Test Bank Solutions for Government and Not for Profit Accounting Concepts and Practices 5th

7/23/2019 Test Bank Solutions for Government and Not for Profit Accounting Concepts and Practices 5th

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Chapter 2

Fund Accounting

TRUE/FALSE (CHAPTER 2)

1. Fund accounting promotes control and accountability over restricted resources.

2. The basis of accounting determines when transactions and events are recognized.

3. If an entity adopts a full accrual basis of accounting, its measurement focus willautomatically be on all economic resources.

. ! government may report some of its funds on a full accrual basis.

". Funds divide a government into functional departments.

#. $eneral funds are established to account for resources legally restricted for specifiedpurposes.

%. Fiduciary activities only benefit parties other than the government itself.

&. The Financial !ccounting 'tandards (oard re)uires all nongovernmental not*for*profitentities to use fund accounting.

+. In addition to preparing fund financial statements, governments should also prepareconsolidated financial statements to provide information on the financial position andoperating results of the government as a single economic entity.

1. Fiduciary activities should be reported in fund statements, but should be e-cluded from thegovernment*wide statements.

11. !t first glance, the government*wide statement of activities bears little resemblance to theincome statement of a business.

12. In accounting for costs incurred on a maor construction proect in a capital proects fund,the construction outlays are reported as e-penditures, not capital assets.

$ranof Test (an/ 0hapter 2 age 1


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MULTIPLE CHICE (CHAPTER 2)

1. hat is the primary reason that governmental entities use fund accountinga4 Fund accounting is re)uired by law.b4 Fund accounting is re)uired by $!!.c4 Fund accounting promotes control and accountability over restricted resources.

d4 Fund accounting promotes better control over operating activities.

2. (asis of accounting determines which of the followinga4 hen transactions and events are recognized.b4 hat transactions and events will be reported.c4 here transactions and events will be reported.d4 hy transactions and events will be reported.

3. ! fund isa4 ! separate legal entity.b4 ! separate fiscal and accounting entity.c4 ! separate self*balancing set of accounts for inventory purposes.

d4 5one of the above.

. hich of the following funds is a fiduciary funda4 ermanent fund.b4 !gency fund.c4 0apital proect fund.d4 6ebt service fund.

". hen a governmental entity adopts a basis of accounting other than full accrual and ameasurement focus that e-cludes long*lived assets and liabilities in its governmental fundtypes7a4 It is in violation of the law.

b4 It is in violation of $!!.c4 It has reported in accordance with $!! standards for the governmental fund financial

statements re)uired by the new $!'( reporting model.d4 It has the ability to better measure the results of operations.

#. ! city receives a donation from a citizen who specifies that the principal must be invested andthe earnings must be used to support operations of a city*owned recreational facility. Theprincipal of this gift should be accounted for in which of the following fundsa4 Trust fund.b4 'pecial revenue fund.c4 ermanent fund.d4 Internal service fund.



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%. hich of the following is 58T a governmental funda4 0ity 9all 6ebt 'ervice Fund.b4 0ity :tilities ;nterprise Fund.c4 $asoline Ta- 'pecial


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1. The 0ity of 'an >ose built a new city hall and financed construction by issuing bonds due ininstallments over the ne-t 3 years. The bond principal and interest will be paid by a specialta- levied on property in the 0ity. The revenue received from this special ta- should beaccounted for in which of the following fundsa4 $eneral fund.b4 Internal service fund.

c4 0apital proect fund.d4 6ebt service fund.

1".


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21. hich of the following liabilities would 58T be found in the fund balance sheet of the$eneral Fund of the 0ity of ?armadu/ea4 !ccounts payable.b4 6ue to 'pecial


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2%. :nder the $!'( 'tatement 5o. 3 reporting model for governmental entities, thegovernment*wide 'tatement of 5et !ssets will display which of the followinga4 !ssets, Aiabilities, and 5et !ssets.b4 !ssets, Aiabilities, and Fund (alances.c4 !ssets, Aiabilities, and Fund ;)uity.

d4 !ssets, Aiabilities, and 8wner=s ;)uity.

