ACC 410 Week 11 Final Exam Chapters 6 Through 15 – Strayer

ACC 410 Government and Not-for-Profit Accounting Week 11 Final Exam – Strayer (All Possible Questions With Answers)

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Chapter 6

Governmental Activities – Accounting for Capital Projects and Debt Service

TRUE/FALSE (CHAPTER 6)

1. The resources to service all long-term debts of the governmental entity are typically accounted for in debt service funds.

2. When governments establish capital projects funds, they may choose to maintain a separate fund for each major project, or they may choose to combine two or more projects in a single fund.

3. GASB Statement No. 34 does not require a budgetary comparison statement for capital projects funds as it does for the general fund and for each major special revenue fund that has a legally adopted annual budget.

4. Capital projects funds do not report long-term obligations in the fund.

5. When bonds are issued at a premium, the capital projects fund can transfer those excess resources to the debt service fund.

6. When bonds are issued at a discount, the debt service fund usually transfers an amount to the capital projects fund to make up for the deficiency.

7. In accounting for costs incurred on a major construction project in a capital projects fund, the construction outlays would be accumulated in a long-term asset account.

8. Debt service funds are maintained to account for resources accumulated to pay interest and principal on general long-term debt—that is, long-term debt associated primarily with governmental activities.

9. In contrast to the accounting for debt service fund expenditures, the interest revenue on bonds held as investments should be accrued in the period the revenue is earned.

10. Special assessments are imposed nonexchange transactions, similar to property tax levies.

11. The interest paid on debt issued for public purposes by state and local governments is generally subject to federal taxation.

12. Nongovernmental not-for-profits must account for defeasances differently than governments.

MULTIPLE CHOICE (CHAPTER 6)

1. The capital project fund of a governmental entity is accounted for using which of the following bases of accounting?
a) Budgetary basis.
b) Cash basis.
c) Modified accrual basis.
d) Accrual basis.

2. In which fund type would a governmental entity’s capital project fund be found?
a) Governmental fund type.
b) Proprietary fund type.
c) Fiduciary fund type.
d) Capital project fund type.

3. The debt service fund of a governmental entity is accounted for using which of the following bases of accounting?
a) Budgetary basis.
b) Cash basis.
c) Modified accrual basis.
d) Accrual basis.

4. In which fund type would a governmental entity’s debt service fund be found?
a) Governmental fund type.
b) Proprietary fund type.
c) Fiduciary fund type.
d) Capital project fund type.

5. With regard to the resources dedicated to the acquisition of fixed assets which will be used in general government activities, which of the following is true?
a) Governments must maintain capital project funds for resources that are legally restricted to the acquisition of fixed assets.
b) Governments may maintain capital project funds for resources that are legally restricted to the acquisition of fixed assets.
c) Governments may account for any resources dedicated (whether legally or not) to the acquisition of fixed assets in any of the governmental funds.
d) Government must account for all resources set aside for fixed asset acquisition in a capital project fund.

6. Salt City issued $5 billion of bonds at face value to fund the reconstruction of the major interstate highways in and around their city. The bond underwriters withheld $2 million for underwriting fees and remitted the balance to the City. Assuming the City maintains its books and records in a manner that facilitates the preparation of fund financial statement, how would the underwriting fee be accounted for in the capital project fund?
a) Reduce Other financing sources $2 million.
b) Reduce Bonds payable $2 million.
c) Increase Expenditures $2 million.
d) It would not be accounted for in the capital project fund.

7. Sugar City issued $2 million of bonds to fund the construction of a new city office building. The bonds have a stated rate of interest of 5% and were sold at 101. Which of the following entries should be made in the Capital Project Fund to record this event?
a) Debit Cash $2.02 million; Credit Bonds Payable $2 million and Premium on Bonds Payable $.02 million.
b) Debit Cash $2.02 million; Credit Bonds Payable $2 million and Other Financing Sources $.02 million.
c) Debit Cash $2.02 million; Credit Other Financing Sources $2.02 million.
d) Debit Cash $2.02 million; Credit Other Financing Sources $2 million and Revenue $.02 million.

Use the following information to answer questions # 8 and #9
Voters in Lincoln School District approved the construction of a new high school and approved a $10 million bond issue with a stated rate of interest of 6% to fund the construction. Bids were received and the low bid was $10 million. When the bonds were issued, they sold for face value less bond underwriting fees of $.5 million. The School Board voted to fund the balance of the construction by a transfer from the general fund.

8. The entry in the capital project fund to record the receipt of the bond proceeds would be
a) Debit Cash $9.5 million; Credit Bonds Payable $9.5.
b) Debit Cash $9.5 million; Credit Other Financing Sources $9.5.
c) Debit Cash $9.5 million and Expenditures $.5 million; Credit Bonds Payable $10 million.
d) Debit Cash $9.5 million and Expenditures $.5 million; Credit Other Financing Sources $10.

9. The entry in the capital project fund to record the additional funding for the construction would be
a) Debit Due from General Fund $.5 million; Credit Other financing Sources $.5 million.
b) Debit Due from General Fund $.5 million; Credit Revenue $.5 million.
c) Debit Cash $.5 million; Credit Due to General Fund $.5 million.
d) Debit Other Financing Sources $.5 million; Credit Due to General Fund $.5 million.

Use the following information to answer questions #10 and #11
Voters in Phillips City approved the construction of a new $10 million city hall building and approved a $10 million bond issue with a stated rate of interest of 6% to fund the construction. When the bonds were issued, they sold for 101. What are appropriate entries related to the premium?

10. In the capital project fund
a) Debit Cash $100.000; Credit Revenues $100,000 ; no other entries required.
b) Debit Cash $100,000; Credit Other Financing Sources $100,000; No other entries required.
c) Debit Cash $100,000; Credit Revenues; ALSO
Debit Other Financing Uses—Nonreciprocal Transfer $100,000; Credit Cash $100,000
d) Debit Cash $100,000; Credit Other Financing Sources—$100,000; ALSO
Debit Other Financing Uses—Nonreciprocal Transfer $100,000; Credit Cash $100,000

11. In the debt service fund
a) Debit Cash $100.000; Credit Revenues $100,000 ; no other entries required.
b) Debit Cash $100,000; Credit Other Financing Sources—Nonreciprocal Transfer $100,000; No other entries required.
c) Other Financing Sources—Nonreciprocal Transfer $100,000; credit Cash $100,000.
d) No entry in the Debt Service Fund

12. Sister City was notified by the State that they had been awarded a $6 million grant to aid in the construction of a senior citizens center. At the time of the notification what is the appropriate entry in the capital project fund (assuming that the City maintains its books and records in a manner to facilitate the preparation of the fund financial statements)?
a) No entry at the time of the notification
b) Debit Grants Receivable $6 million; Credit Revenue $6 million
c) Debit Grants Receivable $6 million; Credit Deferred Revenue $6 million.
d) Debit Grants Receivable $6 million; credit Other Financing Sources—Nonreciprocal Transfer $6 million.

13. Previously Rose City issued bonds with a face value of $10 million to construct a new city maintenance facility. Assuming that the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, what is the appropriate entry when the City receives a progress billing from the contractor?
a) Debit Building; Credit Cash
b) Debit Building; Credit Accounts Payable.
c) Debit Expenditure; Credit Accounts Payable
d) No entry is required.

14. Previously Atomic City had issued bonds with a face value of $10 million to construct a new city hall. Because the money will not be needed for several months, the city invested the bond proceeds in U.S. Government securities. Assuming that the city maintains its books and records in a manner that facilitates the preparation of the fund financial statements, what is the appropriate entry when the City receives interest on the investments?
a) Debit Cash; Credit Revenue.
b) Debit Cash; Credit Other Financing Source
c) Debit Cash; Credit Deferred Revenue
d) No entry required.

15. A City issued bonds for the purpose of financing a major capital improvement. Which fund is the most appropriate fund in which to record the receipt of the bond proceeds?
a) General Fund.
b) Special Revenue Fund.
c) Capital Project Fund.
d) Debt Service Fund.

16. Use of a Debt Service Fund is required
a) When financial resources are being accumulated for the purpose of paying for capital asset acquisition.
b) When financial resources are being accumulated for the purpose of paying principal and interest when it matures.
c) For all bonded debt service payments.
d) For all debt service payments.

17. Six years ago Hill City issued $10 million of 6% term bonds, due 30 years from the date of issue. Interest on the bonds is payable semi-annually on January 1 and July 1. Hill City has a September 30 fiscal year end. The amount of interest payable that would be included on the balance sheet for the debt service fund of Hill City at September 30 would be
a) $ -0-
b) $150,000
c) $300,000
d) $600,000

18. Sue City has outstanding $5 million in general term bonds used to finance the construction of the new City Library. Sue City has a June 30 fiscal year-end. Interest at 6% is payable each January 1 and July 1. The principal of the bonds is due 10 years in the future. The City budgeted the July 1, 1999 interest payment in the budget for the fiscal year ended June 30, 1999. On June 30, cash was transferred from the General Fund to the Debt Service Fund to make the required payment. The maximum amount of interest payable that may be included on the balance sheet of the debt service fund of Sue City at June 30 would be
a) $ -0-
b) $150,000.
c) $300,000.
d) $3,000,00.

Use the following information to answer questions #19 and #20
Calhoun County makes annual transfers from the general fund to the debt service fund to pay principal and interest on long-term debt.

19. When the County makes the transfer the entry in the debt service fund should be
a) Debit Cash; Credit Revenue.
b) Debit Cash; Credit Other Financing Sources.
c) Debit Cash; Credit Interest Payable.
d) Debit Cash with Fiscal Agent; Credit Other Financing Sources.

20. In the debt service fund, what is the appropriate entry when the principal payment is made?
a) Debit Bonds Payable; Credit Cash.
b) Debit Expenditures; Credit Cash.
c) Debit Other Financing Uses—Nonreciprocal Transfer; Credit Cash.
d) No entry is required.

Use the following information to answer questions #21 and #22.
The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks. The citizens agreed to tax themselves for 20 years in an amount sufficient to pay principal and interest on the bonds. The City will oversee the construction of the sidewalks and act as agent for servicing the debt. The City does not guarantee the debt nor does it assume any legal or moral obligation for the bonds.

21. The proceeds of the bond issue should be recorded in which fund of the City of Arlington?
a) Agency Fund.
b) Special Assessment Fund.
c) Capital Project Fund.
d) Debt Service Fund.

22. When the City collects the special tax, the proceeds of that tax should be accounted for in which fund of the City of Arlington?
a) Agency Fund.
b) Special Assessment Fund.
c) Capital Project Fund.
d) Debt Service Fund.

Use the following information to answer questions #23 – #25.

The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks. The citizens agreed to a special tax on their property for 20 years in an amount sufficient to pay principal and interest on the bonds. The City will oversee the construction of the sidewalks and act as agent for servicing the debt. If the special tax is not sufficient to make the principal and interest payments, the City will assume the obligations.

23. The proceeds of the bond issue should be recorded in which fund of the City of Arlington?
a) Agency Fund.
b) Special Assessment Fund.
c) Capital Project Fund.
d) Debt Service Fund.

24. When the City collects the special tax, the proceeds of that tax should be accounted for in which fund of the City of Arlington?
a) Agency Fund
b) Special Assessment Fund.
c) Capital Project Fund.
d) Debt Service Fund.

25. When the City of Arlington levies the special assessment tax, the best entry would be
a) Debit Taxes Receivable; Credit Revenues.
b) Debit Taxes Receivable; Credit Deferred Revenues.
c) Debit Taxes Receivable; Credit Liability.
d) Debit Taxes Receivable; Credit Fund Balance.

26. Adams County has outstanding $10 million in bonds issued by the County to construct a sewer system in a specific area of the county. The taxpayers in that area voted for the construction and the bonds and agreed to tax themselves to pay the principal and interest on the bonds. The County contracted for the construction and issued the bonds but the City assumed no legal or moral obligation for the bonds. If the special tax payments are not sufficient to make the required principal and interest payments, the County will not make up the difference. The $10 million of bonds should appear in which fund financial statements or schedule?
a) Capital Project Fund.
b) Special Assessment Fund.
c) Schedule of Long-term Obligations.
d) The bonds need not appear on the face of the financial statements of Adams County.

27. Harbor City issued 6% tax-exempt bonds and used the proceeds to acquire federal government securities yielding 7%. After paying the interest on the tax-exempt bonds, the City cleared 1%. This is an example of
a) An illegal act.
b) Poor fiscal management.
c) Arbitrage.
d) Debt refunding.

28. The City of St. Joe had outstanding $5 million of 6% bonds with a call provision. Due to changes in the prevailing interest rates, the City issued new bonds at 4.5% and used the proceeds to call the 6% bonds. This is an example of
a) Debt retirement.
b) Debt refunding.
c) In-substance defeasance.
d) Economic defeasance.

29. A governmental entity has elected to issue new debt and use the proceeds to redeem existing debt because there is an economic gain in doing so. There is, however, an ‘accounting loss’ associated with these events. An accounting loss is defined as
a) The present value of the principal and interest payments on the new debt less the present value of the principal and interest payments on the old debt.
b) The present value of the principal and interest payments on the old debt less the present value of the principal and interest payments on the new debt.
c) The cash paid to redeem the old debt less the book value of the old debt.
d) The face value of the new debt less the cash paid to redeem the old debt.

30. The City of Williamsburg decided to defease old 6% bonds carried in its Electric Enterprise Fund with new 4.5% bonds. As a result of the defeasance, the City incurred an accounting loss. This loss should be recognized
a) As an adjustment to retained earnings since it is applicable to prior periods.
b) In the year of the defeasance.
c) Over the remaining life of the old bonds or the new bonds, whichever is shorter.
d) It should not be recognized.

PROBLEMS (CHAPTER 6)

1. The voters of Salt Lake City authorized the construction of a new north-south expressway for a total cost of no more that $75 million. The voters also approved the issuance of $50 million of 5% general obligation bonds. The balance of the necessary funds will come from the following sources: $15 million from a federal grant and $10 million from a state grant. The City controls expenditures in capital project funds through project management The City does not formally incorporate budgetary entries in the capital project fund but it does use encumbrance accounting for control purposes. REQUIRED: Assuming the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, prepare journal entries, in the Capital Project Fund, for the following transactions.

(a) The City issued $50 million of 5% general obligation bonds at 101.

(b) The City transferred the premium to the appropriate fund.

(c) The City incurred bid-related expenditures of $1,000.

(d) The City signed a contract with the lowest competent bidder for $48 million.

(e) The city received notice from the State that the grant had been approved and the proceeds will be forwarded to the City in the State’s current fiscal year.

(f) The City received the federal grant in full.

(g) The City received a progress billing from the contractor for $10 million. The City pays the billing.

2. The City of Eugene has the following balances in the accounts of its capital project fund at year-end. All accounts have normal balances. All amounts are in millions of dollars.
REQUIRED: (a) Prepare an operating statement for the capital project fund.
(b) Prepare a Balance Sheet for the capital project fund.

