solusi manual advanced acc zy Chap018

Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements

1
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
Fund

Enterprise
Fund

Measurement focus

Current financial resources

Economic resources

Accounting basis

Modified accrual

Accrual

Budgetary basis

Operating budget

None required

Long-term assets

No

Yes

Long-term debt

No

Yes

Encumbrances

Yes

No

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.

18-1


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 nonexpendable. 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.
Q18-11 Agency funds must be self-balancing with assets equalling liabilities.
Therefore, agency funds do not have a net fund balance.

18-2


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.

18-3


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.

18-4


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.

18-5


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.

18-6


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.

18-7


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.

18-8


C18-5 The GASB’s Decision-Making Process
The GASB’s presentation of its decision-making process is found on their web site at
www.gasb.org/ then click on GASB FACTS in the left-hand frame, then click on Facts
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!

18-9


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!

SOLUTIONS TO EXERCISES
E18-1 Multiple-Choice Questions on Government Financial Reporting
1. a
2. d
3. b
4. a
5. a
6. b
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

18-10


E18-2 Multiple-Choice Questions on Governmental Funds [AICPA Adapted]
1. d
2. b
3. a
4. c
5. c
6. b

E18-3 Multiple-Choice Questions on Proprietary Funds [AICPA Adapted]
1. b
2. d
3. d
4. b
5. c
6. c Prepaid insurance would be reported as an asset.
7. b
8. c
9. c

18-11


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
follows:
Deductions - Benefits
Vouchers Payable
Vouchers Payable
Cash

3.

d

75,000

75,000
75,000

d

4.

75,000

Income is determined as follows:
Revenue – Charges for Services
Operating Expenses
Depreciation Expense
Interest Expense
Income

5.

c

$100,000
(45,000)
(40,000)
(5,000)
$ 10,000

The assets at June 30, 20X7 appear as follows:
Cash
Due from Other Funds
Computer Equipment (net)
Total Assets

$ 96,000
7,000
610,000
$713,000

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.

18-12


E18-5 Multiple-Choice Questions on Financial Reporting Issues for
Governmentwide and Fund-Based Financial Statements
1. c
2. c
the net assets of internal service funds are included in governmental
activities
3. d
4. d
5. a

$150,000 = $500,000 – $350,000

6. d

$37,000 = $25,000 + $20,000 – $8,000

7. c

$660,000 = $1,000,000 + $300,000 - $40,000 - $600,000

8. d

$1,035,000 = $1,000,000 + $60,000 interest - $20,000 benefits paid
- $5,000 deduction for investment revaluation

18-13


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
.
Cash
Revenue – County Grant
Receipt of grant from county.
January 1, 20X2
Cash
Other Financing Sources – Bond Issue
Other Financing Sources – Bond Premium
Sale of $150,000 par bonds at 104.
November 3, 20X2
Other Financing Uses – Transfer
Out to Debt Service Fund
Cash
Transfer premium to debt service fund.
2. Entries to record and pay for construction:
April 5, 20X2
ENCUMBRANCES
BUDGETARY FUND BALANCE –
RESERVED FOR ENCUMBRANCES
August 8, 20X2
BUDGETARY FUND BALANCE – RESERVED
FOR ENCUMBRANCES
ENCUMBRANCES
Expenditures—Capital Outlay
Contract Payable
Establish contract payable for walkway.
Expenditures—Capital Outlay
Vouchers Payable
Establish vouchers payable for added carpeting.
November 3, 20X2
Contract Payable
Vouchers Payable
Cash
Pay contract payable and vouchers payable.
3. Close nominal accounts:
Revenue – County Grant
Fund Balance – Unreserved

18-14

50,000

156,000

6,000

50,000

150,000
6,000

6,000

182,000
182,000

182,000
189,000

5,500

189,000
5.500

50,000
150,000
6,000

182,000
189,000

5,500

194,500

206,000


E18-6 (continued)
Expenditures
4. Transfer of ending balance and close transfer account:
Cash
Record transfer of remainder to Debt Service.
Close transfer out against unreserved
fund balance.
b.

200,500

194,500
6,000

5,500

5,500

5,500
5,500

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

Revenue:
County Grant
Expenditures:
Capital Outlay
Deficiency due to excess of Expenditures over
Revenue
Other Financing Sources (Uses):
Proceeds of Bond Issue
Transfer Out to Debt Service Fund--Premium
Transfer Out to Debt Service Fund--Remainder
Total Other Financing Sources (Uses)
Net Change in Fund Balance
Fund Balance, January 1, 20X2
Fund Balance, December 31, 20X2

18-15

$ 50,000
194,500
$(144,500) )
$156,000
(6,000)
(5,500)

144,500
-0-0$
-0$


E18-7 Debt Service Fund Entries and Statement
a.

Entries for debt service fund during 20X2:
1.

