Government & Not-For-Profit Accounting Exam 2 Review
it updated its accounts, but did not close them because the project is not completed and its budget is for the entire project, not for a single period.
State grant received in advance (liability) 1 million Revenue - state grant 1 million
In the year it imposes a special assessment, a gov't should recognize in its gov't-wide statements
The amount of the assessment as both a deferred inflow of resources and an asset
Assume the same facts as the previous question. The amount that city should add to the liability account in the government-wide statement of net position as of year-end 2021 is...
$0.1 million
it transferred 0.12 million to the debt service fund
Due to debt service fund .12 Cash .12
it issued purchase orders and signed construction contracts for $9.2 million
Encumbrances 9.2 reserve for encumbrances 9.2
In its governmental fund statements, a government should recognize revenue from special assessments
In the years in which the assessments become available for expenditure
How should gov'ts report their long-lived assets in their gov't-wide financial statements?
In their gov't-wide financial statements, gov'ts report assets on their statements of activities they report an annual expense for depreciation; on their statement of activities they report their assets at historical cost less accumulated depreciation.
To eliminate anticipated deficit the city opts to sell its city hall to itself for $5 million. Transactions: financing agency pays the city $5 million in 2021 in exchange for "ownership" - carried city hall as general capital asset. Agency acquires the necessary cash by issuing 20-year, 6% notes. The notes will be repaid in 20 annual installations of $435,920. The notes are guaranteed by the city at large - liability payable from the general fund. The agency leases the city hall back to the city at large - lease payments from general fund. Journal entries.
Cash $5 million Proceeds from sale and leaseback $5 million Capital assets - expenditure 5 million Other financing sources - capital lease 5 million first payment: Debt service expenditure - lease interest $300,000 Debt service expenditure - lease principal $135,920 Cash $435,920
It transferred .12 million from the capital projects fund
Cash .12 million Due from capital projects fund .12 million
it sold the investments for .85 million, the difference between selling price and cost representing interest earned.
Cash .85 million Investments .8 million Interest revenue, investments .05 million
It received the $1 million grant from the state, recognizing it as a liability until it incurred at least $1 million in construction costs
Cash 1 million State grant received in advance (liability) $1 million
during the year, the gov't collected 2 million in assessments and 0.4 million in interest. During the first 60 days of the following year it collected an additional .1 million in assessments and .01 million in interest, both of which were due the previous year.
Cash 2.4 million Assessments receivable 2 million Interest revenue, assessments .4 million Assessments not yet recognized as revenue (deferred inflow) 2.1 million interest receivable on assessments .01 million revenue from assessments 2.1 million interest revenue, assessments .01 million
It sold 5 million of its investments for $5.14 million, the excess of selling price over cost representing interest earned. By year-end the investments still on hand had increased in value by $0.06 million, an amount also attributable to interest earned.
Cash 5.14 Investments 5 investment (interest) revenue .14
Pacific independent school district issued $100 million of general obligations bonds to finance the construction of new schools. The bonds were issued at a discount of $0.6 million, but the project will still cost $100 million. Record journal entries
Cash 99.4 million other financing sources - bond proceeds (bond discount ) 0.6 million Other financing sources - bond proceeds (face value) $100 million Due from general fund $0.6 million Other financing sources - nonreciprocal transfer from the general fund $0.6 million
Record journal entries in governmental funds: In 1993, the city constructed the building at a cost of $1.5 million. Of this amount, $1 million was financed with bonds and the balance from unrestricted city funds.
Construction costs - expenditures 1.5 million Cash 1.5 million
The risk that a company will go bankrupt and thereby be unable to repay a bond that gov't holds as an investment as required is know as
Credit risk
Record journal entries in governmental funds: in the 15 years from 2004 to 2018, the city recorded depreciation (as appropriate). Depreciation was calculated by dividing the underpreciated balance of the original cost, plus the costs of renovation, over the anticipated remaining life of 25 years.
