Solution manual advanced accounting 2nd by hamlen CH11

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CHAPTER 11
SOLUTIONS TO MULTIPLE CHOICE QUESTIONS, EXERCISES AND PROBLEMS

MULTIPLE CHOICE QUESTIONS
1.

a

2.

c

3.

c
All funding sources are restricted. The ending balance sheet appears as follows:
Cash
Total

4.

b

5.

b

6.

a

7.

a

$19,000,000 Accounts payable
_________ Fund balance—restricted
$19,000,000 Total

$ 1,000,000
18,000,000
$19,000,000

Enterprise funds use full accrual accounting. Cash received is $200,000 and book value
is $1,000,000, for a loss of $800,000.
8.

d

9.

d

10.

d
Agency funds report cash inflows as liabilities and cash outflows as reductions in
liabilities.

Solutions Manual, Chapter 11

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11.

c
The present value of the future lease payments is reported as expenditures and other
financing sources. The first lease payment of $500,000 is an expenditure, divided into
interest of $120,000 (= 4% x $3,000,000) and principal of $380,000 (= $500,000 $120,000).

12.

b
Governmental funds do not report accrued liabilities unless they will be paid from this
year’s available resources.

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EXERCISES

E11.1

Permanent Fund Transactions
Scholarship Fund
Journal Entries

2013 entries:
Cash—principal

1,010,000

Fund balance—
nonspendable
To record donation; $1,010,000 = $1,050,000 - $40,000.
Investments—principal

1,010,000

1,010,000

Cash—principal
To record investment of scholarship fund.
2014 entries:
Cash—income

1,010,000

70,000

Revenues

To record earnings on investments.
Expenditures

70,000

2,500

Cash—income
To record administrative expenses charged to income.
Expenditures

2,500

50,000
Cash—income

50,000

To record scholarship awards.
Investments—income

30,000

Gain on investments
To record appreciation in investments value.
Revenues
Gain on investments
Expenditures
Fund balance—restricted
To close revenues and expenditures.

Solutions Manual, Chapter 11

30,000

70,000
30,000
52,500
47,500

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E11.2

Capital Project Transactions

Capital Projects Fund
Bonds authorized—
unissued

900,000
Appropriations

900,000

To record budget.

Cash

900,000

Bond proceeds
To record issuance of bonds at par.
Capital outlay

900,000

900,000
Cash

900,000

To record purchase of building.
General Fund
Debt service: interest

18,000

Cash
To record interest paid on bonds issued by capital project fund.

18,000

All the above transactions are reported on the statement of revenues, expenditures, and changes
in fund balances of governmental funds. Bond proceeds are reported as other financing sources.
Capital outlay and debt service: interest are reported as expenditures.

E11.3
a.

Capital Project Transactions
Budget entry on 2/1/14:
Bonds authorized—
unissued

15,000,000

Appropriations
To record budget for police station.
2/10/14
Cash

15,000,000

100,000

Due to general fund
To record advance from general fund.

3/1/14
Expenditures
Cash
To record initial planning costs.
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100,000

80,000
80,000

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3/15/14
Cash

15,150,000
Bond proceeds
Due to debt service fund

15,000,000
150,000

To record bond issuance.
Due to debt service fund

150,000

Cash
To record remittance to debt service fund.

150,000

Due to general fund

100,000

Cash
To record repayment of general fund advance.
3/20/14
Encumbrances

100,000

14,000,000

Fund balance—restricted
To record awarding of contract.
6/10/14
Fund balance—restricted

14,000,000

8,000,000
Encumbrances

Expenditures

8,000,000
8,000,000

Contracts payable—
retainage
Cash

To record submission and payment of bills.

800,000
7,200,000

6/30/14 closing entries:
Appropriations

15,000,000
Expenditures
Encumbrances
Fund balance—restricted
To close expenditures and encumbrances against appropriations.
Bond proceeds

15,000,000

Bonds authorized—
unissued
To close other financing sources against estimated revenues.