2&. :nder the $!'( 'tatement 5o. 3 reporting model for governmental entities, the focus ofthe government*wide 'tatement of !ctivities is on which of the followinga4 rogram revenues and general revenues.b4 rogram revenues and e-penses.c4 5et income.d4 The net cost of each of the government=s main functions and programs.

2+. ! not*for*profit entity 'tatement of 5et !ssets will 58T report which of the followinga4 5et assets invested in capital assets net of related debt.b4 0apital assets.

c4 Temporarily restricted net assets.d4 ermanently restricted net assets.

3. hich of the following funds of 0hessie 0ity would be consolidated to form thegovernmental activities column in the 0ity=s government*wide financial statementsa4 Its general fund, special revenue fund, and agency fund.b4 Its general fund, debt service fund, and capital proects fund.c4 Its general fund, enterprise fund, and fiduciary fund.d4 Its enterprise fund and internal service fund.

31. hich fund type would all governments normally include in their fund financialstatements

a4 0apital proects fundsb4 'pecial revenue fundsc4 $eneral fundd4 Fiduciary funds

32. :nder the $!'( 'tatement 5o. 3 reporting model for governmental entities, fundfinancial statements include separate sets of financial statements for7a4 ;ach maor function of the government.b4 $overnmental funds, proprietary funds, and fiduciary funds.c4 $overnmental funds, enterprise funds, and internal service funds.d4 $overnmental funds, special revenue funds, and debt service funds.

$ranof Test (an/ 0hapter 2 age #


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33. hen a fa- machine purchased by a governmental unit is received, it should be recorded inthe general fund as aCn4a4;-penseb4;ncumbrancec4;-penditure

d4$eneral 0apital !sset

3. hich of the following is not included in the financial section of the 0omprehensive!nnual Financial


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PR!LEMS (CHAPTER 2)

1. !ssume that the 0ity of Ft. 'mith maintains its boo/s and records in a manner that facilitatesthe preparation of the fund financial statements. For each of the following events indicate inwhich fundCs4 of the 0ity of Ft. 'mith the event would be recorded and ustify your fundselection.

a. The 0ity collected property ta-es levied for the general operations of the 0ity.b. The 0ity collected property ta-es levied to pay principal and interest on bonds issued

several years in the past to construct a new fire station.c. The 0ity collected property ta-es levied on a specific area of the 0ity for the purposes of

providing more fre)uent snow removal than is enoyed by the rest of the 0ity.d. The 0ity sold bonds to finance the construction of a new 0ity 9all.e. The 0ity sold bonds to finance maor renovations at the city*owned electric utility.f. The 0ity purchased a street sweeping machine.

2. !ssume that the 0ity of !mber maintains its boo/s and records in a manner that facilitatesthe preparation of the fund financial statements. !mber 0ity maintains a general fund, a

capital proects fund, and a special revenue fund. 6uring the current fiscal year, the 0ityengaged in the following transactions.


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. ayla Township issued the following bonds during the year7

Ten*year bonds to ac)uire e)uipment for a data

processing service reported in an internal service fund E2,,

(onds to construct a new police station E+,,

(onds to increase the capacity of the water treatment

plant reported in an enterprise fund E,&,

a. The amount of debt reported in the Township=s general fund is71. E2. E+,,3. E11,,. E1",&,

b. The Township should report depreciation e-pense related to the new capital assets inthese funds7

1. The general fund2. The enterprise fund3. The enterprise and internal service funds. The capital proects fund

c. The bonds issued to construct the new police stations should be reported as71. 6ebt proceeds in the general fund2. Aong*term debt in the debt service fund3. 6ebt proceeds in the capital proects fund. 5one of the above

d. In accordance with bond covenants, the Township sets aside E1,, to help assurethat it is able to meet its first payment of principal and interest on the police station debt dueone year from the date the bonds were issued. The amount of liability that the Townshipshould report in its debt service fund is7

