ACC 410 WEEK 6 QUIZ 4

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ACC 410 WEEK 6 QUIZ 4

CHAPTER 9

BUSINESS-TYPE ACTIVITIES

TRUE/FALSE (CHAPTER 9)

1. In both the fund statements and the government-wide statements, business-type activities and internal service funds are on a full accrual basis, and their measurement focus is on all economic resources.
2. The operating statement required as one of the three basic financial statements for proprietary funds is called the statement of revenues, expenditures, and changes in net position.
3. The amounts reported in proprietary fund statements are generally the same as those reported in the government-wide statements because both sets of statements are on a full accrual basis of accounting.
4. Governments are required to prepare a statement of cash flows for proprietary funds, but not for governmental funds.
5. GASB Statement No. 34 mandates that governments report their cash flows from operations using the indirect method.
6. The FASB mandates that entities report their cash flows from operations using the direct method.
7. Governments generally do not have to get formal legislative approval for enterprise fund budgets or incorporate them into their accounting systems.
8. In accounting for closure and postclosure landfill costs in an enterprise fund, a government does not necessarily have to “fund” the costs during the landfill’s useful life; it merely has to report both an expense and a liability for them.
9. The revenues of an internal service fund are the expenditures and expenses of other funds of that government.
10. The proprietary fund operating statement includes ALL changes in net position including capital contributions.
11. Governments must account for an activity in an enterprise fund only if local laws specifically require use of an enterprise fund.
12. Governments are not required to incorporate proprietary fund budgets into the accounting system.
13. GASB standards require that governments advance fund landfill closure and postclosure costs on an actuarial basis similar to the advance funding of pension plans.
14. The costs of cleaning up toxic substances seeping out from an abandoned county dump into the town water supply may be accounted for in either a governmental fund or an enterprise fund.
15. Internal service funds should be consolidated with other governmental funds in the government-wide statements.
16. Governments may choose whether to account for internal service fund activities on an accrual basis or a modified accrual basis.

MULTIPLE CHOICE (CHAPTER 9)

1. The appropriate measurement focus for the business-type activities of the Raymond City is
2. Current financial resources.
3. Economic resources.
4. Both (a) and (b).
5. None of the above.

2. Which of the following is not a proprietary fund?
3. City Water Enterprise
4. City Motor Pool Internal Service Fund.
5. City Hall Capital Projects Fund.
6. None of the above. They are all proprietary funds.

3. The appropriate basis of accounting for the proprietary funds of a government is
4. Cash basis.
5. Modified accrual.
6. Full accrual.
7. None of the above.

4. Which of the following is a valid reason for governments to engage in business-type activities?
5. The government does not want control over the activity.
6. The activity competes with general government activities.
7. The government does not want to subsidize the activity.
8. The government can provide the services more cheaply or efficiently than can a private firm.

5. Which of the following is a valid argument for separate accounting principles for proprietary activities?
6. Two separate measurement focuses and bases for accounting within the same set of financial statements are confusing.
7. There are no clear-cut distinctions between business and non-business activities.
8. The measurement focus on all economic resources is more consistent with the GASB’s objectives that financial reporting should provide information to help determine whether current-year revenues were sufficient to pay for current-year services.
9. Surveys of statement users indicate that information on depreciation is not of high priority to government decision makers.

6. Which of the following is a key reason for using business-type accounting to account for proprietary fund activities?
7. The modified accrual basis of accounting captures all the resources and obligations associated with an activity.
8. Depreciation is not recognized in business-type accounting in governments and surveys of statement users indicate that information on depreciation is not of high priority to government decision makers.
9. The measurement focus on all economic resources is more consistent with the GASB’s objectives that financial reporting should provide information to help determine whether current-year revenues were sufficient to pay for current-year services.
10. Business-type accounting facilitates comparisons with governmental activities.

7. Which of the following is NOT a budget typically prepared for an activity accounted for in a proprietary fund?
8. Appropriation budget.
9. Cash budget.
10. Capital budget.
11. Flexible budget.

8. A government reports the utility services it provides to citizens in a proprietary fund. Which accounting standards must the proprietary fund apply?
9. All FASB pronouncements, unless a FASB pronouncement conflicts with or contradicts a GASB pronouncement.
10. All FASB pronouncements issued prior to November 30, 1989, as well as any post-November 30, 1989 pronouncements specifically adopted by GASB.
11. All GASB pronouncements.
12. All FASB and AICPA standards incorporated into GASB Statement No. 62, as well as any FASB pronouncements issued after November 30, 1989 that have been specifically adopted by the GASB.

9. A proprietary fund of a government has some donor-restricted assets. Which of the following best describes where and how those assets will generally be displayed in the fund’s financial statements?
10. In a separate restricted asset category on the statement of net position.
11. Intermingled with other assets on the statement of net position.
12. Intermingled with other assets on the statement of net position, but footnoted.
13. In a separate restricted fund.

Use the following information to answer #10 and #11.

Bowdon City voted to establish an internal service fund to account for its printing services.  The city transferred $500,000 cash from the general fund to the newly created internal service fund.

10. The appropriate entry in the general fund to account for this transfer is a credit to cash for $500,000 and a debit for $500,000 to
11. Due from internal service fund.
12. Nonreciprocal transfer-out.
13.  
14. Investment in internal service fund.

