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Accounting
Jeter ● Chaney

Introduction to
Accounting
For State and Local
Governmental Units

1
Prepared by Sheila Ammons, Austin Community College
Learning Objectives
• Identify the issues involved in developing standards for
nonprofit organizations.
• Describe the broad categories of government fund
entities.
• Distinguish between a general fund and a special
revenue fund.
• Explain the use of a capital projects fund.
• Describe the purpose of a debt service fund.
• Explain the use of a permanent fund.

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Learning Objectives
• Distinguish proprietary funds from government funds.
• Describe where capital assets and long-term obligations
are reported in government financial statements.
• Describe the changes in reporting requirements under
GASB Statement No. 34.
• Explain the benefits of government-wide statements.
• Describe the types of interfund activities.

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Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.
Governmental Accounting
• GASB’s Statement No. 34, issued June 1999, requires:
– Financial statements using government-wide (entity-
wide) approach. (This does not eliminate traditional
fund accounting.)
– Statements emphasizing major funds.
– Management’s discussion and analysis (MD&A).
• GASB Statement No. 34 requires “full accrual”
accounting for all government-wide statements (i.e.,
flow of economic resources approach).

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Reporting Model: Minimum
Information Required
Government-wide Fund Financial Statements
Statement of net position Governmental funds:
Statement of activities Balance sheet
Statement of revenues, expenditures,
and changes in fund balances
Reconciliation to government-wide
statements
Proprietary funds:
Balance sheet or statement of net position
Statement of revenues, expenses,
and changes in net position
Statement of cash flows—direct format
Fiduciary funds:
Statement of fiduciary net position
Statement of changes in net position 5
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.
History of Governmental Accounting
Standards
• GASB was established (1984):
– Separate board under oversight of Financial
Accounting Foundation (FAF).
– Responsible for establishing financial and reporting
standards for governments.
– GASB endorsed prior statements and interpretations
of the NCGA, as well as standards embodied in the
1974 AICPA Industry Audit Guide.
– Pronouncements of the GASB are codified. The
codification is updated annually.

LO 1 Issues involved in developing standards. 6


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History of Governmental Accounting
Standards
Hierarchy of Standards
–GASB Statement No. 55 establishes the hierarchy used to
establish generally accepted reporting standards for all
state and local government-owned entities, including
government-owned colleges and universities, health
care providers, and utilities.
– The GASB and the FASB each has primary
responsibility for setting standards for entities under its
jurisdiction.
– Pronouncements of one Board should not be mandatory
for entities under the jurisdiction of the other Board,
unless designated as such by the primary Board.

LO 1 Issues involved in developing standards.


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The Structure of Governmental
Accounting
• Eleven Categories of Fund Entities
– Governmental Funds (expendable)—
– Focus on sources, use, and balances of current
financial resources.
–General Fund
–Special Revenue Funds
–Capital Projects Funds
–Debt Service Funds
–Permanent Funds

LO 2 Broad categories funds. 8


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The Structure of Governmental
Accounting
• Eleven Categories of Fund Entities (continued)
– Proprietary Funds (nonexpendable)—
– Focus on determination of operating income,
changes in
net position, financial position, and cash flows.
–Enterprise Funds
–Internal Service Funds

LO 2 Broad categories funds . 9


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The Structure of Governmental
Accounting
• Eleven Categories of Fund Entities
– Fiduciary Funds
– Reports assets held in a trustee or agency capacity
for others.
– Focus on net position.
–Pension Trust Funds
–Investment Trust Funds
–Private-Purpose Trust Funds
–Agency Funds

LO 2 Broad categories funds . 10


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Governmental Fund Entities
.
General Fund
• Used to account for and report all financial resources not
accounted for and reported in another fund.
Special Revenue Fund
• Used to account for and report the proceeds of specific revenue
sources that are restricted or committed to expenditure for
specified purposes other than debt service or capital projects.
– The term proceeds of specific revenue sources establishes
that one or more specific restricted or committed revenues
should be the foundation for a special revenue fund.

LO 3 General fund vs special revenue fund. 11


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Governmental Fund Entities
• In special revenue funds, as in the general fund, the
• following steps are taken:
– A budget is established and recorded in the accounts.
– Encumbrances are used to control budgeted
expenditures.
– Fixed assets are only reported on government-wide
statement.
– Depreciation is not recorded.
– Long-term debt is only reported on government-wide
statements.

