175050473-Chapter-17-IMSM

Chapter 20

Chapter 17

Accounting for State and Local Governments, Part IIChapter 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.

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.Managements 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.a.It must be fiscally dependent upon the primary organization orb.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 ObjectivesHaving 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 government-wide 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 governments infrastructure assets such as bridges and sidwalks.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 QuestionIs 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 commissions 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 commissions budget must be approved by the county government, the commission would appear to qualify as a component unit for Harland County.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.

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:

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 Managements 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

i.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

(3)Overall financial position and results of operations

(4)Balances and transactions analyses with explanation of significant changes

(5)Analysis of significant variations between original and final budget amounts

(6)Description of significant capital asset and long-term debt activity

(7)Information about the modified approach for infrastructure assets

(8)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 (Managements Discussion & Analysis)2.General purpose financial statements

3.Auditors 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.

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.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 governments 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

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.A22.C

23.A

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)$28,750

Depreciation Expense (6 year life)4,792

Accumulated Depreciation4,792

Interest Expense (10 percent of $28,750)2,875

Reduction in Liability ($6,000

payment less 2,875 interest)3,125

Liability ($28,750 less $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)$33,350

Depreciation Expense (5 year life)6,670

Accumulated Depreciation6,670

Interest Expense (10 percent of $33,350)3,335

Reduction in Liability ($8,000

payment less 3,335 interest)4,665

Liability ($33,350 less $4,665)28,685

This same lease will be accounted for in the following manner on the fund-based financial statements (as a General Fund).

Initial Recording:

Expenditures$33,350

Other Financing Sources33,350

Payment of $8,000:

Expenditures-Interest3,335---Expenditures-Principal 4,665

28.a.

GOVERNMENT-WIDE FINANCIAL STATEMENTS

January 1, 2008

AssetsCapital Lease49,600

Capital Lease Obligation

49,600

December 31, 2008

Capital Lease Obligation6,048

Interest Expense ($49,600 x 12%)5,952

Cash

12,000

Depreciation ExpenseGovernmental1,900

Accumulated Depreciation (10-year life)

1,900

Depreciation ExpenseBusiness-type7,650


7,650

b.

FUND-BASED FINANCIAL STATEMENTS

Enterprise Fund

January 1, 2008AssetsCapital Lease30,600


30,600

December 31, 2008


Interest Expense ($30,600 x 12%)3,672

Cash

9,000

Depreciation Expense7,650

Accumulated Depreciation

Capital Lease (4-year life)

7,650

General Fund

ExpendituresLeased Assets19,000

Other Financing Sources

Capital Lease

19,000

ExpendituresInterest ($19,000 x 12%)2,280

ExpendituresPrincipal720

Cash

3,000

29.a.


January 1, 2008TruckCapital Lease87,800

Cash

22,000


65,800

December 31, 2008

Interest Expense ($65,800 x 8%) 5,264


Cash

22,000



17,560

December 31, 2009 (obligation is now $49,064 or $65,800 less $16,736)Interest Expense ($49,064 x 8%) 3,925


Cash

22,000



17,560

b.


General Fund

January 1, 2008

ExpendituresLeased Asset87,800

Other Financing SourcesCapital Lease

87,800

ExpendituresLease Obligation 22,000

Cash

22,000

December 31, 2008

ExpendituresInterest 5,264

ExpendituresLease Obligation16,736

Cash

22,000

December 31, 2009


ExpendituresLease Obligation18,075

Cash

22,000

c.


Proprietary Fund (should be same as handling in government-wide statements)

January 1, 2008

TruckCapital Lease87,800

Cash

22,000


65,800

December 31, 2008



Cash

22,000



17,560

December 31, 2009



Cash

22,000



17,560

30.a.


Accounted for as an Enterprise Fund (within the Business-type Activities)December 31, 2008ExpenseLandfill Closure (3% of $1.9 million)57,000

Landfill Closure Liability

57,000

Landfill Closure Liability50,000

Cash

50,000

December 31, 2009ExpenseLandfill Closure

(9% of $2.1 million less $57,000)132,000


132,000


Cash

50,000

b.

GOVERNMENT-WIDE FINANCIAL STATEMENTS (same as above)

Accounted for as a General Fund (within the Governmental Activities)

December 31, 2008

ExpenseLandfill Closure57,000


57,000


Cash

50,000

December 31, 2009



132,000


Cash

50,000

c.

FUND-BASED FINANCIAL STATEMENTS (same as above)Accounted for as an Enterprise Fund (within the Proprietary Funds)

December 31, 2008ExpenseLandfill Closure57,000


57,000


Cash

50,000

December 31, 2009



132,000


Cash

50,000

d.