11. The appropriate entry in the internal service fund is a debit to cash for $500,000 and a credit for $500,000 to
12. Due to general fund.
13. Nonreciprocal transfer-in.
14. Capital contribution (Revenues).
15. Investment provided by the general fund.

12. Cougar City issued $2 million in general obligation bonds to acquire a fleet of vehicles for the Central Motor Pool Internal Service Fund. At the date of issue, the appropriate entry in the internal service fund is a $ 2 million debit to cash and a $2 million credit to
13. Bonds payable.
14. Capital contribution (revenues).
15. Capital contributed (revenues) AND show $2 million as an addition to the schedule of changes in long-term obligations.
16. No entry in the internal service fund. Show $2 million as an addition to the schedule of changes in long-term obligations.

13. Which of the following is the best rationale/justification for reporting the business-type activities of a government in a separate fund?
14. Laws or regulations require that the activity’s costs of providing services be recovered by fees and charges rather than by general purpose taxes or similar charges.
15. Separate funds facilitate budgeting, planning, and control.
16. Separate funds facilitate an assessment of the activity’s performance.
17. Separate funds facilitate an assessment of the activity’s fiscal status.

14. Which of the following are required basic statements of a proprietary fund?
15. Balance sheet and income statement.
16. Balance sheet; statement of revenues, expenses, and changes in retained earnings; and statement of cash flows.
17. Statement of net assets and statement of revenues, expenses, and changes in fund net assets.
18. Statement of net position; statement of revenues, expenses, and changes in net position; and statement of cash flows.

15. Flora County issues $6 million of revenue bonds to finance construction of additional physical plant facilities for the county sewer system that is accounted for in an enterprise fund. The bond agreement requires that $0.5 million of the proceeds be invested in U.S. Treasury securities to be used to service the debt if revenues in a particular year are insufficient to do so.  When it sells the bonds, the county debits restricted cash and credits revenue bonds payable.  What additional entry, if any, is needed?
16. No additional entry is needed at this time.
17. Debit restricted net position $0.5 million; Credit unrestricted net position $0.5 million.
18. Debit unrestricted net position $0.5 million; Credit restricted net position $0.5 million.
19. Debit unrestricted retained earnings $0.5 million; Credit restricted retained earnings $0.5 million.

16. Linden County operates a solid waste landfill that is accounted for in an enterprise fund. The county calculated this year’s portion of the total closure and postclosure costs associated with the landfill to be $300,000.  The entry(ies) to record this cost should be
17. Debit landfill expense $300,000; Credit liability for landfill costs $300,000
18. Debit landfill expense $300,000; Credit liability for landfill costs $300,000 AND

include an addition of $300,000 on the schedule of changes in long-term obligations.

1. Show only an addition of $300,000 on the schedule of changes in long-term obligations.
2. No entry in the fund; No addition on the schedule of changes in long-term obligations.

17. Fennell County operates a solid waste landfill that is accounted for in a governmental fund. The county calculated this year’s portion of the total closure and postclosure costs associated with the landfill to be $600,000.  The entry to record this cost should be
18. Debit landfill expenditure $600,000; Credit liability for landfill costs $600,000
19. Debit landfill expenditure $600,000; Credit liability for landfill costs $600,000 AND

include $600,000 as an addition on the schedule of changes in long-term obligations.

1. No entry in the fund; include $600,000 on the schedule of changes in long-term obligations.
2. No entry in the fund; no addition on the schedule of changes in long-term obligations.

18. During the current year, the Adams County Solid Waste Landfill, which is accounted for in an enterprise fund, installed wells designed to assist in the ground water monitoring process after closure of the   The landfill has reached 40 percent of its capacity and is expected to continue to accept waste until 2016.  The wells cost $80,000 to acquire and install.  The appropriate entry to record the addition is a credit to Cash for $80,000 and an $80,000 debit to
19. Landfill assets.
20. Landfill expenses.
21. Liability for landfill costs.
22. Deferred outflow of resourcs.

19. Over the long run, internal service funds are intended to generate sufficient revenues to cover the
20. Full costs of providing services.
21. Full costs of providing services and earn a profit.
22. Current operating costs of providing services.
23. Current operating costs of providing services and earn an operating profit.

20. Which of the following is NOT true about internal service funds as reported in the fund financial statements?
21. Costs reported by internal service funds are reported twice within the same set of financial statements.
22. Billing rates must be set to cover the full cost of providing the goods or services.
23. Depreciation can be charged to governmental funds through the billing rates established by the internal service fund.
24. Deficits or surpluses in the general fund can be transferred to the internal service fund by adjusting the billing rates.

21. In a statement of net position, the net position of a proprietary fund should be displayed in which of the following categories?
22. Unrestricted fund balance; restricted fund balance; invested in capital assets, net of related debt.
23. Unrestricted net position; restricted net position; invested in capital assets, net of related debt.
24. Unrestricted net assets; restricted net assetsRestricted net assets; retained earnings; unrestricted net assets.

22. A statement of revenues, expenses, and changes in net position of a proprietary fund should include which of the following in addition to operating revenues, operating expenses, and ending net position?
23. Nonoperating revenues and expenses.
24. Nonoperating revenues and expenses; other changes in net position.
25. Nonoperating revenues and expenses; capital contributions and other changes in net position; beginning net assets.
26. None of the above.

