Test bank with answers for advanced accounting 3e by jeter chapter 18

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Chapter 18
Introduction to Accounting for State and Local Governmental Units
Multiple Choice
1.

The highest level of priority of pronouncements that a government entity should look to for
accounting and reporting guidance is
a. GASB Technical Bulletins.
b. GASB Concepts Statements.
c. AICPA Industry Accounting Guides.
d. GASB Statements.

2.

Which of the following funds would account for operations that are financed and operated in a
manner similar to private business enterprises?
a. Debt Service Fund
b. Enterprise Fund

c. Internal Service Fund
d. Special Revenue Fund

3.

All of the following are Governmental (Expendable) Fund Entities except the
a. Capital Projects Fund.
b. Debt Service Fund.
c. Internal Service Fund.
d. Special Revenue Fund.

4.

The activities of a municipal airport should be accounted for in the
a. General Fund.
b. Internal Service Fund.
c. Special Revenue Fund.
d. Enterprise Fund.

5.

Fixed assets and noncurrent liabilities are accounted for in the records of
a. governmental funds
b. expendable funds
c. proprietary funds
d. both governmental and expendable funds.

6.

The liability for general obligation long-term debt is reported in the

a. Debt Service Fund.
b. Capital Projects Fund.
c. Enterprise Fund.
d. none of these.

7.

The activities of a central computer facility should be accounted for in the
a. General Fund.
b. Internal Service Fund.
c. Enterprise Fund.
d. Capital Projects Fund.




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18-2

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

8.

Internal Service Fund billings to government departments for services rendered is an example of
interfund
a. reimbursements.
b. transfers.
c. services provided and used.
d. loans.

9.

A nonrecurring contribution from the General Fund to the Enterprise Fund is an example of an
interfund
a. reimbursement.
b. transfer.
c. services provided and used.
d. loan.
10.

For state and local government units, the full accrual basis of accounting should be used for what
type of fund?
a. Special revenue
b. General
c. Debt service
d. Internal service

11.

Encumbrances would not appear in which fund?
a. General
b. Enterprise
c. Capital projects
d. Special revenue

12.

Which type of fund can be either expendable or nonexpendable?
a. Debt service
b. Enterprise
c. Trust
d. Special revenues

13.

Which of the following funds frequently does not have a fund balance?
a. General fund
b. Agency fund
c. Special revenue fund
d. Capital projects fund

14.

A city should record depreciation as an expense in its
a. general fund and enterprise fund.
b. internal service fund and general fund.
c. enterprise fund and internal service fund.
d. enterprise fund and capital projects fund.

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Chapter 18 Introduction to Accounting for State and Local Governmental Units

18-3

15.

Part of the general obligation bond proceeds from a new issuance was used to pay for the cost of a
new city hall as soon as construction was completed. The remainder of the proceeds was transferred
to repay the debt. Entries are needed to record these transactions in the
a. general fund and capital projects fund.
b. general fund and debt-service fund.
c. trust fund and debt-service fund.
d. debt-service fund and capital projects fund.

16.

One of the differences between accounting for a governmental unit and a commercial unit is that a
governmental unit should
a. not record depreciation expense in any of its funds.
b. always establish and maintain complete self-balancing accounts for each fund.
c. use only the cash basis of accounting.
d. use only the modified accrual basis of accounting.

17.

When a truck is received by a governmental unit, it should be recorded in the General Fund as a(n)
a. appropriation.
b. encumbrance.
c. expenditure.
d. fixed asset.

18.

Which of the following should be accrued as revenues by the general fund of a local government?
a. Sales tax held by the state which will be remitted to the local government
b. Parking meter revenues
c. Sales tax collected by merchants
d. Income taxes currently due

19.

Which of the following funds of a governmental unit recognizes revenues and expenditures under
the same basis of accounting as the general fund?

a. Debt service
b. Enterprise
c. Internal service
d. Nonexpendable trust

20.

Repayments from the funds responsible for a particular expenditure to the funds that initially paid
for them are interfund
a. loans.
b. services provided and used.
c. transfers.
d. reimbursements.

21.

It is proper to recognize revenues or expenditures resulting from which of the following
classifications of interfund activity?
a. Interfund loans and interfund transfers
b. Interfund services provided/used and interfund reimbursements
c. Interfund reimbursements and interfund loans
d. Interfund services provided/used and interfund transfers




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18-4

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

22.

