General Purpose Government

Chapter 1
Which of the following governments would be considered a general purpose government?
A)Mineral Valley State University.
B)Jackson County.
C)Billings Community Library.
D)Darien Consolidated School District.

Feedback: General purpose governments typically provide a wide array of service functions. This would be the case for a county government, whereas the other choices depict special purpose governments?entities that provide either a single service or a narrow range of services.

The organization that establishes accounting and financial reporting standards for the federal government is the:
A)Governmental Accounting Standards Board (GASB).
B)Federal Accounting Standards Advisory Board (FASAB).
C)Financial Accounting
Standards Board (FASB).
D)Cost Accounting Standards Board (CASB).

Feedback: The FASAB is the body recognized by the American Institute of CPAs to establish accounting and financial reporting standards for the federal government. According to the FASAB hierarchy, the FASAB is the only body authorized to establish GAAP for the Federal Government.

The Governmental Accounting Standards Board (GASB) has the authority to set accounting and financial reporting standards for all of the following except:
A)Governmental not-for-profit organizations.
B)State and local governments.
C)Public colleges and universities.
D)The federal government and its agencies and departments.

Feedback: Choice C may look like a good choice, but choice D is the only correct choice since the GASB does not set standards for the federal government. Public colleges and universities are not-for-profit components of state or local governments or stand-alone governments in their own right.

Which of the following concepts is the cornerstone of governmental financial reporting?
A)Relevance.
B)Interperiod equity.
C)Accountability.
D)Liquidity.

Feedback:
According to the GASB, accountability is the cornerstone of governmental financial reporting.

Federal accounting and reporting standards issued by the FASAB:
A)First require ratification by the GASB before being released.
B)Are considered authoritative guidance for the federal government and its agencies and departments under Rule 203 of the AICPA Code of Professional Conduct, as well as under the GAAP hierarchy promulgated by the FASAB.
C)Should not be construed as generally accepted accounting principles.
D)Both A and B are correct.

Feedback: Of these choices, only choice B is correct. See Illustration 1-1 and related discussion in this chapter.

The concept of interperiod equity relates to whether:
A)Current period revenues are sufficient to pay for current period services.
B)Current assets are larger than current liabilities.
C)The organization enforces a policy of tax equity.
D)All of the above.

Feedback: Of these choices, only choice A is correct. If interperiod equity is being achieved, then future taxpayers, or perhaps future generations, will not have to assume a financial burden for benefits received by present or past taxpayers.

Which authoritative standards-setting body focuses its standards on both internal and external financial reporting?
A)A
B)B
C)C
D)D

Feedback: Choice D is the correct answer. Only the FASAB, as shown in Illustration 1-2, has as an objective to provide information internally for such purposes as assessing budgetary integrity and adequacy of systems and controls. Also, the FASAB specifically identifies executives and program managers as primary information users.

As compared with business organizations, which of the following are distinguishing characteristics of governments and not-for-profit organizations?
A)Lower importance of cost accounting systems.
B)Resource providers expect benefits proportional to the resources provided.
C)Absence of profit motive.
D)All of the above.

Feedback: Choice C is the correct answer since a governmental entity does not exist to earn a profit. Choices A and B are both incorrect statements.

Financial reporting by state and local governments should be useful in making economic, social, and political decisions, and in assessing accountability by:
A)Assisting in determining compliance with finance-related laws, rules, and regulations.
B)Assisting financial report users in evaluating government profitability.
C)Improving government managers' capacity to deliver services to the public.
D)All of the above.

Feedback: GASB objectives for governmental financial reporting, as shown in Illustration 1-2, do not address internal management information needs. Also, seeking a profit is not a purpose of government; therefore, evaluating profitability makes no sense as an objective of financial reporting. Thus, choice A is the only correct response.

Which of the following is included in the minimum requirements for general purpose external financial reporting specified by GASB standards?
A)Management discussion and analysis (MD&A).
B)Government-wide financial statements.
C)Fund financial statements.
D)All of the above.

Feedback: All of the above choices are required parts of general purpose external financial reporting, as depicted in Illustration 1-3.

Fiscal accountability can best be assessed by which required basic financial statements?
A)Government-wide.
B)Governmental fund.
C)Both A and B are correct.
D)None of the above.

Feedback: Choice B is the right answer since the governmental fund financial statements have a current financial resources focus that is helpful in assessing short-term fiscal performance.

Which of the following required supplementary information (RSI) is designed to communicate in narrative, easily readable form the purpose of a state or local government's basic financial statements and current financial position?
A)Independent auditor's report.
B)Letter of transmittal.
C)Management's Discussion and Analysis (MD&A).
D)Notes to the financial statements.

Feedback: Choice C is the right answer and is the only item of RSI listed.

Government-wide financial statements are intended to assist financial statement users in assessing:
A)A
B)B
C)C
D)D

Feedback: Government-wide financial statements report on the government as a whole and are intended to help users assess operational accountability. The governmental fund financial statements are focused on fiscal accountability.

Which of the following is not one of the three categories of funds identified in Chapter 1?
A)Operating.
B)Governmental.
C)Proprietary.
D)Fiduciary.

Feedback: "Operating funds" are sometimes referred to in colloquial use, but it is not one of the fund categories recognized by the GASB.

The basis of accounting that reports revenues when measurable and available for spending, rather than when earned, is called the:
A)Cash basis.
B)Modified cash basis.
C)Modified accrual basis.
D)Accrual basis.

Feedback: As explained in Chapter 1, the modified accrual basis of accounting is used for reporting the financial information of the governmental funds. Under this basis of accounting, revenues are recognized when they are both measurable and available for spending.

Which of the following best describes the relationship between a government's comprehensive annual financial report (CAFR) and the minimum general purpose external financial reporting requirements under GASB standards?
A)The CAFR has the same content as the minimum requirements for general purpose external financial reporting.
B)The minimum requirements for general purpose external financial reporting are included as a part of a CAFR.
C)A CAFR is recommended but not required; the MD&A, basic financial statements (government-wide and fund, including notes), and required supplementary information other than MD&A are the minimum requirements for general purpose external financial reporting.
D)Both B and C are correct.

Feedback:
The MD&A, basic financial statements (government-wide and fund, including notes), and required supplementary information other than MD&A are the minimum requirements for general purpose external financial reporting. These items are just part of the Financial Section of a CAFR, one of the three sections found in a CAFR. The best answer then is choice D.

Which of the following would appropriately be reported in the financial section of a CAFR?
A)An MD&A.
B)Letter of transmittal.
C)Statistical tables and charts showing demographic and economic data.
D)All of the above.

Feedback:
Choice A, an MD&A, is required as part of the minimum requirements for general purpose external financial reporting and, therefore, would appropriately be included in the financial section of a typical CAFR. Choice B is part of the introductory section of a CAFR and choice C is part of the statistical section.

Federal agencies and departments provide which of the following information in their performance and accountability report?
A)A
B)B
C)C
D)D

Feedback: Consistent with the objectives of federal government reporting to focus on both the information needs of external users and internal managers, the PAR includes both a performance section and a basic financial statements section.

Which of the following is included as part of the Financial Report of the United States Government but not the performance and accountability report (PAR) prepared by federal agencies and departments?
A)MD&A.
B)A Citizen's Guide.
C)Financial statements.
D)All of the above are included in both reports.

Feedback: One of the features of the Financial Report of the United States Government is a "plain language" Citizen's Guide, which makes it easier for unsophisticated readers of the report to understand the complex information provided.

Which of the following reflects the appropriate classification categories for the net assets of not-for-profit organizations?
A)Restricted, designated, unrestricted.
B)Restricted and unrestricted.
C)Permanently restricted, temporarily restricted, unrestricted.
D)Program, management and general, fund-raising.

Feedback: FASB standards require that not-for-profit organizations report on management's compliance with donor restrictions on the use of resources by classifying their net assets in the three categories shown in choice C.

Chapter 2

Which of the following is not an activity category in which general purpose governments typically engage?
A)Fiduciary.
B)Contractual.
C)Business-type.
D)Governmental.

Feedback: As explained in this chapter, state and local governments typically engage in governmental, business-type, and fiduciary activities.

All of the following are part of the basic financial statements except:
A)Management's discussion and analysis.
B)The government-wide statement of net position.
C)The statement of revenues, expenditures, and changes in fund balances?governmental funds.
D)All of the above are part of the basic financial statements.

Feedback: Management's discussion and analysis is required supplementary information, but it is not part of the basic financial statements.

Which of the following is a basic fund financial statement?
A)Statement of revenues, expenditures, and changes in fund balances.
B)Statement of fiduciary net position.
C)Statement of cash flows.
D)All of the above are correct statements.

Feedback: Choices A, B, and C all identify fund financial statements. Therefore, choice D is the only correct answer.

Which of the following financial statements is required at the government-wide level?
A)Statement of activities.
B)Statement of revenues, expenditures, and changes in fund balances.
C)Statement of cash flows.
D)All of the above financial statements are required at the government-wide level.

Feedback: As shown on Illustration 2-2 and discussed in this chapter, the two required statements at the government-wide level are a statement of net position and a statement of activities.

GASB's first accounting and reporting principle requires that the accounting system used by a state or local governments must make it possible:
A)To prepare consolidated modified accrual basis statements for the governmental unit as a whole.
B)To present fairly and with full disclosure the funds and activities of the governmental unit in conformity with GAAP.
C)To demonstrate compliance with finance-related legal and contractual provisions.
D)Both B and C.

Feedback: Both Choices B and C are included in the GASB's first accounting and financial reporting principle.

A fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives, is known as a:
A)Public corporation.
B)Fund.
C)Activity.
D)Accounting system.

Feedback: This statement is essentially the GASB's definition of a fund, as defined in this chapter.

Which of the following basic financial statements is most useful in assessing fiscal accountability?
A)Statement of activities.
B)Statement of cash flows?proprietary funds.
C)Balance sheet?governmental funds.
D)Statement of fiscal accountability.