23. In which of the following circumstances must an enterprise fund be used to account for the activity?
24. A newly created electric utility fund will finance its operations by a charge to users based on kilowatt hours used.
25. To finance the acquisition of plant facilities, a newly created electric utility issues general obligation debt.
26. To finance the acquisition of plant facilities, a newly created electric utility issues revenue bonds that will be repaid solely from operations of the electric utility.
27. To acquire needed plant facilities, a newly created electric utility enters into long-term lease agreements.

24. Jay County has designated the General Fund as the single fund to account for its self-insurance activities. What is the maximum amount that can be charged to expenditure in the general fund related to the self-insurance activities?
25. The amount of “premium” charged to the other funds.
26. The amount of actual claims expenditures.
27. The actuarially determined amount necessary to cover claims, expenditures, and catastrophic losses.
28. The amount transferred from other funds and activities to the general fund for self-insurance purposes.

25. Jona City has designated an internal service fund as the single fund to account for its self-insurance activities. Most of the insured activities, such as the police department, fire department, and general government functions, are accounted for in the general fund.  What is the maximum amount that can be charged to expenditure in the general fund related to the self-insurance activities?
26. The amount of “premium” charged to the general fund by the internal service fund.
27. The amount of actual losses incurred by the insurance activity.
28. The actuarially determined amount necessary to cover claims, expenditures, and catastrophic losses.
29. The amount transferred from the general fund to the internal service fund for self-insurance purposes.

26. A government operates a landfill. In the Landfill Enterprise Fund financial statements, which of the following would be reported as a restricted asset?
27. Cash received from the sale of bonds that must, based on the debt covenant, be spent only on building a new landfill runoff treatment plant.
28. Cash that management has voted to use only for landfill expansion.
29. Cash received from the general fund that will be used only to expand the landfill.
30. None of the above.

Use the following information to answer questions #27 and #28.

During the year Endor City’s self-insurance internal service fund billed the general

fund $600,000 for “premiums,” of which $60,000 was for catastrophic losses and the balance was the premium computed on an actuarially determined basis.  During the year the city incurred $500,000 in claims losses. The total amount transferred to the self-insurance fund by the general fund was $620,000.

27. The amount the city’s self-insurance fund can recognize as revenue is
28. $620,000
29. $600,000.
30. $540,000.
31. $500,000.

28. The amount the city’s general fund can recognize as an expenditure is
29. $620,000.
30. $600,000.
31. $540,000.
32. $500,000.

29. When a government enterprise fund has restricted assets on its statement of net position, which of the following is a true statement?
30. The total of the restricted assets in the asset section will be equal to the “restricted net position” amount in the equity section.
31. The total of the restricted assets will be offset by a liability of an equal amount.
32. The total of the restricted assets less related liabilities will be equal to the “restricted net assets” amount in the equity section.
33. None of the above statements is true.

30. Any internal service fund balances that are not eliminated in the consolidation process should generally be presented on the government-wide financial statements
31. In the business-type activities column.
32. In the internal service fund column.
33. In the governmental activities column.
34. These balances should not be presented on the government-wide financial statements.

31. On the fund financial statements, internal service activities should be presented
32. In the propriety fund statements, net of interfund eliminations.
33. In the governmental fund statements, net of interfund eliminations.
34. In the proprietary fund statements, without any interfund eliminations.
35. In the governmental fund statements, without any interfund eliminations.

32. “Cash flows from investing activities” include which of the following as cash inflows
33. Cash collection of receivables for sales of services.
34. Grants for operating activities.
35. Interest and dividends received.
36. Purchases of investments.

33. “Cash flows from capital and related financing activities” include which of the following as cash outflows
34. Grants to other governments for operating activities.
35. Grants to other governments for capital asset acquisitions.
36. Payments for services performed by other funds.
37. Purchases of capital assets.

34. “Cash flows from operating activities” include which of the following as inflows
35. Proceeds from short-term borrowing to finance operations.
36. Receipts from property taxes levied to support operations of the activity.
37. Grants from other governments to finance an operating deficit.
38. Any cash receipt that does not meet the definition of investing, capital and related financing, or noncapital financing activities.

35. “Cash flows from investing activities” include which of the following as outflows
36. Repayments of short-term borrowing to finance operations.
37. Interest received on investments.
38. Cash transfers to other funds.
39. Purchase of short-term investments.

36. “Cash flows from capital and related financing activities” include which of the following as inflows
37. Repayment of bonds issued to construct a new city hall building.
38. Interest received on investments.
39. Grant from the state to subsidize the mass transit system.
40. Receipts from the sale of an old backhoe that had been used in general government activities.

37. “Cash flows from investing activities” do NOT include which of the following as inflows
38. Receipts from the sale of marketable securities.
39. Interest received on bonds held as short-term investments.
40. Interest received on bonds held as long-term investments.
41. Transfers to other funds.

38. “Cash flows from noncapital financing activities” include which of the following as outflows
39. Repayment of bonds issued to finance construction of city hall.
40. Deposits into investment pools.
41. Loans to another fund of the same government .
42. Grants made to other governments to support operating activities.

39. Which of the following entities is required to use the direct method to report its cash flows?
40. City of Gaston Utility Fund.
41. United Way.
42. General Motors.
43. Oak Grove Water Users Association.

40. Which of the following factors do rating agencies take into account when considering revenue bond debt?
41. Tax base.
42. Assessed valuation of property in jurisdiction.
43. History of rates and rate increases.
44.  