Revenues of a special revenue fund of a governmental unit should be recognized in the period in
which the
a. revenues become available and measurable.
b. revenues become available and appropriated.
c. revenues are billable.
d. cash is received.

23.

What is the underlying reason a governmental unit uses separate funds to account for its
transactions?
a. Governmental units are so large that it would be unduly cumbersome to account for all
transactions as a single unit.
b. Because of the diverse nature of the services offered and legal provisions regarding activities of
a governmental unit, it is necessary to segregate activities by functional nature.

c. Generally accepted accounting principles require that nonbusiness entities report on a funds
basis.
d. Many activities carried on by governmental units are shortlived and their inclusion in a general
set of accounts could cause undue probability of error and omission.

24.

Which of the following is not a budgetary account?
a. Appropriations
b. Estimated Revenues
c. Encumbrances
d. Reserve for Encumbrances

25.

An interfund transfer should be reported in a governmental fund operating statement as a(n):
a. due from (to) other funds
b. other financing source (use)
c. revenue or expenditure
d. none of the above




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Chapter 18 Introduction to Accounting for State and Local Governmental Units

18-5

Problems
18-1

During 2010, the City of Lebo started a street paving project. The project is being financed by the
proceeds from the issue of five-year, 6% special assessment bonds payable at a face value of
$3,000,000. The bonds were issued July 1, 2010 at their par value. One-fifth of the principal plus
interest is payable on June 30 of each year beginning June 30, 2011. Property owners are assessed to
provide the funds to pay the principal and interest on the debt.
The following transactions occurred during 2010 and 2011:
1. The bonds for the paving of the streets were issued.
2. The street paving was completed at a cost of $3,000,000.
3. Property owners were assessed and billed for the first installment of principal and interest on the
special assessment debt.
4. Assessments for the first installment of principal and interest on the special assessment debt
were collected. The June 30, 2011, payment of principal and interest was made.
Required:
Prepare all journal entries for the preceding transactions that are necessary for the City of Lebo
assuming:
A.

The City of Lebo has not obligated itself in any manner to the holders of the special
assessment bonds.
B.
The City of Lebo has made a commitment to the holders of the special assessment bonds to
assure the full payment of principal and interest on the due dates.

18-2

The following activities and transactions are typical of those which may affect the various funds
used by a municipal government.
Required:
Prepare journal entries to record each transaction and identify the fund in which each entry is
recorded.
1. The Zola City Council passed a resolution approving a general operating budget of $6,800,000
for the fiscal year. Total revenues are estimated at $5,800,000.
2. The Zola City Council passed an ordinance providing a property tax levy of $3.50 per $100 of
assessed valuation for the fiscal year. Total property valuation in Zola City is $320,000,000.
Property is assessed at 30% of current property valuation. Property tax bills are mailed to
property owners. An estimated 5% will be uncollectible.
3. Kansas City sold a general obligation term bond issue for $1,000,000 at 104 to a major
brokerage firm. The stated interest rate is 10%. Construction of a new Municipal Courts
Building will be financed by the bond issue proceeds.
4. The premium on bond sale in (3) above is transferred to the Debt Service Fund.
5. At the end of fiscal year, the Zola City Council approves the write-off of $55,000 of uncollected
taxes because of inability to locate the property owners.




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18-6

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
6. The Kansas City Municipal Courts Building (3 above) is completed. Contracts and expenses
total $1,190,000, and all have been paid and recorded in the Capital Projects Fund. Prepare
entries to close this project and record the completion of the project in all other funds and/or
account groups affected. Any balance in the Capital Projects Fund is to be applied to payment
of interest and principal of the bond issue.
7. On March 1, Webb City issued 10% serial bonds at par to finance streetlights in an area recently
incorporated in the city limits. The face amount of the bonds is $900,000; interest is payable
annually, and bonds are to be retired in equal amounts over 6 years from collections from
assessments against property affected. In case of default by the property owners, the bond
principal will be paid by the city.
a. Record the issuance of the bonds on March 1 of the current year.
b. Record the payment to bondholders on March 1 of the next year.
8. The street lighting project in (7) above was completed on September 30 at a total cost of
$840,000. Record summary entries for expenditure transactions from March 1 - September 30,
and on completion of the project.

