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ACC 410 Government and Not-for-Profit Accounting Week 8 Quiz – Strayer

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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?