Solutions Manual, Chapter 11

8,080,000
6,000,000
920,000

15,000,000

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b.

City of Portsmouth
Statement of Revenues, Expenditures, and Changes in Fund Balance
Capital Projects Fund
For the Year Ended June 30, 2014
Expenditures
Other financing sources:
Bond proceeds
Change in fund balance
Fund balance—beginning
Fund balance—ending

$(8,080,000)
15,000,000
6,920,000
0
$ 6,920,000

City of Portsmouth
Balance Sheet—Capital Projects Fund
For the Year Ended June 30, 2014
Assets
Cash (1)

Liabilities and fund balances
$ 7,720,000 Contracts payable—retainage
_______ Fund balance—restricted
Total
$ 7,720,000 Total
(1) $7,720,000 = $15,150,000 - $80,000 - $150,000 - $7,200,000.

E11.4

$

800,000
6,920,000
$ 7,720,000

Capital Project Calculations

a.

If a 3% return equals $2,424,000 then bond proceeds were $80,800,000 (=
$2,424,000/.03). The premium was $800,000, so the face value of the bonds was
$80,000,000.

b.

The $11,550,000 retainage balance indicates that the contract was awarded for
$77,000,000 (= $11,550,000/.15).

c.

The amount authorized for the project is typically equal to the face value of the bonds
issued, in this case $80,000,000.

d.
Excess appropriation over amount spent ($80,000,000-$77,000,000)
Revenues from temporary investments
Capital projects fund balance, end of year

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$3,000,000
2,424,000
$5,424,000

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E11.5

Adequacy of Capital Project Authorization

a.

Because the data show both bonds payable of $9,000,000 (presumably the bonds' face
value) and Cash—debt service of $150,000 (presumably the premium), the apparent bond
proceeds were $9,150,000.

b.

It appears that the actual total cost of the project will be $11,000,000. This amount
consists of $4,500,000 of construction in progress (presumably the expenditures to date)
and $6,500,000 of outstanding encumbrances. Thus the apparent cost overrun is
$1,000,000 (= $11,000,000 - original authorization of $10,000,000). Sufficient cash and
short-term investments exist to cover the total project cost but none to repay the
remaining $1,000,000 of bond anticipation notes payable. The township will likely have
to come up with a second $1,000,000 contribution.

c.

Cash—debt service: This should not be present as the $150,000 represents the bond
premium that should have been transferred to the debt service fund.
Construction in progress: Expenditures of $4,500,000 should be shown in the capital
projects fund.
Bonds payable: The capital projects fund should show bond proceeds of $9,000,000, as
other financing sources.

E11.6
a.

Debt Service Fund Transactions
1.
Required additions
Required earnings

(1)

3,250,000

65,000

Appropriations (1)
Fund balance—committed
$1,250,000 = .05 x $25,000,000

2.
Cash

1,250,000
2,065,000

3,250,000
Transfers in

Investments

3,250,000
Cash

Solutions Manual, Chapter 11

3,250,000

3,250,000

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3.
Cash

625,000
Investments
Gain on investments

Debt service: interest

580,000
45,000
625,000

Cash
4.
Cash

625,000

625,000
Investments
Gain on investments

Debt service: interest

600,000
25,000
625,000

Cash

625,000

5.
Cash

68,000
Investment income

68,000

6.
Unrealized loss (2)

10,000

Investments
(2) $(10,000) = $2,060,000 – ($3,250,000 - $580,000 - $600,000)

10,000

Closing entries:
Gain on sale of
investments
Transfers in
Investment income

70,000

3,250,000
68,000
Unrealized loss on
investments
Required additions
Required earnings
Fund balance—committed

Appropriations

1,250,000
Debt service: interest

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10,000
3,250,000
65,000
63,000

1,250,000

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b.