Cash $ 68
Deferred Revenue $ 5
Expenditures $ 10
Fund Balance—Unreserved $ 14
Grants Receivable $ 10
Other Financing Sources $ 50
Other Financing Uses $ 1
Revenues $ 20

3. In 1999, the voters of Southside City authorized the construction of a new swimming pool for a total cost of no more that $5 million. The voters also approved the issuance of $5 million of 5% general obligation serial bonds to be repaid by a special property tax . Interest on these bonds is payable annually on June 30. On June 30, 1999, the City sold the bonds at 101 and signed contracts for the construction of the swimming pool. Each June 30, beginning in 2000, $250,000 of the bonds mature. If the property tax is not sufficient to make the necessary principal and interest payments the City is obligated to transfer the necessary monies from the general fund to the debt service fund. The City does not formally incorporate budgetary entries in the debt service fund but it does use encumbrance accounting for control purposes. The City has a June 30 fiscal year end.
REQUIRED: Assuming the City maintains it books and records in a manner that facilitates the preparation of the fund financial statements, prepare journal entries, in the Debt Service Fund, for the following transactions.

(a) The City immediately transferred the premium to the Debt Service Fund. The Debt Service Fund may not use the premium to pay principal or interest until the year 2019.

(b) On June 30, Southside City invests the premium in a 10-year 5% Certificate of Deposit at a local financial institution. The Certificate pays interest annually on June 30. The interest is automatically reinvested in the Certificate.

(c) Property taxes in the amount of $300,000 were collected by June 30, 2000. Another $50,000 is expected to be collected by August 31.

(d) The city transferred, to the debt service fund, the cash necessary to make the June 30, 2000 payments. The checks will be mailed on July 1.

(e) The city recognized the interest earned on the Certificate of Deposit.

(f) The city recognizes the appropriate liabilities in the debt service fund.

ESSAYS (CHAPTER 6)

1. The citizens of a defined geographical area of the City of Sale authorized a special assessment to be levied on their property to finance the reconstruction of the sewer system infrastructure that serves the area. The City will solicit bids, oversee reconstruction, issue the debt in the name of the City, and service the debt. The City does not guarantee the debt but the City will collect the special assessments and make principal and interest payments to the bondholders. Discuss the appropriate accounting for the construction phase and the debt service phase of this project. Justify the required accounting and financial reporting for these two phases of this project.

2. What is arbitrage? What are its potential uses and/or abuses? How are potential abuses regulated?

Chapter 7

Governmental Activities – Capital Assets and Investments in Marketable Securities

TRUE/FALSE (CHAPTER 7)

1. General capital assets are distinguished from the capital assets of proprietary funds and fiduciary funds.

2. General capital assets are excluded from governmental funds, themselves, because of the funds measurement focus (current financial resources).

3. In governmental funds, the capital asset costs are reported as expenses when the assets are acquired.

4. At the government-wide level, governments must depreciate inexhaustible assets, such as land, works of art, or historical treasures.

5. Governments do not have to depreciate infrastructure assets if they can demonstrate they are preserving them in a specified condition.

6. Unlike businesses, governments should not capitalize interest on general capital assets that they construct themselves.

7. Most infrastructure assets are the responsibility of the federal government, not state and local governments.

8. Prior to the issuance of GASB Statement No. 34, state and local governments provided virtually no information as to most of their infrastructure.

9. Governments invest in marketable securities for much the same reason that businesses do—to earn a return on cash that would otherwise be unproductive.

10. Governments are prohibited from entering into reverse repurchase agreements.

MULTIPLE CHOICE (CHAPTER 7)

1. The objectives of financial reporting for fixed assets should be to provide information
a) About a governmental entity’s physical resources.
b) That can be used to assess the service potential of a governmental entity’s physical resources.
c) To help users assess a government’s long- and short-term capital needs.
d) All of the above.

2. A governmental entity may record long-term assets in which of the following funds or account groups?
a) General Fund
b) Internal Service Fund.
c) Capital Project Fund
d) Debt Service Fund.

3. General fixed assets are excluded from governmental funds because
a) The measurement focus of governmental funds is on current financial resources.
b) They are not used to generate revenues.
c) The basis of accounting is accrual.
d) None of the above.

4. The City of Shiloh sold a used police car. The police car, which had a historical cost of $17,000 and a fair value of $12,000, was sold for $5,000. Assuming that the City maintains its books and records in a manner to facilitate the preparation of the fund financial statements, what is the appropriate entry in the General Fund to record this sale?
a) Debit Cash $5,000; Credit Revenue $5,000.
b) Debit Cash $5,000 and Loss on Sale $7,000; Credit Automotive Equipment $12,000.
c) Debit Cash $5,000; Credit Other Financing Sources—Sale of Asset $5,000.
d) Debit Cash $5,000; Credit Automotive Equipment $5,000.

5. Which of the following costs will be included in the cost of land on the government-wide financial statements?
a) Purchase price (invoice amount).
b) Cost of demolishing existing structures that cannot be used.
c) Closing costs.
d) All of the above.

6. Donated assets are reported at
a) Historical cost to the donor.
b) Book value in the hands of the donor.
c) Fair value on date of donation.
d) Zero value because they were not purchased.

7. To elect not to capitalize works of art and similar assets, a government must see that the assets meet all of the following criteria except:
a) The assets must be held for public exhibition, education, or research in furtherance of public service, rather than for financial gain.
b) The assets must be protected, kept unencumbered, cared for and preserved.
c) The assets must be subject to an organizational policy that requires the proceeds form sales of the collection items be used to acquire very similar items for the collection.
d) The assets must be subject to an organizational policy that requires the proceeds from sales of the collection items be used to acquire other items for the collection.

8. If a government capitalizes works of art and similar assets, which of the following statements is true relative to depreciation on the works of art and similar assets?
a) Donated assets cannot be depreciated.
b) All works of art must be depreciation, not just exhaustible.
c) All exhaustible assets must be depreciated.
d) The government may elect to omit all depreciation.

9. Which of the following is NOT an infrastructure asset?
a) Roads.
b) Sidewalks.
c) Buildings.
d) Bridges.

10. If a government receives a donation of a work of art, the government must recognize revenue
a) Only if it elects to capitalize its collection.
b) Only if it elects NOT to capitalize its collection.
c) On all donations of works of art.
d) It cannot recognize revenue from donations.

11. For a government that elects NOT to capitalize its works of art and similar assets, the appropriate entry when receiving a contribution of a work of art at the government-wide level is
a) No entry is required for contributed assets.
b) Debit Asset; Credit Revenues.
c) Debit Asset; Credit Equity.
d) Debit Expense, Credit Revenue.

12. For a government that elects to capitalize its works of art and similar assets, the appropriate entry when receiving a contribution of a work of art at the government-wide level is
a) No entry is required for contributed assets.
b) Debit Asset; Credit Revenues.
c) Debit Asset; Credit Equity.
d) Debit Expense/Expenditure, Credit Revenues.

13. GASB standards require that depreciation be reported on all capital assets except
a) Infrastructure accounted for on the standard approach.
b) Infrastructure assets accounted for on the modified approach.
c) Donated assets.
d) Capitalized works of art.

14. With regard to capitalization of infrastructure, which of the following is true?
a) All infrastructure must be capitalized on the financial statement before GASB Statement No. 34 can be implemented.
b) Only large governments must capitalize all infrastructure on the date they implement GASB Statement No. 34.
c) Small and medium size governments may elect to delay capitalization of infrastructure.
d) Small governments may omit capitalizing all infrastructure acquired before the date on which they implement GASB Statement No. 34.

15. If a government elects the modified approach with regard to capitalization of infrastructure
a) Costs to preserve infrastructure assets are expensed as incurred with no additional disclosure required.
b) Costs to preserve infrastructure assets are expensed as incurred and disclosure of assessed condition is required.
c) Costs to preserve infrastructure assets are capitalized as incurred and depreciated over the estimated useful life with no additional disclosure required.
d) Costs to preserve infrastructure assets are capitalized as incurred and NOT depreciated over the estimated useful life with additional disclosure required.

16. A broker-dealer or other financial institution transfers cash to a government in exchange for securities and the government agrees to repay the cash plus interest and return the securities. From the government’s point of view, this transaction is a
a) Repurchase agreement.
b) Reverse repurchase agreement.
c) Derivative.
d) Option.

17. The risk that the other party to an investment will not fulfill its obligation is
a) Market risk.
b) Credit risk.
c) Collaterized risk.
d) Legal risk.

18. Which of the following is NOT an example of a derivative?
a) Stock options.
b) Interest-only strips.
c) Debt instruments backed by pools of mortgages.
d) Repurchase agreements.

19. Governments must classify bank balance in one of three categories. Which of the following is NOT one of those categories?
a) Insured or collateralized with the security held by the entity or its agents in the entity’s name.
b) Collateralized with security held by the pledging financial institution’s trust department.
c) Insured, registered in the name of the government or held by the government or its agent in the government’s name.
d) Uncollateralized.

20. Investments, other than bank balances, must be classified into one of three categories. Which of the following is NOT one of those categories?
a) Insured, registered in the name of the government or held by the government or its agent in the government’s name.
b) Uninsured and unregistered, with securities held by the other party’s trust department or agent in the government’s name.
c) Uninsured and unregistered in the government’s name and held by the other party or the other party’s agent.
d) Uncollateralized.

PROBLEMS (CHAPTER 7)

1. The City of Brownsville engaged in the following transactions. Assuming that the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, prepare the appropriate journal entries in the General Fund.

a) The City purchased for cash three dump trucks at a unit cost of $70,000 each.

b) The City sold for $3,000, a police car that had been purchased four years ago at a cost of $30,000. At the time of acquisition, the City estimated that the police car had a useful life of five years and a salvage value of $5,000.

c) During the year, the City spent $12 million to build a third lane on both sides of the major north-south highway through town.

d) During the year the City began construction of a new City Hall. By year-end, the City had made progress payments to the contractor of $2 million.

2. The City of Brownsville engaged in the following transactions. Assuming that the City maintains its books and records in a manner that facilitates the preparation of the government-wide financial statements, prepare the appropriate journal entries.

a) The City purchased for cash three dump trucks at a unit cost of $70,000 each.

b) The City sold for $3,000, a police car that had been purchased four years ago at a cost of $30,000. At the time of acquisition, the City estimated that the police car had a useful life of five years and a salvage value of $5,000.

c) During the year, the City spent $12 million to build a third lane on both sides of the major north-south highway through town.

d) During the year the City began construction of a new City Hall. By year-end, the City had made progress payments to the contractor of $2 million.

3. GASB Statement No. 34 allows for two different treatments of infrastructure. If the government chooses to use the modified approach instead of the standard (depreciation) approach, what is the proper accounting treatment of preservation cost at the government-wide level?

ESSAYS (CHAPTER 7)

1. Governmental accounting does not permit depreciation to be charged on the operating statements of the governmental funds. Present arguments FOR reporting depreciation and present arguments AGAINST reporting depreciation.

2. What is “deferred maintenance”? What is its possible role in governmental financial reporting?

3. Recently, governmental investment policies have been sharply criticized because of some significant losses incurred by certain governments. What is the nature of the problem that is being criticized? What should be the role of accounting in determining and reporting investment strategies?

Chapter 8

Governmental Activities – Long-Term Obligations

TRUE/FALSE (CHAPTER 8)

1. Unlike individuals and businesses, governments cannot seek protection under the Federal Bankruptcy Code.

2. General obligation debt is the obligation of the government at large and is thereby backed by the government’s general credit and revenue-raising powers.

3. Revenue debt is secured only by designated revenue streams.

4. When the proceeds of general long-term debt are received by a governmental fund, rather than reporting a liability on the balance sheet, the inflow of resources is treated as another financing source on the operating statement.

5. Per GASB Statement No. 34, governments generally should report their bonds, notes, and comparable long-term obligations at present value.

6. A government is prohibited from ever recognizing bond anticipation notes (BANs) as long-term obligations.

7. Tax anticipation notes (TANs) must be reported as current liabilities of the governmental funds in which the related revenues will be reported, as well as in the government-wide statements.

8. Governments may enter into operating leases, but may not enter into capital leases.

9. In accounting for operating leases, the rental payments should be recognized in a governmental fund and as expenses in the government-wide statement of activities in the periods in which they apply.

10. Because they are not obligations of the government at large, revenue bonds are usually not subject to voter approvals or other forms of voter oversight.

11. Although governments may elect to report conduit obligations in their government-wide and proprietary fund statements, the GASB has ruled that note disclosure is sufficient.

MULTIPLE CHOICE (CHAPTER 8)

1. A governmental entity that is unable to satisfy claims against it
a) Is prohibited from filing bankruptcy.
b) May not seek protection under the Federal Bankruptcy Code.
c) May seek protection under the Federal Bankruptcy Code, using a special section directed to governments.
d) Is automatically placed under the jurisdiction of a higher level of government.

2. To seek protection under the Federal Bankruptcy Code, a governmental entity must
a) Be unable to provide the level of services it has provided in the recent past.
b) Be unable to pay its debt in its current year.
c) Have budgeted expenditures in excess of revenues.
d) Both (b) and (c).

3. General long-term debt of a governmental entity includes
a) All future financial obligations.
b) All future financial obligations that result from past transactions.
c) All future financial obligations that result from past transactions for which the government has already received a benefit.
d) All future financial obligations that are backed by the government’s general credit and revenue raising power and that result from past transactions for which the government has already received a benefit.

4. In governmental fund-type financial statements, the assets acquired under a capital lease would be reported at
a) They are not reported in the fund financial statements.
b) The present value of the required lease payments.
c) The undiscounted total of required lease payments.
d) The total of all payments required under the lease.

5. In the government-wide financial statements, the assets acquired under a capital lease would be reported at
a) They are not reported in the fund financial statements.
b) The present value of the required lease payments.
c) The undiscounted total of required lease payments.
d) The total of all payments required under the lease.

6. In the government-wide financial statements, long-term liabilities of governmental entities are generally reported at
a) Face value.
b) Face value plus (minus) unamortized premium (discount).
c) Present value.
d) Market value of the obligation.

7. Pulling County has a December 31 fiscal year-end. In November, the County borrowed $8 million from a local bank, due in six months at 6% interest, to finance general government operations. The county pledges property tax revenues to secure the loan. At year-end, how should the bank note be displayed in the fund financial statements?
a) Nothing in the General Fund; Nothing in a Schedule of Changes in Long-Term Obligations.
b) General Fund–$8 million in Other Financing Sources; Nothing in a Schedule of Changes in Long-Term Obligations.
c) General Fund–$8 million in Other Financing Sources; $8 million in a Schedule of Changes in Long-Term Obligations.
d) General Fund–$8 million in Notes Payable; Nothing in a Schedule of Changes in Long-Term Obligations.

8. Governmental entities enter into capital leases, rather than conventional buy and borrow arrangements for which of the following reasons? Capital leases
a) May be an effective means of circumventing debt limitations.
b) Are less expensive overall than buy and borrow arrangements.
c) Reduce the cash outflows related to the asset acquisition.
d) Have less impact on fund balance than buy and borrow arrangements.

9. New City entered into a lease agreement for several new dump trucks to be used in general government activities. Assuming the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, acquisition of these dump trucks would require entries in which of the following funds and/or schedules?
a) General Fund only.
b) General Fund AND Schedule of Changes in Long-Term Debt Obligations.
c) General Fund AND Schedule of General Fixed Assets.
d) General Fund, Schedule of General Fixed Assets AND Schedule of General Long-Term Debt Obligations.

