Solution manual advanced accounting 4e jeter ch18

Fund Entities Governmental Funds 1 General Fund - to account for all unrestricted resources except those required to be accounted for in another fund.. 2 Special Revenue Funds - to acco

CHAPTER 18

ANSWERS TO QUESTIONS

1 Fund Entities

Governmental Funds

(1) General Fund - to account for all unrestricted resources except those required to be

accounted for in another fund

(2) Special Revenue Funds - to account for the proceeds of specific revenue sources (other

than expendable trusts, or for major capital projects) that are legally restricted to expenditures for specified purposes

(3) Capital Projects Funds - to account for financial resources segregated for the acquisition of

major capital facilities (other than those financed by Enterprise Funds)

(4) Debt Service Funds - to account for the accumulation of resources for, and the payment of,

interest and principal on general obligation long-term debt

(5) Permanent Funds – to account for resources that are legally restricted to the extent that

only earnings, and not principal, may be used for purposes that support the government’s programs – that is, for the benefit of the government or its citizenry

Proprietary Funds

(6) Enterprise Funds – to account for the provision of goods or services to the general public

on a continuing basis where all or most of the costs involved are financed by user charges,

or where periodic determination of revenue earned, expenses incurred, and /or net income

is appropriate for management control, accountability, or other purposes

(7) Internal Service Funds - to account for the financing of goods or services provided by one

department or agency to other departments or agencies of the governmental unit, or to other governmental units, on a cost – reimbursement basis

Fiduciary Funds

(8) Pension (and Other Employee Benefit) Trust Funds – used to report resources that are

required to be held in trust for the members and beneficiaries of defined benefit pension plans, defined contribution plans, other postemployment benefit plans, or other employee benefit plans

(9) Investment Trust Funds – used to report the external portion of investment pools reported

by the sponsoring government

(10) Private-Purpose Trust Funds – used to report escheat property and to report all other trust

agreements under which principal and income benefit individuals, private organizations, or

other governments

2 Government-wide statements are now required to help users assess the benefits and costs of various programs in a manner comparable to the appraisal of profit seeking businesses For example, the revenues generated by a program can be compared to the expenses incurred by that program The new requirements also enable a reconciliation to be made between the fund statements and these new government-wide statements

By providing this information, the government-wide statements should contribute to meeting the operational accountability aspects of the overall objective stated in the conceptual framework: fulfilling government’s duty to be publicly accountable and enabling users to assess that accountability

3 A governmental fund is an expendable fund entity The accounting and reporting emphasis for a governmental fund is on the inflow, outflow, and unexpected balance of net financial resources and on the compliance with detailed legal provisions that specify the types of revenue to be raised and the purposes for which the financial resources may be used

The accounting and reporting emphasis of a proprietary fund is similar to that of a commercial enterprise Thus, both current and fixed assets and current and noncurrent liabilities are accounted for in the records of proprietary fund entities In addition, revenue, expenses (including depreciation) and net income are determined and reported for proprietary fund entities

4 Fiduciary funds are classified as governmental funds or as proprietary funds depending upon whether or not their resources must be maintained intact If the resources of a fiduciary fund may

be expected to carry out its designated activities it is classified as a governmental (expendable) fund entity If the principal of the fiduciary fund must be maintained intact it is classified as a proprietary (nonexpendable) fund entity

5 A disbursement to another fund is treated as a receivable on the records of the fund that makes the disbursement when the disbursement constitutes an advance or loan to another fund

A disbursement to another fund is treated as an expenditure on the records of the fund that makes the disbursement when the disbursement constitutes a quasi-external transaction or a reimbursement Quasi-external transactions are interfund transactions that would be treated as revenue, expense or expenditures if they were consummated with an organization external to the governmental unit Reimbursements are transactions which involve the transfer of resources from one fund to another in order to reimburse the recipient fund for expenditures made by it that are properly expenditures of the reimbursing fund

All interfund transactions other than quasi-external transactions, reimbursements, and loans or advances are interfund transfers and are recorded as a transfer to other funds on the records of the fund that makes the disbursements