35,000

Property Taxes Receivable
Allowance for Uncollectibles
Revenue – Property Tax
Record tax levy.

40,000

Cash
Record tax collections.

2.

ESTIMATED REVENUES CONTROL
ESTIMATED OTHER FINANCING
SOURCES – TRANSFER IN
APPROPRIATIONS CONTROL
BUDGETARY FUND BALANCE
Record budget.

35,000

5,000

Property Taxes Receivable — Delinquent
Allowance for Uncollectibles – Delinquent
Revise estimate of uncollectibles and
reclassify remaining receivables.
Cash
Other Financing Sources – Transfer
in from Capital Projects Fund
Receive bond premium.
3.

5,000
4,000

34,000
6,000

4,000
36,000

35,000

6,000
6,000

Expenditures
Matured Bonds Payable ($150,000 x 1/10 due)
Matured Interest Payable ($150,000 x .10
interest)
Record matured principal and interest.

30,000

Matured Bonds Payable
Matured Interest Payable
Cash
Pay matured principal and interest.

15,000
15,000

Expenditures
Vouchers Payable
Record other expenditures.

1,700

Vouchers Payable
Cash
Pay approved vouchers.

1,200

18-16

5,000
1,000
3,000

15,000
15,000

30,000

1,700

1,200


E18-7 (continued)
4.

5.

Cash
In From Capital Projects Fund
Record transfer of unspent funds in
capital projects fund to debt service fund.

5,500
5,500

34,000
6,000

in from Capital Projects Fund ($6,000 + $5,500)
Fund Balance – Reserved for Debt Service
Expenditures
Close nominal accounts..
b.

BUDGETARY FUND BALANCE
ESTIMATED OTHER FINANCING
SOURCES – TRANSFER IN
Close budgetary accounts.

39,000

5,000

11,500

18,800
31,700

City of Waterman
Debt Service Fund
Balance Sheet
December 31, 20X2

Assets:
Cash
Property Tax Receivables (net)
Total Assets
Liabilities:
Vouchers Payable
Fund Balance:
Reserved for Debt Service
Total Liabilities and Fund Balance
c.

35,000

City of Waterman
Debt Service Fund
Revenue:
Property Taxes
Expenditures:
Principal Retirement
Interest
Miscellaneous
Total Expenditures
Excess of Revenue over Expenditures
Transfers In From Capital Projects Fund
Fund Balance, January 1, 20X2
Fund Balance, December 31, 20X2

18-17

$15,300
4,000
$19,300
$

500

18,800
$19,300

$39,000
$15,000
15,000
1,700

31,700
$ 7,300
11,500
$18,800
-0$18,800


E18-8 Enterprise Fund Entries and Statements
a.

Entries for enterprise fund:
1.

Accounts Receivable
Revenue
Record charges to customers.

420,000

Cash
Accounts Receivable
Record collections on account.

432,000

2.

Cash
Due to General Fund
Receive loan from general fund.

30,000

3.

Plant and Equipment
Contracts Payable
Record extension of water and gas lines.

75,000

Contracts Payable
Cash
Record payment for extended lines.

75,000

4.

12,400
328,000
30,000

Due to Central Stores Fund
Vouchers Payable
Interest Payable
Cash
Record payment of approved vouchers,
interest, and payment to central stores.
5.

Inventory of Supplies
Operating Expenses
Interest Expense
Due to Central Stores Fund
Vouchers Payable
Interest Payable
Record expenses.

12,400
325,000
30,000

Revenue
Reduce revenue for uncollectible accounts.

6,300

Accumulated Depreciation
Adjust for depreciation for period.

32,000

Supplies Expense
Adjust for supplies on hand.

15,200

18-18

420,000

432,000

30,000

75,000

75,000

12,400
328,000
30,000

367,400

6,300

32,000

15,200


E18-8 (continued)
Closing entries:
Revenue
Operating Expenses
Interest Expense
Supplies Expense
Profit and Loss Summary
Close nominal accounts.

413,700

Net Assets – Unrestricted
Close profit and loss summary.
Net Assets – Invested in Capital
Assets, Net of Related Debt
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 assetsInvested in capital assets net of related debt

b.

8,500

328,000
30,000
32,000
15,200
8,500

8,500

43,000
43,000

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

Assets:
Cash
Accounts Receivable
Less: Allowance for Uncollectibles
Land
Plant and Equipment
Less: Accumulated Depreciation
Total Assets

$ 13,000
(6,300)
$555,000
(112,000)

$111,600
6,700
5,200
120,000
443,000
$686,500

Liabilities:
Vouchers Payable
Due to General Fund
Bonds Payable, 6%
Total Liabilities

$ 18,000
30,000
500,000
$548,000

Net Assets:
Invested in Capital Assets, net of Related Debt
Unrestricted
Total Net Assets

$ 63,000
75,500
$138,500

18-19


E18-8 (continued)
c.

