Solution manual advanced accounting 4e jeter ch17

A fund is a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources together with all related liabilities and residual equities or

CHAPTER 17 ANSWERS TO QUESTIONS

1 The performance of services by nonbusiness organizations is based on social need rather than on the profit motive and there is no conscious or deliberate effort by such organizations to derive a profit from their operations

Nonbusiness organizations are not operated for the financial benefit of a specific individual or group of individuals and those who contribute resources to nonbusiness organizations do not necessarily benefit proportionately or at all from the services provided by such organizations There is no proprietary interest in nonbusiness organizations and the equity interest in the net assets

of such organizations cannot be sold or exchanged

2 A fund is a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations

3 At any particular point in time the unreserved fund balance of an expendable fund entity represents the balance of financial resources that are available for expenditure for the specified purposes or objectives for which the fund was created

4 Major classifications of increases in expendable fund resources are revenues, debt issue proceeds and transfers from other funds Decreases in expendable fund resources are classified as expenditures or as transfers to other funds

5 In accounting for expendable funds entities revenue is recognized when (1) it can be objectively measured and (2) it is available to finance expenditures of the current period In contrast, in accounting for profit-oriented enterprises revenue is ordinarily not recognized until (1) it can be objectively measured and (2) the earnings process is complete or substantially complete

6 Municipality:

Functions – Public Safety

Activity – Vice Control

Organization Unit – Police Department

Object – Travel

Functional and activity classifications are recommended for external financial reporting

7 An appropriation is an authorization enacted by a legislative body or granted by a governing board

to make expenditures for a specified purpose

An encumbrance is an obligation in the form of a purchase order or other commitment that reduces appropriation authority and is formally recorded in the accounting records

An expenditure is a decrease in the net financial resources of a fund entity incurred to carry out the activities or objectives of the fund

A disbursement represents the payment of cash for an expenditure Such payments may precede the expenditure (an advance), coincide with the expenditure (a direct payment), or follow the expenditure (the payment of a liability)

8 An expense is associated with accounting for profit oriented enterprises or proprietary funds and may be defined as an expired cost consumed in the production of revenue An expenditure is associated with accounting for expendable funds entities and is a decrease in the net financial resources of a fund entity incurred to carry out the activities or objectives of the fund

9 In accounting for commercial activities, estimated uncollectible receivables are treated as an expense in the determination of net income In accounting for expendable fund entities, estimated uncollectible taxes are treated as a direct reduction of revenue in the determination of the inflow of financial resources The estimate of uncollectible taxes is treated as a direct reduction of revenue rather than as an expenditure since the failure to collect taxes is not an outflow of financial resources but rather is a reduction in the inflow of financial resources Since there is no appropriation for the amount of estimated uncollectible taxes, it is properly accounted for as a reduction of revenue rather than as an expenditure

10 Since the amount of an appropriation cannot be legally exceeded, the placing of purchase orders and the signing of contracts are critical events in controlling the expenditures of expendable fund entities The financial resources of a fund are said to be encumbered when a transaction is entered into that requires performance on the part of another party before the nonprofit entity becomes liable to perform (expend financial resources) its part of the transaction Encumbrance accounting formally records the reduction of appropriation authority resulting from purchase orders and similar commitments and thus serves to provide an accounting safeguard against the expenditure of financial resources in excess of appropriations

There would be no reason to prevent a commercial enterprise from using encumbrance accounting

so long as the balance in reserve for encumbrances was offset by the balance in the encumbrances account for reporting purposes However, the compelling need for encumbrance accounting arising from the penalties provided by law for government administrators who expend funds in excess of those appropriated is not a factor in the operation and administration of commercial enterprises

11 The balance in the Reserve for Encumbrances account is not a liability Rather it represents the estimated amount of net financial resources of the fund entity that will be needed in the subsequent year to liquidate obligations entered into under the authority of the current year’s appropriation As such it represents a restriction on the availability of fund resources for future appropriation rather than a liability and is properly reported in the financial statements as a portion (reserved) of the total fund balance

12 There should be columns for the following balances: Appropriations, Encumbrances, Expenditures, Total Encumbrances and Expenditures, and Unencumbered Balance

fund entity Depreciation is not accounted for in the records of an expendable fund entity for the same reasons that fixed assets are excluded from the records of such entities Expenditures, not expenses, are measured in fund accounting

Acquisitions of fixed assets require the use of financial resources and are accounted for as expenditures Depreciation of such assets is not a use of the financial resources of an expendable fund entity and thus is not properly recorded in the accounts of such entities Inclusion of depreciation expense in the operating statement of an expendable fund entity would confuse two fundamentally different measurements - expenditures and expenses

