GOVERNMENTAL AND NONPROFIT

ACCOUNTING 10TH EDITION SMITH

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Governmental and Nonprofit Accounting: Theory and Practice, 10e (Freeman)
Problems – Chapter 6

Problem 1 – Matching: Match the Resource Flow with the Type of Expenditure

Listed below in the left column are events that may or may not be expenditures for the General Fund.
Listed in the right column are the classifications of expenditures for governmental funds. Correctly match
each event with the appropriate expenditure classification. Unless specifically stated otherwise, assume
all amounts have been incurred. If the event is not an expenditure, state how the event would be reported
in the current year General Fund financial statements.

1. Interest on short-term debt. A. Expenditures – Operating

2. Purchase of a vehicle that will be used in the Library B. Expenditures –
(accounted for as a Special Revenue Fund). Intergovernmental
3. Signing a capital lease. C. Expenditures – Capital Outlay
4. Claim against the government to be paid in a future D. Expenditures – Debt Service –
year. Principal
5. Borrowing money with a short-term note. E. Expenditures – Debt Service –
6. Year-end accrual of interest on long-term debt. Interest
7. Compensated absences earned and paid during the F. Not an expenditure
year. G. Event reduces expenditure (also
8. Paying salaries and wages. identify which of above
9. Amounts withheld from salaries and wages for taxes expenditures would be reduced)
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 and Social Security/Medicare.
10. Ordering supplies and materials (assume the
purchases method is used).
11. Receiving supplies (assume the purchases method is
used).
12. Using supplies (assume the purchases method is
used).
13. Ordering supplies and materials (assume the
consumption method is used).
14. Issuing long-term debt.
15. Receiving supplies (assume the consumption method
is used).
16. Using supplies (assume the consumption method is
used).
17. Capital lease principal payment.
18. The General Fund reimbursed the Special Revenue
Fund (SRF) for salaries paid originally from SRF
resources.
19. Capital lease interest payment.
20. Repayment of a short-term note.
21. The General Fund received a payment from the
Library Fund (SRF) for its portion of the government
electricity bill.
22. Year-end accrual of interest on short-term note.
23. Compensated absences earned in the current year but
to be paid in future years.
24. Claim against the government to be paid in the
current year.
25. The General Fund received an electric bill for the
entire government. The General Fund paid the bill.
26. The General Fund transferred money to the Capital
Projects Fund to provide financing for the
construction of a major facility.

Answers:
1. E
2. F – reported as a capital outlay expenditure by the SRF
3. C
4. F – reported as a general long-term liability until paid
5. F – Balance Sheet liability
6. F – not accrued
7. A
8. A
9. F – Balance Sheet liability
10. F – reported as an encumbrance until received
11. A
12. F – expenditure reported when received
13. F – reported as an encumbrance until received
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14. F – Other financing source
15. F – Balance Sheet asset
16. A
17. D
18. A
19. E
20. F – reduction of Balance Sheet liability
21. G – A
22. E
23. F – general long-term liability
24. A
25. A
26. F – Other financing use – transfer

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Problem 2 – Inventory Journal Entries

A government with a beginning inventory of supplies of $100 in its General Fund and had the
following transactions during the year (all amounts are in thousands).

Transactions:

1. Ordered supplies with an estimated cost of $3,150.

2. Received supplies with an actual invoice cost of $2,920. No payment was made upon
receipt; $2,950 was the encumbered amount.
3. Paid $2,300 on account for supplies received in #2.
4. During the year, the inventory warehouse issued $2,900 in supplies to general
government departments.
5. The ending physical inventory of General Fund supplies found $150 on hand at year end.

Requirements:

A. Consumption method of accounting for inventory

1. Prepare the general journal entries required to account for the previous
information.
2. Indicate the effects of the general journal entries on the Balance Sheet
equation.
3. Indicate amounts reported on Balance Sheet and Statement of Revenues,
Expenditures, and Changes in Fund Balance with respect to the Inventory of
Supplies.
B. Purchases method of accounting for inventory
1. Prepare the general journal entries required to account for the previous
information.
2. Indicate the effects of the general journal entries on the Balance Sheet
equation.
3. Indicate amounts reported on Balance Sheet and Statement of Revenues,
Expenditures, and Changes in Fund Balance with respect to the Inventory of
Supplies.