Augusta
MUD Enterprise Fund
Statement of Revenue, Expenses, and
Changes in Fund Net Assets

Revenue:
Revenue from Services
Expenses:
Operating
Depreciation
Supplies
Operating Income
Nonoperating Expense:
Less: Interest on Capital-Related Debt
Change in Net Assets
Net Assets, January 1
Net Assets, December 31

$413,700
$328,000
32,000
15,200

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

18-20

375,200
$ 38,500
30,000
$ 8,500
130,000
$138,500


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 Received from Customers
Cash Payments for Goods and Services
Cash Paid to Internal Service Fund for Supplies
Net Cash Provided by Operating Activities
Cash Flows from Noncapital Financing Activities:
Cash Received from General Fund for Noncapital Loan
Net Cash Provided by Noncapital
Financing Activities
Cash Flows from Capital and Related Financing
Activities:
Interest on Capital-Related Debt
Extension of Service Lines
Net Cash Used for Capital and
Related Financing Activities

$ 432,000
(325,000)
(12,400)

$ 94,600

$ 30,000
30,000

$(30,000)
(75,000)
(105,000)

Cash Flows from Investing Activities

-0-

Net Increase in Cash
Cash at Beginning of Year
Cash at End of Year

$ 19,600
92,000
$111,600

Reconciliation of Operating Income to Net Cash
Provided by Operating Activities:
Operating Income
Adjustments to Reconcile Operating Income to Net Cash
Depreciation
Change in Assets and Liabilities:
Decrease in Inventory and Supplies
Decrease in net Accounts Receivable
Increase in Vouchers Payable
Total Adjustments

$ 38,500
$ 32,000
2,800
18,300
3,000

56,100
$ 94,600

[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.]

18-21


E18-9 Interfund Transfers and Transactions
General Fund
1.

a.

b.

2.

a.

March 1, 20X8, Transfer out:
Other Financing Uses – Transfer Out to
Building Maintenance Fund
Cash
June 30, 20X8, Closing entry:
Other Financing Uses – Transfer Out to
April 1, 20X8, Financing transaction:
Due from Building Maintenance Fund
Cash

b.
3.

April 15, 20X8, Transfer out:
Cash

b.

4.

12,000

12,000
12,000

8,000

8,000

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

a.

12,000

a.

May 5, 20X8, Interfund services provided or used:
Expenditures
Due to Transportation Service Fund
Due to Transportation Service Fund
Cash

b.

Expenditures

2,400

2,400
2,400

825
825

825

18-22

2,400

825
825

825


E18-9 (continued)
1.

Building Maintenance Internal Service Fund
a.

b.

2.

12,000

Transfer In from General Fund
Net Assets

12,000

12,000

12,000

April 1, 20X8, Financing transaction:
Cash
Due to General Fund

8,000

8,000

Debt Service Fund
a.

b.

4.

March 1, 20X8, Transfer in:
Cash

a.

3.

Other Fund

April 15, 20X8, Transfer in:
Cash
Other Financing Sources –
Unreserved Fund Balance

2,400
2,400

2,400

2,400

Transportation Service Fund
a.

May 5, 20X8, Interfund services provided or used:
Due from General Fund
Revenue from Billings
Cash

b.

825
825

Revenue from Billings
Net Assets - Unrestricted

18-23

825

825
825

825


E18-10 Internal Service Fund Entries and Statements
a.

Entries for 20X2, including closing entries:
1.

2.

Furniture and Equipment
Vouchers Payable
Record acquisitions of supplies,
furniture, and office equipment.

96,000
4,700

Billings to Departments
Record billings for jobs completed.

292,000

Cash
Record collections on billings.

287,300

Costs of Printing Jobs
Operating Expenses
Vouchers Payable
Record costs of printing jobs.

204,000
38,000

Accumulated Depreciation
Record depreciation for period.
Vouchers Payable
Cash
Pay approved vouchers.

23,000

243,000

100,700

292,000

287,300

92,400
149,600

23,000

243,000

Closing entries:
Operating Expenses
Close nominal accounts.
Close profit and loss summary.
Net Assets – Invested in Capital Assets,
Net of Related Debt
Net Assets - Unrestricted
Reclassify net assets as of end of period:
$18,300 = (ending balance of $191,700 net
capital assets less $0 related debt ) less
$210,000 beginning balance in net assets invested.

18-24

292,000

27,000

18,300

204,000
38,000
23,000
27,000

27,000

18,300


E18-10 (continued)
b.

Bellevue
Printing Shop Fund
December 31, 20X2

Assets:
Cash
Furniture and Equipment
Less: Accumulated Depreciation
Total Assets

$264,700
(73,000)

$ 68,900
20,300
13,400
191,700
$294,300

Liabilities:
Vouchers Payable
Total Liabilities

$ 19,300
$ 19,300

Net Assets:
Invested in Capital Assets, Net of Related Debt
Unrestricted
Total Net Assets

$191,700
83,300
$275,000

c.