14 The adoption of a budget for a general fund is a legislative process that is highly formalized and which results in the formal recording of the budgeted amounts (appropriations) within the framework of the double entry accounting system The adoption of a budget by a commercial unit

is also a planning and control device, but the adoption process and the subsequent application of the budget is seldom as formalized or as rigid as it is in governmental accounting

15 There are two principal financial statements recommended for expendable fund entities: (1) a Comparative Balance Sheet and (2) a Comparative Statement of Revenue, Expenditures and Other Changes in Fund Balance These two statements may be accompanied by schedules that present detailed financial data which support and amplify the information summarized in the formal financial statements Supporting schedules may also be used to present budgetary data or to demonstrate compliance with legal provisions

16 In order to determine the total cost of performing a particular function or activity, the total expenditures for such functions or activities would have to be adjusted by reducing the amount of capital expenditures included therein and by adding depreciation expenses relating to the dissipation of services embodied in capital assets utilized to support the function or activity Since capital acquisitions are not distinguished from other expenditures in the records of expendable fund entities and since depreciation is not calculated within the framework of the records of expendable fund entities there may be no reasonable basis for determining the amount or classification of these adjustments

Business Ethics

Business ethics solutions are merely suggestions of points to address The objective is to raise the students' awareness of the topics, and to invite discussion In most cases, there is clear room for disagreement or conflicting viewpoints

Issues to be considered: If pricing is a function of cost, then businesses charging excessive prices can

be viewed as following excessive, even obscene pricing strategies Also, there are others visiting the city who are not attending the football game and who might adversely affected (for example,

individuals with medical emergencies, ill family members, etc.) On the other hand, the goal of

business is to make a profit and take advantage of market opportunities As long as people are aware of the practices, many might argue that the pricing strategy is appropriate

Answers to Analyzing Financial Statements

AFS 17-1

1 Assets and liabilities are not classified by current and non-current, because government funds present current financial resources In addition, the typical for-profit balance sheet equation is assets equal liabilities plus equity In the non-profit statement, Assets equal liabilities plus fund balances

2 The largest asset is Investments This may seem surprising, but in the general fund capital assets are not recorded

3 The reserve for encumbrances represents the portion of the funds set aside to pay for goods not yet received and services not yet contracted for prior to year-end

AFS 17-2

1 The statement of Revenues, Expenditures, and Changes in Fund Balances focuses on the inflows and outflows of current financial resources and come into and leave from the government When a capital asset is purchased, the entire cost is recognized in the government’s fund (whereas on a for-profit statement the cost is capitalized and depreciation over its useful life) Similarly, when a government repays debt, both the interest and principal payments are reflected on the statement On a for-profit income statement, only interest is recognized as an expense

2 The largest expenditure in the general fund is for police

3 The largest source of revenue is from property taxes

4 When the general fund revenues, expenditures, and other financing sources are added together, the general fund increased by $39,777 Of this amount, $10,851 was transferred in from other parts of the government

