Solution manual advanced financial accounting, 8th edition by baker chap018

Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements CHAPTER 18 GOVERNMENTAL ENTITIES: SPECIAL FUNDS AND GOVERNMENT-WIDE FINANCIAL STATEMENTS ANSWERS TO QUESTIONS Q18-1 A governmental entity would use a special revenue fund rather than a general fund when the resources earmarked for the fund, such as federal or state government grants or special tax levies, are restricted for specific purposes Q18-2 Operating budgets are prepared for the general fund, special revenue funds, and debt service fund Capital budgets are prepared for the capital projects fund Q18-3 Interest on long-term debt is accounted for in the debt service fund for only the interest that is due and legally payable as an expenditure Interest is not accrued on the outstanding balance of the long-term debt Q18-4 The major differences between a special revenue fund and an enterprise fund are Special Revenue Fund Enterprise Fund Measurement focus Current financial resources Economic resources Accounting basis Modified accrual Accrual Budgetary basis Operating budget None required Long-term assets No Yes Long-term debt No Yes Encumbrances Yes No Financial statements Governmental type Commercial type Q18-5 The basis of accounting used in the proprietary funds is the accrual basis because the focus of the governmental entity is on capital maintenance and income determination rather than budgetary spending authority Q18-6 The financial statements that must be prepared for the governmental funds are the balance sheet and the statement of revenues, expenditures, and changes in fund balances The financial statements that must be prepared for the enterprise funds are the statement of net assets, the statement of revenues, expenses, and changes in fund net assets, and the statement of cash flows 18-1 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements Q18-7 Proceeds from a bond issue are accounted for as an other financing source in the fund that issued the bonds However, some governments have a policy that the capital projects fund may not keep any bond premium, in which case the bond premium is typically transferred to a debt service fund Other financing sources and uses are reported separately below operations, but above special items, on the governmental funds’ statement of revenues, expenditures, and changes in fund balance Q18-8 A permanent fund is a governmental fund for which the principal is maintained, but the income in the fund can be used by the government for its programs that benefit all of its citizens The basis of accounting in permanent funds is the modified accrual method Private-purpose trust funds are established to benefit specific individuals or organizations, as specified by the donor These private-purpose trust funds may have an expendable principal, or the principal may be nonexpendable The accrual basis of accounting is used for private-purpose funds Thus, a major difference between these funds is the specificity of who the beneficiaries of the fund are Q18-9 GASB 34 specifies that only governmental and enterprise funds determined to be “major” funds need to be separately disclosed in their own columns in the fund financial statements There are two tests to determine which individual governmental and enterprise funds are considered major if they meet both tests First, the general fund is always considered a major fund The first test is total assets, liabilities, revenues, or expenditures/expenses of that individual fund are at least 10 percent or more of the governmental or enterprise category The second test is that total assets, liabilities, revenues, or expenditures/expenses of the individual governmental or enterprise fund are at least percent of the total for all governmental and enterprise funds combined Any individual funds that are not considered major are aggregated and presented in a single column Management may, at any time, separately disclose even those non-major funds for which they feel the additional disclosure will provide information valuable to the readers of the financial statements Q18-10 Because the measurement focus of the governmental funds is on current financial resources, revenue would be recognized in the governmental funds only if the donated items are available to finance expenditures of the current period, For example, donated land would be included in contribution revenue of a governmental fund if the land was sold, or the government has entered into a contract to sell the land, and that the proceeds from the sale will be available to finance expenditures of the current period However, a donation to a governmental fund, in the form of financial resources or capital assets, that has a restriction imposed by the donor which makes the donation unavailable to finance current expenditures, is not included in the governmental fund’s financial statements Of course, on the government-wide statement of activities, all donations would be shown, at fair value on a separate line below general revenues Specifically, endowment and permanent fund principal donations are reported below general revenues and above special and extraordinary items On the governmental funds financial