Bellevue
Printing Shop Fund
Statement of Revenue, Expenses, and
Changes in Fund Net Assets

Revenue:
Expenses:
Operating
Depreciation
Income
Net Assets, January 1
Net Assets, December 31

$292,000
$204,000
38,000
23,000

18-25

265,000
$ 27,000
248,000
$275,000


E18-10 (continued)
d.

Bellevue City
Internal Service Fund – Printing Shop
Statement of Cash Flows
For the Year Ended December 31, 20X2

Cash Flows from Operating Activities:
Cash Received from Customers
Cash Payments for Printing Jobs

$ 287,300
(238,300)

Cash Flows from Noncapital Financing Activities
Cash Flows from Capital and
Related Financing Activities
Acquisition of Capital Assets
(furniture and copier)
Net Cash Used for Capital and Related
Financing Activities

$49,000
-0-

$ (4,700)
(4,700)

Cash Flows from Investing Activities

-0-

Net Increase in Cash
Cash at Beginning of Year
Cash at End of Year

$44,300
24,600
$68,900

Reconciliation of Operating Income to Net Cash
Operating Income

$27,000

Adjustments to Reconcile Operating Income
to Net Cash Used by Operating Activities:
Depreciation
Change in Assets and Liabilities:
Increase in Due from Other Funds
from Billings
Increase in Inventory of Supplies
Increase in Vouchers Payable
Total Adjustments

18-26

$ 23,000
(4,700)
(3,600)
7,300

22,000
$49,000


E18-11 Multiple-Choice Questions on Government-wide Financial Statements
1.

c

($1,450,000 - $120,000)

2.

a

[($1,450,000 - $120,000) - $780,000]

3.

b

4.

c

For the amount of the bond issue proceeds. Note that no repayments
of debt were made during the year.

5.

c

The interest adjustment is from the modified accrual basis ($30,000)
to the accrual basis of measurement ($25,000).

6.

d

7.

c

8.

b

9.

c

10.

b

18-27


SOLUTIONS TO PROBLEMS
P18-12 Adjusting Entries for General Fund [AICPA Adapted]
Adjusting entries to correct the general fund:
1.

No entry required.

2.

Expenditures
Buildings
Correct for state grant
expended for buildings.

300,000

Expenditures
Capital Outlays (equipment)
Correct for expenditures
for playground equipment.
3.

22,000

Bonds Payable
Buildings
Correct for bonds used
to construct buildings.

1,000,000

Debt Service from Current Funds
Correct for transfer to debt service fund.
4.

5.

130,000

ENCUMBRANCES
FOR ENCUMBRANCES
Correct for unrecorded encumbrances.

4,950

Fund Balance – Reserved for Inventory
Correct for reserve for ending inventory.

6,500

22,000

1,000,000

130,000

2,800

Expenditures
Correct for supplies used in period.

300,000

18-28

2,800

4,950

6,500


P18-13 Entries for Funds [AICPA Adapted]
Fund

Journal Entries

1.

General
Fund

400,000
BUDGETARY FUND BALANCE – UNRESERVED

394,000
6,000

2.

General
Fund

Taxes Receivable – Current
Revenue – Taxes
Allowance for Uncollectibles – Current

382,200
7,800

3.

PrivatePurpose
Trust Fund

Investments
Contributions

4.

General

50,000

Cash
Additions – Interest
Out to Internal Service Fund
Cash

Internal
Service
Fund
5.

390,000

Cash

Capital
Projects

Cash

5,500

5,000
5,000

72,000


24,000

General

6.

Special Assessments Receivable
Revenue – Special Assessments
Out to Capital Projects Fund
Due to Capital Projects Fund

5,500

5,000
5,000

72,000

3,000

Debt
Service
Fund

50,000

3,000

3,000

General
Fund

Cash

3,000

Capital
Projects
Fund

Cash

3,000

Debt
Service
Fund

Cash
Special Assessments Receivable

18-29

24,000

24,000

3,000
3,000
3,000

24,000


P18-13 (continued)
Fund
7.

Capital
Projects
Fund

Journal Entries
ENCUMBRANCES
75,000
FOR ENCUMBRANCES

75,000

FOR ENCUMBRANCES
ENCUMBRANCES

75,000

75,000

Expenditures
Contracts Payable

75,000

Contracts Payable
Cash

75,000

8.

Internal
Service
Fund

Cash (or Vouchers Payable)

9.

General
Fund

Cash
Taxes Receivable – Current
Revenue – Licenses and Fees
Allowance for Uncollectibles – Current
Revenue – Taxes
Estimate
$7,800
Actual
(4,000)
Correction
$3,800

10.