10. Southwest City enters into a lease agreement that contains a nonappropriation clause. The clause
a) Has been held by courts in 26 states to effectively cancel the lease.
b) Stipulates that the yearly lease payment must be appropriated by the City Council each year.
c) Prohibits the city from replacing leased property with similar property.
d) Permits the city to lease at lower rates than would be possible without the presence of the clause.

11. Why would a government issue revenue bonds (which generally are issued at a higher rate of interest than general obligation bonds) even though the government knows that if revenues from the project are not sufficient to cover principal and interest payments, the government will use resources from general government activities to fund the principal and interest payments?
a) Revenue bonds may not require approval of the voters.
b) Revenue bonds may not be considered in legal debt limitations.
c) Revenue bonds may permit the interest costs to be passed on to the users.
d) All of the above.

12. Which of the following funds is most likely to receive the proceeds of revenue bonds?
a) General Fund.
b) Capital Project Fund.
c) City Utility Enterprise Fund.
d) Highway Department Special Revenue Fund.

13. Sun City is located in Hailey County. Sun Valley School District encompasses all of Sun City and some of Hailey County. Property in Sun City is assessed at $400 million; property in Hailey County is assessed at $800 million; property in Sun Valley School District is assessed at $600 million. The total debt outstanding for Sun City is $30 million; Hailey County is $50 million; Sun Valley School District is $45 million. Compute the amount of direct and overlapping debt for Sun City.
a) $ 30 million.
b) $ 75 million.
c) $ 85 million.
d) $125 million.

14. Obligations of property owners within a particular government for their proportionate share of debts of other governments with whom they share boundaries is
a) Overlapping debt.
b) Conduit debt.
c) Committed debt.
d) Moral obligation debt.

15. Overlapping debt should be reported in which of the following ways?
a) It should be reported in the Schedule of Changes in Long-Term Obligations.
b) It should be disclosed as a note to the financial statements.
c) It should be reported in a schedule in the statistical section of the annual report.
d) It should not be reported in the financial statements of the reporting entity.

16. An obligation issued in the name of a government on behalf of a nongovernmental entity is called
a) Overlapping debt.
b) Conduit debt.
c) Committed debt.
d) Moral obligation debt.

17. The City of Pocahontas issued $20 million in general obligation bonds at par. The City loaned the proceeds to Domsee Fish Processors to expand the size of their facility, which would allow Domsee to hire additional workers. The loan payments from Domsee to the City are established to match the principal and interest payments on the bond issue. The bonds are payable exclusively from the loan repayments by Domsee. The bonds are secured by the additional plant facilities built by Domsee. Where should the City report the bonds on the annual financial report?
a) In the government-wide financial statements.
b) In the notes to the financial statements.
c) In the proprietary fund financial statements.
d) In any of the above ways.

18. Industrial development bonds are issued in the name of a government with the proceeds used to attract private businesses to a community. Which of the following is a true statement about industrial development bonds?
a) The proceeds are used by the private corporations and principal and interest payments are made by the private corporation. The government backs the bonds in the event of default by the private corporation.
b) The proceeds are used by the private corporations and principal and interest payments are made by the private corporation. The government does not back the bonds in the event of default by the private corporation.
c) The proceeds are used by the government to build infrastructure to service private corporations with principal and interest payments made by the government out of the additional tax revenues received from the private corporation.
d) The proceeds are used by the government to build infrastructure to service private corporations with principal and interest payments made by the private corporation in lieu of property taxes.

19. The Southside City has $95 million of debt recorded in its Schedule of Changes in Long-Term Obligations, made up of $60 million of general obligation debt, $2 million of compensated absences payable, $8 million claims and judgments, and $25 million of obligations under capital leases. The State limits the amount of general obligation debt that can be issued by a City to 20% of the assessed value of taxable property. The assessed value of property in Southside City is $500 million. The amount of legal debt margin for Southside City is
a) $ 5 million.
b) $ 40 million.
c) $ 60 million.
d) $100 million.

20. A state created a Housing Authority to provide financing for low-income housing. The Authority issues bonds and uses the proceeds for that purpose. Currently the Authority has outstanding $200 million in bonds backed by the State’s promise to cover debt service shortages should they arise. The State Constitution specifically limits the State to no more than $2 million in general obligation debt. How can the state officials defend the $200 million in debt outstanding?
a) The debt is not general obligation debt.
b) The State is only morally obligated on the debt.
c) The debt is the debt of the Authority not the State.
d) All of the above.

21. Debt that is issued by one entity but backed by the promise of another entity to make up any debt service deficiency is
a) Committed debt.
b) Overlapping debt.
c) Conduit debt.
d) Moral obligation debt.

22. A City entered into a long-term capital lease for some office equipment. Assuming the city maintains its books and records in a manner to facilitate preparation of fund financial statements, what entry would be made in the General Fund to record this event?
a) Debit Expenditures; Credit Other Financing Sources—Leases.
b) Debit Equipment; Credit Other Financing Sources—Leases.
c) Debit Equipment; Credit Leases Payable.
d) No entry since it this event had no impact on financial resources.

23. Which of the following is likely to be used by a bond-rating agency to rate the general obligation bonds of a governmental entity?
a) A review of the Basic Financial Statements.
b) Consideration of economic statistics such as unemployment rates.
c) Consideration of legal debt margin.
d) All of the above.

PROBLEMS (CHAPTER 8)

1. During the fiscal year ended 6/30/02 the City of Hartsville engaged in the following transactions. Assuming the city maintains its books and records in a manner that facilitates the preparation of its fund financial statement, prepare all necessary journal entries that the City should make for each transaction. Clearly indicate in which fund the entry is being made. If no entry is required, write ‘No Entry Required’.

a) In July 2001, the City issued $20 million in 6% general obligation term bonds to finance construction of a new building to house City offices. The bonds were issued at a premium of $200,000.

b) In September, 2001 the City transferred $1 million from the General Fund to cover the $.6 million principal and $.4 million interest payments due that month on debt issued in previous years.

c) In September, 2001 the City paid the principal and interest due from (b).

d) In June 2002, the City transferred $2 million from the General Fund to cover the $1.2 million interest payment and the $.8 million principal payment due in July on the bonds issued in July 2001.

2. A city enters into the following transactions during the current year. Assuming that the City maintains its books and records in a manner that facilitates the preparation of its fund financial statements, prepare entries to record the following transactions. Indicate the fund in which the entry is being made.

a) The City issues $5 million of tax anticipation notes, backed by property taxes that will be recorded in the General Fund.

b) The City issues $2 million of 90-day bond anticipation notes that it expects to roll over into long-term bonds.

c) The City repays the $5 million in (a)

d) The City successfully issues $20 million in long-term bonds and uses some of the proceeds to repay the notes in (c).

3. Young County engaged in the following debt-related transactions during the year. Assuming that Young County maintains its books and records in a manner that facilitates the preparation of its government-wide financial statement, prepare the necessary journal entries to record these transactions. Clearly indicate if debt is long-term or short-term (current). If no entry is required, write ‘No Entry Required’.

a) The County issued $5 million in 6%, 20-year bonds for $5,117,466 to yield 5.8 % to the investor.

b) The County made the first semi-annual interest payment on the bonds in (a). Assume an amount of $1,594 for amortization of the premium.

c) The County issues $3 million in 6% demand bonds for which it does not enter into a take-out agreement.

d) In anticipation of property tax revenues being received several months after fiscal year-end, the County borrows $2 million from a local bank payable in nine months.

e) The County leased a new machine for its County Highway Department in an arrangement that qualified as a capital lease. The present value of the minimum lease payments is $150,000, which approximates the fair value of the machine.

ESSAYS (CHAPTER 8)

1. Identify and define ‘conduit debt.’ What is/are the current reporting standards for conduit debt issued by governmental entities. Do you approve or disapprove of the use of conduit debt by governmental entities? Justify your answer. Do you approve or disapprove of the current reporting standards related to conduit debt? Why?

2. Generally accepted accounting principles require many assets to be reported at market values. However, few liabilities are reported at market value. What are the arguments for and against reporting liabilities at market value?

3. Why is information about long-term debt important to financial statement users?

Chapter 9

Business-Type Activities and Internal Services

TRUE/FALSE (CHAPTER 9)

1. In both the fund statements and the government-wide statements, business-type activities and internal services are on a full accrual basis, and their measurement focus is on all economic resources.

2. The operating statement required as one of the three basic financial statements for proprietary funds is called the statement of revenues, expenditures, and changes in fund net assets.

3. The amounts reported in proprietary fund statements are generally the same as those reported in the government-wide statements because both sets of statements are on a full accrual basis of accounting.

4. Governments are required to prepare a statement of cash flows for proprietary funds, but not for governmental funds.

5. GASB Statement No. 34 mandates that governments report their cash flows from operations using the indirect method.

6. The FASB mandates entities report their cash flows from operations using the direct method.

7. Governments generally do not have to get formal legislative approval for enterprise fund budgets or incorporate them into their accounting systems.

8. In accounting for closure and postclosure landfill costs in an enterprise fund, a government does not necessarily have to “fund” the costs during the landfill’s useful life; it merely has to report both an expense and a liability for them.

9. The revenues of an internal service fund are the expenditures and expenses of other funds of that government.

10. The proprietary fund statements do not include a total column for all proprietary funds.

MULTIPLE CHOICE (CHAPTER 9)

1. The appropriate measurement focus for the business-type activities of the City of Rockford is
a) Current financial resources.
b) Economic resources.
c) Both (a) and (b).
d) None of the above.

2. Which of the following is not a proprietary fund?
a) City Water Enterprise Fund.
b) City Motor Pool Internal Service Fund.
c) City Hall Capital Project Fund.
d) None of the above. They are all proprietary funds.

3. The appropriate basis of accounting for the proprietary funds of a governmental entity is
a) Cash basis.
b) Modified accrual.
c) Full accrual.
d) None of the above.

4. Which of the following is NOT a valid reason for governmental entities to engage in business-type activities?
a) The activities provide resources that would otherwise have to be raised in other ways.
b) The entity can provide the services more cheaply or efficiently than can a private firm.
c) The entity wants to subsidize the activity.
d) All of the above are valid reasons for governments to engage in business-type activities.

5. Which of the following is NOT a budget typically prepared for an activity accounted for in a proprietary fund?
a) Appropriation budget.
b) Cash budget.
c) Capital budget.
d) Flexible budget.

6. A proprietary fund of a governmental entity has donor-restricted assets on its balance sheet. Which of the following best describes where and how those assets will generally be displayed?
a) In a separate restricted asset category on the balance sheet.
b) Intermingled with other assets on the balance sheet.
c) Intermingled with other assets on the balance sheet but footnoted.
d) In a separate restricted fund.

Use the following information to answer #7 and #8.

The City of Brockton voted to establish an internal service fund to account for its printing services. The City transferred $500,000 cash from the General Fund to the newly created internal service fund.

7. The appropriate entry in the General Fund to account for this transfer would be a credit to cash for $500,000 and a debit for $500,000 to
a) Operating Transfer Out.
b) Nonreciprocal Transfer Out.
c) Expenditures.
d) Investment in Internal Service Fund.

8. The appropriate entry in the proprietary fund is a debit to cash for $500,000 and a credit for $500,000 to
a) Operating transfer in.
b) Nonreciprocal Transfer In.
c) Capital Contribution (Revenues).
d) Investment provided by the General Fund.

9. The City issued $2 million in general obligation bonds to acquire a fleet of vehicles for the Central Motor Pool Internal Service Fund At the date of issue, the appropriate entry in the proprietary fund is a $ 2 million debit to cash and a $2 million credit to
a) Bonds Payable.
b) Contribution Capital (Revenues).
c) Contributed Capital (Revenues) AND show $2 million as an addition to the Schedule of Changes in Long-Term Obligations.
d) No entry in the proprietary fund. Show $2 million as an addition to the Schedule of Changes in Long-Term Obligations.

10. Which of the following is NOT a rationale/justification for reporting the business-type activities of a government in a separate fund?
a) Legally restricted resources should be reported apart from those that are unrestricted.
b) Separate funds facilitate budgeting, planning, and controlling.
c) Separate funds facilitate the assessment of performance of the activity.
d) Separate funds facilitate the assessment of fiscal status of the activity.

11. Which of the following are required basic statements of a proprietary fund?
a) Balance Sheet, Income Statement, Statement of Cash Flows.
b) Balance Sheet, Statement of Revenues, Expenses, and Changes in Equity, and a Statement of Cash Flows.
c) Statement of Net Assets, Statement of Revenues, Expenses, and Changes in Fund Net Assets.
d) Statement of Net Assets, Statement of Revenues, Expenses, and Changes in Fund Net Assets, and Statement of Cash Flows.

12. Franklin County operates a solid waste landfill that is accounted for in an enterprise fund. The County calculated this year’s portion of the total closure and postclosure costs associated with the landfill to be $300,000. The entry(ies) to record this cost should be
a) Debit Landfill Expense $300,000; Credit Liability for Landfill Costs $300,000.
b) Debit Landfill Expense $300,000; Credit Liability for Landfill Costs $300,000 AND include an addition of $300,000 on the Schedule of Changes in Long-Term Obligations.
c) Show only an addition of $300,000 on the Schedule of Changes in Long-Term Obligations.
d) No entry in any fund; No entry in the Schedule of Changes in Long-Term Liabilities.

13. Marsh Lake County operates a solid waste landfill that is accounted for in a governmental fund. The County calculated this year’s portion of the total closure and postclosure costs associated with the landfill to be $600,000. The entry to record this cost should be
a) Debit Landfill Expenditure $600,000; Credit Liability for Landfill Costs $600,000.
b) Debit Landfill Expenditure $600,000; Credit Liability for Landfill Costs $600,000 AND include $600,000 as an addition on the Schedule of Changes in Long-Term Obligations.
c) No entry in the fund; include $600,000 on the Schedule of Changes in Long-Term Obligations.
d) No entry in any fund or Schedule.

14. Over the long run, governmental internal service funds are intended to
a) Generate revenues sufficient to cover the full costs of providing services.
b) Generate revenues sufficient to cover the full costs of providing services and to earn a profit.
c) Generate revenues sufficient to cover the current operating costs of providing services.
d) Generate revenues sufficient to cover the current operating costs of providing services and to earn an operating profit.

15. Which of the following is NOT true about internal service funds as reported in the fund financial statements?
a) Costs reported by internal service funds are reported twice within the same set of financial statements.
b) Billing rates must be set to cover the full cost of providing the goods or services.
c) Depreciation can be charged to governmental funds through the billing rates established by the internal service fund.
d) Deficits or surpluses in the general fund can be transferred to the internal service fund by adjusting the billing rates.

16. In the Statement of Net Assets, the net assets of a proprietary fund should be displayed in which of the following categories?
a) Unrestricted Fund Balance, Restricted Fund Balance, Invested in Capital Assets.
b) Unrestricted Net Assets, Restricted Net Assets, Invested in Capital Assets Net of Related Debt.
c) Unrestricted Net Assets, Restricted Net Assets, Net Assets Available for Use.
d) Net Assets Available for Use.