1. E2. E1,,3. E+,,. E&,,

$ranof Test (an/ 0hapter 2 age +


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". ! newly established 0hessie Foundation engaged in the following transactions71. ! donor made a E1,, pledge, giving the organization a legally enforceable +*day

note for the full amount.2. The same donor paid E", of the amount pledged.3. The Foundation purchased a building for E+,, paying E+, in cash and giving a

ten*year mortgage for the balance. The building has a 2"*year useful life. The

organization charges a half*year=s depreciation for all assets in the year they are ac)uired.. The organization hired five employees. !t year*end, these employees had earned

E1, in salaries and wages for which they had not been paid.The Foundation accounts for its activities in a single fund.

a. repare ournal entries to record the transactions, ma/ing the following alternativeassumptions as to the organization=s measurement focus7

0ash only

0ash plus other current financial resources Ccash plus short*term receivables less

short*term payables4

!ll economic resources

b. (ased on your entries, prepare appropriate operating statements and balance sheets forthe organization.

#. aterah 0ity maintains the following funds7

1. $eneral2. 'pecial revenue3. 0apital proects. 6ebt service". ;nterprise

#. Investment trust%. ermanent&. !gency

For each of the following transactions, indicate which fund would most li/ely be used toreport the transaction7

a. The 0ity collects E1 million of ta-es for an independent fire district locatedwithin the 0ity.

b. The 0ity spends E1.2 million on street maintenance using the proceeds of a citygas ta- dedicated for road and highway maintenance and improvements.

c. The 0ity receives a be)uest of E1." million. The donor=s ill, re)uires that the

principal amount be invested in perpetuity and that the earnings on theinvestment be used to maintain a city par/ to be renamed for the donor.

d. The 0ity collects water and sewer fees of E.2 million.e. The 0ity pays E million to a contractor for wor/ on the new bridge.f. The 0ity receives E1.3 million to invest on behalf of the 0ounty.g. The 0ity pays its police officers wages of E32",.h. The 0ity pays E2.2 million in (ond Interest on its general obligation debt.



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%. The $eneva 9ousing !uthority, a governmental entity, accounts for its activities on amodified accrual basis of accounting. In the current period, it reports the following transactions7

The !uthority issues E2." million in long*term bonds.

The !uthority purchases acres of land for E", in cash.

It sells one of these acres of land for E12", in cash.

It made a E32", payment on the debt, consisting of E%", of interest and E2",

in principal.

It lost a lawsuit filed by one of its renters and was ordered to pay E1 million in damages

over " years. It made its first cash payment of E2,.

1. repare ournal entries to record each of these transactions in the general fund.2. (ased on your entries, prepare a balance sheet and statement of revenues, e-penditures,

and changes in fund balance for the general fund.3. 0omment on how these statements capture the !uthority=s economic resources and

obligations.. 0omment on the e-tent to which the statement of revenues, e-penditures, and changes in

fund balances captures the !uthority=s costs of services.". hen the !uthority prepares $!! financial statements based on $!'( 'tatement 5o.3, what assets and liabilities would be added in the !uthority=s government*wide'tatement of 5et !ssets hat gains and losses would be added in its government*wide'tatement of !ctivities

&. The newly established ;nvironmental 0ouncil Ca not*for*profit organization4 uses two fundsfor internal reporting purposes. The general fund is used to record day*to*day operatingtransactions. ! building fund is used to accumulate resources for a new building to house the0ouncil=s operations. (oth funds are reported using the accrual basis of accounting. In its firstyear, the 0ouncil engaged in the following transactions7

1. It received cash contributions of E",, E1, of which donors stipulate must beused for the new building.

2. It incurred operating payroll costs of E2,, of which E1&, is paid in cash.3. It earned E1, in interest Cpaid in cash4 on investments restricted to the ac)uisition of

the new building.. It transferred E2", from its general fund to the building fund.". It paid E1", in fees Caccounted for as e-penses4 for architectural drawings for the

proposed building.

a. repare ournal entries to record the transactions. (e sure to indicate the fund in whichthe entry would be made.

b. repare a statement of revenues, e-penses and other changes in fund balances and abalance sheet. :se a two*column format, one column for each of the 0ouncil=s twofunds.



