilities payable from restricted assets other than long-term debt
Net assets restricted for revenue bonds retirement

$167,000
64,000
$103,000

4. Short-term investments, both current and restricted, in the statement of net assets are cash
equivalents. Thus, the end-of-year amount of cash and cash equivalents in the statement
of cash ows is computed as follows: $62,000 $120,000 $22,000 $145,000
$349,000.

Accounting and Reporting for Internal Service Funds


An internal service fund is established to sell supplies and services to other funds of the governmental entity, but not to the public. This type of fund is created to ensure uniformity and
economies in the procurement of supplies and services for the governmental entity as a whole,
such as computer and stationery supplies and the maintenance and repairs of motor vehicles.
The operations of internal service funds resemble those of a business enterprise, except
that internal service funds are not prot-motivated. The revenues of internal service funds
should be sufcient to cover all their operating costs and expenses, with perhaps a modest
prot margin. In this way, the resources of internal service funds are revolving; the original contribution from the general fund of the governmental entity to establish an internal

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service fund is expended for supplies, operating equipment, employees salaries or wages,
and other operating expenses, and the amounts expended then are recouped through billings
to other funds of the governmental entity.
Although an internal service fund should use an annual budget for managerial planning and control purposes, the budget need not be entered in the accounting records of
the fund. The accrual basis of accounting, including the perpetual inventory system and
depreciation of plant assets, is appropriate for an internal service fund. Encumbrance
accounting may be useful in controlling nonrecurring purchase orders of an internal
service fund.
Because internal service funds do not issue revenue bonds and do not receive contributions or deposits from customers, the nancial statements of internal service funds are
nearly identical in form and content to those of business enterprises. However, similar to
enterprise funds, internal service funds do not have owners equity in their statements of net
assets. A net assets ledger account balance typically supports that amount in the net assets
section of the statement of net assets for an internal service fund.

Financial Statements for Internal Service Fund


The following nancial statements for the Town of Verdant Glen Internal Service Fund are
illustrative of the statements for such a fund. The receivable from General Fund, $6,000, in
the statement of net assets below is the counterpart of the related payable to Internal Service Fund in the General Fund trial balance on page 729 of Chapter 17.

Financial Statements
of a Governmental
Entitys Internal
Service Fund

TOWN OF VERDANT GLEN INTERNAL SERVICE FUND


Statement of Revenues, Expenses, and Changes in Net Assets
For Year Ended June 30, 2006
Operating revenues:
Charges for services
Operating expenses:
Personal services
Supplies
Heat, light, and power
Depreciation
Total operating expenses
Increase in net assets
Net assets, beginning of year
Net assets, end of year

$162,400
$21,200
84,300
20,500
34,000
160,000
2,400
636,800
$639,200

TOWN OF VERDANT GLEN INTERNAL SERVICE FUND


Statement of Net Assets
June 30, 2006
Assets
Current assets:
Cash
Receivable from General Fund
Inventory of supplies, at rst-in, rst-out cost
Total current assets

8,600
6,000
64,300
$ 78,900
(continued)

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Accounting, Tenth Edition

V. Accounting for
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19. Governmental Entities:


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Chapter 19 Governmental Entities: Proprietary and Fiduciary Funds, CAFR 787

TOWN OF VERDANT GLEN INTERNAL SERVICE FUND


Statement of Net Assets (concluded)
June 30, 2006
Capital assets:
Land
Building
Machinery and equipment
Subtotal
Less: Accumulated depreciation
Net capital assets
Total assets

$ 142,100
627,500
132,800
902,400
327,800
574,600
$ 653,500
Liabilities

Current liabilities:
Vouchers payable
Total liabilities

$ 14,300
$ 14,300
Net Assets

Net assets:
Invested in capital assets, net of related debt
Unrestricted
Total net assets

$ 574,600
64,600 (a)
$ 639,200

(a) $78,900 $14,300

TOWN OF VERDANT GLEN INTERNAL SERVICE FUND


Statement of Cash Flows
For Year Ended June 30, 2006
Net cash provided by operating activities (Exhibit 1):
Cash receipts from interfund services provided
Cash payments to employees for services
Cash payments to other suppliers of goods or services
Other operating cash payments
Total cash payments
Net cash provided by operating activities
Cash ows from capital and related nancing activities:
Acquisition of machinery and equipment
Increase in cash
Cash, beginning of year
Cash, end of year
Exhibit 1 Cash ows from operating activities:
Increase in net assets
Adjustments to reconcile increase in net assets to net cash
provided by operating activities:
Depreciation expense
Decrease in receivable from General Fund
Increase in inventory of supplies
Increase in vouchers payable
Net cash provided by operating activities

$370,300
$ 76,000
212,000
53,600
341,600
$ 28,700
(23,400)
5,300
3,300
$ 8,600
$

2,400

34,000
1,000
(11,300)
2,600
$ 28,700

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Applicability of FASB Pronouncements to Proprietary Funds


In GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds . . . ,
the GASB addressed the troublesome issue of whichif anypronouncements of the
FASB should apply to proprietary funds of governmental entities.2 As an interim measure,
the GASB provided that proprietary funds should apply all Accounting Research Bulletins,
Accounting Principles Board Opinions, and Financial Accounting Standards Board Statements and Interpretations issued as of November 30, 1989, unless those pronouncements
conicted with or contradicted GASB pronouncements. In addition, proprietary funds might
elect to apply all (not some) FASB Statements and Interpretations issued after November
30, 1989, as long as they do not conict with or contradict GASB pronouncements. Thus,
GASB Statement No. 20 provided temporary guidance to governmental entities for applying business enterprise-type accounting standards, as appropriate, to their proprietary funds.
In GASB Statement No. 34, Basic Financial Statements . . . , paragraphs 93 through 95,
the GASB reafrmed the foregoing provisions of GASB Statement No. 20.

FIDUCIARY FUNDS
Private-purpose trust funds, pension trust funds, agency funds, and investment trust funds
constitute the duciary funds of a governmental entity. The position of the governmental
entity with respect to such funds is one of a custodian or a trustee, rather than an owner.
For duciary funds, the Governmental Accounting Standards Board has mandated use
of the accrual basis of accounting and preparation of a statement of duciary net assets and
a statement of changes in duciary net assets.3 The following sections of this chapter describe and illustrate accounting and reporting for duciary funds.

Accounting and Reporting for Agency Funds


Agency funds are of short duration. Typically, agency funds are used to account for sales
taxes collected by a state government on behalf of the municipalities and townships of the
state, and for payroll taxes and other deductions withheld from salaries and wages payable
to employees of a governmental entity. The amounts withheld subsequently are paid to a
federal or state collection unit.
Agency funds do not have operations during a scal year; thus, the only nancial statements
for an agency fund are a statement of duciary assets showing the cash or receivables of the
fund and the amounts payable to other funds or governmental entities or to outsiders, and a
statement of changes in duciary assets, illustrated as follows for the Town of Verdant Glen:

TOWN OF VERDANT GLEN AGENCY FUND

Financial Statements
of a Governmental
Entitys Agency Fund

Statement of Fiduciary Assets


June 30, 2006
Assets
Cash

$12,600
Liabilities

Vouchers payable

2
3

Ibid., Sec. P80.104 and P80.105.


Ibid., Sec. 1600, Fund Financial Statements, C, and Sec. 2200.172Sec. 2200.174.