17. A Statement of Revenues, Expenses, and Changes in Fund Net Assets should include which of the following in addition to operating revenues and operating expenses and ending Net Assets?
a) Nonoperating revenues and expenses.
b) Nonoperating revenues and expenses, and Other changes in Net Assets.
c) Nonoperating revenues and expenses, Capital Contribution and Other changes in Net Assets, and Beginning Net Assets.
d) None of the above.

18. In which of the following circumstances must an enterprise fund be used to account for the activity?
a) A newly created electric utility fund will finance its operations by a charge to users based on kilowatt hours used.
b) To finance the acquisition of plant facilities a newly created electric utility issues general obligation debt.
c) To finance the acquisition of plant facilities a newly created electric utility issues revenue bonds which will be repaid from operations of the electric utility.
d) To acquire needed plant facilities a newly created electric utility enters into long-term lease agreements.

19. Washington County has designated the general fund as the single fund to account for its self-insurance activities. What is the maximum amount that can be charged to expenditure in the general fund related to the self-insurance activities?
a) The amount of ‘premium’ charged to the other funds.
b) The amount of actual claims expenditures.
c) The actuarially-determined amount necessary to cover claims, expenditures, and catastrophic losses.
d) The amount transferred from other funds and activities to the general fund for self-insurance purposes.

20. Lehi City has designated an internal service fund as the single fund to account for its self-insurance activities. Most of the insured activities such as the police department, fire department, and general government functions are accounted for in the General Fund. What is the maximum amount that can be charged to expenditure in the General Fund related to the self-insurance activities?
a) The amount of ‘premium’ charged to the General Fund by the internal service fund.
b) The amount of actual losses incurred by the insurance activity.
c) The actuarially-determined amount necessary to cover claims, expenditures, and catastrophic losses.
d) The amount transferred from the General Fund to the internal service fund for self-insurance purposes.

Use the following information to answer questions #21 and #22.
During the year the City’s Self-Insurance Internal Service Fund billed the General Fund $300,000 for ‘premiums,’ of which $30,000 was for catastrophic losses and the balance was the premium computed on an actuarially-determined basis. During the year the City incurred $250,000 in claims losses. The total amount transferred to the Self-Insurance Fund by the General Fund was $310,000.

21. The amount the City Self-Insurance Fund can recognize as revenue is
a) $310,000
b) $300,000.
c) $270,000.
d) $250,000.

22. The amount the City General Fund can recognize as expenditure is
a) $310,000.
b) $300,000.
c) $270,000.
d) $250,000.

23. When a governmental enterprise fund has restricted assets on its balance sheet which of the following is a true statement?
a) The total of the restricted assets in the asset section will be equal to the “Restricted Net Assets” amount in the equity section.
b) The total of the restricted assets will be offset by a liability of an equal amount.
c) The total of the restricted assets less related liabilities will be equal to the “Restricted Net Assets” amount in the equity section.
d) None of the above statements is true.

24. Any internal service fund balances that are not eliminated in the consolidation process should generally be presented on the government-wide financial statements
a) Should not be presented on the government-wide financial statements.
b) In the internal service fund column.
c) In the governmental activities column.
d) In the business-type activities column.

25. On the fund financial statements, internal service activities should be presented
a) In the Propriety Fund statements, net of interfund eliminations.
b) In the Governmental Fund statements, net of interfund eliminations.
c) In the Proprietary fund statements, without any interfund eliminations.
d) In the Governmental Fund statements, without any interfund eliminations.

26. Cash flows from Operating Activities does NOT include which of the following as cash inflows?
a) Cash collection of receivable for sale of services.
b) Grants for operating activities.
c) Interest and dividends earned.
d) Receipts for services performed for other funds.

27. Cash flows from Operating Activities does NOT include which of the following as cash outflows?
a) Grants to other governments for operating activities.
b) Grants to other governments for capital asset acquisitions.
c) Payments for services performed by other funds.
d) Payments in lieu of taxes.

PROBLEMS (CHAPTER 9)

1. Benton County voted to establish an internal service fund to account for printing and copying for all its department and agencies. The County engaged in the following activities related to the new fund. Prepare transactions to record these events in the internal service fund. If no entry is required, write “No Entry Required.”

a) The County Commission voted to transfer $200,000 from the General Fund to the internal service fund to establish the new fund.

b) Leased equipment to be used in printing activities. The total lease obligation is $600,000.

c) Issued $1 million in general obligation bonds at 101. The bonds were issued to acquire additional equipment. The bonds are to be serviced from the internal service fund.

d) Purchased equipment at a cost of $980,000. The equipment has an estimated useful life of nine years and an estimated salvage value of $80,000.

e) Billed the General Fund for 1998 copying and printing charges, $70,000.

f) Paid salaries to printing employees, $50,000.

2. The City of Petersburg has operated a City Utility Enterprise Fund for a number of years. The fund accounts for the activities of the City-owned electric, water and sewer systems. During the current year, the City engaged in the following transactions related to the City Utility Fund. Prepare the appropriate journal entries. If none is required, write “No Entry Required.”

a) The City billed its customers $1 million for services provided during the year.

b) The City received $260,000 from a developer to connect new houses to the existing utility lines.

c) Depreciation on existing physical plant was $700,000.

d) Revenue bonds in the amount of $2 million were issued at par to finance new construction. The bond agreement requires that the City retain $200,000 of the bond proceeds for purposes of servicing the debt if revenues are not sufficient to do so.

3. The City of San Dominguez received a $500,000 federal grant to acquire several buses to be used in its public transit system. The City paid $400,000 to acquire several buses. At year-end, $100,000 of the grant had not yet been used. During the year total depreciation on the buses was $40,000. Revenues for the public system were $600,000, operating expenses (other than depreciation) were $470,000. Assuming the Public Transit Proprietary Fund began the year with Unrestricted NetAssets of $420,000, prepare the following for the Public Transit Enterprise Fund.
a) Statement of Revenues, Expenses, and Changes in Fund Net Assets.
b) Net Asset section of the Balance Sheet.

4. Greene County operates a solid waste landfill that is accounted for as an enterprise fund. At the end of 1999, the Landfill Enterprise Fund had a Liability for Landfill Costs of $50,000. The County estimated the costs associated with closing monitoring the landfill as follows. Calculate the total costs as of year-end 2000 and 2001 and the current period costs. Prepare the required journal entry(ies) at year-end 2000 and 2001. Be sure to show all of your work.
2000 2001
Costs
Equipment to be installed $2.5 million $3.0 million
Final cover $ .5 million $1.0 million
Monitoring and maintaining $4.0 million $4.0 million
Capacity used in total 30,000 58,000
Estimated total capacity 600,000 580,000

ESSAYS (CHAPTER 9)

1. Internal service funds are used by many governmental entities to account for activities that provide services to the entity itself. What are the ramifications of such an accounting arrangement? What are the effects on the entity’s financial statements?

2. Governmental entities may elect to account for their landfill activities in either of two different funds. Explain the differences that would result if one government elected to account for its landfill activities in its general fund and another government elected to account for its landfill activities in an enterprise fund.

3. Because of the rising cost of commercial insurance, many governments have elected to be ‘self-insured.’ Explain what is meant by being ‘self-insured.’ Explain the difference in the accounting for self-insurance activities between a governmental fund and a proprietary fund.

Chapter 10

Permanent Funds and Fiduciary Funds

TRUE/FALSE (CHAPTER 10)

1. Per GASB Statement No. 34, permanent funds are classified as fiduciary funds.

2. In accounting for permanent funds only the income can be spent; the principal must be preserved intact.

3. Fiduciary funds focus on current financial resources and use a full accrual basis of accounting.

4. Fiduciary funds are excluded from the government-wide statements.

5. The concept of major versus nonmajor funds does not apply to fiduciary funds, as it does to governmental and proprietary funds.

6. Accounting for the employer’s contribution in a defined contribution plan is straight forward, because the employer is obligated only to make annual contributions in the amount specified in the plan terms.

7. Accounting for the employer’s contribution in a defined benefit plan is straight forward, because the employer is obligated only to make annual contributions in the amount specified in the plan terms.

8. Most public pension plans are defined benefit plans.

9. An employer may have a liability to a defined benefit plan other than for its annual required contributions, depending on the future financial health of the plan.

10. In an agency fund, assets always equals fund balance because there are no liabilities.

MULTIPLE CHOICE (CHAPTER 10)

1. A governmental entity receives a gift of cash and investments with a fair value of $200,000. The donor specified that the earnings from the gift must be used to beautify city-owned parks and the principal must be re-invested. The $200,000 gift should be accounted for in which of the following funds?
a) Investment trust fund.
b) Private-purpose trust fund.
c) Agency fund.
d) Permanent fund.

2. In previous years, Center City had received a $400,000 gift of cash and investments. The donor had specified that the earnings from the gift must be used to beautify city-owned parks and the principal must be re-invested. During the current year, the earnings from this gift were $24,000. The earnings from this gift should generally be considered revenue to which of the following funds?
a) Special revenue fund.
b) Private-purpose trust fund.
c) Agency fund.
d) Permanent fund.

3. Which of the following activities of a governmental entity should be accounted for in a fiduciary fund?
a) Funds received from the federal government to support public transportation activities.
b) Funds received from an individual who specified that the principal must be kept intact but the income can be used to support families of police officers killed in the line of duty.
c) Funds received from the state government that must be used to purchase capital assets.
d) Funds received from a contractor to assist with the development of utility infrastructure.

4. What basis of accounting is used to account for transactions of a governmental private-purpose trust fund?
a) Full accrual basis of accounting.
b) Modified accrual basis of accounting.
c) Cash basis of accounting.
d) Budgetary basis of accounting.

5. Which of the following would NOT be accounted for in a fiduciary fund of a governmental entity?
a) Nonexpendable resources held for the benefit of other governmental units.
b) Nonexpendable resources held for the benefit of the government holding the resources.
c) Expendable resources held for the benefit of other governmental units.
d) Funds held as an agent for other entities.

6. Permanent funds are classified as
a) Governmental funds.
b) Proprietary funds.
c) Fiduciary funds.
d) Trust funds.

7. Which of the following is NOT a fiduciary fund?
a) Pension trust funds.
b) Investment trust funds.
c) Permanent funds.
d) Private-purpose trust funds.

8. What basis of accounting is used to account for transactions of a government permanent fund?
a) Full accrual basis of accounting.
b) Modified accrual basis of accounting.
c) Cash basis of accounting.
d) Budgetary basis of accounting.

Use the following information to answer #9-#12
Previously a city received a $1 million gift, the income from which was restricted to support maintenance of city-owned parks. During the current year the endowment earned $70,000 of which $50,000 was transferred to the City Park Special Revenue Fund.

9. On the year-end fund financial statement, the endowment fund would report revenues of:
a) $0.
b) $50,000.
c) $70,000.
d) None of the above.

10. On the year-end fund financial statement, the endowment fund would report the $50,000 transferred to the Special Revenue Fund as:
a) A reduction of revenues.
b) A nonreciprocal transfer out.
c) A reduction of equity.
d) An expenditure.

11. On the year-end financial statements, the endowment fund would report, as a result of these transactions, a fund balance (net assets) of:
a) $1,000,000
b) $1,070,000
c) $1,050,000
d) $1,020,000

12. On the year-end financial statements, the special revenue fund will report
a) $50,000 Nonreciprocal Transfer In
b) $70,000 Nonreciprocal Transfer In
c) $50,000 Revenue
d) $70,000 Revenue

13. Cedar City has a permanent fund that reported current year investment earnings (realized and unrealized) of $80,000. The endowment principal is $800,000 and the city council has adopted a policy of considering only the inflation adjusted rate of return to be available for transfer to the recipient fund. During the current year the Council declared the inflation-adjusted rate of return to be 8%. How much revenue would be recognized in the permanent fund?
a) $ 0.
b) $ 64,000.
c) $ 80,000.
d) Unable to determine.

14. At the beginning of the year, the permanent fund of Rapid City had an investment portfolio with a historical cost of $200,000 and a fair value of $220,000. There were no purchases or sales of securities during the year. At year end the portfolio had a fair value of $240,000. At the end of the year Rapid City will account for this increase in fair value in which of the following ways?
a) Credit Investment Income, $20,000.
b) Credit Investment Income, $40,000.
c) Credit Fund Balance, $20,000.
d) No entry is made to recognize increase in fair value.

15. Several years ago, a donor gave $5 million to the City and specified that the principal was to be kept intact but the earnings were to be used to support operations of the city parks. During the current year, the City earned $300,000 on the gift. To what type of fund should the City transfer accountability for the $300,000 earnings.
a) It should not transfer accountability. The $300,000 should remain in the Permanent Fund.
b) A special revenue fund.
c) The General Fund.
d) An enterprise fund.

16. A defined contribution pension plan is one in which the employer agrees to which of the following?
a) The employer agrees to make specific payments to a specified pension plan with no guarantee of a specific pension amount to be paid to the employee.
b) The employer agrees to make specific payments to a specified pension plan AND guarantees that the employee will receive a specified pension (usually determined by length of service and salary).
c) The employer agrees to make necessary payments to a specified pension plan that guarantees that the employee will receive a specified pension (usually determined by length of service and salary).
d) The employer agrees to pay a specified amount (usually determined by length of service and salary) to the employee, but the employer makes no specific guarantee to make payments to the specified pension plan.

17. Hill City Light & Water (a proprietary fund) contributes to a defined benefit plan for its employees. During 1999 Hill City contributed $27 million to its pension plan. On February 15, 2000, Hill City made an additional $3 million contribution related to 1999. The actuarially determined contribution amount was $32 million. The amount of pension expense recognized by Hill City Light & Water for 1999 should be:
a) $ 0
b) $ 27 million
c) $ 30 million
d) $ 32 million

18. During the fiscal year ended December 31, 2001, the Highland City General Fund contributed $48 million to a defined benefit pension plan for its employees. On February 27, 2002, Highland made an additional $2 million contribution related to the 2001 pension contribution requirements. The actuarially determined contribution amount for 2001 is $52 million. The amount of pension expenditure recognized by Highland City General Fund for 2001 should be:
a) $ 0
b) $ 48 million
c) $ 50 million
d) $ 52 million

19. The Schedule of Changes in Long-Term Obligations contains an account Net Pension Obligation. Which of the following describes the event that gave rise to this account?
a) The actual contribution by a proprietary fund was less than the actuarially required contribution.
b) The actual contribution by a governmental fund was less than the actuarially required contribution.
c) The actuarially computed pension liability exceeded the pension plan assets.
d) The pension plan assets exceeded the actuarially computed pension liability.

20. Required disclosure by a government General Fund related to its pension plan does NOT include which of the following?
a) The employer’s funding policy.
b) The components of the pension cost.
c) The key assumptions used in determining the pension costs.
d) The present value of the future benefits to be paid.

21. A plan’s unfunded actuarially accrued liability is the excess of
a) The actuarially-determined plan cost over the actual contribution.
b) The actuarially-determined plan cost over the plan assets.
c) The actuarially-determined pension liability over the plan assets.
d) The actuarially-determined pension liability over the total contributions.

