Solution manual advanced accounting 9e by hoyle ch17

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CHAPTER 17
ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS,
PART II
Chapter Outline
I.

Government entities sometimes obtain property by lease rather than by purchase.

A. Leases are recorded as either capital leases or operating leases based upon the
criteria first established by FASB Statement 13.

B. Based on this standard, a lease that meets any one of the following criteria is a capital
lease:
a. The lease transfers ownership of the property to the lessee by the end of the lease
term.
b. The lease contains an option to purchase the leased property at a bargain price.
c. The lease term is equal to or greater than 75 percent of the economic life
of the leased property.
d. The present value of minimum lease payments equals or exceeds 90 percent of
the fair value of the leased property.
C. For a state or local government, a capital lease is recorded as follows:
a. In the government-wide financial statements, the lease is reported as an asset and
liability at the present value of the minimum leases payments and then
depreciation (on the asset) and interest (on the liability) are recognized in the same
manner as used by for-profit organizations.
b. In the fund-based financial statements for government funds, the present value of
the minimum lease payments is recorded as an expenditure and an other financing
source with later interest and principal payments recorded as expenditures. No
depreciation is recognized because the asset is not recognized.

II.

Governments often establish solid waste landfills. They can be recorded within the
proprietary funds, if a user fee is assessed, or as part of the general fund if the landfill is
open to the public without a charge.
A. A landfill can eventually create a large liability for the government because of closure
costs and post-closure maintenance and monitoring.
B. On government-wide financial statements, recognition of this liability is based on accrual
accounting and the economic resource measurement focus. Thus, the liability is
recognized as the available space becomes filled. If the landfill is recorded as an
Enterprise Fund, this same reporting is appropriate for fund-based financial statements.
C. If the landfill is reported within the General Fund, the liability is only reported on the
fund-based statements when there is a claim to current financial resources.

III. Governments incur a liability for compensated absences earned by government employees
such as school teachers and police officers.
A. Government-wide financial statements require recognition of the liability and expense
as incurred based on accrual accounting and the economic resource measurement
focus.
B. Fund-based financial statements record a liability only if the claim is to be paid from
current financial resources.
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IV. Works of Art and Historical Treasures
A. Artworks, historical treasures, and similar assets should be capitalized at cost (or fair
value at the date of donation) in government-wide financial statements.
B. An expense rather than an asset can be recorded if the item does not generate
economic benefits and meets the following criteria.
a. Held for public exhibition, education, or research in furtherance of public service,
rather than financial gain.
b. Protected, kept unencumbered, cared for, and preserved.
c. Subject to the policy that revenues generated from sales of items in the collection
be used to add to the collection.
C. If capitalized, depreciation is not required if this type of asset is considered to be
inexhaustible.
V.

Infrastructure Assets and Depreciation

A. Newly-acquired infrastructure assets (such as roads, bridges, and sidewalks) should be
capitalized at historical cost in the government-wide financial statements and recorded
as an expenditure in the fund-based financial statements.
B. Major general infrastructure assets put into service since 1980 must also be capitalized
although an estimation of current book value may be necessary.
C. Depreciation of all capital assets other than land and inexhaustible artworks is required
so that infrastructure items are also subject to depreciation.
D. However, the “modified approach” allows the expensing of maintenance costs in lieu of
depreciation for infrastructure assets if certain criteria are met.
a. A minimum acceptable condition level is established for a network of infrastructure
assets and documentation is provided to show that this minimum level has been
maintained.
b. An asset management system must be in place to monitor the particular system of
assets.

VI. The comprehensive annual financial report (CAFR) includes general purpose external
financial statements. These statements are divided into three distinct sections.
A. Management’s discussion and analysis (MD&A) which provides a broad range of
information to help decision-makers evaluate the operations and financial position of
the government entities.
B. Financial statements
a. Government-wide financial statements.
b. Fund-based financial statements.
c. Notes to the financial statements.
C. Required supplementary information.
VII. For governmental accounting, a primary government such as a city or town is a reporting
entity that normally produces a comprehensive annual financial report (CAFR).
A. In addition, a special purpose government (such as a school board or water
commission) qualifies as a reporting entity if it meets the following three criteria:
a. It has a separately elected governing body.
b. It is legally independent
c. It is fiscally independent of any other state and local governments
B. Component units that meet either of the following two criteria should be reported within
the CAFR of the reporting government even though they are independent operations.
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a. It must be fiscally dependent upon the primary organization or
b. The primary government must appoint a voting majority of the governing board and

either be able to impose its will on the component organization or the component
organization provides a financial benefit or imposes a financial burden on the
primary government.
C. Once identified, component units can be discretely presented in a separate column to
the right of the government-wide statements or blended with the primary government as
if it made up a part of the primary organization.
VIII. Public colleges are required to meet GASB standards, whereas private colleges are
required to meet FASB standards.
A. Private colleges generally depend more on tuition and usually have greater
endowments.
B. Governments provide the major support for public colleges.
C. GASB No. 35 requires the application of GASB No. 34 to public colleges. However,
many of these schools assume that they function solely as an Enterprise Fund (open to
the public for a user charge). Thus, these schools are allowed to produce fund-based
financial statements without need for government-wide statements.