18-3

Prepare entries, in general journal form, to record the following transactions in the proper fund(s)
and/or account group(s). Designate the fund or account group in which each entry is recorded.
1. Bond proceeds of $2,000,000 were received to be used in constructing a new City Jail. An
equal amount is contributed from general revenues.
2. Serial bonds in the amount of $300,000 matured. Interest of $75,000 was paid on these and
other serial bonds outstanding.
3. Insurance proceeds amounting to $19,000 were received as a result of the accidental destruction
of a garbage truck costing $33,000. Accumulated depreciation on the truck was $21,000.
4. The City Parks Endowment Fund transferred $160,000 in expendable funds to the City Parks
Special Revenue Fund.
5. Proceeds of $21,000 were received from the sale of equipment which had been purchased from
general revenues at a cost of $100,000. Accumulated depreciation on the equipment was
$75,000.
6. The City Power Company (an enterprise fund) issued a bill for $400,000 for electricity provided
to municipal government buildings.
7. The City Power Company transferred excess funds of $90,000 to the General Fund.
8. A central data processing center was established by a contribution of $400,000 from the General
Fund, a long-term loan of $130,000 from the City Parks Special Revenue Fund, and general
obligation bond proceeds of $180,000.
9. The Data Processing Fund billed the General Fund $20,000 and the City Parks Special Revenue
Fund $8,500 for data processing services.




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Chapter 18 Introduction to Accounting for State and Local Governmental Units

18-7

10. The City Power Company received $7,000 as customer deposits during the year. The monies
are to be held in trust until customers request that their services be discontinued and final bills
are collected.
11. In order to retire general obligation term bonds when they become due, it is determined that the
Debt Service Fund will require annual contributions of $40,000 and earnings in the current year
of $3,000.
18-4

The general fund trial balance for Shawnee City held the following balances at June 30, 2011, just
before closing entries were made:
Unreserved Fund Balance
Estimated Revenues
Revenues
Appropriations
Expenditures

Expenditures-Prior Year
Encumbrances
Operating Transfers In
Reserve for Encumbrances
Reserve for Encumbrances – Prior Year

$ 2,000
33,000
27,250
28,000
26,200
1,200
3,000
6,000
3,000
1,500

Required:
Prepare the necessary closing entries.
18-5

The following schedule of capital assets was prepared for Pratt County.

Government Activities
Total Capital Assets
Less: Accumulated
Depreciation
Net Capital Assets

Beg. Balance

$850,000
( 500,000)
$350,000

Additions
250,000
( 50,000)
$200,000

Retirements
(185,000)
150,000

Ending Balance
$915,000
( 400,000)

( 35,000)

$515,000

All capital asset acquisitions were made in the capital projects fund and paid in cash. An asset was sold by
the general fund for $40,000 cash.
Required:
Determine how the above information will be reflected on each of the following statements for the
year 2011.
A.
The governmental funds’ statement of revenues, expenditures, and changes in fund
balances. List the governmental fund and then list the dollar amount within the appropriate
heading on the statement (such as Revenues, Expenditures, or Other Financing Sources

(Uses)).
B.
The government-wide statement of net assets.
C.
The government-wide statement of activities.




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18-8

Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

18-6

The following events take place:
1. Interest payments in the amount of $20,000 that are the responsibility of the Debt Service

Fund are paid by the General Fund.
2.
The Internal Service Fund bills the Special Revenue Fund $25,000 for services performed.
3.
The Special Revenue Fund transfers $10,000 to the Internal Service Fund as a temporary loan.
4.
The General Fund transfers $150,000 to start an Internal Service Fund.
Required:
Identify the interfund activity as a loan, services provided and used, interfund transfer, or interfund
reimbursement and prepare entries in general journal form to record the transactions on the records
of the fund involved.

18-7

The following transactions take place:
1. On January 1, the city issued 9% general obligation bonds with a face value of $4,000,000
payable in 10 years to finance the construction of city offices. Total proceeds were
$4,500,000.
2. On December 20, construction was completed and occupancy taken of the city offices. The
full cost of $3,900,000 was paid to the contractor, and appropriate closing entries were made
with regard to the project.
3. The General Fund repaid the Special Revenue Fund a loan of $15,000 plus $900 in interest on
the loan.
Required:
Prepare entries in general journal form to record these transactions in the proper fund(s). Designate
the fund in which each entry is recorded.

