solution manual advanced financial accounting 8th edition baker chap018

CHAPTER 18 GOVERNMENTAL ENTITIES: SPECIAL FUNDS AND GOVERNMENT-WIDE FINANCIAL STATEMENTS ANSWERS TO QUESTIONS Q18-1 A governmental entity would use a special revenue fund rather than a

CHAPTER 18 GOVERNMENTAL ENTITIES: SPECIAL FUNDS AND GOVERNMENT-WIDE FINANCIAL STATEMENTS

ANSWERS TO QUESTIONS

Q18-1 A governmental entity would use a special revenue fund rather than a

general fund when the resources earmarked for the fund, such as federal or state government grants or special tax levies, are restricted for specific purposes

Q18-2 Operating budgets are prepared for the general fund, special revenue funds,

and debt service fund Capital budgets are prepared for the capital projects fund

Q18-3 Interest on long-term debt is accounted for in the debt service fund for only

the interest that is due and legally payable as an expenditure Interest is not accrued

on the outstanding balance of the long-term debt

Q18-4 The major differences between a special revenue fund and an enterprise

fund are

Special Revenue Enterprise

Measurement focus Current financial resources Economic resources

Budgetary basis Operating budget None required

Financial statements Governmental type Commercial type

Q18-5 The basis of accounting used in the proprietary funds is the accrual basis

because the focus of the governmental entity is on capital maintenance and income determination rather than budgetary spending authority

Q18-6 The financial statements that must be prepared for the governmental funds

are the balance sheet and the statement of revenues, expenditures, and changes in fund balances The financial statements that must be prepared for the enterprise funds are the statement of net assets, the statement of revenues, expenses, and changes in fund net assets, and the statement of cash flows

Q18-7 Proceeds from a bond issue are accounted for as an other financing source

in the fund that issued the bonds However, some governments have a policy that the capital projects fund may not keep any bond premium, in which case the bond premium is typically transferred to a debt service fund Other financing sources and uses are reported separately below operations, but above special items, on the governmental funds’ statement of revenues, expenditures, and changes in fund balance

Q18-8 A permanent fund is a governmental fund for which the principal is

maintained, but the income in the fund can be used by the government for its programs that benefit all of its citizens The basis of accounting in permanent funds is the modified accrual method Private-purpose trust funds are established to benefit specific individuals or organizations, as specified by the donor These private-purpose trust funds may have an expendable principal, or the principal may be non-expendable The accrual basis of accounting is used for private-purpose funds Thus,

a major difference between these funds is the specificity of who the beneficiaries of the fund are

Q18-9 GASB 34 specifies that only governmental and enterprise funds determined

to be ―major‖ funds need to be separately disclosed in their own columns in the fund financial statements There are two tests to determine which individual governmental and enterprise funds are considered major if they meet both tests First, the general fund is always considered a major fund The first test is total assets, liabilities, revenues, or expenditures/expenses of that individual fund are at least 10 percent or more of the governmental or enterprise category The second test is that total assets, liabilities, revenues, or expenditures/expenses of the individual governmental or enterprise fund are at least 5 percent of the total for all governmental and enterprise funds combined Any individual funds that are not considered major are aggregated and presented in a single column Management may, at any time, separately disclose even those non-major funds for which they feel the additional disclosure will provide information valuable to the readers of the financial statements

Q18-10 Because the measurement focus of the governmental funds is on current

financial resources, revenue would be recognized in the governmental funds only if the donated items are available to finance expenditures of the current period, For example, donated land would be included in contribution revenue of a governmental fund if the land was sold, or the government has entered into a contract to sell the land, and that the proceeds from the sale will be available to finance expenditures of the current period However, a donation to a governmental fund, in the form of financial resources or capital assets, that has a restriction imposed by the donor which makes the donation unavailable to finance current expenditures, is not included in the governmental fund’s financial statements Of course, on the government-wide statement of activities, all donations would be shown, at fair value

on a separate line below general revenues Specifically, endowment and permanent fund principal donations are reported below general revenues and above special and extraordinary items

