Exam Item 19-1 (True or False)

Chapter 20 Test Bank

ACCOUNTING FOR STATE AND LOCAL GOVERNMENTAL UNITS -

PROPRIETARY AND FIDUCIARY FUNDS

Multiple Choice Questions

LO11.What basis of accounting is used by proprietary funds?

a.Modified accrual accounting.

b.Accrual accounting.

c.Cash basis accounting.

d.Fair value accounting.

LO12.Enterprise funds are accounted for in a manner similar to

a.internal service funds.

b.construction project funds.

c.agency funds.

d.private-purpose trust funds.

LO13.Payments in lieu of taxes from an enterprise fund should be reported as a(n)

a.operating expense.

b.operating transfer out.

c.nonoperating expense.

d.nonoperating transfer out.

LO14.The enterprise fund accounting equation is

a.assets = liabilities.

b.current assets + noncurrent assets + liabilities = fund balance.

c.current assets + noncurrent assets + liabilities = net assets.

d.current assets + noncurrent assets - liabilities = net assets.

LO15.Depreciation of a proprietary funds fixed assets is

I. reported in the governmental-wide financial statements.II.recorded in the proprietary fund.

a.I. only.

b.II. only.

c.I. and II.

d.Neither I nor II.

LO16.Which of the following funds is not included in government-wide financial statements?

a.Internal service funds.

b.Enterprise funds.

c.Fiduciary funds.

d.Permanent funds.

LO27.In a proprietary fund statement of cash flows, cash paid to other funds, except for interfund services used, should be classified as a cash outflow from

a.operating activities.

b.noncapital financing activities.

c.capital and related financing activities.

d.investing activities.

LO28.Major categories of the enterprise fund cash flow statement include all of the following except cash flows from

a.investing activities.

b.restricted and unrestricted fund balances.

c.noncapital financing activities.

d.capital and related financing activities.

LO29.GASBs cash flow statement reporting

a.requires the direct method.

b.requires the indirect method.

c.permits either the direct or indirect method.

d.requires reconciliation between the direct and indirect method.

LO310.The agency fund accounting equation is

a.assets = liabilities.

b.current assets + noncurrent assets + liabilities = fund balance.

c.current assets + noncurrent assets + liabilities = net assets.

d.current assets + noncurrent assets - liabilities = net assets.

LO311.Which of the following does not appear on the statement of cash flows as an operating activity?

a.Receipts from interfund reimbursements.

b.Payments for taxes and in lieu of taxes.

c.Payments for interest.

d.Fines for late service payments.

LO312.Which of the following is not a fiduciary fund?

a.A permanent fund.

b.A proprietary fund.

c.A trust fund.

d.An agency fund.

LO313.What basis of accounting is used by fiduciary funds?

a.Modified accrual accounting.

b.Accrual accounting.

c.Cash basis accounting.

d.Present value accounting.

LO314.Prudent City collects state sales taxes quarterly from local businesses and then gives the state revenue department the money at the end of the year. The sales taxes would go in Prudent Citys

a.special revenue fund.

b.general fund.

c.agency fund.

d.enterprise fund.

LO3

15.In reference to agency funds, which of the following statements is correct?

a.Agency funds are fiduciary funds used to account for resources that governments hold in a custodial capacity.

b.Agency funds can arise from the normal and recurring operations of other funds.

c.Agency funds can be used when the governmental entity undertakes necessary administrative duties, such as determining the eligibility of potential recipients.

d.All of the above are correct.

LO316.Private-purpose trust funds are accounted for in the same manner as

a.permanent funds.

b.proprietary funds.

c.special revenue funds.

d.fiduciary funds.

LO317.In reference to trust funds, which of the following statements is correct?

a.Investment trust funds are fiduciary funds used to account for multigovernmental external investment pools sponsored by a governmental agency.

b.Private-purpose trust funds are fiduciary funds used to account for resources that are held for the benefit of parties outside of the governmental agency.

c.Pension trust funds are fiduciary funds used when a government acts as trustee for a defined pension plan for a governmental entity.

d.All of the above are correct.

