advanced accounting 6e by jeter chaney chapter 18

Advanced
Accounting
Jeter ● Chaney

Introduction to
Accounting
For State and Local
Governmental Units
1

Prepared by Sheila Ammons, Austin Community College


Learning Objectives
• Identify the issues involved in developing standards for
nonprofit organizations.
• Describe the broad categories of government fund entities.
• Distinguish between a general fund and a special revenue
fund.
• Explain the use of a capital projects fund.
• Describe the purpose of a debt service fund.
• Explain the use of a permanent fund.

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Learning Objectives
• Distinguish proprietary funds from government funds.
• Describe where capital assets and long-term obligations
are reported in government financial statements.
• Describe the changes in reporting requirements under

GASB Statement No. 34.
• Explain the benefits of government-wide statements.
• Describe the types of interfund activities.

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Governmental Accounting
• GASB’s Statement No. 34, issued June 1999, requires:
– Financial statements using government-wide (entitywide) approach. (This does not eliminate traditional fund
accounting.)
– Statements emphasizing major funds.
– Management’s discussion and analysis (MD&A).
• GASB Statement No. 34 requires “full accrual” accounting
for all government-wide statements (i.e., flow of economic
resources approach).
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Reporting Model: Minimum
Information Required
Government-wide
Statement of net position
Statement of activities

Fund Financial Statements
Governmental funds:
Balance sheet
Statement of revenues, expenditures,
and changes in fund balances

Reconciliation to government-wide
statements

Proprietary funds:
Balance sheet or statement of net position
Statement of revenues, expenses,
and changes in net position
Statement of cash flows—direct format

Fiduciary funds:
Statement of fiduciary net position
Statement of changes in net position
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History of Governmental Accounting
Standards
• GASB was established (1984):
– Separate board under oversight of Financial Accounting
Foundation (FAF).
– Responsible for establishing financial and reporting standards
for governments.
– GASB endorsed prior statements and interpretations of the
NCGA, as well as standards embodied in the 1974 AICPA
Industry Audit Guide.
– Pronouncements of the GASB are codified. The codification is
updated annually.
LO 1 Issues involved in developing standards.

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History of Governmental Accounting
Standards
Hierarchy of Standards
–GASB Statement No. 55 establishes the hierarchy used to
establish generally accepted reporting standards for all state and
local government-owned entities, including government-owned
colleges and universities, health care providers, and utilities.
– The GASB and the FASB each has primary responsibility
setting standards for entities under its jurisdiction.

for

– Pronouncements of one Board should not be mandatory for
entities under the jurisdiction of the other Board, unless
designated as such by the primary Board.

LO 1 Issues involved in developing standards.
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The Structure of Governmental
Accounting
• Eleven Categories of Fund Entities
– Governmental Funds (expendable)—
– Focus on sources, use, and balances of current financial
resources.
– General Fund
– Special Revenue Funds

– Capital Projects Funds
– Debt Service Funds
– Permanent Funds
LO 2 Broad categories funds.

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The Structure of Governmental
Accounting
• Eleven Categories of Fund Entities (continued)
– Proprietary Funds (nonexpendable)—
– Focus on determination of operating income,
changes in
net position, financial position, and cash flows.
– Enterprise Funds
– Internal Service Funds

LO 2 Broad categories funds .

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The Structure of Governmental
Accounting
• Eleven Categories of Fund Entities
– Fiduciary Funds
– Reports assets held in a trustee or agency capacity for others.
– Focus on net position.
– Pension Trust Funds

– Investment Trust Funds
– Private-Purpose Trust Funds
– Agency Funds

LO 2 Broad categories funds .

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Governmental Fund Entities
.
General Fund
• Used to account for and report all financial resources not accounted
for and reported in another fund.
Special Revenue Fund
• Used to account for and report the proceeds of specific revenue
sources that are restricted or committed to expenditure for
specified purposes other than debt service or capital projects.
– The term proceeds of specific revenue sources establishes that
one or more specific restricted or committed revenues should
be the foundation for a special revenue fund.
LO 3 General fund vs special revenue fund.

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Governmental Fund Entities
• In special revenue funds, as in the general fund, the
• following steps are taken:
– A budget is established and recorded in the accounts.

– Encumbrances are used to control budgeted expenditures.
– Fixed assets are only reported on government-wide statement.
– Depreciation is not recorded.
– Long-term debt is only reported on government-wide statements.

LO 3 General fund vs special revenue fund.

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Governmental Fund Entities
Capital Projects Fund
• Used to account for and report financial resources that
are restricted, committed, or assigned to expenditure for
capital outlays, including the acquisition or construction
of capital facilities and other capital assets. Capital
project funds exclude those types of capital-related
outflows financed by proprietary funds or for assets that
will be held in trust for individuals, private
organizations, or other governments.
LO 4 Capital projects fund.