Town of Canterbury
Debt Service Fund
Statement of Revenues, Expenditures, and Changes in Fund Balances
For the Year Ended September 30, 2014
Revenues
Investment income
Gains on investments, net
Total revenues
Expenditures
Debt service: interest
Excess of revenues over (under) expenditures
Other financing sources (uses)
Transfer in
Change in fund balance
Fund balance—beginning
Fund balance—ending

$

68,000
60,000
128,000
(1,250,000)
(1,122,000)

3,250,000
2,128,000
0
$ 2,128,000

Town of Canterbury
Debt Service Fund
Balance Sheet
September 30, 2014
Assets
Cash
Investments
Total assets

Solutions Manual, Chapter 11

Fund balance
$68,000 Fund balance—committed
2,060,000
$2,128,000 Total fund balance

$2,128,000
_ _______
$2,128,000

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E11.7

Debt Service Fund Irregularities

These items are improperly reported in the debt service fund:
Water utility bonds payable and interest payable: The bonds and related interest are properly
accounted for in the water utility enterprise fund. Even if the bonds had been properly reported
in the debt service fund, under the modified accrual basis of accounting the debt service fund
would show bond proceeds and should not have accrued six-months' interest at December 31,
2014 because the interest is not legally due until June 30, 2015.
Apparently the debt service fund budget erroneously envisioned the water utility bonds as
revenue (estimated revenue = water utility bonds payable) and the appropriations represent the
six months' accrued interest on the water utility bonds. The fund balance reflects the
inappropriate budget entry.
Contributions from property owners: This account title and the explanation signify that this
special assessment debt belongs not in the debt service fund but in an agency fund.
Money received from issuance of the bonds payable and receipt of contributions from property
owners is reflected in the cash, due from water utility, and short-term investments accounts.
Corrective action: This debt service fund appears to have no substance without the special
assessment debt (for which the government has no liability) and the water utility debt (which
doesn't belong there). Thus the only remedy is to reverse the entire trial balance, driving all the
account balances to zero, and make sure all amounts are properly recorded in other funds.

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E11.8
a.

Internal Service Fund Financial Statements
City of Wooster
Central Supplies Storehouse
Statement of Revenues, Expenses, and Changes in Net Position
For the Year 2014
(in thousands)
Operating revenues
$ 19,200
Operating expenses (1)
18,000
Operating income
1,200
Capital contributions
25,000
Change in net position
26,200
Total net position—beginning
0
Total net position—ending
$ 26,200
City of Wooster
Central Supplies Storehouse
Statement of Net Position
At Fiscal Year-End 2014
(in thousands)
Assets
Current assets:
Cash (2)
Due from general fund
Inventory (3)

Total assets
Net position
Unrestricted
Total net position
Supporting calculations:
(1)
Cost of goods sold ($19,200/1.2)
Other operating expenses
Total operating expenses
(2)
Beginning cash balance
General fund transfer
Collections from other funds ($19,200 - $1,500)
Operating expenses
Purchase of supplies
Ending cash balance

Solutions Manual, Chapter 11

$ 20,700
1,500
4,000
$ 26,200
$ 26,200
$ 26,200

$ 16,000
2,000
$ 18,000

$

0
25,000
17,700
(2,000)
(20,000)
$ 20,700
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(3)
Beginning inventory balance
Plus: Purchases
Less: Cost of goods sold
Ending inventory balance
b.

0
20,000
(16,000)
$ 4,000

The general fund balance sheet shows supplies inventory of $300,000, and nonspendable
fund balance of $300,000. A liability for $1,500,000 appears on the balance sheet as
"Due to Central Supplies Storehouse." The general fund statement of revenues,
expenditures and changes in fund balances includes $12,000,000 of supplies

expenditures, and a $25,000,000 transfer out is listed under other financing uses for the
nonrefundable transfer.

E11.9
a.

$

Enterprise Fund Profitability Analysis
Modified accrual accounting:
ROA

=

ROS

x

TATO

(2,900)
310

=

(2,900)
1,100

x

1,100
310

(9.35)

=

(2.64)

x

3.54

Note: 310 = (300 + 320)/2
Business accounting:
ROA

=

ROS

x

TATO

300
3,300

=

300
1,300

x

1,300
3,300

.091

=

0.230

x

0.394

Note: 3300 = (3050 + 3550)/2

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b.