41. The use of either an enterprise fund or a governmental fund to report a particular activity is most likely optional ifFees are charged to external users for goods or services.
42. The entity’s pricing policies set fees and charges to recover costs, including capital costs.
43. The entity is financed solely with revenue debt, as opposed to general obligation debt.
44. The entity’s costs are legally required to be recovered from fees and charges rather than general purpose taxes or similar charges.

42. The financial statements of a proprietary fund are prepared using the

Full Accrual     Modified                      Economic Resources   Current Financial

Basis                Accrual Basis               Measurement Focus     Resources Measure-

ment Focus     

1. No Yes                              Yes                              No
2. Yes No                               No                               Yes
3. No Yes                              No                               Yes
4. Yes No                               Yes                              No

43. The following transactions were among those reported by Morris City’s water utility enterprise fund for the current year.

Proceeds from sales of revenue bonds                        $3,900,000

Cash received from customer households                   $1,600,000

Capital contributed by subdivisions                                $700,000

In the water utility enterprise fund’s statement of cash flows for the current year, what amount should be reported as cash flows from capital and related financing activities?

1. $3,900,000
2. $6,200,000
3. $5,500,000
4. $4,600,000

44. Which of the following is a common example of governments’ service concession arrangements with independent operators?
45. a) Operation of a toll road
46. b) Management of a for-profit hospital
47. c) Terms on which the government receives discounts for prompt payment
48. d) Either a) or b).

45. As part of a service concession arrangement with a private firm involving operation of a city car park, a government agrees to incur certain future maintenance costs. If the present value of the consideration paid and to be paid to the government exceeds the present value of the maintenance costs to be incurred by the government, how, if at all, should the government report the “gain”?
46. a) Immediate recognition of revenue.
47. b) Deferred inflow of resources, and recognize revenue in a systematic and rational manner over the term of the arrangement.
48. c) Current liability.
49. d) A gain should not be reported; only a loss.

46. Which of the following statements about accounting for pollution remediation costs is NOT true?
47. a) They may be accounted for in either an enterprise fund or a governmental fund.
48. b) In the government-wide statements, estimates of costs to be incurred in the future should be reported as expenses and offsetting liabilities.
49. c) Because of the potential effects on public health, liabilities for all estimated remediation costs should be considered and reported as current liabilities.
50. d) Remediation costs to be accounted for include postremediation monitoring costs as well as actual cleanup costs.

PROBLEMS (CHAPTER 9)

1. Bilberry County voted to establish an internal service fund to account for printing and copying for all its departments and agencies. The county engaged in the following activities related to the new fund.  REQUIRED: Prepare journal entries to record these events in the internal service fund.  If no entry is required, write “No entry required.”

1. The county commission voted to transfer $300,000 from the general fund to the internal service fund to establish the new fund.

1. Entered into a capital lease for equipment to be used in printing activities. The total present value of the lease obligation is $600,000.

101. Issued $2 million in general obligation bonds at 101. The bonds were issued to acquire additional equipment and are to be serviced from the internal service fund.

1. Purchased equipment for $1,950,000. The equipment has an estimated useful life of nine years and an estimated salvage value of $150,000.

1. Billed the general fund for copying and printing charges, $70,000.

1. Paid salaries to printing employees, $50,000.

2. Carlton City has operated a City Utility (Enterprise) Fund for a number of years. The fund accounts for the activities of the city-owned electric, water and sewer systems.  During the current year, the city engaged in the following transactions related to the city utility Fund.  REQUIRED: Prepare the appropriate journal entries.  If none is required, write “No entry required.”

1. The city billed its customers $1 million for services provided during the year.

1. The city received $260,000 from a developer to connect new houses to the existing utility lines.

1. Depreciation on existing physical plant was $700,000.

1. Revenue bonds in the amount of $2 million were issued at par to finance new construction. The bond agreement requires that the city retain $200,000 of the bond proceeds for purposes of servicing the debt if revenues are not sufficient to do so.

3. The City of Santangelo received a $500,000 federal grant to acquire several buses to be used in its public transit system. The city paid $400,000 to acquire several buses.  At year-end, $100,000 of the grant had not yet been used.  During the year total depreciation on the buses was $40,000. Revenues for the public system were $600,000; operating expenses (other than depreciation) were $470,000.  REQUIRED: Assuming the Public Transit Enterprise Fund began the year with unrestricted net assets of $420,000, prepare the following for the Public Transit Enterprise Fund.

1. Statement of revenues, expenses, and changes in net position.

1. Net position section of the statement of net position.

4. Garfield County operates a solid waste landfill that is accounted for as an enterprise fund. At the end of 2013, the Landfill Enterprise Fund had a liability for landfill closure and postclosure care costs of $50,000.  The county estimated the total costs associated with closing and monitoring the landfill as listed below.  REQUIRED: (a) Calculate the estimated total current cost of postclosure care as of year-ends 2014 and 2015. (b) Calculate current period expenses for year-ends 2014 and 2015.  (c) Prepare the required journal entries at year-ends 2014 and 2015 to recognize the current period expenses.  Be sure to show all of your work.