Capital
Projects
Fund

Cash

11.

General
Fund

FOR ENCUMBRANCES
ENCUMBRANCES
Expenditures
Cash

1,900

393,000

3,800

500,000

15,000
15,000

18-30

75,000
75,000
1,900

386,000
7,000
3,800

500,000

15,000
15,000


P18-14 Entries to Adjust Account Balances [AICPA Adapted]
a.

General Fund
Adjusting entries:
1.

Allowance for Uncollectibles – Delinquent
Reduce estimated losses on prior year's
taxes to amount of receivables of $8,000.

2.

Revenue
Donated Land
Remove accounts belonging only in the
government-wide financial statements.

3.

Fund Balance – Reserved
for Encumbrances – 20X0
Record purchase orders outstanding
on June 30, 20X0.

8,800

Expenditures – 20X0
Other Expenditures
Reclassify purchases of supplies
chargeable to prior year's appropriations.
Excess of $600 actual cost over estimate
is approved and charged to current year
expenditures.

8,800

ENCUMBRANCES
FOR ENCUMBRANCES
Record encumbering of appropriations for
purchase orders outstanding on June 30, 20X1.

2,100

4.

5.

Special Assessment Bonds Payable
Record liability to capital projects
fund for cash obtained from sale of
special assessment bonds.

6.

Revenue
Tax Anticipation Notes Payable
Due to Water Utility Fund
Record tax anticipation notes payable
and liability to water utility fund for
funds obtained from sale of scrap.

18-31

2,200

27,000

2,200

27,000

8,800

8,800

2,100

100,000

21,000

100,000

20,000
1,000


P18-14 (continued)
Closing entries:
UNRESERVED
FOR ENCUMBRANCES
ENCUMBRANCES

348,000

2,100

Fund Balance – Reserved for Encumbrances

2,100

Revenue
Other Expenditures
Expenditures – Building Addition Constructed
Expenditures – Serial Bonds Paid

306,000
31,200

Fund Balance – Reserved for
Encumbrances – 20X0
Expenditures – 20X0
b.

8,800

310,000
38,000

2,100
2,100

271,200
50,000
16,000

8,800

Adjusting Journal Entries:
Capital Projects Fund:
5.
Record receivable due from general
fund for proceeds of sale of bonds.
Water Utility Fund:
6.
Revenue – Miscellaneous
Record receivable from general fund
for cash obtained from sale of scrap.

18-32

100,000

1,000

100,000

1,000


P18-15 Capital Projects Fund Entries and Statements
a.

Journal entries:
1.

CPF Cash
5,080,000
Cash

80,000

DSF Cash
In from Capital Projects Fund
2.

45,000

80,000

80,000

CPF Expenditures
Vouchers Payable

5,000,000
80,000

Vouchers Payable
Cash

80,000

45,000

45,000
45,000

(Note: It is not necessary to first establish, and then immediately reverse an
encumbrance account.)
3.

4.

CPF ENCUMBRANCES
4,500,000
FOR ENCUMBRANCES

4,500,000

CPF BUDGETARY FUND BALANCE – RESERVED
FOR ENCUMBRANCES
2,000,000
ENCUMBRANCES

2,000,000

Expenditures
Contracts Payable
Contracts Payable – Retained
Percentage
CPF Contracts Payable
Cash

2,000,000

1,800,000

1,800,000
200,000

1,800,000

Closing entries for Capital Projects Fund:
Expenditures
RESERVED FOR ENCUMBRANCES
ENCUMBRANCES

18-33

5,000,000
80,000

2,045,000
80,000
2,955,000

2,500,000

2,500,000


P18-15 (continued)
Fund Balance – Reserved
for Encumbrances

b.

2,500,000

West City
Balance Sheet
June 30, 20X3
Cash
Total Assets

Assets

$ 3,155,000
$ 3,155,000

Liabilities and Fund Balance
Contracts Payable – Retained Percentage
Fund Balance:
Reserved for Encumbrances
Unreserved
Total Liabilities and Fund Balance
c.

2,500,000

$
$2,500,000
455,000

200,000

2,955,000
$ 3,155,000

West City
For Fiscal Year Ended June 30, 20X3
Expenditures:
Capital Outlays:
Building Removal
Building Construction
Total Expenditures
Deficiency of Revenues over Expenditures
Proceeds of Serial Bonds
Transfer Out to Debt Service Fund
Total Other Financing Sources (Uses)
Fund Balance, July 1, 20X2
Fund Balance, June 30, 20X3

18-34

$

45,000
2,000,000
$ 2,045,000
$(2,045,000)
5,080,000
(80,000)
$ 5,000,000
$ 2,955,000
-0$ 2,955,000


P18-16 Recording Entries in Various Funds [AICPA Adapted]
1.