LO 3 General fund vs special revenue fund. 12


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Governmental Fund Entities
Capital Projects Fund
• Used to account for and report financial resources that
are restricted, committed, or assigned to expenditure for
capital outlays, including the acquisition or construction
of capital facilities and other capital assets. Capital
project funds exclude those types of capital-related
outflows financed by proprietary funds or for assets that
will be held in trust for individuals, private
organizations, or other governments.

LO 4 Capital projects fund. 13


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Governmental Fund Entities
• Capital Projects Fund
– Resources to acquire or construct major capital facilities.
– Resources for the acquisition include
– proceeds of long-term debt issues,
– grants or payments from other governmental units,
– funds from private sources,
– transfers of current revenues from other
governmental funds,
– special assessments, and
– other sources.

LO 4 Capital projects fund. 14


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Governmental Fund Entities – Capital
Projects
• Exercise 18-12: The town of Aberdeen authorized a fire station to be
built at an estimated cost of $150,000. On January 1, 2015, 6% bonds
with a par value of $150,000 were authorized and issued. Any
difference between the par value of the bonds and the proceeds from
their sale is transferred to the Debt Service Fund. The following
transactions relating to the Capital Project Fund occurred during 2015.
– Encumbrances were recorded in the amount of $150,000.
– Proceeds from bond issue were received in amount of $155,000.
– Premium on bond issue was transferred to the Debt Service Fund.
– Contract billings of $150,000 were approved for payment on the
completion of the fire station.
– Contractor was paid except for retention of 5% of the contract.
– Final contract price was paid. The nominal accounts were closed.

LO 4 Capital projects fund. 15


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Governmental Fund Entities – Capital
Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects
Fund to record the transactions and events.
1. Encumbrances were recorded in the amount of $150,000.

Encumbrance 150,000
Fund Balance - Assigned (encumbrances) 150,000

2. Proceeds of $155,000 from bond issue were received.

Cash 155,000

Bond Issue Proceeds 155,000

LO 4 Capital projects fund. 16


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Governmental Fund Entities – Capital
Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects
Fund to record the transactions and events.

3. Premium was transferred to the Debt Service Fund.

Transfer to Debt Service Fund 5,000


Cash 5,000

LO 4 Capital projects fund. 17


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Governmental Fund Entities – Capital
Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects
Fund to record the transactions and events.
4. Contract billings of $150,000 were approved for payment on the
completion of the fire station.

Fund Balance - Assigned (encumbrances) 150,000


Encumbrances 150,000

Expenditures 150,000

Contracts Payable 150,000

LO 4 Capital projects fund. 18


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Governmental Fund Entities – Capital
Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects
Fund to record the transactions and events.
5. Contractor was paid except for retention of 5% of the contract.

Contracts Payable 150,000


Contracts Payable – Retained Percentage 7,500

Cash 142,500

LO 4 Capital projects fund.


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Governmental Fund Entities – Capital
Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects
Fund to record the transactions and events.
6. Final contract price was paid. The nominal accounts were closed.

Contracts Payable - Retained Percentage 7,500


Cash 7,500

Bond Issue Proceeds 155,000


Transfer to Debt Service Fund 5,000

Fund Balance - Unassigned 150,000

Fund Balance - Unassigned 150,000


Expenditures 150,000

LO 4 Capital projects fund.


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Governmental Fund Entities
Debt Service Fund
• Used to account for and report financial resources that
are restricted, committed, or assigned to expenditure for
principal and interest. Debt service funds should be used
to report resources if legally mandated (i.e. debt payable
from property taxes). Financial resources that are being
accumulated for principal and interest maturing in future
years should be reported in debt service funds.

LO 5 Debt service fund. 21


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Governmental Fund Entities
Debt Service Fund
• Resources for, and the payment of, general long-term debt
principal and interest.
• Financed by the following sources
1) General property tax
2) Sales tax or other specified tax revenues
3) Transfers of other fund revenues
4) Special assessments
5) Revenue from investment of debt service fund
resources. There is no interest payable accrual on
general obligation long-term debt.