statements, special and extraordinary items are reported below operations, but above the net change in fund balance line, in the statement of revenues, expenditures, and changes in fund balance Special items are those significant transactions within the control of management that are either unusual in nature or infrequent in occurrence Extraordinary items are transactions or events that are both unusual and infrequent in occurrence Q18-11 Agency funds must be self-balancing with assets equalling liabilities Therefore, agency funds not have a net fund balance 18-2 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements Q18-12 Component units are separate government entities for which the primary government is financially accountable The financial presentation of these component units is dependent on the separability from the primary government If the component unit is virtually inseparable, then the component unit’s financial information is blended into the primary government’s financial statements However, if the component unit is distinguishable, and has its own taxing authority, then the component unit’s financial information is presented in a separate column in the government-wide financial statements Q18-13 Two reconciliation schedules are required by GASB 34 The first reconciles the fund balances reported in the governmental funds to the net assets of governmental activities reported on the government-wide financial statements For example, internal service funds are not a governmental fund, but the accounts for internal service funds are blended into the governmental activities that are reported on the government-wide financial statements The second reconciliation schedule reconciles the net change in fund balances reported in the governmental funds statements to the change in net assets reported in the government-wide financial statements These two reconciliation schedules are required by GASB 34 to be presented either on the face of the fund financial statements or in a separate schedule immediately following the fund financial statements Q18-14 The budgetary comparison schedule reports, for the general fund and any other governmental fund that has a legally adopted budget, the initially approved budget, the final budget of the year, and the actual amounts, for each line item in the statement of revenues, expenditures, and changes in fund balance A variance column may also be used to compare the actual against the final budget This budgetary comparison schedule is part of the required supplementary information (RSI) required by GASB 34 GASB 41 amended GASB 34 for those governments that not use the general fund and special revenue fund structure specified in GASB 34 for their budgetary purposes GASB 41 specified that those governments with significant perspective differences should provide a budgetary comparison schedule in the RSI based on the structure the government used for its legally adopted budget Q18-15 The government-wide financial statements present the infrastructure assets, such as roads, bridges, tunnels, sewer and water systems, etc., and other long-term assets of the government entity, such as buildings, equipment, vehicles, etc The capital assets should be reported at historical cost or fair value at the time of donation, if donated Because the basis of accounting for the government-wide financial statements is the accrual method, depreciation is recorded on the other long-term assets and these are reported net of depreciation For infrastructure assets, the governmental entity may elect to use a modified approach in which depreciation is not recorded The modified approach requires an assessment of the current condition of the infrastructure assets and an estimate of the annual amount required to maintain and preserve the infrastructure assets In addition, the government-wide financial statements present the general long-term debt obligations of the governmental entity at the present value of the debt principal and future interest, just as computed under the accrual basis of accounting that is used for commercial entities 18-3 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements SOLUTIONS TO CASES C18-1 Basis of Accounting and Reporting Issues a In the accrual basis of accounting, revenue should be recognized in the accounting period in which it is earned and becomes measurable In the modified accrual basis of accounting, revenue should be recognized in the accounting period in which it becomes both measurable and available to finance expenditures of the fiscal period "Available" means collectible within the current period or soon enough thereafter to be used to pay current period liabilities b For the general fund, the modified accrual basis of accounting should be used because it is a governmental fund, which is, in essence, an accounting segregation of financial resources For the special revenue fund, the modified accrual basis of accounting should be used because it is a governmental fund, which is, in essence, an accounting segregation of financial resources For the enterprise fund, the accrual basis of accounting should be used because it is a proprietary fund, with activities similar to those in the commercial, profit-seeking