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ESSA"S (CHAPTER 2)

1. hy do governments and not*for*profit entities use fund accounting

2. $overnments use the modified accrual basis of accounting and a current financial resourcesmeasurement focus when presenting the governmental fund financial statements but they use

the accrual basis of accounting and the flow of economic resources for the government*widefinancial statements. hat is a basis of accounting hat is measurement focus 9ow doesthe selection of one affect the selection of the other

3. For what purposes do governmental entities use agency funds hat are the distinguishingcharacteristics of agency funds

. The (asic Financial 'tatements for !mmon 0ity contains the following statements. For eachstatement identify the appropriate measurement focus and basis of accounting.

a.4 $overnment*wide 'tatement of 5et !ssetsb.4 $overnment*wide 'tatement of !ctivities

c.4 (alance 'heetG$overnmental Fundsd.4 'tatement of


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A#S$ERS T TRUE/FALSE (CHAPTER 2)

1. True2. True3. True. True

". False#. False%. True&. False+. True1. True11. True12. True



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A#S$ERS T MULTIPLE CHICE (CHAPTER 2)

1. c2. a3. b. b

". c#. c%. b&. d+. a1. b11. b12. a13. b1. d1". b1#. a

1%. d1&. c1+. a2. b21. d22. b23. d2. b2". d2#. c2%. a2&. d

2+. a3. b31. c32. b33. c3. b3". d



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A#S$ERS T PR!LEMS (CHAPTER 2)

roblem 1

a. $eneral Fund. The general fund is used to account for the general activities of agovernmental entity.

b. 6ebt 'ervice Fund. The debt service fund is used to account for payments of principal andinterest on debt incurred to finance general government activities.

c. 'pecial

Ta- revenue E &,

d. ';0I!A roceeds of note E #,0ash 2,

$ranof Test (an/ 0hapter 2 age 1"


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roblem 3

a. ;-penditures*salaries E1,0ash E1,

b. 0ash E 3",

roceeds of notes E 3",

c. !utomobile e-penditure E 3",0ash E 3",

d. !ccounts payable E %,0ash E %,

e. 0ash E3,",Ta- revenue orroperty ta- receivable E3,",

f. 0ash E ",$rant revenue E ",

roblem

a. 1b. 3c. 3d. 1

$ranof Test (an/ 0hapter 2 age 1#


17/25

roblem "

a. Focus on cash

C14

5o entry necessary G no cash involved.

C24

0ash E ",0ontribution revenues E ",

To record the partial collection of the note

C34

(uilding ac)uisition e-penditure E +,0ash E +,

To record the cash paid to acquire the building

C4

5o entry necessary G no cash involved

Focus on cash plus current financial resources

C14

5ote receivable E1,,0ontribution revenue E1,,

To record the note received

C24

0ash E ",5ote receivable E ",


C34

(uilding ac)uisition e-penditure E +,0ash E +,

To record the cash paid to acquire the building (No recognition is given to the long-term note or

to the building, a long-term asset.)

C4

age e-penditure E 1,ages payable E 1,

To record the wages earned by employees, but not yet paid.

$ranof Test (an/ 0hapter 2 age 1%


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Focus on all economic resources

C14

5ote receivable E1,,0ontribution revenue E1,,

To record the note received

C24

0ash E ",5ote receivable E ",


C34

(uilding E +,0ash E +,

?ortgage note payable &1,To record the acquisition of the building

6epreciation e-pense E 1&,!ccumulated depreciation E 1&,

To record depreciation on the building

C4

age e-pense E 1,ages payable E 1,

To record the wages earned by employees, but not yet paid

b.'tatements of


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(alance 'heets

0urrent !llFinancial ;conomic

0ash


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roblem #

a. &b. 2c. %d. "

e. 3f. #g. 1h.