Learning Objectives
Having completed Chapter Seventeen of the textbook, “Accounting for State and Local
Governments (Part Two),” students should be able to fulfill each of the following learning
objectives:

1. Understand how leases are classified as either capital or operating and their subsequent
recording in the government-wide and fund-based financial statements.

2. Explain the reason for the difference in the classification of the operation of solid waste
landfills as either a proprietary fund or a general fund.

3. Understand how a landfill can generate a large liability for a government and the difference
in the recognition and the subsequent recording of this liability in the government-wide
financial statements and the fund-based financial statements.

4. Understand how governments incur a liability for compensated absences earned by
government employees and the difference in their subsequent recording in the governmentwide financial statements and the fund-based financial statements.

5. Explain the capitalization rules for art, historical treasures, and similar assets and their
subsequent recording in the government-wide and in the fund-based financial statements.

6. Describe when an exception to the required capitalization and depreciation rules for art,
historical treasures, or similar assets is justified.

7. Understand the accounting that is required for a government’s infrastructure assets such as
bridges and sidwalks.

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8. Explain the criteria for the “modified approach” that allows expensing of maintenance costs
in lieu of depreciation for infrastructure assets.
9. Describe the three distinct sections of the general purpose external financial statements.
10. Be able to explain when an operation (such as a school system) that is not a primary
government (such as a city or state) is still viewed as a reporting entity for government
accounting purposes.
11. Explain the criteria that must be met to be reported as a component unit and the difference
in reporting between a unit that is discretely presented and one that is shown as a blended

unit.
12. Describe the two government-wide financial statements.
13. Describe the traditional fund-based financial statements, especially for the governmental
funds and for the proprietary funds.
14. Explain the method by which governmental accounting rules are applied to public colleges
and universities.

Answer to Discussion Question
Is It Part of the County?
In financial accounting for a for-profit organization, the boundary for the reporting entity and its
various activities (or subsidiaries) is relatively easy to determine. GAAP provides the basis for
inclusion in the consolidated financial statements, which includes all entities over which a
company has control.
In accounting for state and local governments, the distinction is not so clear. What constitutes a
reporting entity? Obviously, a primary government such as a city or county is a reporting entity.
What about other governmental operations and activities that exist separate from a primary
government? When do those operations qualify as special purpose governments and when
should they be viewed as component units to be reported by a primary government?
A special purpose government is a reporting entity. It has a separately elected governing body,
it is legally independent, and it is fiscally independent. Fiscal independence constitutes setting
its own budget, levying taxes, and/or issuing bonds without outside approval. Here, the
industrial development commission is not fiscally independent of Harland County. Harland
County has the ability to impose its will on the separate organization by its right to approve the
commission’s budget. Therefore, the industrial development commission is not a special
purpose government.
Is the industrial development commission a component unit? Component units are not always
easy to determine. An activity is classified as a component unit if it is fiscally dependent on the
primary government. Because the commission’s budget must be approved by the county
government, the commission would appear to qualify as a component unit for Harland County.

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Can the commission also be a component unit of the state? There is not fiscal dependence but
a component unit does exist if the primary government appoints a voting majority of the board
and (a) the primary government can impose its will on that board or (b) the separate
organization provides a financial benefit for the primary government or imposes a financial
burden. The state does appoint 15 out of 20 of the board members. appointment of that
number of board members does indicate state control. However, there is no evidence or
information here that indicates that the state can impose its will on the board or that the
separate organization provides a financial benefit or imposes a financial burden on the state.
Therefore, unless other information becomes available indicating that one these requirements is
present, the industrial commission is not a component unit of the state. However, because of
the appointment of the majority of the board, the commission is a related organization to the
state. In that case, the state must disclose the nature of the relationship in its financial
statements.