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Governmental Fund Entities
• Capital Projects Fund
– Resources to acquire or construct major capital facilities.
– Resources for the acquisition include
– proceeds of long-term debt issues,

– grants or payments from other governmental units,
– funds from private sources,
– transfers of current revenues from other governmental funds,
– special assessments, and
– other sources.
LO 4 Capital projects fund.

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Governmental Fund Entities – Capital
Projects
• Exercise 18-12: The town of Aberdeen authorized a fire station to be built at an
estimated cost of $150,000. On January 1, 2015, 6% bonds with a par value of
$150,000 were authorized and issued. Any difference between the par value of the
bonds and the proceeds from their sale is transferred to the Debt Service Fund. The
following transactions relating to the Capital Project Fund occurred during 2015.
– Encumbrances were recorded in the amount of $150,000.
– Proceeds from bond issue were received in amount of $155,000.
– Premium on bond issue was transferred to the Debt Service Fund.
– Contract billings of $150,000 were approved for payment on the completion of the
fire station.
– Contractor was paid except for retention of 5% of the contract.
– Final contract price was paid. The nominal accounts were closed.

LO 4 Capital projects fund.

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Governmental Fund Entities – Capital
Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects
Fund to record the transactions and events.
1.Encumbrances were recorded in the amount of $150,000.
Encumbrance

150,000

Fund Balance - Assigned (encumbrances)
150,000

2.Proceeds of $155,000 from bond issue were received.
Cash

155,000

Bond Issue Proceeds
155,000
LO 4 Capital projects fund.

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Governmental Fund Entities – Capital
Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects
Fund to record the transactions and events.
3.Premium was transferred to the Debt Service Fund.
Transfer to Debt Service Fund

5,000

Cash
5,000

LO 4 Capital projects fund.

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Governmental Fund Entities – Capital
Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects
Fund to record the transactions and events.
4.Contract billings of $150,000 were approved for payment on the
completion of the fire station.
Fund Balance - Assigned (encumbrances)

150,000

Encumbrances
150,000
Expenditures

150,000

Contracts Payable
150,000

LO 4 Capital projects fund.

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Governmental Fund Entities – Capital
Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects
Fund to record the transactions and events.
5.Contractor was paid except for retention of 5% of the contract.

Contracts Payable

150,000

Contracts Payable – Retained Percentage
7,500
Cash
142,500

LO 4 Capital projects fund.

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Governmental Fund Entities – Capital
Projects
Exercise 18-12: Prepare the journal entries necessary in the Capital Projects
Fund to record the transactions and events.
6.Final contract price was paid. The nominal accounts were closed.

Contracts Payable - Retained Percentage
Cash
7,500
Bond Issue Proceeds
Transfer to Debt Service Fund
5,000
Fund Balance - Unassigned
150,000
Fund Balance - Unassigned
Expenditures
150,000

7,500
155,000

150,000

LO 4 Capital projects fund.

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Governmental Fund Entities
Debt Service Fund
• Used to account for and report financial resources that
are restricted, committed, or assigned to expenditure for
principal and interest. Debt service funds should be used
to report resources if legally mandated (i.e. debt payable
from property taxes). Financial resources that are being
accumulated for principal and interest maturing in future

years should be reported in debt service funds.

LO 5 Debt service fund.

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Governmental Fund Entities
Debt Service Fund
• Resources for, and the payment of, general long-term debt
principal and interest.
• Financed by the following sources
1) General property tax
2) Sales tax or other specified tax revenues
3) Transfers of other fund revenues
4) Special assessments
There of
is no
interest
payable
accrual
on
5) Revenue from investment
debt
service
fund
resources.
general obligation long-term debt.

LO 5 Describe a debt service fund.

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Governmental Fund Entities – Debt
Service
• Problem 18-1: On January 1, 2015, the City of Cape May
authorized and issued $200,000 of 5%, three-year term bonds.
Interest is payable annually on December 31. A debt service
fund is established to accumulate the necessary resources to
pay the annual interest on the bonds and to redeem the bonds
when they mature. The required annual addition for principal
and interest will be transferred annually to the debt service
fund from the general fund. It is assumed that amounts
received by the debt service fund for the payment of principal
can be invested at an annual return of 8%.
LO 5 Debt service fund.
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Governmental Fund Entities – Debt
Service
Problem 18-1: Prepare a schedule to calculate the annual required
additions and annual required earnings to repay the principal on the
bonds assuming the first installment for principal and interest is
transferred to the debt service fund from the general fund on Dec. 30,
2015.

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Governmental Fund Entities – Debt
Service
Problem 18-1: Prepare the journal entries to be recorded by the debt
service fund as follows:
1.The 2015 budget entry.
Authorized Transfer from the General Fund

71,607

Estimated Revenues

4,929

Appropriations
10,000

($200,000

Fund
Balance
66,536

-

×

5%)

Committed

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