Answers:

A1. Consumption method journal entries (assuming perpetual inventory system).

# Accounts Debit Credit

1 Encumbrances 3,150
Encumbrances Outstanding 3,150

2a Encumbrances Outstanding 2,950

Encumbrances 2,950

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# Accounts Debit Credit
2b Supplies Inventory 2,920
Vouchers Payable 2,920

3 Vouchers Payable 2,300

Cash 2,300

4 Expenditures – Operating 2,900

Supplies Inventory 2,900

5 Supplies Inventory 30
Expenditures – Operating 30

Beginning Inventory, Supplies 100

Supplies received during year 2,920
Supplies issued during year (2,900)
Ending Inventory – per books 120
Ending Inventory – per physical count 150
Inventory Overage 30

Alternative entries for 2b, 4, and 5 – assumes periodic

inventory system.
2b Expenditures – Operating 2,920
Vouchers Payable 2,920

4 No entry required – expenditures already recorded in 2b.

5 Supplies Inventory 50
Expenditures – Operating 50

Beginning Inventory, Supplies 100

Ending Inventory, Supplies 150
Increase in Inventory 50

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A2. Effects of journal entries on the Balance Sheet equation using regular entries (perpetual
inventory system)

Trans Deferred Deferred Fund

# Assets Outflows Liabilities Inflows Balance
1 NE NE NE NE NE
2a NE NE NE NE NE
2b 2,920 NE 2,920 NE NE
3 (2,300) NE (2,300) NE NE
4 (2,900) NE NE NE (2,900)
5 30 NE NE NE 30

Note: Since the effects for Deferred Outflows and Deferred Inflows are all NE, you may
choose to omit those columns.

Effects of journal entries on the Balance Sheet equation using regular entries (periodic
inventory system).

Trans Deferred Deferred Fund

# Assets Outflows Liabilities Inflows Balance
1 NE NE NE NE NE
2a NE NE NE NE NE
2b NE NE 2,920 NE (2,920)
3 (2,300) NE (2,300) NE NE
4 NE NE NE NE NE
5 50 NE NE NE 50

A3. Financial Statement Reporting

Balance Sheet
Asset – Inventory 150
Fund Balance – Nonspendable 150

Operating Statement
Expenditures – Operating 2,870

B1. Purchases method journal entries

# Accounts Debit Credit

1 Encumbrances 3,150
Encumbrances Outstanding 3,150

2a Encumbrances Outstanding 2,950

Encumbrances 2,950
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 # Accounts Debit Credit

2b Expenditures – Operating 2,920

Vouchers Payable 2,920

3 Vouchers Payable 2,300

Cash 2,300

4 No Entry Required

5 Supplies Inventory 50
Other Financing Source – Increase in Inventory 50

Beginning Inventory, Supplies 100

Ending Inventory, Supplies 150
Increase in Inventory 50

B2. Effects of journal entries on the Balance Sheet equation

Trans Deferred Deferred Fund

# Assets Outflows Liabilities Inflows Balance
1 NE NE NE NE NE
2a NE NE NE NE NE
2b NE NE 2,920 NE (2,920)
3 (2,300) NE (2,300) NE NE
4 NE NE NE NE NE
5 50 NE NE NE 50

B3. Financial Statement Reporting

Balance Sheet
Asset – Inventory 150
Fund Balance – Nonspendable 150

Operating Statement
Expenditures – Operating 2,920
Other Financing Source – Increase in Inventory 50

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Problem 3 – Capital Leases

A general government department of the City of Rocky Flats leased specialized equipment under
a multi-year, noncancelable lease agreement that qualifies as a capital lease. The lease required a
down payment of $500 and the present value of the minimum lease payments (i.e., the
capitalizable cost of the leased asset) was $5,000. The implicit rate of interest on the lease is
10%. Subsequent lease payments of $750 are required annually beginning in 20X2. All
amounts are in thousands of dollars.

Transactions:

1. The lease was signed on March 1, 20X1.

2. Prepare any adjusting entries required at December 31, 20X1, the end of Rocky Flats
fiscal year.
3. The City made the required payment on February 28, 20X2.

Requirements:

1. Prepare the general ledger journal entries for the transactions for the General Fund. If no
entry is required, do not leave it blank. State "No Entry Required" and briefly explain
why.
2. Indicate the effects of the transaction on the accounting equations for the General Fund
and the General Capital Assets and General Long-Term Liabilities accounts. Do not
leave a cell blank.
3. How will the capital lease be reported on the General Fund financial statements for the
year ended December 31, 20X1?