Answers to Questions
1. State and local governments apply FASB Statement Number 13, “Accounting for Leases,”
to determine whether a lease is a capital lease or an operating lease. A lease that meets
any one of the following criteria is held to be a capital lease:
a. The lease transfers ownership of the property to the lessee by the end of the lease term.
b. The lease contains an option to purchase the leased property at a bargain price.
c. The lease term is equal to or greater than 75 percent of the estimated economic life of

the leased property.
d. The present value of rental or other minimum lease payments equals or exceeds 90
percent of the fair value of the leased property.
2. Within the government-wide financial statements, the accounting for capitalized leases is the
same as for-profit enterprises. The asset and liability are initially recorded at the present
value of the minimum lease payments. Accrual accounting and the economic resource
measurement basis are appropriately followed. The equipment would be increased along
with the liability obligation. Subsequently, both depreciation expense and interest expense
must be recognized. The entries in the fund-based financial statements are the same if a
proprietary fund is involved.
The recording of a capital lease in one of the governmental funds within the fund-based
statements involves the following three steps:
a. The initial entry reports the present value of the liability as an other financing
resource.
b. The present value is also recorded as an expenditure consistent with the current
financial resources approach being used.
c. When each payment is made, the debt and interest are both recorded as
expenditures.
3. In government-wide financial statements, the lease payment is treated the same as it is in
for-profit organizations: part of the payment is considered interest and the rest is payment
of the lease obligation.
In fund-based financial statements, the recording is the same if a proprietary fund is
involved. However, the recording of a capital lease payment in the governmental funds
involves the recording of the debt and interest payments as expenditures.
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4. Solid waste landfills can be a significant source of liability for local governments. The federal
government has strict rules on groundwater monitoring and post-closure activities. This legal
obligations can involve large payments over an extended period of time even after the
landfill is closed.
5. Government-wide financial statements recognize expenses on the accrual and economic
resource measurement basis. Therefore, seven percent of the expected landfill closure
liability cost would be accrued during the current year as an expense and to report the
proper liability.
In the fund-based financial statements, the entry is the same as above if an Enterprise Fund
is involved.
In the fund-based statements, if the landfill is recorded in the General Fund, the only charge
to expenditures is a current payment, if it is made. Thus, the eventual liability is ignored
unless it will be paid from current financial resources.
6. Government-wide financial statements recognize expenses on the accrual and economic
resource measurement basis. At the end of the first year, 11 percent is multiplied times the
expected closing and other related costs and that figure is recognized as both an expense
and a liability. At the end of the second year, 24 percent is multiplied times the expected
costs (which may have changed since the end of year one) and the liability to be reported is
raised to this new amount. It is the change in the liability that creates the amount of
expense to be reported for the second year.
For fund-based financial statements, assuming the landfill is reported in the General Fund,
no recording is made unless (a) an actual payment is made because of the eventual closure
or (b) some part of that liability represents a claim to current financial resources in this
period.
7. The amount accrued, $2,000 in this case, should be recorded on the government-wide
financial statements as an expense at the end of 2008 along with the related liability. As a
governmental fund transaction, the fund-based financial statements only include an amount

as a liability at the end of 2008 if it is to be paid early enough in 2009 to require the use of
current financial resources held at the end of 2008 (which does not appear to be the case).
8. Because of the accrual recorded on the government-wide financial statements at the end of
2008, the actual payment simply reduces both cash and the liability balance.
On the fund-based financial statements, assuming no accrual was reported in 2008, the
payment in 2009 is a reduction in cash along with an Expenditure balance. If the amount is
paid with proprietary funds, it is treated the same as in government-wide statements.
9. Governments should capitalize donated works of art, historical treasures, and similar assets
at the fair value at the date of the gift. However, if there is no charge for admission to see
the art, it is difficult to consider it an asset because it generates no economic benefit. Thus,
the artwork does not have to be capitalized if all of the following criteria are met:

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a. Held for public exhibition, education, or research in furtherance of public service, rather
than financial gain.
b. Protected, kept unencumbered, cared for, and preserved.
c. Subject to an organizational policy that requires the proceeds from sales of collection
items to be used to acquire other items for collections.
If capitalized, depreciation is only required if the asset is exhaustible. This means that the
asset is used up by display, education, or research. Otherwise, depreciation is not required.
10. A revenue still must be reported because of the donation. If the government chooses not to
record the qualifying asset in the government-wide financial statements, an expense must