FUND-BASED FINANCIAL STATEMENTS Accounted for as a General Fund (within the Governmental Funds)

December 31, 2008

ExpendituresLandfill Closure50,000

Cash

50,000

December 31, 2009

ExpendituresLandfill Closure 50,000

Cash

50,000

31. a.GOVERNMENT-WIDE FINANCIAL STATEMENTSDecember 31, 2008

ExpenseLandfill Closure1,296,000

Landfill Closure Liability1,296,000

b.FUND-BASED FINANCIAL STATEMENTS

December 31, 2008Despite 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

ExpensesCompensated Absences1,200

LiabilityCompensated Absences

1,200

January 2009

LiabilityCompensated Absences1,200

Cash

1,200

b.FUND-BASED FINANCIAL STATEMENTS

December 31, 2008This vacation is taken early enough in the following year to necessitate the use of current financial resources.

ExpendituresCompensated Absences1,200

LiabilityCompensated Absences

1,200

January 2009

LiabilityCompensated Absences1,200

Cash

1,200

c. December 31, 2008It 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 2009ExpendituresCompensated Absences1,200

Cash

1,200

33.a.GOVERNMENTWIDE FINANCIAL STATEMENTS

Museum PieceArtwork300,000

RevenueDonation300,000

b.


Accumulated DepreciationMuseum Piece (30,000) Book Value 270,000

RevenueDonation300,000

Depreciation Expense 30,000

c.

Revenue Donation 300,000

Expense Artwork 300,000

34.a.GOVERNMENT-WIDE FINANCIAL STATEMENTS (Business-type Activities)

December 31, 2008


Cash

60,000



3,000

b. FUND-BASED FINANCIAL STATEMENTS (General Fund)

December 31, 2008

ExpendituresArtwork60,000

Cash

60,000

35. GOVERNMENT-WIDE FINANCIAL STATEMENTS

One possibility: Infrastructure assets with depreciation recorded

Infrastructure AssetsStreet Lights100,000

Cash

100,000

Subsequent Entries



Infrastructure Assets

10,000

Maintenance ExpenseInfrastructure Assets6,300

Cash

6,300

(if this work extends the life of the assets beyond the original expectation, the debit here would be to Accumulated Depreciation.)


Cash

9,000

Second possibility: Infrastructure assets using the modified approach


Cash

100,000

Subsequent Entries

Maintenance ExpenseInfrastructure Assets 6,300

Cash

6,300

Infrastructure AssetsStreet Lights 9,000

Cash

9,000

36. a.The major criterion for inclusion in a governments 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 board2.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 governments CAFR is warranted. The account balances of the component unit are included along with the financial statements of the 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 governments 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 activitys 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

1/1/08Cash90,000

Other Financial Sources

Capital Contribution

90,000

2/1/08Cash130,000

Notes Payable

130,000

3/1/08No Journal Entry

4/1/08Truck110,000

Cash

110,000

5/1/08 Cash20,000

Deferred Revenue

20,0006/1/08Prepaid Rent12,000

Cash

12,000

7/1/08Accounts Receivable13,000

Revenues--Services

13,000

Cash11,000

Accounts Receivable

11,000

8/1/08Interest Expense

(130,000 x 12% x 6/12)7,800

Notes Payable2,200

Cash

10,000

9/1/08Salaries Expense18,000

Cash

18,000

Deferred Revenue 18,000

Revenue--Grant

18,000

10/1/08Maintenance Expense1,000

Cash

1,000

11/1/08Salaries Expense10,000

Cash

10,000

Deferred Revenue 2,000

RevenueGrant

2,000

12/31/08Accounts Receivable19,000

Revenues--Services

19,000

Cash 3,000

Accounts Receivable

3,000

ADJUSTING ENTRIES

12/31/08Interest Expense

(127,800 x 12% x 5/12)6,390

Interest Payable

6,390

12/31/08Depreciation Expense

(110,000 x 1/10 x 9/12) 8,250


8,250

12/31/08Rent Expense7,000

Prepaid Rent

7,000

(to record expiration of rent at $1,000 a month)

38.a. CITY OF WILLIAMSON

STATEMENT OF ACTIVITIES

For Year Ended December 31, 2008

Net (Expense) Revenue andProgram Revenues

Changes in Net Assets

OperatingCapital

Charges forGrants and Grants andGovernmental Business-typeFunctions/ProgramsExpensesServices ContributionsContributions ActivitiesActivitiesTotal

Governmental activities

General Government$149,000$ 5,000

$14,000($130,000)

$130,000)

Public Safety 90,0003,000

( 87,000)

(87,000)

Health and Sanitation 70,000 42,000

(28,000)

(28,000)

Interest on Debt 16,000

_______(16,000)

(16,000)Total governmental activities$325,000$50,000

$14,000($261,000)

$261,000General Revenues:

Property taxes

$401,000 $401,000

Franchise taxes 42,000

42,000

Investments (gain) 13,000

13,000

Total general revenues

$456,000

$456,000Change in net assets

195,000

195,000

Net assetsbeginning

0

0Net assetsending

$195,000

$195,000

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

38. a.(continued)CITY OF WILLIAMSON

STATEMENT OF NET ASSETS

December 31, 2008

GovernmentalBusiness-type

ActivitiesActivitiesTotal

Assets

Cash and cash equivalents$ 62,000

$ 62,000

Prepaid expenses2,000

2,000

Investments 103,000

103,000

Receivables (net)81,000 81,000

Inventories 3,000

3,000

Capital assets (net) 172,000

172,000

Total assets423,000

$423,000Liabilities

Salaries payable 19,000

19,000

Compensating absences

liabilities

13,000

13,000

Noncurrent liabilities196,000

196,000

$228,000

$228,000Net assets

Invested in capital assets,

net of related debt (24,000)

(24,000)

Unrestricted (deficit) 219,000

219,000

Total net assets $195,000

$195,00038. (continued)b.