2014                2015

Costs

Equipment to be installed            $3.5 million     $3.0 million

Final cover                                   $0.5 million     $1.0 million

Monitoring and maintaining         $4.0 million     $5.0 million

Capacity used                    30,000             58,000

Estimated total capacity                 600,000                       580,000

5. Altona City opened a landfill that it elects to account for in an enterprise fund.

• At the time the landfill was opened the government estimated total capacity of the landfill to be 5 million cubic feet, useful life to be 20 years, and total closure and postclosure costs to be $18 million.
• At the end of Year 1, the government reestimated total closure costs to be $18.3 million and estimated capacity to be same as the original estimate.
• At the end of Year 2, the government reestimated total capacity to be 4.8 million cubic feet and total closure costs to be $18.5 million.
• At the end of Year 3, the government reestimated useful life to be 17 years but capacity remained unchanged from the preceding year and closure and postclosure costs were estimated to be $18.4 million.

REQUIRED:  Prepare journal entries in the enterprise fund to record the following events.

1. During Year 1, the city estimates that 300,000 cubic feet of capacity were used. Record the landfill expense.
2. During Year 2, the city estimates that 650,000 cubic feet of capacity were used. Record the landfill expense.
3. During Year 3 the city installed equipment at a cost of $130,000. The equipment will be used in monitoring the landfill when it is closed.
4. During Year 3 the city estimates that 1,050,000 cubic feet of capacity were used. Record the landfill expense.

6. When insurance premiums went through the roof, Shorte City decided to “self insure.” It established an internal service fund (ISF), setting aside resources for potential claims in the new fund. During the year, the following transactions were recorded in the ISF:

• The ISF recognized $1.5 million in claims expense/liabilities in accordance with GASB standards and paid $1.3 million of those claims.
• Based on an actuarial calculation, the ISF billed the other funds of the city for $2.0 million. Of this amount, $1.2 million was billed to the city’s general fund and $0.8 million was billed to the city’s water and sewer enterprise fund.  The actuarial valuation included a reasonable provision for future catastrophe losses of $0.3 million.

REQUIRED:

1. Prepare journal entries to record these transactions in the city’s self-insurance ISF.
2. Suppose, instead, that the city reported its self-insurance activities in the general fund. Prepare journal entries to record these transactions in the City’s general fund.  Assume that any excess was allocated ratably (proportionately) between the general fund and the water and sewer fund.

7. The following list of cash flows was taken from the Camber City airport fund’s statement of cash flows. All amounts are in thousands.

Cash on hand, beginning of year	$    122
Operating lease receipts	2,650
Interest received from investments	25
Wages and salaries paid	915
Purchases of supplies	1,025
Collections (for services) from other funds of the city	290
Interest paid on long-term capital debt	175
Purchases of capital assets	1,725
Proceeds of revenue bonds to acquire capital assets	1,200
Purchases of investments	725
Proceeds from sale of capital assets	55
Proceeds from sales of investments	880
Capital lease payments	100
Operating grants received	500
Proceeds from line of credit (used for operations)	375
Capital contribution from airline	125
Interest paid on line of credit	5

REQUIRED:  Put these cash flow amounts in the form of a cash flows statement for the airport.  Calculate and include a line for cash on hand at the end of the period.

8. Falmouth City owns and operates a mini-bus system which it accounts for in an enterprise fund. Prepare journal entries to record the following transactions, which occurred in a recent year.

1. The mini-bus system issued $5 million of 8 percent revenue bonds at par and used the proceeds to acquire new mini-buses.

1. As required by the bond covenant, the system set aside 1 percent of the gross bond proceeds for repair contingencies.

1. The system accrued 6 months interest on the revenue bonds at year-end.

1. The system incurred $30,000 of repair costs and paid for them with cash set aside for repair contingencies.

ESSAYS (CHAPTER 9)

1. Many governments use internal service funds to account for activities that provide services to the government itself. What are the ramifications of such an accounting arrangement?  What are the effects on the government’s financial statements?

2. Governments may elect to account for their landfill activities in either a governmental or an enterprise fund. Explain the differences that would result if one government elected to account for its landfill activities in its general fund and another government elected to account for its landfill activities in an enterprise fund.

3. Because of the rising cost of commercial insurance, many governments have elected to be “self-insured.” Explain what being “self-insured” means.  Explain the difference in the accounting for self-insurance activities between a governmental fund and a proprietary fund.

4. An electric utility reports both restricted assets and restricted net position, but the amounts are different from each other. What could account for this difference?

5. What are the differences between a cash flows statement prepared for a governmental electric utility versus one prepared for an investor-owned utility?

6. How should a government usually report the activities of an internal service fund in the government-wide financial statements?

7. A city’s comptroller is distraught because depreciation cannot be recorded in a general fund. Moreover, for political reasons the city council never permits the general fund to have a substantial surplus balance.  As a consequence the city is unable to “save” resources to replace aging capital assets.  The comptroller has heard that it is possible indirectly to charge depreciation in a general fund by transferring capital assets to an internal service fund and correspondingly to build up a cash reserve to replace the capital assets.  Is the comptroller correct?  If so, explain how an internal service fund can be used to charge depreciation in the general fund and thereby create a cash reserve of what would otherwise be general fund assets.

CHAPTER 10

Fiduciary Funds and Permanent 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 the full accrual basis of accounting.

4. Fiduciary funds are excluded from the government-wide financial statements.

5. The concept of major versus nonmajor funds does not apply to permanent funds, as it does to governmental and proprietary funds.

6. Accounting for the employer’s contribution to a defined contribution pension 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 to a defined benefit pension plan is straight forward, because the employer is obligated only to make annual contributions in the amount specified in the plan terms.