Feedback: The governmental fund statements are intended to assist in assessing a government's fiscal accountability. One of those statements is the balance sheet?governmental funds. Choice D may look like an obvious choice; however, there is no such statement.

The basis of accounting under which revenues are recognized when measurable and available is the:
A)Modified accrual basis of accounting.
B)Accrual basis of accounting.
C)Cash basis of accounting.
D)Modified cash basis of accounting.

Feedback: In governmental funds, resource inflows must be measurable and available. Available means collectible within the current period or soon enough thereafter to pay liabilities of the current period. This describes the modified accrual basis of accounting, choice A.

Depreciation expense for depreciable general capital assets should be reported on the:
A)Statement of revenues, expenditures, and changes in fund balances.
B)Statement of activities.
C)Statement of general capital assets.
D)All of the above.

Feedback: Depreciation expense for depreciable general capital assets should be reported at the government-wide level only, in the statement of activities. Choice C is not a financial statement prepared for external financial reporting.

Which of the following fund types focuses on the measurement of current financial resources and flows thereof?
A)General fund.
B)Capital projects fund.
C)Permanent fund.
D)All of the above.

Feedback: Choices A, B, and C, along with special revenue funds and debt service funds, comprise the governmental funds category. Governmental funds focus on current financial resources.

The accrual basis of accounting is used in accounting for financial transactions that affect:
A)Governmental activities at the government-wide level.
B)Proprietary funds.
C)Fiduciary funds
D)All of the above.

Feedback: The accrual basis of accounting is used for all fiduciary and proprietary funds, as well as for both governmental and business-type activities at the government-wide level. Thus, choice D is the correct choice.

General capital assets, such as buildings and equipment, would be recorded in the accounts of:
A)Governmental activities at the government-wide level.
B)Capital projects funds.
C)Permanent funds.
D)All of the above.

Feedback: Choices B and C are governmental fund types for which capital outlay expenditures are recorded for capital asset acquisitions, rather than recording the asset. The appropriate capital asset account is debited in the governmental activities journal at the government-wide level, as illustrated in Entry 2b of this chapter.

If a capital projects fund borrows $500,000 by issuing a 5-year note payable, how does this transaction affect the accounts of the capital projects fund?
A)Cash is increased by $500,000.
B)Fund balance is increased by $500,000.
C)Long-term liabilities are increased by $500,000.
D)Both A and B are correct.

Feedback: As perverse as this may seem, choice D is the correct answer. This transaction illustrates the fact that a capital projects fund, a governmental fund type, is concerned only with current financial resources and flows thereof. The $500,000 long-term liability would be reported in the governmental activities column of the government-wide statement of net assets.

Which of the following is not a fiduciary fund type?
A)Private-purpose trust fund.
B)Investment trust fund.
C)Permanent fund.
D)Pension trust fund.

Feedback: Choice C is the correct answer because a permanent fund is a governmental rather than fiduciary fund type.

Financial reporting for internal service funds differs from that for enterprise funds in which of the following ways?
A)Internal service funds use the accrual basis of accounting.
B)Internal service fund financial information is generally reported in the governmental activities column of the government-wide financial statements.
C)Major fund reporting is used for internal service funds.
D)Both B and C are ways in which financial reporting for internal service funds differ from that for enterprise funds.

Feedback: Choice B is a correct statement of how financial reporting for internal service funds typically differs from that for enterprise funds. Choice A is incorrect since all proprietary funds use the accrual basis of accounting. Choice C is stated backwards in that major fund reporting applies to enterprise funds but not to internal service funds.

The establishment of a fiduciary fund is warranted when:
A)Any trust or agency relationship exists.
B)The government needs to segregate resources for future construction purposes.
C)A trust or agency relationship exists in which the beneficiary is a private party (individuals, organizations, or other governments).
D)All of the above.

Feedback:
Choice C is correct. For an agency or trust relationship to be reported in a fiduciary fund requires that the beneficiary of the trust or agency be a private party, rather than the public at large or a program of the primary government.

Capital assets, including depreciation on those assets, would appropriately be reported in which of the following funds?
A)Capital projects.
B)Enterprise.
C)Pension Trust.
D)Both B and C.

Feedback: Governmental fund types, of which capital projects is one type, use the current financial resources measurement focus and the modified accrual basis of accounting. Thus, neither capital assets nor depreciation is reported in those funds. All proprietary and fiduciary funds, however, use the economic resources measurement focus and full accrual, similar to commercial accounting. Those fund types report capital assets and depreciation.

Financial information for fiduciary funds is reported in which of the following basic financial statements?
A)A
B)B
C)C
D)D

Feedback: As discussed in this chapter, the resources of fiduciary funds are held for the benefit of private parties and therefore cannot be used for the benefit of the general public or the government's own programs. Consequently, these activities are reported only in the fund financial statements and not in the government-wide financial statements.

Which of the following is always reported in a separate column of a governmental fund financial statement?
A)The General Fund.
B)Special revenue funds.
C)Permanent funds.
D)All of the above.

Feedback: Choice A is correct since the General Fund is always considered a major fund. Choices B and C would be correct only if particular special revenue or permanent funds were treated as major funds.

A certain city had several special revenue funds. Fund X had total revenues that exceeded 10 percent of total revenues for all governmental funds and exceeded 5 percent of total revenues for governmental and enterprise funds combined. Fund Y had total assets that exceeded 10 percent of total assets for all governmental funds and total revenues that exceeded 5 percent of total revenues for governmental and enterprise funds combined. Based on this information, which of these funds would be classified as a major fund?
A)Both funds X and Y.
B)Fund X only.
C)Fund Y only.
D)Insufficient information to determine which would be a major fund.

Feedback: The answer to this question may not be obvious, but the point is worth making. The same element (e.g., assets, liabilities, revenues, expenditures/expenses) must meet both the 10 percent and the 5 percent rule before a fund must be classified as a major fund. Fund Y does not meet this requirement. Management of a governmental unit has discretion, however, to classify any fund as a major fund, even if it does not meet the quantitative criteria.

Chapter 3 – expenditures Which of the following describes the recommended format for the government-wide statement of activities?
A)Revenues minus expenses equals change in net position.
B)Revenues minus expenditures equals change in fund balances.
C)Program expenses minus program revenues equals net (expense) revenue; net (expense) revenue plus general revenues, transfers, and net special and extraordinary items equals change in net position.
D)Program revenues minus program expenses minus general revenues and net special and extraordinary items equals change in net position

Feedback: Choice C describes the format depicted in Illustration 3-1.

Camden City receives occupancy taxes collected by all local hotels, motels, and inns. These revenues are restricted by state law for promotion of tourism. These tax revenues should be reported in the government-wide statement of activities as:
A)Program revenue of the city's Culture and Recreation Department, which is assigned responsibility for promoting tourism.
B)General revenue.
C)Either A or B, at the city's discretion.
D)Neither A nor B. These revenues should be reported only in the special revenue fund.

Feedback: GASB standards require that that all tax revenues, even those that are earmarked for a specific function or program, must be reported as general revenue.

Depreciation expense on general capital assets may be reported on the government-wide statement of activities as:
A)A direct expense of a function or program.
B)An indirect expense that can either be allocated to functions or programs on some appropriate basis, such as square footage of building use, or be reported on a separate line on the statement of activities.
C)Either A or B, as applicable.
D)None of the above. Depreciation expense is not reported for general capital assets.

Feedback: As noted in this chapter, depreciation expense generally is recorded and reported as a direct expense on the appropriate line for the related function or program.
Or it can be an indirect expense that is allocated on a rational basis to the appropriate functions or programs. Finally, if there is no rational basis for allocating depreciation to functions or programs, a government may report depreciation expense as a separate line-item. In this case, there should be a note explaining that this line does not include depreciation reported as direct expenses of functions or programs.

A revenue or expense that is significant in amount, beyond control of management, and is both unusual in nature and infrequent in occurrence should be reported as a (an):
A)Extraordinary item.
B)Significant item.
C)Special item.
D)Unusual/infrequent item.

Feedback:
This statement defines an extraordinary item. Extraordinary items, like special items, should be reported below general revenues, in the lower section of the statement of activities.

Under which basis of accounting is it appropriate to recognize expenditures rather than expenses?
A)Cash.
B)Modified cash.
C)Accrual.
D)Modified accrual.

Feedback: Expenditures rather than expenses should be recognized and reported when incurred by a governmental fund. The basis of accounting for these funds is modified
accrual.

Which of the following kinds of assets would be reported on the balance sheet for the General Fund or other governmental fund types?
A)Taxes receivable.
B)Inventory of materials and supplies.
C)Prepaid items.
D)All of the above.

Feedback: The General Fund and all other governmental fund types report only current financial resources (essentially cash and other assets that are expected to be converted into cash during the current fiscal year or soon thereafter). Choices A, B, and C all represent current assets and therefore would be reported on the balance sheet for governmental funds.

The Village of Wyclyffe levies its property taxes on November 1 each fiscal year. Taxes are due in two installments with due dates of December 1 of the current year and April 1 of the following year. Wyclyffe's fiscal year ends on December 31. To record a tax levy of $1,000,000, assuming all taxes will be collected when due, which account(s) will be credited as revenues of the current year in the General Fund and for what amounts?
A)Revenues, $1,000,000.
B)Revenues, $500,000; Deferred Revenues, $500,000.
C)Deferred Revenues, $1,000,000.
D)Either A or B, provided the village follows consistent recognition policies.

Feedback: This is an illustration of GASB's 60-day rule that applies to property tax revenue recognition, as described in this chapter. Any amounts not expected to be collected within 60 days of the end of the current fiscal year should be credited initially to Deferred Revenues. During the following fiscal year, Deferred Revenues will be debited and Revenues will be credited.

The expenditure classification "fuel and other vehicular supplies" is an example of which of the following types of classifications?
A)Activity.
B)Character.
C)Object.
D)Function.

Feedback: Choice C describes the things for which expenditures are made?i.e., fuel and other supplies required to operate and maintain the government's vehicles.

Which of the following is an activity classification for expenditures?
A)Traffic patrol.
B)Personal services.
C)Public Works.
D)Data Processing Department.

