Chapter 9- Accounting for Governmental and Nonprofit Entities_16th_sm

Chapter 09 - Financial Reporting of State and Local Governments

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CHAPTER 9: FINANCIAL REPORTING OF STATE AND LOCAL GOVERNMENTS

OUTLINE Number Topic Type/Task Status

(re: 15/e)

Questions: 9-1 Special districts and primary government Compare New 9-2 Letter of transmittal and MD&A information Compare New 9-3 Interim reports Explain Same 9-4 Financial reporting entity Explain Same 9-5 Primary government and component units Explain New 9-6 CAFR and general purpose reports Explain 9-7 9-7 Required financial statements List 9-8 9-8 Reconciliation of financial statements Examples 9-9 9-9 Intra-entity transactions Explain New 9-10

Contemporary issues Explain Same

Cases: 9-1 Identification of component units Analysis 9-1 revised 9-2 MD&A and statistical tables Analysis 9-2 revised 9-3 Classification of fund balances Analysis New 9-4

Popular reports Internet Same

Exercises/Problems: 9-1 Examine the CAFR Examine 9-1 revised 9-2 Various Multiple Choice 9-2 revised 9-3 Interim reports Examine New 9-4 Comprehensive set of transactions Journal entries Same 9-5 Fund balance classifications Matching New 9-6 Adjusting net position balances Matching 9-6 revised 9-7 Change in net position Calculation Same 9-8 Governmental fund financial statements Error identification Same 9-9 Government-wide financial statements Preparation 9-9 revised 9-10 Modified accrual to accrual accounting Adjustments, JEs Same


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CHAPTER 9: FINANCIAL REPORTING OF STATE AND LOCAL GOVERNMENTAL UNITS

Answers to Questions 9-1. According to the Bureau of Census a special district includes local entities (other than

counties, municipalities, townships, or school districts) authorized by state law to provide only one or a limited number of designated functions, and with sufficient administrative and fiscal autonomy to qualify as separate governments. As can be seen from this definition a special district is a type of special purpose government.

A primary government is broader in scope than a special district. According to GASB a

primary government can be a state government, a general purpose government, or a special purpose government. To qualify as a primary government, GASB indicates a special purpose government needs to have a separately elected governing body, and be legally separate and fiscally independent of state or local governments. This definition is similar to the definition provided by the Bureau of Census for a special district. Therefore, a special district could be considered a type of primary government.

9-2. The letter of transmittal generally cites legal and policy requirements for the report. It can

also provide information on factors relating to government services and operations. Since the transmittal letter is generally not a part of the audit, it can include somewhat subjective information. On the other hand, the MD&A is considered required supplementary information (RSI) subject to review by the auditor. As such, the MD&A can only contain material set out by the GASB standards. Some of the information required to be included in the MD&A is an overview of financial activity for the year, explanation of the contents of the CAFR, and a description of the financial condition and financial trends of the government.

9-3. Disagree. Administrators need periodic reports in order to make day-to-day operating and

management decisions. Government council members should expect at least monthly financial information so that they can provide oversight of the managers. Interim reports are especially helpful in evaluating whether budgets and cash needs are being met.

9-4. According to the GASB a financial reporting entity is a primary government,

organizations for which the primary government is financially accountable, and other organizations for which the nature of their relationship with the primary government are such that exclusion would make the reporting entitys basic financial statements misleading. Organizations making up a financial reporting entity are the primary government and its component units. The primary government is a state or local general-purpose government, or a special-purpose government. Component units are the entities for which the primary government is financially accountable.

9-5. A component unit is a legally separate entity for which the primary government is

financially accountable. The GASB also considers a component unit to be an entity


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Ch. 9, Answers, 9-5 (Contd) whose relationship with the primary government is so important that excluding it from

the financial reports of the primary government would make the primary governments financial reports misleading. Financially accountable means that the primary government appoints a voting majority of the component units governing board and is able to impose its will on the component unit, or there is the potential for the component unit to provide specific financial benefits to, or impose specific financial burdens on the primary government.

9-6. General purpose external financial reports include managements discussion and analysis,

basic financial statements and related notes, and required supplementary information. A CAFR provides information beyond the minimum requirements of the general purpose external financial statements. Included in a CAFR are all general purpose external financial report information, an auditors report (as appropriate), a narrative section (introductory section), combining and individual fund statements and schedules, and a statistical section.