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Answers:

1. Journal Entries

# Accounts Debit Credit

1 Expenditures – Capital Outlay 5,000
Cash 500
Other Financing Sources – Capital Lease 4,500

2 No entry required at December 31. The lease payment is

not due until next year, and it is in-substance debt service
on general long-term debt. Therefore, there is no accrual
of interest or principal expenditures.

3 Expenditures – Debt Service – Interest (4,500 x 10%) 450

Expenditures – Debt Service – Principal 300
Cash 750

2. Effects on accounting equations for the General Fund and the General Capital Assets and
General Long-Term Liabilities accounts.

Trans Fund Net

# Assets Liabilities Balance GCA GLTL Position
1 (500) NE (500) 5,000 4,500 500
2 NE NE NE NE NE NE
3 (750) NE (750) NE (300) 300

3. Capital lease reporting in the General Fund Financial Statements

Balance Sheet – no effect. No asset or liability to report.

Operating Statement – as noted in the journal entry, Capital Outlay expenditure and OFS
for capital lease will be reported.

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Problem 4 – Other Expenditure Transactions

Listed below are various transactions affecting the City of Highland Flats General Fund for the
fiscal year ending June 30, 20X4.

Transactions:

1. Near the beginning of the year, the City was sued by one of its residents claiming that the
resident was injured due to a hazardous sidewalk. The resident is asking for damages of
$500,000. The City expects to win the case.
2. Later in the year, the City decided to settle the aforementioned lawsuit on the advice of its
legal counsel. The government settled the suit for $300,000, paying $100,000 now, and
$50,000 on August 1 for each of the next 4 years. For these types of lawsuits, the City is
self-insured for the first $50,000 and 100% insured for the remaining payments. Because
of a cash flow issue, the city borrowed $50,000 on a 6 month, 3% note that comes due 2
months after year-end. No money was received from the insurance company by year-
end, but the total amount due was expected by August 15.
3. The city’s employees earned $25,000 in compensated absences during the year. Of this
amount, $10,000 was paid during the year. In addition, $5,000 due at the end of last year
was paid this year, and another $7,500 will be paid in the first 45 days of the following
fiscal year. Finally, $7,000 earned in earlier years was paid this year.
4. The actuarial amount owed to the City’s OPEB Plan for the year is $20,000. Of this
amount, only $5,000 – the approximate amount of retiree healthcare costs paid for the
year – was paid to the plan. The balance will be paid in later years.

Requirements:

1. Prepare the journal entries for the above events, including any necessary year-end
adjusting entries. If a transaction requires no entry, state “No entry required” and explain
why.
2. Demonstrate the effects of these transactions on the accounting equation for the General
Fund and the General Capital Assets and General Long-term Liabilities accounts.

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Answers:

1. Journal entries:

# Accounts Debit Credit

1 No entry required. At this time a loss is not probable and
the amount of the loss cannot be reasonably estimated.
Therefore, no liability exists.

2a Expenditures – Operating 150,000

Due from Insurance Company 100,000
Cash 100,000
OFS – Insurance Proceeds 100,000
Claims Payable 50,000

b Cash 50,000
Note Payable 50,000

c Expenditures – Debt Service – Interest 500

Interest Payable (50,000 x 3% x 4/12) 500

3 Expenditures – Operating (10,000 + 7,500 + 7,000) 24,500

Compensated Absences Payable 5,000
Cash (10,000 + 5,000 + 7,000) 22,000
Compensated Absences Payable 7,500

4 Expenditures – Operating 5,000

Cash 5,000

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2. Effects on accounting equations for the General Fund (Deferred Outflows and Deferred
Inflows have been excluded since all are no effect) and the General Capital Assets and
General Long-Term Liabilities accounts.

Trans Fund Net

# Assets Liabilities Balance GCA GLTL Position
1 NE NE NE NE NE NE
2a NE 50,000 50,000 NE 150,000 (150,000)
2b 50,000 50,000 NE NE NE NE
2c NE 500 (500) NE NE NE
3 (22,000) 2,500 (24,500) NE 500 (500)
4 (5,000) NE (5,000) NE 15,000 (15,000)

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