LO418.The two required financial statements for defined benefit pension plans are a statement of

a.plan net assets and a schedule of funding progress.

b.plan net assets and a statement of changes in plan net assets.

c.changes in plan net assets and a schedule of employer contributions.

d.revenues, expenses, and changes in net assets and a statement of cash flows.

LO419.A pension trust fund statement of changes in plan net assets would include all of the following except

a.employer contributions.

b.employee contributions.

c.benefit payments.

d.cash surrender value.

LO420.In reference to governmental accounting for public employee retirement systems (PERS), which of the following statements is correct?

a.PERS are subject to ERISA regulations.

b.Governments often turn to FASB for guidance in their efforts to comply with pension regulations.

c.GASB pension standards require governments to present a schedule of funding progress for defined benefit pension plans.

d.All of the above are correct.

LO1Exercise 1Prepare journal entries to record the following transactions in the enterprise fund for a state university.

1. Tuition and fees assessed total $8,000,000 of which 80% was collected by year-end; scholarships were granted for $300,000 and $200,000 was estimated to be uncollectible.

2. Revenues collected from sales and services to the university bookstore were $1,200,000.

3. Salaries and wages were $3,000,000, of which $200,000 was for employees of the university bookstore.

4. Unrestricted cash was used to pay the long-term mortgage on the university's buildings: $1,500,000 for interest and $500,000 for mortgage principal.

5. Restricted contributions of $800,000 for a specific academic program were received.

6. Expenditures of $445,000 for the restricted program were incurred and paid.

7. Equipment of $55,000 was purchased and paid for with unrestricted cash.

LO1Exercise 2

Spencer College assessed $1,350,000 in student tuition for the fall semester. The college estimates bad debts will be 2% of the gross assessed tuition. Spencer is located in Montana where a scholarship program provides for tuition waivers totaling $120,000. Estimated uncollectible tuition is $13,500.

Determine the amount of revenue to be reported in the Spencer enterprise fund.

LO1Exercise 3

Record the following transactions in the Porter Hospital enterprise fund:

1. Gross patient services revenues: $10,000,000.

2. Included in the above revenues are: charity services, $200,000; contractual adjustments, $700,000; and estimated uncollectible amounts, $350,000.

3. Purchased equipment by issuing a 5-year note for $80,000.

4. Received cash donations restricted for a capital building addition program, $2,200,000.

5. Incurred and paid $180,000 of contractor billings for the capital building program.

LO1

Exercise 4

Journalize the following utility transactions in the Brown County enterprise fund:

1. Billings to external customers $1,600,000, billings to Brown County

governmental funds $130,000.

2. Collected refundable deposits from new utility customers $10,000.

3. Collected 95% of all billings by fiscal year-end.

4. Refunded $4,000 in deposits to former utility customers.

5. Unbilled services to outside customers at year-end $14,000.

LO1

Exercise 5Prepare journal entries in an Internal Service Fund of Prat County to record each of the following transactions.

1. Purchased equipment on September 1 by paying $25,000 down and borrowing $100,000 on a 6%, 2-year note.

2. Billed General Fund departments $620,000 for services provided to those departments. Billings to the Enterprise Fund totaled $165,000. All billings were collected by year-end except for $100,000 charged to the General Fund.

3. Accrued year-end (December 31) adjustments for interest expense and depreciation. The useful life of the equipment is 5 years with no salvage value.

LO1

Exercise 6Journalize the following utility transactions in the Starkey County enterprise fund:

1. The utility sold $4,000,000 of 6.5% revenue bonds at 98 on July 1 (an interest payment date). The bond proceeds are to be used for new plant construction and the issue will mature in 20 years.

2. Depreciation for the year-ended December 31 included $300,000 for buildings and $190,000 for equipment.

3. The utility paid $600,000 in construction costs for the new plant.

4. Interest on the revenue bonds was accrued at year-end.

LO1

Exercise 7Prepare journal entries to record the following grant-related transactions of an enterprise fund.