be reported in place of the asset whether purchased or received as a gift. If the item is
received by donation, the revenue portion of the entry is required.
11. The modified approach is an alternative to depreciating infrastructure assets. This approach
allows the government to expense all maintenance costs rather than record depreciation but
only if certain guidelines are met. The government must accumulate certain information
about particular infrastructure assets within either a network or subsystem of a network. The
government must establish a minimum acceptable level for the network or subsystem of the
network and maintain documentation that this level is being maintained. An asset
management system must be in place to monitor and provide records of the infrastructure
assets.The ongoing condition must be assessed and an annual estimation made of the cost
of maintaining and preserving the infrastructure to meet the established condition levels.
Governments must determine whether this amount of work should be carried out simply to
avoid the recording of depreciation.
12. Depreciation of infrastructure assets is not recorded but all maintenance is expensed. Also,
in applying the modified approach, certain disclosures are required on the government-wide
financial statements. This includes disclosure that the government is accumulating certain
information about particular infrastructure assets within either a network or subsystem of a
network. The disclosure must include specific information about the minimum acceptable
level for the network or subsystem of the network and that this level is being maintained and
monitored by an asset management system.
13. A Management’s Discussion and Analysis (MD&A) similar to profit-making financial
statements is now required for state and local governments.The MD&A is presented before
the financial statements and provides the following information:
(1) A brief discussion of the financial statements and information provided and their
relationships to each other.
(2) Condensed financial information at least including
a. Total capital and other assets
b. Total long-term and other liabilities
c. Total net assets, including amounts invested, in capital assets net of debt, restricted
and unrestricted amounts.

d. Program revenues, by major source.
e. General revenues, by major source.
f. Total revenues.
g. Program expenses, by function.
h. Total expenses
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i.

(3)
(4)
(5)
(6)
(7)
(8)

Excess or deficiency before contributions to term and permanent fund principal,
special and extraordinary items, and transfers.
j. Contributions
k. Special and extraordinary items
l. Transfers
m. Change in net assets
n. Ending net assets

Overall financial position and results of operations
Balances and transactions analyses with explanation of significant changes
Analysis of significant variations between original and final budget amounts
Description of significant capital asset and long-term debt activity
Information about the modified approach for infrastructure assets
Any known facts, decisions, or conditions that are expected to significantly impact on
financial position or results of operations.

14. The Comprehensive Annual Financial Report (CAFR) includes three sections
a. Introductory Section
1. Letter of transmittal
2. Organizational chart
3. List of principal officers
b. Financial Section
1. MD&A (Management’s Discussion & Analysis)
2. General purpose financial statements
3. Auditor’s report
4. Other required supplementary information
c. Statistical Section
15. A general purpose government is a traditional government such as a city, county, or state.
A special purpose government (such as school system) can also be a primary government
for reporting purposes if certain requirements are met.
Classification as a special purpose government requires meeting three criteria:
a. It has a separately elected governing body.
b. It is legally independent. It can sue and be sued and buy, sell, and lease property.
c. It is fiscally independent of other state and local governments. It can determine its own
budget, levy and set tax rates, and issue bonded debt without outside approval.
16. Classification as a component unit requires meeting one of two criteria:
a. The activity is fiscally dependent on a state or local government. It cannot determine its
own budget, levy and set tax rates, and issue bonded debt without outside approval.

or
b. An outside primary government appoints a voting majority of the governing board of the
activity. The primary organization must also be able to do one or more of the following:
impose its will on the board of the component organization, or provide a financial benefit
to the component organization, or the component organization provides a financial
benefit to the primary government.

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17. If blended, component units are included in the primary government as if they were part of
the government. The component unit is legally separate but so intertwined and substantially
the same as the primary government so that inclusion is necessary for appropriate
presentation.
A discretely presented component unit is shown separately on the far right side of the
government-wide financial statements because the organization is not substantially the
same as the government and can stand alone.
18. The two government-wide financial statements are the Statement of Net Assets and the
Statement of Activities.
The Statement of Net Assets includes:
a. All assets and long-term liabilities.
b. Capital assets net of accumulated depreciation including newly acquired infrastructure
assets.
c. The primary government is divided into governmental or business-type activities.