8 Estimated revenues and appropriations are formally recorded in the records of the General Fund

to assist in the control and administration of general fund expenditures In particular, the formal recording of appropriations is intended to assist administrators in complying with specific legal restrictions on the amount of various classifications of expenditures Since the resources of a Capital Projects Fund can be expended for only the single authorized project for which the fund was created, the fund balance itself serves an adequate measure of and control over unexpended appropriation authority Thus, there is no necessity to formally record the budgeted revenue and appropriation for the capital project

9 Not all major capital facilities acquisitions are accounted for in Capital Projects Funds Construction or acquisition of capital facilities financed by Enterprise Funds are accounted for in the records of those funds In addition, there may be instances in which the resources of the General Fund or a Special Revenue Fund are appropriated for the acquisition of a major capital facility So long as such acquisitions do not involve the issuance of general obligation long-term debt securities, they may be accounted for in the fund which appropriates the resources rather than in a separate Capital Projects Fund

10 Unpaid interest on bonds payable incurred since the last payment date is not accrued as an expenditure and liability of the Debt Service Fund at year end This exception to expenditure accrual is justified because financial resources that are appropriated in other funds or from general tax levies for transfer to or receipt by Debt Service Funds are usually appropriated in the period in which the interest on the debt must be paid To accrue the Debt Service Fund expenditure and liability in one year, but record the transfer or collection of the financial resources appropriated for this purpose in a later year, would be confusing and potentially misleading

11 Interfund activity includes the following four items

1 Interfund loans – Interfund loans should be reported as interfund receivables in the

lender fund and as an interfund payable in the borrower fund

2 Interfund services provided and used – (previously known as quasi-external transactions)

sales and purchases of goods and services between funds for a price approximating their external exchange value Interfund services provided and used should be reported as revenues in seller funds and expenses or expenditures in the purchaser funds Unpaid amounts should be reported as interfund receivables and payables in the fund balance sheet or the statement of net assets

3 Interfund transfers – (formerly known as either residual equity transfers or operating

transfers) flows of assets without an equivalent flow of assets in return and without a requirement for repayment In government funds, transfers should be reported as ‘other financing uses’ in the funds and as ‘other financing sources’ in the funds receiving the transfer In proprietary funds, transfers should be reported after non-operating revenues and expenses

4 Interfund reimbursements – repayments from the funds responsible for the particular expenditure or expense to the funds that initially paid for them Reimbursements should

not be displayed in the financial statements

12 1 Bonds Payable: F, J, and in some circumstances G

2 Reserve for Encumbrances; A, B, D, and H

3 Equipment: F, G, and J

4 Appropriations: A, B, and D

5 Estimated Revenue; A and B

6 Property Taxes Receivable; A, B, C, D, H, and J

7 Construction Work in Progress: F, G, and J

8 Accumulated Depreciation: F, G, H, and J

9 Depreciation Expense: F, G, H, and J

10 Required Earnings: C

13 On the Statement of Net Assets, the primary reconciling items include capital assets and term liabilities Capital assets used in governmental activities are not financial resources and are not reported in the funds Long-term liabilities are not due and payable in the current period and are not reported in the governmental funds

long-In reconciling the net assets, the primary differences are capital expenditures, sales of assets, bond proceeds, and interest expense Governmental funds report capital outlays as expenditures while governmental activities report depreciation expense over the life of the asset In the statement of activities, the gain or loss from the sale is reported, while in the governmental funds, the proceeds from the sale are reported as revenues Bond proceeds provide current financial resources to government funds, but issuing debt increases long-term liabilities on the statement of assets In government funds, the interest paid is deducted, while in the statement of activities, interest expense is recognized according to the accrual method

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

1 The current periods financial statements would only reflect the amounts actually paid in the current period (current financial resources)

2 Under GASB 45, the liability for future amounts to be paid would have to be reported on a present value basis on the government-wide statement of net assets

3 Since the actual outlay associated with an increased benefit does not have to be paid in the current period, the decision defers the economic consequences until a future period