The business accounting data produce conventional results—a reasonable ROA and ROS
but a very low TATO—whereas the modified accrual accounting data produce negative
return measures but a very high TATO. We believe an analysis of this kind is of limited
value in a modified accrual accounting environment for the following reasons:
1.

The capital assets that make up most of the asset portfolio are not present under
modified accrual accounting. Thus the denominator of the ROA and TATO is
significantly understated.

2.

Related to 1. is the modified accrual accounting requirement that capital asset
acquisitions be recorded as expenditures and not capitalized in the fund. This
treatment causes income measures to be drastically understated when capital asset
acquisitions are significant.

E11.10
a.

Special Assessment Project
To find the amount of an annuity (the annual assessments) with present value sufficient
to cover the $3,000,000 bond liability, we divide the present value of a 10-payment
ordinary annuity of $1 discounted at 6% into the $3,000,000 present obligation.
407,609 = 3,000,000/7.360

b.

Capital Projects Fund
Cash

3,000,000
Bond proceeds

3,000,000

Debt Service Fund
Assessments receivable—
current
Assessments receivable—
deferred

407,609
3,668,481
Revenue
Deferred revenue

407,609
3,668,481

Cash

407,609
Assessments receivable—
current

Expenditures

407,609
180,000

Cash

180,000

Interest = .06 x $3,000,000

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Investments

227,609

Cash
Amount invested = $407,609 - $180,000
c.

227,609

Capital Projects Fund
Cash

3,000,000
Bond proceeds

3,000,000

Agency Fund
Assessments receivable—
current

407,609
Due to special assessment
bondholders

Cash

407,609
407,609

Assessments receivable—
current
Due to special assessment
bondholders

407,609

180,000
Cash

Investments

227,609
Cash

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180,000

227,609

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E11.11
1.

Capital Asset Transactions
Recorded in general fund:
Capital outlay

1,000,000

Cash
1,000,000
Reported as a reduction in fund balance (expenditure); asset not reported in general fund
balance sheet.
2.

Recorded in internal service fund:
Equipment

25,000

Cash
Reported as a long-term asset in the internal service fund’s balance sheet.
3.

Recorded in capital projects fund:
Cash

25,000

2,000,000
Bond proceeds

2,000,000

Capital outlay

2,000,000
Cash
2,000,000
Outlay reported as a reduction in fund balance (expenditure); asset not reported in capital
projects fund’s balance sheet. Bond proceeds increase fund balance (other financing
sources); liability not reported in balance sheet.
4.

Recorded in enterprise fund:
Cash

800,000
Loan payable

Equipment

800,000
800,000

Cash
800,000
Equipment reported as an asset in the enterprise fund=s balance sheet. Loan reported as
liability in balance sheet.

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E11.12
a.

Lease Transactions
The present value of the lease is $2,180,720, computed as follows:
Present value of annuity of 5 payments, 4%: 4.4518 x 400,000 =
Plus first payment
Total present value

$1,780,720
400,000
$2,180,720

7/1/13
Expenditures—capitalized
leases

2,180,720
Other financing sources—
capitalized leases

Expenditures—principal

2,180,720
400,000

Cash

400,000

6/30/14
Expenditures—interest
Expenditures—principal

71,229
328,771

Cash
Interest = 4% x ($2,180,720 – 400,000) = $71,229

400,000

6/30/15
Expenditures—interest
Expenditures—principal

58,078
341,922

Cash
Interest = 4% x ($2,180,720 – 400,000 – 328,771) = $58,078

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400,000

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b.

7/1/13
Expenditures—rent

400,000
Cash

6/30/14
Expenditures—rent

400,000

400,000
Cash

6/30/15
Expenditures—rent

400,000
Cash

c.