d. The internal balances reflect inter-activity transactions between governmental and
business-type activities.
e. Discretely presented component units are shown to the far right of the statement.
The Statement of Activities includes:
a. Expenses by function.
b. Interest expense on long-term debt.
c. Related program revenues including charges for services, operating grants and
contributions, and capital grants and contributions.
d. Net expenses and revenues for each function.
e. Net expenses and revenues for each category of the government.
f. General revenues for governmental activities, business-type revenues, or component
units.
g. Special items that are significant transactions or other events within the control of
management that are either unusual or infrequent in nature.
h. Transfers between governmental and business-type activities.
19. The two fund-based financial statements for government funds are the Balance Sheet and
the Statement of Revenues, Expenditures, and Changes in Fund Balance. The Balance
Sheet measures current financial resources and uses modified accrual accounting and
includes:
a. Separate columns for the general fund and other major funds.
b. Non-major funds are combined and reported as “other governmental funds.”
c. Totals for government funds.
d. Fund Balance Reserved shows financial resources encumbered or reserved for other
purposes.
The Statement of Revenues, Expenditures, and Changes in Fund Balance includes:
a. The general fund and each major fund in separate columns, with all minor funds in
another column.
b. Revenues.
c. Expenditures.
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d. Other financing sources and uses.
e. Special items.
f. A reconciliation between the ending change in fund balances and the ending change in
net assets for governmental activities.
20. Program revenues are those revenues derived from a specific program (such as parks and
recreation) or from outsiders seeking to contribute to the cost of the function. They include
charges rendered for services, operating grants and contributions, and capital grants and
contributions.
General revenues are those from the population as a whole including property taxes, sales
taxes, unrestricted grants, and investment income. They are not traced to any individual
program.
This distinction is important because program revenues are matched with expenses for each
activity providing a net expense or revenue figure for each.
21. The net expenses and revenues format allows the users of a government’s financial
statements to determine the relative financial burden (or benefit) that each of its reporting
functions has on its taxpayers. In other words, the users of the statement can determine
what it costs for the government to provide benefits such as public safety.
22. On government-wide financial statements, internal service funds are combined with the
governmental activities (or business-type activities if more appropriate). Their placement is
based on the identity of the functions that they primarily serve. If an internal service fund is
mainly used to serve one or more governmental funds, then it should be included with the
governmental activities.

23. Fiduciary funds are not reported on government-wide financial statements because these
resources must be used for a purpose outside of the primary government.
24. From a reporting perspective, the FASB sets accounting standards for private colleges while
the GASB sets standards for public universities. Operationally, public universities receive
signficant funding from a government (usually a state government), whereas private
universities rely more on tuition charges. Because of the ability to generate funding from
the government, public colleges generally have smaller endowments.
25. Many public colleges and universities make the assumption that they are solely an
Enterprise Fund because they are open to the public but have a user charge (tuition and
other fees). For proprietary funds, government-wide financial statements and fund-based
financial statements are quite similar. Consequently, the authoritative guidelines allow such
schools to produce only fund-based financial statements and avoid the redundancy of also
creating government-wide statements.

Answers to Problems
1.

A

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2.

D ($49,000 expenditure on the first day of the capital lease and then
$70,000 more in the form of payments made over the life of the lease)

3.

B

4.

D

5.

A

6.

D

7.

C

8.

C

9.

A

10.

C

11.

B

12.

C

13.

A

14.

B

15.

A

16.

D

17.

B

18.

B

19.

A

20.

C

21.

A

22.

C

23.

A

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24.

A

25.

C

26.

C

27. The lease signed by the Enterprise Fund will be accounted for in the same
way on the government-wide financial statements (as a business-type
activity) and the fund-based financial statements (as a Proprietary Fund).
Leased Asset (present value)
Depreciation Expense (6 year life)
Accumulated Depreciation
Interest Expense (10 percent of $28,750)
Reduction in Liability ($6,000
payment less 2,875 interest)
Liability ($28,750 less $3,125)

$28,750

4,792
4,792
2,875
3,125
25,625

The lease signed by the General Fund will be accounted for in the following
manner for the government-wide financial statements (as a governmental
activity).
Leased Asset (present value)
Depreciation Expense (5 year life)
Accumulated Depreciation
Interest Expense (10 percent of $33,350)
Reduction in Liability ($8,000
payment less 3,335 interest)
Liability ($33,350 less $4,665)

$33,350
6,670
6,670
3,335
4,665
28,685

This same lease will be accounted for in the following manner on the fundbased financial statements (as a General Fund).
Initial Recording:
—Expenditures
—Other Financing Sources
Payment of $8,000:
—Expenditures-Interest

---Expenditures-Principal

$33,350
33,350
3,335
4,665

28. a.
GOVERNMENT-WIDE FINANCIAL STATEMENTS
January 1, 2008
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Assets—Capital Lease
Capital Lease Obligation

49,600
49,600

December 31, 2008
Capital Lease Obligation
Interest Expense ($49,600 x 12%)
Cash

6,048
5,952
12,000

Depreciation Expense—Governmental
Accumulated Depreciation (10-year life)

1,900

Depreciation Expense—Business-type
Accumulated Depreciation (4-year life)

7,650

1,900

7,650

b.
FUND-BASED FINANCIAL STATEMENTS
Enterprise Fund
January 1, 2008
Assets—Capital Lease
Capital Lease Obligation

30,600
30,600

December 31, 2008
Capital Lease Obligation

Interest Expense ($30,600 x 12%)
Cash

5,328
3,672
9,000

Depreciation Expense
Accumulated Depreciation—
Capital Lease (4-year life)