Feedback:
The activity classification is the line of work for which an expenditure is made. Thus, traffic patrol would be an activity classification. Choice B, personal services, is an object classification. Choice C describes a function of government and therefore is a function or program classification. Choice D is clearly an organizational unit classification.

Which of the following accounts is classified as an operating statement account rather than a budgetary account?
A)Encumbrances.
B)Estimated Other Financing Uses.
C)Appropriations.
D)Expenditures.

Feedback: Expenditures is an operating statement account in which actual, not estimated, amounts are recorded. The other accounts are all budgetary accounts for which estimated amounts are recorded.

An expenditure differs from an expense in which of the following ways?
A)An expenditure is recognized when paid in cash; an expense is recognized when incurred.
B)An expenditure is the estimated amount of a purchase; an expense is the actual amount.
C)An expenditure is the cost to acquire a good or service; an expense is the cost of a good or service consumed during the period.
D)There is no difference; an expenditure and an expense have the same meaning in governmental accounting.

Feedback: As choice C describes, an expenditure is the cost to acquire a good or service whereas an expense represents the cost of a good or service consumed during the period.

According to GASB standards, a budgetary comparison can be in the form of a:
A)Basic financial statement.
B)Required supplementary information schedule.
C)Note disclosure.
D)Both A and B are correct.

Feedback:
GASB standards require that a budgetary comparison be presented for the General Fund and each major special revenue fund for which a budget is legally adopted. The budgetary comparison can be a schedule (not statement) reported as part of required supplementary information reported after the notes to the financial statement (such as is shown in Illustration 3-5) or, optionally, a statement of revenues, expenditures, and changes in fund balances?budget and actual can be presented as one of the basic financial statements.

Fund balances of the General Fund at year-end represents the:
A)Citizens' equity?the amount that should be distributed to each citizen if the fund is liquidated.
B)Arithmetic difference between total assets and total liabilities of the fund, assuming there are no deferred outflows or inflows or resources.
C)Amount expected to be expended during the following year.
D)Amount available in the fund for new
spending.

Feedback: Of these choices, only Choice B is correct. Choice A is incorrect since fund balances are not analogous in any legal way to the owners' equity of a business. Choice C is incorrect since it is expected that a large amount of new revenues will provide additional resources for spending in the following year. Choice D is incorrect since the amount available for new spending excludes nonspendable amounts such as those representing inventories of supplies, noncurrent receivables, etc.

Which of the following inflows to a governmental fund would not be classified as revenue?
A)An interfund transfer in.
B)Charges to park users for picnic pavilions.
C)A grant from a higher level of government.
D)Both A and B would not be classified as revenue.

Feedback: Transfers from other funds and proceeds of long-term borrowing are reported as other financing sources of a governmental fund. Both choices B and C are properly reported as revenue. Thus, choice D is an incorrect answer.

Carthage City's budget for the next fiscal year requires that $1,200,000 of revenues be raised from property taxes. Its records indicate that an average 3 percent of taxes levied is never collected. To provide reasonable assurance that $1,200,000 of property tax revenues will be available for spending, the city's property tax levy (decimal amounts rounded to the next higher dollar) should be at least:
A)$1,237,114.
B)$1,200,000.
C)$1,164,000.
D)Some other amount.

Feedback: As in this chapter, the amount of the required levy to raise a required amount of revenue is calculated by dividing the required amount of revenue by the estimated collectible portion. In this case, the levy should be $1,200,000 divided by .97 or $1,237,114 (rounded to the next highest dollar). (In an actual case, the levy might vary slightly from this amount depending on the specific tax rate approved by the city's governing body to produce the net $1,200,000 needed for revenues.)

The balance of the Expenditures control account in a government's general ledger must equal:
A)The sum of the balances of the Encumbrances and Appropriations accounts.
B)The sum of the balances of the individual expenditure accounts in the Appropriations, Expenditures, and Encumbrances Subsidiary Ledger.
C)The balance of the Estimated Revenues account and Revenues accounts.
D)The difference between the balances of the Estimated Revenues and Budgetary Fund Balance accounts.

Feedback: When using subsidiary ledgers the sum of the balance of the accounts in the subsidiary ledger must equal the balance of the corresponding control account in the general ledger.

In a city's Appropriations, Expenditures, and Encumbrances Ledger, Available Appropriations (or, alternatively, Available Balance) of a particular account is calculated as:
A)Appropriations minus expenditures.
B)Appropriations minus encumbrances.
C)The sum of appropriations and encumbrances minus expenditures.
D)Appropriations minus the sum of encumbrances and expenditures.

Feedback: Choices A and B are both incomplete since both encumbrances and expenditures represent commitments or use of appropriations. Thus, choice D is the correct response (see Illustration 3-8).

At any given date during the year, the balance of a revenue detail account in the revenue subsidiary ledger represents the:
A)Amount of estimated revenues recorded in the budget entry at the beginning of the year.
B)The amount of revenues recognized from the beginning of the year to the given date.
C)The difference between the amount of estimated revenues recorded in the budget entry and revenues recognized to date.
D)The sum of the amount of estimated revenues recorded in the budget entry and revenues recognized to date.

Feedback: As shown in Illustration 3-7, the balance of any particular revenue detail account at a given date represents the difference between the debit balance of Estimated Revenue for that account and the cumulative credit balance for actual revenues recognized. Thus, the balance gives a direct indication of how much of the budgeted revenue has been realized to date.

The Encumbrances account should be credited when:
A)A purchase order is placed for goods.
B)Goods are received.
C)Vouchers for goods are approved for payment.
D)Checks are mailed.

Feedback: Choice B is correct. Encumbrances is debited and Encumbrances Outstanding is credited at the time goods are placed on order. This entry is reversed when goods are received.

Which of the following is part of the minimum external financial reporting requirements for a tax-supported independent public school district?
A)Management's discussion and analysis.
B)District-wide financial statements.
C)Fund financial statements.
D)All of the above.

Feedback: Choice D is the correct response because a tax-supported independent public school district is a primary government in its own right. Consequently, it follows the same financial reporting requirements as other local governments, plus the amplifying guidance of the NCES described in the appendix to Chapter 3.

Chapter 4- statements

A General Fund balance sheet differs from a government-wide statement of net position in that:
A)A General Fund balance sheet reports only current assets and liabilities; a government-wide statement of net position reports current and noncurrent assets as well as current and noncurrent liabilities.
B)A General Fund balance sheet reports material amounts of inventories of supplies; a government-wide statement of net position does not report inventories of supplies.
C)A General Fund balance sheet reports fund balances as restricted or unrestricted; a government-wide statement of net position segregates amounts of net position as net investment in capital assets, restricted, and unrestricted.
D)All of the above are correct.

Feedback:
Of these choices only choice A is a correct statement. Choice B is incorrect since material amounts of supplies inventories should be reported on both the General Fund balance sheet and government-wide statement of net position (see Illustration 4-1). Although choice C might look correct, it is not. Fund balances on the General Fund balance sheet should be reported as nonspendable and spendable. Spendable fund balances should be further classified as restricted, committed, assigned, and unassigned, not restricted and unrestricted.

The net position section of the government-wide statement of net position reports the three categories:
A)Restricted, committed, and unrestricted.
B)Net investment in capital assets, restricted, designated, and unassigned.
C)Net investment in capital assets, restricted, and unrestricted.
D)Restricted, designated, and nondesignated.

Feedback: Choice C is the only correct answer, as shown in Illustration 4-1.

The dual-track approach to governmental accounting used in this text is most useful because:
A)It parallels the approach used by most governments that have adopted GASB'S reporting model.
B)It is the only way that a government can meet the requirements of GASB'S reporting model.
C)Most governments do not possess the computer capabilities to classify and aggregate accounting information in the ways required to prepare both governmental and fund financial statements.
D)It helps the student learn the different ways in which accounting transactions and events affect the government-wide and fund financial statements, as well as providing a manual accounting system that aids in preparing both kinds of statements.

Feedback: As discussed under the heading "Dual-Track Accounting Approach," most governments and their vendors have continued to use their fund accounting software systems. Consequently, in the short-run it has been easier for these governments to account for all transactions and events in the usual way and then, with the help of their auditors, reclassify fund accounting information as necessary at year-end to prepare the government-wide financial statements. Thus, choices A and B are not valid reasons for you to use the dual-track approach to learning the GASB reporting model. Although, choice C may well be true, that also is not the main reason for our book to adopt the dual-track approach. The correct reason is given in choice D; that is, the dual-track approach serves to help you understand that particular transactions may have very different effects on the government-wide and fund financial statements because these statements are based on different measurement focuses and bases of accounting. Also, the dual-track approach is a manual accounting system that will enable you to prepare all required financial statements by the time you reach Chapter 9.

Which of the following is properly reported as a liability of the General Fund?
A)General Obligation Bonds Payable.
B)Vouchers Payable.
C)Capital Lease Obligations.
D)All of the above.

Feedback: The General Fund, and all governmental funds for that matter, report only current assets and current liabilities. The only current liability among the choices given is Vouchers Payable.

When the annual budget is recorded, the legislative authorization to expend resources is:
A)Credited to Appropriations.
B)Debited to Expenditures.
C)Credited to Expenditures.
D)Debited to Appropriations.

Feedback: As part of the journal entry to record the annual budget, the Appropriations account is credited for the amount of expenditures that have been authorized in the budget.

The Parks and Recreation Department ordered equipment estimated to cost $5,200 and an encumbrance was recorded in that amount. When the equipment was received at an actual cost of $5,100, the required General Fund journal entry should include:
A)A debit to Expenditures in the amount of $5,200.
B)A debit to Appropriations in the amount of $5,100.
C)A credit to Encumbrances in the amount of $5,200.
D)A debit to Encumbrances in the amount of $5,100.

Feedback: In the General Fund, Expenditures will be debited for the actual amount of $5,100 and Vouchers Payable will be credited. The original encumbrance entry will be reversed in the amount of $5,200. Equipment will be debited for $5,100 in the governmental activities general journal at the government-wide level.

