Questions for review and discussion: 6, 7, 8, and 9  

Problems 4-1, 4-2, 4-7, and 4-8

6. What is the general rule for recognizing property taxes as revenues? How are property taxes accounted for differently in the governmental fund statements as opposed to the government wide statements?

Property taxes should be recognized in the period for which the taxes are levied. In the fund statements, the taxes must meet the additional criterion that they be “available.”

7. What is the earliest point in the sales tax collectionprocess at which revenue may be recognized?How can you justify recognizing revenueon the basis of this event?

Sales taxes should be recognized in the period in which the underlying sales transaction takes place. Sales taxes are “derived” from an underlying economic event that event being the sales transaction. Hence it is appropriate to recognize revenue at the time of the event.

8. Explain the distinction between reimbursementgrants and entitlements. How does this distinctionaffect the way each type of grant is accountedfor?

Reimbursement grants are payments that are intended to pay for specified expenditures. Most typically the grantor reimburses the grantee for all or a portion of allowable costs. Entitlements, by contrast, are payments, usually from a higher level government, to which a state or local government is automatically entitled in an amount determined by a specified formula.

Because expenditure-driven grants are tied directly to specific expenditures, they should be recognized as revenues in the same period as the expenditures — i.e., when the grantee satisfies the eligibility requirements by incurring the allowable costs. Entitlements do not typically have any significant eligibility requirements. Hence, they

can be recognized as revenue as soon as the funds are available for expenditure. They may, however, have time requirements in that they must be spent in a specified period. If so, recognition should take place in the period or periods when resources are required to be used or when use may begin.

9. A private citizen makes an unrestricted pledgeof $5 million to a city’s museum. The city isconfident that the donor will fulfill her pledge.However, the cash will not be received for atleast two years. How does the amount of revenuerecognized differ between the governmentalfund statements and the government-widestatements? Explain.

The city could recognize the revenue as soon as it has made all eligibility requirements — in this case none. Therefore, in its government-wide statements it can recognize revenue upon receipt of the pledge. However, in its fund statements, the donation cannot be recognized as revenue until it is available for expenditure — i.e., when the cash is received.

4-1Select the best answer.1. Under the modified accrual basis of accounting,revenues cannot be recognizeda. until cash has been collectedb. unless they are collected within 60 days ofyear-endc. until they are subject to accruald. until they are measurable and available

2. Available (as in ‘‘measurable and available’’)meansa. available to finance expenditures of the currentperiodb. subject to accrualc. collectibled. available for appropriation

3. Property taxes are an example ofa. an imposed exchange transactionb. an imposed non exchange transaction

c. a derived tax transactiond. a government-mandated non exchangetransaction

4. To be considered available, property taxesmust have been collected either during thegovernment’s fiscal year or within

a. the time it takes for the government toliquidate its obligations from the prior yearb. 30 days of year-endc. 60 days of year-endd. the following fiscal year

5. For its fiscal year ending September 30, 2012,Twin City levied $500 million in propertytaxes. It collected taxes applicable to fiscal2012 as follows (in millions):June 1, 2011–September 30, 2011October 1, 2011–September 30, 2012October 1, 2012–November 30, 2012December 2012$ 20440154The city estimates that $10 million of theoutstanding balance is uncollectible. Forthe fiscal year ending September 30, 2012,how much should Twin City recognize inproperty tax revenue (in millions) in itsgeneral fund?a. $440b. $460c. $475d. $490

6. Assume the same facts as in the previousexample. How much should Twin City recognizein property tax revenue (in millions) in itsgovernment-wide statement of activities?a. $440b. $460c. $475d. $490

7. Central City was awarded two state grantsduring its fiscal year ending September 30,2012: a $2 million block grant that can beused to cover any operating expenses incurredduring fiscal 2013; a $1 million grant that canbe used any time to acquire equipment for itspolice department. For the year ending September30, 2012, Central City should recognizein grant revenue in its governmental fundstatements (in millions)a. $0b. $1c. $2d. $3

8. Assume the same facts as in the previousexample. How much should the city recognizein grant revenue in its government-widestatements?a. $0b. $1c. $2d. $3

9. Assuming that a government collects itssales taxes in sufficient time to satisfy theavailable criterion, it ordinarily recognizesrevenue from sales taxes in its governmentalfund statementsa. when the underlying sales transaction takesplaceb. on the date the merchant must remit thetaxes to the governmentc. on the date the merchant must file a taxreturnd. when the taxes are received by the government

10. Assuming that a government collects its salestaxes in sufficient time to satisfy the availablecriterion, it ordinarily recognizes revenue fromsales taxes in its government-wide statementsa. when the underlying sales transaction takesplaceb. on the date the merchant must remit thetaxes to the governmentc. on the date the merchant must file a tax

returnd. when the taxes are received by the government

4-2

The following information relates to Hudson Cityfor its fiscal year ending December 31, 2012:_ On January 31, 2012 the city purchased as aninvestment for its debt service fund a three-year,6%, $1 million bond, for $998,000. During theyear, it received $3,000 in interest. At year-end,the market value of the bond was $999,500._ On December 31, 2011 the Foundation for theArts pledged to donate $1, up to a maximumof $1,000,000, to finance construction of thecity-owned art museum for each $3 that themuseum is able to collect from other privatecontributors. During 2012, the city collected$600,000. In January and February 2013 it collectedan additional $2,400,000._ During the year, the city imposed license fees onstreet vendors. All vendors were required to purchasethe licenses by September 30, 2012. Thelicenses cover the one-year period from October1, 2012 through September 30, 2013. During 2012the city collected $240,000 in license fees._ The city sold for $40,000 a fire truck that it hadacquired five years earlier for $250,000. At thetime of sale the city had charged $225,000 indepreciation._ The city received a grant of $2 million to partiallyreimburse costs of training police officers.During the year, the city incurred $1,500,000 ofallowable costs and received $1,200,000. Itexpects to incur an additional $500,000 in allowablecosts in January 2013 and be reimbursed forall allowable costs by the end of February 2013.Select an answer from the following list ofamounts. An amount may be selected once, morethan once, or not at all._ The city received a grant of $2 million to partiallyreimburse costs of training police officers.During the year, the city incurred $1,500,000 ofallowable costs and received $1,200,000. Itexpects to incur an additional $500,000 in allowablecosts in January 2013 and be reimbursed for

all allowable costs by the end of February 2013.