$12,600

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Chapter 19 Governmental Entities: Proprietary and Fiduciary Funds, CAFR 789

TOWN OF VERDANT GLEN AGENCY FUND


Statement of Changes in Assets and Liabilities
For Year Ended June 30, 2006

Balances,
July 1, 2005

Additions

Deductions

Balances,
June 30, 2006

Assets
Cash

$14,200

$49,000

$50,600

$12,600

Liabilities
Vouchers payable

$14,200

$49,000

$50,600

$12,600

Accounting and Reporting for Private-Purpose Trust Funds


Private-purpose trust funds of a governmental entity are longer-lived than agency funds.
An expendable trust fund is one whose principal and income both may be expended
to achieve the objectives of the trust. A nonexpendable trust fund is one whose revenues are expended to carry out the objectives of the trust; the principal remains intact. For example, an endowment established by the grantor of a trust may specify that the
revenues from the endowment are to be expended by the governmental entity for
student scholarships, but the endowment principal is not to be expended. A nonexpendable trust fund requires two separate trust fund accounting entitiesone for principal and
one for revenues. Accounting for the two separate trust funds requires a careful distinction
between transactions affecting the principalsuch as changes in the investment portfolio
and transactions affecting revenuessuch as cash dividends and interest on the investment
portfolio. The trust indenture, which is the legal document establishing the trust, should
specify distinctions between principal and revenues. If the trust indenture is silent with
respect to such distinctions, the trust law of the governmental entity governs separation of
principal trust fund and revenues trust fund transactions.
Because the governmental entity serves as a custodian for a trust fund, accounting for a
trust fund should comply with the trust indenture under which the fund was established.
Among the provisions that might affect the accounting for a trust fund are requirements that
the annual budget for the trust fund be entered in its accounting records and that depreciation be recognized for an endowment principal trust fund that includes depreciable plant
assets.
To illustrate accounting for private-purpose trust funds, assume that Karl and Mabel
Root, residents of the Town of Verdant Glen, contributed marketable securities with a current fair value of $100,000 on July 1, 2005, to a trust to be administered by the Town of
Verdant Glen as trustee. Principal of the gift was to be maintained in an Endowment Principal Nonexpendable Trust Fund. Revenues from the marketable securities were to be used
for scholarships for qualied students to attend Verdant Glen College; the revenues and
expenditures for scholarships were to be accounted for in an Endowment Revenues Expendable Trust Fund. The Bank of Verdant Glen trust department was to receive an annual trustees fee of $500 for administering the two trust funds on behalf of the Town of
Verdant Glen.
Journal entries for the two trust funds for the year ended June 30, 2006, are summarized on page 790 (changes in current fair value of the marketable securities are disregarded).

Closing entries

Payment of scholarships to students James


Rich and Janet Wells
Payment of trustees fee

Transfer of cash from Principal Trust Fund to


Revenues Trust Fund

Investments
Revenues
Interest Receivable
Dividends Receivable
Revenues
Cash
Interest Receivable
Dividends Receivable
Other Financing Uses
Payable to Revenues Trust Fund

Receivable from Principal Trust Fund


Other Financing Sources
Payable to Revenues Trust Fund
Cash

Cash
Receivable from Principal Trust Fund
Expenditures
Cash
Expenditures
Cash
Revenues
Other Financing Uses
Net assets Reserved for Endowment
Other Financing Sources
Expenditures
Net assets Reserved for Scholarships

Account Titles

113,000

13,000

13,000

13,000

5,000
8,000

100,000

13,000
100,000

13,000

13,000

5,000
8,000

13,000

100,000

13,000

500

12,000

13,000

13,000

12,500
500

500

12,000

13,000

13,000

Endowment
Revenues
Expendable
Trust Fund

V. Accounting for
Nonbusiness Organizations

Recording of liability to Revenues Trust


Fund for interest and dividends

Receipt of interest and dividends

Accrual of revenues on marketable


securities

Receipt of marketable securities in trust

Explanation of Transactions and Events

Endowment
Principal
Nonexpendable
Trust Fund

790

Journal Entries for Nonexpendable Trust Fund and Expendable Trust Fund of a Governmental Entity

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Financial Statements of Nonexpendable Trust Fund


Financial statements of the Town of Verdant Glen Endowment Principal Nonexpendable
Trust Fund are shown below for the year ended June 30, 2006:
Financial Statements
of a Governmental
Entitys Nonexpendable
Trust Fund

TOWN OF VERDANT GLEN ENDOWMENT PRINCIPAL


NONEXPENDABLE TRUST FUND
Statement of Changes in Fiduciary Net Assets
For Year Ended June 30, 2006
Operating revenues:
Interest
Dividends
Gifts
Total operating revenues
Transfers out
Increase in net assets
Net assets, beginning of year
Net assets, end of year

5,000
8,000
100,000
$113,000
13,000
$100,000
-0$100,000

TOWN OF VERDANT GLEN ENDOWMENT PRINCIPAL


NONEXPENDABLE TRUST FUND
Statement of Fiduciary Net Assets
June 30, 2006
Assets
Investments, at fair value

$100,000
Net Assets

Net assets reserved for endowment

$100,000

Financial Statements of Expendable Trust Fund


For the Town of Verdant Glen Endowment Revenues Expendable Trust Fund, nancial
statements for the year ended June 30, 2006, are as follows:
Financial Statements
of a Governmental
Entitys Expendable
Trust Fund

TOWN OF VERDANT GLEN ENDOWMENT REVENUES


EXPENDABLE TRUST FUND
Statement of Changes in Fiduciary Net Assets
For Year Ended June 30, 2006
Revenues
Expenditures:
Education
Administration
Total expenditures
Excess (deciency) of revenues over expenditures
Transfers in
Increase in net assets
Net assets, beginning of year
Net assets, end of year

$ -0$ 12,000
500
$ 12,500
$(12,500)
13,000
$
500
-0$
500

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TOWN OF VERDANT GLEN ENDOWMENT REVENUES


EXPENDABLE TRUST FUND
Statement of Fiduciary Net Assets
June 30, 2006
Assets
Cash

$500
Net Assets

Net assets

$500

There is no unreserved and undesignated net assets balance for either of the Town of
Verdant Glen trust funds, because the trust indenture required the reservation of the entire
net assets of each fund to achieve the purpose of the trust.

Accounting and Reporting for Pension Trust Funds


The GASB has dened a pension trust fund as follows:
A fund used by a governmental entity to report resources that are required to be held in trust
for the members and beneciaries of dened benet pension plans, dened contribution
plans, other postemployment benet plans, or other employee benet plans. They are used to
account for the accumulation of assets for the purpose of paying benets when they become
due in accordance with the terms of the plan: a pension plan included in the nancial reporting entity of the plan sponsor or a participating employer.4

Pension trust funds are accounted for in essentially the same manner as proprietary
funds. Thus, the accounting records of pension trust funds are maintained under the accrual
basis of accounting and include all assets, liabilities, revenues, and expenses of the fund.
Because of the complexities of pension trust funds, illustrative journal entries for a pension trust fund are beyond the scope of this discussion. The following nancial statements
for the Town of Verdant Glen Employees Retirement System Pension Trust Fund for the
year ended June 30, 2006, which exclude a statement of cash ows (which is optional)
illustrate some of the accounting concepts involved.5
TOWN OF VERDANT GLEN PENSION TRUST FUND
Statement of Changes in Fiduciary Net Assets
For Year Ended June 30, 2006
Additions:
Employee contributions
Employer contributions
Investment net gains and revenues, net of investment expenses
Total additions
Deductions:
Annuity and disability benets
Refunds of contributions
Administrative expenses
Total deductions
Increase in net assets
Net assets held in trust for pension benets, beginning of year
Net assets held in trust for pension benets, end of year
4
5

Ibid., Sec. P20.551.