LO 5 Describe a debt service fund. 22


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Governmental Fund Entities – Debt
Service
• Problem 18-1: On January 1, 2015, the City of Cape
May authorized and issued $200,000 of 5%, three-year
term bonds. Interest is payable annually on December
31. A debt service fund is established to accumulate the
necessary resources to pay the annual interest on the
bonds and to redeem the bonds when they mature. The
required annual addition for principal and interest will
be transferred annually to the debt service fund from the
general fund. It is assumed that amounts received by the
debt service fund for the payment of principal can be
invested at an annual return of 8%.
LO 5 Debt service fund.
23
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Governmental Fund Entities – Debt
Service
Problem 18-1: Prepare a schedule to calculate the annual required
additions and annual required earnings to repay the principal on the
bonds assuming the first installment for principal and interest is
transferred to the debt service fund from the general fund on Dec. 30,
2015.
Required Increase Required
Principal Required In Fund Fund
Year Payment Earnings Balance Balance
2015 61,067 - 61,607 61,607
2016 61,607 4,929 66,536 128,143
2017 61,607 10,250 71,857 200,000

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Governmental Fund Entities – Debt
Service
Problem 18-1: Prepare the journal entries to be recorded by the debt
service fund as follows:
1. The 2015 budget entry.

Authorized Transfer from the General Fund 71,607


Estimated Revenues 4,929
Appropriations ($200,000  5%) 10,000
Fund Balance - Committed 66,536

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Governmental Fund Entities – Debt
Service
Problem 18-1: Prepare the journal entries to be recorded by the debt service
fund as follows:
2. The entry to record the annual transfer from the general fund.

Cash 71,607
Transfer from General Fund 71,607

3. The entry to record the annual payment of interest.

Expenditures - Interest 10,000


Cash 10,000

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Governmental Fund Entities – Debt
Service
Problem 18-1: Prepare the journal entries to be recorded by the debt
service fund as follows:
4. The entry to record $4,929 in interest income for 2015.

Cash 4,929
Interest income 4,929

27
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Governmental Fund Entities – Debt
Service
Problem 18-1: Prepare the journal entries to be recorded by the debt
service fund as follows:
5. The entry(s) to close the accounts at the end of 2015.

Appropriations 10,000
Expenditures 10,000

Interest Income 4,929


Transfer from General Fund 71,607
Authorized Transfer from the General Fund 71,607
Estimated Earnings 4,929

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Governmental Fund Entities
Permanent Fund
• Used to account for and report financial resources that
are restricted to the extent that only earnings, and not
principal, may be used for purposes that support the
reporting government’s programs – that is, for the
benefit of the government or its citizenry. Permanent
funds do not include private-purpose trust funds, which
should be used to report situations in which the
government is required to use the principal or earnings
for the benefit of individuals, private organizations, or
other governments.
LO 6 Explain the use of a permanent fund.
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Governmental Fund Entities
Permanent Fund
• Two types of Nonexpendable Trust funds:
– Principal must be retained intact but earnings may be
expended.
– Principal and the earnings must be retained intact.
• Established as a result of a gift, a bequest, or some other
action that requires the governmental unit to act in a
fiduciary capacity.

LO 6 Explain the use of a permanent fund.


30
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Proprietary Funds
• Proprietary fund reporting focuses on determination of
operating income, changes in net position (or cost
recovery), financial position, and cash flows.
• Net Position Approach: All changes in net position are
included somewhere in the “statement of activities.”
• Proprietary funds include:
– Enterprise Funds.
– Internal Service Funds.

LO 7 Proprietary funds. 31
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Proprietary Funds
Enterprise Funds
• Activity for which a fee is charged to external users for
goods and services.
• Common examples:
– Public utilities (water or electricity)
– Airports
– Transportation systems
– Parking lots and garages
– Recreational facilities (swimming pools)

LO 7 Proprietary funds.
32
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Proprietary Funds
Enterprise Funds
– Resources may come from contributions or from the
proceeds of long-term debt issues or both.
– Contributions may be obtained from
• Other governmental units,
• Resources of the General Fund
• Property owners,
• Subdivision developers, or
• Customers.

LO 7 Proprietary funds.
33
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Proprietary Funds
Enterprise Funds
– Activities are required to be reported as Enterprise Funds
if any one of the following is met:
1. The activity is financed with debt that is secured solely
by a pledge of the net revenues from fees and charges
of the activity.
2. Laws or regulations required that costs of providing
services must be recovered with fees and changes
(rather than with taxes or similar revenues).
3. Pricing policies establish fees and charges designed to
recover its costs, including capital costs.
LO 7 Proprietary funds.
34
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Proprietary Funds
Internal Service Funds
• Activity that provides goods or services to other funds,
departments, or agencies of the primary governmental
unit and its component units, or to other governments,
on a cost reimbursement basis.
• Should be used only if the reporting government is the
predominant participant in the activity.
– Otherwise, the activity should be reported as an
Enterprise Fund.