Select an answer from the following list ofamounts. An amount may be selected once, morethan once, or not at all.a.b.c.d.e.f.g.h.i.j.k.l.m.n.o.p.q.01,5003,0004,50015,00040,00060,000200,000225,000240,000600,000998,000999,5001,000,0001,200,0001,500,0002,000,000___ 1. amount of investmentincome that the cityshould recognize in itsdebt service fund

___ 2. reported value of thebond in the

government-widestatements at year-end___ 3. amount of investmentincome that the cityshould recognize in itsgovernment-widestatements___ 4. contribution revenuefrom Foundation for theArts to be recognized inthe governmental fundstatements___ 5. contribution revenuefrom Foundation for theArts to be recognized inthe government-widestatements___ 6. revenue from license feesto be recognized in thegovernmental fundstatements___ 7. increase in general fundbalance, owing to thesale of the fire engine___ 8. increase in net assets(government-widestatements), owing tothe sale of the fire engine___ 9. revenue in thegovernmental fundstatements from thepolice training grant___ 10. revenue in thegovernment-widestatements from thepolice training grant

1. e2. m3. e4. h5. h6. j7. f8. c

9. p10. p

4-7The amount of revenue to be recognized from grants depends on the type of grant.The following information relates to three grants that the town of College Hills received from the state during its fiscal year ending December 31, 2012:

a. A cash grant of $200,000 that must be used to repair roads;b. $150,000, in cash, of a total grant of $200,000, to reimburse the town for actual expendituresincurred in repairing roads. During the year, the town incurred $150,000 in allowable repaircosts;

c. A cash entitlement grant of $200,000 that is intended to supplement the town’s 2013 budgetand must be expended in that year.

1. Prepare journal entries to record the three grants in a governmental fund.2. What amount of revenue should be reported for each grant in the town’s government-wide statement of activities for 2012? Where on that statement should these revenues most likely bereported?

1.

a. Road repair grant

Cash  $200,000Grant revenue $200,000

To record grant revenue. Even though the grant must be used for a special purpose (and hence should be recorded in a special revenue fund), the town can recognize revenue at the time the grant is awarded.

b. Reimbursement grant

Road repair expenditures $150,000Cash  $150,000

To record road repair expenditures

Cash  $150,000Grant revenue $150,000

To record grant revenue. The town can recognize revenue only for the amount it is eligible to receive — the amount of allowable expenditures.

c. Entitlement grant

Cash  $200,000Deferred revenue $200,000

To record grant revenue. The grant is subject to a time requirement and hence the town cannot recognize revenue until that requirement is satisfied — i.e., in 2013.

2. Road repair grant: $200,000; reimbursement grant: $150,000 (allowable costs incurred); entitlement grant: $0. (Because of the time requirement, revenue cannot be recognized in either the funds statement or the government-wide statement until 2014.) The town is most likely to report road repairs within the public works function or as a program within that function. Thus, the road repair and reimbursement grants would be reported as program revenues of governmental activities, most likely in the “capital grants and contributions” column. The cash entitlement grant, in contrast, appears to be a general revenue—not associated with any specific function or program. It would be reported in the governmental activities column under “general revenues.”

4-8Unrealized investment gains and losses may be difficult to explain to legislators and constituents.A government held the securities shown below (all of which are either bonds that mature in morethan one year or stocks) in one of its investment portfolios.

1. Ignoring dividends and interest, what amount of gain or loss should the government recognizeduring the year?

2. What was the government’s ‘‘realized’’ gain or loss (sales proceeds less cost) for the year?Which gain or loss—that to be reported on the financial statements (as computed in question1) or the realized gain or loss—is more indicative of the change in resources available for future expenditure?

3. Suppose that Security B is a long-term bond that the government intends to hold to maturity.

What is the most probable reason for the decline in fair value during the year? In whatsense is the reported loss indicative of an economic loss?

1. Investment gain (loss):

Outputs

Sales $ 250

Ending balance at fair value 945 $1,195

Inputs

Beginning balance at fair value $ 880

Purchases 330 1,210

Investment gain (loss) ($ 15 )

2. The only realized gain was on the sale of Security C — sales proceeds of $250 less cost of $200 — a gain of $50. If the government intends to hold, rather than sell, its securities, then arguably the realized gain is the better indicator of the increase in resources available for current expenditure. However, as long as the investments will at some time be available for sale, then as the result of the changes in the fair value of the securities the government has realized an economic gain. In that sense, therefore, the reported gain is the better measure of the increase in resources available for future expenditure.

3. The decline in fair value is most probably due to an increase in prevailing interest rates. The loss is indicative of an economic loss in that the government has incurred an opportunity cost. The government is locked into Security B, which earns interest at a lower rate than the government could have earned, had it had the opportunity to acquire bonds that pay interest at the prevailing rate.