Ibid., Sec. Pe5.901.

$131,600
247,300
146,200
$525,100
$222,000
38,300
187,200
447,500
$ 77,600
842,300
$919,900

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TOWN OF VERDANT GLEN PENSION TRUST FUND


Statement of Fiduciary Net Assets
June 30, 2006
Assets
Cash and short-term investments, at fair value
Receivables
Long-term investments, at fair value
Capital assets, less accumulated depreciation
Total assets

21,200
34,800
884,600
82,100
$1,022,700

Liabilities
Refunds payable and other
Net assets held in trust for pension benets

102,800
$ 919,900

In addition to the foregoing nancial statements, the pension trust fund of a governmental entity must provide two schedules as required supplementary information following
the notes to the pension funds nancial statements:
A schedule of funding progress that includes historical trend information about the actuarially determined funded status of the pension plan and the progress made in accumulating
sufcient assets to pay benets when due
A schedule of employer contributions that includes historical trend information about the
annual required contributions compared with the actual contributions6

Following is a discussion of important features of the nancial statements for the Town
of Verdant Glen Pension Trust Fund:
1. The dened benet pension plan of the Town of Verdant Glen is a contributory pension
plan, to which both covered employees and the town make contributions. (In a noncontributory pension plan, only the town would make contributions.)
2. Investment revenues of the Pension Trust Fund include realized and unrealized gains and
losses on investments as well as interest and dividends.
3. Annuity benets are pension payments to retired former employees of the Town of
Verdant Glen. Disability benets are payments to former employees whose disabilities
precluded their working until scheduled retirement dates.
4. All pension payments to retired employees had been made through June 30, 2006; otherwise, the liabilities in the Pension Trust Fund statement of duciary net assets would
include an amount for annuities payable.
5. Not illustrated for the Town of Verdant Glen Pension Trust Fund are the extensive disclosures required in notes to the nancial statements of the Pension Trust Fund. These
required disclosures are set forth in GASB Statement No. 25, Financial Reporting for
Dened Benet Pension Plans and Note Disclosures for Dened Contribution Plans,
paragraph 32.

Accounting and Reporting for Investment Trust Funds


Governmental entities such as counties and states often maintain external investment
pools, similar to the pooled investments of the various funds of nonprot organizations
discussed in Chapter 16. Smaller governmental entities, such as towns and villages located
6

Ibid.

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in the same county or state, may achieve higher returns by pooling their investments with
those of other small entities. The investments are managed by the treasurer or chief nancial ofcer of the state or county sponsoring government. In GASB Statement No. 31,
Accounting and Financial Reporting for Certain Investments and for External Investment
Pools, the GASB required sponsoring governments to establish investment trust funds for
external investment pools. Financial statements for the investment pools would be the same
as for pension trust funds: a statement of duciary net assets and a statement of changes in
duciary net assets.7
To illustrate, assume that Riparian County maintains an external investment pool for the
Town of Verdant Glen and other towns and villages within its borders. Following are hypothetical nancial statements for the Riparian County Investment Trust Fund:
RIPARIAN COUNTY INVESTMENT TRUST FUND
Statement of Changes in Fiduciary Net Assets
For Year Ended June 30, 2006
Additions:
Participants contributions
Investment net realized and unrealized gains and revenues,
net of investment expenses
Total additions
Deductions:
Administrative expenses
Net increase
Net assets held in trust for pool participants, beginning of year
Net assets held in trust for pool participants, end of year

$ 1,800,000
1,140,000
$ 2,940,000
460,000
$ 2,480,000
65,820,000
$68,300,000

RIPARIAN COUNTY INVESTMENT TRUST FUND


Statement of Fiduciary Net Assets
June 30, 2006
Assets
Cash and short-term investments, at fair value
Long-term investments at, fair value
Total assets

$26,200,000
42,180,000
$68,380,000
Liabilities

Payable to Treasurer of Riparian County


Net assets held in trust for pool participants

80,000
$68,300,000

COMPREHENSIVE ANNUAL FINANCIAL REPORT


OF GOVERNMENTAL ENTITIES
As pointed out in Chapter 17 (page 714), the Governmental Accounting Standards Boards
issuance in 1999 of GASB Statement No. 34, created renewed interest in nancial reporting by state and local governmental entities. The GASB reported its objective in issuing
GASB Statement No. 34, as follows:

Ibid., Sec. I50.116.

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The Boards objective with this Statement is to establish a basic nancial reporting model
that will result in greater accountability by state and local governments by providing more useful information to a wider range of users than did the previous model. The new model also
improves on earlier standards and proposals for modifying the previous model, . . . . 8

GASB Statement No. 33A Preliminary Step


Before issuing GASB Statement No. 34, the GASB resolved the pressing issue of accounting for a governmental entitys nonexchange transactions, such as most taxes, grants, and
private donations. The four classes of nonexchange transactions and their recognitions established by the GASB are summarized in the following chart:9
Classes and Timing of Recognition of Nonexchange Transactions
Class
Derived tax revenues
Examples: sales taxes,
personal and corporate
income taxes, motor fuel
taxes, and similar taxes
on earnings or
consumption
Imposed nonexchange
revenues
Examples: property taxes,
most nes and
forfeitures

Government-mandated
nonexchange
transactions
Examples: federal
government mandates
on state and local
governments
Voluntary
nonexchange
transactions
Examples: certain grants
and entitlements, most
donations

Recognition
Assets*
Period when underlying exchange has occurred or when
resources are received, whichever is rst.
Revenues
Period when underlying exchange has occurred. (Report advance receipts as deferred revenues.) When modied accrual
accounting is used, resources also should be available.
Assets*
Period when an enforceable legal claim has arisen or when
resources are received, whichever is rst.
Revenues
Period when resources are required to be used or rst period
that use is permitted (for example, for property taxes, the
period for which levied). When modied accrual accounting
is used, resources also should be available. (For property
taxes, apply NCGA Interpretation 3, as amended.)
Assets* and liabilities
Period when all eligibility requirements have been met or
(for asset recognition) when resources are received,
whichever is rst.
Revenues and expenses or expenditures
Period when all eligibility requirements have have been met.
Report advance receipts or payments for use in the following
period as deferred revenues or advances, respectively.
However, when a provider precludes the sale, disbursement,
or consumption or resources for a specied number of
years, until a specied event has occurred, or permanently
[for example, permanent and term endowments], report
revenues and expenses or expenditures when the resources
are, respectively, received or paid and report resulting net
assets, equity, of fund balance as restricted. When modied
accrual accounting is used for revenue recognition,
resources also should be available.

*If there are purpose restrictions, report restricted net assets (or equity or fund balance) or, for governmental funds, a reservation of fund
balance.
8
9

GASB Statement No. 34, par. 183.


Codication, Sec. N50.901.