4 One issue to consider is whether the government is concerned about future fiscal responsibility

If the debt does not have to be recorded on the books, it might give an unrealistic view of the financial responsibility for future payments that the government has offered Also, because in many cases, the benefits are not guaranteed, there is a likelihood that the benefits might be canceled in the future if the government can not afford them

Answers to Analyzing Financial Statements

AFS 18-1 Type of Government Fund

Part A

1 P_ Department of Aviation (Airport Authority)

2 _G Police and Fire Departments

3 _P Water and Wastewater System

4 _F Agency Funds

5 _P Sanitation

6 _G Public Works

7 _F Pension and Retirement Trust Funds

8 _P Internal Service (i.e Information Technology)

9 _G Payment of General Obligation Debt

Part B

These funds much operate much like business in that they earn revenues by providing some product or service

AFS 18-2 Statement of Net Assets

1 The balance in unrestricted net assets is a positive $145,896

2 A growing negative number might indicate that the government has been funding long-term obligations on a year-to-year basis rather than setting aside funds for these liabilities The amount of cash reported on the statement is $29,706, which is significantly less than the amount of unrestricted net assets,

3 The largest restricted net asset category is for capital projects at $139,431

AFS 18-3 Reconciling the Government Fund Balance with the Government-wide Statement of Net Assets

1 a Capital assets used in governmental activities are not current financial resources are aren’t reported in governmental funds (only on the government-wide statements b Long-term liabilities are not due during the current period and are not recognized in government funs

2 Accounts receivables are not current period financial resources and are not reported on governmental funds

AFS 18-4 Statement of Activities

Capital Projects Fund

Capital Projects Fund

Capital Projects Fund

Internal Service Fund

Capital Projects Fund

Debt Service Fund

Special Revenue Fund

Due From Internal Service Fund

2 Interfund service provided and used

Internal Service Fund

Due From Special Revenue Fund

Due From Debt Service Fund

Capital Projects Fund

Transfer to General Fund

Residual equity transfers represent non-recurring transfers while operating transfers consist

of recurring transfers between funds for the purpose of shifting resources from the fund legally required to record the revenue to the fund legally required to expend the revenue Both types of transfers are reported as “other financial uses or sources on the Statement of Revenues, Expenditures and Changes in Fund Balance

Transfer From General Fund

Government-Wide Statement of Net Assets

Cash

Bonds Payable

100,000

1,000,000 100,000

1,000,000

100,000

1,000,000 100,000

1,000,000

3 Capital Projects Fund

Expenditures

Cash

Bond Issue Proceeds

Transfers From General Fund

Exercise 18–5 (continued)

2 Capital Projects Fund

Bond Issue Proceeds

Transfer to Debt Service Fund

Transfer to Debt Service Fund

Unreserved Fund Balance

Transfer to Debt Service Fund

Cash

Unreserved Fund Balance

Transfer to Debt Service Fund

Exercise 18–6

2008

Transfer from Special Revenue Fund

To record transfer received

Transfer from Special Revenue Fund

To record transfer received

Jan 4 Unreserved Fund Balance

Transfer to Special Revenue Fund

To close remaining accounts

11,400

11,400

Exercise 18–7 Exercise 18–8 Exercise 18–9

1 Capital projects fund

Long-term obligation account group

10 The general fund

11 Debt service fund

2 The general fund

4 Enterprise fund

15 Agency fund

6 The general fund

16 The general fund

9 Capital projects fund

19

The general fund

Enterprise fund The general fund

Exercise 18-11

1 Due From Special Revenue Fund

Transfer from Special Revenue Fund

128,125

125,000 3,125

3,125 250,000

240,625 12,500

10 Contracts Payable - Retained Percentage

Cash Revenue

Transfer from Special Revenue Fund

Expenditures

12,500

3,125 250,000

12,500

253,125

150,000 150,000

6 Contracts Payable - Retained Percentage

Cash

Bond Issue Proceeds

Transfer to Debt Service Fund

Unreserved Fund Balance

Unreserved Fund Balance

150,000

Exercise 18-13

2 Library and Civic Center 1,562,500 66% 12% 50,000 38% 1% 1,012,500 33% 22% 1,500,000 40% 30%

3 Library & Civic Center - Term bonds 104,000 4% 1% - 0% 0% 316,000 10% 7% 396,000 10% 8%

4 Land Acquisition - Serial Bond 21,000 1% 0% - 0% 0% 4,000 0% 0% - 0% 0%

The General Fund is always considered a major fund The following funds are considered major because they exceed 10% of the total