7,650
7,650

General Fund
Expenditures—Leased Assets
Other Financing Sources—
Capital Lease

19,000
19,000

Expenditures—Interest ($19,000 x 12%)
Expenditures—Principal
Cash

2,280
720
3,000

29. a.
GOVERNMENT-WIDE FINANCIAL STATEMENTS
January 1, 2008
Truck—Capital Lease
Cash
Capital Lease Obligation
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87,800
22,000
65,800

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December 31, 2008
Interest Expense ($65,800 x 8%)
Capital Lease Obligation
Cash
Depreciation Expense
Accumulated Depreciation (5-year life)

5,264
16,736
22,000
17,560

17,560

December 31, 2009 (obligation is now $49,064 or $65,800 less $16,736)
Interest Expense ($49,064 x 8%)
3,925
Capital Lease Obligation
18,075
Cash
22,000
Depreciation Expense
Accumulated Depreciation
b.
FUND-BASED FINANCIAL STATEMENTS
General Fund
January 1, 2008
Expenditures—Leased Asset
Other Financing Sources—Capital Lease
Expenditures—Lease Obligation
Cash

17,560
17,560

87,800
87,800
22,000
22,000

December 31, 2008
Expenditures—Interest

Expenditures—Lease Obligation
Cash

5,264
16,736

December 31, 2009
Expenditures—Interest
Expenditures—Lease Obligation
Cash

3,925
18,075

22,000

22,000

c.
FUND-BASED FINANCIAL STATEMENTS
Proprietary Fund (should be same as handling in government-wide
statements)
January 1, 2008
Truck—Capital Lease
87,800
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Cash
Capital Lease Obligation

December 31, 2008
Interest Expense ($65,800 x 8%)
Capital Lease Obligation
Cash
Depreciation Expense
Accumulated Depreciation

December 31, 2009
Interest Expense ($49,064 x 8%)
Capital Lease Obligation
Cash
Depreciation Expense
Accumulated Depreciation

22,000
65,800

5,264
16,736
22,000
17,560
17,560

3,925
18,075
22,000
17,560
17,560

30. a.
GOVERNMENT-WIDE FINANCIAL STATEMENTS
Accounted for as an Enterprise Fund (within the Business-type Activities)
December 31, 2008
Expense—Landfill Closure (3% of $1.9 million)
Landfill Closure Liability
Landfill Closure Liability
Cash
December 31, 2009
Expense—Landfill Closure
(9% of $2.1 million less $57,000)
Landfill Closure Liability
Landfill Closure Liability
Cash

57,000
57,000
50,000
50,000

132,000
132,000
50,000
50,000

b.
GOVERNMENT-WIDE FINANCIAL STATEMENTS (same as above)
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Accounted for as a General Fund (within the Governmental Activities)
December 31, 2008
Expense—Landfill Closure
Landfill Closure Liability
Landfill Closure Liability
Cash
December 31, 2009
Expense—Landfill Closure
Landfill Closure Liability
Landfill Closure Liability
Cash

57,000
57,000
50,000
50,000

132,000

132,000
50,000
50,000

c.
FUND-BASED FINANCIAL STATEMENTS (same as above)
Accounted for as an Enterprise Fund (within the Proprietary Funds)
December 31, 2008
Expense—Landfill Closure
Landfill Closure Liability
Landfill Closure Liability
Cash
December 31, 2009
Expense—Landfill Closure
Landfill Closure Liability
Landfill Closure Liability
Cash

57,000
57,000
50,000
50,000

132,000
132,000
50,000
50,000

d.
FUND-BASED FINANCIAL STATEMENTS

Accounted for as a General Fund (within the Governmental Funds)
December 31, 2008
Expenditures—Landfill Closure
Cash

50,000

December 31, 2009
Expenditures—Landfill Closure
Cash

50,000

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50,000

50,000
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31. a. GOVERNMENT-WIDE FINANCIAL STATEMENTS
December 31, 2008
Expense—Landfill Closure

1,296,000

Landfill Closure Liability

1,296,000

b. FUND-BASED FINANCIAL STATEMENTS
December 31, 2008
Despite the huge eventual liability, there is nothing recognized at the end
of 2008 because there is not a claim to any current financial resources.