8. Not-for-profits report all investment gains and losses on endowments as additions to temporarily restricted net assets, regardless of donor-imposed restrictions.

9. An employer may have a liability to a defined benefit pension plan other than for its annual required contributions, depending on the future financial health of the plan.

10. In an agency fund, assets always equal fund balances because there are no liabilities.

11. Employers that provide postemployment healthcare benefit plans should account for them in private-purpose trust funds.

12. Colleges that use a fixed rate of return approach to manage the distribution of income from their endowments must apply the same rate to determine how much investment income to report in their financial statements.

13. GASB standards require a defined benefit pension plan to report investments at fair market value even if the plan’s actuary uses a different value in determining the employer’s contribution requirements.

14. In contrast to most private-sector pension plans, most government plans are defined contribution plans.
15. Permanent funds focus on measuring current financial resources and use a modified accrual basis of accounting.

MULTIPLE CHOICE (CHAPTER 10)

1. A government 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?
2. a) General fund.
3. b) Private-purpose trust fund.
4. c) Agency fund.
5. d) Permanent fund.

2. In previous years, Boze 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?
3. a) Special revenue fund.
4. b) Private-purpose trust fund.
5. c) Agency fund.
6. d) Permanent fund.
7.  
8. Use the following information to answer Questions #3-4

Carl City received $200,000 to help maintain a local art museum that is owned and operated by a not-for-profit organization. During the year the city transferred net earnings of $20,000 to the appropriate entity/fund.

3. The $200,000 gift would be reported in a (an):
4. a) Special revenue fund.
5. b) Private-purpose trust fund.
6. c) Agency fund.
7. d) Permanent fund.

4. The $20,000 transfer would be reported by the fund that made the transfer as a (an)
5. a) Transfer-out.
6. b)
7. c) Deduction from net position—benefits.
8. d)

Use the following information to answer Questions #5-6.

In the current year, Loma City earned $24,000 on the principal of a private-purpose trust fund but disbursed only $20,000.

5. During the current year the private-purpose trust fund will recognize, related to earnings:
6. a) $24,000 revenues.
7. b) $20,000 revenues.
8. c) $24,000 addition to net position.
9. d) $20,000 addition to net position.

6. During the current year the private-purpose trust fund will recognize, related to the cash outflow:
7. a) $20,000 transfer-out.
8. b) $20,000 expenses.
9. c) $24,000 deduction from net position.
10. d) $20,000 deduction from net position.

7. Which of the following activities of a government should be accounted for in a fiduciary fund?
8. a) Funds received from the federal government to support public transportation activities.
9. 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.
10. c) Funds received from the state government that must be used to purchase capital assets.
11. d) Funds received from a contractor to assist with the development of utility infrastructure.

8. What basis of accounting is used to account for transactions of a government’s private-purpose trust fund?
9. a) Full accrual basis of accounting.
10. b) Modified accrual basis of accounting.
11. c) Cash basis of accounting.
12. d) Budgetary basis of accounting.

9. In which of the following funds would a government report depreciation expense?
10. a) Private-purpose trust fund.
11. b) Agency fund.
12. c) Permanent fund.
13. d) None of the above

10. Which of the following would NOT be accounted for in a fiduciary fund of a government?
11. a) Nonexpendable resources held for the benefit of other governments.
12. b) Nonexpendable resources held for the benefit of the government holding the resources.
13. c) Expendable resources held for the benefit of other governments.
14. d) Funds held as an agent for other entities.

11. Permanent funds are classified as
12. a) Governmental funds.
13. b) Proprietary funds.
14. c) Fiduciary funds.
15. d) Trust funds.

12. Which of the following is NOT a fiduciary fund?
13. a) Pension trust fund.
14. b) Investment trust fund.
15. c) Permanent fund.
16. d) Private-purpose trust fund.

13. What basis of accounting is used to account for the transactions of a government’s permanent fund?
14. a) Full accrual basis of accounting.
15. b) Modified accrual basis of accounting.
16. c) Cash basis of accounting.
17. d) Budgetary basis of accounting.

USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS #14-16

Previously a local private-sector charity received a $1 million gift, the income from which was restricted to support activities for senior citizens.  During the current year the endowment earned $40,000 of interest revenues, of which the charity designated $30,000 to support senior citizen activities.

14. On its year-end statement of activities, the charity would report interest revenues of:
15. a) $0
16. b) $30,000
17. c) $40,000
18. d) None of the above.

15. On its year-end statement of financial position, the charity would report temporarily restricted net assets of:
16. a) $40,000.
17. b) $ 0.
18. c) $30,000.
19. d) $1.04 million.

16. On its year-end statement of financial position, the charity would report permanently restricted net assets of:
17. a) $1 million.
18. b) $1.04 million.
19. c) $1.03 million.
20. d) $1.01 million.

17. Maple 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 percent.  How much revenue would be recognized in the permanent fund?
18. a) $ 0.
19. b) $ 64,000.
20. c) $ 80,000.
21. d) Insufficient information to determine.

18. During the year, a state-owned university received a $5 million gift. The donor specified that the principal of the gift must be held intact for 3 years, but the earnings from the gift can be used to support technology improvements in the college of business. At the end of the 3 years, the donor together with the university president and the college dean will decide how the $5 million gift can be used.  The university will report the gift in what type of fund?
19. a) Permanent fund.
20. b) Private-purpose trust fund.
21. c) Special revenue fund
22. c) Plant fund.