On the governmental funds financial statements, special and extraordinary items

are reported below operations, but above the net change in fund balance line, in the statement of revenues, expenditures, and changes in fund balance Special items are those significant transactions within the control of management that are either unusual in nature or infrequent in occurrence Extraordinary items are transactions or events that are both unusual and infrequent in occurrence

Q18-12 Component units are separate government entities for which the primary

government is financially accountable The financial presentation of these component units is dependent on the separability from the primary government If the component unit is virtually inseparable, then the component unit’s financial information is blended into the primary government’s financial statements However, if the component unit is distinguishable, and has its own taxing authority, then the component unit’s financial information is presented in a separate column in the government-wide financial statements

Q18-13 Two reconciliation schedules are required by GASB 34 The first reconciles

the fund balances reported in the governmental funds to the net assets of governmental activities reported on the government-wide financial statements For example, internal service funds are not a governmental fund, but the accounts for internal service funds are blended into the governmental activities that are reported

on the government-wide financial statements The second reconciliation schedule reconciles the net change in fund balances reported in the governmental funds statements to the change in net assets reported in the government-wide financial

statements These two reconciliation schedules are required by GASB 34 to be

presented either on the face of the fund financial statements or in a separate schedule immediately following the fund financial statements

Q18-14 The budgetary comparison schedule reports, for the general fund and any

other governmental fund that has a legally adopted budget, the initially approved budget, the final budget of the year, and the actual amounts, for each line item in the statement of revenues, expenditures, and changes in fund balance A variance column may also be used to compare the actual against the final budget This budgetary comparison schedule is part of the required supplementary information

(RSI) required by GASB 34 GASB 41 amended GASB 34 for those governments

that do not use the general fund and special revenue fund structure specified in

GASB 34 for their budgetary purposes GASB 41 specified that those governments

with significant perspective differences should provide a budgetary comparison schedule in the RSI based on the structure the government used for its legally adopted budget

Q18-15 The government-wide financial statements present the infrastructure assets,

such as roads, bridges, tunnels, sewer and water systems, etc., and other long-term assets of the government entity, such as buildings, equipment, vehicles, etc The capital assets should be reported at historical cost or fair value at the time of donation, if donated Because the basis of accounting for the government-wide financial statements is the accrual method, depreciation is recorded on the other long-term assets and these are reported net of depreciation For infrastructure assets, the governmental entity may elect to use a modified approach in which depreciation is not recorded The modified approach requires an assessment of the current condition

of the infrastructure assets and an estimate of the annual amount required to maintain and preserve the infrastructure assets In addition, the government-wide financial statements present the general long-term debt obligations of the governmental entity at the present value of the debt principal and future interest, just

as computed under the accrual basis of accounting that is used for commercial

entities

SOLUTIONS TO CASES

C18-1 Basis of Accounting and Reporting Issues

a In the accrual basis of accounting, revenue should be recognized in the accounting period in which it is earned and becomes measurable

In the modified accrual basis of accounting, revenue should be recognized in the accounting period in which it becomes both measurable and available to finance expenditures of the fiscal period "Available" means collectible within the current period or soon enough thereafter to be used to pay current period liabilities

b For the general fund, the modified accrual basis of accounting should be used because it is a governmental fund, which is, in essence, an accounting segregation of financial resources

For the special revenue fund, the modified accrual basis of accounting should be used because it is a governmental fund, which is, in essence, an accounting segregation of financial resources

For the enterprise fund, the accrual basis of accounting should be used because it is

a proprietary fund, with activities similar to those in the commercial, profit-seeking sector

C18-2 Capital Projects, Debt Service, and Internal Service Funds

a Capital projects funds account for the acquisition or construction of major capital facilities or improvements A separate capital projects fund is created at the time the project is approved and ceases at the completion of the project Accounting for capital projects funds is similar to accounting for the general fund The modified accrual basis of accounting is used; no fixed assets, depreciation, or long-term debt is recorded in these funds

The bond proceeds are not revenue to the capital projects fund; they are reported as Other Financing Sources A premium on the sale of bonds is transferred to the debt service fund When the expenditure is recorded, Contract Payable is credited for the current portion due and Contract Payable-Retained Percentage is credited for the amount held back to ensure that the contractor fully completes the project to the satisfaction of the governmental entity