CITY OF WILLIAMSON

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES

Governmental Funds

For Year Ended December 31, 2008Revenues:General FundTotal Government FundsProperty Taxes$401,000$401,000

Franchise Taxes 42,000 42,000

Charges for Services 50,000 50,000

Investments (Gain) 13,000 13,000

$506,000$506,000Expenditures:

General Government$110,000$110,000

Public Safety 90,000 90,000

Health and Sanitation 54,00054,000

Debt Service:

Principal Payment on Debt4,000 4,000

Interest on Debt16,00016,000

Capital outlay 200,000 200,000

Total expenditures$474,000$474,000Excess (Deficiency) of

Revenues over Expenses32,00032,000Other Financing Sources:

Proceeds from Long-term Note200,000200,000Total Other Sources200,000200,000

Net Changes in Fund Balance232,000232,000

Fund Balances (Beginning) -0- -0-

Fund Balances (Ending)$232,000$232,00038. b.(continued)CITY OF WILLIAMSON

BALANCE SHEET

Governmental Funds

December 31, 2008

Total

General FundGovernmental Funds

Assets

Cash and cash equivalents $ 62,000 $ 62,000

Prepaid expenses2,0002,000

Investments 103,000 103,000

Receivables, net 81,000 81,000

Inventories 3,000 3,000

Total assets$251,000$251,000Liabilities

Salaries payable 19,000 19,000

Total Liabilities$19,000$19,000Fund Balances

Reserved for encumbrances12,00012,000

Reserved for inventories3,0003,000

Reserved for prepaid expenses2,0002,000

Unreserved215,000215,000

Total Fund Balances232,000232,000Total Liabilities

and Fund Balances$251,000$251,00039. a. CITY OF BERNARD

STATEMENT OF ACTIVITIES

For Year Ended December 31, 2008

Net (Expense) Revenue andProgram Revenues

Changes in Net Assets

Charges forGrants andGovernmental

Functions/ProgramsExpensesServices Contributions ActivitiesTotal

Governmental activities:General Government$180,000$15,000

($165,000)($165,000)

Public Safety 158,000 8,000

( 150,000) ( 150,000)

Public Works 159,500 12,000

(147,500) (147,500)

Health and Sanitation 37,00031,000$25,000 19,000 19,000

Interest on Debt 42,000_____________(42,000) (42,000)Total Governmental

activities$576,500$66,000$25,000($485,500)($485,500)

General Revenues:

Property Taxes$630,000$630,000

Sales Taxes 99,00099,000

Dividend Income 20,00020,000

Gain on Sale of Investments 14,00014,000Gain on Value of Investments 5,0005,000

Total general revenues $768,000$768,000

Change in net assets:

Change During 2008 $ 282,500$ 282,500

Net assetsbeginning 120,000 120,000Net assetsending$402,500$402,500

39. a.(continued)Computations:

General Governmental[$90,000 + 9,000 + 25,000 + 12,000 + 14,000 (salaries payable) + 30,000 depreciation] = 180,000

Public Safety

[$94,000 + 16,000 + 12,000 + 10,000 + 17,000 (salaries payable) + 9,000 depreciation] = $158,000

Public Works

[$69,000 + 13,000 + 9,000 + 5,000 (salaries payable) + 14,000 supplies expense + 39,000 landfill closing costs + 10,500 depreciation] = $159,500

Health and Sanitation[$22,000 + 4,000 + 4,000 + 7,000] =37,000

Landfill[260,000 x 15%] = $39,000

39. a.(continued)CITY OF BERNARD

STATEMENT OF NET ASSETS

December 31, 2008

Governmental

ActivitiesTotals

Assets

Current Assets:

Cash and Cash

Equivalents $139,000 $139,000

Prepaid Insurance6,0006,000

Investments116,000116,000

Receivables (net) 120,000120,000

Inventories 6,000 6,000

Total Current Assets387,000387,000

Capital Assets:

Building (net of depreciation)$240,000$240,000

Building (net of depreciation) 199,500199,500

Equipment (net of depreciation) 81,00081,000

Truck (capital lease) $64,000 $64,000Total Assets$971,500$971,500Liabilities

Current Liabilities:

Wages Payable$36,000$36,000

Noncurrent Liabilities:

Lease Obligation Payable$64,000$64,000

Closure Liability Landfill39,000 39,000

Long-term Notes Payable430,000430,000

Total Liabilities569,000569,000Net assets

Invested in capital assets,

net of related debt154,500154,500

Unrestricted (deficit) 248,000248,000

Total Net Assets $402,500$402,50039. (continued)b.