9-7. The nine required statements are:

The two government-wide financial statementsstatement of net position and statement of activities.

The two governmental fund financial statementsbalance sheet and statement of revenues, expenditures, and changes in fund balances.

The three proprietary fund financial statementsstatement of net position; statement of revenues, expenses, and changes in fund net position; and statement of cash flows.

The two fiduciary fund financial statementsstatement of fiduciary net position and statement of changes in fiduciary net position.

9-8. Chapter 9 provides a list of the items requiring reconciliation when going from the

modified accrual to accrual basis of accounting. Students should be able to provide examples related to each of the nine items identified in Chapter 9. The use of a state or local governments CAFR (easily located through an Internet search) will help students provide examples.

9-9. Intra-entity transactions are transactions between the primary government and its

component units. Both exchange and nonexchange transactions are considered intra-entity transactions.

If transactions are occurring between the primary government and a component unit that is blended, the transaction activity must be eliminated for reporting at the government-wide level. The reason is that the blended component unit is collapsed with the primary governments governmental activities. Eliminating the activity between the primary government and the component unit will prevent double-counting of the activity. As an example of the effectif the component unit is treated as a special revenue type fund for blending purposes, the effect of all activity between the component unit and the governmental funds would be eliminated for reporting at the government-wide level.


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Ch. 9, Answers, 9-9 (Contd)

This is the same as would occur if the activity was between governmental funds, such as between a special revenue fund and any of the other governmental fund types (General Fund, debt service fund, capital projects fund, or permanent fund).

9-10. OCBOA stands for other comprehensive basis of accounting. These bases are non-GAAP,

and for governments generally include cash, modified cash, or regulatory basis of accounting. Governments may use OCBOA rather than GAAP if they believe the OCBOA makes it easier for management to maintain and prepare financial reports, makes it easier for all users to understand, or is less costly than GAAP. An audit opinion must be modified to reflect that OCBOA rather than GAAP was used (see Chapter 11).

Solutions to Cases 9-1. a. Tesser hospital is a component unit of the City of Tesser. Tesser is financially

accountable for the hospital since the mayor appoints the governing board and the city is able to impose its will on the hospital through final approval of the budget.

b. The Atkins Convention and Visitors Bureau is a component unit of the City of

Atkins. Since the city has the right to approve the rate of the tax (i.e., the city sets the tax) it has the ability to impose its will on the Convention and Visitors Bureau through its control over revenue. Because the city can impose its will on the Convention and Visitors Bureau it is financially accountable for the bureau.

c. The Sports Authority is not a component unit of Dawson County. As indicated,

the Sports Authority is a legally separate entity with its own board; therefore, the only question is if there is fiscal dependency on the county. Since the actions of the Sports Authority are voluntary and the recommendations of the county need not be incorporated, no fiscal dependency is created.

d. The County Aviation Authority is a component unit of the City of Middle Falls. If

the city is legally obligated to assume debt responsibilities in the event of a default a financial burden has been imposed on the city; therefore, the Aviation Authority would be considered a component unit. The opinion that the likelihood of default by the Aviation Authority is remote does not affect the decision.

e. Help for Kids is not a component unit of Alice County. Through its request the

county is performing what is referred to as a ministerial or compliance function (GASB, Codification, Sec. 2100.116). A compliance function is not considered to result in fiscal dependence.

9-2. a. The two primary governmental funds revenue sources are property taxes and

intergovernmental revenues. In 2010 property taxes represent over 35 percent and intergovernmental represents over 19 percent of governmental funds revenues. The percent of revenues coming from property taxes is up from a low of


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Ch. 9, Solutions, Case 9-2 (Contd) 29.5 percent in 2005. Conversely, the percent of revenues coming from intergovernmental sources is down from a high of almost 26 percent in 2004.