The financial statements for capital projects funds are a balance sheet and a statement of revenues, expenditures, and changes in fund balance No budget versus actual is required because capital projects funds use a capital budget rather than an operating budget

b Debt service funds account for the accumulation and use of resources for the payment of general long-term debt principal and interest Accounting for the debt service fund is similar to accounting for the general fund The modified accrual basis

of accounting is used; no fixed assets or long-term debt is recorded; only current maturities are recorded in the fund

The bond premium received from the capital projects fund is recorded as an other financing source – transfer in The matured portion of a serial bond is recognized as

an expenditure and Matured Bonds Payable is credited Interest legally due and payable is recorded as an expenditure and Matured Interest Payable is credited

The financial statements of the debt service fund are a balance sheet and a statement of revenue, expenditures, and changes in fund balance

c Internal service funds account for the financing of goods or services provided by one department to other departments on a cost-reimbursement basis Separate internal service funds are established for each type of service Accounting for internal service funds is the same as for enterprise funds or commercial entities The accrual basis is used; these funds record fixed assets, depreciation, and long-term debt

The internal service fund may be started with a transfer in from the general fund The billings are recorded in "Due from" accounts and the revenue account, Charges for Services The closing entries involve a Profit and Loss Summary or Excess of Net Revenues over Costs account

The financial statements of an internal service fund are a statement of net assets; a statement of revenues, expenses, and changes in fund net assets; and, a statement

of cash flows

C18-3 Discovery Case

Summary of major information items in the Financial Report of the United States Government,

1 The report is prepared by the Secretary of the Treasury

2 The Management’s Discussion and Analysis presents comparative historical information for operations and financial position along with budget information, both historical and projected

3 The Comptroller General of the United States heads the General Accountability Office (GAO) who is the auditor for the U.S government For several years, the Comptroller General has disclaimed an opinion on the consolidated financial statements because of the material deficiencies in the government’s systems, recordkeeping, documentation, and financial reporting The material deficiencies are listed in the auditor’s report

4 The following five statements are presented: (1) Statements of Net Cost, (2) Statements of Operations and Changes in Net Position, (3) Reconciliations

of Net Operating Revenue (Cost) to the Budget Surplus (unaudited), (4) Dispositions of the Budget Surplus (unaudited), and (5) Balance Sheets

5 The Statements of Net Cost present the costs and revenue for the major departments, agencies, commissions, and other units of the federal government

6 The Statement of Operations and Changes in Net Position presents the revenues by type, the total costs, and the net operating revenue (cost) for each year

7 The Reconciliation of Net Operating Revenue (Cost) to the Budget Surplus presents the increases or decreases in major cost programs, along with the amount of capitalized fixed assets by major agencies of the federal government

8 The Dispositions of the Budget Surplus presents the changes in assets and liabilities during the years reported

9 The Balance Sheets present the assets, by major type, the liabilities, by major type, and reconciles to the net position of the U.S government

10 Major footnotes include a stewardship report on the resources held by the U.S government, and a large number of notes to the financial statements that report

on specific items related to agencies, commissions, and other entities within the federal government

C18-4 Becoming Familiar With a Local Government’s Comprehensive Annual Financial Report (CAFR)

(Note to the instructor: Most local governments now produce a comprehensive annual

financial report You might select the local city or county in which the university is located

or a large city close to the university town Printed copies of the CAFR may be obtained directly from that governmental entity and you could place these copies on reserve in your university library for use by your students Alternatively, many governments now provide their CAFRs online A Google web search using ―CAFR‖ and the name of your city, county or state will show if your selection provides an online copy of its CAFR Or, you may do a Google search using ―CAFR‖ and then select one of the government units that provide an online copy of its CAFR and then provide that link to your students or insert that link into your online syllabus.)

a Students should read the MD&A to get familiar with the governmental entity One of the items contained in the MD&A is information on the nature of the services performed

by the government At the local government level, the services usually consist of police and fire protection, street maintenance, recreation, and other services typically the responsibility of the local government

b Because there is so much information contained in a CAFR, it is important to see what information is covered by the auditor’s opinion The auditor’s opinion is usually unqualified The auditor does not audit the MD&A and other RSI and does not express an opinion on this information The auditor reads the MD&A and other RSI to determine if the information contained therein is reasonable

c A general purpose government will have most fund types It is beneficial for the student

to see which fund types are used and which ones are not used by a government.