1. Received an operating grant in cash from the state, $2,500,000.

2. Incurred and paid qualifying expenses on the grant program, $1,600,000.

3. Received a federal grant to finance construction of a plant, $4,500,000 (cash received in advance).

4. Incurred and paid construction cost on the plant, $3,000,000.

LO2Exercise 8Based upon the provided 2006 annual cash flow information, prepare a cash flow statement for the Blue Valley Aquatic Center enterprise fund.

Green fees received $500,000

Membership fees received 30,000

League outing fees received 120,000

Interest revenue received 2,000

Cash received from short-term note payable 75,000

Payments to employees 350,000

Payments to suppliers 198,000

Cash paid in lieu of taxes to the general fund 60,000

Payments for capital improvements 85,000

Interest paid on short-term loan 3,000

Cash balance on January 1, 2006 15,000

LO2Exercise 9The four cash flow activities required in a government proprietary fund's statement of cash flows are listed below and assigned a letter code.

A) Cash flows from operating activities

B) Cash flows from noncapital financing activities

C) Cash flows from capital and related financing activities

D) Cash flows from investing activities

Required:

Use the correct letter code to indicate where each of the following ten items should be reported in the statement of cash flows.

1. An enterprise fund fixed asset was sold for cash.

2. The proceeds from the sale of the fixed asset were transferred to the general fund.

3. Paid principal, $100, 000, and interest, $250,000, on a mortgage.

4. Cash proceeds from sale of investments, $90,000. Investments were purchased with the proceeds of debt issued to finance construction of specialized equipment that is almost completed.

5. Cash paid for new equipment, $22,000.

6. Cash received from the general fund to cover part of the cost of plant expansion, $1,000,000.

7. Cash received from another fund as a 6-month loan for the sole purpose of financing purchase of equipment, $90,000.

8. Cash proceeds from issuing bonds for an enterprise fund construction project.

9. Cash paid to employees for salaries.

10. Cash received from interest earned on investments.

LO2Exercise 10Based upon the provided 2006 annual cash flow information, prepare a cash flow statement for the Downtown University Motor Pool internal service fund.

Cash received from customers $850,000

Cash received general fund (noncapital loan) 20,000

Interest revenue received 1,000

Cash received from short-term note payable 40,000

Payments to employees 450,000

Payments to suppliers 250,000

Cash paid in lieu of taxes to the general fund 65,000

Payments for capital improvements 75,000

Interest paid on short-term loan 2,000

Principal paid on capital debt 50,000

Interest paid on capital debt 10,000

Cash balance on January 1, 2006 12,000

SOLUTIONSMultiple Choice Questions

1.b

2.a

3.d

4.d

5.c

6.a

7.b

8.b

9.a

10.a

11.a

12.b

13.b

14.c

15.aI wrote a replacement question.

16.d

17.dI wrote a replacement question.

18.a

19.d

20.cI wrote a replacement question.

Exercise 1 Tuition and fees receivable

8,000,000

Tuition revenue

8,000,000

Scholarships expense

300,000

Bad debts expense

200,000

Tuition and fees receivable

300,000

Allowance for uncollectible accounts

200,000

Cash

6,400,000

Tuition and fees receivable

6,400,000

Cash

1,200,000

Auxiliary enterprises revenue

1,200,000

Educational and general expenses 2,800,000

Auxiliary enterprises expense

200,000

Cash

3,000,000

Interest expense

1,500,000

Mortgage payable

500,000

Cash

2,000,000

5.

Restricted cash

800,000

Deferred contribution revenue

800,000

6.

Educational expense

445,000

Restricted cash

445,000

Deferred contribution revenue

445,000

Contribution revenue

445,000

7.

Equipment

55,000

Cash

55,000

Exercise 2

The full amount of tuition charges is recognized. The tuition waivers and the uncollectible accounts should be reported as expenses. Therefore, the revenue of the enterprise fund is $1,350,000.

Exercise 3

Accounts receivable/Cash

10,000,000

Patient service revenue

10,000,000

2.

Charity service adjustments

200,000

Contract adjustments

700,000

Bad debt expense

350,000

Accounts receivable

900,000

Allowance for uncollectible accounts

350,000

Equipment

80,000

Notes payable

80,000

Restricted cash

2,200,000

Deferred contribution revenue

2,200,000

Construction in progress

180,000

Deferred contribution revenue

180,000

Restricted cash

180,000

Contribution revenue

180,000

Exercise 4

1.

