ACC 410 Week 4 Quiz – Strayer

ACC/410 Week 4 Quiz – Strayer

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Chapter 4

Governmental Activities – Recognizing Revenues

TRUE/FALSE (CHAPTER 4)

1. If an entity elects to focus on all economic resources (both current and long-term assets and liabilities), then it should adopt a modified accrual basis of accounting.

2. The budgetary measurement focus of governments is determined by applicable state or local laws.

3. The revenue-recognition issues facing governments are simpler to resolve than those of businesses.

4. Governmental activities tend to derive the majority of their revenues from exchange transactions.

5. In accounting for property taxes, under the modified accrual basis, existing standards provide that, except in unusual circumstances, revenues should be recognized only if cash is expected to be collected within sixty days of year-end.

6. Ad valorem taxes are taxes that are based on value.

7. Income taxes are classified as ad valorem taxes.

8. Sales taxes are taxpayer assessed, that is, parties other than the beneficiary government determine the tax base.

9. All intergovernmental grants are accounted for in exactly the same way.

10. Revenues that cannot be classified as general revenues are by default considered program revenues.

11. Taxes that are imposed on the reporting government’s citizens are considered general revenues, even if they are restricted to specific programs.

MULTIPLE CHOICE (CHAPTER 4)

1. As used in governmental accounting, interperiod equity refers to a concept of
a) providing the same level of services to citizens each year.
b) measuring whether current year revenues are sufficient to pay for current year services.
c) levying property taxes at the same rate each year.
d) requiring that general fund budgets be balanced each year.

2. For fund financial statements, the measurement focus and basis of accounting used by governmental fund types are
a) current financial resources and modified accrual accounting.
b) economic resources and modified accrual accounting.
c) financial resources and full accrual accounting.
d) economic resources and full accrual accounting.

3. The modified accrual basis of accounting is used in presenting the fund financial statements of the governmental funds because
a) it is the superior method of accounting for the economic resources of any entity.
b) it provides information as to the extent the entity achieved interperiod equity.
c) it is budget oriented while facilitating comparisons among entities.
d) it results in accounting measurements based on the substance of transactions.

4. As used in defining the term ‘modified accrual basis of accounting’, available means
a) received in cash.
b) will be received in cash within 60 days of year-end.
c) collection in cash is reasonably assured.
d) collected within the current period or expected to be collected soon enough thereafter to be used to pay liabilities of the current period.

5. Under the accrual basis of accounting, property tax revenues are recognized
a) when they are received in cash.
b) in the year for which they were levied.
c) in the year for which they were levied and when collection in cash is reasonably assured.
d) when they are available to finance expenditures of the fiscal period.

6. Under the modified accrual basis of accounting, the amount of property tax revenues that should be recognized by a governmental entity in the current year related to the current year levy will be
a) the total amount of the levy.
b) the expected collectible portion of the levy.
c) the portion of the levy collected.
d) the portion of the levy collected in the current year or within sixty days of the fiscal period.

7. Under the modified accrual basis of accounting used by a governmental entity, investment revenues for the current period should include
a) only interest and dividends received.
b) all interest and dividends received during the period plus all accruals of interest and dividends earned.
c) all interest and dividends received plus gains and losses on securities that were sold during the period.
d) all interest and dividends received, all gains and losses on securities sold and all changes in market values on securities held in the portfolio at year-end.

8. Under the accrual basis of accounting used by a governmental entity, investment revenues for the current period should include
a) only interest and dividends received.
b) all interest and dividends received during the period plus all accruals of interest and dividends earned.
c) all interest and dividends received plus gains and losses on securities that were sold during the period.
d) all interest and dividends received, all gains and losses on securities sold and all changes in market values on securities held in the portfolio at year-end.

9. Under the modified accrual basis of accounting, derived nonexchange revenues are recognized by a governmental entity as revenue
a) when the underlying exchange transaction occurs.
b) when available.
c) when the underlying event occurs and the revenue is available.
d) when earned.