22. Citizens within a defined geographic area of Hill City created a special assessment district to facilitate the construction of sidewalks. Hill City was responsible for overseeing the entire construction project. Hill City issued bonds in its own name to pay the contractor for the construction. However, Hill City was not responsible in any manner for the bonds. The bonds were secured by the special assessments which would be levied against the property within the special assessment district. Collections of special assessments would be recorded in which of the following funds of Hill City?
a) Special Assessment Fund.
b) Agency Fund.
c) Special Revenue Fund.
d) Debt Service Fund

23. The City of Highland Hills receives a federal grant to assist in nutrition (feeding) programs for senior citizens. The City will select the contractors to provide the feeding and approve the participants in the program. The proceeds of this grant should be accounted for in which of the following funds of the City?
a) General Fund.
b) Special Revenue Fund.
c) Agency Fund.
d) Expendable Trust Fund.

24. The City of Highland Hills receives a federal grant to assist in nutrition (feeding) programs for senior citizens. Senior citizens whose income is below a specified amount (the amount was specified by the Federal government) are eligible to participate in the program. Monthly checks of $100 (this amount was specified by the Federal government) will be mailed to eligible senior citizens. The proceeds of this grant should be accounted for in which of the following funds of the City?
a) General Fund.
b) Special Revenue Fund.
c) Agency Fund.
d) Expendable Trust Fund.

25. Financial assets held by a governmental investment pool should be valued at
a) Cost.
b) Amortized cost.
c) Fair value on the date of the financial statements.
d) Fair value computed by a weighted-average approach.

PROBLEMS (CHAPTER 10)

1. Name the two financial statements and two schedules of required supplementary information required by GASB Statement No. 25 for each defined benefit pension plan.

2. The City of Shane received a cash gift of $125,000 from a citizen who specified that the gift must be used to support recreational activities for youth of the City. The City accounted for this gift in the appropriate fund. During the year the City engaged in the following activities. Prepare the appropriate journal entries.

a) The City accepted the donation.

b) The City engaged in a fund-raising effort to provide additional funds to support youth recreational activities. The City raised $6,000 in pledges. The City collected $2,000 in cash with the remaining pledges collectible shortly after the end of the year.

c) The City temporarily invested $50,000 of the gift in marketable securities.

d) The City spent $26,000 on goal posts, nets, etc., for the soccer field.

e) The City received $2,000 in dividends and interest earned on the temporary investment.

f) At year-end the temporary investments had a market value of $51,000.

g) The City closed the revenue and expense accounts.

3. Assume a state government qualifies as a “cash conduit” on a $1 million pass-through grant from the federal government to a local government. Record the following transactions in the state’s Pass-Through Agency Fund.

a) Receipt of the $1 million in cash.

b) Cash disbursement of $1 million to the local government.

ESSAYS (CHAPTER 10)

1. Explain the difference between public-purpose trusts and private-purpose trusts.

2. Agency funds are excluded from the face of the external financial statements for a governmental entity. What are agency funds? Should they be presented on the face of the government’s financial statements? Could, or should, they be presented elsewhere?

3. Why do agency funds have no fund equity or operating accounts?

Chapter 11

Issues of Reporting, Disclosure, and Financial Analysis

TRUE/FALSE (CHAPTER 10)

1. Governments must incorporate their blended component units into both the fund and government-wide statements.

2. Governments must incorporate their discretely presented component units into both the fund and the government-wide statements.

3. A related organization is a contractual arrangement, whereby two or more participants agree to carry out a common activity and share its risks and rewards.

4. A related organization must be incorporated into the primary government’s financial statements.

5. The comprehensive annual financial report (CAFR) is divided into three main sections: the table of contents section, the auditors’ report section, and the financial section.

6. The typical audit is designed to cover all information included in the CAFR.

7. There are only two government-wide statements: the statement of net assets and the statement of activities.

8. Required notes are an essential element of the basic financial statements.

9. Required supplementary information (RSI) is considered part of the basic financial statements.

10. Public colleges and universities must adhere to the same GASB pronouncements as other types of governments.

MULTIPLE CHOICE (CHAPTER 11)

1. Which of the following is NOT a primary government?
a) A state government.
b) A general purpose local government with the ability to determine its own budget.
c) A general purpose local government whose tax levies must be approved by the state.
d) A special purpose local government whose tax levies must be approved by the state.

2. Which of the following is NOT required for a special purpose local government to be considered a primary government?
a) It must have a separately elected governing body.
b) It must have the power to issue tax exempt debt.
c) It must be legally separate from other primary governments.
d) It must be fiscally independent of other governments.

3. Which of the following is NOT a necessary condition for a governmental entity to be considered fiscally independent?
a) It must be able to determine its own budget.
b) It must be able to levy taxes and/or set rates for its services.
c) It must be able to issue bonds.
d) It must be able to issue bonds that are tax-exempt.

4. Which of the following is NOT a necessary characteristic of a component unit?
a) It is legally separate from the other government.
b) The other government appoints a voting majority of the component unit’s governing body or a voting majority of the unit’s governing body is composed of officials of the other government.
c) The other government can impose its will on the unit or the unit has the potential to provide a financial benefit to or impose a financial burden on the other government.
d) The other government provides services that are used by both governments.

5. The Marsh River School District, a legally separate school district that has a separately elected governing body, cannot enter into any debt agreements without the approval of the County Commission. Marsh River School District would be considered a:
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

6. The County Commission appoints a voting majority of the members of the Board of a particular organization. The County Commission cannot impose its will upon the organization. There is no potential for the organization to provide any financial benefit to the County nor is there is any potential for the organization to impose any financial burden on the county. The organization is an example of a:
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

7. The State has a legally separate State Building Authority which has a board appointed by the Governor. The Authority issues debt in its own name, holds title to buildings in its own name, and leases its building exclusively to the State. The authority would be considered a
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

8. The State has a legally separate State Building Authority which has a board appointed by the Governor. The Authority issues debt in its own name, holds title to buildings in its own name, and leases its building exclusively to the State. In what manner would the Authority be included in the State’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Note disclosure only.
d) Not included in any manner.

9. The City created a legally separate Housing Authority to provide low-income housing to residents of the City. The City issues debt for the Housing Authority in the name of the City, but the Housing Authority is responsible for repayment of the debt. The Housing Authority is governed by a board composed of all 5 members of the City Council. Actions can be taken by the Authority upon receiving an affirmative vote by a simple majority of the board. The Housing Authority would be considered a:
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

10. The City created a legally separate Housing Authority to provide low-income housing to residents of the City. The City issues debt for the Housing Authority in the name of the City, but the Housing Authority is responsible for repayment of the debt. The Housing Authority is governed by a board composed of all 5 members of the City Council. Actions can be taken by Authority upon receiving an affirmative vote by a simple majority of the board. In what manner would the Authority be included in the City’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Note disclosure only.
d) Not included in any manner.

11. The County created a legally separate County Hospital authority. Members of the board of the County Hospital are elected in county-wide elections. The hospital receives no financial support from the County, except that the County pays the hospital bills for county indigents. All revenues of the Hospital are user fees. The County Hospital would be considered a
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

12. The County created a legally separate County Hospital authority. Members of the board of the County Hospital are elected in county-wide elections. The hospital receives no financial support from the County, except that the County pays the hospital bills for county indigents. All revenues of the Hospital are user fees. In what manner would the Hospital be included in the County’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Note disclosure only.
d) Not included in any manner.

13. The City created a legally separate Port Authority. Members of the board of the Port Authority are elected in general city elections. The Port Authority receives no tax dollars; it is supported entirely by user fees. The Port Authority determines its budget, sets user fees, and has the power to issue bonded debt. The Authority would be considered a
a) Primary government.
b) Component unit.
c) Related organization
d) Affiliated organization.

14. The City created a legally separate Port Authority. Members of the board of the Port Authority are elected in general city elections. The Port Authority receives no tax dollars; it is supported entirely by user fees. The Port Authority determines its budget, sets user fees, and has the power to issue bonded debt. In what manner would the Port Authority be included in the City’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Note disclosure only.
d) Not included in any manner.

15. The City created a legally separate entity to operate a County Hospital. The City Council appoints a voting majority of the board of the Hospital. The City cannot impose its will on the Hospital and there is no potential for a financial benefit or financial burden to the City. The County Hospital would be a
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

16. The City created a legally separate entity to operate a County Hospital. The City Council appoints a voting majority of the board of the Hospital. The City cannot impose its will on the Hospital and there is no potential for a financial benefit or financial burden to the City. In what manner would the Hospital be included in the City’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Only by note disclosure of the relationship.
d) Not included in any manner.

17. A Comprehensive Annual Financial Report for the City of Highland Hills need not include which of the following sections?
a) Condensed summary data.
b) Introductory section.
c) Financial section.
d) Statistical section.

18. The introductory section of a CAFR does NOT include which of the following?
a) Table of Contents.
b) Letter of Transmittal.
c) Auditor’s Opinion on the Basic Financial Statements.
d) GFOA Certificate of Achievement.

19. The financial section of a CAFR does not include:
a) Letter of Transmittal.
b) MD&A and Other RSI.
c) Basic Financial Statements.
d) Notes to the financial statements.

20. Which of the following statements is not a required part of the General Basic Financial Statements of the City of Highland Hills?
a) Government-wide Statement of Net Assets.
b) Statement of Revenues, Expenditures, and Changes in Fund Balances for all Governmental Funds.
c) Statement of Revenues, Expenses, and Changes in Net Assets for all Proprietary and Fiduciary Funds.
d) Statement of Cash Flows for all Proprietary Funds.

21. The auditor’s report generally includes an opinion on which of the following sections of the CAFR?
a) The introductory section, the financial section, and the statistical section.
b) The introductory and the financial sections only.
c) The statistical and the financial sections only.
d) The financial section only.

22. Government-wide financial statements include which of the following?
a) Balance Sheet; Income Statement.
b) Balance Sheet; Income Statement; Statement of Cash Flows.
c) Statement of Net Assets; Statement of Activities.
d) Statement of Net Assets; Statement of Activities; Statement of Cash Flows; Statement of Changes in Long-Term Obligations.

23. Fund Financial Statements include which of the following for a proprietary fund?
a) Balance Sheet; Statement of Revenues, Expenses, and Changes in Net Assets.
b) Statement of Net Assets; Statement of Revenues, Expenses, and Changes in Net Assets; Statement of Cash Flows.
c) Statement of Net Assets; Statement of Changes in Net Assets.
d) Statement of Net Assets; Statement of Changes in Net Assets; Statement of Cash Flows.

24. Fund Financial Statements include which of the following for a governmental fund?
a) Statement of Net Assets; Statement of Changes in Net Assets.
b) Statement of Net Assets; Statement of Changes in Net Assets; Statement of Cash Flows.
c) Balance Sheet; Statement of Revenue, Expenditures, and Changes in Fund Balance; Statement of Cash Flows.
d) Balance Sheet; Statement of Revenue, Expenditures, and Changes in Fund Balance.

25. Fund financial statements for Fiduciary Funds include which of the following?
a) Balance Sheet; Income Statement.
b) Balance Sheet; Income Statement; Statement of Cash Flows.
c) Statement of Fiduciary Net Assets; Statement of Changes in Fiduciary Net Assets.
d) Statement of Fiduciary Net Assets; Statement of Changes in Fiduciary Net Assets; Statement of Cash Flows.

26. With regard to combining statements, which of the following statements is true?
a) Combining statements for nonmajor governmental funds are optional.
b) Combining statements for nonmajor governmental funds are required.
c) Combining statements for nonmajor internal service funds are optional.
d) Combining statements for all internal service funds is optional.

27. With regard to MD&A, which of the following is true?
a) Is necessary to understanding a government’s financial standing.
b) Is necessary to provide information not already provided by the basic financial statements.
c) Is necessary to provide information not already provided by the CAFR.
d) Should not be required.

PROBLEMS (CHAPTER 11)

1. For each of the following independent cases state whether or not the entity described should be included in the financial statements of the primary government and if so, how? Be concise but adequately defend your answer using GASB criteria.

a) The Planning and Development Authority is a separate legal entity with a five-member board appointed as follows: one member appointed by the School District, one member appointed by the City, one member appointed by the County, and two members elected by the three appointed members. The Planning and Development Authority borrowed $50,000 from the City. The money was used to make loans to businesses agreeing to relocate to the immediate area. Repayments of the principal and interest by borrowers is available for lending to new entities.

b) The State created a Public Building Authority, a separate legal entity. The Governor appoints a voting majority of the board of the Authority. The Authority issues bonds, backed by the assets financed with the proceeds. The Authority leases the buildings to the State and use the proceeds of the leases to service the debt on the bonds.

c) Bane County Hospital is built on land donated to the hospital by the US Bureau of Land Management. The hospital board members elect replacements to the Board without outside nominations. The hospital is entirely supported by revenues generated by the hospital. The County Commission must approve the budget each year, but the County Commission has never questioned any item in the budget.

d) The State University board of trustees are elected in a statewide general election. The State provides approximately half of the operating revenues necessary to fund University programs. State laws apply to the conduct of business at the University.

2. Outline the required parts of a Comprehensive Annual Financial Report.

ESSAYS (CHAPTER 11)

1. The state established the State Housing Authority to finance construction of low-income housing. The Authority, a state-owned corporation, is governed by an independent board of directors, the members of which are appointed by the governor. They can be removed only for cause. The board of directors has complete control over the Authority’s operations. The Director is hired by the Board and reports to the Board; the Director cannot be removed by the Governor. Although the State Constitution limits the State to $2 million of bonds, the Authority issued $970 million in bonds to finance construction projects. Older debt issues are issued by the Authority but are backed by the taxing power of the State. The newer bonds are issued by the Authority but are revenue bonds only.

The Authority uses the proceeds of its debt to make loans to finance housing construction. Debt is serviced from monies received in repayment of loans made by the Authority.
Do you believe the State should include the Authority in its reporting entity? If so, how? Justify your answer using the GASB Financial Reporting Entity criteria.

2. A Comprehensive Annual Financial Report includes a Statistical Section. What kinds of information are found in the statistical section? To what use would a reader put the information found in the statistical section? In your opinion, is the statistical section worth the effort put into its preparation?

3. GASB reporting standards require that legally separate component units be included on the face of the financial statements of the primary government. Small City created a legally separate City Utility Service. The Small City Council appoints the Utility board members, authorizes the bonds of the Utility, and approves its budget. Small City’s general fund revenues are $58 million; the revenues of the Public Utility are $100 million (the Public Utility owns a generating plant and sells its excess power to other communities). Discuss the appropriate reporting for the Public Utility. Do you think that this presentation is meaningful? Why or why not?

Chapter 12

Not-for-Profit Organizations

TRUE/FALSE (CHAPTER 12)

1. The FASB has standard-setting jurisdiction over all private not-for-profits and all government-owned not-for-profits.

2. Private not-for-profit accounting is closer to business than to government accounting.

3. FASB Statement No. 117 directs that revenues and expenses be reported in a statement of financial position.

4. In the statement of activities, FASB Statement No. 117 requires revenues to be reported as increases in one of the three categories of net assets, depending on donor-imposed restrictions; however, all expenses should be reported as decreases in unrestricted net assets.