Depreciation not recorded in gov't funds
It issued $8.5 million in bonds at a premium of $0.30 million and incurred $0.18 million in issue costs. The premium, net of issue costs, is to be transferred to a newly established debt service fund
Estimated other financing sources - bond proceeds $8.5 Estimated revenues - state grant $1 million Estimated Revenues - interest 0.20 Estimated other financing sources - transfer from the general fund 0.48 Appropriations - construction cost 10 million Appropriations - bond issue costs 0.18 Cash $8.62 Bond issue costs 0.18 Other financing sources - bond proceeds (face value) 8.50 Other financing sources - bond premium 0.30 Other financing sources - nonreciprocal transfer to debt service fund 0.12 Due to debt service fund 0.12
it prepared its annual budget. It estimated that it would collect from property owners $1.3 million in special assessments and $0.5 million of interst on the unpaid balance of the assessments. In addition, it expected to earn interest of $0.08 million on temporary investments. It would be required to pay interest of $0.68 million and make principal payments of $1.7 million on the outstanding debt. It anticipated transferring $0.5 million from the general fund to cover the revenue shortage.
Estimated revenues -assessments 1.3 million Estimated revenues - interest on assessments .5 million Estimated revenues - investment interest 0.08 million Estimated other financing sources - nonreciprocal transfer from general fund .5 million Appropriations - debt service, principal 1.7 million Appropriations - debt service, interest .68 million
In its fund financial statements, the city would recognize the receipt of a new computer (to be used for general admin purposes) that it had ordered the previous year as an...
Expenditure
Record journal entries in governmental funds: In the same period, the city repaid the $250,000 balance of the debt
Expenditure - debt service 250,000 Cash 250,000
it made its first interest payment of 0.34 million
Expenditure - debt service, interest .34 million Cash .34 million
It recognized its year-end obligation for interest of .34 million and principal of 1.7 million, but did not actually make the required payments.
Expenditure - debt service, interest .34 million Expenditure - debt service, principal 1.7 million matured interest payable .34 million matured bonds payable 1.7 million
Record journal entries in governmental funds: In the same period, the city repaid $750,000 of the bonds.
Expenditure -debt service $750,000 Cash $750,000
Nolanville starts fiscal 2021 with $25K in supplies. During the year it orders $180K in supplies, receives $170K, and uses $190K. It accounts for inventories on the consumption basis. In its 2021 governmental fund financial statements it should report
Expenditure: $190,000 Nonspendable Fund Balance: $0 (Does not make sense to Twedt)
It received invoices totaling 5.7 million. As permitted by its agreement with its prime contractor, it retained (and recorded as a payable) $0.4 million pending satisfactory completion of the project. It paid the balance of $5.3 million
Expenditures - construction 5.7 Cash 5.3 Due to the contractor (retainage payable) .4 Reserve for encumbrances 5.7 Encumbrances 5.7
What is the distinction between expenditures and expenses as the terms are used in governmental accounting?
Expenditures are decreases in net financial resources whereas expenses are reductions in overall net assets.
Assuming same facts, in it's 2021 government-wide statements it should report
Expense: $190,000 inventory: $5000
Nolanville's payroll for one of its departments is $15K per week. It pays its employees on the Thursday of the week following that in which the wages & salaries are earned. In 2021, December 31 fell on a Friday. For the workweek beginning Monday, December 27, 2021, and ending Friday, Dec 31, 2021, employees were paid on Friday, January 7, 2022. For fiscal year 2021, what amount should the city recognize as wage and salary expenditure pertaining to the week ending Friday, December 31, 2021, in its fund statements and in the government wide statements?