Which of the following would be recorded as a program revenue in the governmental activities journal?
A)Property taxes.
B)Motor fuel taxes.
C)Sales taxes.

D)None of the above.
Feedback: GASB standards require that all taxes, even those that may be earmarked for a specific function or program, be reported as a General Revenue in the government-wide statement of activities. Thus, none of these items would be reported as program revenue.

Which of the following represents the typical sequence of expenditure-related transactions?
A)Appropriation, Encumbrance, Disbursement, Expenditure.
B)Appropriation, Encumbrance, Expenditure, Disbursement.
C)Encumbrance, Appropriation, Expenditure, Disbursement.
D)Encumbrance, Appropriation, Disbursement, Expenditure.

Feedback: Choice B is the best choice since it represents the typical sequence of budget authorization, place an order for goods, receipt of goods, and payment for goods received.

Stone Township's nonexempt taxable property has assessed valuation of $500,000,000. For the current fiscal year, Stone Township's Council has set a property tax rate of $4 per $100 of assessed valuation. For the past 10 years, property tax collections have averaged 96 percent of taxes levied. Based on this information, the journal entry in Stone Township's General Fund to record its tax levy will include a:
A)Debit to Taxes Receivable?Current in the amount of $19,200,000.
B)Debit to Taxes Receivable?Current in the amount of $20,000,000.
C)Credit to Revenues in the amount of $19,200,000.
D)Both B and C are correct.

Feedback: The journal entry will be a debit to Taxes Receivable?Current for $20,000,000 ($4 X ($500,000,000/$100)) and credits to Estimated Uncollectible Current Taxes for $800,000 and to Revenues for $19,200,000. Thus, choice D is the correct response.

On June 30, the end of the City of Dalton's current fiscal year, uncollected property taxes of $900,000 became delinquent. The related estimated uncollectible account balance on these taxes was $90,000. On the same date, penalties on the delinquent taxes were assessed in the amount of $45,000. The city estimated that 10 percent of the penalties would not be collected. The journal entry in the General Fund to record the reclassification of current taxes to delinquent status will include a:
A)Debit to Estimated Uncollectible Current Taxes for $90,000.
B)Debit to Estimated Uncollectible Delinquent Taxes for $90,000.
C)Credit to Deferred Revenues for $900,000.
D)Credit to Revenues for $45,000.

Feedback: As illustrated in journal entry 10, the contra-receivable account Estimated Uncollectible Current Taxes must be reclassified to delinquent status by debiting this account and crediting Estimated Uncollectible Delinquent Taxes. The other choices all reflect incorrect entries.

(This question uses the same data as Question 10, which is repeated here.) On June 30, the end of the City of Dalton's current fiscal year, uncollected property taxes of $900,000 became delinquent. The related estimated uncollectible account balance on these taxes was $90,000. On the same date, penalties on the delinquent taxes were assessed in the amount of $45,000. The city estimated that 10 percent of the penalties would not be collected. The journal entry in the General Fund to record the penalties on delinquent taxes will include a:
A)Debit to Estimated Uncollectible Delinquent Taxes for $90,000.
B)Credit to Deferred Revenues for $900,000.
C)Credit to Revenues for $40,500.
D)Debit to Interest and Penalties Receivable for $90,000.

Feedback: Recording this event requires a journal entry to reclassify the current tax receivable and its related estimated uncollectible account balance to delinquent status. In addition, an entry is made to recognize interest and penalties receivable, an estimated uncollectible amount, and revenues, recorded net of the estimated uncollectible amount. The only choice that would correctly be part of these entries is choice C?a credit to Revenues in the amount of $40,500 ($45,000 less 10% of $45,000). (See illustrative journal entries 10 and 11a in Chapter 4.)

Late in its fiscal year, a federal agency approved Hilton Village's application for a $400,000 operating grant to provide recreational activities for at-risk youth. The program will begin in the following fiscal year. The grant provides for reimbursement of expenditures for services to eligible recipients rendered during the following fiscal year. On the notification date, the village's journal entry in the General Fund should include a:
A)Debit to Due from Federal Government.
B)Credit to Deferred Revenues.
C)Both A and B are correct.
D)None of the above. No entry should be made until all eligibility requirements have been met.

Feedback: This transaction is an example of a voluntary nonexchange transaction. For these transactions, unless cash is received in advance, which is not the case here, no journal entry is made until all eligibility requirements have been made, or choice D.

The governing body of the City of Taunton approved additional appropriations of $3,000 to cover unexpected overtime costs of the fire department. Approval of the additional appropriations will require a:
A)Debit to Encumbrances.
B)Debit to Appropriations.
C)Debit to Budgetary Fund Balance.
D)Debit to Supplemental Appropriations.

Feedback:
The journal entry to record this budget amendment will require a debit to Budgetary Fund Balance and a credit to Appropriations. Therefore, C is the only correct choice.

The General Fund received $100,000 in lieu of taxes from the city owned water utility, an enterprise fund. This amount approximates the value of services provided to the utility by departments accounted for by the General Fund. This is an example of a (an):
A)Interfund transfer.
B)Interfund loan.
C)Internal exchange transaction for interfund services provided and used.
D)Reimbursement.

Feedback: A payment in lieu of taxes from a government's own utility is an example of what is described in the text as an internal exchange transaction. As mentioned in this chapter, the GASB simply refers to these transactions as interfund services provided and used. The key point is that an expenditure/expense and revenue are recognized as if one of the parties to the transaction were external to the government.

The General Fund recorded a liability to the city owned electric utility (an enterprise fund of the city) for electric power used during the prior month. The journal entry for the General Fund will include:
A)A debit to Expenditures.
B)A debit to Interfund Transfers Out.
C)A debit to Encumbrances.
D)None of the above.

Feedback: This is an example of an internal exchange transaction, so it appropriate to debit Expenditures as service is received.

An interfund transfer out should be reported in a governmental fund operating statement as a (an):
A)Due to other funds.
B)Other financing use.
C)Expenditure.
D)Change in fund balance.

Feedback: Interfund transfers are reported as either other financing sources or other financing uses, depending on whether the transfer is in or out. In this case, choice B is correct.

On July 1, the first day of its fiscal year, Claret City levied a $2,000,000 property tax which is payable in full on December 1 of the same year. On September 15, the city decided to borrow $100,000 in 90-day, 5 percent tax anticipation notes to cover operating expenditures until the tax revenues are collected. The journal entry in the General Fund on September 15 to record the issuance of tax anticipation notes will include:
A)A credit to Other Financing Sources?Proceeds of Tax Anticipation Notes.
B)A credit to Tax Anticipation Revenue.
C)A credit to Tax Anticipation Notes Payable.
D)Either B or C is acceptable if consistently applied.

Feedback: Tax anticipation notes are a current liability of the General Fund. Thus, it is appropriate to record them as such, as in choice C.

The Revenues account of a state or local government is debited when:
A)Property taxes are recorded.
B)Property taxes are collected.
C)The budget is recorded at the beginning of the year.
D)The account is closed at the end of the year.

Feedback: The Revenues account is credited as revenues are recognized during the year. Except for special cases, such as removing an erroneous entry from the Revenues account or correcting an overstatement of revenue, the only time the account would be debited would be when it is closed to Fund Balance at fiscal year-end. Thus, choice D is the only correct choice among those available.

The City of Ashland uses a periodic inventory system in which the amount of inventory at year-end is unknown until a physical count is completed. The town uses the purchases method of accounting for its inventory of consumable supplies in the General Fund. Assume that the inventory of supplies reported on the General Fund balance sheet at the end of the previous fiscal year, December 31, 2013, was $44,000 and a physical count as of December 31, 2014, reveals that the inventory is only $40,000. During the year, the town records all purchases of supplies as debits to Expenditures. The adjusting journal entry in the General Fund at December 31, 2014, will include a:
A)Debit to Fund Balance--Unassigned in the amount of $4,000.
B)Credit to Expenditures?2014 in the amount of $4,000.
C)Credit to Inventory of Supplies in the amount of $4,000.
D)Credit to Inventory of Supplies in the amount of $44,000.

Feedback: This question may require some thought, but what should be obvious is that since inventory decreased during the year, it is necessary to reduce the balance of the Inventory of Supplies account by the amount of the decrease, or $4,000. Thus, the only correct answer is choice C. Choice A is incorrect since Fund Balance?Unassigned would be credited and Fund Balance?Nonspendable?Inventory of Supplies would be debited for the $4,000 decrease. Choice B is incorrect since no adjustment of Expenditures is required using the purchases method. Choice D is incorrect since the credit to Inventory of Supplies should be only for the amount of inventory decrease.

During January 2014 General Fund supplies ordered in the previous fiscal year and encumbered at an estimated amount of $1,000 were received at an actual cost of $1,100. The entry to record this transaction will require a debit to:
A)Expenditures?2014 in the amount of $1,100.
B)Expenditures?2014 in the amount of $100.
C)Expenditures?2013 in the amount of $1,100.
D)Encumbrances?2013 in the amount of 1,000.

Feedback: Expenditures should be charged to the appropriations of the fiscal year to which they apply. So, in this case, the encumbrance of $1,000 had been made against the FY 2013 appropriation and Encumbrances in this amount was carried over from 2013. Thus, the expenditure should be coded as 2013 so that the $1,000 will not be charged against the 2014 appropriation for purposes of actual vs. budget comparisons in 2014. On the other hand, the excess of the actual cost over what had been estimated, $100 in this case, had not been provided for in the carryover reserve for encumbrances and should be charged to the 2014 appropriation, by debiting Expenditures?2014 for $100.

Which of the following is a correct statement regarding the schedule of revenues, expenditures, and changes in fund balance?budget and actual prepared for the General Fund?
A)Both the original and final budgeted amounts must be reported.
B)Actual amounts should be reported using the budgetary basis.
C)Only expenditures charged to the current period appropriations should be reported in this schedule.
D)All of the above.

Feedback: Choices A, B, and C are all correct statements.