Short Answer
1.
There are eleven categories of government fund entities that fall under three subheadings. Describe

the subheadings of government fund entities.
2.

GASB Statement No. 34 specifies how governments report capital assets and long-term obligations.
Describe where capital assets and long-term obligations are reported in government financial
statements.

Short Answer Questions from the Textbook
1. Eleven funds are recommended to account for the various activities and resources of a governmental unit. Identify these funds by title and type and briefly state (in two sentences or less) the
basic purpose of each fund.
2. Why are governments required to prepare financial statements on a government-wide basis using
full accrual accounting?
3. What is the difference between a governmental fund and a proprietary fund?
4. Are fiduciary funds governmental funds or proprietary funds? Explain.




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Chapter 18 Introduction to Accounting for State and Local Governmental Units

18-9

5. A disbursement by the general fund to another fund may be recorded as a receivable, an
expenditure, or a fund transfer. Explain the circum-stances that would result in each of these
different treatments.
6. In what funds would you expect bonds payable to be included?
7. In what funds might property and other non financial resources be recorded?
8. Why are budgeted revenues and expenditures formally recorded in the records of the general fund
but not in the records of a capital projects fund?
9. Are all major capital facilities acquisitions ac-counted for in a capital projects fund? Explain.
10. What exception to the normal expenditure recognition criteria is associated with debt ser-vice funds
and what is the justification for this exception?
11. Identify and describe four types of interfund activities.
12. The following funds and account groups are recommended for use in accounting for state and
municipal governmental financial operations:
A. General Fund.
B. Special Revenue Fund.
C. Debt Service Fund.
D. Capital Projects Fund.
E. Agency Fund.
F. Enterprise Fund.
G. Internal Service Fund.
H. Trust Fund.
I. Government-wide Statement of Activities.
J. Government-wide Statement of Net Assets.
Identify, by the letters given above, the funds and account groups in which each of the ac-count
titles below might properly appear.

(1) Bonds Payable.
(2) Reserve for Encumbrances.
(3) Equipment.
(4) Appropriations.
(5) Estimated Revenue.
(6) Property Taxes Receivable.
(7) Construction Work in Progress.
(8) Accumulated Depreciation.
(9) Depreciation Expense.
(10)Required Earnings.
13. Describe some of the major reconciling items between a government fund and the governmentwide financial statements.
Business Ethics Question from the Textbook
GASB 45requires that the expected future costs of retiree health costs be recognized in the current period.
Prior to this, governments used a pay-as-you-go plan in which only the current year’s actual payments




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18-10 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
affected the financial statements. Suppose you are working for a government prior to the issuance of GASB
45. As part of the collective bar-gaining agreement, the government offers employees increased health
benefits.
1. Prior to the issuance of GASB 45, what would be the impact on the government’s financial
statements?
2. Under GASB 45, what are the financial statement implications?
3. Why might the current governmental leaders agree to offer such a benefit?4.What are the ethical
issues involved in this decision?




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Chapter 18 Introduction to Accounting for State and Local Governmental Units 18-11
ANSWER KEY
Multiple Choice

1.
2.
3.
4.
5.
6.
7.

d
b
c
d
c
d
b

8.
9.
10.
11.
12.
13.
14.

c
b
d
b
c
b

c

15.
16.
17.
18.
19.
20.
21.

d
b
c
a
a
d
b

22.
23.
24.
25.

a
b
d
b

Problems
18-1

A.
1. Capital Projects Fund
Cash
Contribution from Property Owners
2. Capital Projects Fund
Expenditures
Cash

3,000,000
3,000,000

3,000,000
3,000,000

3. No Entry Necessary
4. Agency Fund
Cash [(3,000,000/5) + (3,000,000 × .06)]
Amount Held for Debt Service
Amount Held for Debt Service
Cash
B.
1. Capital Projects Fund
Cash
Term Bond Payable

2. Capital Projects Fund
Expenditures
Cash

3. Debt Service Fund
Special Assessment Receivable
Special Assessment Revenue
[(3,000,000/5) + (3,000,000 × .06)]

780,000
780,000
780,000
780,000

3,000,000
3,000,000

3,000,000
3,000,000

780,000



780,000


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18-12 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