CITY OF BERNARD

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES

Governmental Funds

For Year Ended December 31, 2008 General Fund

Revenues:

Property taxes$630,000

Sales taxes 99,000

Dividend income 20,000

Charges for services 66,000

Grant 25,000

Investments (realized gain) 14,000Investments (unrealized gain) 5,000 Total$859,000

Expenditures:

Current:

General governmental $150,000

Public safety 149,000

Public works 122,000

Health and sanitation 37,000

Debt Service:

Principal payment on debt10,000

Interest on debt 42,000

Capital Outlay:

Building210,000

Equipment 90,000

Truckleased 64,000

Total expenditures $874,000

Excess (deficiency) of revenues

over expenses)$(15,000)Other Financing Sources:

Proceeds from long-term note200,000Capitalized leasetruck 64,000Total other financing sources264,000Net changes in fund balance249,000

Fund balancebeginning 90,000

Fund balanceendingunrestricted

and unreserved$339,000*

39. b.(continued)*The fund balance shown here is $339,000. Of that amount, $31,000 is reserved for encumbrances, leaving $308,000 as an unreserved amount. Two additional fund balance amounts will be added to the balance sheet: one for supplies and one for prepaid expenses.CITY OF BERNARD

BALANCE SHEET

Governmental Funds

December 31, 2008

General Fund

Assets

Cash and cash equivalents

$139,000

Investments

116,000

Receivables, net

120,000

Supplies

6,000

Prepaid Insurance

6,000

Total Assets

$387,000

Liabilities and Fund Balances

Liabilities:

Salaries Payable

$ 36,000

Fund Balances:

Restricted

Supplies

6,000

Prepaid Insurance

6,00012,000

Unrestricted

Reserved for encumbrances

Equipment$24,000

Supplies 7,00031,000

Unrestricted, unreserved$308,000 339,000

Total Fund Balance

$351,000

Total Liabilities and Fund Balance

$387,00040. One way to accumulate the information for the government-wide financial statements is to prepare the journal entries for the listed transactions.

a.The transfer is within the governmental activities and is not recorded.

Governmental ActivitiesParks and Recreation

Land 20,000

Cash

20,000

b.Governmental ActivitiesParks and Recreation

Cash 110,000

Bonds Payable

110,000

c.Governmental ActivitiesGeneral

Cash 510,000

Property Tax Receivable 90,000

General RevenuesProperty Taxes 600,000

d.Governmental ActivitiesParks and Recreation

Building 80,000

Cash

80,000

e.Governmental ActivitiesParks and Recreation

Sidewalk 10,000

Cash

10,000

f.Governmental ActivitiesParks and Recreation

Cash 8,000

Program RevenuesPark

8,000

g.Business-Type ActivitiesCivic Auditorium

Parking Deck 200,000

Cash

20,000

Notes Payable 180,000

40.(continued)h.Governmental ActivitiesEducation

Cash 100,000

Deferred Revenues

100,000

ExpensesSchool Lunches 37,000

Cash

37,000

Deferred Revenues 37,000

Program RevenuesOperating Grant

37,000

i.Governmental ActivitiesEducation

Cash 5,400

ReceivablesSchool Fees 600

Program RevenuesSchool Fees

6,000

j.Governmental ActivitiesEducation

Supplies 22,000

Cash

22,000

ExpensesSupplies 17,000

Supplies

17,000

k.Governmental ActivitiesEducation

ExpensesArt 80,000

Program RevenuesCapital Gift

80,000

l.Governmental ActivitiesGeneral

Transfers 20,000

Cash

20,000

Business-Type ActivitiesCivic Auditorium

Cash 20,000

Transfers

20,000

m.No entry

40.(continued)n.Governmental ActivitiesEducation

School Bus 102,000

Cash

102,000

o.Governmental ActivitiesEducation

ExpensesSalaries 270,000

ExpensesVacations 23,000

Cash

240,000

Salary Payable

30,000

Vacations Payable

23,000

p.Business-Type ActivitiesCivic Auditorium



Cash

42,000

Salary Payable

3,000

Vacations Payable

5,000

q.Business-Type ActivitiesCivic Auditorium

Cash 110,000

Rent Receivable 20,000

Program RevenuesRent

130,000

r.Governmental ActivitiesParks and Recreation

ExpensesMaintenance 9,000

Cash

9,000

s.Governmental ActivitiesParks and Recreation

ExpensesInterest 9,000

Bonds Payable 5,000

Cash

14,000

t.Business-Type ActivitiesCivic Auditorium


Interest Payable

13,000

40.(continued)

Also:Depreciation Entries:

Governmental ActivitiesEducation

(School Building$1,000,000/20)

ExpensesDepreciation 50,000


50,000

Governmental ActivitiesParks and Recreation

(Building$80,000/10 x )