19. A wealthy citizen provided in her will for a gift of cash and other assets to Balsa city. The will specified that the gift was to be kept intact and that the earnings from the gift were to be used to support public parks. At the time of the donation, the gift had a book value in the hands of the donor of $300,000 and a fair value of $500,000.  When recording this gift the city would credit
20. a) Contributions revenues $500,000.
21. b) Other financing sources—contributions $500,000.
22. c) Contributions revenues $300,000.
23. d) Other financing sources—contributions $300,000.

20. At the beginning of the year, the permanent fund of Rose City had an investment portfolio with a historical cost of $300,000 and a fair value of $330,000. There were no purchases or sales of securities during the year. At the end of the year the portfolio had a fair value of $360,000.  At year-end,                                   the city s account for this increase in fair value in which of the following ways?
21. a) Credit Investment income, $30,000.
22. b) Credit Investment income, $60,000.
23. c) Credit Fund balance, $30,000.
24. d) No entry should be made to recognize an increase in fair value.

21. Several years ago, a donor gave $5 million to Denton City and specified that the principal was to be kept intact but the earnings were to be used to support the operations of city parks. During the current year, the city earned $300,000 on the gift.  To what type of fund, should the city transfer the $300,000 earnings?
22. a) It should not make any transfers. The $300,000 should remain in the city’s permanent fund.
23. b) A special revenue fund.
24. c) The general fund.
25. d) An enterprise fund.

22. A defined contribution pension plan is one in which the employer agrees to do which of the following?
23. a) To make payments to a specified pension plan with no guarantee of a specific pension amount to be paid to the employees.
24. b) To make actuarially determined payments to a pension plan AND to guarantee that the employees will receive a specified pension benefit (usually determined by length of service and salary).
25. c) To make actuarially determined payments to a pension plan that guarantees employees will receive a specified pension (usually determined by length of service and salary).
26. c) To pay specified amounts (usually determined by length of service and salary) to the employees upon retirement.

23. Dale City Light & Water (a proprietary fund) contributes to a defined benefit pension plan for its employees. During 2014, the city contributed $36 million to the pension plan. The city also made a $4 million contribution related to 2013.  The actuarially determined contribution requirement for 2014 was $43 million.  The amount of pension expense recognized by Dale City Light & Water for 2014 should be:
24. a) $ 0
25. b) $ 36 million
26. c) $ 40 million
27. d) $ 43 million

24. During the fiscal year ended December 31, 2013, Glen City’s general fund contributed $60 million to a defined benefit pension plan for city employees. On February 27, 2014, the general fund made an additional $3 million contribution related to the 2013 pension contribution requirements. The actuarially determined contribution requirement for 2013 is $65 million.   The amount of pension expenditure recognized by the general fund for 2013 should be:
25. a) $ 0
26. b) $ 60 million
27. c) $ 63 million
28. d) $ 65 million

25. In which of the following funds would the account “net pension obligation” be most likely to appear?
26. a) General fund.
27. b) Enterprise
28. c) Private-purpose trust fund.
29. d) Agency fund.

26. 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?
27. a) The actual contribution by a proprietary fund was less than the annual required contribution per the actuary.
28. b) The actual contribution by a governmental fund was less than the annual required contribution per the actuary.
29. c) The actuarially computed pension liability exceeded the pension plan assets.
30. d) The actuarially computed pension liability was less than the pension plan assets.

27. Required disclosure by the general fund of a government related to its pension plan does NOT include which of the following?
28. a) The employer’s funding policy.
29. b) The components of the pension cost.
30. c) The key assumptions used in determining the pension cost.
31. d) The present value of the future benefits to be paid.

28. The primary financial statements for a government-sponsored pension plan are:
29. a) Balance sheet and statement of activities.
30. b) Balance sheet, statement of activities, and cash flows statement.
31. c) Statement of fiduciary net assets and a statement of changes in fiduciary net assets
32. d) Balance sheet, statement of activities, cash flows statement, and statement of funding progress.

29. Which of the following is NOT a criterion that an employer’s annual required contribution must satisfy to be considered acceptable?
30. a) It must consist of the employer’s normal cost plus a provision for amortizing the plan’s unfunded actuarially accrued liability.
31. b) Actual assumptions must be in accordance with standards of the Actuarial Standards Board.
32. c) Actuarial value of pension plan assets must be based on market values on the financial statement date.
33. d) Assumptions as to investment earnings should be based on long-term projections.

30. A plan’s unfunded actuarially accrued liability is the excess of the:
31. a) Actuarially determined plan cost over the actual contribution.
32. b) Actuarially determined plan cost over the plan assets.
33. c) Actuarially determined pension liability over the plan assets.
34. d) Actuarially determined pension liability over the total contributions

31. Citizens within a defined geographic area of Dolan City created a special assessment district to facilitate the construction of sidewalks. The city was responsible for overseeing the entire construction project.  The city issued bonds in its own name to pay the contractor for the construction.  However, the city was not responsible in any manner for the bonds.  The bonds were secured by the special assessments that are levied against properties within the special assessment district.  Collections of special assessments would be recorded in which of the following funds of Dolan City?
32. a) Special assessment fund.
33. b) Agency fund.
34. c) Special revenue fund.
35. d) Debt service fund.