10. Under the accrual basis of accounting, derived nonexchange revenues are recognized by a governmental entity as revenue
a) when the underlying exchange transaction occurs.
b) when available.
c) when the underlying event occurs and the revenue is available.
d) when earned.

11. Under the modified accrual basis of accounting, gains and losses on disposal of fixed assets
a) are not recognized.
b) are recognized when the proceeds (cash) of the sale are received (on the installment basis).
c) are recognized only if there is a gain.
d) are recognized when the sale occurs, regardless of when the cash is collected.

12. Under the accrual basis of accounting, gains and losses on disposal of fixed assets
a) are not recognized.
b) are recognized when the proceeds (cash) of the sale are received (on the installment basis).
c) are recognized only if there is a gain.
d) are recognized when the sale occurs, regardless of when the cash is collected.

13. Under the modified accrual basis of accounting, fines, license fees, permits, and other miscellaneous revenue are generally recognized
a) when cash is received.
b) when assessed.
c) when an enforceable legal claim exists.
d) when an enforceable legal claim exists and the revenue is available.

14. Under the accrual basis of accounting, fines, license fees, permits, and other miscellaneous revenue are generally recognized
a) when cash is received.
b) when assessed.
c) when an enforceable legal claim exists.
d) when an enforceable legal claim exists and the revenue is available.

15. A city which has a 12/31 fiscal year end has adopted a policy of recognizing the maximum amount of property tax revenue allowable under GAAP. Property taxes of $600,000 (of which 10% are estimated to be uncollectible) are levied in October 1999 to finance the activities of the fiscal year 2000. During 2000, cash collections related to property taxes levied in October 1999 were $500,000. In 2001 the following amounts related to the property taxes levied in October 1999 were collected: January $25,000; March, $5,000. For the fiscal year ended 12/31/00, what amount should be recognized as property tax revenues related to the 1999 levy on the fund financial statements?
a) $600,000.
b) $540,000.
c) $525,000.
d) $500,000.

16. A city that has adopted a 12/31 fiscal year end has adopted a policy of recognizing property tax revenue consistent with the 60-day rule allowable period under GAAP. Property taxes of $600,000 (of which none are estimated to be uncollectible) are levied in October 2000 to finance the activities of fiscal year 2001. Property taxes are due in two installments June 20 and December 20. Cash collections related to property taxes are as follows:
1/15/01 for property taxes levied in 1999, due in 2000 $ 25,000
2/15/01 for property taxes levied in 1999, due in 2000 $ 15,000
3/15/01 for property taxes levied in 1999, due in 2000 $ 10,000
6/20/01 First installment of taxes levied in 2000, due 6/20/01 $350,000
12/20/01 Second installment of taxes levied in 2000, due 12/20/01 $150,000
1/15/02 for property taxes levied in 2000, due in 2001 $ 15,000
2/15/02 for property taxes levied in 2000, due in 2001 $ 10,000
3/15/02 for property taxes levied in 2000, due in 2001 $ 5,000
The total amount of property tax revenue that will be recognized in the government-wide financial statements in 2001 is:
a) $600,000.
b) $575,000.
c) $535,000.
d) $525,000.

17. Under GAAP, property taxes levied in one fiscal period to finance the activities of the following fiscal period are recognized as revenue in the fund financial statements
a) in the year levied.
b) in the year for which they are intended to finance the activities.
c) when collected, regardless of when levied.
d) in the year for which they are intended to finance the activities, if collected within that period or within a period no greater than 60 days after the close of the fiscal year.

18. Under GAAP, property taxes levied in one fiscal period to finance the activities of the following fiscal period are recognized as revenue in the government-wide financial statements
a) in the year levied.
b) in the year for which they are intended to finance the activities.
c) when collected, regardless of when levied.
d) in the year for which they are intended to finance the activities, if collected within that period or within a period no greater than 60 days after the close of the fiscal year.