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Subsequent to its issuance, GASB Statement No. 33 was modied with respect to accounting for a governmental entitys derived tax revenues or imposed nonexchange revenues shared with other governmental entities.10

Subsequent StepsGASB Statements No. 35, 37, 38, and 41


Subsequent to the issuance of GASB Statement No. 34, the GASB issued four additional
statements that either modied or supplemented Statement No. 34, as follows:
1. GASB Statement No. 35, Basic Financial Statementsand Managements Discussion
and Analysisfor Public Colleges and Universities. This statement merely amended
Statement No. 34 to include public colleges and universities within its scope.11
2. GASB Statement No. 37, Basic Financial Statementsand Managements Discussion
and Analysisfor State and Local Governments: Omnibus. This statements purpose
was to encourage nancial managers of governmental entities to report management
discussion and analysis items that have the most relevance and to avoid boilerplate
language.12
3. GASB Statement No. 38, Certain Financial Statement Note Disclosures. Following
a general disclosure principle that disclosure in the notes to the nancial statements of a
governmental entity is needed only when the information required to be disclosed is not
displayed on the face of the nancial statements, GASB Statement No. 38 established
and modied disclosure requirements related to the following:
Summary of signicant accounting policies
Violations of nance-related legal or contractual provisions
Debt and lease obligations
Short-term debt
Disaggregation of receivable and payable balances
Interfund balances and transfers13
4. GASB Statement No. 41, Budgetary Comparison SchedulesPerspective Differences. This statement requires a governmental entity that, because of perspective differences, is unable to present budgetary comparisons for the general fund and major
special revenue funds to present, as required supplementary information, budgetary
comparison schedules based on the fund, organization, or program structure that the
entity uses for its legally adopted budget.14

Composition of a Governmental Entitys Comprehensive


Annual Financial Report
The Governmental Accounting Standards Board provided the following general guidelines
for a governmental entitys comprehensive annual nancial report:
a. A comprehensive annual nancial report should be prepared and published, covering all
activities of the primary government (including its blended component units*) and providing an overview of all discretely presented component units* of the reporting entity
10

Codication, Sec. N50.125.


Ibid., Sec. Co.5.
12
Ibid., Sec. 2200.109.
13
Ibid., Secs. 2300.103, 2300.106, 2300.1182300.121.
14
Ibid., Sec. 2400.102.
* The term component units is dened on page 717 of Chapter 17.
11

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including introductory section, managements discussion and analysis (MD&A), basic nancial statements, required supplementary information other than MD&A, appropriate combining and individual fund statements, schedules, narrative explanations, and statistical
section. The reporting entity is the primary government (including its blended component
units) and all discretely presented component units . . . .
b. The minimum requirements for MD&A, basic nancial statements, and required supplementary information other than MD&A are:
(1) Managements discussion and analysis.
(2) Basic nancial statements. The basic nancial statements should include:
(a) Government-wide nancial statements.
(b) Fund nancial statements.
(c) Notes to the nancial statements.
(3) Required supplementary information other than MD&A.15

The GASB diagrammed the foregoing features of a comprehensive annual nancial report
as follows:16

Managements discussion
and analysis

Government-wide
financial statements

Fund financial
statements

Notes to the financial statements

Required supplementary information


(other than MD&A)

The GASB provided general guidance for the sections of a comprehensive annual nancial
report as follows:
1. Managements Discussion and Analysis should discuss the current-year results in
comparison with the prior year, with emphasis on the current year. This fact-based
analysis should discuss the positive and negative aspects of the comparison with the
prior year.17

15

Ibid., Sec. 2200 Statement of Principle, b and c.


Ibid., Sec. 2200.103.
17
Ibid., Sec. 2200.107.
16

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2. The government-wide nancial statements consist of a statement of net assets and a


statement of activities. Those statements should:
a. Report information about the overall government without displaying individual funds
or fund types
b. Exclude information about duciary activities, including component units that are
duciary in nature (such as certain public employee retirement systems)
c. Distinguish between the primary government and its discretely presented component
units
d. Distinguish between governmental activities and business-type activities of the primary government
e. Measure and report all assets (both nancial and capital), liabilities, revenues, expenses, gains, and losses using the . . . accrual basis of accounting.18
3. Separate nancial statements should be presented for the primary governments governmental and proprietary funds.19
4. The notes to the nancial statements should communicate information essential for
fair presentation of the nancial statements that is not displayed on the face of the
nancial statements. As such, the notes are an integral part of the basic nancial statements. The notes should focus on the primary governmentspecically, its governmental activities, business-type activities, major funds, and nonmajor funds in the
aggregate.20
5. Required supplementary information consists of schedules, statistical data, and other information that the GASB has determined are an essential part of nancial reporting and
should be presented with, but are not part of, the basic nancial statements of a governmental entity.21
The foregoing discussion regarding the comprehensive annual nancial report of a governmental entity suggests that such a report may be a complex, voluminous disclosure
instrument. The statement of net assets and the statement of activities of the City of
Alexandria, Virginia, for the scal year ended June 30, 2000, are clear evidence of such
complexity.22

SEC ENFORCEMENT ACTION DEALING WITH WRONGFUL


APPLICATION OF ACCOUNTING AND REPORTING
STANDARDS FOR GOVERNMENTAL ENTITY
AAER 970
In AAER 970, In the Matter of The City of Syracuse, New York, Warren D. Simpson, and
Edward D. Polgreen (September 30, 1997), the SEC reported that ofcial statements produced by the City of Syracuse in connection with the issuance of $23,000,000 face amount
of one-year bond anticipation notes were materially false and misleading. According to the
SEC, the combined statements of revenue, expenditures, and changes in fund balances for
the Citys general and debt service funds reported a $400,000 excess of revenues over

18

Ibid., Sec. 2200.110.


Ibid., Sec. 2200.148.
20
Ibid., Sec. 2300.102.
21
Ibid., Sec. 2200.178.
22
Bruce W. Chase and Laura B. Iriggs, How to Implement GASB Statement No. 34, Journal of Accountancy, November 2001 (Jersey City: American Institute of Certied Public Accountants, Inc.), pp. 7779.
19

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expenditures instead of the actual $9,400,000 excess of expenditures over revenues. In


addition, the combined ending fund balances of the general and debt service funds were
overstated by $24,200,000. According to the SEC, the primary cause of the misstatements
was the preparation of the combined nancial statements before the Citys accounting
records had been closed for the relevant scal year and the premature recognition of property tax revenues. The City, its most senior accountant in its Finance Department, and its
First Deputy Commissioner of Finance agreed to cease and desist from violating the Securities Act of 1933 and the Securities and Exchange Act of 1934.

Review
Questions

1. Under what circumstances are general obligation bonds payable of a governmental entity recorded in the governmental entitys enterprise fund? Explain.
2. The accounting for a governmental entitys enterprise fund in many respects is similar
to the accounting for a business enterprise; yet there are a number of differences between the two types of accounting. Identify at least three of the differences.
3. Why does a governmental entitys enterprise fund have restricted assets in its statement
of net assets? Explain.
4. What are the four categories of cash ows in the statement of cash ows for a governmental entitys enterprise fund?
5. How is the excess of total assets over total liabilities displayed in the nancial statements of a governmental entitys internal service fund? Explain.
6. How does the statement of net assets of a governmental entitys internal service fund
differ from the statement of net assets of the governmental entitys enterprise fund?
Explain.
7. Is a statement of revenues, expenses, and changes in duciary net assets issued for an
agency fund of a governmental entity? Explain.
8. Accounting for a nonexpendable trust for which a governmental entity acts as custodian requires the establishment of two separate private-purpose trust funds. Why is this
true?
9. Explain the nature of the contributions in the statement of changes in duciary net assets of a governmental entitys pension trust fund.
10. Are fund nancial statements the only nancial statements included in the comprehensive annual nancial report of a governmental entity? Explain.
11. Does the managements discussion and analysis section of a governmental entitys
comprehensive annual nancial report include required supplementary nancial information? Explain.