32. Lomond City receives a federal grant to assist in nutrition programs for its senior citizens. The city will select the contractors that will provide meals 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?
33. a) A governmental fund.
34. b) An enterprise fund.
35. c) An agency fund.
36. d) A private-purpose trust fund.

33. Ashby City receives a federal grant to assist in nutrition programs for its 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?
34. a) General fund.
35. b) Special revenue fund.
36. c) Agency fund.
37. d) Private-purpose trust fund.

34. Financial assets reported by most investment trust funds of governments should be reported at
35. a) Cost
36. b) Amortized historical cost.
37. c) Fair value on the date of the financial statements.
38. d) Fair value computed by a weighted-average approach.

35. Assets reported in a government’s investment trust fund should include:
36. a) Only investments owned by external participants in the investment pool.
37. b) Investments of both the sponsoring government and of external participants in the investment pool.
38. c) Investments related to the sponsoring government’s governmental funds and of external participants in the investment pool.
39. d) Investments related to the sponsoring government’s other fiduciary funds and of external participants in the investment pool.

 36. FINANCIAL ASSETS REPORTED BY QQQQQQQQQQQQQ2A7-LIKE INVESTMENT POOLS SHOULD BE REPORTED AT

1. a) Fair value at the date of the financial statements.
2. b) Amortized historical cost.
3. c) Fair value computed using a weighted-average approach.
4. d)

37. GASB standards of accounting for other postemployment benefits (OPEB) require that governments
38. a) Fund their OPEB benefits on an actuarially determined basis.
39. b) Report actuarially determined required contributions as OPEB expense, regardless of whether the government actually makes the contributions.
40. c) Report OPEB costs in accordance with the FASB’s standards of accounting for OPEB.
41. d) Only disclose an estimate of their OPEB liabilities.

38. Liabilities reported in pension trust funds consist of
39. a) Liabilities accrued using the accrual basis of accounting, including the actuarial accrued liability for the plan.
40. b) Liabilities accrued using the modified accrual basis of accounting, excluding the actuarial accrued liability for the plan.
41. c) Liabilities accrued using the accrual basis of accounting, excluding the actuarial accrued liability for the plan.
42. d) Liabilities accrued using the modified accrual basis of accounting, including the plan benefits that will be paid with measurable and available financial resources.

39. Governments must present which of the following financial statements for fiduciary funds?
40. Statement of assets and benefits and statement of cash flows.
41. Statement of fiduciary net assets and statement of changes in benefits,
42. Statement of fiduciary net position and statement of changes in fiduciary net position.
43. Statement of net assets and statement of accrued benefit obligations.

40. The fiduciary fund financial statements in a government’s annual financial report comprise
41. Consolidated statements only–no separate statements for individual pension plans.
42. A separate column in each statement for each fiduciary fund type.
43. A consolidated assets and benefits statement showing three classes of net assets.
44. Statements reporting information by major fund.

41. The liabilities related to benefits and refunds of a defined benefit pension plan are reported in a government’s fiduciary fund financial statements using the

Full Accrual     Modified                      Economic Resources   Current Financial

Basis                Accrual Basis               Measurement Focus     Resources Measure-

ment Focus     

1. No                    Yes                                                Yes                              No
2. Yes                    No                                    No                               Yes
3. No                    Yes                                                No                               Yes
4. Yes                    No                                    Yes                              No

42. A major difference between defined benefit pension plans and defined contribution pension plans is that
43. a) In defined benefit plans, the risk of loss is borne primarily by the employer.
44. b) Accounting for defined benefit plans is much simpler than accounting for defined contribution plans.
45. c) Employees generally are required to contribute to defined contribution plans but not to defined benefit plans.
46. d) There is no major difference between the two kinds of pension plans.

43. Which of the following is NOT true of agency funds?
44. a) Governments use them to account for resources held as trustee or agent for another government, fund, not-for-profit entity, or individual.
45. b) They are required to use a modified accrual basis of accounting.
46. c) They have no operations and therefore are not required to prepare financial statements.
47. d) Agency fund assets are always offset by liabilities.

44. Whether gains on the sale of a government endowment’s investments should be considered additions to principal or expendable income for accounting purposes is:
45. a) An issue that has been resolved by federal law.
46. b) Debatable, but generally resolved in favor of adding the gains to unrestricted assets (expendable), absent donor or legal stipulations.
47. c) A matter for governments to decide, independent of donor or legal considerations.
48. d) Debatable, but generally resolved in favor of adding the gains to principal (nonexpendable assets), absent donor or legal stipulations.

45. The funded status of a defined benefit pension plan is
46. a) The result of comparing the actuarial value of plan assets with the plan’s actuarial accrued liability for benefits.
47. b) The amount by which plan assets exceed benefits due to current retirees.
48. c) Current-year contributions less amounts currently due but not paid to current retirees,
49. d) The policy as to whether the plan is being financed on a pay-as-you-go (cash) basis or through actuarially determined employer contributions.

46. Which of the following is a NOT a true statement concerning postemployment benefits other than pensions (OPEB)?
47. a) OPEB comprise predominantly healthcare benefits.
48. b) Many governments do not provide OPEB or provide them on a pay-as-you-go basis.
49. c) GASB standards of accounting for OPEB are very similar to those for pension benefits.
50. d) OPEB plans should be accounted for in permanent funds.