19. A City levies a 2% sales tax. Sales tax must be remitted by the merchants to the City by the 20th day of the month following the month in which the sale occurred. Cash received by the City related to sales tax is as follows:
Amount received 1/20/00, applicable to December 1999 sales $ 50
Amount received 2/20/00, applicable to January 2000 sales $ 15
Amount received during 2000 related to February-November 2000 sales $200
Amount received 1/20/01 for December 2000 sales $ 55
Amount received 2/20/01 for January 2001 $ 20
Assuming the City uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize in the fund financial statement as sales tax revenue for the fiscal year ended 12/31/00.
a) $215.
b) $265.
c) $270.
d) $275.

20. A City levies a 2% sales tax. Sales tax must be remitted by the merchants to the City by the 20th day of the month following the month in which the sale occurred. Cash received by the City related to sales tax is as follows:
Amount received 1/20/00, applicable to December 1998 sales $ 50
Amount received 2/20/00, applicable to January 2000 sales $ 15
Amount received during 2000 related to February-November 2000 sales $200
Amount received 1/20/01 for December 2000 sales $ 55
Amount received 2/20/01 for January 2001 $ 20
Assuming the City uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize in the government-wide financial statement as sales tax revenue for the fiscal year ended 12/31/00.
a) $215.
b) $265.
c) $270.
d) $275.

21. A City levies a 2% sales tax that is collected for them by the State. Sales tax must be remitted by the merchants to the State by the 20th day of the month following the month in which the sale occurred. The State has a policy of remitting sales taxes to the City within 30 days of collection by the State. Cash received by the State related to sales tax is as follows:
Amount received 1/20/00, applicable to December 1999 sales $ 50
Amount received 2/20/00, applicable to January 2000 sales $ 15
Amount received 3/20/00, applicable to February 2000 sales $ 10
Amount received during 2000 related to March-November 2000 sales $190
Amount received 1/20/01 for December 2000 sales $ 55
Amount received 2/20/01 for January 2001 $ 20
Amount received 3/20/01 for February 2001 $ 5
Assuming the City uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize as sales tax revenue in its fund financial statements for the fiscal year ended 12/31/00.
a) $215.
b) $265.
c) $270.
d) $275.

22. A City levies a 2% sales tax that is collected for them by the State. Sales tax must be remitted by the merchants to the State by the 20th day of the month following the month in which the sale occurred. The State has a policy of remitting sales taxes to the City within 30 days of collection by the State. Cash received by the State related to sales tax is as follows:
Amount received 1/20/00, applicable to December 1999 sales $ 50
Amount received 2/20/00, applicable to January 2000 sales $ 15
Amount received 3/20/00, applicable to February 2000 sales $ 10
Amount received during 2000 related to March-November 2000 sales $190
Amount received 1/20/01 for December 2000 sales $ 55
Amount received 2/20/01 for January 2001 $ 20
Amount received 3/20/01 for February 2001 $ 5
Assuming the City uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize as sales tax revenue in its government-wide financial statements for the fiscal year ended 12/31/00.
a) $215.
b) $265.
c) $270.
d) $275.

23. Under GAAP, income tax revenues should be recognized in the fund financial statements in the accounting period
a) when collected in cash by the taxing authority.
b) in which the underlying income was earned, regardless of when collected.
c) in which the underlying income was earned, if collected in time to satisfy the budgetary obligations of the preceding year.
d) when earned.

24. Under GAAP, income tax revenues should be recognized in the government-wide financial statements in the accounting period
a) when collected in cash by the taxing authority.
b) in which the underlying income was earned, regardless of when collected.
c) in which the underlying income was earned, if collected in time to satisfy the budgetary obligations of the preceding year.
d) when earned.

25. During 2000, the city issued $300 in fines for failure to keep real property in ‘acceptable’ condition. During that period the city spent $200 to mow and clean up the unoccupied properties for which the fines were assessed. The city estimates that $30 of the fines issued in 2000 will be uncollectible. During 1999 the city collected $230 related to 2000 fines and $20 related to 1999 fines. The amount of revenue that the city should recognize in its 2000 fund financial statements related to fines is
a) $230.
b) $250.
c) $270.
d) $300.