4,000

Business-Type ActivitiesCivic Auditorium

($600,000/30)



20,000

Governmental ActivitiesEducation

(School Bus$102,000/5 x 3/12)



5,100

Business-Type ActivitiesParking Deck

($200,000/20 x )



5,000

40.(continued)City of Pfeiffer

Statement of Activities

Government-Wide Financial Statements

Year ending December 31, 2008

ProgramGrants Net (Expenses)/Revenues

Component

Expenses Revenues and GiftsGovernmentalBusiness-TypeTotalUnit

Governmental Activities

Education $482,100 $ 6,000 $117,000 $(359,100)

$(359,100)

Parks and Recreation 22,000 8,000 ( 14,000)

( 14,000) Total for

Governmental

Activities $504,100 $14,000 $117,000 $(373,100)

$(373,100)

Business-Type Activities

Civic Auditorium 88,000 130,000

$42,000 42,000 Total for Primary

Government $592,100 $144,000$117,000 $(373,100)$42,000 $(331,100)

Component Unit:

Museum $ 42,000 $50,000

$8,000 General Revenues

Property Taxes 600,000

600,000

Transfers (20,000) 20,000 -0-

Total General Revenues and Transfers $580,000 $20,000 $600,000 -0- Change in Net Assets $206,900 $62,000 $268,900 $8,000

Net Assets, Beginning of Year 1,123,000 662,000 1,785,000 106,000 Net Assets, End of Year $1,329,900 $724,000 $2,053,900 $114,000


Statement of Net Assets

Government-Wide Financial Statements

December 31, 2008 Governmental Business-Type

Component

Activities Activities Total UnitAssets:

Cash $302,400 $130,000 $432,400 $24,000

Property Tax Receivables 90,000 -0- 90,000 -0-

Receivables-School Fees 600 -0- 600 -0-

Rent Receivable -0- 20,000 20,000 -0-

Supplies 5,000 -0- 5,000 -0-

Land 20,000 -0- 20,000 -0-

Sidewalk 10,000 -0- 10,000 -0-

School Bus 96,900 -0- 96,900 -0-

Parking Deck (net) -0- 195,000 195,000 -0-

Buildings (net) 1,026,000 580,000 1,606,000 300,000 Total Assets $1,550,900 $925,000 $2,475,900 $324,000Liabilities:

Salary Payable $30,000 $3,000 $33,000 -0-

Vacation Payable 23,000 5,000 28,000 -0-

Interest Payable -0- 13,000 13,000 -0-

Deferred Revenues 63,000 -0- 63,000 -0-

Bonds and Notes Payable 105,000 180,000 285,000 $210,000 Total Liabilities $221,000 $201,000 $422,000 $210,000Net Assets:

Capital Assets, less

related debt $1,047,900 $582,000 $1,629,900 $ 90,000

Unrestricted 282,000 142,000 424,000 24,000 Total Net Assets $1,329,900 $724,000 $2,053,900 $ 114,00041. One way to accumulate the information for the fund-based financial statements is to prepare the journal entries for the listed transactions.

a.General Fund

Other Financing UsesTransfer 70,000

Cash

70,000

Capital Projects Fund

Cash 70,000

Other Financing SourcesTransfer

70,000

ExpendituresLand 20,000

Cash

20,000

b.Capital Projects Fund

Cash 110,000

Other Financing SourcesBond

110,000

c.General Fund

Cash 510,000

Property Tax Receivable 90,000

RevenuesProperty Taxes

560,000

Deferred Revenues

40,000

d.Capital Projects Fund

ExpendituresBuilding 80,000

Cash

80,000

e.Capital Projects Fund

ExpendituresSidewalk 10,000

Cash

10,000

f.General Fund

Cash 8,000

RevenuesPark

8,000

41.(continued)

g.Enterprise Fund

Parking Deck 200,000

Cash

20,000

Notes Payable

180,000

h.Special Revenue Fund

Cash 100,000

Deferred Revenues

100,000

ExpendituresSchool Lunches 37,000

Cash

37,000

Deferred Revenues 37,000

RevenuesOperating Grant

37,000

i.General Fund

Cash 5,400

ReceivablesSchool Fees 600

RevenuesSchool Fees

6,000

j.General Fund

ExpendituresSupplies 22,000

Cash

22,000

k.No entry because there is no impact on current financial resources.

l.General Fund

Other Financing UsesTransfer 20,000

Cash

20,000

Enterprise Fund

Cash 20,000

Other Financing SourcesContribution

20,000

41.(continued)

m.