sector 18-4 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements C18-2 Capital Projects, Debt Service, and Internal Service Funds a Capital projects funds account for the acquisition or construction of major capital facilities or improvements A separate capital projects fund is created at the time the project is approved and ceases at the completion of the project Accounting for capital projects funds is similar to accounting for the general fund The modified accrual basis of accounting is used; no fixed assets, depreciation, or long-term debt is recorded in these funds The bond proceeds are not revenue to the capital projects fund; they are reported as Other Financing Sources A premium on the sale of bonds is transferred to the debt service fund When the expenditure is recorded, Contract Payable is credited for the current portion due and Contract Payable-Retained Percentage is credited for the amount held back to ensure that the contractor fully completes the project to the satisfaction of the governmental entity The financial statements for capital projects funds are a balance sheet and a statement of revenues, expenditures, and changes in fund balance No budget versus actual is required because capital projects funds use a capital budget rather than an operating budget b Debt service funds account for the accumulation and use of resources for the payment of general long-term debt principal and interest Accounting for the debt service fund is similar to accounting for the general fund The modified accrual basis of accounting is used; no fixed assets or long-term debt is recorded; only current maturities are recorded in the fund The bond premium received from the capital projects fund is recorded as an other financing source – transfer in The matured portion of a serial bond is recognized as an expenditure and Matured Bonds Payable is credited Interest legally due and payable is recorded as an expenditure and Matured Interest Payable is credited The financial statements of the debt service fund are a balance sheet and a statement of revenue, expenditures, and changes in fund balance c Internal service funds account for the financing of goods or services provided by one department to other departments on a cost-reimbursement basis Separate internal service funds are established for each type of service Accounting for internal service funds is the same as for enterprise funds or commercial entities The accrual basis is used; these funds record fixed assets, depreciation, and long-term debt The internal service fund may be started with a transfer in from the general fund The billings are recorded in "Due from" accounts and the revenue account, Charges for Services The closing entries involve a Profit and Loss Summary or Excess of Net Revenues over Costs account The financial statements of an internal service fund are a statement of net assets; a statement of revenues, expenses, and changes in fund net assets; and, a statement of cash flows 18-5 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements C18-3 Discovery Case Summary of major information items in the Financial Report of the United States Government, The report is prepared by the Secretary of the Treasury The Management’s Discussion and Analysis presents comparative historical information for operations and financial position along with budget information, both historical and projected The Comptroller General of the United States heads the General Accountability Office (GAO) who is the auditor for the U.S government For several years, the Comptroller General has disclaimed an opinion on the consolidated financial statements because of the material deficiencies in the government’s systems, recordkeeping, documentation, and financial reporting The material deficiencies are listed in the auditor’s report The following five statements are presented: (1) Statements of Net Cost, (2) Statements of Operations and Changes in Net Position, (3) Reconciliations of Net Operating Revenue (Cost) to the Budget Surplus (unaudited), (4) Dispositions of the Budget Surplus (unaudited), and (5) Balance Sheets The Statements of Net Cost present the costs and revenue for the major departments, agencies, commissions, and other units of the federal government The Statement of Operations and Changes in Net Position presents the revenues by type, the total costs, and the net operating revenue (cost) for each year The Reconciliation of Net Operating Revenue (Cost) to the Budget Surplus presents the increases or decreases in major cost programs, along with the amount of capitalized fixed assets by major agencies of the federal government The Dispositions of the Budget Surplus presents the changes in assets and liabilities during the years reported The Balance Sheets present the assets, by major type, the liabilities, by major type, and reconciles to the net position of the U.S government 10 Major footnotes include a stewardship report on the resources held by the U.S government, and a large number of notes to the financial statements that report on specific items related to agencies, commissions, and other entities within the federal government 18-6 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements C18-4 