4. Debt Service Fund
Cash
Special Assessment Receivable
Expenditures – Principal
Expenditures – Interest
Cash

18-2

1. General Fund:
Estimated Revenue
Unreserved Fund Balance
Appropriations
2. General Fund:
Property Tax Receivable
Allowance for Uncollectible Taxes
Revenue
3. Capital Projects Fund:
Cash
Term Bond Payable
Premium on Bond Payable
4. Capital Projects Fund:

Transfer to Debt Service Fund
Cash
Debt Service Fund:
Cash
Transfer from Capital Projects Fund

5. General Fund:
Allowance for Uncollectible Taxes
Property Tax Receivable
6. Capital Assets:
Buildings
Cash

780,000
780,000
600,000
180,000
780,000

5,800,000
1,000,000
6,800,000

3,360,000
168,000
3,192,000

1,040,000
1,000,000
40,000

40,000
40,000

40,000
40,000

55,000
55,000

1,190,000
1,190,000

Capital Projects Fund:
Transfer to Debt Service Fund
Cash

10,000

Debt Service Fund:
Cash
Transfer from Capital Projects Fund

10,000

10,000



10,000

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Chapter 18 Introduction to Accounting for State and Local Governmental Units 18-13
7. Capital Projects Fund:
Cash
Term Bond Payable

900,000

Debt Service Fund:
Expenditures – Principal
Expenditures – Interest
Cash

150,000
90,000

8. Capital Projects Fund:
Expenditures
Vouchers Payable/Cash
Fund Balance
Expenditures

18-3

900,000

240,000

840,000
840,000
840,000
840,000

1. Capital Projects Fund:
Cash
Term Bond Payable
Transfer from General Fund
General Fund:
Transfer to Capital Projects Fund
Cash
2. Debt Service Fund:
Expenditures
Cash

4,000,000
2,000,000

2,000,000

2,000,000
2,000,000

375,000
375,000

3. General Fund:
Cash
Revenue

19,000
19,000

Capital Assets
Cash
Accumulated Depreciation
Gain on Sale
Vehicles

19,000
21,000
7,000
33,000

4. Trust Fund:
Transfer to Special Revenue Fund
Cash

160,000

Special Revenue Fund:
Cash
Transfer from Trust Fund

160,000

160,000



160,000


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18-14 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
5. General Fund:

Cash
Revenue

21,000
21,000

Capital Assets:
Cash
Accumulated Depreciation
Loss on Sale
Machinery and Equipment
6. Enterprise Fund:
Due from General Fund
Revenue
General Fund:
Expenditures
Due to Enterprise Fund
7. Enterprise Fund:
Transfer to General Fund
Cash
General Fund:
Cash
Transfer from Enterprise Fund

21,000
75,000
4,000
100,000

400,000

400,000

400,000
400,000

90,000
90,000

90,000
90,000

8. Internal Service Fund:
Cash
710,000
Contribution from General Fund
Due to City Parks Fund
Contributions from General Obligation Bonds
General Fund:
Transfer to Internal Service Fund
Cash

400,000

Special Revenue Fund:
Due from Internal Service Fund
Cash

130,000

400,000

130,000
180,000

400,000



130,000


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Chapter 18 Introduction to Accounting for State and Local Governmental Units 18-15
9. Internal Service Fund:
Due from General Fund
Due from Special Revenue Fund
Revenue

20,000

8,500
28,500

General Fund:
Expenditures
Due to Internal Service Fund

20,000

Special Revenue Fund:
Expenditures
Due to Internal Service Fund

8,500

10. Agency Fund:
Cash
Customer Deposit Agency Fund Balance
11. Debt Service Fund:
Required Additions
Required Earnings
Fund Balance

20,000

8,500

7,000
7,000

40,000
3,000
43,000

18-4
Appropriations
Unreserved Fund Balance
Estimated Revenues

28,000
5,000

Revenues
Operating Transfers In
Expenditures
Encumbrances
Unreserved Fund Balance

27,250
6,000

Reserve for Encumbrances – Prior Year
Expenditures – Prior Year

1,500

33,000

26,200
3,000

4,050



1,500


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18-16 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
18-5
A.