b. Students will have interpreted the information provided in a variety of ways. The

following discussion provides some points students may have considered. With the exception of 2009, property taxes have consistently increased as a percent of revenue since 2005. A review of assessed and estimated actual property values reveals that both values increased during 2008 and 2009 despite the housing market failure. However, the assessed and estimated actual property values have fallen in 2010. A review of the table indicates that the reason for the fall appears to be related to the large increase in tax exempt property. Residential and commercial construction was actually higher in 2010 than 2009. The increase in property tax revenue appears to be the result of the increased millage rate. The property tax indicators are generally strong. Weaker indicators relate to the large increase in tax exempt properties and the increased millage rate. Another problem is the State of Florida rollback provisions that limit the amount by which the millage rate can be increased. Overall, it appears that property tax revenue should continue to be a somewhat stable, provided property values do not continue to fall, but probably not a growing source of revenue for Jacksonville over the next two to three years.

c. Students will have interpreted the information provided in a variety of ways. The

following discussion provides some points the students may have considered. Sales tax revenue is the third largest source of revenues for Jacksonville. Sales tax revenue is elastic in that it tends to move with the health of the economy. A review of the sales tax revenue indicates that sales tax as a percent of revenue has dropped over the past 10 years. In 2010 sales taxes provided 11.4 percent of the revenue while in 2002 they provided 14.75 percent of the revenue. Sales tax revenues have dropped over the last two years. The MD&A indicates that sales tax revenues are expected to be down 3 percent in the 2010-2011 fiscal year. The decline in sales tax revenue over the past three years reflects the weak state of the economy and the high unemployment rate in Jacksonville and the State of Florida. With the impact of the overall economy and the recent sales tax trend, sales tax revenues could continue to decline or be flat over the next two to three years.

9-3. a. Non-spendable means the assets can not be spent, either (1) because they are not

in a spendable form such as cash or financial assets that can be converted to cash, or (2) because contractual requirements indicate the assets must remain intact. For an advance, which is a type of receivable, to be non-spendable there must be an indication that it is not convertible to cash in the near term due to the terms of the agreement under which the advance was made.


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Ch. 9, Solutions, Case 9-3 (Contd)

b. San Mateo reported all unassigned fund balances as part of the General Fund. According to GASB standards, only the General Fund can report a positive unassigned fund balance; therefore, San Mateo has correctly reported its unassigned amounts.

c. Since a restriction on the citys fund balance can only be imposed by an external

party (including legislative action of a higher level of government), the remaining options for classifying the reserve would appear to be committed, assigned, or unassigned. The information indicates that the board adopted a policy on reserves in 1999. Of importance in making the decision about classifying the reserve is a determination as to whether the policy was a formal action of the board that can only be undone by a similar formal action. Additionally, for a reserve to be reported as committed, the GASB requires that the formal action include additional information such as the requirements for additions to the reserves and conditions under which the amounts can be used. If such conditions are met the reserve amounts would be classified as committed. If the policy on reserves simply reflects the boards intent to set aside resources for times of economic uncertainty the general reaction would be that the amounts can be classified as assigned. However, the GASB standard specifically indicates that reserve amounts cannot be assigned. The answer is not apparent from the information provided. Therefore, students could arrive at different conclusions. Those indicating the funds should be classified as committed may point to the fact that the policy is very specific as to its purpose and provides specific guidelines for when amounts can be used. The degree of detail indicates actions that are greater than intent. However, there is no indication about how amounts are added to the reserve (see comments in prior paragraph), which negates the possibility of reporting the reserves as committed. Students indicating the funds should be classified as assigned may point out there is no evidence that a formal action needs to be taken to undo the policy. Here it should be pointed out that while the students solution appears logical, the GASB specifically prohibits reserves from being reported as assigned. Some students may also indicate that the reserves should be unassigned since there is insufficient information to indicate the funds should be committed. Based on the limited information provided by San Mateo, unassigned would be appropriate.

9-4. a. Hillsborough County does produce a popular report in a downloadable .pdf form.

Cities and counties may be more likely to have experimented with popular reports than smaller townships and villages.

b. Students responses will reflect the reports they were able to obtain, so answers

will vary. The criteria for usefulness developed by GASB in Concept Statement No. 1 or the FASB Conceptual Framework will be helpful in addressing this


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Ch. 9, Solutions, Case 9-4 (Contd)

question. In order to be useful, statements must be relevant, reliable, understandable, timely, consistent, and comparable.