Exercises
(Exercise 19.1)

Select the best answer for each of the following multiple-choice questions:
1. An agency fund of a governmental entity is an example of which of the following type
of fund?
a. Fiduciary b. Governmental c. Proprietary d. Internal service

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2. Is a Contributed Capital from General Fund amount displayed in the statement of net
assets of a governmental entitys:

a.
b.
c.
d.

Enterprise Fund?

Internal Service Fund?

Yes
No
No
Yes

No
Yes
No
Yes

3. The following transactions were among those reported by the Scobey County Water
and Power Enterprise Fund for the scal year ended June 30, 2006:
Proceeds from issuance of revenue bonds
Cash deposits received from customer households
Cash contributed by subdividers

$5,000,000
3,000,000
1,000,000

In the water and power enterprise funds statement of cash ows for the year ended
June 30, 2006, the amount to be reported as cash ows from capital and related nancing activities is:
a. $9,000,000
b. $8,000,000
c. $6,000,000
d. $5,000,000
4. Does a governmental entitys agency fund issue a:

a.
b.
c.
d.

Statement of Fiduciary
Assets

Statement of Changes
in Fiduciary Net Assets?

Yes
Yes
No
No

Yes
No
Yes
No

5. Slade City Internal Service Fund received a transfer in of $50,000 cash from the General Fund. This $50,000 transfer is accounted for in the Internal Service Fund with a
credit to:
a. Revenues.
b. Other Financing Sources.
c. Accounts Payable.
d. Transfers In
6. Is the entire fund balance reserved in:

a.
b.
c.
d.

A Nonexpendable
Private-Purpose Trust Fund?

An Expendable
Private-Purpose Trust Fund?

Yes
Yes
No
No

Yes
No
Yes
No

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7. Which of the following funds of a governmental entity uses the same basis of
accounting as an enterprise fund?
a. Special revenue funds.
b. Internal service funds.
c. Permanent funds.
d. Capital projects funds.
8. Restricted assets are displayed in a governmental entity statement of net assets for:
a. Both an enterprise fund and an internal service fund.
b. Neither an enterprise fund nor an internal service fund.
c. An enterprise fund only.
d. An internal service fund only.
9. Which of the following funds of a governmental entity may account for expendable or
nonexpendable resources?
a. Debt service funds.
b. Enterprise funds.
c. Private-purpose trust funds.
d. Special revenue funds.
e. None of the foregoing funds.
10. Customers deposits that may not be spent for operating purposes are displayed in the
statement of net assets of the enterprise fund of a governmental entity as:
a. Restricted cash or investments.
b. Nonrestricted cash or investments.
c. Payable to general fund.
d. Payable to special revenue fund.
11. Does an agency fund for a governmental entity issue:

a.
b.
c.
d.

A Statement of
Fiduciary Assets

A Statement of Changes
in Fiduciary Net Assets

A Statement of
Cash Flows?

Yes
Yes
Yes
Yes

Yes
No
Yes
No

Yes
Yes
No
No

12. A Net Assets Reserved for Endowment ledger account is appropriate for:
a. An endowment principal nonexpendable trust fund only.
b. An endowment revenues expendable trust fund only.
c. Either an endowment principal nonexpendable trust fund or an endowment revenues expendable trust fund.
d. Neither an endowment principal nonexpendable trust fund nor an endowment revenues expendable trust fund.
13. Which of the following taxes is not a tax revenue of a governmental entity that is classied as derived under GASB Statement No. 33, Accounting and Financial Reporting
for Nonexchange Transactions?
a. Sales tax
b. Personal income tax
c. Motor fuel tax
d. Property tax
(Exercise 19.2)

The Enterprise Fund of Orchard City billed the Orchard City General Fund $16,400 for
utility services on May 31, 2006.
Prepare journal entries for the May 31, 2006, billing for both the Orchard City General
Fund and the Orchard City Enterprise Fund.

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(Exercise 19.3)
CHECK FIGURE
Restricted fund
balance, $43,400.

Selected ledger accounts of the Town of Goland Enterprise Fund had the following balances on June 30, 2006:
Liabilities payable from restricted assets:
Interest payable
Current portion of revenue bonds
Customers deposits
Restricted assets:
Cash
Short-term investments, at fair value

$ 24,400
80,000
62,600
42,300
168,100

Prepare a working paper to compute the required balance of the Net Assets Restricted
for Revenue Bonds Retirement ledger account of the Town of Goland Enterprise Fund on
June 30, 2006.
(Exercise 19.4)

On June 18, 2006, the Wilbert Township Enterprise Fund made a $120,000 payment in lieu
of property taxes to the Wilbert Township General Fund.
Prepare journal entries on June 18, 2006, for Wilbert Townships General Fund and Enterprise Fund.

(Exercise 19.5)

Selected items taken from comparative nancial statements of the Town of Liddell Enterprise Fund were as follows for the scal year ended June 30, 2006:

CHECK FIGURE
Net cash provided by
operating activities,
$218,900.

Decrease in inventory of supplies


Decrease in receivable from General Fund
Decrease in vouchers payable
Depreciation expense
Increase in accounts receivable
Increase in accrued liabilities
Increase in short-term prepayments
Net income
Operating income
Transfer out to General Fund
Payment in lieu of property taxes to General Fund

$ 42,600
21,700
12,200
81,700
36,800
8,100
11,600
94,200
125,400
18,600
46,800

Prepare the cash ows from operating activities exhibit for the statement of cash ows
(direct method) for the Town of Liddell Enterprise Fund for the year ended June 30, 2006.
(Exercise 19.6)
CHECK FIGURE
Ending net assets,
$1,278,400.

From the following trial balance, prepare appropriate nancial statements (excluding a
statement of cash ows):
TOWN OF DILBEY INTERNAL SERVICE FUND
Trial Balance
June 30, 2006

Debit
Cash
Receivable from General Fund
Inventory of supplies
Capital assets
Accumulated depreciation of capital assets
Vouchers payable
Net assets, July 1, 2005
Charges for services
Operating expenses
Totals

Credit

17,200
12,000
128,600
1,804,800
$ 655,600
28,600
1,273,600
324,800

320,000
$2,282,600

$2,282,600

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(Exercise 19.7)

Agatha Morris, a citizen of Roark City, donated common stock with a current fair value of
$620,000 to the city under a trust indenture dated July 1, 2005. Under the terms of the indenture, the principal amount is to be kept intact; use of dividends revenues from the common stock is restricted to nancing academic scholarships for college students. On
December 14, 2005, dividends of $42,000 were received on the common stock donated by
Morris.
Prepare journal entries for Roark City to record the foregoing transactions and events in
the appropriate funds. Identify the funds. Disregard entries for accrual of dividends and for
unrealized gains or losses on investments. Omit explanations for the journal entries.