Governmental Funds
Statement of Revenues, Expenditures, and Changes in Fund Balance
For the Year Ended December 31, 2011

General
Fund

Capital
Projects
Fund

Debt
Service
Fund

Total
Governmental
Funds

Revenues
Expenditures
Expenditure

(250,000)

(250,000)

Other Financing Sources (Uses)
Special Items
Revenue from asset sale

40,000

40,000

B.

Government-wide
Statement of Activities
For the Year Ended December 31, 2011
Depreciation expense
Gain on sale

(50,000)
5,000

C.
Government-wide
Statement of Net Assets
December 31, 2011
Capital Assets
Accumulated Depreciation
Net Capital Assets

18-6
1.

915,000
(400,000)
$515,000

Interfund Reimbursement
General Fund
Due From Debt Service Fund
Expenditures

20,000

Debt Service Fund
Expenditures
Due to General Fund

20,000

20,000



20,000


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Chapter 18 Introduction to Accounting for State and Local Governmental Units 18-17
2.

3.

4.

18-7

Interfund service provided and used
Internal Service Fund
Due From Special Revenue Fund
Revenue

25,000

Special Revenue Fund
Expenditures
Due to Internal Service Fund

25,000

25,000

25,000

Interfund loan
Special Revenue Fund
Due From Internal Service Fund
Cash

10,000

Internal Service Fund
Cash
Due to Special Revenue Fund

10,000

10,000

10,000

Interfund Transfer
General Fund
Transfer to Internal Service Fund
Cash

150,000

Internal Service Fund
Cash
Contributions From General Fund

150,000

1.

Capital Projects Fund
Cash
Term Bond Payable
Premium on Bond Payable
Transfer to Debt Service Fund

Cash
Debt Service Fund
Cash
Transfer From Capital Projects Fund

150,000

150,000

4,500,000
4,000,000
500,000
500,000
500,000

500,000



500,000


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2.

Capital Projects Fund
Expenditures
Cash
Bond Issue Proceeds
Expenditures
Transfer to Debt Service Fund
Unreserved Fund Balance

3,900,000
4,500,000
3,900,000
500,000
100,000

Transfer to Debt Service Fund
Cash

100,000

Unreserved Fund Balance
Transfer to Debt Service Fund

100,000

Debt Service Fund
Cash
Transfer from Capital Projects Fund
Capital Assets
Buildings
Cash
3.

3,900,000

100,000

100,000

100,000
100,000

3,900,000
3,900,000

General Fund
Due to Special Revenue Fund
Expenditures
Cash
Special Revenue Fund
Cash
Due From General Fund
Revenue

15,000
900
15,900

15,900
15,000
900

Short Answer
1.
Governmental funds report on current period resources and focus on inflows, outflows, and
unexpended financial resources. They are designed to determine compliance with legal provisions
specifying how revenues are raised and resources spent.
Proprietary funds are used to account for the business-type activities of the government. The
reporting focused on the determination of operating income, changes in net assets, financial position,
and cash flows.
Fiduciary funds account for assets held by the government for others and these funds cannot be used
to support the government’s own programs. The reporting focuses on net assets and changes in net
assets.
2.

Capital assets and long-term obligations are not reported for governmental activities. Instead, these
items are reported on the government-wide Statement of Net Assets and for proprietary funds.
Schedules of capital assets and a schedule of long-term obligations are required to be disclosed.




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Chapter 18 Introduction to Accounting for State and Local Governmental Units 18-19
Short Answer Questions from the Textbook Solutions

1.

Fund Entities
Governmental Funds
(1)
General Fund - to account for all unrestricted resources except those required to be accounted for
in another fund.
(2)

Special Revenue Funds - to account for the proceeds of specific revenue sources (other than
expendable trusts, or for major capital projects) that are legally restricted to expenditures for
specified purposes.

(3)

Capital Projects Funds - to account for financial resources segregated for the acquisition of major
capital facilities (other than those financed by Enterprise Funds).

(4)

Debt Service Funds - to account for the accumulation of resources for, and the payment of, interest
and principal on general obligation long-term debt.

(5)

Permanent Funds – to account for resources that are legally restricted to the extent that only
earnings, and not principal, may be used for purposes that support the government’s programs –
that is, for the benefit of the government or its citizenry.