d.Students should become familiar with the types of information found in the notes One item of information disclosed in the notes is a description of the measurement focus and basis of accounting used by the governmental funds The footnotes’ discussions regarding the governmental funds and their use of the financial resources measurement focus and modified accrual basis of accounting reinforce what the students learned from the text

e Listing the financial statements that use the economic resources measurement focus and accrual basis of accounting reinforces the coverage in the text In their evaluation, students should remember that the governmental fund financial statements are the only ones prepared using the current financial resources measurement focus and the modified accrual basis of accounting

f Students should be aware of the reporting of major funds in the financial statements

of governmental and proprietary funds

g This question emphasizes that the reporting entity for the government may be larger than the local governmental if the local government has fiscal accountability over other governmental entities Because many component units are reported discretely, students should have little problem identifying the existence of component units

C18-4 (continued)

h The purpose of this question is for students to become acquainted with the balance sheet equation for the governmental funds: Assets = Liabilities + Fund Balance Another goal for this question is for students to see that fund balance is separated into two components: (1) reserved and (2) unreserved

i The purpose behind questions i - l is to help students understand the format of the

statement of revenues, expenditures, and changes in fund balance The first section deals with revenues, which are reported according to source Students will discover that taxes are generally not the only source of revenue

j The objective of this question is to get students to understand how governments report expenditures Students may expect governments to report expenditures by object; however, expenditures are not reported this way on the statement of revenues, expenditures, and changes in fund balance

k The purpose of this question is to have students examine the items reported in other financing sources and uses This should reinforce what they learn in the text when they read the section dealing with interfund transfers

l This question covers the last items reported on the statement of revenues, expenditures, and changes in fund balance: special items, the change in fund balance for the year, and the ending fund balance at the end of the most recent year Students should not expect to see any special items since their occurrence is rare However, students should see the change in fund balance for the year being added to the beginning fund balance to produce ending fund balance

C18-5 The GASB’s Decision-Making Process

The GASB’s presentation of its decision-making process is found on their web site at

About the GASB: The Mission and Structure of the Board, and finally, click on An Open Decision-Making Process

1 The Governmental Accounting Standards Advisory Council (GASAC) This council is

composed of about 25 persons from a diverse background in government accounting and finance This council provides suggestions for topics to be considered by the GASB In addition, the Board receives concerns about current governmental accounting needs from other persons and groups who work in governmental accounting or auditing

2 Task Force In many cases, a task force is formed shortly after the Board agrees to

place the project on its agenda A task force is comprised of persons who know the project’s subject matter and provides expertise and advice to the GASB as it focuses

on the critical issues and determine if a new standard is necessary

3 Discussion Memorandum (DM) The DM is normally prepared by the staff and

defines the problem(s), the scope of the project, the accounting and reporting issues; and presents relevant research, alternative solutions to the issues, and arguments both for and against each alternative Written comments are solicited and in many cases a public hearing is scheduled to discuss the DM

4 Invitation to Comment (ITC) An ITC is sometimes issued when the GASB seeks

more input on one or more of the issues

5 Preliminary Views (PV) A PV puts forth the Board’s consensus at an early stage in

the process A majority of the Board must approve the issuance of a PV The Board solicits comments on the PV

6 Public Hearing A public hearing is typically scheduled to provide the Board with an

opportunity to hear the viewpoints of the public as well as to allow the Board to raise questions to the staff regarding written or oral comments received on the project, including any submissions at the public hearing

7 Analysis of Oral and Written Comments The staff performs an analysis of the

submitted comments, looking for information and good arguments on the issues, and

presents this analysis to the members of the Board who often make their own review

of the comments

8 Meetings of the Board The Board may have several, or many, meetings to discuss

the issues Board meetings on the project are open to the public, although observers are not allowed to participate in the discussions

9 Exposure Draft (ED) An ED presents the proposed new standards, the proposed

effective date and method of transition, background information, and explains the basis for the Board’s conclusions regarding the issues covered by the ED

10 Further Deliberations by the Board The Board receives comments on the ED and

discusses the comments to determine if any modifications are needed in the proposed standard

11 Statements of Governmental Accounting Standards or Statements of Governmental Accounting Concepts A majority of the Board must vote in favor of adopting a

pronouncement Statements of Standards establish new accounting or reporting requirements Statements of Concepts do not create new standards, but rather give guidance for dealing with problems that arise on an issue

And then, the Board continues to work on the next project!