(Exercise 19.8)

Ledger account balances on June 30, 2006, applicable to the City of Carvell Pension Trust
Fund statement of changes in pension plan net assets for the scal year ended on that date,
were as follows:

CHECK FIGURE
Ending net assets,
$841,700.

Administrative expenses
Annuity benets
Disability benets
Employer contributions
Net assets held in trust for pension benets, July 1, 2005
Investment revenues (net)
Employee contributions
Refunds of contributions

$294,600
284,300
52,800
318,500
841,000
163,900
211,600
61,600

Prepare a statement of changes in duciary net assets for the City of Carvell Pension
Trust Fund for the year ended June 30, 2006.
(Exercise 19.9)

Among the transactions or events of Local Town for the month of November, 2005, were
the following:
Nov. 3 Issued at face amount $1 million of general obligation bonds, the proceeds of
which were to nance construction of a new water treatment plant for water
sold to residents of the town.
5 Received an invoice of $25,000 in the General Fund for equipment for which
a purchase order in the amount of $24,700 had been issued earlier. The town
uses encumbrance accounting.
7 Acquired for $50,000 cash supplies for the central warehouse, to be issued to
various departments of the town. The perpetual inventory system is used for
supplies.
30 Issued bills totaling $80,000 to consumers of the water utility, for water consumption for the 30 days ended November 30, 2005.
Prepare journal entries (omit explanations) for the foregoing transactions or events of
Local Town for the month of November 2005. Identify the fund or voluntarily maintained
account group in which each journal entry is recorded.

Cases
(Case 19.1)

You have been requested to audit the nancial statements of the funds and voluntarily maintained account groups of Ashburn City for the scal year ended June 30, 2006. During the
course of your audit, you learned that on July 1, 2005, the city had issued at face amount

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$1 million, 20-year, 8% general obligation serial bonds to nance additional power-generating


facilities for the Ashburn City electric utility. Principal and interest on the bonds were
payable by the Ashburn City Electric Utility Enterprise Fund. However, for the rst ve
years of the serial maturities of the bondsJuly 1, 2006, through July 1, 2010a special
tax levy accounted for in the Ashburn City Special Revenue Fund was to contribute to the
payment of 80% of the interest and principal of the general obligation bonds. At the end of
the ve-year period, revenues from the electric utilitys new power-generating facilities are
expected to produce cash ows for the Ashburn City Electric Utility Enterprise Fund sufcient to pay all the serial maturities and interest of the general obligation bonds during the
period July 1, 2011, through July 1, 2025.
You found that the accounting records of the Ashburn City Electric Utility Enterprise
Fund included the following ledger account balances relative to the general obligation
bonds on June 30, 2006:

8% general obligation serial bonds payable ($50,000 due July 1, 2006)


Interest payable (interest on the bonds is payable annually each July 1)
Interest expense

$1,000,000 cr
80,000 cr
80,000 dr

The statement of revenues, expenses, and changes in net assets for the year ended
June 30, 2006, prepared by the accountant for the Ashburn City Electric Utility Enterprise
Fund showed a decrease in net assets of $40,000. You also learned that on July 1, 2006,
the Ashburn City Special Revenue Fund paid $104,000 ($130,000 0.80 $104,000)
and the Ashburn City Electric Utility Enterprise Fund paid the remaining $26,000
($130,000 0.20 $26,000) to the scal agent for the 8% general obligation serial
bonds. The $130,000 was the total of the $50,000 principal and $80,000 interest due on the
bonds July 1, 2006. In the Enterprise Funds journal entry to record payment of the bond
principal and interest, the amount of $104,000 was credited to the Transfer In ledger
account.
Instructions
Do you concur with the Ashburn City Electric Utility Enterprise Funds accounting and reporting treatment for the 8% general obligation serial bonds? Discuss.
(Case 19.2)

Wallace and Brenda Stuart, residents of Colby City, have donated their historic mansion, Greystone, in trust to Colby City to serve as a tourist attraction. For a nominal
charge, tourists will be guided through Greystone to observe the paintings, sculptures,
antiques, and other art objects collected by the Stuarts, as well as the mansions unique
architecture.
The trust indenture executed by the Stuarts provided that the admissions charges to
Greystone (which was appraised at $5 million on the date of the trust indenture) are to
cover the operating expenditures associated with the tours, as well as maintenance and
repairs costs for Greystone. Any excess of admissions revenues over the foregoing expenditures and costs was to be donated to Colby University for scholarships to art and architecture students. The trust indenture requires depreciation of Greystone.
Instructions
Discuss the fund accounting issues, and related accounting matters such as depreciation, that should be considered by officials of Colby City with respect to the Stuart
Trust.

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Problems
(Problem 19.1)
CHECK FIGURE
Aug. 1, debit cash in
Enterprise Fund,
$1,115,574.

Among the transactions and events of Kaspar City for the rst four months of the scal year
ending June 30, 2006, were the following:
2005
July 1

Billed general property taxes, $1,600,000, of which 5% was estimated to be


uncollectible.
Aug. 1 Issued $1 million, 20-year, 7% general obligation bonds to yield 6%, interest
payable February 1 and August 1, to nance construction of a power-generating
facility for the electricity utility.
Sept. 1 Received invoice in General Fund for a new computer for governmental accounting. Cost of the computer and related software was $10,000; the related
purchase order had been issued for $10,200.
Oct. 1 Received invoice in General Fund for supplies received from Internal Service
Fund, $1,200. The amount had not been subject to encumbrance.
Instructions
Prepare journal entries for the foregoing transactions or events of Kaspar City for the rst
four months of the scal year ended June 30, 2006, in all affected funds or voluntarily
maintained account groups. Identify the funds or account groups. The Internal Service
Fund uses the periodic inventory system.

(Problem 19.2)

CHECK FIGURES
Increase in net assets,
$57,000; total assets
$1,361,000.

The adjusted trial balance of the Town of Tolliver Enterprise Fund on June 30, 2006, was as
follows:

TOWN OF TOLLIVER ENTERPRISE FUND


Adjusted Trial Balance
June 30, 2006

Debit
Cashunrestricted
Cashrestricted
Short-term investments, at fair valueunrestricted
Short-term investments, at fair valuerestricted
Accounts receivable
Allowance for doubtful accounts
Receivable from General Fund
Receivable from Internal Service Fund
Inventory of supplies, at average cost
Short-term prepayments
Land
Buildings
Accumulated depreciation of buildings
Machinery and equipment
Accumulated depreciation of machinery and equipment
Vouchers payable
Contracts payable

Credit

22,000
38,000
64,000
97,000
64,000
$

12,000

26,000
18,000
47,000
8,000
160,000
830,000
186,000
247,000
62,000
38,000
27,000
(continued)

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TOWN OF TOLLIVER ENTERPRISE FUND


Adjusted Trial Balance (concluded)
June 30, 2006

Debit
Accrued liabilities
Interest payable
Customers deposits
6% revenue bonds, payable $40,000 a year
Net assets restricted for revenue bonds retirement
Unrestricted net assets, beginning of year
Charges for services
Operating grants
Investment revenue and net gains
Personal services
Contractual services
Material and supplies
Heat, light, and power
Depreciation expense
Interest expense and scal agents fees
Totals