400,000

400,000

Capital lease expenditures are $2,180,720 higher in total than operating lease
expenditures, because the present value of the payments is reported as an expenditure for
acquisition of a capital asset. Capital lease accounting mimics acquisition of a capital
asset (expenditure) financed by debt (other financing source). Payments on the debt are
expenditures for principal and interest, and are the same amount in total as rent
expenditures reported for an operating lease.

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PROBLEMS
P11.1

Special Revenue Fund

a.
Cash

1,800,000

Transfers in
Federal grant revenue
To record transfer from general fund and receipt of federal grant.
Investments

900,000
900,000

320,000

Cash
To record investment of $320,000 in cash.
Encumbrances

320,000

1,750,000
Fund balance—restricted
Fund balance—committed

900,000
850,000

To record award of contract.
Fund balance—restricted
Fund balance—committed

900,000
850,000

Encumbrances
To reverse encumbrances for contract.
Expenditures

1,750,000

1,750,000

Accounts payable
To record deliveries of wildlife, and billings.
Cash

1,750,000

18,000
Investment income

18,000

To record investment revenue.
Cash

320,000

Investments
To record liquidation of investments.
Accounts payable
Cash
To record payment to contractor.

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320,000

1,670,000
1,670,000

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Transfers out

68,000

Due to general fund
68,000
To reclassify fund balance to be transferred to general fund; $68,000 = $1,800,000 –
320,000 + 18,000 + 320,000 – 1,670,000 – 80,000.
Federal grant revenue
Transfers in
Investment income

900,000
900,000
18,000

Expenditures
Transfers out
To close revenues, transfers in, expenditures, and transfers out.
b.

1,750,000
68,000

Grand City
Special Revenue Fund
Balance Sheet
December 31, 2013
Assets
Cash (1)

Liabilities and fund balance
$ 148,000 Accounts payable
______ Due to general fund
$ 148,000

(1) Cash account supporting computations:
Inflows($18,000 + 320,000 + 900,000 + 900,000)
Outflows ($1,670,000 + 320,000)
Ending balance

Solutions Manual, Chapter 11

$
$

80,000
68,000
148,000

$ 2,138,000
1,990,000
$ 148,000

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P11.2

Reporting for Endowment

a.

The trust benefits County public programs, and only earnings may be used to subsidize
the center’s education activities. Therefore its activities are reported in a permanent fund.

b.

Journal entries (not required):
Investment in bonds—princ.
Investment in CDs—princ.

485,000
25,000

Fund balance—
nonspendable
To record initial bequest and investment of cash in CDs.
Cash—income

510,000

30,000
Transfers in

30,000

To record transfer from County.

Education expenditures

55,000

Cash—income
Accounts payable—income
To record education expenditures for the year.
Interest receivable
Cash—income

50,000
5,000

375
375

Interest revenue—income
To record CD interest. $750 = $25,000 x 3%.
Cash—income
Investment in bonds—
income

750

25,000

4,100
Interest revenue
29,100
To record interest on bonds, using the effective interest method. $29,100 = 6% x

$485,000, and $25,000 = 5% x $500,000.

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Scheurer-Smith Trust Fund
Statement of Revenues, Expenditures and Changes in Fund Balances
For the Year Ended December 31, 2012
Revenues
Bond interest
CD interest

$ 29,100
750
29,850
(55,000)
(25,150)

Expenditures
Excess of revenues over (under) expenditures
Other financing sources:
Transfer in from County
Excess of revenues and other financing sources over
expenditures

30,000
$

4,850

Scheurer-Smith Trust Fund
Balance Sheet
December 31, 2012
Assets
Cash—income $30,000 + $375 - $50,000 + $25,000)
Interest receivable—income
Investment in bonds—income
Investment in CDs—principal
Investment in bonds—principal
Total assets
Liabilities and fund balances
Accounts payable—income
Fund balance—nonspendable
Fund balance—restricted
Total liabilities and fund balances

$

5,375
375
4,100
25,000
485,000
$519,850

$

5,000
510,000
4,850
$519,850

Note: Using the effective interest method, the reported investment increases each year.
This increase represents spendable income.