Proprietary Funds
(6)
Enterprise Funds – to account for the provision of goods or services to the general public on a
continuing basis where all or most of the costs involved are financed by user charges, or where
periodic determination of revenue earned, expenses incurred, and /or net income is appropriate for
management control, accountability, or other purposes.
(7)

Internal Service Funds - to account for the financing of goods or services provided by one
department or agency to other departments or agencies of the governmental unit, or to other
governmental units, on a cost – reimbursement basis.

Fiduciary Funds
(8)
Pension (and Other Employee Benefit) Trust Funds – used to report resources that are required to
be held in trust for the members and beneficiaries of defined benefit pension plans, defined

contribution plans, other postemployment benefit plans, or other employee benefit plans.
(9)

Investment Trust Funds – used to report the external portion of investment pools reported by the
sponsoring government.

(10)

Private-Purpose Trust Funds – used to report escheat property and to report all other trust
agreements under which principal and income benefit individuals, private organizations, or other
governments.
Agency Funds – used to report resources held by the reporting government in a purely custodial
capacity (assets equal liabilities). Agency funds typically involve only the receipt, temporary
investment, and remittance of fiduciary resources to individuals, private organizations, or other
governments.

(11)

2.

Government-wide statements are now required to help users assess the benefits and costs of various
programs in a manner comparable to the appraisal of profit seeking businesses. For example, the revenues
generated by a program can be compared to the expenses incurred by that program. The new requirements




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18-20 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition
also enable a reconciliation to be made between the fund statements and these new government-wide
statements.
By providing this information, the government-wide statements should contribute to meeting the
operational accountability aspects of the overall objective stated in the conceptual framework: fulfilling
government’s duty to be publicly accountable and enabling users to assess that accountability.
3.

A governmental fund is an expendable fund entity. The accounting and reporting emphasis for a
governmental fund is on the inflow, outflow, and unexpected balance of net financial resources and on the
compliance with detailed legal provisions that specify the types of revenue to be raised and the purposes
for which the financial resources may be used.
The accounting and reporting emphasis of a proprietary fund is similar to that of a commercial enterprise.
Thus, both current and fixed assets and current and noncurrent liabilities are accounted for in the records of
proprietary fund entities. In addition, revenue, expenses (including depreciation) and net income are
determined and reported for proprietary fund entities.

4.

Fiduciary funds are classified as governmental funds or as proprietary funds depending upon whether or

not their resources must be maintained intact. If the resources of a fiduciary fund may be expected to carry
out its designated activities it is classified as a governmental (expendable) fund entity. If the principal of
the fiduciary fund must be maintained intact it is classified as a proprietary (nonexpendable) fund entity.

5.

A disbursement to another fund is treated as a receivable on the records of the fund that makes the
disbursement when the disbursement constitutes an advance or loan to another fund.
A disbursement to another fund is treated as an expenditure on the records of the fund that makes the
disbursement when the disbursement constitutes a quasi-external transaction or a reimbursement. Quasiexternal transactions are interfund transactions that would be treated as revenue, expense or expenditures if
they were consummated with an organization external to the governmental unit. Reimbursements are
transactions which involve the transfer of resources from one fund to another in order to reimburse the
recipient fund for expenditures made by it that are properly expenditures of the reimbursing fund.
All interfund transactions other than quasi-external transactions, reimbursements, and loans or advances
are interfund transfers and are recorded as a transfer to other funds on the records of the fund that makes
the disbursements.

6.

Bonds payable may be included in the records of an Enterprise Fund, the government-wide statement of
net assets and under some circumstances in the records of an internal Service Fund.

7.

Property and other nonfinancial resources may be included in the records of an Enterprise Fund, an
Internal Service Fund, a nonexpendable Trust Fund and the government-wied statement of net assets.

8.

Estimated revenues and appropriations are formally recorded in the records of the General Fund to assist in

the control and administration of general fund expenditures. In particular, the formal recording of
appropriations is intended to assist administrators in complying with specific legal restrictions on the
amount of various classifications of expenditures. Since the resources of a Capital Projects Fund can be
expended for only the single authorized project for which the fund was created, the fund balance itself
serves an adequate measure of and control over unexpended appropriation authority. Thus, there is no
necessity to formally record the budgeted revenue and appropriation for the capital project.

9.