General Fund

Encumbrances 99,000

Fund BalanceReserved For Encumbrances

99,000

n.General Fund

Fund BalanceReserved for

Encumbrances 99,000

Encumbrances

99,000

ExpendituresSchool Bus 102,000

Cash

102,000

o.General Fund

ExpendituresSalaries 270,000

Cash

240,000

Salary Payable

30,000

p.Enterprise Fund



Cash

42,000

Salary Payable

3,000

Vacations Payable

5,000

q.Enterprise Fund

Cash 110,000

Rent Receivable 20,000

Program RevenuesRent

130,000

r.General Fund

ExpendituresMaintenance 9,000

Cash

9,000

41.(continued)s.General Fund (no mention is made of using a separate Debt Service Fund)


ExpendituresBonds Payable 5,000

Cash

14,000

t.Enterprise Fund


Interest Payable

13,000

Also:Recognition of remaining supplies (from J above)

General Fund

Supplies 5,000

Fund BalanceReserved for Supplies

5,000

Depreciation Entries

Business-Type ActivitiesCivic Auditorium ($600,000/30)



20,000

Business-Type ActivitiesParking Deck ($200,000/20 x )



5,000


Statement of Revenues, Expenditures, and Changes in Fund Balance

Fund-Based Financial Statements Governmental Funds

Year ending December 31, 2008

Total

General Special Capital ProjectsGovernmental

FundRevenue Funds Funds Funds

Revenues

-Property Taxes $560,000 -0- -0- $560,000

-Park 8,000 -0- -0- 8,000

-Operating Grant -0- $ 37,000 -0- 37,000

-School Fees 6,000 -0- -0- 6,000 Total Revenues $574,000 $ 37,000 -0- $611,000Expenditures

-Land -0- -0- 20,000 20,000

-Buildings -0- -0- 80,000 80,000

-Sidewalk -0- -0- 10,000 10,000

-School Lunches -0- 37,000 -0- 37,000

-Supplies 22,000 -0- -0- 22,000

-School Bus 102,000 -0- -0- 102,000

-Salaries 270,000 -0- -0- 270,000

-Maintenance 9,000 -0- -0- 9,000

-Interest 9,000 -0- -0- 9,000

-Bond Payment 5,000 -0- -0- 5,000 Total Expenditures $417,000 $37,000 $110,000 $564,000Excess (deficiency) of

revenues over

expenditures $157,000 -0- $(110,000) $ 47,000Other Financing

Sources (Uses)

-Other Financing

Sources -0- -0- $180,000 $180,000

-Other Financing

Uses $(90,000) -0- -0- (90,000) Total Other

Financing

Sources (Uses) $(90,000) -0- $180,000 $ 90,000Change in Fund

Balance $ 67,000 -0- $ 70,000 $137,000

Fund Balance

Beginning 123,000 -0- -0- 123,000Fund Balance

Ending $190,000 -0- $70,000 $260,000


Balance Sheet

Fund-Based Financial Statements - Governmental Funds

December 31, 2008

Total

General Special Capital ProjectsGovernmental

FundRevenue Funds Funds Funds

Assets

-Cash $169,400 $63,000 $70,000 $302,400

-Property Tax

Receivable 90,000 -0- -0- 90,000

-Receivables

School Fees 600 -0- -0- 600

-Supplies 5,000 -0- -0- 5,000 Total Assets $265,000 $63,000 $70,000 $398,000

Liabilities

-Salary Payable $ 30,000 -0- -0- $ 30,000

-Deferred Revenues 40,000 $63,000 -0- 103,000

Total Liabilities $ 70,000 $63,000 -0- $133,000Fund Balances

-Reserved for

Supplies $ 5,000 -0- -0- $ 5,000

-Unreserved 190,000 -0- $70,000 260,000 Total Fund

Balances $195,000 -0- $70,000 $265,000 Total Liabilities

And Fund

Balances $265,000 $63,000 $70,000 $398,00041.(continued)City of Pfeiffer

Statement of Revenues, Expenses, and Changes in Fund Net Assets

Fund-Based Financial StatementsProprietary Funds

Year Ending December 31, 2008 Enterprise Fund (Civic Auditorium)

Operating Revenues

Rent Revenues $130,000Operating Expenses

Salaries $ 45,000

Vacations 5,000

Depreciation 25,000 Total Operating Expenses $ 75,000 Operating Income $ 55,000

Non-operating Expenses

Interest Expense $ 13,000Income Before Capital Contribution $ 42,000

Capital Contribution 20,000Change in Net Assets $ 62,000

Total Net AssetsBeginning 662,000Total Net AssetsEnding $724,00041.(continued)City of Pfeiffer

Statement of Net Assets

Fund-Based Financial StatementsProprietary Funds

December 31, 2008 Enterprise Fund (Civic Auditorium)

Assets

Current Assets

Cash $130,000

Rent Receivable 20,000 Total Current Assets $150,000Noncurrent Assets

Parking Deck (net) $195,000

Buildings (net) 580,000 Total Noncurrent Assets $775,000 Total Assets $925,000

Liabilities

Current Liabilities

Salary Payable $ 3,000

Vacation Payable 5,000

Interest Payable 13,000 Total Current Liabilities $ 21,000Noncurrent Liabilities

Notes Payable $180,000 Total Liabilities $201,000Net Assets

Invested in Capital Assets,

less related debt $582,000

Unrestricted 142,000

Total Net Assets $724,00042.