Becoming Familiar With a Local Government’s Comprehensive Annual Financial Report (CAFR) (Note to the instructor: Most local governments now produce a comprehensive annual financial report You might select the local city or county in which the university is located or a large city close to the university town Printed copies of the CAFR may be obtained directly from that governmental entity and you could place these copies on reserve in your university library for use by your students Alternatively, many governments now provide their CAFRs online A Google web search using “CAFR” and the name of your city, county or state will show if your selection provides an online copy of its CAFR Or, you may a Google search using “CAFR” and then select one of the government units that provide an online copy of its CAFR and then provide that link to your students or insert that link into your online syllabus.) a Students should read the MD&A to get familiar with the governmental entity One of the items contained in the MD&A is information on the nature of the services performed by the government At the local government level, the services usually consist of police and fire protection, street maintenance, recreation, and other services typically the responsibility of the local government b Because there is so much information contained in a CAFR, it is important to see what information is covered by the auditor’s opinion The auditor’s opinion is usually unqualified The auditor does not audit the MD&A and other RSI and does not express an opinion on this information The auditor reads the MD&A and other RSI to determine if the information contained therein is reasonable c A general purpose government will have most fund types It is beneficial for the student to see which fund types are used and which ones are not used by a government d Students should become familiar with the types of information found in the notes One item of information disclosed in the notes is a description of the measurement focus and basis of accounting used by the governmental funds The footnotes’ discussions regarding the governmental funds and their use of the financial resources measurement focus and modified accrual basis of accounting reinforce what the students learned from the text e Listing the financial statements that use the economic resources measurement focus and accrual basis of accounting reinforces the coverage in the text In their evaluation, students should remember that the governmental fund financial statements are the only ones prepared using the current financial resources measurement focus and the modified accrual basis of accounting f Students should be aware of the reporting of major funds in the financial statements of governmental and proprietary funds g This question emphasizes that the reporting entity for the government may be larger than the local governmental if the local government has fiscal accountability over other governmental entities Because many component units are reported discretely, students should have little problem identifying the existence of component units 18-7 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements C18-4 (continued) h The purpose of this question is for students to become acquainted with the balance sheet equation for the governmental funds: Assets = Liabilities + Fund Balance Another goal for this question is for students to see that fund balance is separated into two components: (1) reserved and (2) unreserved i The purpose behind questions i - l is to help students understand the format of the statement of revenues, expenditures, and changes in fund balance The first section deals with revenues, which are reported according to source Students will discover that taxes are generally not the only source of revenue j The objective of this question is to get students to understand how governments report expenditures Students may expect governments to report expenditures by object; however, expenditures are not reported this way on the statement of revenues, expenditures, and changes in fund balance k The purpose of this question is to have students examine the items reported in other financing sources and uses This should reinforce what they learn in the text when they read the section dealing with interfund transfers l This question covers the last items reported on the statement of revenues, expenditures, and changes in fund balance: special items, the change in fund balance for the year, and the ending fund balance at the end of the most recent year Students should not expect to see any special items since their occurrence is rare However, students should see the change in fund balance for the year being added to the beginning fund balance to produce ending fund balance 18-8 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements C18-5 The GASB’s Decision-Making Process The GASB’s presentation of its decision-making process is found on their web site at www.gasb.org/ then click on GASB FACTS in the left-hand frame, then click on Facts About the GASB: The Mission and Structure of the Board, and finally, click on An Open Decision-Making Process The Governmental Accounting Standards Advisory Council (GASAC) This council is composed