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P11.3
a.

Capital Projects and Debt Service Activities
Books of Capital Projects Fund
Journal entries for fiscal 2013:
(1)
Bonds authorized—unissued
Estimated financing sources—
federal grant

100,000,000

200,000,000

Appropriations
To record the budget for the capital project.

300,000,000

Due from federal government

200,000,000
Federal grant revenue

200,000,000

To record federal grant.
(2)
Cash

1,000,000

Due to general fund
To record advance from general fund.

1,000,000

(3)
Expenditures

950,000

Cash
To record engineering and architectural costs.

950,000

(4)
Cash

100,500,000

Bond proceeds
Due to debt service
fund
To record issuance of $100,000,000 bonds for $100,500,000.
Due to debt service fund

100,000,000
500,000

500,000

Cash
To record transfer of bond premium to debt service fund.
(5)
Cash
Due from federal
government
To record partial receipt of federal grant.

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500,000

65,000,000
65,000,000

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(6)
Encumbrances

285,000,000
Fund balance—
restricted

(7)
Due to general fund

285,000,000

1,000,000

Cash
To record repayment to general fund.
(8)
Fund balance—restricted

1,000,000

180,000,000

Encumbrances
To reverse encumbrances for invoices received.
Expenditures

180,000,000

180,000,000

Contracts payable
Contracts payable—
retainage
To record billing from contractors.
Contracts payable

144,000,000
36,000,000

120,000,000
Cash

120,000,000

To record payment to contractors.
September 30, 2013 closing entries:
Federal grant revenue

200,000,000
Bond proceeds
100,000,000
Bonds authorized—
unissued
Estimated financing
sources—federal grant
To close actual against budgeted revenues and other financing sources.
Appropriations

200,000,000

300,000,000

Expenditures
Encumbrances
Fund balance—
restricted
To close actual expenditures and encumbrances against appropriations.

Solutions Manual, Chapter 11

100,000,000

180,950,000
105,000,000
14,050,000

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Journal entries for fiscal 2014:
Encumbrances

105,000,000

Fund balance—
restricted
To restore encumbrances closed at year-end.
Fund balance—restricted

105,000,000

105,000,000

Appropriations
To establish appropriations for the year.
(3)
Cash

105,000,000

135,000,000

Due from federal
government
To record receipt of balance of federal grant.

(4)
Fund balance—restricted

135,000,000

105,000,000

Encumbrances
To record reversal of encumbrances.
Expenditures

105,000,000

115,000,000
Contracts payable
Contracts payable—
retainage

92,000,000
23,000,000

To record invoices.
Contracts payable

116,000,000
Cash

116,000,000

To record payment to contractors.

(5)
Contracts payable—retainage

59,000,000
Cash

59,000,000

To record payment of retainage.
Transfers out
Cash
To record transfer of remaining cash to debt service fund.

©Cambridge Business Publishers, 2013
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4,050,000
4,050,000

Advanced Accounting, 2nd Edition


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Closing entries for 2014:
Fund balance—restricted
Appropriations

14,050,000
105,000,000

Expenditures
Transfers out
To close expenditures and transfers against appropriations.

115,000,000
4,050,000

Books of Debt Service Fund
Journal entries for fiscal 2013:
No budget entry is required because no additions or expenditures are planned for 2013.
(4)
Cash

500,000

Transfers in
To record transfer of bond premium.

500,000

Closing entry for 2013:
Transfers in

500,000
Fund balance—
committed

500,000

To record closing of transfer.
Journal entries for fiscal 2014:
Required additions

5,000,000
Appropriations

5,000,000

To record budget for 2014.
(1)
Cash

5,000,000

Transfers in
To record transfer from general fund.
(2)
Expenditures
Cash
To record payment of bond interest.

Solutions Manual, Chapter 11

5,000,000

5,000,000
5,000,000

©Cambridge Business Publishers, 2013

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