Solutions to Exercises and Problems 9-1. Since each of the students will have a different annual report, the solutions to 9-1 should

differ from student to student. Note that not all reports that say CAFR on the cover have three sections. Some reports may only contain the middle or financial section.

9-2. 1. d. 6. a. 2. a. 7. b. 3. c. 8. b. 4. d. 9. c. 5. d. 10. a. 9-3. a. For the first half of 2010 revenues generally exceeded expenditures (an exception

was February). However, the last five months of the year the trend reversed with expenditures exceeding revenues by increasingly larger amounts each month. The first three months of 2011 indicate larger variances than were seen in 2010. Although no trend is yet apparent, it can be seen that once again February expenditures exceeded revenues, indicating that February is a low point for revenue collections.

b. It appears Fort Collins has been able to maintain its 2009 expenditure level fairly

well in 2010. Although there are some months (February, August, October, and December) when the 2010 expenditures exceed those in 2009, generally, the 2010 expenditures are slightly lower than 2009.

c. There appear to be two unusual spikes in 2011 relative to 2010. Revenues for

January and February are somewhat consistent with 2010; however, the March revenues are much higher. There is a similar pattern with expenditures. The January and March expenditures are somewhat consistent with 2010; however, the February expenditures are much higher. A question would be whether there is a relationship between the revenue and expenditure spikes. For example, perhaps one time expenditures were incurred in February for which grant revenue was received in March. If there is no relationship, the large increases in variances are somewhat of a concern that warrants monitoring since they indicate management may be having difficulty aligning expenditures and revenues.


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Ch. 9, Solutions (Contd) 9-4. CITY OF LYNNWOOD TRANS. FUND AMOUNTS NO. OR ACTIVITY ACCOUNT TITLE Debits Credits 1. GF ESTIMATED REVENUES 2,000,000 APPROPRIATIONS 1,990,000 BUDGETARY FUND BALANCE 10,000 2. GF TAXES RECEIVABLECURRENT 1,940,000 ESTIMATED UNCOLLECTIBLE CURRENT TAXES 9,000 REVENUES 1,931,000

GA TAXES RECEIVABLECURRENT 1,940,000 ESTIMATED UNCOLLECTIBLE CURRENT TAXES 9,000 GENERAL REVENUES PROPERTY TAXES 1,931,000 3. GF OFUINTERFUND TRANSFERS OUT 25,000 CASH 25,000 ISF CASH 25,000 EQUIPMENT 300,000 ACCUMULATED DEPRECIATION 65,000 TRANSFERS IN 260,000 4. PF INVESTMENTSMARKETABLE SECURITIES 800,000 REVENUESCONTRIBUTIONS FOR ENDOWMENT 800,000


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Ch. 9, Solutions, 9-4 (Cont'd)

TRANS. FUND AMOUNTS NO. OR ACTIVITY ACCOUNT TITLE Debits Credits CASH 40,000 REVENUESINVESTMENT EARNINGS 40,000 PF OFUINTERFUND TRANSFERS OUT 40,000 CASH 40,000 SRF CASH 40,000 OFSINTERFUND TRANSFERS IN 40,000 GA INVESTMENTSMARKETABLE SECURITIES 800,000 GENERAL REVENUES CONTRIBUTIONS FOR ENDOWMENT 800,000 CASH 40,000 PROGRAM REVENUESPARKS AND RECREATIONOPERATING GRANTS & CONTRIBUTIONS 40,000 5. EF DUE FROM OTHER FUNDS 125,000 CHARGES FOR SERVICES 125,000 CASH 124,000 DUE FROM OTHER FUNDS 124,000 GF EXPENDITURES 125,000 DUE TO OTHER FUNDS 125,000


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Ch. 9, Solutions, 9-4 (Cont'd) TRANS. FUND AMOUNTS NO. OR ACTIVITY ACCOUNT TITLE Debits Credits DUE TO OTHER FUNDS 124,000 CASH 124,000 GA EXPENSESGENERAL GOVERNMENT 125,000 INTERNAL BALANCES 125,000 INTERNAL BALANCES 124,000 CASH 124,000 6. ISF & GA SUPPLIES INVENTORY 4,500 CASH 4,500 7. GF CASH 1,988,000 TAXES RECEIVABLECURRENT 1,925,000 REVENUES 63,000 GA CASH 1,988,000 TAXES RECEIVABLECURRENT 1,925,000 PROGRAM REVENUEGENERAL GOVERNMENTCHARGES FOR SERVICES 63,000 8. ISF DUE FROM OTHER FUNDS 23,800 BILLINGS TO DEPARTMENTS 23,800 EF EXPENSESADMINISTRATIVE 8,100 DUE TO OTHER FUNDS 8,100