Credit
18,000
24,000
38,000
400,000
33,000
726,000
643,000
50,000
12,000

281,000
143,000
46,000
38,000
57,000
83,000
$2,269,000

$2,269,000

Instructions
Prepare a statement of revenues, expenses, and changes in net assets and a statement of net
assets for the Town of Tolliver Enterprise Fund for the scal year ended June 30, 2006.
(Problem 19.3)

In compliance with a newly enacted state law, Diggs County assumed the responsibility of
collecting all property taxes levied within its boundaries as of July 1, 2005. A composite
property tax rate per $100 of net assessed valuation was developed for the scal year ending June 30, 2006, and is presented below:

Diggs County General Fund


Evans City General Fund
Hickman Township General Fund
Total

$ 6.00
3.00
1.00
$10.00

All property taxes were due in quarterly installments. After collection, taxes were to be
distributed to the governmental entities represented in the composite rate. In order to administer collection and distribution of such taxes, Diggs County established a Tax Agency
Fund.
Additional Information
1. In order to reimburse Diggs County for estimated costs of administering the Tax Agency
Fund, the Tax Agency Fund was to deduct 2% from the tax collections each quarter for
Evans City and Hickman Township. The total amount deducted was to be remitted to the
Diggs County General Fund.
2. Current year tax levies to be collected by the Tax Agency Fund were as follows:

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Diggs County
Evans City
Hickman Township
Totals

Gross
Levy

Estimated Amount
to Be Collected

$3,600,000
1,800,000
600,000
$6,000,000

$3,500,000
1,740,000
560,000
$5,800,000

3. As of September 30, 2005, the Diggs County Tax Agency Fund had received $1,440,000
in rst-quarter payments. On October 1, 2005, the Diggs County Tax Agency Fund made
a distribution to the three governmental entities.
Instructions
For the period July 1, 2005, through October 1, 2005, prepare journal entries (explanations
omitted) to record the foregoing transactions and events for the following funds:
Diggs County Tax Agency Fund
Diggs County General Fund

Evans City General Fund


Hickman Township General Fund

Your working paper should be organized as follows:

Account Titles

(Problem 19.4)

Diggs
County
Tax Agency
Fund

Diggs
County
General
Fund

Evans City
General
Fund

Hickman
Township
General
Fund

dr(cr)

dr(cr)

dr(cr)

dr(cr)

The Town of Northville was incorporated and began operations on July 1, 2005. The
following transactions and events occurred during the rst scal year, July 1, 2005, to June
30, 2006:
(1) The town council adopted a budget for general operations during the year ending
June 30, 2006. Revenues were estimated at $400,000. Legal authorizations for budgeted expenditures were $394,000. There were no other nancing sources or uses.
(2) Property taxes were levied in the amount of $390,000; it was estimated that 2% of this
amount would be uncollectible. These taxes were available on the date of levy to nance current expenditures.
(3) During the year a resident of the town donated marketable securities with a current
fair value of $50,000 to the town under a trust. The terms of the trust indenture specied that the principal amount was to be kept intact; use of revenues generated by the
securities was restricted to nancing college scholarships for students. Revenues
earned and received on these marketable securities amounted to $5,500 through
June 30, 2006.
(4) A General Fund transfer of $55,000 was made to establish an Internal Service Fund
to provide for an inventory of supplies.
(5) The town council decided to install lighting in the Town Park, and a special assessment
project was authorized to install the lighting at a cost of $75,000. The assessments were
levied for $72,000, with the town contributing $3,000 from the General Fund. All assessments were collected during the year, as was the General Fund contribution.

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(6) A contract for $75,000 was approved for the installation of the lighting. On June 30,
2006, the lighting was completed but not approved. The contractor was paid all but
5%, which was retained to ensure compliance with the terms of the contract. Encumbrances accounts are maintained.
(7) During the year, the Internal Service Fund purchased supplies at a cost of $41,900.
(8) Cash collections recorded by the General Fund during the year were as follows:
Property taxes
Licenses and permits fees

$386,000
7,000

(9) The town council decided to build a town hall at an estimated cost of $500,000 to replace space occupied in rented facilities. The town does not record project authorizations. General obligation term bonds bearing interest at 6% were to be issued. On June
30, 2006, the bonds were issued at their face amount of $500,000, payable June 30,
2026. No contracts had been signed for this project and no expenditures had been made.
(10) A re truck was acquired for $16,000, and the voucher was approved and paid by the
General Fund. This expenditure previously had been encumbered for $15,000.
Instructions
Prepare journal entries for the Town of Northville to record each of the foregoing transactions and events in the appropriate fund or account group. Omit explanations for the journal
entries. Do not prepare closing entries for any fund. Organize your working paper as follows:
Transaction or
Event No.

Fund or
Account Group

Account
Titles

Debit

Credit

Number each journal entry to correspond with the transactions or events described on
page 807 and above. Use the following funds (show fund symbol in working paper) and account titles:

Endowment Principal Private-Purpose Trust Fund (EPF)


Cash
Investments
Other Financing UsesTransfers Out
Payable to Endowment Revenues Private-Purpose Trust Fund
Revenues
Endowment Revenues Private-Purpose Trust Fund (ERF)
Cash
Other Financing SourcesTransfers In
Receivable from Endowment Principal Private-Purpose Trust Fund
General Capital Assets Account Group (GCA) (voluntarily maintained)
Improvements (Other than Buildings)
Investment in General Capital Assets from Capital Projects Funds
Investment in General Capital Assets from General Fund Revenues
Machinery and Equipment
General Fund (GF)
Allowance for Uncollectible Current Taxes
Appropriations
Budgetary Fund Balance
Cash
(continued)

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Encumbrances
Estimated Revenues
Expenditures
Fund Balance Reserved for Encumbrances
Other Financing Uses
Payable to Special Revenue Fund
Revenues
Taxes ReceivableCurrent
Vouchers Payable
General Long-Term Debt Account Group (GLTD) (voluntarily maintained)
Amount to Be Provided
Term Bonds Payable
Internal Service Fund (ISF)
Cash
Other Financing Sources
Inventory of Supplies
Special Revenue Fund (SRF)
Cash
Other Financing Sources
Receivable from General Fund
Revenues
Special Assessments ReceivableCurrent
Town Hall Capital Projects Fund (TH)
Cash
Other Financing Sources
Town Park Lighting Capital Projects Fund (TPL)
Cash
Encumbrances
Expenditures
Fund Balance Reserved for Encumbrances
Vouchers Payable

(Problem 19.5)

The City of Cavendish operates a central garage in an Internal Service Fund to provide
garage space and repairs for all city-owned and -operated vehicles. The Internal Service
Fund was established by a contribution of $200,000 from the General Fund on July 1, 2003,
at which time the building was acquired. The post-closing trial balance of the Internal Service Fund on June 30, 2005, was as follows:
CITY OF CAVENDISH INTERNAL SERVICE FUND
Post-Closing Trial Balance
June 30, 2005

Debit
Cash
Receivable from General Fund
Inventory of material and supplies
Land
Building
Accumulated depreciation of building
Machinery and equipment
Accumulated depreciation of machinery and equipment
Vouchers payable
Net assets, beginning of year
Totals

Credit

$150,000
20,000
80,000
60,000
200,000
$ 10,000
56,000

$566,000

12,000
38,000
506,000
$566,000

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Additional Information for the Fiscal Year Ended June 30, 2006:
(1) Material and supplies were purchased on account for $74,000.
(2) The perpetual inventory balance of material and supplies on June 30, 2006, was
$58,000, which agreed with the physical count on that date.
(3) Salaries and wages paid to employees totaled $230,000, including related fringe benets.
(4) A billing was received from the Enterprise Fund for utility charges totaling $30,000,
and was paid.
(5) Depreciation of the building was recognized in the amount of $5,000. Depreciation of
the machinery and equipment amounted to $8,000.
(6) Billings to other funds for services rendered to them were as follows:
General Fund
Enterprise Fund
Special Revenue Fund

$262,000
84,000
32,000

(7) Unpaid interfund receivable balances on June 30, 2006, were as follows:
General Fund
Special Revenue Fund

$ 6,000
16,000

(8) Vouchers payable on June 30, 2006, were $14,000.