Not all major capital facilities acquisitions are accounted for in Capital Projects Funds. Construction or




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Chapter 18 Introduction to Accounting for State and Local Governmental Units 18-21
acquisition of capital facilities financed by Enterprise Funds are accounted for in the records of those
funds. In addition, there may be instances in which the resources of the General Fund or a Special Revenue

Fund are appropriated for the acquisition of a major capital facility. So long as such acquisitions do not
involve the issuance of general obligation long-term debt securities, they may be accounted for in the fund
which appropriates the resources rather than in a separate Capital Projects Fund.
10. Unpaid interest on bonds payable incurred since the last payment date is not accrued as an expenditure and
liability of the Debt Service Fund at year end. This exception to expenditure accrual is justified because
financial resources that are appropriated in other funds or from general tax levies for transfer to or receipt
by Debt Service Funds are usually appropriated in the period in which the interest on the debt must be
paid. To accrue the Debt Service Fund expenditure and liability in one year, but record the transfer or
collection of the financial resources appropriated for this purpose in a later year, would be confusing and
potentially misleading.
11.

Interfund activity includes the following four items
1. Interfund loans – Interfund loans should be reported as interfund receivables in the lender fund
and as an interfund payable in the borrower fund.
2. Interfund services provided and used – (previously known as quasi-external transactions) sales
and purchases of goods and services between funds for a price approximating their external
exchange value. Interfund services provided and used should be reported as revenues in seller
funds and expenses or expenditures in the purchaser funds. Unpaid amounts should be reported
as interfund receivables and payables in the fund balance sheet or the statement of net assets.
3. Interfund transfers – (formerly known as either residual equity transfers or operating transfers)
flows of assets without an equivalent flow of assets in return and without a requirement for
repayment. In government funds, transfers should be reported as ‘other financing uses’ in the
funds and as ‘other financing sources’ in the funds receiving the transfer. In proprietary funds,
transfers should be reported after non-operating revenues and expenses.
4. Interfund reimbursements – repayments from the funds responsible for the particular expenditure
or expense to the funds that initially paid for them. Reimbursements should not be displayed in
the financial statements.

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18-22 Test Bank to accompany Jeter and Chaney Advanced Accounting 3rd Edition

12. 1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
13.

Bonds Payable: F, J, and in some circumstances G.

Reserve for Encumbrances; A, B, D, and H.
Equipment: F, G, and J
Appropriations: A, B, and D.
Estimated Revenue; A and B.
Property Taxes Receivable; A, B, C, D, H, and J
Construction Work in Progress: F, G, and J.
Accumulated Depreciation: F, G, H, and J.
Depreciation Expense: F, G, H, and J.
Required Earnings: C.

On the Statement of Net Assets, the primary reconciling items include capital assets and long-term
liabilities. Capital assets used in governmental activities are not financial resources and are not reported
in the funds. Long-term liabilities are not due and payable in the current period and are not reported in
the governmental funds.
In reconciling the net assets, the primary differences are capital expenditures, sales of assets, bond
proceeds, and interest expense. Governmental funds report capital outlays as expenditures while
governmental activities report depreciation expense over the life of the asset. In the statement of
activities, the gain or loss from the sale is reported, while in the governmental funds, the proceeds from
the sale are reported as revenues. Bond proceeds provide current financial resources to government
funds, but issuing debt increases long-term liabilities on the statement of assets. In government funds,
the interest paid is deducted, while in the statement of activities, interest expense is recognized
according to the accrual method.

Business Ethics
Business ethics solutions are merely suggestions of points to address. The objective is to raise the students'
awareness of the topics, and to invite discussion. In most cases, there is clear room for disagreement or
conflicting viewpoints.
1. The current periods financial statements would only reflect the amounts actually paid in the current
period (current financial resources).
2. Under GASB 45, the liability for future amounts to be paid would have to be reported on a present

value basis on the government-wide statement of net assets.
3. Since the actual outlay associated with an increased benefit does not have to be paid in the current
period, the decision defers the economic consequences until a future period.
4. One issue to consider is whether the government is concerned about future fiscal responsibility. If
the debt does not have to be recorded on the books, it might give an unrealistic view of the financial
responsibility for future payments that the government has offered. Also, because in many cases, the
benefits are not guaranteed, there is a likelihood that the benefits might be canceled in the future if
the government can not afford them.