Permanent funds differ from endowed private-purpose trust funds in that:
A)Permanent funds use the modified accrual basis of accounting.
B)They consist of donated amounts for which the principal must be preserved (i.e., endowments) and only the earnings thereon can be used for the specified purpose of the trust.
C)Their investments in stock and in bonds maturing more than one year from receipt must be reported at fair value as of the balance sheet date.
D)All of the above.

Feedback:
Of the choices provided, choice A is the only correct statement of a difference between permanent funds and a similar endowment-type private-purpose trust fund. Choices B and C reflect characteristics that may be common to both permanent funds and private-purpose trust funds.

The Town of Waynesville received a gift of $500,000 that is to be invested by the town and the earnings thereon are to be used for maintenance of the Waynesville Community Cemetery. The town has determined that a permanent fund will be established to account for this gift. The journal entry in the permanent fund to record receipt of the cash gift will include a:
A)Credit to Revenues?Contributions for Endowment.
B)Credit to Net position?Restricted for Endowment.
C)Credit to Fund Balance?Nonspendable?Principal of Permanent Fund.
D)Any of these is appropriate, if applied consistently.

Feedback: This question illustrates the principle under GASB standards that all inflows must be recorded to a temporary operating statement account so that they are reported in the statement of revenues, expenditures, and changes in fund balances. Thus, choice A is the correct answer. It is true, however, that Revenues?Contributions for Endowment will be closed at year-end to Fund Balance? Nonspendable?Principal of Permanent Fund, as shown in journal entry 5 under the Permanent Funds section of Chapter 4.

In which class of nonexchange transactions are revenues recognized when the underlying exchange has occurred?
A)Imposed nonexchange revenues.
B)Derived tax revenues.
C)Voluntary nonexchange transactions.
D)Government-mandated nonexchange transactions.

Feedback: As shown in Illustration A4-1, in the derived tax revenues class (e.g., sales and income taxes), revenues are recognized when the underlying transaction has occurred.

Which of the following is a correct statement regarding interim financial reporting for state and local governments?
A)Interim financial reporting to bondholders and other creditors is required on a quarterly basis.
B)Currently, interim financial reporting is not required to parties outside the government.
C)At a minimum, interim financial information, such as actual and budgeted revenues and expenditures for the year to date, should be prepared for use by internal managers on a quarterly, monthly, weekly, or other periodic basis, as needed.
D)Both B and C are correct.

Feedback: As explained in Appendix B to this chapter, state and local governments are not required to report interim financial information to external parties. However, because of the critical role of budgetary compliance in the government setting, interim reporting of actual vs. budgeted revenues and expenditures on the periodic basis needed is essential for use by internal managers and perhaps the governing body. Thus, choice D is the best response.

Chapter 5 – capital assets

Which of the following would be reported as a general capital asset?
A)A garbage truck purchased and used by the city's Solid Waste Disposal Fund, an enterprise fund.
B)An off-set printer purchased and used by the city's Central Duplicating Fund, an internal service fund.
C)A computer purchased and used by the Finance Department, a function of the General Fund.
D)All of the above are general capital assets.

Feedback: As indicated in Chapter 5, a capital asset acquired and used by an activity accounted for in a governmental fund type is a general capital asset. These assets are accounted for in the governmental activities general ledger at the government-wide level and not in any governmental fund. A capital asset owned by a proprietary or fiduciary fund is accounted for in that fund and is reported as an asset of that fund. Internal service fund capital assets are also reported in the Governmental Activities column of the government-wide statement of net position if the internal service fund predominately serves governmental funds. Enterprise fund capital assets are reported in the Business-type Activities column of the government-wide statement of net position. Fiduciary fund financial information, including that related to capital assets, is reported only in the fund financial statements and not in the government-wide financial statements.

The Village of Jonesburg had the following General Fund capital outlay expenditures during its current fiscal year:

Assuming these were the only capital outlays for the fiscal year, the amount to be reported as capital assets on the Village's General Fund balance sheet at the end of the current fiscal year is:
A)$50,000.
B)$47,000.
C)$3,000.
D)$0.

Feedback: This may seem to be a trick question, but it really is not. Just recall that capital assets are not reported on the balance sheet of any governmental fund. Instead, all general capital assets are reported in the Governmental Activities column of the government-wide statement of net position.

Which of the following would not be reported as a general capital asset?
A)Water rights acquired by the state's Department of Conservation, a function of the General Fund.
B)The inventory of asphalt held by the city's Street Maintenance Department, a function of the General Fund.
C)A new bridge constructed by the county and maintained by the Public Works Department, a function of the General Fund.
D)The sculptures of an internationally known local artist purchased by the mayor's office, a function of the General Fund, for display in city hall.

Feedback: Of the items listed, only inventory would be considered a current asset rather than a capital asset. Water rights are intangible assets, which are classified as capital assets under GASB standards. The bridge is an infrastructure asset. Since it is maintained by a function of the General Fund it would be considered a general capital asset. Sculptures would be classified as works of art. It is possible that the city would opt not to record works of art as a general capital asset, but it must report (note disclosure) the assets even if it opts not to record them (see page 172 of the text).

Regarding calculation and reporting of depreciation on capital assets, for which of the following capital assets would accumulated depreciation be reported on the government-wide statement of net position?
A)A
B)B
C)C
D)D

Feedback: Depreciation is reported for all depreciable capital assets reported on the government-wide statement of net position, both those reported in the Governmental Activities column (i.e., general capital assets and most internal service fund capital assets) and those reported in the Business-type Activities column (i.e., enterprise fund capital assets). Fiduciary fund financial information is reported only in the fund financial statements, not in the government-wide financial statements.

Which of the following is a required disclosure regarding capital assets?
A)Capital assets that are not being depreciated should be reported separately from those that are being depreciated.
B)Depreciation expense for the year with disclosure of the amounts charged to each function on the statement of activities.
C)An explanation concerning major changes in a capital asset category during the year.
D)Both A and B are required disclosures.

Feedback: Choices A and B are required disclosures about capital assets as discussed on pp. 171-172 of the text. While changes to capital asset categories are disclosed, no explanations concerning capital asset changes are required.

State and local governments can avoid reporting depreciation on infrastructure assets if they use the modified approach and meet which of the following two requirements?
A)(1) Manage the eligible infrastructure assets using an asset management system that includes (a) an up-to-date inventory, (b) condition assessment and results using a measurement scale, and (c) estimates of the amount needed to maintain and preserve assets at the condition level established. (2) Document that the eligible assets are being preserved at or above the condition level established.
B)(1) File a "Declaration of Intent to Follow the Modified Approach" with the GASB. (2) Agree in writing to maintain infrastructure assets at a high condition level.
C)(1) Agree in writing to maintain infrastructure assets at a high condition level. (2) Document that the assets are, in fact, being maintained at the high condition level established.
D)None of the above. A government cannot avoid reporting depreciation on infrastructure assets, even if it adopts the modified approach.

Feedback: These two statements paraphrase quite closely the two requirements printed on p. 176. Choices B and C may seem to make sense, but they are not correct, in part because GASB does not require that any particular condition level be established.

Elm City sold a truck for $5,000 that had an original cost of $32,000. Accumulated depreciation on the truck, which had been used by the Parks and Recreation Department, amounted to $28,000 at the date of the sale. The journal entries to record this transaction will include a (an):
A)Debit to Cash for $5,000 in the General Fund journal only.
B)Credit to Other Financing Sources?Proceeds of Sales of Assets for $1,000 in the governmental activities journal.
C)Credit to Gain on Disposal of Equipment for $1,000 in the governmental activities journal at the government-wide level.
D)All of the above.

Feedback: Choice A is incorrect since Cash would be debited in both the General Fund and governmental activities journals. Choice B is incorrect since the amount of the credit would be $5,000.

Which of the following would be part of the journal entries to be made at the inception of a lease if a government leases a computer for the Police Department, a General Fund department?
A)A debit to Expenditures in the General Fund in an amount equal to the annual lease payment.
B)A debit to Equipment in the governmental activities journal in an amount equal to the present value of the minimum lease payments or fair value of the asset, whichever is lower.
C)A credit to Other Financing Sources?Capital Lease Agreements in the governmental activities journal in the amount equal to the present value of the minimum lease payments.
D)All of the above.

Feedback: Choice A is incorrect since the amount should be the present value of the minimum lease payments to be made over the life of the lease, not the annual lease payment. Choice C is incorrect since the credit at the government-wide level should be to the long-term liability account, Capital Lease Obligations Payable.

Upon the recommendation of its communications director, the City Council has decided that Southland City's public access Internet system has become obsolete and, therefore, meets the GASB's definition of an impaired asset. The amount of impairment is estimated at $100,000. Assuming that the Internet system has been managed by the City's Public Affairs Department, a function of the General Fund, and is not insured, the asset impairment will be recorded as a:
A)Debit to Other Financing Use?Decline in Value of Equipment the General Fund general journal.
B)Debit to Expenses?Public Affairs.
C)Credit to Equipment in the governmental activities journal at the government-wide level.
D)Both B and C are correct.

Feedback: Choice A is incorrect because the loss is not reported at all in the governmental funds operating statement, but instead is reported as program expense of the appropriate governmental activities function or program as indicated in Choice B. Choice C is also required, as indicated on p. 180 of the text.

Which of the following accounts would be least likely to be found in the general ledger of a capital projects fund?
A)Construction Work in Progress.
B)Expenditures.
C)Revenues.
D)Encumbrances.

Feedback: Construction Work in Progress is a capital asset account and therefore would not be appropriate for a governmental fund type such as a capital projects fund. Instead, Construction Work in Progress would be found in the general ledger for governmental activities at the government-wide level.

During the current fiscal year, Midwest City incurred $500,000 of construction costs on its new city jail project and $15,000 of interest expense for bonds issued to finance the project. The City's engineers estimated the project, begun early in the current fiscal year, was 50 percent complete at year-end. Midwest City's financial statements will reflect which of the following items related to this project?
A)Construction Work in Progress of $515,000 in the Governmental Activities column of the government-wide statement of net position.
B)Construction Expenditures of $515,000 in the capital projects fund statement of revenues, expenditures, and changes in fund balances.
C)Construction Work in Progress of $500,000 in the Governmental Activities column of the government-wide statement of net position.
D)Both A and B are correct.