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Ch. 9, Solutions, 9-4 (Cont'd) TRANS. FUND AMOUNTS NO. OR ACTIVITY ACCOUNT TITLE Debits Credits GF EXPENDITURESGENERAL GOVERNMENT 15,700 DUE TO OTHER FUNDS 15,700 GA INTERNAL BALANCES 8,100 PROGRAM REVENUEGENERAL GOVERNMENTCHARGES FOR SERVICES 8,100 9. CPF CASH 5,000,000 OFSPROCEEDS OF BONDS 5,000,000 ENCUMBRANCES 4,500,000 ENCUMBRANCES OUTSTANDING 4,500,000 GA CASH 5,000,000 BONDS PAYABLE 5,000,000 10. GF ENCUMBRANCES 32,000 ENCUMBRANCES OUTSTANDING 32,000 ENCUMBRANCES OUTSTANDING 32,000 EXPENDITURES 31,900 ENCUMBRANCES 32,000 CASH 31,900 GA EQUIPMENT 31,900 CASH 31,900


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Ch. 9, Solutions (Cont'd) 9-5. 1. d. 2. c. 3. a. 4. d. 5. b.

9-6. 1. d. 2. e. 3. c. 4. c. 5. a.


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Ch. 9, Solutions (Cont'd) 9-7.

TOWN OF LEESBURG Reconciliation of the Statement of Revenues, Expenditures, and Changes

in Fund BalancesGovernmental Funds to the Statement of Activities For the Year Ended June 30, 2014

Net change in fund balances governmental funds $ 131,700 Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives as depreciation expense. This is the amount by which capital outlays $(1,250,000) exceeded depreciation $(595,000). 655,000 Transactions involving capital assets resulted in a loss. The loss did not require the use of current financial resources, and therefore was not reported in the governmental funds. (13,000) Bond proceeds provide current financial resources to governmental funds, but issuing debt increases long-term liabilities in the statement of net position. This is the amount of the proceeds. (3,030,000) A decrease in accrued liabilities indicates that expenditures recorded in the governmental funds exceed expenses for the current period. 24,000 Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds. 298,000 Change in net position of governmental activities $ (1,934,300)


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Ch. 9, Solutions (Cont'd) 9-8. Some of the modifications or corrections that should be made include:

The word Expenses should be changed to Expenditures in the statement title.

An analysis should be done of the Other Governmental Funds column to determine whether any of the three funds included in the column meet the definition of a major fund. If so, the fund should be shown in a separate column to the right of the General Fund.

A Total Governmental Funds column should be provided to the right of the Other Governmental Funds column.

Debt proceeds is not a revenue. It should be shown in a separate section titled Other Financing Sources (Uses). This section appears after expenditures.

Transfers out is not an expenditure. It should be shown in a separate section titled Other Financing Sources (Uses). This section appears after expenditures.

Debt service should be shown separately from the General Government function. Further, debt service should show the expenditures for principal and the expenditures for interest. Generally, information on debt service is shown after the functional expenditures.

Capital outlay should be shown separately from the functions of government. Generally, information on capital outlays is shown after the functional expenditures.

The beginning and ending fund balances for the period should be included after the Net Change in Fund Balances.