5. Restricted contributions may be reported as unrestricted if the restriction has been met in the same period as the contribution is made.

6. FASB Statement No. 95 requires not-for-profits use the direct method in the preparation of the statement of cash flows.

7. In accounting for investments, not-for-profits, like businesses, must report their investments at fair value and classify the investments as either trading, available-for-sale, or held-to-maturity.

8. Absent explicit donor or legal stipulations, a not-for-profit’s endowment principal (permanently restricted net assets) would not be affected by either gains or losses on investments.

9. Not-for-profits cannot own or be integrally affiliated with either businesses or other not-for-profits.

10. FASB Statement No. 93 makes the recognition of depreciation on long-lived assets optional at the discretion of the not-for-profit.

MULTIPLE CHOICE (CHAPTER 12)

1. Financial statements for Smith College, a church-supported college, should be prepared according to standards set by
a) AICPA.
b) FASB.
c) GASB.
d) Smith may choose any of the above.

2. The basis of accounting used by not-for-profit organizations in their external financial reports is
a) Industry-specific basis of accounting.
b) Cash basis of accounting.
c) Modified accrual basis of accounting.
d) Accrual basis of accounting.

3. FASB requires the focus of external financial reporting be on
a) The donor-imposed restrictions on resources.
b) All restrictions on resources.
c) Funds of the entity.
d) The entity taken as a whole.

4. Expenses incurred by not-for-profit organizations should be reported as
a) Decreases in one of the three categories of net assets.
b) Decreases in unrestricted net assets.
c) Decreases in temporarily restricted net assets.
d) Decreases in permanently restricted net assets.

5. Revenues of a not-for-profit organization should be reported as
a) Increases in one of the three categories of net assets.
b) Increases in unrestricted net assets.
c) Increases in temporarily restricted net assets.
d) Increases in permanently restricted net assets.

6. Restricted gifts to not-for-profit organizations
a) Must always be shown as an increase in restricted net assets.
b) Must always be shown as an increase in unrestricted net assets.
c) May be shown as an increase in unrestricted net assets if the restriction is met in the same period.
d) May be shown as an increase in unrestricted net assets at the discretion of management.

7. The account title “Resources Released from Restriction” is reported by a ‘restricted fund’ as a
a) Revenue account.
b) Contra-revenue account.
c) Expense account.
d) Contra-expense account.

8. The account title “Resources Released from Restriction” is reported by an ‘unrestricted fund’ as a
a) Revenue account.
b) Contra-revenue account.
c) Expense account.
d) Contra-expense account.

9. FASB requires that all not-for-profit organizations report expenses
a) By object.
b) By function.
c) By natural classification.
d) By budget code.

10. Voluntary health and welfare organizations must also report expenses by
a) Object.
b) Function.
c) Natural classification.
d) Budget code.

11. The National Association for the Preservation of Wildlife received $10,000 from a benefactor to support the overall objective of the organization. This amount will be recognized as revenue
a) In the period received.
b) In the period spent.
c) Never, because it is not earned.
d) In the period it becomes susceptible to accrual.

12. Not-for-profit organizations report their cash flows in which of the following categories?
a) Operating, noncapital financing, capital financing, investing.
b) Operating, noncapital financing, investing.
c) Operating capital financing, investing.
d) Operating, financing, investing.

13. Not-for-profit organization should report contributions restricted for long-term purposes in which of the following categories?
a) Operating.
b) Financing.
c) Capital financing.
d) Investing.

14. Not-for-profit organizations should report interest and dividends earned and restricted for long-term purposes in which of the following categories?
a) Operating.
b) Financing.
c) Capital financing.
d) Investing.

15. Revenue from an exchange transaction may be classified as an increase in which class of net assets?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) Any of the above.

16. During the annual fundraising drive, the Cancer Society raised $900,000 in pledges of financial support for their general operations. By the fiscal year-end, the Society had collected $600,000 of the pledges. The Society estimates that 10% of the remaining pledges will be uncollectible. The NET amount of revenue the Society should recognize during the current year from this pledge drive is
a) $900,000.
b) $870,000.
c) $810,000.
d) $600,000.

Use the following information to answer #17 – #19.
United Charities’ annual fund raising drive in 2001 raised pledges of $600,000 of which $400,000 were collected in 2001 and $100,000 were collected in 2002. United Charities estimates $75,000 of the remaining pledges will never be collected.

17. The increase in unrestricted net assets in 2001 as a result of the fund raising drive is
a) $600,000.
b) $525,000.
c) $400,000.
d) $125,000.

18. The increase in temporarily restricted net assets in 2001 as a result of the fundraising drive is
a) $600,000.
b) $525,000.
c) $400,000.
d) $125,000.

19. In 2002, the change in unrestricted net assets is
a) $0
b) $100,000 increase.
c) $100,000 decrease.
d) $500,000 increase.

20. In a prior year, United Charities received a $100,000 gift to be used to acquire vans to provide transportation for physically challenged adults. During the current year, United acquired two vans at a cost of $60,000 each. The appropriate entry(ies) to record the acquisition should be
a) UNRESTRICTED FUND
Resources Released from Restriction $100,00
Cash $100,000
RESTRICTED FUND
Fixed Assets $120,000
Cash $ 20,000
Resources Released from Restriction $100,000
b) RESTRICTED FUND
Resources Released from Restriction $ 100,000
Cash $100,000
UNRESTRICTED FUND
Fixed Assets $120,000
Resources Released from Restriction $100,000
Cash $ 20,000
c) UNRESTRICTED FUND
Fixed Assets $120,000
Cash $120,000
d) RESTRICTED FUND
Fixed Assets $120,000
Cash $120,000

21. In the current year National Pet Charities, which uses fund-type accounting to maintain its books and records, received a $30,000 contribution to help educate people on responsible pet ownership. During the current year, the entry to record this donation is
a) UNRESTRICTED FUND. No entry.
RESTRICTED FUND. Debit Cash $30,000; Credit Revenues $30,000.
b) UNRESTRICTED FUND. No entry.
RESTRICTED FUND. Debit Cash $30,000; Credit Net Assets $30,000.
c) UNRESTICTED FUND. Debit Cash $30,000; Credit Revenues $30,000.
RESTRICTED FUND. No entry.
d) UNRESTRICTED FUND. Debit Cash $30,000; Credit Net Assets $30,000.
RESTRICTED FUND. No entry.

22. Grace Church, a nondenominational not-for-profit entity, operates a school in connection with the Church. This year members of the Church decided to construct a new wing on the school with six classrooms. The Church hired an architect and a construction supervisor. The bulk of the labor for construction was donated by Church members who were willing workers but not necessarily skilled carpenters. Materials for the construction cost $300,000 and the paid labor was $100,000. The fair value of the completed building is $1 million. When the building is completed what should be the balance in the asset account ‘Building’ and the account ‘Contributed Revenue.’
a) Building $400,000; Contributed Revenue $0.
b) Building $400,000; Contributed Revenue $600,000.
c) Building $1 million; Contributed Revenue $600,000.
d) Building $1 million; Contributed Revenue $0.

23. Mary’s Extended Care Center, a not-for-profit entity, enjoys the services of a group of high school age people who each agree to work three afternoons a week for three hours each afternoon performing a variety of patient-related services such as writing letters for those who are unable to do so, delivering mail to the patient rooms, and pushing wheel-chair patients across the grounds. The services rendered by these young people enhance the quality of life for the residents. They could not be provided if they were not donated because there are not enough resources to do so. The past year the young people donated 5000 hours in total. The services would have cost $6.00 per hour if they had been purchased but they were worth $10 an hour to St. Mary’s. What is the amount of contributed revenue that should be recognized by St. Mary’s related to these services?
a) $50,000.
b) $30,000.
c) $0.
d) Cannot determine.

24. Simplex Games, a not-for-profit entity organized to provide athletic competition opportunities for high school students, utilizes a number of volunteers in carrying out its mission. At the 2002 Games 50 volunteers provided a total of 1000 hours of service performing tasks such as picking up litter and delivering water to the athletes. A local CPA firm donates its services to prepare the annual tax return and other federal and state required paperwork which must be filed to maintain its status as a tax-exempt organization. During 2002 the CPA firm provided 50 hours of service. If purchased, the CPA services would have cost $50 per hour and the game workers would have cost $5 per hour. How much contributed service revenue should Simplex Games recognize in 2002?
a) $7,500.
b) $5,000.
c) $2,500.
d) $0.

25. A not-for-profit Art Museum that has elected not to capitalize its art collection receives a donation of a rare piece of Tlinket Indian art. The donor paid $8,000 for the piece several years ago. Today the piece has an estimated fair value of $50,000. What entry should the Art Museum make upon receipt of this donation?
a) Debit Collection Items $50,000; Credit Donated Revenue $50,000.
b) Debit Collection Items $8,000; Credit Donated Revenue $8,000.
c) Debit Collection Items $50,000; Credit Unrestricted Net Assets $50,000.
d) No entry required.

26. Native Art Museum, a not-for-profit entity that elects not to capitalize its collection items, purchased for $10,000 a wonderful totem pole for display near the door of the Museum. As a result of this transaction, which of the following entries should be made?
a) Debit Collection Items $10,000; Credit Cash $10,000.
b) Debit Collection Expense $10,000; Credit Cash $10,000.
c) Debit Unrestricted Net Assets $10,000; Credit Cash $10,000.
d) No entry is required.

27. The Nature Conservatory, a not-for-profit entity, engaged in a fundraising drive to raise money to buy land to provide a habitat for the endangered Sleepy Eagle. A donor pledged $1 million to the project provided that the Nature Conservatory was able to raise an additional $1.5 million from other sources. What entry should the Nature Conservatory make at the time of the $1 million pledge?
a) Debit Pledge Receivable $1 million; Credit Unrestricted Revenue $1 million.
b) Debit Pledges Receivable $1 million; Credit Temporarily Restricted Revenue $1 million.
c) Debit Pledges Receivable $1 million; Credit Temporarily Restricted Net Assets $1 million.
d) No entry is made at the time of the pledge.

28. When should a not-for-profit entity recognize pledge revenue that is contingent upon raising a matching amount?
a) When the pledge is made.
b) When the cash is received.
c) When the matching funds have been raised.
d) When the project is completed.

29. A donor pledges $100,000 to the Shakespeare Foundation to be used only to support the summer Shakespeare Theater—an event that has been held every summer for 38 years. This is an example of a(an)
a) Conditional contribution.
b) Unconditional contribution.
c) Restricted contribution.
d) Unrestricted contribution.

30. United Charities accepted a contribution from a donor and agreed to transfer the assets to Aid for Friends, a not-for-profit that provides temporary shelter to the homeless. United Charities should debit cash or other assets and credit
a) Unrestricted revenue.
b) Temporarily restricted revenue.
c) Liability to Aid for Friends.
d) United Charities should not make an entry.

31. Music Lovers Foundation, a not-for-profit governed by an independent board, was founded to support the Northern State University Choir until such time as the state legislature shall adequately fund the choir. When the Choir is adequately funded by appropriation the Foundation may direct resources to other music projects that it deems acceptable. When Music Lovers accepts a contribution from a donor it should debit cash and/or other assets and credit
a) Unrestricted revenue.
b) Temporarily restricted revenue.
c) Liability.
d) It should not make an entry.

32. The Save the Animals Foundation received a gift of $500,000 from a donor who wanted the gift used to acquire habitat for endangered snails. The money may be invested but all earnings are restricted to habitat acquisition. During the year all of the gift was invested in corporate securities. At year-end, the securities had a value of $501,0000. The appropriate way to recognize the change in fair value is
a) Debit Investment $1,000; Credit Unrestricted Revenue $1,000.
b) Debit Investment $1,000; Credit Temporarily Restricted Revenue $1,000.
c) Debit Investment $1,000; Credit Permanently Restricted Revenue $1,000.
d) No entry should be made until the securities are sold.

33. Sheridan Public School Foundation had available temporarily restricted gifts in excess of $200,000. The Foundation decided to invest this money temporarily until it needs the funds for the restricted purpose. The donors had made no specific stipulations regarding investment earnings but the Foundation board had voted to use the earnings on the projects for which the gift had originally been restricted. At year-end, the securities had a fair value of $200,500. The appropriate way to recognize the change in fair value is
a) Debit Investment $500; Credit Unrestricted Revenue $500.
b) Debit Investment $500; Credit Temporarily Restricted Revenue $500.
c) Debit Investment $500; Credit Permanently Restricted Revenue $500.
d) No entry should be made until the securities are sold.

34. The Friends of the Library (FOL), a not-for-profit entity, received a gift restricted to acquisition of a special piece of the equipment used to restore books. Late last year FOL acquired the machine at a total cost of $19,000. The machine is estimated to have a useful life of eight years and a salvage value of $3,000. In what fund should FOL make the entry to record the depreciation for the current year?
a) Unrestricted fund.
b) Temporarily restricted fund.
c) Permanently restricted fund.
d) FOL should not recognize depreciation.

35. A not-for-profit would include which of the following financial statements in is Basic Financial Statements?
a) Statement of Financial Position and Statement of Activities.
b) Statement of Financial Position, Statement of Activities, and Cash Flow Statement.
c) Statement of Financial Position, Statement of Activities, Cash Flow Statement, and a Statement of Functional Expenses.
d) Statement of Financial Position, Statement of Activities, and a Statement of Functional Expenses.