Entries made in the capital projects fund for 20X8:
Cash
Issued $800,000 of bonds at their face value.

800,000

ENCUMBRANCES
FOR ENCUMBRANCES
Contractor’s bid is accepted.

750,000

BUDGETARY FUND BALANCE – RESERVED FOR
ENCUMBRANCES
ENCUMBRANCES
One-third of the project was completed during 20X8.
Expenditures
Contracts Payable
Actual construction cost incurred in 20X8.
2.

800,000

750,000

250,000

246,000

250,000

246,000

Entries made in the special revenue fund for 20X8:
BUDGETARY FUND BALANCE – UNRESERVED
Record the budget for 20X8.

112,000

Cash
Revenues
Collected hotel room taxes.

109,000

Expenditures
Vouchers Payable
Incurred expenditures for general promotion
and motor vehicle.

103,000

Vouchers Payable
Cash
Paid expenditures.

103,000

18-35

108,000
4,000

109,000

103,000

103,000


P18-16 (continued)
3.

Entry made in the general fund for 20X8:
Cash
Record transfer of resources to debt service fund.

313,500

313,500

Entries made in the debt service fund for 20X8:
Cash
In from General Fund
Record transfer of resources from general fund.

313,500
313,500

Expenditures – Interest
Record interest legally due and payable.
Expenditures – Principal
Record principal legally due and payable.

300,000

Cash
Record payment of matured bonds and interest.
4.

13,500

300,000
13,500

300,000

313,500

Closing entries in the general fund for 20X8:
BUDGETARY FUND BALANCE – RESERVED FOR
ENCUMBRANCES
ENCUMBRANCES
Close outstanding encumbrances at year-end.
Fund Balance – Reserved for Encumbrances
Reserve actual fund balance for encumbrances
expected to be honored in 20X9.

5.

13,500

83,000

83,000

83,000

83,000

Adjusting entry in the general fund for 20X8:
Fund Balance – Reserved for Inventories
Adjust inventory of supplies to balance
at December 31, 20X8.

18-36

3,000

3,000


P18-17 Matching Questions Involving Various Funds
1.

L

2.

C

3.

R

4.

M

5.

I

6.

G

7.

Q

8.

A

9.

O

10.

F

18-37


P18-18 Questions on Fund Transactions [AICPA Adapted]
1. $104,500

(Stated in item #3.)

2. $17,000


3. $125,000

(Item #5 states that $83,000 is reserved for encumbrances. To this
is added the $42,000 reserve for the ending inventory.)

4. $236,000

(Item #1 states that $600,000 of bond proceeds were received in
the capital project fund, less $364,000 of construction expenditures
in the period.)

5. $6,000

(Item #2 states that $109,000 tax revenues were received from
which $81,000 and $22,000 was expended.)

6. $104,500


7. $386,000

(Item #1 states construction expenditures of $364,000 plus item #2
states a motor vehicle purchase of $22,000.)

8. $100,000

(Item #3 states a reduction in long-term debt principal of
$100,000.)

9. $181,000

(Item #6 states that $181,000 was used to purchase supplies
during the period.)

10. $190,000

(Item #6 states encumbrances of $190,000.)

18-38


P18-19

Matching Questions Involving the Statement of Cash Flows for a
Proprietary Fund

1.

C

2.

A

3.

C

4.

A

5.

E

6.

A

7.

C

8.

B

9.

B

10.

C

11.

A

12.

E

13.

D

14.

D

15.

C

18-39


P18-20

Matching Questions Involving the Statement of Revenues,
Expenditures, and Changes in Fund Balance for a Capital Projects
Fund and a Debt Service Fund

1.

C

2.

D

3.

C

4.

C

5.

B

6.

A

7.

C

8.

D

9.

A

10.

C

11.

B

12.

B

13.

D

18-40


P18-21 Question on Fund Transactions [AICPA Adapted]
a.
1.

G

2.

K

3.

L

4.

L

5.

E

6.

J

7.

D

8.

A

9.

F

10.

B

11.

B and J

12.

F and J

13.

C and J

14.

J

15.

B and J

16.

G and J

17.

A

18.

D

19.

I and J

20.

H and J

b.