26. Under GAAP, license and permit fees should be recognized in the fund financial statements in the accounting period
a) when collected.
b) when collected, plus proceeds collected within 60 days of fiscal year-end.
c) when earned.
d) when earned, if collected within 60 days of fiscal year end.

27. A city receives a $200,000 grant from the state to purchase vans to transport physically challenged individuals. During the current year the city receives the entire $200,000 and purchases one bus for $85,000 and issues a purchase order for another van for $80,000. The grant revenue that the city should recognize on the government-wide financial statements in the current year is
a) $-0-.
b) $ 85,000.
c) $165,000.
d) $200,000.

28. A city receives notice of a $200,000 grant from the state to purchase vans to transport physically challenged individuals. Although the city did not receive any of the grant funds during the current year, the city purchased one bus for $85,000 and issues a purchase order for another van for $80,000. The grant revenue that the city should recognize in the government-wide financial statements in the current year is
a) $-0-.
b) $ 85,000.
c) $165,000.
d) $200,000.

29. Payments made to a state pension plan by the state government on behalf of a local government should
a) not be displayed or disclosed in the local government financial statements.
b) be displayed as a revenue in the local government financial statements.
c) be displayed as both a revenue and an expenditure in the local government financial statements.
d) should be disclosed, but not displayed, in the local government financial statements.

30. Unrestricted grant revenues with a time requirement should be recognized in the accounting period in which
a) the award is announced.
b) the cash is received.
c) the grant may be used.
d) expenditures are recorded on grant-related activities.

31. Reimbursement-type grant revenues are recognized in the accounting period in which
a) the award is made.
b) the cash is received.
c) cash is disbursed on grant-related activities.
d) expenditures are recorded on grant-related activities.

32. A local governmental entity began the year with a security with an historical cost of $85 and a fair value at the beginning of the year of $95. During the year, dividends of $2 were received. At the end of the year the security had a fair value of $100. The amount that should be recognized on the fund financial statements for the year as investment income is
a) $-0-.
b) Gain $7.
c) Gain $15.
d) Gain $17.

33. A local governmental entity began the year with a portfolio of securities with an historical cost of $600 and a fair value of $620. During the year the government acquired an additional security at a cost of $130 and sold for $100 a security that had an historical cost of $86 and a fair value at the beginning of the year of $95. At the end of the year the securities portfolio had a fair value of $665. The amount that should be recognized on the financial statements for the year as investment income is
a) Gain $5.
b) Gain $10.
c) Gain $14.
d) Gain $15.

34. Under GAAP, investment income for governmental entities must include
a) only dividends and interest received during the period.
b) only dividends and interest earned during the period.
c) only realized gains and losses.
d) dividends and interest received during the period and both realized and unrealized gains and losses.

PROBLEMS (CHAPTER 4)

1. Property Taxes
Assuming that the City maintains the books and record in a manner that facilitates the preparation of the fund financial statements, prepare all necessary 2000 journal entries to record the following 2000 events related to the revenues of a city. The City has a 12/31 fiscal year-end. The city has adopted the 60-day rule for all revenue recognition for which it is appropriate.

a) On January 3, the City Council levied property taxes of $1 million to support general government operations, due in two equal installments with due dates of June 20 and December 20. The property taxes were levied to finance the 2000 budget which had been adopted on November 3, 1999. Historically 2% of property taxes are uncollectible.

b) The City collected the following amounts related to property taxes
Delinquent 1999 taxes collected in January, 2000 $ 11,000
Delinquent 1999 taxes collected in March, 2000 $ 12,500
2000 taxes collected in June, 2000 $ 540,000
2000 taxes collected in December, 2000 $ 400,000
Delinquent 2000 taxes collected in January, 2001 $ 10,000
Delinquent 2000 taxes collected in March, 2001 $ 15,000

c) Delinquent 2000 property taxes were reclassified as delinquent.

d) $2,000 of 1998 taxes was written off.