a. False A pension trust fund is one of the fiduciary funds because the money cannot be used by officials for the benefit of the government. Fiduciary funds do not appear in the government-wide financial statements although separate statements are presented as part of the fund-based financial statements.

b. True The permanent funds are included within the governmental funds because the income generated from the amount being held is to be used by the government. Although the principal cannot be utilized by government officials, the income can.c. True A commitment of current financial resources was made when this order was placed. Thus, an encumbrance should have been recognized at that time. However, the actual amount of the obligation proved to be slightly higher. When the liability was incurred, the original encumbrance should have been removed and an expenditure recorded for the amount of current resources that is actually required.

d. True The expense to be recognized each year is the adjustment required to establish the proper liability. At the end of Year One, that liability should be $96,000 or 12 percent of $800,000. At the end of the second year, the liability has grown to $172,000 (20 percent of $860,000). Increasing the liability from $96,000 to $172,000 necessitates an expense of $76,000. Even though the question relates to the fund-based financial statements, the Enterprise Funds do accrue expenses as incurred in much the same way as a for-profit business.e. True The expense to be recognized each year is the adjustment required in the liability. At the end of Year One, that liability should be $99,000 or 11 percent of $900,000. At the end of the second year, the liability has grown to $170,000 (20 percent of $850,000). Increasing the liability from $99,000 to $170,000 necessitates an expense of $71,000. Even though the question relates to the General Fund, government-wide financial statements always accrue expenses as incurred.

f. False In the governmental funds, a capitalized lease is recorded based on the present value of the future cash flows. Thus, the initial recording is an expenditure of $39,000.

g. False An Agency Fund is used when passing money through the government to a specified recipient. Thus, the only two accounts typically found in an Agency Fund are cash (or similar monetary assets) and the liability to indicate where that cash is destined.

h. True The asset is capitalized at $39,000, the present value of the future cash flows. Over a six-year life, depreciation expense of $6,500 should be recognized each year. A related liability of $29,000 should also be recorded (after the first payment is removed). With an interest rate of 10 percent being used, interest expense of $2,900 should be recognized in the first year. Total expenses to be reported are $9,400 ($6,500 plus $2,900).

43.

a. This gift did not involve a current financial resource and should not have been recorded in the fund-based financial statements. There is no indication that it was recorded there. The recording of the asset and depreciation would have been made in the government-wide statements. Thus, the increase in the fund balance of $30,000 was correct and should not be changed.

b. Apparently, in the government-wide financial statements, a $15,000 revenue was reported along with an asset of the same value. Depreciation recognized for the first year would have been $500 ($15,000 capitalized amount over a 30-year life) so that a net increase in the net assets should have been $14,500. If the allowed alternative had been followed as officials wished, both revenues and expenses would have been increased by $15,000 for no net effect. Consequently, removing the $14,500 increase that was reported changes the net expense figure from $130,000 to $144,500.

c. The government officials wanted to use the alternative which was to record an expense rather than an asset. If no entry was made by the art museum, there was no change created in the net asset figure. Had the appropriate entry been made, both revenues and expenses would have risen by $15,000, but then, no net effect would have resulted. The revenues and expenses are both understated but the net asset figure is not affected either way. Although the individual totals are wrong, the increase in net assets stays at $140,00044.

a. On the government-wide statements, an expense of $20,000 was reported. Instead, an asset and liability of $62,000 should have been reported. Depreciation on the asset (over a five-year period) would have been $12,400 and interest expense would have been $6,200 (10 percent of $62,000). Thus, total expenses should have been reported as $18,600. The reported expenses ($20,000) were $1,400 too high. Removing that amount of expense causes the increase in net assets to rise from $140,000 to $141,400.

b. A $62,000 expenditure should have been recorded on the first day of the year because of the capitalized lease. In addition, a $62,000 other financing source should have been recorded. Another $20,000 expenditure was properly reported on the last day of the year to record the payment. Because both the initial expenditure ($62,000) and the other financing source ($62,000) were left out, the net effect of the omission is zero. Thus, the $30,000 increase in the fund balance as shown for the General Fund is correct.

45.The revenue of $30,000 and the expense of $42,000 were not included in the primary government figures for the government-wide statements. They were discretely presented and should have been blended.

Adding these two figures to primary government-wide totals reduces the overall increase in net assets by $12,000 ($30,000 minus $42,000) from $140,000 to $128,000.

46.

a. In fund-based statements, for the General Fund, only the amount of this liability that will be paid in the next 60 days (2 months) is viewed as a claim against current financial resources. That amount would be $10,000 (2/12 of $60,000). That expenditure must be recorded at the end of Year Four and reduces the increase in the General Fund fund balance by this $10,000 from $30,000 to $20,000.

b. For the government-wide financial statements, the entire $60,000 liability should be recorded in Year Four based on standard accrual accounting. The related expense reduces the increase in net assets by $60,000 from $140,000 to $80,000.