Feedback: Construction Work in Progress is a capital asset account. Therefore, it would be reported in the Governmental Activities column of the government-wide statement of net position but not on the balance sheet for the capital projects fund. Choices A and B are incorrect in that interest expense incurred for construction is not capitalized for general capital assets, per the discussion on pp. 186 and 194 of the text.

Which of the following capital assets would not be depreciated?
A)The city's police vehicles.
B)Purchased computer software.
C)The partially completed city hall.
D)The art work owned and displayed in the city parks.

Feedback: Depreciation is reported for all depreciable capital assets reported on the government-wide statement of net position, both those reported in the Governmental Activities column (i.e., general capital assets and most internal service fund capital assets) and those reported in the Business-type Activities column (i.e., enterprise fund capital assets). Depreciation is generally not recorded on construction work in progress until the asset is completed and reclassified as a depreciable asset. Choice D might be a correct answer, if the art work is capitalized, as discussed on page 171 of the text.

A city completed construction of its new library. It was decided that the $10,000 remaining in the capital projects fund at the completion of construction should be used to service the long-term debt issued to construct the library. Which of the following is correct concerning the closing of the capital projects fund?
A)The capital projects fund would debit Expenditure?Principal and credit Cash for $10,000.
B)The capital projects fund would debit Other Financing Uses?Interfund Transfer Out and credit Fund Balance for $10,000.
C)The governmental activities journal at the government-wide level would make no journal entry.
D)None of the above journal entries is correct concerning the closing of the capital projects fund.

Feedback: Since the $10,000 remaining in the capital projects fund is to be used to service long-term debt, it should be transferred to the debt service fund. To record the transfer of funds the capital projects fund would debit Other Financing Uses?Interfund Transfer Out and credit Cash for the $10,000, making choices A and B incorrect. Because the transfer occurs between two governmental funds, it would not be recorded at the government-wide level, as indicated by choice C.

After final inspection of the construction work on its new county jail, Carter County incurred an additional $50,000 of costs for site cleanup and interior rework performed by employees of the Public Works Department. The County had previously retained $40,000 of construction billings from the jail contractor to cover rework or project remediation. The journal entry or entries to record the additional work will include a:
A)Debit to Construction Expenditures in the amount of $50,000 in the capital projects fund journal.
B)Debit to Construction Expenditures in the amount of $10,000 in the capital projects fund journal.
C)Debit to Contracts Payable?Retained Percentage in the amount of $10,000 in the governmental activities journal.
D)Both B and C are correct.

Feedback: Construction Expenditures is debited for the amount that the cost of additional remedial work by a government's own force exceeds the balance of Contracts Payable?Retained Percentage. In this case, the debit is for $10,000 since that is how much the cost of site cleanup and interior rework exceeds the $40,000 balance of retained monies. Choice C is incorrect because the debit to Contracts Payable?Retained Percentage should be for the full amount of $40,000 that had been retained.

Brisbane Township issued $1,000,000 of 6-month bond anticipation notes to facilitate the beginning of street construction while waiting to see if market conditions improved before issuing $10 million of bonds. Brisbane has a written agreement with an investment firm, Pitch Municipal Services, Inc., to refinance the $1,000,000 of bond anticipation notes with $1,000,000 of bonds when the $10 million of bonds are issued during the next few months. Recording the issuance of the bond anticipation notes will include a:
A)Credit to Other Financing Sources?Proceeds of Bond Anticipation Notes in the capital projects fund journal.
B)Credit to Bond Anticipation Notes Payable in the capital projects fund journal.
C)Credit to Estimated Other Financing Sources?Proceeds of Bonds in the governmental activities journal at the government-wide level.
D)None of the above.

Feedback: The fact situation described in this question indicates that the two criteria described on p. 193 in the text are met. Thus, the debt is reported as a long-term liability in the Governmental Activities column of the government-wide statement of net position and as an other financing source (Proceeds of Bond Anticipation Notes) in the capital projects fund. Accounting for the issuance of the bond anticipation notes would be as illustrated on p. 193.

An interfund transfer from the General Fund to partially finance a capital projects fund would be reported by the capital projects fund as a (an)
A)Fund balance addition.
B)Other financing source.
C)Revenue.
D)Current liability.

Feedback: This interfund transfer would be recorded as an other financing use by the General Fund and as an other financing source by the capital projects fund.

The county issued bonds to construct a new jail facility. Sale of the bonds occurred between interest payment dates. Which of the following statements concerning the sale of bonds between interest payment dates is correct?
A)Additional cash, in the amount of the accrued interest, will be available for use by the capital projects fund.
B)The capital projects fund will have a decrease in cash available for use equal to the amount of accrued interest.
C)The amount of accrued interest will have no effect on the cash available for use by the capital projects fund.
D)It is a management decision how accrued interest is used by the capital projects fund.

Feedback: Accrued interest is the result of the party buying the bonds paying up front the amount of interest accrued (but not earned by the buyer) from the date of the bond issue to the date of purchase. As a result, the additional cash resulting from accrued interest is used by the debt service fund to make the first interest payment due on the debt used to finance the new jail facility. Therefore, the accrued interest has no effect on the cash available for use by the capital projects fund.

A capital projects fund will sometimes report a large excess of expenditures over revenues and other financing sources in its operating statement during the early stages of construction. The most likely reason is:
A)Short-term debt has been used for interim financing.
B)Poor management, resulting in large cost overruns.
C)Insufficient planning.
D)Inadequate financing.

Feedback:
If short-term financing is used to pay for early stages of the construction and such financing has not met the rollover debt criteria included in GASB Codification, Sec. B50.101 and GASBS 62, pars. 39?43 (see p. 193), then a liability will be reported in the capital projects fund for the short-term debt and an expenditure will be reported for spending the debt proceeds. This creates an interim situation where there are few assets and the liability is offset by a large fund deficit.

Which of the following accounts will be debited in the capital projects fund journal when a contractor billing that was previously recorded is paid?
A)Construction Expenditures.
B)Contracts Payable.
C)Construction Work in Progress.
D)All of the above.

Feedback: When the billing was previously recorded, Construction Expenditures was debited and Contracts Payable was credited. When the billing is paid Contracts Payable, less any amount of retainage authorized under the contract, will be debited and Cash will be credited.

In the basic financial statements of a government, financial information for a capital projects fund will be reported in a separate column if:
A)The capital projects fund qualifies as a major fund.
B)The capital project is still ongoing at the end of the fiscal year.
C)Sufficient information has not been disclosed about the capital project in the notes to the financial statements.
D)All of the above.

Feedback:
Under the GASB reporting model, a governmental fund or enterprise fund has its own separate column in the governmental fund or proprietary fund basic financial statements only if the fund meets the criteria for or is designated by management as a major fund.

Chapter 9

If a component unit is, in substance, a part of the primary government, its financial data should be reported:
A)In a separate column from that of the primary government.
B)By discrete presentation.
C)By blending.
D)All of the above are acceptable methods of display.

Feedback: If a component unit is, in substance, a part of the primary government, either because its governing board is substantially the same as the primary government or it provides services entirely or almost entirely to the primary government, its financial information should be reported in the same columns as that of the primary government. Such blended reporting applies to both the government-wide and fund financial statements.

The primary criterion considered in determining whether a potential component unit should be reported as part of the governmental reporting entity is:
A)Financial interdependence.
B)Financial accountability.
C)Political responsibility.
D)Taxing authority.

Feedback: The primary criterion is financial accountability. In short, if the elected officials of the primary government are financially accountable for another organization (i.e., a component unit) that organization must be reported as part of the reporting entity.

Six of the nine members of the board of trustees of the Clinton Sewer District are appointed by the village council of Clinton and the council has the power to remove board members at its discretion. In addition, the village must approve any bond issues of the sewer district and is secondarily obligated to pay debt service on bonds recently issued by the district to construct a new sewage treatment plant, should sewage revenues be insufficient to make principal and interest payments. Based on the GAAP criteria for defining the reporting entity it would appear that:
A)Financial data for the sewer district should be reported as part of the Village of Clinton reporting entity.
B)The sewer district is financially dependent on the primary government.
C)The village has the ability to impose its will on the sewer district.
D)All of the above.

Feedback: The fact situation described in this question indicates that the village council can impose its will on the sewer district board and that there is significant financial interdependency between the district and the village. Thus, there can be little doubt that the sewer district should be included in the reporting entity.

A majority of the members of the Jamestown library board are appointed by the city council of Jamestown, but the city council has no power to remove members for cause (removal requires a recall petition vote by voters of the Library District). The Library District is a separate legal entity. The library board has the power to levy its own property taxes and, with the approval of a majority of registered voters in the district, can issue tax-exempt bonds. Although the Library District must submit an informational copy of its annual budget to the city council, the council's approval is not required. The city has no obligation to subsidize the Library District's operations and has no obligation for its debt. The city has no claim on any financial resources of the Library District. Based on the GAAP criteria for defining the reporting entity it would appear that:
A)The city council is able to impose its will on the Library District.
B)The Library District is a component unit of the city reporting entity.
C)The Library District is not a component unit of the city reporting entity.
D)Both A and B are correct.

Feedback:
Based on the facts presented, it would appear that the city is not financially accountable for the Library District. Thus, the Library District should not be included as part of the city's reporting entity.

Which of the following is correct regarding interim financial reports?
A)Interim reporting is highly recommended for sound financial administration.
B)GASB standards require quarterly reports.
C)The Securities and Exchange Commission requires state or local governments with outstanding public debt to provide quarterly financial reports to bondholders.
D)Both B and C are correct.

Feedback: Unless it is required by state law or local ordinances, interim reporting is left to the discretion of the government. However, without the use of periodic interim reports, it is hard to conceive how effective budgetary and financial control could be maintained.