2. Sales Tax Revenues
Assuming that the City maintains the books and records in a manner that facilitates the preparation of the fund financial statements, prepare all necessary 2000 journal entries to record the following 2000 events related to the revenues of a city. The City has a 12/31 fiscal year-end. The city has adopted the 60-day rule for all revenue recognition for which it is appropriate. The City levies a local sales tax which is collected by the merchants and remitted to the City by the 20th day of the month following the month of sale.

a) On January 20, the City receives sales tax returns and related payments of $7,000 from the merchants of the City for the month of December 1999.

b) On February 20, the City receives sales tax returns and related payments of $3,000 from the merchants of the City for the month of January 2000.

c) During 2000 the City receives sales tax returns and related payments of $40,000 from the merchants for the months of February-November 2000

d) On January 20, 2001 the City receives sales tax returns and related payments of $7,500 from the merchants of the City for the month of December 2000.

3. Assuming that the City maintains the books and records in a manner that facilitates the preparation of the fund financial statements, prepare all necessary 2000 journal entries to record the following 2000 events related to the revenues of a city. The City has a 12/31 fiscal year-end. The city has adopted the 60-day rule for all revenue recognition for which it is appropriate.

a) On January 15, the City received notification that it was the recipient of a $200,000 federal grant to assist in the operation of a “Meals on Wheels’ program. The federal government expects to send the cash in about 3 months.

b) In February the City spent $21,000 on ‘Meals on Wheels.’

c) In March, fines of $1,200 were issued for parking tickets. Payment may be made by the citizens by mail within a specified period of time or they may be protested and a court date will be set. Approximately 10% will be abated by the Courts.

d) In April the City received the $200,000 from the federal government.

e) Payments of $800 were received in April in payment of March parking tickets.

f) Restaurant licenses are issued for a one-year period. The licenses are valid for one year from July 1 to June 30. The license fees are used to pay restaurant inspectors. In June, $7,500 in restaurant license fees was received.

ESSAY (CHAPTER 4)

1. Governmental entities use modified accrual accounting to determine when transactions and events will be recognized in the financial statements of the governmental fund types.
Required:
a) What is modified accrual accounting and how does it affect revenue recognition for the following types of revenue: property taxes; sales and income taxes; licenses, permits and fines; grants of all types; investment income; and donations.
b) In your opinion is modified accrual accounting the best basis of accounting for governmental entities? Why or why not? Defend your answer.

2. Answer the following questions with regard to preparation of the fund financial statements. At fiscal year-end, a city holds an investment portfolio in it general fund that has a fair market value of $15 million and a historical cost of $28 million. The portfolio had a fair value of $18 million at the beginning of the current fiscal year. The portfolio is composed of a variety of bonds with a face value of $29 million and a due date five years in the future. The bonds were acquired to meet a $29 million debt due five years in the future. Although the bonds have the usual market risk, the credit risk is minimal.
Required:
a) At what amount should the portfolio be valued on the balance sheet?
b) What amount, if any, should appear on the operating statement?
c) Defend the valuation method required by GAAP.
d) Argue against the valuation method required by GAAP.
e) At what amount would the City want to record the investments on their financial statements? Why?

3. Answer the following questions with regard to preparation of the fund financial statements. A local government receives three grants from the State. One grant is received in cash but must be used only for the acquisition of two vans specifically equipped to transport physically challenged citizens who use wheelchairs as a means of mobility. The second grant provides for reimbursement of costs incurred in operating a public transit system. The third grant is a distribution of State general fund revenues allocated to each City in the State based on the population of the City. This last grant is to be used in general government operations. The City also receives a federal grant which must be passed through by the City to smaller units of government who meet the eligibility requirements. The City must monitor these smaller units of government for compliance with grant requirements.
Required:
a) Discuss the various methods of revenue recognition for grants and other similar revenues.
b) Discuss the appropriate basis for revenue recognition for each of these grants.
c) Discuss the rationale for each of these methods of revenue recognition.