of about 25 persons from a diverse background in government accounting and finance This council provides suggestions for topics to be considered by the GASB In addition, the Board receives concerns about current governmental accounting needs from other persons and groups who work in governmental accounting or auditing Task Force In many cases, a task force is formed shortly after the Board agrees to place the project on its agenda A task force is comprised of persons who know the project’s subject matter and provides expertise and advice to the GASB as it focuses on the critical issues and determine if a new standard is necessary Discussion Memorandum (DM) The DM is normally prepared by the staff and defines the problem(s), the scope of the project, the accounting and reporting issues; and presents relevant research, alternative solutions to the issues, and arguments both for and against each alternative Written comments are solicited and in many cases a public hearing is scheduled to discuss the DM Invitation to Comment (ITC) An ITC is sometimes issued when the GASB seeks more input on one or more of the issues Preliminary Views (PV) A PV puts forth the Board’s consensus at an early stage in the process A majority of the Board must approve the issuance of a PV The Board solicits comments on the PV Public Hearing A public hearing is typically scheduled to provide the Board with an opportunity to hear the viewpoints of the public as well as to allow the Board to raise questions to the staff regarding written or oral comments received on the project, including any submissions at the public hearing Analysis of Oral and Written Comments The staff performs an analysis of the submitted comments, looking for information and good arguments on the issues, and presents this analysis to the members of the Board who often make their own review of the comments Meetings of the Board The Board may have several, or many, meetings to discuss the issues Board meetings on the project are open to the public, although observers are not allowed to participate in the discussions Exposure Draft (ED) An ED presents the proposed new standards, the proposed effective date and method of transition, background information, and explains the basis for the Board’s conclusions regarding the issues covered by the ED 10 Further Deliberations by the Board The Board receives comments on the ED and discusses the comments to determine if any modifications are needed in the proposed standard 11 Statements of Governmental Accounting Standards or Statements of Governmental Accounting Concepts A majority of the Board must vote in favor of adopting a pronouncement Statements of Standards establish new accounting or reporting requirements Statements of Concepts not create new standards, but rather give guidance for dealing with problems that arise on an issue And then, the Board continues to work on the next project! 18-9 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements C18-6 Summarizing a Recent GASB Exposure Draft Note to the Instructor: This case provides your students with the opportunity to be on the leading edge of a proposed governmental accounting or reporting standard Students can learn about some of the specifics of an expected, new GASB Statement The most recent ED on the web page will be dependent on future actions of the GASB, but the Project Pages link in the left-hand frame of the GASB’s opening web page presents information on the status of current GASB projects These projects are in various stages of progress, but as of 2008, it appears that future Statements may be on economic condition reporting, fund balance reporting, and on service efforts and accomplishments reporting Of course, given the dynamic nature of governmental accounting and reporting, it is expected that new projects will be added, and some of the current projects may be discontinued or included within a larger project the board is studying And, some may become new GASB Statements! SOLUTIONS TO EXERCISES E18-1 Multiple-Choice Questions on Government Financial Reporting a d b a a b a $8,839,000 = assets of $14,839,000 minus liabilities of $6,000,000 c $7,150,000 = capital assets (net) of $12,500,000 minus long-term debt of $5,350,000 c $1,035,000 = net assets of $8,839,000 minus $7,150,000 minus $654,000 10 a (answers b, c, and d each include a fiduciary fund which is not a major fund) 11 d 12 c 18-10 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements P18-15 (continued) Fund Balance – Unreserved Fund Balance – Reserved for Encumbrances b 2,500,000 West City Capital Projects Fund Balance Sheet June 30, 20X3 Cash Total Assets Assets $ 3,155,000 $ 3,155,000 Liabilities and Fund Balance Contracts Payable – Retained Percentage Fund Balance: Reserved for Encumbrances Unreserved Total Liabilities and Fund Balance c 2,500,000 $ $2,500,000 455,000 200,000 2,955,000 $ 3,155,000 West City Capital Projects Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For Fiscal Year Ended June 30, 20X3 Expenditures: Capital Outlays: Building Removal Building Construction Total Expenditures Deficiency of Revenues over Expenditures Other Financing Sources (Uses): Proceeds of Serial Bonds Transfer Out to Debt Service Fund Total