Fund Statements: $15,000 Gov't-Wide Statements: $15,000
On December 1, 2021, Nolanville issued $10 million of 30-year, 8 percent bonds for $9.78 million, a price that reflects a semiannual yield of 4.1 percent. Interest ($400,00 per semiannual period) is payable on May 31 and November 30, beginning May 31, 2022. In its 2021 fund and government-wide statements, Nolanville should report an interest expenditure/expense of
Fund statements: $0 Gov't-Wide Statements: $66,830
In May 2023, Nolanville repaid $2 million of the bonds that it had issued in 2021. In its 2023 fund and government-wide statements, Nolanville should report an expenditure/expense relating to the repayment of the bonds of
Fund statements: $2million Gov't-Wide Statements: $2 million
journal entries, both fund and gov't-wide: It sold for $16,000 land that it had acquired 3 years earlier for $28,000
Fund: Cash 16,000 Other financing sources - sale of land 16,000 Gov't-wide: Cash 16000 Loss on sale of land 12000 land 28000
It traded in a four year old sanitation department vehicle for a new model. The old vehicle had initially cost $27,000 , its carrying value at the time of trade was $17,000, and its market value was $13,000. The city paid an additional $39,000 cash for the new model. The fair value of the new model was $52,000
Fund: Expenditures - acquisition of vehicle 39,000 Cash 39,000 Gov't-wide: Vehicle - new 52,000 Accumulated depreciation - old 10,000 Loss on trade-in 4,000 Cash 39,000 Vehicle - old 27,000
journal entries, both fund and gov't-wide: it acquired computer equipment at a cost of $40,000
Fund: Expenditures - acquisition of computers 40,000 Cash 40,000 Gov't-wide: Computers 40,000 Cash 40,000
journal entries, both fund and gov't-wide: It competed construction of a new jail, incurring $245,000 in new costs. In the previous year the city had incurred $2.5 million in construction costs. the project was accounted for in a capital projects fund.
Fund; Expenditures - construction costs 245,000 Cash 245,000 Gov't-wide: Construction in process 245,000 Cash 245,000 Buildings 2,745,000 construction in process 2,745,000
Lemon County permits employees to accumulate any sick leave that they do not take. If employees do not use accumulated sick leave, then they will be paid for those days upon retirement or termination (up to a max of 45 days). In 2021, employees earned $4.0 million in sick leave. Of this amount they were paid $3.1 million. The county expects that they will be paid $0.6 million as they take sick days in future years and $0.2 million upon retirement or termination. The balance of $0.1 million will not have to be paid. Prepare journal entries
General Fund Sick leave expenditure $3.1 million Cash $3.1 million Only 0.2 million to be taken as a retirememnt benefit would be recognized in the schedule of long-term obligations and in the gov't-wide statements.
In 2021, employees of Pecos River County earned $5 million in vacation pay. They were paid for $4.2 million but deferred taking the balance of their earned vacations until subsequent years. Also, employees were paid $0.7 million for vacation earned in previous years. Prepare journal entries.
General Fund Vacation pay expenditure $4.2 million Cash $4.2 million Vacation pay expenditure $0.7 million Cash $0.7 millon
Although Statement No. 34 requires that infrastructure assets be accounted for similar to other capital assets, it allows for a major exception with regard to depreciation. What is that exception?
If a gov't satisfies certain conditions, then it need not charge depreciation.
A city issues $10 million of debt that it uses to acquire an office building. In the year that it issues the debt and acquires the building the city neither makes any interest payments nor repays any of the debt principal. Assume that the city accounts for all capital acquisitions in a capital projects fund and all payments of interest and principal in a debt service fund. The transaction would
Increase expenditures of the capital projects fund
If is sometimes said that in debt service funds the accounting for interest revenue is inconsistent with that for interest expenditure. Explain. What is the rationale for this seeming inconsistency?
Interest (on investments) is generally recognized as revenue is earned (full accrual basis). Interest expenditure, by contrast, should not be accrued; it should be reported as an expenditure only as due.
It invested $7.62 million in short-term securities
Investments 7.62 Cash 7.62
How can gov'ts use derivatives as a means of reducing investment or borrowing risk?
Many types of derivatives are developed to reduce overall investment risk.
What are the differences between market risk, credit risk, and legal risk? Suppose that local gov't invests in 20yr US gov't bonds. Assess each of the 3 risks, and discuss the disclosures required by a gov't on its financial statements?
Market risk is the risk of changing prices. Credit risk is the risk of the other party defaulting. Legal risk is that the transaction being determined to be prohibited by law, regulation or contract.