47.

a. Apparently, the amounts recorded this year (in the parks) was in the wrong fund; the landfill should have continued to be reported as an Enterprise Fund. By itself, that does not have any net impact on the net assets reported for the entire government on the government-wide statements. The amounts are simply in the wrong columns. However, the clean-up liability has not been reported for the current year. An additional 8 percent was filled in the current year so that the liability should have increased by $16,000 (8 percent of $200,000). That reduces the increase in net assets from $140,000 to $124,000.

b. The revenues ($4,000) and expenses ($15,000) for the current year must now be moved to the Enterprise Funds ($11,000 net reduction). In addition, the $16,000 clean-up liability computed in (a) above should be recorded so that the overall decrease in net assets in connection with the landfill is $27,000. For the Enterprise Funds, the net increase is net assets is not $60,000 but rather $33,000.

c. The revenues and expenditures have been correctly reported this year within the General Fund. In addition, there is no indication that the clean-up costs will require any current financial resources so that no reporting is needed in the fund-based statements. The increase in the fund balance of the General Fund of $30,000 appears to be correct.

48.

a. The modified approach only applies to infrastructure assets and not to machines and the like. Thus, $4,000 in depreciation expense has been incorrectly omitted. Including the recording of depreciation reduces the increase in net assets from $140,000 to $136,000.

b. The depreciation expense discussed in (a) above increases the net expenses for education from $710,000 to $714,000.

49.

a. False Assuming that the next payment is not due until July 1, Year Two, it is not a claim to current financial resources. Therefore, no liability should be reported on the fund-based financial statements.

b. False The original liability of $78,000 should be reported and immediately reduced by $20,000 to $58,000. However, interest for the last six months of Year One should be accrued ($58,000 x 10 percent x 6/12 year or $2,900) to raise the liability to $60,900.

c. True Interest for the last six months of Year One should be accrued ($58,000 x 10 percent x 6/12 year) or $2,900.

d.False On the fund-based financial statements, the expenditure total equals the $78,000 present value of the cash flows plus the first $20,000 payment.

e.True The asset is initially capitalized at $78,000. At the end of the first year, depreciation of $7,800 should be recognized ($78,000 x 1/5 x 6/12) which reduces the net leased asset to $70,200.

f.False On the fund-based financial statements, the expenditure total equals the $78,000 present value of the future cash flows.

g.False There are four separate criteria for a capitalized lease. One of those is that the life of the lease is 75 percent or more of the life of the asset. If the car has an eight-year life, the five year lease is only 62.5% of the life of the asset. However, the lease contract could well meet any of the other three criteria and capitalization would still be necessary.

h.False Payments totaling $100,000 are being made and the car will be used up. So, the total expense has to be $100,000 on the government-wide statements no matter how the reporting is done. For fund-based statements, the present value of the future cash flows is recognized and then the eventual payments are also recognized as expenditures. This total will be more than $100,000 (but is offset somewhat by the reporting of an other financing source).

50.

a.False The handling in the government-wide financial statements will be the same whether the landfill is reported as a General Fund or as an Enterprise Fund.

b.False Assuming the city has a December 31 year-end, no claim to current financial resources exists at that time.

c.False The Enterprise Fund should report a liability equal to 26 percent of $2 million less the amount of cash that has already been paid.d.True In most all cases, Enterprise Funds are reported the same in the government-wide financial statements and the fund-based financial statements.

e.True The liability is $2 million times 26 percent or $520,000. However, payments of $100,000 have already been made so the liability is now only $420,000.

f.True In either case, $2 million will be spent. That will show up as an expense in the government-wide financial statements and as an expenditure in the fund-based financial statements (assuming the landfill is reported in the General Fund).

51.

a.True The amount of the liability to be reported each year would have been based on $3 million rather than $2 million.

b.True The government-wide financial statements accrue all liabilities whether they are governmental activities or business-type activities.

c.False At the end of Year Two, a liability of $420,000 is reported (26 percent of $2 million less $100,000 in payments). At the end of Year Three, a liability of $1,050,000 is reported (40 percent of $3 million less $150,000 in payments). Adjusting the liability balance of $420,000 to $1,050,000 necessitates recognizing an expense of $630,000.

d.False Present value is not used for landfill closure costs.

52.

a.True One of the requirements for being able to choose to not capitalize a museum piece is that any proceeds from a future sale must be required to be used for a similar purchase.

b.False If the asset is viewed as being inexhaustible (the asset is already over 200 years old), no depreciation is required.

c.False The city can record the $10,000 value as an expense immediately but it can also choose to capitalize the asset and then depreciate it over its expected useful life.

d.False Revenue recognition is required for gifts of this type. It is only the decision as to whether to record an asset or an expense that is at the option of the government.

e.True Both a revenue and an expense can be reported for this donation so that net assets are not impacted.

53.

a.False Although the city here appoints a majority of the board members, there is no indication that (a) the city can impose its will on this board, (b) that the library provides a financial benefit or a financial burden for the city, or (c) that the library is financially dependent on the city. Appointing a majority of the board makes the library a related organization but not necessarily a component unit.b.True If the results of the component un

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175050473-Chapter-17-IMSM