Accounts receivable

1,600,000

Due from other funds

130,000

Service revenue

1,730,000

2.

Restricted cash

10,000

Customer deposits

10,000

3.

Cash

1,643,500

Accounts receivable

1,520,000

Due from other funds

123,500

4.

Customer deposits

4,000

Restricted cash

4,000

5.

Accounts receivable

14,000

Service revenue

14,000

Exercise 51. Equipment

125,000

Cash

25,000

Notes payable

100,000

2. Due from general fund

620,000

Due from enterprise fund

165,000

Service revenues

785,000

Cash

685,000

Due from general fund

520,000

Due from enterprise fund

165,000

3. Interest expense

2,000

Interest payable

2,000

($100,000 X .06 X 4/12 = $2,000)

Depreciation expense

8,333

Accumulated depreciation-equip.

8,333

($125,000 / 5 years) X 4/12 = $8,333

Exercise 61. Restricted cash 3,920,000

Discount on revenue bonds

80,000

Bonds payable

4,000,000

2. Depreciation expense

490,000

Accumulated depreciation-building

300,000 150,000

Accumulated depreciation-equipment

190,000

3. Construction in progress

600,000

Restricted cash

600,000

4. Interest expense

132,000

Discount on revenue bonds

2,000

Interest payable

130,000

(Interest payable = $4,000,000 x 6.5% x 1/2 = $130,000)

(Discount amortization = $80,000/20 x 1/2 = $2,000)

Exercise 71.Restricted cash

2,500,000

Deferred grant revenues

2,500,000

2.Expenses

1,600,000

Restricted cash

1,600,000

Deferred grant revenues

1,600,000

Nonoperating revenues--grants

1,600,000

3.Restricted cash

4,500,000

Deferred contributed capital

4,500,000

4.Construction in progress

3,000,000

Restricted cash

3,000,000

Deferred contributed capital

3,000,000

Contributed capital

3,000,000

Exercise 8Red River Municipal Golf Course Fund

Statement of Cash Flows

For the Year Ended December 31, 2006Cash Flows from Operating Activities:

Cash received from customers $ 650,000

Cash paid for operating expenses (548,000)

Net cash provided $ 102,000

Cash Flows from Noncapital

Financing Activities:

Cash received from short-term note 75,000

Cash paid for interest ( 3,000)

Operating transfer out - other funds (60,000)

Net cash provided 12,000

Cash Flows from Capital and Related

Financing activities:

Cash paid on capital improvements (85,000)

Net cash used ( 85,000)

Cash Flows from Investing Activities:

Interest received 2,000

Net cash provided 2,000

Net increase in unrestricted cash 31,000

Cash balance, January 1, 2006 15,000

Cash balance, December 31, 2006 $ 46,000Exercise 91. C

2. B

3. C

4. D

5. C

6. C

7. C

8. C

9. A

10. D

Exercise 10

Downtown University Motor Pool Fund

Statement of Cash Flows

For the Year Ended December 31, 2006Cash Flows from Operating Activities:

Cash received from customers $ 850,000

Cash paid for operating expenses (700,000)

Net cash provided $ 150,000

Cash Flows from Noncapital

Financing Activities:

Cash received from short-term note 40,000

Cash received from general fund -

Noncapital loan 20,000

Cash paid for interest ( 2,000)

Operating transfer out - other funds (65,000)

Net cash used ( 7,000)

Cash Flows from Capital and Related

Financing activities:

Principal paid on capital debt (50,000)

Interest paid on capital debt (10,000)

Cash paid on capital improvements (75,000)

Net cash used (135,000)

Cash Flows from Investing Activities:

Interest received 1,000

Net cash provided 1,000

Net increase in unrestricted cash 9,000

Cash balance, January 1, 2006 12,000

Cash balance, December 31, 2006 $ 21,0002009 Pearson Education, Inc. publishing as Prentice Hall

20-1PAGE 2009 Pearson Education, Inc. publishing as Prentice Hall

20-15