4,000,000

3,800,000 200,000

2 Property Tax Receivable

Estimated Uncollectible Property Tax Revenue

3,000,000

120,000 2,880,000

3 Due From State

Exercise 17–3

1 Estimated Revenues

Appropriations Unreserved Fund Balance

1,950,000

1,800,000 150,000

2 Property Tax Receivable

Estimated Uncollectible Property Tax Revenue

1,150,000

35,000 1,115,000

Exercise 17–4

1 Revenue

Estimated Revenue Unreserved Fund Balance

3,210,000

3,110,000 100,000

2 Appropriations

Expenditures Encumbrances Unreserved Fund Balance

2,700,000

1,960,000 734,000 6,000

3 Reserve for Encumbrances – 2008

Unreserved Fund Balance

Expenditures – 2008

50,000 5,000

55,000

4 Transfers From Other Funds

Unreserved Fund Balance

Transfers to Other Funds

40,000 50,000

1,690,000

2 Appropriations

Expenditures Encumbrances Unreserved Fund Balance

1,550,000

1,310,000 165,000 75,000

3 Reserve for Encumbrances – 2007

Expenditures – 2007 Unreserved Fund Balance

35,000

32,000 3,000

Exercise 17–7

Part A Expenditures

Cash Inventory

Reserve for Supplies Inventory

Expenditures Unreserved Fund Balance

Reserve for Supplies Inventory

$330,000

Consumption

$555,000 (220,000) (5,000) $330,000

Exercise 17–8

1 Estimated Revenue

Appropriations Unreserved Fund Balance

1,900,000

1,850,000 50,000

2 Property Tax Receivable

Estimated Uncollectible Property Taxes (5%) Revenue

955,000

47,750 907,250

580,000

2 Property Tax Receivable ($60,000,000/$100)

Estimated Uncollectible Taxes (3%) Revenue

To record tax levy

600,000

18,000 582,000

3 Encumbrances

Reserve for Encumbrances

To record purchase order for motorcycle

4,200

4,200

4 Expenditures ($4,200 + $425)

Vouchers Payable Reserve for Encumbrances

Property Tax Receivable

To record property tax receipts

540,000

540,000

Exercise 17–10

1 d 2 a 3 d 4 b 5 d 6 c 7 c

ANSWERS TO PROBLEMS

Problem 17–1

Part A 1 Estimated Revenue

Appropriations Unreserved Fund Balance Due from Water Fund

Transfer from Water Fund Transfer to Debt Service Fund

Due to Debt Service Fund

1,560,000

50,000

80,000

1,400,000 160,000

50,000

80,000

2 Property Tax Receivable ($11,000,000 .10)

Revenue Allowance for Uncollectible Taxes (2%)

1,100,000

1,078,000 22,000

9 Allowance for Uncollectible Taxes

Property Tax Receivable

Problem 17-1 (continued)

General Fund Preclosing Trial Balance December 31, 2008

Allowance for Uncollectible Taxes

Unreserved Fund Balance

Reserve for Encumbrances – 2007

Reserve for Encumbrances

_

$3,563,000

Credit

$40,000 270,000 30,000 240,000 1,533,000 1,400,000 50,000 $3,563,000

Part C Closing Entries

1 Revenue

Unreserved Fund Balance

Estimated Revenue

1,533,000 27,000

1,560,000

2 Appropriations

Expenditures Encumbrances Unreserved Fund Balance

1,155,000 240,000 5,000

3 Transfer from Water Fund

Unreserved Fund Balance

Transfer to Debt Service Fund

50,000 30,000

80,000

4 Reserve for Encumbrances - 2007

Expenditures - 2007 Unreserved Fund Balance

30,000

29,000 1,000

Problem 17-1 (continued)

General Fund Postclosing Trial Balance December 31, 2008

Cash

Property Tax Receivable

Allowance for Uncollectible Taxes

Unreserved Fund Balance ($270,000 - $27,000 + $5,000 - $30,000 + $1,000)

Reserve for Encumbrances

Total

Debit

$ 391,000 108,000

$ 499,000

Credit

$ 40,000 219,000 240,000 $ 499,000

Problem 17–2

Part A Unreserved Fund Balance per Trial Balance $24,000

Unreserved Fund Balance on December 31, 2008 (above) $66,000

Part B Adjusting and Closing Entries

Revenue

Estimated Revenue Unreserved Fund Balance

696,000

630,000 66,000 Reserve for Supplies Inventory ($72,000 - $60,000)

Supplies Inventory

12,000

12,000 Unreserved Fund Balance

Reserve for Encumbrances

Expenditures - 2008

1,000 42,000

43,000 Appropriations

Expenditures Encumbrances Unreserved Fund Balance

672,000

468,000 120,000 84,000

Part C Unreserved Fund Balance per Trial Balance

Closing Entries ($66,000 - $1,000 + $84,000)

Unreserved Fund Balance 12/31/2009

Reserve for Encumbrances

Reserve for Supplies Inventory

Fund Balance - 12/31/2009

$ 24,000 149,000 173,000 120,000 60,000

$353,000

Problem 17–3

Part A Closing Entries

1 Unreserved Fund Balance

Revenue

Estimated Revenue

64,000 3,656,000

3,720,000

2 Reserve for Encumbrances - 2008

Expenditures - 2008 Unreserved Fund Balance

310,000

296,000 14,000

3 Appropriations

Expenditures Encumbrances Unreserved Fund Balance

3,488,000

3,020,000 382,000 86,000

4 Transfers from Other Funds

Unreserved Fund Balance

Transfers to Other Funds

300,000 220,000

520,000

Part B Budget entry on January 1, 2009

Estimated Revenues

Appropriations Unreserved Fund Balance

3,720,000

3,488,000 232,000 Unreserved fund balance per 12/31/2009 preclosing trial balance

Less credit to unreserved fund balance on 1/1/2009 from budget entry

Unreserved fund balance on 12/31/2008

Reserve for encumbrances 12/31/2008

Total fund balance per balance sheet 12/31/2008

Unreserved fund balance per 12/31/2009 pre-closing trial balance

Closing entries ($14,000 + $86,000 - $64,000 - $220,000)

Unreserved fund balance 12/31/2009

Reserve for encumbrances 12/31/2009

Total fund balance per balance sheet 12/31/2009

$ 422,000 232,000 190,000 310,000 $ 500,000

$422,000 (184,000) 238,000 382,000 $ 620,000

Add inflows of financial resources

Revenues Transfers from other funds

Deduct outflows of financial resources

Expenditures made this year against prior year’s appropriation authority

Expenditures made this year against current year’s appropriation authority

$3,656,000 300,000

$296,000 3,020,000

3,956,000