32. a. GOVERNMENT-WIDE FINANCIAL STATEMENTS
December 31, 2008
Expenses—Compensated Absences
Liability—Compensated Absences
January 2009
Liability—Compensated Absences
Cash

1,200
1,200

1,200
1,200

b. FUND-BASED FINANCIAL STATEMENTS
December 31, 2008—This vacation is taken early enough in the following
year to necessitate the use of current financial resources.
Expenditures—Compensated Absences
Liability—Compensated Absences
January 2009

Liability—Compensated Absences
Cash

1,200
1,200

1,200
1,200

c. December 31, 2008—It is assumed that this vacation is taken late enough
in the following year so as not to affect current financial resources.
Therefore, there is no entry in 2008. There is not a claim that will require
current financial resources.
Late in 2009
Expenditures—Compensated Absences
Cash

McGraw-Hill/Irwin
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1,200
1,200

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33. a. GOVERNMENT—WIDE FINANCIAL STATEMENTS

Museum Piece—Artwork
300,000
Revenue—Donation

300,000

Museum Piece—Artwork
Accumulated Depreciation—Museum Piece
Book Value

300,000
(30,000)
270,000

Revenue—Donation

300,000

b.

Depreciation Expense

30,000

c.
Revenue – Donation
Expense – Artwork

300,000
300,000

34. a. GOVERNMENT-WIDE FINANCIAL STATEMENTS (Business-type Activities)
December 31, 2008
Museum Piece—Artwork
Cash

60,000
60,000

Depreciation Expense
Accumulated Depreciation

3,000
3,000

b. FUND-BASED FINANCIAL STATEMENTS (General Fund)
December 31, 2008
Expenditures—Artwork
Cash

60,000
60,000

35. GOVERNMENT-WIDE FINANCIAL STATEMENTS
One possibility: Infrastructure assets with depreciation recorded
Infrastructure Assets—Street Lights
100,000
Cash
100,000
Subsequent Entries

Depreciation Expense
Accumulated Depreciation
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10,000

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—Infrastructure Assets

10,000

Maintenance Expense—Infrastructure Assets
6,300
Cash
6,300
(if this work extends the life of the assets beyond the original expectation,
the debit here would be to Accumulated Depreciation.)

Infrastructure Assets—Street Lights
Cash

9,000
9,000

Second possibility: Infrastructure assets using the modified approach
Infrastructure Assets—Street Lights
100,000
Cash
100,000
Subsequent Entries
Maintenance Expense—Infrastructure Assets
Cash
Infrastructure Assets—Street Lights
Cash

6,300
6,300
9,000
9,000

36. a. The major criterion for inclusion in a government’s comprehensive annual
financial report is financial accountability.
b. An activity is viewed as a special purpose government if it meets the
following criteria:
1. Has a separately elected governing board
2. Is legally separate
3. Is fiscally independent of other governments
c. Legal separation is usually demonstrated by having corporate powers such
as the right to buy and sell property as well as the right to sue and be sued.
Corporate powers depends on state law so that determination of legal
separation may differ from one state to another.
d. The fiscal independence of a government is indicated by having authority
to do specific actions:
1. Determine and modify its budget without having to get the approval

of another government
2.
Levy taxes and set rate fees without having to get the approval of
another government
3.
Issue bonded debt without having to get the approval of another
government
e. A component unit is any activity that is legally separate from a primary
government but so closely tied to that government that some inclusion in
the government’s CAFR is warranted. The account balances of the
component unit are included along with the financial statements of the
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primary government. However, these reported figures must be discretely
presented separate from the balances of the primary government. The
financial information for the components is usually reported to the right of
the primary government. All component units may be shown individually,
combined into a single column, or combined into separate columns for
governmental and proprietary operations. As indicated in (g) below,
blending is also a possible way of reporting a component unit.
f. One of the criteria for identifying a component unit includes the primary
government’s ability to impose its will on the component unit. A primary
government is assumed to have this ability if it can (1) remove an

appointed board member at will, (2) modify or approve budgets, (3)
override decisions of the board, or (4) hire as well as dismiss the
individuals in charge of the day-to-day activities of the component unit.
g. Normally, as indicated above, the financial position and operations of a
component unit are shown separately from the primary government.
However, if the component unit is sufficiently intertwined with the primary
government it is included within the government figures. This inclusion is
referred to as blending.
h. A primary government may appoint a voting majority of an activity’s board
but have no financial accountability. In such cases, the activity is neither a
part of the primary government nor a component unit. However, because
a majority of the board is appointed by the primary government, the activity
is considered a related organization. Consequently, the identity of the
activity and its relationship must be spelled out in the notes to the financial
statements of the primary government.
37. Enterprise Fund
1/1/08
Cash
Other Financial Sources—
Capital Contribution
2/1/08
Cash
Notes Payable
3/1/08
No Journal Entry
4/1/08
Truck
Cash
5/1/08
Cash

Deferred Revenue
6/1/08
Prepaid Rent
Cash
7/1/08
Accounts Receivable
Revenues--Services
Cash
Accounts Receivable
McGraw-Hill/Irwin
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90,000
90,000
130,000
130,000
110,000
110,000
20,000
20,000
12,000
12,000
13,000
13,000
11,000
11,000
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8/1/08