LO 7 Proprietary funds. 35
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Proprietary Funds
Internal Service Funds
– Common examples:
• Central computer facilities,
• Central garages and motor pools,
• Central purchasing and stores departments, and
• Central printing departments
– Resources obtained from contributions from
• Other funds,
• Proceeds from sale of general obligation bonds, or
• Long-term advances from other funds.
LO 7 Proprietary funds.
36
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Fiduciary Funds
Trust and Agency Funds
– Fiduciary funds are used to report assets held in a trustee
or agency capacity and therefore cannot be used to
support the government’s own programs.
– Purely custodial, and assets always equal liabilities.
– Fiduciary funds include:
• Pension trust funds,
• Investment trust funds,
• Private-purpose trust funds, and
• Agency funds.

37
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Capital Assets and Long-Term
Debt
• The purchase of capital assets are recorded as an
expenditure in the governmental fund statements.
• Proceeds from the issuance of long-term debt is
recorded as Other Financing Sources in the
governmental fund statements.
• Under GASB Statement No. 34, governments report all
capital assets, including infrastructure assets, and
unmatured general long-term debt on a government-
wide basis and report depreciation expense as a charge
to operations in each period.

LO 8 Describe where capital assets are reported.


38
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External Reporting Requirements (GASB
No. 34)
• The following statements and disclosures are required:
– Governmental Fund Financial Statements
– Proprietary Fund Financial Statements
– Fiduciary Funds (and Similar Component Units)
Financial Statements
– Government-wide Statements
– Combining Statements for Major Component Units
– Notes to Financial Statements
– Required Supplementary Information (RSI)

LO 9 GASB 34 reporting requirements. 39


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Government Fund-Based Reporting
• Governments are required only to report the major
funds in separate columns, but have flexibility to report
more funds separately if desired.
• Individual governmental funds and proprietary funds
are major funds if the total assets, liabilities, revenues,
or expenditure/expenses of that individual fund are at
least 10% of the corresponding total for the relevant
fund category (governmental or enterprise funds) and at
least 5% of the corresponding total for all governmental
and enterprise funds combined.

LO 9 GASB 34 reporting requirements. 40


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Government-wide Reporting
• Primary financial statements under GASB Statement
No. 34 are prepared on a government-wide basis.
• Statements are prepared on the accrual basis using the
flow of economic resources concept.
• These primary statements include:
1) The statement of net position.
2) The statement of activities.
• Governmental-wide statement of cash flows is not
required.

LO 9 GASB 34 reporting requirements. 41


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Government-wide Reporting
Statement of Net Position
– Prepared using the accrual basis and includes both
financial and capital resources.
– At a minimum, assets, liabilities, and net position should
be disclosed for each of the following categories:
a) A. Primary Government
1) Government activities
2) Business-type activities
3) Total primary government activities
b) Discretely Presented Component Units

LO 10 Benefits of government-wide reporting. 42


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Government-wide Reporting
Statement of Activities
– Presented using a net cost format.
– Separates revenues into program revenues and
general revenues.
– Expenses are reduced by program revenues resulting
in “net (expense) revenue.”
– General revenues, extraordinary items and special
items, and transfers are reported separately.
– Prepared on a government-wide basis.

LO 10 Benefits of government-wide reporting. 43


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Management’s Discussion and Analysis
(MD&A)
• Required by GASB Statement No. 34.
• Integral part of the annual reporting and should
– provide objective and readable analysis of the
government’s financial activities.
– present both a short-term and a long-term analysis of the
government’s activities.
– discuss the current-year results in comparison with the
prior year.
• Focus is on the primary government (i.e., should distinguish
between the primary government and component units).
LO 10 Benefits of government-wide reporting. 44
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Interfund Activity
• Interfund activity within and among governmental,
proprietary, and fiduciary funds should be classified and
reported as follows:
a) Reciprocal interfund activity
1) Interfund loans
2) Interfund services provided and used
b) Nonreciprocal interfund activity
a) Interfund transfers
b) Interfund reimbursements
LO 11 Types of interfund activity.
45
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Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions
in the proper fund(s). Designate the fund in which each entry is recorded.

1. Bond proceeds of $1,000,000 were received to be used in constructing a


firehouse. An equal amount is contributed from general revenues.