18-41


P18-22 Major Fund Tests
Step 1: 10 percent criterion tests
Denominators for 10 percent tests are the total of each of the four items for that fund type (for
governmental and then for enterprise)
10 percent criterion tests:
Governmental fund type:
Percent of:

Assets
$2,112,400

Liabilities
$951,300

Revenues
$5,790,000

2.00%
3.99%
1.68%
0.00%
0.00%

5.65%
7.94%
0.71%
5.72%
0.19%

Assets
$3,996,000

Liabilities
$2,900,700

Revenues
$618,000

66.07%*
33.93%*

62.08%*
37.92%*

46.76%*
53.24%*

General fund – is always a major fund
Special Revenue
1.28%(a)
Capital Project – Library
21.30%*
Capital Project – Arena
1.33%
Debt Service
1.94%
Permanent
11.65%*
Enterprise fund type:
Percent of:
Enterprise – Electric
Enterprise – Water
(a)

1.28% = $27,000 / $2,112,400
* Meets the 10 percent criterion test

18-42

Expenditures
$5,659,800
5.80%
7.39%
0.99%
5.12%
0.32%
Expenses
$543,000
45.12%*
54.88%*


P18-22 (continued)
Step 2: 5 percent criterion tests
The 5 percent criterion test is applied only to those funds that met the 10 percent criterion
test.
(For each of the four 5 percent tests, the denominator is the combined amount of that
item
from the governmental funds plus the enterprise funds.)
Computation of denominators for 5 percent governmental and enterprise fund types:
Revenue Expenditures/
Assets
Liabilities
s
Expenses
Governmental fund types
$2,112,400
$ 951,300 $5,790,000
$5,659,800
Enterprise fund types
3,996,000
2,900,700
618,000
543,000
Combined
$6,108,400
$3,852,000 $6,408,000
$6,202,800
5 percent criterion tests:
Assets
Percent of combined amount of:
Governmental fund type:
General fund – is always
a major fund
Capital Project – Library
Permanent
Enterprise type funds:
Enterprise – Electric
Enterprise – Water

Liabilities

Revenues

$6,108,400

$3,852,000

$6,408,000

7.37%(a)**
4.03%
43.22%**
22.20%**

Expenditures/
Expenses
$6,202,800

0.99%
0.00%

7.18%**
0.17%

6.74%**
0.29%

46.75%**
28.56%**

4.51%
5.13%**

3.95%
4.80%

(a)

7.37% = $450,000 / $6,108,400
** Meets the 5 percent criterion test
To be a major fund, an individual fund must meet both the 10 percent and the 5 percent
major fund criteria in at least one financial statement item. Each major fund is presented in a
separate column on the fund-based financial statements presented as part of the
comprehensive annual financial report for the governmental entity.
(1) General fund – is always a major fund
(2) Capital Projects – Library fund – assets (both 10% and 5% criterion tests)
(3) Enterprise – Electric – assets and liabilities (both 10% and 5% criterion tests)
(4) Enterprise – Water – assets, liabilities, revenues (both 10% and 5% criterion tests)
The other governmental funds must be aggregated and reported in a single column in the
governmental funds balance sheet and statement of revenues, expenditures, and changes in
fund balance.

18-43


P18-23 Reconciliation Schedules
a. Reconciliation of the Balance Sheet of the Governmental Funds to the Statement of
Net Assets:
City of Sycamore
Reconciliation of the Balance Sheet of Governmental Funds
to the Statement of Net Assets
Fund balances reported in the governmental funds
Amounts reported for the governmental activities in the statement of net
assets are different because:
Capital assets used in governmental activities are not financial resources and
therefore are not reported in the governmental funds. The internal service
fund reported $18,000 in capital assets. Thus, the amount of the adjustment
Is for the capital assets not reported in just the governmental funds,
($4,311,000 = $4,329,000 - $18,000)
Internal service funds are used by management to charge costs of certain
activities. The assets and liabilities of the internal service fund and are
Included in governmental activities In the statement of net assets.
Long-term liabilities, including bonds payable, are not due and payable in the
current period and therefore are not reported as liabilities in the
governmental funds.
Interest in the governmental funds is recognized under the modified accrual
basis, but under the accrual basis for the government-wide financial
statements.
Net assets are adjusted for interest ($5,000 = $6,000 - $1,000).
Net assets of governmental activities

18-44

$ 888,400

4,311,000
37,000
(460,000)

(5,000)
$4,771,400


P18-23 (continued)
b. Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund
Balances of Governmental Funds to the Statement of Activities:
City of Sycamore
Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund
Balances of Governmental Funds to the Statement of Activities
Net change in fund balances – governmental funds
Governmental funds report capital outlays as expenditures. However, in
the statement of activities, the costs of those assets is capitalized and
depreciated over their estimated useful lives. This is the amount by which
capital outlays in the governmental funds ($287,000) exceeded
depreciation of the governmental assets ($187,000)
Bond proceeds provide current financial resources for the governmental
funds. However, the issuance of debt increases long-term liabilities in the
statement of net assets. Bond proceeds of $460,000 are not reduced
because there is no repayment of principal during the year.
Revenues and expenses in the statement of activities are recorded on the
accrual basis. Interest in the governmental funds is recorded on the
modified accrual basis. Accrual interest revenue exceeded modified
accrual interest revenue recognized in the governmental funds by $1,000.
Accrual interest expense exceeded modified accrual interest expense
by $6,000 ($46,000 - $40,000). The net interest adjustment is $5,000.
Internal service funds are used by management to charge the costs of
certain services. The net revenue (expense) of the internal service
funds is reported with governmental activities.
Change in net assets of governmental activities

18-45

$509,400

100,000

(460,000)

(5,000)
9,000
$153,400


P18-24 True/False Questions
1.