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Ch. 9, Solutions (Cont'd) 9-9. TOWN OF FREAZ

STATEMENT OF NET POSITION AS OF JUNE 30, 2014

(000S OMITTED) ASSETS: CURRENT ASSETS: CASH $ 3,639 INVESTMENTS 7,299 TAXES RECEIVABLE (NET $49 OF ESTIMATED UNCOLLECTIBLE TAXES) 5,739 DUE FROM OTHER GOVERNMENTS 6,343 TOTAL CURRENT ASSETS 23,020 CAPITAL ASSETS: LAND $ 8,720 OTHER CAPITAL ASSETS (NET OF DEPRECIATION) INFRASTRUCTURE (NET $45,603) 40,165 BUILDINGS (NET $8,021) 17,659 MACHINERY AND EQUIPMENT (NET $13,785) 14,935 TOTAL CAPITAL ASSETS 81,479 TOTAL ASSETS 104,499 LIABILITIES: CURRENT LIABILITES: ACCOUNTS PAYABLE 7,764 ACCRUED LIABILITIES 4,765 DUE TO OTHER FUNDS (NET) 103 CURRENT PORTION OF LONG-TERM DEBT 8,600 TOTAL CURRENT LIABILITIES 21,232 LONG-TERM LIABILITIES: BONDS PAYABLE 28,700 TOTAL LIABILITES 49,932


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Ch. 9, Solutions, 9-9 (Cont'd) NET POSITION: NET INVESTMENT IN CAPITAL ASSETS 44,179 RESTRICTEDDEBT SERVICE 2,123 UNRESTRICTED: DESIGNATEDSTREET REPAIR 900 UNDESIGNATED 7,365 TOTAL NET POSITION $ 54,567 (Note: Net Investment in Capital Assets=$45,259 beginning balance $1,080 depreciation. Undesignated=$6,598 beginning balance + $587 increase in unrestricted net position + $1,080 depreciation - $900 designated.)


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Ch. 9, Solutions, 9-9 (Cont'd) TOWN OF FREAZ STATEMENT OF ACTIVITIES

FOR THE YEAR ENDED JUNE 30, 2014 (000S OMITTED)

NET (EXPENSES) REVENUES AND CHANGES IN NET PROGRAM REVENUES POSITION S OPERATING CAPITAL CHARGES FOR GRANTS AND GRANTS AND GOVERNMENTAL FUNCTIONS EXPENSES SERVICES CONTRIBUTIONS CONTRIBUTIONS ACTIVITIES PRIMARY GOVERNMENT:

GENERAL GOVERNMENT $ 2,468 $ 4,411 $ 307 $ 2,250

PUBLIC SAFETY 11,577 996 (10,581)

PUBLIC WORKS 5,311 $ 1,680 (3,631)

PARKS & RECREATION 1,817 359 (1,458)

INTEREST ON DEBT 749 (749)

TOTAL GOVERNMENTAL ______ ______ _____ ______ ______

ACTIVITIES $21,922 $ 5,766 $ 307 $ 1,680 (14,169)

GENERAL REVENUES:

PROPERTY TAXES LEVIED FOR GENERAL PURPOSES 13,665

INTEREST & PENALTIES ON DELINQUENT TAXES 746

INTEREST INCOME 345

TOTAL GENERAL REVENUES 14,756

INCREASE IN UNRESTRICTED NET POSITION 587

NET POSITION, JULY 1, 2014 53,980

NET POSITION, JUNE 30, 2014 $54,567


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Ch. 9, Solutions (Cont'd)

9-10. MODIFIED ACCRUAL/ ADJUSTMENT ACCOUNT AFFECTED ACCRUAL ACCOUNT Debit Credit 1. DEPRECIATION EXPENSE ACCRUAL 674,300 BUILDINGS & EQUIPMENT ACCRUAL 674,300 2. SALARY EXPENSE ACCRUAL 39,123 SALARIES PAYABLE ACCRUAL 39,123 3. BUILDINGS & EQUIPMENT ACCRUAL 29,049 EXPENDITURES MODIFIED ACCRUAL 29,049 4. BONDS PAYABLE ACCRUAL 50,000 ACCRUED INTEREST PAYABLE ACCRUAL 1,125 INTEREST EXPENSE ACCRUAL 1,125 EXPENDITURESPRINCIPAL MODIFED ACCRUAL 50,000 EXPENDITURESINTEREST MODIFIED ACCRUAL 2,250 5. INTERNAL BALANCES ACCRUAL 480 DUE FROM OTHER FUNDS MODIFED ACCRUAL 480 DUE TO OTHER FUNDS MODIFIED ACCRUAL 950 INTERNAL BALANCES ACCRUAL 950

Chapter 9- Accounting for Governmental and Nonprofit Entities_16th_sm

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