Record journal entries in governmental funds: In the 10 years from 1993 through 2002, the city recorded depreciation based on an estimated useful life of 30 years.
No entry - depreciation not recorded in funds
When accounting for pension costs, the actuaries estimates and the budget may differ. Which should the entity report for pension costs?
Only the amount of the pension obligation that it intends to liquidate with available resources.
Special assessment debt may be, in economic substance and/or legal form, an obligation of the assessed property owners rather than a government. Should the gov't, therefore, report it in its statements as if it were its own debt? What are the current standards for when a gov't should recognize special assessment debt as its own obligation?
Per current standards, a gov't should report the debt as its own unless: it is prohibited from assuming the debt in the event of property owner default or it is not legally liable for assuming the debt and makes no statement, or gives no indication that it will, or may, honor the debt in the event of default. In their gov't-wide statements, gov'ts would consolidate their capital projects and debt service funds with their other governmental funds. Both revenues and expenses are recognized on a full accrual basis.
Record journal entries in governmental funds: In 2019, the city demolished the building so that the land on which it is situated could be converted into softball fields.
The building was never recorded in a governmental fund; hence it cannot be removed from a governmental fund.
A gov't opts to set aside $10 million of genera fund resources to finance a new city hall. Construction is expected to begin in several years, when the city has been able to accumulate additional resources.
The government may account for the $10 million in a capital projects fund, but in its government-wide statements it may not report the $10 million as "restricted".
Under pressure to balance their budgets, governments at all levels have resorted to fiscal gimmicks, such as delaying wages and salaries of government employees from the last day of the month to the first day of the following month. In the year of the change they thereby had one fewer pay periods. How would the change affect the reported expenditures of a governmental fund under GAAP?
Wages and salaries are accounted for on an accrual basis, therefore it would have no effect on reported expenditures under GAAP.
a gov't owns shares of common stock in a publicly owned company, the stock of which is widely traded. Such an investment would be categorized as
a Level 1 investment
per GASB statement No. 34, roads and bridges should be capitalized and reported as assets on
a gov't-wide statement of net position but not a general fund balance sheet
if a gov't issues bonds at a discount, the discount should be reported as
an amortization expense in the gov't-wide statement of activities in the periods in which the bonds are outstanding
Record journal entries in governmental funds: In 2004, the city renovated the building at a cost of $3 million. the entire amount was financed with unrestricted city funds. the renovation was expected to extend the useful life of a building so that it would last a total of 25 more years - that is, until 2029.
construction costs - expenditures 3 million cash 3 million
Per the modified approach, a government need not
depreciate infrastructure assets
The special assessments bonds were issued at a premium (net of issue costs) of $0.12 million. The gov't recognized the anticipated transfer of the premium to the debt service fund.
due from capital projects funds .12 million Other financing sources - nonreciprocal transfer from capital projects fund .12 million
A state issues bonds, at a premium, to finance road construction projects. The premium would affect
"net position, net investment in capital assets (net of related debt)" in the state's government-wide statement of net position
In 2021, city employees earned $3.6 million in vacation pay that they did not use during the year. The city estimates that of this amount, $2.8 million will be paid in 2022 (out of amounts budgeted for that year), $0.6 million will be paid in subsequent years, and the balance of $0.2 million will not have to be paid. The amount that the city should add to a fund-statement liability account as of year-end 2021 is
$0
In 2021, city employees earned $1.4 million in sick leave that they did not take during the year. The city estimates that of this amount, $0.8 million will actually be paid to employees who take sick leave. Of the balance, $0.1 million will be paid to employees upon their retirement or resignation and $0.5 million will not have to be paid (since employees are limited in the number of sick days that they can carry over from one year to the next). The amount that the city should add to a fund-statement liability account as of year-end 2021 is...
$0 - no obligation until someone is sick
During the year, city employees earned $4 million in sick leave that they did not take during the year. City policy dictates that employees may accumulate up to five years of sick leave and apply it to days lost to illness while they are employed. The city estimates that of the $4 million, $3.5 million will be taken. The remaining $0.5 million will be forfeited.