F

The budgetary comparison schedule requires both the initial budget and the
final budget.

2.

T

3.

F

A component unit is financially accountable to the primary government.

4.

F

The net assets in the government-wide statement of net assets would be
categorized by: invested in capital assets, net of related debt; restricted by
outside donors in specific funds; and, unrestricted.

5.

F

The tests for a major governmental, or enterprise fund, for which separate
disclosure is required in the government-wide financial statements are: (a)
total assets, liabilities, revenues, or expenditures/expenses of that individual
governmental or enterprise fund are at least 10 percent or more of the
governmental or enterprise category, and (b) 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.

6.

T

7.

T

8.

F

9.

T

10.

F

11.

T

12.

F

Depreciation on fixed assets of a government entity may be computed by any
method deemed appropriate, such as straight-line or an accelerated method,
but depreciation of fixed assets is not equal to the expenditures for fixed
assets made in the governmental funds.

13.

F

Management’s Discussion and Analysis is a required supplementary
information disclosure in the new government reporting model.

14.

F

Fiduciary funds are not part of the government-wide statement of net assets,
but would be separately reported in the fiduciary funds section of the fundbased financial statements.

15.

T

The internal service fund is blended into the governmental activities columns
of the government-wide financial statement of net assets and statement of
activities.
In the reconciliation schedule for the statement of revenues, expenditures,
and changes in fund balances, bond proceeds would be subtracted because
they were included as other financing sources in the governmental funds, but
are an addition to liabilities in the government-wide financial statements.

18-46


11P18-25 Determining Whether a Special Revenue Fund Is a Major Fund
Test 1: 10% criterion: Are the assets, liabilities, revenues, or expenditures of the
special revenue fund at least 10% of their respective totals for all governmental
funds?
Totals for
Amount Reported by
Items Tested
Governmental Funds
Special Revenue Fund
1.
Assets
$50,000,000
$4,100,000 ( 8.2%)
(10% test failed)
2.
Liabilities
22,000,000
3,900,000 (17.7%)
(10% test met)
3.
Revenues
70,000,000
6,700,000 ( 9.6%)
(10% test failed)
4.
Expenditures
60,000,000
6,500,000 (10.8%)
(10% test met)
Test 2: 5% criterion: Two items met the 10% criterion test--liabilities and expenditures.
The 5% criterion test is met if at least one of the items that met the 10% criterion first test
is at least 5% of the respective amounts for all governmental and enterprise funds.

2.
4.

Items Tested
Liabilities
(5% test met)
Expenditures/expenses
(5% test met)

Totals for
Governmental and
Enterprise Funds
$37,000,000

Amount reported
by Special
Revenue Fund
$3,900,000 (10.5%)

82,000,000

6,500,000 ( 7.9%)

Conclusion:
The special revenue fund should be reported as a major fund on the financial
statements of the governmental funds for 20X2 because both its expenditures and
liabilities met the 10% and the 5% tests.

18-47


P18-26 Preparation of a Statement of Net Assets for a Governmental Entity
Gibson City
December 31, 20X2

Assets
Cash and cash equivalents
Taxes receivable (net)
Accounts receivable (net)
Internal balances
Inventories
Investments
Capital assets:
Land
Infrastructure
Other depreciable assets (net)
Total assets
Liabilities
Vouchers payable
Accrued interest payable
Revenue bonds payable
General obligation bonds payable
Total liabilities
Net assets
Invested in capital assets,
net of related debt
Restricted
Unrestricted
Total net assets

Governmental
Activities

Business-type
Activities

$ 68,000
52,000

$ 28,000
12,000
5,000
7,000
15,000

(5,000)
10,000
25,000
100,000
60,000
75,000
$385,000
$ 32,000
1,500

50,000
45,000
$162,000
$

4,000
2,000
80,000

Total
$ 96,000
52,000
12,000
17,000
40,000
150,000
60,000
120,000
$547,000

60,000
$ 93,500

$ 86,000

$ 36,000
3,500
80,000
60,000
$179,500

$175,000*
55,000
61,500***
$291,500

$ 15,000**
5,000
56,000***
$ 76,000

$190,000
60,000
117,500
$367,500

Computation notes:
*
$235,000 of capital assets (net) minus $60,000 of general obligation bonds equals
$175,000.
**
$95,000 of capital assets minus $80,000 of revenue bonds equals $15,000.
*** The unrestricted net assets amount is plugged in to make the total net assets equal
assets minus liabilities.
The internal balances amount of $5,000 is the amount that the governmental activities owe to
business-type activities.

18-48

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