Other Financing Sources (Uses) Net Change in Fund Balance Fund Balance, July 1, 20X2 Fund Balance, June 30, 20X3 18-34 $ 45,000 2,000,000 $ 2,045,000 $(2,045,000) 5,080,000 (80,000) $ 5,000,000 $ 2,955,000 -0$ 2,955,000 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements P18-16 Recording Entries in Various Funds [AICPA Adapted] Entries made in the capital projects fund for 20X8: Cash Other Financing Sources – Bond Issue Issued $800,000 of bonds at their face value 800,000 ENCUMBRANCES BUDGETARY FUND BALANCE – RESERVED FOR ENCUMBRANCES Contractor’s bid is accepted 750,000 BUDGETARY FUND BALANCE – RESERVED FOR ENCUMBRANCES ENCUMBRANCES One-third of the project was completed during 20X8 Expenditures Contracts Payable Actual construction cost incurred in 20X8 800,000 750,000 250,000 246,000 250,000 246,000 Entries made in the special revenue fund for 20X8: ESTIMATED REVENUES CONTROL APPROPRIATIONS CONTROL BUDGETARY FUND BALANCE – UNRESERVED Record the budget for 20X8 112,000 Cash Revenues Collected hotel room taxes 109,000 Expenditures Vouchers Payable Incurred expenditures for general promotion and motor vehicle 103,000 Vouchers Payable Cash Paid expenditures 103,000 18-35 108,000 4,000 109,000 103,000 103,000 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements P18-16 (continued) Entry made in the general fund for 20X8: Other Financing Uses – Transfer Out to Debt Service Fund Cash Record transfer of resources to debt service fund 313,500 313,500 Entries made in the debt service fund for 20X8: Cash Other Financing Sources – Transfer In from General Fund Record transfer of resources from general fund 313,500 Expenditures – Interest Matured Interest Payable Record interest legally due and payable 13,500 Expenditures – Principal Matured Bonds Payable Record principal legally due and payable 300,000 Matured Bonds Payable Matured Interest Payable Cash Record payment of matured bonds and interest 300,000 13,500 13,500 300,000 313,500 Closing entries in the general fund for 20X8: BUDGETARY FUND BALANCE – RESERVED FOR ENCUMBRANCES ENCUMBRANCES Close outstanding encumbrances at year-end Fund Balance – Unreserved Fund Balance – Reserved for Encumbrances Reserve actual fund balance for encumbrances expected to be honored in 20X9 313,500 83,000 83,000 83,000 83,000 Adjusting entry in the general fund for 20X8: Fund Balance – Reserved for Inventories Inventory of Supplies Adjust inventory of supplies to balance at December 31, 20X8 18-36 3,000 3,000 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements P18-17 Matching Questions Involving Various Funds L C R M I G Q A O 10 F 18-37 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements P18-18 Questions on Fund Transactions [AICPA Adapted] $104,500 (Stated in item #3.) $17,000 (Stated in item #4.) $125,000 (Item #5 states that $83,000 is reserved for encumbrances To this is added the $42,000 reserve for the ending inventory.) $236,000 (Item #1 states that $600,000 of bond proceeds were received in the capital project fund, less $364,000 of construction expenditures in the period.) $6,000 (Item #2 states that $109,000 tax revenues were received from which $81,000 and $22,000 was expended.) $104,500 (Stated in item #3.) $386,000 (Item #1 states construction expenditures of $364,000 plus item #2 states a motor vehicle purchase of $22,000.) $100,000 (Item #3 states a reduction in long-term debt principal of $100,000.) $181,000 (Item #6 states that $181,000 was used to purchase supplies during the period.) 10 $190,000 (Item #6 states encumbrances of $190,000.) 18-38 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements P18-19 Matching Questions Involving the Statement of Cash Flows for a Proprietary Fund C A C A E A C B B 10 C 11 A 12 E 13 D 14 D 15 C 18-39 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements P18-20 Matching Questions Involving the Statement of Revenues, Expenditures, and Changes in Fund Balance for a Capital Projects Fund and a Debt Service Fund C D C C B A C D A 10 C 11 B 12 B 13 D 18-40 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements P18-21 Question on Fund Transactions [AICPA Adapted] a G K L L E J D A F 10 B 11 B and J 12 F and J 13 C and J 14 J 15 B and J 16 G and J 17 A 18 D 19 I and J 20 H and J b 18-41 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements P18-22 Major Fund Tests Step 1: 10 percent criterion tests Denominators for 10 percent tests are the total of each of the four items for that fund type (for governmental and then for enterprise) 10 percent criterion tests: Governmental fund type: Percent of: Assets $2,112,400 Liabilities $951,300 Revenues $5,790,000 2.00% 3.99% 1.68% 0.00% 0.00% 5.65% 7.94% 0.71% 5.72% 0.19% Assets $3,996,000 Liabilities $2,900,700 Revenues $618,000 66.07%* 33.93%* 62.08%* 37.92%* 46.76%* 53.24%* General fund – is always a major fund Special Revenue 1.28%(a) Capital Project – Library 21.30%* Capital Project – Arena 1.33% Debt Service 1.94% Permanent 11.65%* Enterprise fund type: Percent of: Enterprise – Electric Enterprise – Water (a) 1.28% = $27,000 / $2,112,400 * Meets the 10 percent criterion test 18-42 Expenditures $5,659,800 5.80% 7.39% 0.99% 5.12% 0.32% Expenses $543,000 45.12%* 