$0 all around
a gov't acquires as an investment a 30yr US treasury bond having a face value of $10,000. At the end of year 20, with 10 years remaining until maturity, the bond had a fair value of $10,200. Taking into account the discount at which the gov't initially purchased the bond, its amortized cost was $9,760. Assuming that it held the bond in a gov't fund, the gov't should report the bond at a value of
$10,200
Assuming the same facts, the amount that the city should add to the liability account in the government-wide statement of net position as of year-end 2021 is
$3.4 million
A city holds US treasury notes as an investment in a capital projects fund. During the year, the market value of the notes increase by $50,000. Of this amount, $14,000 can be attributed to a decline in prevailing interest rates and $36,000 to interest that has been earned but not yet received. As of year-end, the city should recognize as revenue
$50,000
A government constructed a bridge 20 years ago at a cost of $30 million. The replacement cost of the bridge today would be $90 million. The bridge has a useful life of 60 years. In its gov't-wide statements the gov't should record the bridge at a value, net of accumulated depreciation, of
20 million
what is meant by an in-substance defeasance, and how can a gov't use it to lower its interest costs? How must it recognize a gain or loss on defeasance if it accounts for the debt in a proprietary fund? How do the GASB standards pertaining to in-substance defeasances differ from those of the FASB?
An in-substance defeasance is a process by which a debtor refunds its debt in economic substance but not legal form. The debtor retires the debt in economic substance by setting aside sufficient funds to make all required payments of both interest and principal up to the date at which the debtor may first exercise its call provision. GASB standards require a gov't to recognize defeasance gains or losses over the remaining life of the existing debt or the life of the new debt, whichever is shorter.
It recorded the $8.5 million of assessments receivable, estimating that $0.2 million would be uncollectible
Assessments receivable 8.5 million Allowance for uncollectible accounts .2 million Assessments not yet recognized as revenue (deferred inflow) 8.3 million
A city's electric utility transfers $40 million to its general fund. Of this amount, $30 million is a return of the general fund's initial contribution of "start-up capital." The balance is a payment in lieu of property taxes that a private utility operating in the city would have had to pay. Explain how each element of the transfer would be reported in the general fund's operating statement.
Both the $30 million return of capital and the $10 million payment in lieu of taxes would be reported as nonreciprocal transfers since they represent payments for which no goods or services of equivalent value have been received and for which there is no requirement for repayment. They would be reported in the statement of revenues, expenditures, and changes in fund balance in the section "other financing sources and uses."
In the prior year, the city signed a five-year lease of telecommunications equipment. The equipment had a fair-market value value of $5 million. In the current year, the city made its first required annual rent payment of $1,252,282. This amount reflected an implicit interest rate of 8 percent. The lease qualifies as a capital lease.
Budget and Funds: 1,252, 282 Gov't-wide: 1.4 million
In December, the city transferred $3 million from the general fund to a debt service fund to cover interest on 30-year bonds, which were issued 10 years earlier. Interest of $6 million on the bonds is due each September 30th and March 31st and the $3 million transfer is intended to cover the interest from October 1 through December 31st that will be due the following March 31st. With respect to the funds statement, consider only the effect on the debt service fund and assume that the city prepares an annual budget for the debt service fund.
Budget: $0 Funds: $0 Gov't-wide: $3 million
The gov't of the state in which the city is located is responsible for making 50 percent of the city's required contribution to a firefighters' life insurance fund. In the current year, the state and the city each contributed $4 million of the required $8 million.
Budget: $4 million Funds Statements: $8 million Gov't-Wide: $8 million
Amount of expenditure/expense for fund, gov't-wide, and budget: As budgeted, the city ordered supplies that cost $8 million, received supplies (including those ordered in a prior year) that cost $9 million, paid for supplies that cost $7 million, and used supplies that cost $7.5 million. The city began the year with a supplies inventory that cost $1.5 million.