The three sections of a comprehensive annual financial report (CAFR) prepared in conformity with GASB standards are the:
A)MD&A, basic financial statements, and notes to the financial statements.
B)Introductory, financial, and statistical sections.
C)MD&A, financial, and statistical sections.
D)Audit, MD&A, and the financial section.

Feedback:
Although governments are not required to prepare a CAFR, they are highly encouraged to do so. When they do prepare a CAFR, the prescribed sections are introductory, financial, and statistical.

Under GASB standards, the financial section of a comprehensive annual financial report (CAFR) includes:
A)Basic financial statements that include both government-wide and fund financial statements.
B)Combining statements and individual fund statements.
C)Required supplementary information.
D)All of the above.

Feedback: All of the items listed above are required parts of the financial section of a CAFR.

Which of the following items is recommended for inclusion in the introductory section of a CAFR?
A)Management's discussion and analysis (MD&A).
B)Audit report.
C)Letter of Transmittal.
D)All of these items are recommended for inclusion in the introductory section.

Feedback:
The MD&A and audit report are parts of the financial section of the CAFR. In fact, the MD&A is a part of the minimum requirements for external financial reporting. A letter of transmittal, table of contents, and other information at the discretion of management should be included in the introductory section. Information included in the introductory section should not duplicate what is reported in the MD&A.

Under the GASB reporting model, which of the following is not a basic financial statement?
A)Schedule of revenues, expenditures, and changes in fund balance?budget and actual.
B)Statement of activities.
C)Statement of revenues, expenses, and changes in fund net position?proprietary funds.
D)Statement of changes in fiduciary net position.

Feedback:
Budget to actual information is considered required supplementary material under the GASB reporting model. The fact that A is a schedule of revenues, expenditures and changes in fund balance is also an indication that this choice is not a financial statement.

Under the GASB reporting model, net position in the government-wide statement of net position should be divided into the categories of:
A)Reserved, unrestricted?designated, unrestricted?undesignated.
B)Net investment in capital assets, restricted, and unrestricted.
C)Unrestricted, temporarily restricted, and permanently restricted.
D)None of the above is correct.

Feedback: The GASB reporting model segregates net position into the three categories: net investment in capital assets, amounts that have been restricted by contract or law, and amounts that are unrestricted and thus may be used at the discretion of management.

Which of the following is not a true statement regarding a management's discussion and analysis (MD&A) prepared by a state or local government?
A)The MD&A should provide an overview of the government's financial activities and financial highlights.
B)The MD&A should provide a narrative explanation of the contents of the CAFR.
C)The MD&A should provide management's long-term forecast of the government's financial condition.
D)The MD&A should describe the government's financial condition, financial trends of the government as a whole and of its major funds, budgetary highlights, and activities affecting capital assets and related debt.

Feedback:
Based on currently known facts, management should discuss economic factors and budget and tax rates for the next year. Long-term forecasts in the MD&A are not permitted by GASB standards.

Which of the following statements is true regarding the basic financial statements prepared for governmental funds in the GASBS reporting model?
A)The governmental funds financial statements display totals for each fund type in separate columns.
B)The governmental funds financial statements display financial information for each major governmental fund in separate columns and display the totals for all nonmajor governmental funds in a single column.
C)The governmental fund financial statements are prepared using the accrual basis of accounting and the economic resources measurement focus.
D)The governmental funds balance sheet reports general capital assets, net of depreciation, and general long-term liabilities.

Feedback: The reporting model requires separate columns only for major funds. Choices C and D are incorrect since governmental funds report only current financial resources, using the modified accrual basis of accounting.

Which of the following best represents the format for the government-wide statement of activities?
A)Function/program expenses ? program revenues = net (expenses) revenues ?/+ general revenues = change in net position.
B)Operating expenses ? operating revenues +/- nonoperating revenues (expenses) = change in net position.
C)Operating revenues ? operating expenses +/- nonoperating revenues (expenses) = change in net position.
D)Program revenues ? function expenses + general revenues = net change in position.

Feedback: The government-wide statement of activities format is a bit unusual in that it starts with function or program expenses and then adjusts expenses for the revenues specific to the function (program revenues) to arrive at a net expense or revenue. The net expense or revenue is than adjusted for general revenues (primarily tax revenues) to arrive at the change in net position. This format is shown in Illustration 9-4.

Among other categories, the statistical section of a CAFR prepared in conformity with GASB standards should provide 10-year trend information relating to:
A)Financial information.
B)Revenue capacity.
C)Debt capacity.
D)All of the above.

Feedback: In addition to the three categories shown, 10-year trend information should be provided about demographic and economic information and operating information.

In preparing financial information to be reported in the Governmental Activities column of the government-wide statement of activities, depreciation expense is usually reported as:
A)Part of the various program expenses.
B)A separate line-item below the program expenses.
C)A separate line-item below general revenues in the lower part of the statement.
D)All of the above are permissible under GASB standards.

Feedback:
Depreciation expense is usually allocated to the various program expense categories on some rational basis, such as floor space of a building occupied by particular functions or programs. This is illustrated in the adjusting entry shown on p. 364 of the text. Depreciation of assets that cannot rationally be allocated to some function or program may be reported on a separate line as indicated in Choice B. This option appears to be rare. Choice A is correct since this question asks how depreciation is usually reported.

The City of Bethel reported Net Investment in Capital Assets of $1,500,000 in the Governmental Activities column of its statement of net position dated December 31, 2013. Its post-closing trial balance prepared as of December 31, 2014, revealed the following amounts related to governmental activities:

Assuming the bonds were issued in a prior year to acquire capital assets, what amount should the City of Bethel report as Net Investment in Capital Assets as of December 31, 2014?
A)$6,100,000.
B)$1,300,000.
C)$800,000.
D)$(200,000).

Feedback: The amount net investment in capital assets as of December 31, 2014 is $1,300,000 ($9,600,000 - $3,500,000 - $4,800,000). This balance represents a $200,000 decrease from the prior period balance of $1,500,000.

Which of the following would be added to total fund balances in the governmental funds balance sheet to reconcile the amount to reported total net position, governmental activities, on the government-wide statement of net position?
A)Capital assets used in governmental activities.
B)Long-term liabilities reported in governmental activities.
C)Accumulated depreciation on capital assets used in governmental activities.
D)Both A and C would be added.

Feedback: Under modified accrual, capital assets are not reported on the balance sheet; therefore, to adjust from modified accrual to accrual (statement of net position) the value of the capital asset accounts must be added. Since accumulated depreciation has the effect of decreasing the value of the capital assets it would be a deduction. Similarly, long-term liabilities are not reported on a modified accrual balance sheet; to adjust to an accrual statement of net position the value of the liabilities is deducted.

When reconciling the net change in fund balances on the statement of revenues, expenditures and changes in fund balances?governmental funds to the governmental activities change in net position on the government-wide statement of activities which of the following would be added?
A)Depreciation expense for the year.
B)The proceeds of new bond issuances.
C)Repayment of long-term debt.
D)Both A and B are correct statements.

Feedback: Repayment of long-term debt reduces the fund balances of governmental funds but does not reduce net position at the government-wide level. To reconcile the two changes requires that debt service expenditures for repayment of long-term debt be added back to the changes in fund balances. Both A and B have the opposite effect; that is, those amounts would be subtracted from fund balances in reconciling to the change in net position. You can satisfy yourself that this is the case, using Illustration 9-8 as a guide.

A city has an ordinance passed by its city council indicating that resources received from a user charge can be used only for a specified purpose. Which of the following fund balance classifications would be used to report the resources related to the user charge?
A)Restricted fund balance.
B)Committed fund balance.
C)Assigned fund balance.
D)Unassigned fund balance.

Feedback:
GASB states that when a formal action (ordinance) taken by the highest level decision makers (city council) of a government indicates resources can be used only for a specified purpose the funds are to be classified as committed. A is incorrect since restrictions can only be placed by external resource providers (e.g. donors or other governments). C is incorrect since the formal action taken in passing an ordinance is stronger than intent, the criterion imposed for assigning fund balances.

Which of the following fund balance classifications would be used by the city's permanent fund to report its endowment resources on its balance sheet?
A)Restricted fund balance.
B)Committed fund balance.
C)Assigned fund balance.
D)Nonspendable fund balance.

Feedback: GASB states that amounts that are legally or contractually required to remain intact are to be reported as nonspendable. A permanent fund is required to maintain the principal of its endowments intact; therefore, the fund balance related to endowment assets should be reported as nonspendable.

Chapter 15 colleges and universities

1: Generally accepted accounting principles (GAAP) for nongovernmental not-for-profit colleges and universities would be found in: a. AICPA Audit and Accounting Guides, "Not-for-Profit Entities." b. FASB pronouncements. c. National Association of College and University Business Officer's Financial Accounting and Reporting Manual (FARM). d. All of the above.
Your Answer: AICPA Audit and Accounting Guides, "Not-for-Profit Entities."
Feedback: <div>According to the FASB standards, only the FASB <i>Codification</i> is considered GAAP for nongovernmental not-for-profit entities. Unless incorporated into the FASB <i>Codification</i>, choices A and C are considered guidance, not GAAP.</div>

2: The financial statements for a nongovernmental not-for-profit college or university will include: a. Statement of financial position; statement of activities; statement of cash flows. b. Statement of financial position; statement of activities; statement of cash flows; statement of functional expenses. c. Statement of net assets; statement of revenues, expenses and changes in net assets; statement of cash flows. d. Statement of net assets; statement of activities; statement of cash flows.
Your Answer: Statement of financial position; statement of activities; statement of cash flows.

Feedback: Choice A is the best answer. See Illustrations 15-4, 15-5 and 15-6 for examples of the statements.

3: Which of the following methods must be followed in preparing a statement of cash flows for a governmental college or university? a. The indirect method. b. The direct method. c. Either the direct or indirect method. d. The worksheet method.

Feedback: GASB requires the direct method be used to report net cash flows from operating activities on the statement of cash flows. Use of the direct method requires a reconciliation of net operating revenues (expenses) to net cash provided (used) by operating activities so the reader gets the benefits of both approaches. See Illustration 15-3 for an example of a statement of cash flows for a governmental university.