roblem %

1. >ournal entries in !uthority=s general fund

C14

0ash E2,",roceeds from borrowing E2,",

To record the issuance of bonds

C24

;-penditure for land E ",0ash E ",

To record the purchase of land

C34

0ash E 12",roceeds from sale of land E 12",

To record sale of land

C4


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2. ?odified accrual statements

$eneva 9ousing !uthority(alance 'heet

0ash E1.#,

Fund (alance E1,#,

$eneva 9ousing !uthority'tatement of


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roblem &

a. >ournal entries

C14

0ash E,0ontribution revenues E,

To record contribution revenue (general fund)

0ash E1,0ontribution revenues E1,

To record contribution revenue (building fund4

C24

8perating e-penditures E2,0ash E1&,

'alaries payable 2,To record payroll e"penditures (general fund)

C34

0ash E 1,Interest revenue E 1,

To record interest revenue (building fund)

C4

Transfer to building fund E 2",

0ash E 2",To record transfer-out to building fund (general fund)

0ash E 2",Transfer*in from general fund E 2",

To record transfer-in from general fund (building fund)

C"4

;-penditures for architectural services E 1",0ash E 1",

To record fees paid to architect (building fund)



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b. Financial 'tatements

;nvironmental 0ouncil'tatement of


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A#S$ERS T ESSA"S (CHAPTER 2)

1. $overnmental and not*for*profit entities use fund accounting to demonstrate accountability.(y segregating the assets, entities are able to demonstrate clearly that the assets were used forthe intended purposes. (y segregating certain activities, governments can better control therevenues and e-pendituresBe-penses of these activities. It would not be uncommon for

governments and not*for*profit entities to segregate assets whose use is restricted by outsidedonors, nor would it be uncommon for these entities to segregate the revenues and e-pensesof activities that are supposed to be self*supporting.

2. (asis of accounting determines 9;5 transactions and events are recognized. ?easurementfocus determines 9!T is being reported upon. If an entity selects the cash basis ofaccounting, its measurement focus will necessarily be upon the flow of cash. If an entityselects full accrual accounting its measurement focus will, of course, be upon flow ofeconomic resources. !n entity must first decide 9!T assets and liabilities it wants todisplay and choose a basis of accounting that will then enable the entity to display thoseassets and liabilities.

3. !gency funds are used to account for assets that the governmental entity holds temporarily onbehalf of other governments, private organizations, or individuals. !gency funds aremechanisms for segregating, on financial reports, assets held for others to demonstrateaccountability and stewardship. (ecause agency funds are merely lists of assets held forothers, with a corresponding obligation to those parties, agency funds have no operatingaccounts and no e)uity accounts. !ssets H liabilities is the accounting e)uation.

. a.4 ;conomic


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%. There are generally no long*term debts reported in the debt service fund because these fundsare maintained on the modified accrual basis of accounting to account only for the currentfinancial resources that will be used to pay the interest and principal on long*term debts.These resources are set apart from other resources because they can only be used for theirspecified purposes. The principal and interest payments on the long*term debt that arecurrently due and payable are reported in the debt service fund that will service the long*term

debt.

&. Fiduciary fundsare used to account for resources held by the government as either a trustee Caparty that administers property for a beneficiary4 or an agent Cone who acts on behalf ofanother4. $overnments do not incorporate Cconsolidate4 fiduciary funds into theirgovernment*wide financial statements because they benefit only outsiders and a governmentcannot e-pect to have use of their resources.

+. Funds are not maintained for organizational units. They are established only for resourcesthat are restricted. Typically the resources for the /ey functional areas are provided by

unrestricted ta- revenues.

1. Aong*lived assets and long*term liabilities. These are recorded on the government*widestatements but not the fund statements as the former are on a full accrual basis but the latterare on a modified accrual basis.

Test Bank Solutions for Government and Not for Profit Accounting Concepts and Practices 5th

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Transcript of Test Bank Solutions for Government and Not for Profit Accounting Concepts and Practices 5th