54.88%* Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements P18-22 (continued) Step 2: percent criterion tests The percent criterion test is applied only to those funds that met the 10 percent criterion test (For each of the four percent tests, the denominator is the combined amount of that item from the governmental funds plus the enterprise funds.) Computation of denominators for percent governmental and enterprise fund types: Revenue Expenditures/ Assets Liabilities s Expenses Governmental fund types $2,112,400 $ 951,300 $5,790,000 $5,659,800 Enterprise fund types 3,996,000 2,900,700 618,000 543,000 Combined $6,108,400 $3,852,000 $6,408,000 $6,202,800 percent criterion tests: Percent of combined amount of: Governmental fund type: General fund – is always a major fund Capital Project – Library Permanent Enterprise type funds: Enterprise – Electric Enterprise – Water Assets Liabilities Revenues Expenditures/ Expenses $6,108,400 $3,852,000 $6,408,000 $6,202,800 0.99% 0.00% 7.18%** 0.17% 6.74%** 0.29% 46.75%** 28.56%** 4.51% 5.13%** 3.95% 4.80% 7.37%(a)** 4.03% 43.22%** 22.20%** (a) 7.37% = $450,000 / $6,108,400 ** Meets the percent criterion test To be a major fund, an individual fund must meet both the 10 percent and the percent major fund criteria in at least one financial statement item Each major fund is presented in a separate column on the fund-based financial statements presented as part of the comprehensive annual financial report for the governmental entity (1) General fund – is always a major fund (2) Capital Projects – Library fund – assets (both 10% and 5% criterion tests) (3) Enterprise – Electric – assets and liabilities (both 10% and 5% criterion tests) (4) Enterprise – Water – assets, liabilities, revenues (both 10% and 5% criterion tests) The other governmental funds must be aggregated and reported in a single column in the governmental funds balance sheet and statement of revenues, expenditures, and changes in fund balance 18-43 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements P18-23 Reconciliation Schedules a Reconciliation of the Balance Sheet of the Governmental Funds to the Statement of Net Assets: City of Sycamore Reconciliation of the Balance Sheet of Governmental Funds to the Statement of Net Assets Fund balances reported in the governmental funds Amounts reported for the governmental activities in the statement of net assets are different because: Capital assets used in governmental activities are not financial resources and therefore are not reported in the governmental funds The internal service fund reported $18,000 in capital assets Thus, the amount of the adjustment Is for the capital assets not reported in just the governmental funds, ($4,311,000 = $4,329,000 - $18,000) Internal service funds are used by management to charge costs of certain activities The assets and liabilities of the internal service fund and are Included in governmental activities In the statement of net assets Long-term liabilities, including bonds payable, are not due and payable in the current period and therefore are not reported as liabilities in the governmental funds Interest in the governmental funds is recognized under the modified accrual basis, but under the accrual basis for the government-wide financial statements Net assets are adjusted for interest ($5,000 = $6,000 - $1,000) Net assets of governmental activities 18-44 $ 888,400 4,311,000 37,000 (460,000) (5,000) $4,771,400 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements P18-23 (continued) b Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities: City of Sycamore Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities Net change in fund balances – governmental funds Governmental funds report capital outlays as expenditures However, in the statement of activities, the costs of those assets is capitalized and depreciated over their estimated useful lives This is the amount by which capital outlays in the governmental funds ($287,000) exceeded depreciation of the governmental assets ($187,000) Bond proceeds provide current financial resources for the governmental funds However, the issuance of debt increases long-term liabilities in the statement of net assets Bond proceeds of $460,000 are not reduced because there is no repayment of principal during the year Revenues and expenses in the statement of activities are recorded on the accrual basis Interest in the governmental funds is recorded on the modified accrual basis Accrual interest revenue exceeded modified accrual interest revenue recognized in the governmental funds by $1,000 Accrual interest expense exceeded modified accrual interest expense by $6,000 ($46,000 - $40,000) The net interest adjustment is $5,000 Internal service funds are used by management to charge the costs of certain services The net revenue (expense) of the internal service funds is reported with governmental activities Change in net assets of governmental activities 18-45 $509,400 100,000 (460,000) (5,000) 9,000 $153,400 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements P18-24 True/False Questions F The budgetary comparison schedule requires both the initial budget and the final budget T F A component unit is financially accountable to the primary government