PROBLEMS (CHAPTER 12)

1. United Charities, a not-for-profit entity, supports activities for lower-income families. They have regularly engaged in activities such as providing transportation for physically-challenged individuals, providing shelters for the temporarily homeless, providing congregate meals for the homeless, and providing shelters for abused women and children. Record the following transactions. Your account titles should clearly indicate to which class of net assets the entry will be closed or the fund in which the entry is being made. If no entry is required, write “No entry required.”

a. United Charities engaged in a fund-raising campaign which resulted in pledges of $600,000 to support activities of the current year. During the year, United collected $500,000 on these pledges.

b. A local citizen pledged $50,000 to purchase and equip a van to provide transportation for physically challenged individuals. This citizen has donated regularly and there is no reason to believe that this pledge will not be collectible.

c. In prior years, an advocacy group for abused women donated $10,000 to be used to furnish a ‘safe-house’ for abused women and children. During the current year renovation of the safe house was completed and furniture was acquired at a total cost of $15,000.

d. A wealthy benefactor pledges $100,000 to United if United successfully raises a matching amount in a capital asset fund-raising drive being conducted over a 12-month period.

e. $60,000 cash is received from a donor who specifies that the money must be spent to provide educational activities for children who will be living in the ‘safe-house’. It will be next year before the ‘safe-house’ has its first residents.

f. A local attorney has agreed to provide legal services to United on a pro-bona basis. During the current period the attorney provided services for which she would have billed $1,500.

g. Several older housewives provide services at the United Charities congregate meal setting facility. These women work in the kitchen serving meals and cleaning up the kitchen. If these services were not donated they would have to purchased. The value of these services at the prevailing wage rate for similar employees would have amounted to $50,000 for the current year.

h. Fixed assets belonging to United Charities have an original cost of $270,000, an estimated salvage value of $70,000, and an estimated useful life of 20 years. Record depreciation if applicable.
2. The Heritage Art Museum, a not-for-profit entity specializing in art items created by natives of the Pacific Northwest, has a December 31 fiscal year-end. The Museum has a policy of not capitalizing collection items. Your entry should clearly indicate to which class of net assets the account would be closed, or in which fund the entry is being made. If no entry is required, write “No entry required.”

a. During the current year the Museum received admissions fees in cash $500,000.

b. Citizens of the local community are encouraged to participate in a program called ‘Friends of the Museum.’ For a yearly contribution of $25 per family, a family is entitled to free admission to the Museum during the calendar year. A ‘Friend of the Museum; also receives a monthly one-page newsletter announcing upcoming events. At year-end, there were 1000 members in the ‘Friends of the Museum.’

c. During the current year the Museum incurred salary expense of $1 million of which $60,000 remains unpaid at year end.

d. During the year the Museum incurred operating expenses of $400,000 of which $30,000 remains unpaid at year end. Of the $400,000, $50,000 was used to buy supplies of which $20,000 remains on hand at year-end.

e. Office equipment owned by the Museum has a historical cost of $100,000, salvage value of $20,000 and can be depreciated over 8 years on the straight-line basis.

f. During the year the Museum conducted a fund-raising drive to raise money to acquire new art items for the Museum. The Museum received pledges of $200,000 of which the Museum had collected $150,000 by year-end and expected to ultimately collect another $20,000.

g. The Museum had a small portfolio of investments in equity securities.. At the beginning of the year the portfolio had a fair value of $60,000. During the year the Museum collected $3,000 in dividends on the securities. At year-end the portfolio had a market value of $61,000.

h. During the year a citizen died and willed his wonderful collection of native art to the Museum. The appraised value of the collection was $600,000.

i. To balance its collection, the Museum sold two of its collection items for $250,000 which approximates fair value. These items had a historical cost to the Museum of $10,000.

j. The proceeds of the sale were used to acquire two new items at a cost of $310,000.

ESSAYS (CHAPTER 12)

1. For each of the cases below state whether or not the contributed services would be recognized, how much would be recognized, and how it would be recognized. Explain your answer in terms of the existing standard. Also explain why, in your opinion, the standard permits/prohibits recognition of this particular type of contribution.

a. A non-denominational church votes to construct a new educational wing on their existing facility. The church will hire an architect to design the new wing and a construction supervisor to oversee the construction. Church members will provide most of the labor for the construction. Labor donated by members who have construction experience or who are considered professional craftsmen at the prevailing wage for their trade or craft is $500,000. Labor donated by persons possessing non-building specialized skills (doctors, teachers, lawyers, etc.) at their prevailing wage rates is $700,000. Labor donated by non-professionals measured at the minimum wage is $300,000. The appraised value of the building when completed is $3 million. The architect was paid $700,000, the construction supervisor was paid $50,000 and the materials purchased for use in the building cost $1 million.

b. An investment advisor, a member of the Board of a not-for-profit entity, provides pro bono investment advise to the NFP. The NFP does not have a particularly large investment portfolio and without the advise of the Board member the NFP would probably invest its idle cash in certificates of deposits at an insured commercial bank to protect itself against loss of its principal. If the investment advisor had provided similar services to his customers he would have charged $2,000.

c. Members of a religious order provide professional nursing services for a health-care facility that is run by their order. The members are not compensated but their order provides lodging, food, and other necessities. The cost of the lodging, food, etc., is paid by the health-care entity and classified as Nursing Service Expense. At the end of the year the balance in the Nursing Service Expense account is $3 million. The value of the nursing services provided, measured at the prevailing wage for nurses, is $5 million.

2. A generous benefactor pledges $1 million to The R. J. Smith Foundation, a not-for-profit entity that promotes the arts. The gift is to be used to provide scholarships for talented musicians at a music camp operated by the Foundation. The gift was given in August, 2002 to support the Summer 2003 music program. The Foundation Director argues that the gift is a conditional restricted gift and therefore cannot be recognized as revenue in 2002. The accountant argues that the gift is an unconditional restricted gift and must be recognized in the current year. What is the basis for the Director’s argument? What is the basis for the accountant’s argument? In your answer provide an explanation of the terms conditional, unconditional, restricted and unrestricted.

Chapter 13

Special Issues for Not-for-Profit Health Care Providers and Institutions of Higher Education

TRUE/FALSE (CHAPTER 13)

1. The statement of financial position of a not-for-profit health care organization should distinguish among unrestricted, temporarily restricted, and permanently restricted net assets.

2. The statement of activities of a not-for-profit health care organization should classify the revenues as unrestricted, temporarily restricted, or permanently restricted, but should report expenses only as decreases in unrestricted resources.

3. Temporarily restricted funds related to plant and equipment generally account only for resources restricted to their purchase or construction, not for the plant and equipment itself, which are typically reported in the general operating fund.

4. Not-for-profit health care organizations must use exactly three funds to account for the three categories of restrictiveness.

5. In classifying expenses in the statement of activities of a not-for-profit health care organization, all expenses are reported exclusively within the temporarily restricted category.

6. Unlike businesses, not-for-profit health care providers often serve patients who they know will be unable to pay the amounts billed.

7. According to the AICPA audit guide, Health Care Organizations, revenue must be recorded using the patient discharge method.

8. The Hill-Burton Act stipulates that hospitals receiving federal construction funds must provide a certain amount of charity care.

9. Government hospitals are subject to the same FASB standards as private not-for-profit health care organizations.

10. Private not-for-profit colleges and universities are subject to the same FASB standards as other not-for-profit entities.

MULTIPLE CHOICE (CHAPTER 13)

1. For a not-for-profit hospital, which of the following financial statements is NOT required?
a) Statement of financial position.
b) Statement of activities.
c) Statement of cash flows.
d) Statement of functional expenses.

2. For a not-for-profit college or university, which of the following categories of net assets is NOT appropriate in its external financial statements?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) None. All of the above are appropriate.

3. New College, a private college, received a $1 million donation. The donor specified that the principal of her gift could not be used for program activities but the earnings on the principal must be used to provide scholarships to academically qualified students in the business school. The $1 million gift would increase which of the following categories of net assets?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) Either (b) and (c).

4. Intermountain Hospital, a not-for-profit health care provider, issued $70 million in term bonds to finance construction of a new wing at its main hospital. Terms of the bond issue require that $5 million of the proceeds of the bond issue be invested in U.S. government securities. The $5 million must be held until maturity of the bonds. The $5 million will increase which class of net assets?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) Either (b) or (c).

5. During the current year, Jones University received a $50,000 gift from an alumnae who specified that it must be used to pay travel costs for faculty to attend health care conferences in foreign countries. During the year the university spent $8,000 to support travel to a health care conference in Italy. The $8,000 disbursement will cause a NET decrease in which class of net assets?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) Cannot be determined.

Use the following information to answer #6 and #7.
Kale Hospital, a not-for-profit entity, received a pledge from a donor in support of a fund raising effort by the Hospital to finance construction of a new facility for cancer treatment. The donor promised to pay $1 million in equal annual installments of $100,000 over the next 10 years. The present value of the gift at the risk-free interest rate is $736,000.

6. The amount of unrestricted revenue that should be recognized by Kale in the year of the gift is
a) $1 million.
b) $736,000.
c) $100,000.
d) $0.

7. The amount of restricted revenue that should be recognized by Kale in the year of the gift is
a) $1 million.
b) $736,000.
c) $100,000.
d) $0.

8. An accountant has encountered a perplexing financial reporting issue related to the hospital for which she is preparing financial statements. The issue is not specifically addressed by FASB statements. To which of the following sources would the accountant probably look for industry-specific guidance?
a) GASB Statements.
b) AICPA accounting and auditing guide, Not-for-Profit Organizations.
c) AICPA accounting and auditing guide, Health Care Organizations.
d) Pronouncements of the HFMA or AHA.

9. Which of the following entities should recognize depreciation expense on its operating statement?
a) Not-for-profit University.
b) Not-for-profit Foundation.
c) Not-for-profit Hospital.
d) All of the above.

10. In prior years, a not-for-profit hospital received funds from a donor who restricted the use of those funds to providing nursing scholarships. During the current year $8,000 of scholarships were awarded. These scholarships should be reported
a) As expenses in the unrestricted fund.
b) As reductions in the revenue section in the unrestricted fund.
c) As expenses in the temporarily restricted fund.
d) As expenses in the permanently restricted fund.

11. During the current year, St. Mary’s Hospital (a not-for-profit entity) earned, based on its normal billings rate, $1 million in patient service revenues. Many of these patients belong to a health plan that has an established pay schedule. Based on the specific services rendered to members of the plan, the hospital estimates that $.05 million will not be collectible from the plan or the patient. Some of the patients are Hospital employees. These employees are given a 50% discount on the services rendered. Employee discounts for the current year total $.01 million. Some of the patients are uninsured and the hospital estimates, that of the amount billed to the uninsured patients, $.2 million will not be collectible (bad debts). The amount of net patient service revenues for St. Mary’s Hospital for the current year is
a) $1 million.
b) $.94 million.
c) $.87 million.
d) $.74 million.

12. A consortium of physicians agree to provide services to the employees of a large County government. The agreement calls for monthly payments from the County to the consortium in the amount of $100,000 per month. County employees are not billed for services rendered by the consortium. All County employees are required to use the consortium under their health care program (any services rendered to County employees by other physicians are not covered under the health plan). During the period the consortium performed services for County employees for which it would have billed $85,000. The consortium referred patients to other health care providers for services they could not perform. The consortium estimates that it will be billed $5,000 for those services. The amount of revenue that should be recognized by the consortium is
a) $100,000.
b) $95,000.
c) $85,000.
d) $80,000.

13. A hospital estimates, based on past experience, that it will incur $5 million in malpractice claims as a result of services rendered in the current period. The hospital carries a malpractice insurance policy with a yearly $2 million deductible clause. The amount that should appear on its year-end financial statement as Claims Expense (Loss) should be
a) $0.
b) $2 million.
c) $3 million.
d) $5 million.

14. A hospital carried a 2-year malpractice insurance policy that allows for retroactive premium adjustments based on experience (claims actually incurred). The basic premium is $150,000 for the 2-year policy payable in advance. At the end of the first year the hospital estimates that it will have to pay an additional $40,000 in premiums as a result of claims filed in the current year and it estimates that it will incur additional premiums in the second year of $50,000 as a result of claims filed in the second year. The amount of insurance expense that should appear on the financial statements at the end of the first year should be
a) $75,000.
b) $115,000.
c) $150,000.
d) $240,000.

15. An accountant has encountered a perplexing financial reporting issue related to the private college for which he is preparing financial statements. The issue is not specifically addressed by FASB Statements. To what standards would the accountant now look for guidance?
a) GASB Statements.
b) AICPA accounting and auditing guide, Not-for-Profit Organizations.
c) AICPA accounting and auditing guide, Audits of Colleges and Universities and/or AICPA SOP 74-8, Financial Accounting and Financial Reporting by Colleges and Universities.
d) College textbooks.

16. A private not-for-profit college would include which of the following financial statements in is Basic Financial Statements?
a) Statement of Financial Position and Statement of Activities.
b) Statement of Financial Position, Statement of Activities, and Cash Flow Statement.
c) Statement of Financial Position, Statement of Activities, Cash Flow Statement, and a Statement of Functional Expenses.
d) Statement of Financial Position, Statement of Activities, and a Statement of Functional Expenses.

17. For financial reporting purposes, government hospitals are within the jurisdiction of the
a) FASB.
b) GASB.
c) AICPA.
d) Hill-Burton Act.

18. For financial reporting purposes, private not-for-profit health care providers are within the jurisdiction of the
a) FASB.
b) GASB.
c) AICPA.
d) Hill-Burton Act.

19. For financial reporting purposes, state supported colleges and universities are within the jurisdiction of the
a) FASB.
b) GASB.
c) AICPA.
d) NACUBO.

20. For financial reporting purposes, private not-for-profit colleges and universities are within the jurisdiction of the
a) FASB.
b) GASB.
c) AICPA.
d) NACUBO.

PROBLEMS (CHAPTER 13)

1. St. Anthony’s hospital is a private not-for-profit entity that provides health care services to the citizens in the small rural community in which it is located. The most recent construction at the Hospital was financed using Hill-Burton funds. During the current month, St. Anthony’s engaged in the following transactions. Using the following information make the appropriate entries for St. Anthony’s for the current month.

a. The Hospital would have billed $1.2 million for services rendered to in-patients. The $1.2 million is based on the hospital’s established billing rate. Of this amount $800,000 will be billed to Delta Medical Group, a third-party payor that insurers many state employees, $150,000 will be billed to uninsured patients, $200,000 is provided to indigents and will be considered charity care, and $50,000 was for services rendered to Hospital employees.

b. Based on prior experience with uninsured patients, the Hospital estimates that $60,000 of the $150,000 will be uncollectible.

c. The Hospital recognizes the value of charity services rendered.

2. Richards College is a not-for-profit college. Record the following transactions for Richards College. The College has a June 30 fiscal year.

a. Tuition revenue for the Fall semester 2002 (August – December) was $4 million; tuition for the Spring semester 2003 (January – May) was $3.8 million; tuition for the Summer semester 2003 (June 1-August 15) was $1 million. All tuition received in cash.

b. Faculty salaries for the Fall semester were $3 million; for the Spring semester, $2.9 million; for the Summer semester were $.5 million. All salaries are paid at the end of the month earned. Salaries earned in summer are June $.2 million, July $2 and August .5 million.

c. During June $3.2 million of tuition applicable to the Fall 2003 was received in cash.

d. Fixed assets of the University have a historical cost of $120 million, estimated salvage value of $20 million and an estimated useful life of 50 years.

ESSAYS (CHAPTER 13)

1. Alpha Hospital is a recipient of Hill-Burton funds and must provide some hospital care for which it will not be compensated. During the current year Alpha Hospital provided $1 million in charity care. What is the current financial reporting requirement for charity care? Do you agree or disagree with the current financial reporting requirement? Why or why not? If you do not agree, how do you think charity care should be reported? If you agree with the current standards, what alternative reporting requirements do you believe will be proposed by those who do not agree with the current standards?

2. Neither the FASB nor the GASB pronouncements, nor the current AICPA not-for-profit audit guide, addresses the issue of tuition revenue. Thus, the 1973 AICPA college and university guide remains the most authoritative source of guidance for both government and not-for-profit institutions. What is the directive on how to report revenues and expenditures of an academic term, such as a summer session, which is conducted over a fiscal year-end?

Chapter 14

Auditing Governments and Not-for-Profit Organizations

TRUE/FALSE (CHAPTER 14)

1. In 1972, the GAO issued Government Auditing Standards known as the Blue Book.

2. Performance audits are intended to determine whether an entity’s financial statements are presented fairly in accordance to GAAP.

3. Agencies that provide funds to governments may stipulate that the audit be conducted in accordance with generally accepted government auditing standards (GAGAS).

4. GAO standards do not mandate a peer review process for audit organizations.

5. The Single Audit Act applies to organizations receiving more than $500,000 in federal assistance under more than one program be subject to a single audit.

6. A single audit has two main components: an audit of the financial statements and an audit of federal financial awards.