Budget: 7 million Fund: $7.5 million Gov't-Wide: $7.5 million
Although governments prepare budgets for both capita projects and debt service funds and integrate them into their accounts, budgetary control over these funds is not as essential as it is for other governmental funds. If budgets are prepared for capital projects funds, in what significant way may they differ from those prepared for other funds?
Budgets, and hence budget comparisons, are not as essential for capital projects and debt service funds because they are often on a project basis.
In a recent year, Ives township acquired six police cars at total cost of $200,000. The vehicles are expected to have a useful life of four years. Assuming it leased the cars and agreed to make, starting in the year of acquisition, four equal payments of $63,095, an amount that represents the annuity requried to liquidate a loan of $200,000 at 10% interest. The lease would satisfy the criteria necessary to be accounted for as a capital lease.
Capital assets - expenditure $200,000 Other financing sources - capital lease 200,000 debt service expenditure (lease principal) 43,095 Debt service expenditure (lease interest) 20,000 cash $63,095
In a recent year, Ives township acquired six police cars at total cost of $200,000. The vehicles are expected to have a useful life of four years. Assuming it paid for the cars in cash at the time of acquisition. What is the journal entry?
Capital assets - expenditure 200,000 Cash 200,000
In a recent year, Ives township acquired six police cars at total cost of $200,000. The vehicles are expected to have a useful life of four years. Assuming it issued $200,000 in installment notes to the car dealer, agreeing to repay them in four annual payments of $63,095, starting the year of acquisition.
Capital assets - expenditure 200,000 Other financing sources - capital lease 200,000 Debt service expenditure (note principal) 43,095 Debt service expenditure (interest) 20,000 cash 63,095
Why are general capital assets not recorded in governmental funds?
Capital assets are nonfinancial resources. In governmental funds, the costs of capital assets are reported as expenditures when the assets are acquired rather than first capitalized as assets and subsequently written-off as the assets are consumed.
Pacific independent school district issued $100 million of general obligations bonds to finance the construction of new schools. The bonds were issued at a premium of $0.6 million. Prepare journal entries for capital projects fund
Cash $100.6 million Other financing sources - bonds proceeds (face value) $100 million Other financing sources - bond proceeds (interest) $0.6 million Other financing use - nonreciprocal transfer of bond premium to debt service fund $0.6 million Cash $0.6 million
It purchased 0.8 million of 6month treasury bills as a temporary investment
investments .8 million cash .8 million
Derivatives are
investments, the value of which is derived from some underlying asset or reference note
Under existing federal statutes, arbitrage as it applies to state and local gov'ts
is legal in some circumstances, but the gov't may be required to remit arbitrage earnings to the federal gov't
A city would probably not have to recognize an impairment loss on its hospital building if
its market value declines significantly
A city issues bonds on July 1. Interest of $600,000 is payable the following January 1. On December 31, the city transfers the required $600,000 from its general fund to its debt service fund. On its Dec. 31 debt service fund statement of revenues, expenditures, and changes in fund balance, the city
may report interest expenditure of either $0 or $600,000
A gov't issues, at par, $10 million of 20-year, 6% bonds that it accounts for in its electric utility fund. The bonds do not contain a call provision. Ten years later prevailing interest rates have fallen to 5%. The gov't is considering whether to purchase the outstanding bonds at their market price and retire them. It would acquire the necessary funds by issuing new ten-year, 5% bonds. The transaction would most likely result in
neither an economic gain or loss but an accounting loss
A city assesses property owners $50 million to extend sewer lines and has not collected any of the assessments. It accounts for its wastewater services in an enterprise fund. In its year-end enterprise fund financial statements, the gov't should
recognize the assessments as assessments receivable and revenue
Bond refundings are most likely to result in an economic gain when
the bonds are subject to a call provision
A city should NOT report on its general-fund balance sheet an office building constructed over 100 years ago because?
the measurement focus of the general fund is on current financial resources and the building is not a current financial resource.
Per GASB Statement No. 34, deferred maintenance costs?
need not be explicitly measured or reported when capital assets are depreciated.