F The net assets in the government-wide statement of net assets would be categorized by: invested in capital assets, net of related debt; restricted by outside donors in specific funds; and, unrestricted F The tests for a major governmental, or enterprise fund, for which separate disclosure is required in the government-wide financial statements are: (a) total assets, liabilities, revenues, or expenditures/expenses of that individual governmental or enterprise fund are at least 10 percent or more of the governmental or enterprise category, and (b) total assets, liabilities, revenues, or expenditures/expenses of the individual governmental or enterprise fund are at least percent of the total for all governmental and enterprise funds combined T T F T 10 F 11 T 12 F Depreciation on fixed assets of a government entity may be computed by any method deemed appropriate, such as straight-line or an accelerated method, but depreciation of fixed assets is not equal to the expenditures for fixed assets made in the governmental funds 13 F Management’s Discussion and Analysis is a required supplementary information disclosure in the new government reporting model 14 F Fiduciary funds are not part of the government-wide statement of net assets, but would be separately reported in the fiduciary funds section of the fundbased financial statements 15 T The internal service fund is blended into the governmental activities columns of the government-wide financial statement of net assets and statement of activities In the reconciliation schedule for the statement of revenues, expenditures, and changes in fund balances, bond proceeds would be subtracted because they were included as other financing sources in the governmental funds, but are an addition to liabilities in the government-wide financial statements 18-46 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements 11P18-25 Determining Whether a Special Revenue Fund Is a Major Fund Test 1: 10% criterion: Are the assets, liabilities, revenues, or expenditures of the special revenue fund at least 10% of their respective totals for all governmental funds? Totals for Amount Reported by Items Tested Governmental Funds Special Revenue Fund Assets $50,000,000 $4,100,000 ( 8.2%) (10% test failed) Liabilities 22,000,000 3,900,000 (17.7%) (10% test met) Revenues 70,000,000 6,700,000 ( 9.6%) (10% test failed) Expenditures 60,000,000 6,500,000 (10.8%) (10% test met) Test 2: 5% criterion: Two items met the 10% criterion test liabilities and expenditures The 5% criterion test is met if at least one of the items that met the 10% criterion first test is at least 5% of the respective amounts for all governmental and enterprise funds Items Tested Liabilities (5% test met) Expenditures/expenses (5% test met) Totals for Governmental and Enterprise Funds $37,000,000 Amount reported by Special Revenue Fund $3,900,000 (10.5%) 82,000,000 6,500,000 ( 7.9%) Conclusion: The special revenue fund should be reported as a major fund on the financial statements of the governmental funds for 20X2 because both its expenditures and liabilities met the 10% and the 5% tests 18-47 Chapter 18 - Governmental Entities: Special Funds and Government-Wide Financial Statements P18-26 Preparation of a Statement of Net Assets for a Governmental Entity Gibson City Statement of Net Assets December 31, 20X2 Assets Cash and cash equivalents Taxes receivable (net) Accounts receivable (net) Internal balances Inventories Investments Capital assets: Land Infrastructure Other depreciable assets (net) Total assets Liabilities Vouchers payable Accrued interest payable Revenue bonds payable General obligation bonds payable Total liabilities Net assets Invested in capital assets, net of related debt Restricted Unrestricted Total net assets Governmental Activities Business-type Activities $ 68,000 52,000 $ 28,000 12,000 5,000 7,000 15,000 (5,000) 10,000 25,000 100,000 60,000 75,000 $385,000 $ 32,000 1,500 50,000 45,000 $162,000 $ 4,000 2,000 80,000 Total $ 96,000 52,000 12,000 17,000 40,000 150,000 60,000 120,000 $547,000 60,000 $ 93,500 $ 86,000 $ 36,000 3,500 80,000 60,000 $179,500 $175,000* 55,000 61,500*** $291,500 $ 15,000** 5,000 56,000*** $ 76,000 $190,000 60,000 117,500 $367,500 Computation notes: * $235,000 of capital assets (net) minus $60,000 of general obligation bonds equals $175,000 ** $95,000 of capital assets minus $80,000 of revenue bonds equals $15,000 *** The unrestricted net assets amount is plugged in to make the total net assets equal assets minus liabilities The internal balances amount of $5,000 is the amount that the governmental activities owe to business-type activities 18-48 ... Funds and Government-Wide Financial Statements Q18-12 Component units are separate government entities for which the primary government is financially accountable The financial presentation of... the component unit’s financial information is presented in a separate column in the government-wide financial statements Q18-13 Two reconciliation schedules are required by GASB 34 The first... reported in the government-wide financial statements These two reconciliation schedules are required by GASB 34 to be presented either on the face of the fund financial statements or in a separate