Interest Expense
(130,000 x 12% x 6/12)
Notes Payable
Cash

9/1/08

Salaries Expense
Cash
Deferred Revenue
Revenue--Grant
10/1/08
Maintenance Expense
Cash
11/1/08
Salaries Expense
Cash
Deferred Revenue
Revenue—Grant
12/31/08 Accounts Receivable
Revenues--Services
Cash
Accounts Receivable

7,800
2,200

10,000

18,000
18,000
18,000
18,000
1,000
1,000
10,000
10,000
2,000
2,000
19,000
19,000
3,000
3,000

ADJUSTING ENTRIES
12/31/08 Interest Expense
(127,800 x 12% x 5/12)
6,390
Interest Payable
12/31/08 Depreciation Expense
(110,000 x 1/10 x 9/12)
8,250
Accumulated Depreciation
12/31/08 Rent Expense
7,000
Prepaid Rent
(to record expiration of rent at $1,000 a month)

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6,390

8,250
7,000

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38. a.

Functions/Programs
Governmental activities
General Government
Public Safety
Health and Sanitation
Interest on Debt
Total governmental activities

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CITY OF WILLIAMSON
STATEMENT OF ACTIVITIES

For Year Ended December 31, 2008

Expenses

$149,000
90,000
70,000
16,000
$325,000

Program Revenues
Operating
Charges for Grants and
Services Contributions

$ 5,000
3,000
42,000

Net (Expense) Revenue and
Changes in Net Assets
Capital
Grants and Governmental Business-type
Contributions Activities
Activities
Total

$14,000

($130,000)

( 87,000)
(28,000)
(16,000)
($261,000)

$130,000)
(87,000)
(28,000)
(16,000)
$261,000

General Revenues:
Property taxes
Franchise taxes
Investments (gain)

$401,000
42,000
13,000

$401,000
42,000
13,000

Total general revenues
Change in net assets
Net assets—beginning
Net assets—ending

$456,000

195,000
0
$195,000

$456,000
195,000
0
$195,000

_______
$14,000

$50,000

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38. a. (continued)
Computations:
General Governmental [$66,000 + 11,000 + 21,000 + 8,000 + 4,000 (salaries
payable) + 13,000 (compensated absences) + 14,000 (art work) + 12,000
(depreciation on building: $120,000/10 years)] = $149,000
Public Safety
[$39,000 + 18,000 + 5,000 + 9,000 (expired insurance) + 12,000
(supplies used) + 7,000 (salaries payable)] = $90,000
Health and Sanitation
[$22,000 + 3,000 + 9,000 + 12,000 + 8,000 (salaries

payable) + 16,000 (depreciation on equipment: $80,000/5 years)] = $70,000

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38. a. (continued)
CITY OF WILLIAMSON
STATEMENT OF NET ASSETS
December 31, 2008
Governmental
Activities
Assets
Cash and cash equivalents
Prepaid expenses
Investments
Receivables (net)
Inventories
Capital assets (net)
Total assets
Liabilities
Salaries payable
Compensating absences
liabilities
Noncurrent liabilities

Net assets
Invested in capital assets,
net of related debt
Unrestricted (deficit)
Total net assets

McGraw-Hill/Irwin
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Business-type
Activities

Total

$ 62,000
2,000
103,000
81,000
3,000
172,000
423,000

$ 62,000
2,000
103,000
81,000
3,000
172,000
$423,000

19,000

19,000

13,000
196,000
$228,000

13,000
196,000
$228,000

(24,000)
219,000
$195,000

(24,000)
219,000
$195,000

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38. (continued)
b.
CITY OF WILLIAMSON

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND
BALANCES
Governmental Funds
For Year Ended December 31, 2008
Revenues:
Property Taxes
Franchise Taxes
Charges for Services
Investments (Gain)
Expenditures:
General Government
Public Safety
Health and Sanitation

General Fund
$401,000
42,000
50,000
13,000
$506,000

Total Government Funds
$401,000
42,000
50,000
13,000
$506,000

$110,000
90,000

54,000

$110,000
90,000
54,000

4,000
16,000

4,000
16,000

200,000
$474,000

200,000
$474,000

32,000

32,000

200,000

200,000

200,000

200,000

Net Changes in Fund Balance
232,000
Fund Balances (Beginning)
-0Fund Balances (Ending)
$232,000

232,000
-0$232,000

Debt Service:
Principal Payment on Debt
Interest on Debt
Capital outlay
Total expenditures
Excess (Deficiency) of
Revenues over Expenses
Other Financing Sources:
Proceeds from Long-term Note
Total Other Sources

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