7. In a single audit, auditors are expected to provide an opinion on the financial statements and on the schedule of expenditures of federal awards.

8. Performance audits are most commonly conducted by external auditors.

9. The Sarbanes-Oxley Act has had no impact on governmental auditing.

10. Performance audits may be conducted by staff without training in accounting.

MULTIPLE CHOICE (CHAPTER 14)

1. In reporting the results of a performance audit, it is appropriate for the auditors to
a. conjecture as to the reasons for the program’s failure to achieve desired results
b. include the auditors’ response to management’s objections to the auditors’ findings
c. provide recommendations as to how the program can be improved
d. all of the above.

2. Government Auditing Standards must be adhered to in all financial audits except of
a. state and local governments
b. federal agencies
c. federally chartered banks
d. public corporations

3. In discerning the objectives of a program to be audited, the auditors should give the least credibility to
a. the legislation creating the program
b. the organization’s program budget
c. the organization’s mission statement and strategic plan
d. comments by the lower-level employees who actually depend on the program for their livelihoods.

4. ‘‘Generally accepted government auditing standards’’ (GAGAS) refers to standards incorporated in
a. the Yellow Book
b. the Yellow Book and OMB Circular A-133
c. the Yellow Book and the AICPA’s Professional Standards
d. the Yellow Book OMB Circular A-133, and the AICPA’s Professional Standards

5. Which of the following statements is incorrect about GAO standards pertaining to performance audits?
a. The GAO mandates that programs be audited annually by accounting trained professionals
b. Performance audits are normally carried out by internal audit departments
c. Performance audits focus on specific programs
d. The GAO does not specify when and how often a program, must be audited

6. Government Auditing Standards characterizes government engagements into which of the following three categories?
a. financial audits, compliance audits, and performance audits
b. financial audits, operational audits, and performance audits
c. financial audits, attest engagements, and performance audits
d. financial audits, efficiency and effectiveness audits, and compliance audits

7. The purpose of this is to avoid duplication of efforts in conducting governmental audits
a. AICPA’s Professional Standards
b. GAO’s Government Auditing Standards
c. Single Audit Act
d. OMB Circular A-133

8. The Yellow Book’s general standards are issued by the
a. GAO
b. FASB
c. AICPA
d. IRS

9. Which of the following is not reported upon in the Schedule of Findings and Questioned Costs?
a. reportable conditions related to internal control
b. material noncompliance with provisions of laws, regulations, contracts, or grant agreements
c. material examples of inefficiency and ineffectiveness in carrying out federally funded programs
d. federally reimbursed expenditures that are not adequately documented

10. Which of the following is not a General Auditing Standard for financial audits?
a. professional judgment
b. financial stability
c. independence
d. competence

11. Which of the following is a Yellow Book standard in respect to independence?
a. auditors may only audit one government agency during a fiscal year
b. auditors should not audit their own work
c. auditors may not advise in respect to computer installation
d. auditors may not audit public corporations

12. Federal funds must be used only for activities that are within the scope of the grant would be a(n)
a. optional activity
b. Yelllow Book mandate
c. allowable activity
d. prohibited activity

13. This law requires that the wages of laborers and mechanics employed by the contractors of federally funded projects be paid at prevailing local wage rates.
a. Davis-Bacon Act
b. Sarbanes-Oxley Act
c. Federal Wage and Hour Law
d. IRS Act

14. The process of specifically directing federal funds to a particular program is called:
a. allocation
b. earmarking
c. identification
d. subversion

15. Per the GAO standards, an auditor’s working papers must
a. be made public unless they contain information that would be harmful to national security
b. contain sufficient information to convince an auditor having no previous connection with the audit that the evidence supports the auditor’s conclusions and judgments
c. be retained by the auditor for a period of no less than 10 years
d. include documentation that the individual auditors on the engagement have satisfied the standards’ continuing professional education requirements

16. Auditors who perform government audits must complete 80 hours of continuing professional education every two years, of which ____ hours must be related directly to government auditing.
a. 24
b. 30
c. 16
d. 8

PROBLEMS (CHAPTER 14)

1. In a program review, auditors need to identify compliance requirements that are specific to the program itself and that are applicable to all federal award recipients. Identify and describe three general compliance requirements.

2. What reports result from single audits?

ESSAYS (CHAPTER 14)

1. How does Sarbanes-Oxley and IRS regulations affect governments and not-for-profits?

2. What are some questions that need to be addressed in assessing an ethical conflict?

Chapter 15

Financial Analysis

TRUE/FALSE (CHAPTER 15)

1. For financial analysis purposes, the Comprehensive Annual Financial Report alone can provide all the information resource providers and other interested parties might need.

2. A government’s economic condition is a broader concept than its financial position.

3. For financial analysis purposes, nonfinancial considerations are at least as important as the financial statements.

4. Bond rating agencies usually require governments to supplement their CAFRs with additional documents, such as budgets, long-range forecasts and plans, and economic reports.

5. By law, governments are prohibited from outsourcing certain activities such as clerical operations, and repair and maintenance services.

6. In the future, e-commerce will affect governments, just as it is now transforming businesses.

7. Budgets are generally on a cash or near-cash basis.

8. Governmental budgets must adhere to GAAP.

9. A widely used rule of thumb holds that two consecutive years of operating deficits connote serious fiscal stress.

10. For many analytical purposes, revenues and expenditures are best expressed per capita.

MULTIPLE CHOICE (CHAPTER 15)

1. The city council of the City of Highland Hills has adopted a policy of aggressively pursuing grants and other resource inflows from other levels of government. Over the past several years, the proportion of total City revenues that comes from other levels of government has been steadily increasing. As a consequent of these increased revenues, the City has begun offering a number of new services to the citizens of the City. In assessing the financial condition of the City of Highland Hills, an analyst would conclude which of the following?
a) The increasing reliance on intergovernmental revenues has increased the financial viability of the City.
b) The increasing reliance on intergovernmental revenues is a negative fiscal characteristic.
c) The increasing reliance on intergovernmental revenues is irrelevant in assessing the financial condition of the City.
d) The increasing reliance on intergovernmental revenues is a sign of poor management on the part of the City Council.

2. Which of the following is generally considered to be a positive fiscal characteristic for a City?
a) A high, or increasing, ratio of intergovernmental revenues to total revenues.
b) A low percentage of restricted revenues to total revenues.
c) A high proportion of one-time revenues to total revenues.
d) A low ratio of property tax revenues to total revenues.

3. Which of the following is generally considered to be a positive fiscal characteristic for a City?
a) An increasing amount of payroll costs.
b) An increasing amount of expenditures for specific functions.
c) An increasing percentage of nondiscretionary expenditures.
d) An increasing percentage of discretionary expenditures.

4. Which of the following would generally be considered to be an indication of future economic problems for a City?
a) A decreasing percentage of revenue raised by the City as a proportion of total appraised value of property.
b) A decreasing percentage of revenue raised by the City as a proportion of median family income.
c) An increasing population base.
d) An increasing industrial base in a variety of industries.

5. Accountants are actively involved in collecting and analyzing data to be used by public policy makers. Which of the following other groups might also be involved in the data collection and analysis process?
a) Statisticians.
b) Economists.
c) Program managers.
d) All of the above.

6. Which of the following groups is least likely to be involved in evaluating the efficiency and effectiveness of government programs?
a) Accountants.
b) Legislators.
c) Economists.
d) Statisticians.

7. Which of the following is an example of an efficiency measure?
a) Cost per client placed in an appropriate job.
b) Cost per ton of garbage collected.
c) Cost per gallon of water suitable for drinking.
d) Cost per child reading at grade level.

8. A private mail and package delivery service boasts that it can deliver the same material as the government-run mail and package delivery service for a fraction of the cost of the government-run service. Which of the following is the best course of action for the government?
a) The government should contract-out all of its mail and package delivery service.
b) The government should develop laws and regulations limiting competition with government-run services.
c) The government should renegotiate their contract with the labor union.
d) The government should determine if costs incurred by the government-run service are negatively impacted by social policy decisions made by the legislative body.

9. Which of the following events would be evidence that the audience criterion of a not-for-profit joint program and fund-raising activity has NOT been met? Each activity included both a program activity and a fund-raising solicitation.
a) American Heart Association mailed pamphlets encouraging heart-healthy diets to all telephone subscribers in a geographic area.
b) Citizen Against Centennial Highway conducted a door-to-door campaign in the area of a proposed new Interstate highway asking citizens to writing to federal, state, and local elected officials expressing opposition to the proposed location.
c) Citizens For 1% (an initiative to limit property tax rates) conducts a mass mailing to all homeowners in the City.
d) Citizens for Term Limits, a not-for-profit group organized to push for term limits for all elected officials, conducts a mailing to encourage citizens to write their legislatures expressing support for term limits. The mailings went to all citizens with incomes greater than $50,000.

10. Which of the following events would be evidence that the content criterion of a not-for-profit joint program and fund-raising activity had not been met? Each activity included both a program activity and a fund-raising solicitation.
a) A hospital sends a copy of the annual financial statement to all trustees, employees and previous donors.
b) Preserve the River mails information on the effects that dams on the river have to the river ecosystem.
c) American Heart Association sends information on heart healthy diets and encourages healthy lifestyles.
d) Citizens for Tax Credits, a not-for-profit entity supporting tax credits for families whose children attend private schools, conducts a mass mailing encouraging a letters to the editor letter-writing campaign.

11. If an activity that involves fund-raising as well as programmatic, management, or general functions meets one of the three broad criteria then all expenses of the joint activity must be
a) Charged to fund-raising.
b) Charged to programmatic.
c) Charged to management and general.
d) Allocated between fund-raising and either programmatic or management and general.

12. In performing a financial analysis of a city, the financial analyst
a) Needs only the financial statements.
b) Must combine financial statement information with financial information from other sources.
c) Must combine financial statement information with both financial and nonfinancial information from other sources.
d) Needs only nonfinancial information from other sources.

13. A government’s financial position is represented by
a) The status of its assets, liabilities, and net assets, as presented in its statement of net assets.
b) The status of its revenues and expenses, as presented in its statement of activities.
c) Both (a) and (b).
d) Neither (a) nor (b).

14. A government’s economic condition is a(n) ____________ concept than its financial position.
a) Easier.
b) Broader.
c) Narrower.
d) Equal to.

15. A government’s fiscal effort is the extent to which it is taking advantage of its
a) Taxpayers.
b) Governing bodies.
c) Fiscal capacity.
d) Employees.

16. Which of the following statements is true regarding the ratio analysis of Intergovernmental Revenues to Total Revenues?
a) A high, or, increasing, ratio of intergovernmental revenues to total revenues is a sign of risk and is generally considered a positive fiscal characteristic.
b) A low, or, decreasing, ratio of intergovernmental revenues to total revenues is a sign of risk and is generally considered a negative fiscal characteristic.
c) A low, or, increasing, ratio of intergovernmental revenues to total revenues is a sign of risk and is generally considered a negative fiscal characteristic.
d) A high, or, increasing, ratio of intergovernmental revenues to total revenues is a sign of risk and is generally considered a negative fiscal characteristic.

17. Which of the following statements is true regarding the ratio analysis of Restricted Revenues to Total Operating Revenues?
a) Higher percentages of restricted revenues are preferred to low percentages.
b) Higher percentages of total operating revenues are preferred to low percentages.
c) Lower percentages of restricted revenues are preferred to high percentages.
d) Lower percentages of total operating revenues are preferred to high percentages.

18. Which of the following statements is true regarding the ratio analysis of Property Tax Revenues to Total Operating Revenues?
a) Property taxes are considered a stable revenue source, and a high ratio or property tax revenues to other, less stable, revenues is a negative attribute.
b) Property taxes are considered a stable revenue source, and a high ratio or property tax revenues to other, less stable, revenues is a positive attribute.
c) Property taxes are considered an unstable revenue source, and a high ratio or property tax revenues to other, more stable, revenues is a negative attribute.
d) Property taxes are considered an unstable revenue source, and a high ratio or property tax revenues to other, more stable, revenues is a positive attribute.

19. Which of the following statements is true regarding the ratio analysis of Nondiscretionary Expenditures to Total Expenditures?
a) The higher the percentage of nondiscretionary expenditures, the less flexibility the government has to reduce (or limit increases in) spending.
b) The higher the percentage of nondiscretionary expenditures, the more flexibility the government has to reduce (or limit increases in) spending.
c) The lower the percentage of nondiscretionary expenditures, the less flexibility the government has to reduce (or limit increases in) spending.
d) The higher the percentage of nondiscretionary expenditures, the less flexibility the government has to increase spending.

20. Which of the following statements is true regarding the formula most often used by governments for the liquidity ratio?
a) Cash divided by current liabilities.
b) Receivables divided by current liabilities.
c) Receivables divided by payables.
d) Cash, short-term investments, and receivables divided by current liabilities.

PROBLEMS (CHAPTER 15)

1. Based on the data from the general fund presented below, assess (as best you can) the financial/fiscal condition of the City of Billmont. As much as possible, justify your answer with quantitative data.
(000 omitted)
Population (increasing slowly) 86
Value of taxable property $123,000
Total general fund revenues $ 23,000
General Fund tax revenue $ 11,000
Intergovernmental revenues $ 4,000
Miscellaneous revenues $ 8,000
Total General Fund expenditures $ 23,000
Current expenditures $ 21,300
Capital outlay $ 1,600
Debt service expenditures $ 100
Operating transfer in $ 600
Operating transfer out ($ 4,600)
Unreserved fund balance $ 13,000
Cash and investments $ 15,000
Total liabilities $ 1,400

2. For each of the following independent cases, indicate whether the costs of the joint activity should be considered fund-raising or not. Justify your decision based on the AICPA criteria.

a. Crowley’s Ridge Girl Scout Council conducted a mass mailing to all parents of girls enrolled in public school in their Council area. The mailing included information about girl scouting, benefits to girls participating in girl scouting, and information on how to enroll girls in scouting. The mailing also included a solicitation for donations and a return envelope for donations.

b. The State University Foundation conducted a mailing to all alumni of the University including an eight-page glossy report highlighting major accomplishments of University faculty and students during the past year. Also included was a solicitation for donations, a detailed list of proposed projects to be funded by donation, and a return envelope in which to mail the donation.

c. The Youth Ranch Foundation supports a residential program for troubled at-risk youth. The Foundation hired an organization to help them design a brochure to be mailed to all telephone subscribers within a 300-mile radius of the Ranch. The brochure depicts the Ranch facilities, explains how it serves the youth, and lists the names of supporters of the Ranch, including most of the law enforcement officers in the area. Also included is an appeal for donations and a return envelope. The designer of the brochure will be paid a percentage of funds raised by the mailing.

d. The Committee for Social Action sent a mass mailing to registered voters explaining the need for maintaining certain benefits for children whose parents will become ineligible for welfare benefits under proposed changes in the State welfare laws. The mailing includes copies of form letters to be mailed to State legislators and includes addresses for those legislators. The mailing includes a solicitation for donations and a return envelope.

ESSAYS (CHAPTER 15)

1. What is the difference between fiscal capacity and fiscal effort?

2. For a not-for-profit organization, what is the difference between operational efficiency and operational effectiveness?