Instructions
For the scal year July 1, 2005, through June 30, 2006, prepare journal entries to record all
the transactions and events for the City of Cavendish Internal Service Fund. Omit explanations for the entries. Use the following account titles, in addition to those included in the
June 30, 2006, post-closing trial balance:
Charges for Services
Operating Expenses
(controlling account)
(Problem 19.6)
CHECK FIGURE
b. Trial balance totals,
$34,200.

Payable to Enterprise Fund


Receivable from Enterprise Fund
Receivable from Special Revenue Fund

Your audit of the nancial statements of the Town of Novis for the scal year ended June 30,
2006, disclosed that the towns inexperienced accountant was uninformed regarding governmental accounting standards and recorded all transactions and events in the General Fund.
The following Town of Novis General Fund trial balance was prepared by the accountant:
TOWN OF NOVIS GENERAL FUND
Trial Balance
June 30, 2006

Debit
Cash
Accounts receivable
Taxes receivablecurrent
Town property
Vouchers payable
Bonds payable

Credit

$ 12,900
1,200
8,000
16,100
$ 15,000
48,000
(continued)

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TOWN OF NOVIS GENERAL FUND


Trial Balance (concluded)
June 30, 2006

Debit
Unreserved and undesignated fund balance
Appropriations
Expenditures
Estimated revenues
Revenues
Totals

Credit
23,200
350,000

332,000
290,000
$708,200

$320,000
$708,200

Your audit disclosed the following:


1. The accounts receivable balance was due from the towns water utility for the sale of obsolete equipment on behalf of the General Fund. Accounts for the water utility operated
by the town are maintained in the Water Utility Enterprise Fund.
2. The total property tax levy for the year was $270,000. The towns tax collection experience in recent years indicates an average loss of 3% of the total property tax levy for uncollectible taxes.
3. On June 30, 2006, the town retired at face amount 12% general obligation serial bonds
totaling $30,000. The bonds had been issued on July 1, 2001, in the total amount of
$150,000. Interest paid during the year also was recorded in the Bonds Payable ledger
account. There was no debt service fund for the serial bonds.
4. On July 1, 2005, to service various departments the town council authorized a supply
room with an inventory not to exceed $10,000. During the year supplies totaling
$12,300 were purchased and debited to Expenditures. The physical inventory taken on
June 30, 2006, disclosed that supplies totaling $8,400 had been used. No internal service
fund was authorized by the town council.
5. Expenditures for Fiscal Year 2006 included $2,600 applicable to purchase orders issued
in the prior year. Outstanding purchase orders on June 30, 2006, not entered as encumbrances in the accounting records, amounted to $4,100.
6. The amount of $8,200, receivable from the state during Fiscal Year 2006 for the towns
share of state gasoline taxes, had not been entered in the accounting records, because the
state was late in remitting the $8,200.
7. Equipment costing $7,500, which had been acquired by the General Fund, was removed
from service and sold for $900 during the year, and new equipment costing $17,000 was
acquired. These transactions were recorded in the Town Property ledger account. The
town does not recognize depreciation in the General Capital Assets Account Group.
Instructions
a. Prepare adjusting and closing entries for the Town of Novis General Fund on June 30,
2006.
b. Prepare a post-closing trial balance for the Town of Novis General Fund for the year
ended June 30, 2006.
c. Prepare adjusting entries for any other funds or account groups of the Town of Novis.
(The towns accountant had recorded all the foregoing transactions or events in the General Fund, and had prepared no journal entries for other funds or voluntarily maintained
account groups.)

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(Problem 19.7)

CHECK FIGURE
Net cash provided by
operating activities,
$146,000.

Selected nancial statements of the Village of Rosner Enterprise Fund are as follows:

VILLAGE OF ROSNER ENTERPRISE FUND


Statement of Revenues, Expenses, and Changes in Net Assets
For Year Ended June 30, 2006
Operating revenues:
Charges for services
Operating expenses:
Personal services
Contractual services
Material and supplies
Heat, light, and power
Depreciation
Payment in lieu of property taxes
Total operating expenses
Operating income
Nonoperating revenues (expenses):
Operating grant
Investment revenue and net gains
Interest expense
Total nonoperating revenues (expenses)
Income before transfers
Transfer (out) to General Fund
Increase in net assets
Net assets, beginning of year
Net assets, end of year

$282,000
$ 41,000
26,000
37,000
11,000
36,000
15,000
166,000
$116,000
$ 20,000
8,000
(40,000)
(12,000)
$104,000
(55,000)
$ 49,000
282,000
$331,000

VILLAGE OF ROSNER ENTERPRISE FUND


Statements of Net Assets
June 30, 2006 and 2005

June 30,
2006

2005

Assets
Current assets:
Cash and short-term investments
Accounts receivable (net)
Receivable from General Fund
Inventory of supplies
Short-term prepayments
Total current assets
Restricted assets:
Cash and short-term investments
Capital assets (net)
Total assets

$ 41,000
82,000
12,000
21,000
4,000
$160,000

$ 32,000
76,000
8,000
23,000
5,000
$144,000

118,000
641,000
$919,000

106,000
614,000
$864,000
(continued)

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VILLAGE OF ROSNER ENTERPRISE FUND


Statements of Net Assets (concluded)
June 30, 2006 and 2005

June 30,
2006
Liabilities
Current liabilities:
Vouchers payable
Accrued liabilities
Total current liabilities
Liabilities payable from restricted assets:
Interest payable
Current portion of revenue bonds
Customers deposits
Total liabilities payable from restricted assets
Long-term debt:
10% revenue bonds payable
Total liabilities

2005

$ 67,000
46,000
$113,000

$ 73,000
39,000
$112,000

$ 20,000
$ 50,000
55,000
$125,000

$ 20,000
-050,000
$ 70,000

$350,000
$588,000

$400,000
$582,000

$241,000
43,000
47,000
$331,000

$214,000
36,000
32,000
$282,000

Net Assets
Net assets:
Invested in capital assets, net of related debt
Restricted for revenue bonds retirement
Unrestricted
Total net assets

Additional Information for the Fiscal Year Ended June 30, 2006
(1) The 10% revenue bonds, which pay interest January 1 and July 1, are due serially
$50,000 a year beginning July 1, 2006.
(2) New customers deposits totaled $7,000; refunds of customers deposits amounted to
$2,000.
(3) Capital assets with a carrying amount of $22,000 were disposed of for that amount;
new capital assets were acquired for cash.
(4) A $55,000 transfer of net assets was made to the General Fund.
(5) The short-term investments are cash equivalents.
Instructions
Prepare a statement of cash ows (indirect method) for the Village of Rosner Enterprise
Fund for the scal year ended June 30, 2006.