Capital Cash 2,000,000


Projects
Fund Bond Issue Proceeds 1,000,000
Transfer from General Fund 1,000,000

General Transfer to Capital Projects 1,000,000


Fund
Cash 1,000,000
46
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Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions
in the proper fund(s). Designate the fund in which each entry is recorded.

2. $800,000 of serial bonds matured. Interest of $120,000 was paid on


these and other serial bonds outstanding.

Debt Expenditures 920,000


Service
Fund Cash 920,000

47
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Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions
in the proper fund(s). Designate the fund in which each entry is recorded.

3. $8,000 was received as insurance proceeds from the accidental


destruction of a police car costing $24,000.

General Cash 8,000


Fund
Revenue 8,000

48
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Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions
in the proper fund(s). Designate the fund in which each entry is recorded.

4. $120,000 in expendable funds was transferred from the City Parks


Endowment Fund to the City Parks Special Revenue Fund.

Trust Transfer to Special Revenue Fund 120,000


Fund
Cash 120,000

Special Cash 120,000


Revenue
Fund Transfer from Trust Fund 120,000

49
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Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions
in the proper fund(s). Designate the fund in which each entry is recorded.

5. Equipment purchased from general revenues at a cost of $200,000 was


sold for $40,000.

General Cash 40,000


Fund Revenue 40,000

50
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Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions
in the proper fund(s). Designate the fund in which each entry is recorded.

6. The City Water Company (an enterprise fund) issued a bill for $800 for
water provided to the street department’s street cleaner.

Enterprise Due from General Fund 800


Fund
Revenue 800

General Expenditures 800


Fund
Due to Enterprise Fund 800

51
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Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions
in the proper fund(s). Designate the fund in which each entry is recorded.

7. The City Water Company transferred $400,000 in excess funds to the


General Fund.

Enterprise Transfer to General Fund 400,000


Fund
Cash 400,000

General Cash 400,000


Fund
Transfer from Enterprise Fund 400,000

52
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Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions
in the proper fund(s).
8. A central motor pool was established by a contribution of $120,000
from the General Fund, a long-term loan of $80,000 from the City Parks
Special Revenue Fund, and general obligation bond issue proceeds of
$200,000.

Internal Cash 400,000


Service
Fund Contributions from General Fund 120,000
Due to City Parks Special Revenue Fund 80,000
Contributions from General Obligation Bonds 200,000

Continued
53
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Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions
in the proper fund(s).
8. A central motor pool was established by a contribution of $120,000
from the General Fund, a long-term loan of $80,000 from the City Parks
Special Revenue Fund, and general obligation bond issue proceeds of
$200,000.

General Transfer to Internal Service 120,000


Fund
Cash 120,000

Special Due from Internal Service fund 80,000


Revenue
Cash 80,000
Fund
54
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Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions
in the proper fund(s).
9. The Motor Pool Fund billed the General Fund $10,000 and the City
Parks Fund $4,000 for the use of motor vehicles.

Internal Due from General Fund 10,000


Service
Fund Due from City Park Special Revenue Fund 4,000
Revenue 14,000

General Expenditures 10,000


Fund
Due to Internal Service 10,000

continued 55
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Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions
in the proper fund(s).
9. The Motor Pool Fund billed the General Fund $10,000 and the City
Parks Fund $4,000 for the use of motor vehicles.

Special Expenditures 4,000


Revenue
Due to Internal Service Fund 4,000
Fund

56
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Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions
in the proper fund(s).
10. Special Assessment Bonds in the amount of $400,000 were retired.
The city has indicated a willingness to guarantee the payment of principal.

Debt Expenditures 400,000


Service
Fund Cash 400,000

57
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Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions
in the proper fund(s).
11. Customers’ deposits of $8,000 for water meters were received by the
City Water Company during the year. The monies are to be held in trust
until the customers request that their services be disconnected and the final
bills are collected.

Agency Cash 8,000


Fund
Customer Deposit Agency Fund 8,000

58
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Governmental Fund Journal Entries
Problem 18-7: Prepare journal entries to record the following transactions
in the proper fund(s).
12. It is determined that the Service Fund will require an annual
contribution of $60,000 and earnings of $6,000 in the current year to
accumulate the amounts necessary to retire general obligation term bonds.

Debt Required Additions 60,000


Service
Fund Required Earnings 6,000
Fund Balance - Unassigned 66,000

59
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