4: Which of the following is a typical source of revenue for both nongovernmental not-for-profit and public colleges and universities? a. Federal grants and contracts. b. Tuition and fees. c. Investment income. d. All of the above.
Feedback: A list of revenue accounts suggested by NACUBO appears on p. 630. Governmental and nongovernmental not-for-profit colleges and universities will have differing proportions of each revenue choice listed, but the three choices listed will typically appear on each operating statement.

5: A wealthy alumna pledged $1,000,000 for stem cell research, payable in full the following year, with the intent that research not commence until the pledge is paid. Her pledge would be recorded as a revenue in the current year by: a. A b. B c. C d. D

Feedback: The facts stated in this question indicate that the pledge has both time and purpose restrictions. A nongovernmental not-for-profit college or university would record this pledge as contribution revenue, which would be closed to Net Assets?Temporarily Restricted. Because of the time restriction, GASB (see discussion on p. 632) would require that the pledge not be recorded until the pledge is received.

6: The appropriate classification of net assets on the statement of financial position for a nongovernmental not-for-profit college or university includes the categories of: a. Unrestricted, reserved, and permanently restricted. b. Unrestricted, restricted, and net investment in capital assets. c. Temporarily restricted, permanently restricted, and unrestricted. d. Unreserved fund balance, reserved fund balance.
Feedback: <div>A nongovernmental not-for-profit college or university will follow the FASB <i>Codification</i>. Thus, the statement of financial position would report net assets in the three categories shown in Choice C.</div>

7: A statement of cash flows prepared for a nongovernmental not-for-profit college or university following FASB standards: a. Must use the indirect method. b. May use the direct or indirect method. c. Must use the direct method. d. None of the above.

Feedback: FASB allows nongovernmental not-for-profit colleges and universities to choose between the direct and indirect methods in preparing the statement of cash flows. See Illustration 15-6 for an example of the statement of cash flows for a nongovernmental not-for-profit college.

8: NACUBO provides guidance to colleges and universities that causes the reporting for nongovernmental not-for-profit colleges and universities to differ from that of nongovernmental voluntary health and welfare organizations. Which of the following would be reported differently by a voluntary health and welfare organization and a nongovernmental not-for-profit college? a. An increase in estimated uncollectible receivables. b. Depreciation expense on buildings and equipment. c. Division of expenses into program and support functions. d. Grant revenue restricted for a specific purpose.

Feedback: Choices B, C, and D are reported in the same manner by all not-for-profit organizations following. However, since GASB standards require governmental colleges and universities to report net revenue amounts, NACUBO indicates that an increase in estimated uncollectible amounts related to tuition and fees should be netted against the revenue account, Tuition and Fees; thereby increasing comparability among college and university financial statements. Other types of nongovernmental not-for-profit organizations would report the increase in estimated uncollectible amounts as an expense (e.g., bad debt expense).

9: Which of the following is a reporting difference between a governmental college following GASB standards for business-type reporting and a nongovernmental not-for-profit college following FASB standards? a. The requirement that revenues and expenses be reported on the accrual basis. b. The requirements for non-recognition of works of art and historical treasures on the financial statements. c. The requirement that investments be reported at fair value. d. The requirement that revenues and expenses be reported as operating and non-operating.

Feedback: Choices A, B, and C are the same under GASB and FASB standards. GASB, however, requires that revenues and expenses be separated into operating and nonoperating on the statement of revenues, expenses and changes in net position. Under FASB standards, the college has considerable flexibility in the format for presenting revenues and expenses; though not required, it could opt to present revenues and expenses as operating and non-operating. Therefore, Choice D is the best answer.

10: Near the end of the current fiscal year, Southeastern University, a governmental university, collected tuition and fees in the amount of $50,000 for classes that will be held early in the following fiscal year. The required journal entry to record this transaction is: a. A b. B c. C d. D

Feedback: <div>Choice A is the only correct answer. Under GASB standards<i>,</i> universities engaged in business-type transactions should use the accrual basis of accounting, which means revenues should be recognized when earned. In this case, the revenues are clearly intended for use in the next period and will not have been earned until then. See p. 631 for information regarding tuition recognition when a semester crosses two fiscal years. Choice C would be recorded in the fiscal year in which the classes are offered. Choice D includes an account that would appear in a nongovernmental not-for-profit university, not a public one.</div>

11: A bequest of $35,000 in securities was made to Snow Mountain College, a nongovernmental not-for-profit college. The decedent specified that both principal and interest were to be used for student loans. The required journal entry to record this transaction is: a. A b. B c. C d. D

Feedback: Choice C is the only correct answer. Choice A is incorrect since the investments are restricted for student loan use. Choice B is incorrect since the gift is in the form of securities rather than cash. All gifts should flow through the operating statement, so an entry directly to net assets is inappropriate. By default, then, the correct answer is Choice C.

12: Western University, a nongovernmental not-for-profit university, received gifts of $2,000,000 for which the donors have stipulated that the principal must remain intact in perpetuity and the investment income is restricted for scholarships and fellowships. The journal entry to record the receipt of these gifts: a. A b. B c. C d. D

Feedback: A private university will record contributions as support revenue when the gifts are made and at the end of the year close that temporary account to Net Assets?Permanently Restricted for Scholarships and Fellowships. So Choice B is better than Choice C. Choice A is not appropriate because this gift does not result in deferred revenue being recorded. Choice D credits an inappropriate account.

13: An agreement in which the donor receives a pro rata share of the investment income earned by the university on the donor&#39;s contribution best defines which of the following? a. Split-interest agreement. b. Annuity agreement. c. Life income fund. d. Quasi-charitable trust agreement.

Feedback: Choice C is correct as defined on p. 644. Choice A is wrong because it is a generic term that covers several types of planned giving agreements. Choice B is incorrect annuity agreements pay out a fixed amount at regular periods, regardless of the income earned on investments. Choice D does not exist.

14: Which of the following is an example of a split-interest agreement? a. Term endowment. b. Quasi-charitable trust agreement. c. Permanent endowment. d. Pooled (life) income fund.
Feedback: Only Choice D relates to split-interest agreements, which require that the college or university share the benefits of the donor's gift. Endowments do not require that the donor's gift be shared and Choice B does not exist.

15: Student groups and other campus groups deposited an additional $150,000 of organization funds with the University; $120,000 was withdrawn; and $40,000 in cash was invested for the long term. Assuming a nongovernmental not-for-profit college, the journal entry(ies) that capture these transactions is (are): a. A b. B c. C d. D

Feedback: Choice A is the only correct entry. Each transaction affects Cash but should be recorded separately to leave a good audit trail that explains why each transaction was made. Choice B is wrong for several reasons, but one is that there could be no revenue earned on an agency type transaction. Choice C is incorrect because the receipts and disbursement entries should be separated, and the second entry does not make sense.

16: At the end of the year, the account Academic Support Expense in a nongovernmental not-for-profit college or university is closed to: a. Net Assets?Unrestricted. b. Net Assets?Temporarily Restricted. c. Revenues?Tuition and Fees. d. Net Assets?Released from Restrictions?Unrestricted.

Feedback: All operating revenue and expense accounts in a nongovernmental not-for-profit college or university are closed to the Net Assets?Unrestricted account. Other closing entries will be made to reflect changes in the restricted net asset accounts.

17: Funds received from an external donor are to be used solely for the purchase of library books. The donation would result in an increase to: a. Unrestricted net position in a governmental university. b. Temporarily restricted net assets in a nongovernmental not-for-profit university. c. Unrestricted net position/assets in a governmental or nongovernmental not-for-profit university, respectively. d. Permanently restricted net assets in a nongovernmental not-for-profit university.
Your Answer: Unrestricted net position in a governmental university.

Feedback: Choice B is the only correct answer. As stated, the question does not suggest that the gift was permanently restricted (or unrestricted).

18: Which of the following statements is not true about auditing colleges and universities? a. Colleges and universities must have audits done by external auditors following generally accepted governmental auditing standards (GAS or GAGAS). b. Universities that expend more than $500,000 in federal financial assistance in a year must have a single audit. c. Guidance over spending federal money is provided in both Circular A-21 (Cost Principles) and A-110 (Administrative Requirements) from the Office of Management and Budget. d. OMB Circular A-133 provides guidance for auditors performing a single audit for a college or university.
Feedback: Choice A is not a correct statement. Auditors may follow AICPA generally accepted auditing standards (GAAS) in performing a financial audit of a college or university. However, if federal funds exceeding $500,000 have been expended in a year, then auditors must follow GAS (or GAGAS) in performing a single audit. Choices B, C, and D are true statements.

19: Which of the following statements most accurately reflects how federal sponsored research funds awarded to a university are to be recorded? a. Universities should record federal research funds awards as exchange transactions. b. The terms of a federal sponsored research funds award should dictate whether funds are recorded as an exchange or nonexchange transaction. c. Universities should record federal research funds awards as nonexchange transactions. d. Universities with an established policy on classifying federal sponsored research funds awards as exchange transactions should record federal sponsored research fund awards as exchange transactions.
Feedback: Choice B is the best answer (p. 648). Since the terms of the award should dictate how the award should be recorded, Choices A, C, and D are incorrect.

20: Which of the following statements concerning the Uniform Prudent Management of Institution Funds Act (UPMIFA) is correct? a. All nongovernmental not-for-profit entities are required to comply with the provisions of the act. b. The act sets an investment risk level for entities to ensure contributed assets are not placed in overly risky investments. c. The act sets a spending rate equal to 5 percent of the average three-year return earned on investments. d. The act provides guidance on conditions under which a not-for-profit can modify restrictions placed on net assets.
Feedback: Choice D is correct as discussed on p. 646 of the text. Choice A is incorrect because the act applies only to entities managing funds for charitable purposes, and only in those states that have adopted the act. Choices B and C are incorrect in that the act provides guidance on investment strategy and spending rate, but does not establish and "bright lines" or specific risk levels or spending rates.