amounts for that class of fund (either governmental or proprietary) and 5% or the total of both classes (governmental and proprietary):

The major funds are the General Fund, the Library and Civic Center Fund, The Library and Civic Center – Term Bond Fund, and

the Sewer Fund

Exercise 18-14

1

Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year Ended December 31, 2008

Capital Debt Total General Projects Service Governmental Fund Fund Fund Funds Revenues

Expenditures

Interest Paid (7,000) (7,000)

Other Financing Sources (Uses) Bond Issue Proceeds 96,007 96,007

2

Government-wide

Statement of Net Assets December 31, 2008

Bonds Payable $ 96,688

3

Government-wide

Statement of Activities For the Year Ended December 31, 2008

Interest Expense $ (7,681)

Amortization Schedule Interest Cash Discount

12/31/04 7,681 7,000 681 96,688

Exercise 18-15

1

Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balance For the year ended December 31, 2008 Capital Debt Total General Projects Service Governmental Fund Fund Fund Funds Revenues

Expenditures

Expenditure (100,000) (100,000) Other Financing Sources (Uses) Special Items Revenue from Asset Sale 65,000 65,000

2

Government-wide

Statement of Net Assets December 31, 2008

Capital Assets $ 525,000

Accumulated Depreciation (205,000)

Net Capital Assets $ 320,000

3

Government-wide

Statement of Activities For the Year Ended December 31, 2008

Depreciation Expense $ (30,000)

Gain on Sale ($65,000 – ($75,000 - $25,000)) 15,000

Governmental funds report capital outlays as expenditures while

governmental activities report depreciation expense to allocate those

expenditures over the life of the asset This is the amount by which

capital outlays exceeded depreciation in the current period 20,000

In the statement of activities, only the gain on the sale of equipment

is reported, while in the governmental funds, the proceeds from the sale

increase financial resources Thus, the change in net assets differs

from the change in fund balance by the book value of the asset sold (7,500) Bond proceeds provide current financial resources to governmental funds,

but issuing debt increases long-term liabilities in the statement of net

Interest expense recognized on the accrual basis is less than the amounts

Exercise 18-17

Reconciling the Statement of Net Assets with Governmental Fund Reporting

For the Year Ended December 31, 2008

Capital assets used in governmental activities are not financial resources

Long-term liabilities are not due and payable

in the current period and therefore are not reported in the funds (103,466)

ANSWERS TO PROBLEMS

Problem 18–1

Part A Year

Required Principal Payment

Required Earnings

Required Increase

In Fund Balance

Required Fund Balance

71,607 4,929

10,000 66,536

10,000

4,929 71,607

10,000

71,607 4,929

Problem 18–2

1 Capital Projects Fund

Cash

Bond Issue Proceeds

Transfer to Debt Service Fund

3 Capital Project Fund

Reserve for Encumbrances

5 Capital Projects Fund

Bond Issue Proceeds

Transfer to Debt Service Fund

Unreserved Fund Balance

Unreserved Fund Balance

Encumbrances

Expenditures

Debt Service Fund

Transfer from Capital Projects Fund

90,000 85,000

Problem 18–2 (continued)

7 Capital Projects Fund

Reserves for Encumbrances

9 Capital Projects Fund

Contracts Payable – Retained Percentage

3 Debt Service Fund

Special Assessment Receivable

Special Assessment Revenue (($500,000/4) + (0.07 $500,000)

160,000

160,000

Cash

160,000

125,000 35,000