C18-6 Summarizing a Recent GASB Exposure Draft

Note to the Instructor: This case provides your students with the opportunity to be on

the leading edge of a proposed governmental accounting or reporting standard Students can learn about some of the specifics of an expected, new GASB Statement

The most recent ED on the web page will be dependent on future actions of the GASB, but the Project Pages link in the left-hand frame of the GASB’s opening web page presents information on the status of current GASB projects These projects are in various stages of progress, but as of 2008, it appears that future Statements may be on economic condition reporting, fund balance reporting, and on service efforts and accomplishments reporting Of course, given the dynamic nature of governmental accounting and reporting, it is expected that new projects will be added, and some of the current projects may be discontinued or included within a larger project the board is studying And, some may become new GASB Statements!

7 a $8,839,000 = assets of $14,839,000 minus liabilities of $6,000,000

8 c $7,150,000 = capital assets (net) of $12,500,000 minus long-term debt of $5,350,000

9 c $1,035,000 = net assets of $8,839,000 minus $7,150,000 minus $654,000

10 a (answers b, c, and d each include a fiduciary fund which is not a major fund)

11 d

12 c

E18-2 Multiple-Choice Questions on Governmental Funds [AICPA Adapted]

E18-4 Multiple-Choice Questions on Various Funds

1 c The additions - investment earnings include the $50,000 of dividends and the

$35,000 of interest earned The contribution is reported as an addition contributions

-2 a The entries in the trust fund to record the resources spent would appear as

4 d Income is determined as follows:

Revenue – Charges for Services $100,000

6 b This is an example of an interfund services provided or used transaction The

general fund would debit expenditures

7 a This is an example of an interfund services provided or used transaction The

enterprise fund would debit operating expenses

8 b The net assets would be for the $600,000 transfer in plus the $10,000 of

income for the period

E18-5 Multiple-Choice Questions on Financial Reporting Issues for Government- wide and Fund-Based Financial Statements

8 d $1,035,000 = $1,000,000 + $60,000 interest - $20,000 benefits paid

- $5,000 deduction for investment revaluation

E18-6 Capital Projects Fund Entries

a Entries for capital projects fund during 20X2:

1 1 Receipt of grant, sale of bonds and transfer of premium

January 1, 20X2

Receipt of grant from county

January 1, 20X2

Other Financing Sources – Bond Issue 150,000 Other Financing Sources – Bond Premium 6,000 Sale of $150,000 par bonds at 104

November 3, 20X2

Other Financing Uses – Transfer

Transfer premium to debt service fund

2 Entries to record and pay for construction:

April 5, 20X2

BUDGETARY FUND BALANCE –

Pay contract payable and vouchers payable

3 Close nominal accounts:

Other Financing Sources – Bond Issue 150,000 Other Financing Sources – Bond Premium 6,000

E18-6 (continued)

Other Financing Uses – Transfer

4 Transfer of ending balance and close transfer account:

Other Financing Uses – Transfer

Record transfer of remainder to Debt Service

Other Financing Uses – Transfer

Close transfer out against unreserved fund balance

b

City of Waterman Capital Projects Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For Fiscal Year Ended December 31, 20X2 Revenue:

Other Financing Sources (Uses):

Proceeds of Bond Issue $156,000 Transfer Out to Debt Service Fund Premium (6,000) ) Transfer Out to Debt Service Fund Remainder (5,500)

Total Other Financing Sources (Uses) 144,500

Fund Balance, January 1, 20X2 -0- Fund Balance, December 31, 20X2 $ -0-

E18-7 Debt Service Fund Entries and Statement

a Entries for debt service fund during 20X2:

ESTIMATED OTHER FINANCING

Record budget

Record tax levy

Record tax collections

Property Taxes Receivable — Delinquent 5,000

Allowance for Uncollectibles – Delinquent 1,000

Revise estimate of uncollectibles and reclassify remaining receivables

Other Financing Sources – Transfer

Receive bond premium

Record matured principal and interest

E18-7 (continued)

Other Financing Sources – Transfer

Record transfer of unspent funds in capital projects fund to debt service fund

ESTIMATED OTHER FINANCING

Close budgetary accounts

Other Financing Sources – Transfer

in from Capital Projects Fund ($6,000 + $5,500) 11,500 Fund Balance – Reserved for Debt Service 18,800

c City of Waterman

Debt Service Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For Fiscal Year Ended December 31, 20X2 Revenue:

Transfers In From Capital Projects Fund 11,500

Fund Balance, January 1, 20X2 -0-

E18-8 Enterprise Fund Entries and Statements

a Entries for enterprise fund:

Receive loan from general fund

Reduce revenue for uncollectible accounts

Close nominal accounts

Close profit and loss summary

Net Assets – Invested in Capital

Record increase in net assets-invested:

$43,000 = (ending balance of $563,000 net capital assets less $500,000 related debt) minus

$20,000 beginning balance in net assets- Invested in capital assets net of related debt

MUD Enterprise Fund Statement of Net Assets December 31, 20X1

Less: Accumulated Depreciation (112,000) 443,000

E18-8 (continued)

MUD Enterprise Fund Statement of Revenue, Expenses, and Changes in Fund Net Assets For Fiscal Year Ended December 31, 20X1

Less: Interest on Capital-Related Debt 30,000

[Note that interest expense on capital-related debt is a non-operating expense.]

E18-8 (continued)

d

Augusta MUD Enterprise Fund Statement of Cash Flows For the Year Ended December 31, 20X1

Cash Flows from Operating Activities:

Cash Payments for Goods and Services (325,000)

Cash Paid to Internal Service Fund for Supplies (12,400)

Net Cash Provided by Operating Activities $ 94,600

Cash Flows from Noncapital Financing Activities:

Cash Received from General Fund for Noncapital Loan $ 30,000

Net Cash Provided by Noncapital

Cash Flows from Capital and Related Financing

Activities:

Interest on Capital-Related Debt $(30,000)

Net Cash Used for Capital and

Reconciliation of Operating Income to Net Cash

Provided by Operating Activities:

Adjustments to Reconcile Operating Income to Net Cash

Provided by Operating Activities:

Change in Assets and Liabilities:

Decrease in net Accounts Receivable 18,300

[Note that interest paid on capital-related debt is reported in cash flows from capital and related financing activities and not in the operating activities.]

E18-9 Interfund Transfers and Transactions

General Fund

1 a March 1, 20X8, Transfer out:

Other Financing Uses – Transfer Out to

b June 30, 20X8, Closing entry:

Other Financing Uses – Transfer Out to

2 a April 1, 20X8, Financing transaction:

Due from Building Maintenance Fund 8,000

b Shown on the general fund balance sheet on June 30, 20X8

3 a April 15, 20X8, Transfer out:

Other Financing Uses – Transfer

b June 30, 20X8, Closing entry:

Other Financing Uses – Transfer

4 a May 5, 20X8, Interfund services provided or used:

b June 30, 20X8, Closing entry:

E18-9 (continued)

Other Fund

1 Building Maintenance Internal Service Fund

a March 1, 20X8, Transfer in:

b June 30, 20X8, Closing entry:

2 Building Maintenance Fund

a April 1, 20X8, Financing transaction:

3 Debt Service Fund

a April 15, 20X8, Transfer in:

Other Financing Sources –

b June 30, 20X8, Closing entry:

Other Financing Sources –

4 Transportation Service Fund

a May 5, 20X8, Interfund services provided or used:

b June 30, 20X8, Closing entry:

E18-10 Internal Service Fund Entries and Statements

a Entries for 20X2, including closing entries:

Record collections on billings

Close nominal accounts

Close profit and loss summary

Net Assets – Invested in Capital Assets,

Reclassify net assets as of end of period:

$18,300 = (ending balance of $191,700 net capital assets less $0 related debt ) less