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Solution manual advanced accounting 11e by BEAMS 19 chapter

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Chapter 19
AN INTRODUCTION TO ACCOUNTING FOR STATE AND LOCAL
GOVERNMENTAL UNITS
Questions
1

The Governmental Accounting Standards Board has primary responsibility for setting standards that
provide GAAP for state and local governmental units. The most authoritative literature includes GASB
Statements of Standards and GASB Interpretations. The second level of authoritative literature includes
GASB Technical Bulletins and those AICPA audit and accounting guides and statements of position that
the AICPA intended to make applicable to governments and that the GASB has cleared.
Before 1984, the Municipal Finance Officers Association (MFOA) and its National Committee on
Governmental Accounting provided guidance via the publication of Municipal Accounting and Auditing
in 1951 and Governmental Accounting, Auditing, and Financial Reporting (GAAFR) in 1968. Since
1974, the AICPA has also issued industry audit guides for audits of state and local governmental units.

2

The Municipal Finance Officers Association (MFOA), now referred to as the Government Finance Officers

Association (GFOA), first issued Governmental Accounting, Auditing, and Financial Reporting
(GAAFR) in 1968. For many years, this resource book – often referred to as the Blue Book due to its
distinctive blue cover - constituted the most complete frameworks of accounting principles specific to
governmental units, and provided standards for preparing and evaluating the financial reports of
governmental units. Updated periodically to reflect changes to governmental accounting, the 2005 GAAFR
is the most recent version with a new version expected late 2011.

3

According to the AICPA’s Audit and Accounting Guide, a governmental entity is generally created for the
administration of public affairs and has one or more of the following characteristics:
▪ Popular election of officers or appointment (or approval) of a controlling majority of the
members of the organization’s governing body by officials of one or more state or local
governments;
▪ The potential for unilateral dissolution by a government with the net assets reverting to a
government; or
▪ The power to enact or enforce a tax.
An organization may also be classified as a governmental entity if it possesses the ability to issue debt that
is exempt from federal taxation.

4

A fund is a separate fiscal and accounting entity with a self-balancing set of accounts, “segregated for the
purpose of carrying on specific activities or attaining certain objectives in accordance with special
regulations, restrictions, or limitations.” [GASB Codification] Fund accounting facilitates budgetary
control.
A governmental unit may have hundreds of funds, but only eight fund types. The Codification
discusses three fund categories (governmental, proprietary, and fiduciary) and eight fund types (general,
special revenue, permanent, capital projects, debt service, internal service, enterprise, and trust and agency
funds).

5

Governmental funds are “expendable” or “source and disposition” funds through which most
governmental functions are financed. These funds are essentially working capital entities. They include the
general fund, special revenue funds, permanent funds, capital projects funds, and debt service funds.
Proprietary funds are “nonexpendable” or “commercial type” funds used to account for ongoing
activities that are similar to those found in private enterprise. They use the business accounting equation
and their reporting parallels that of a business entity in most regards. They include two fund types—
enterprise funds and internal service funds.


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18-1


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19-2
Fiduciary funds are used to account for assets held by the governmental unit as trustee or agent
for individuals, private organizations, and other governmental units. Fiduciary funds include trust funds
(pension, investment, and private purpose) and agency funds.
6

The five types of governmental funds are the general fund, permanent funds, special revenue funds, capital
projects funds, and debt service funds. Each is a working capital entity, therefore, each is used to account
for a portion of a government’s general government working capital. They are distinguished by the purpose
for which the resources of each fund may (must) be used. Working capital to be used for
construction/acquisition of major general government fixed assets should be accounted for in capital
projects funds; that to be used to pay principal and interest on general long-term debt should be accounted
for in debt service funds. Special revenue funds are used to account for portions of working capital to be
used for other specific general operating purposes. Permanent funds report resources that are legally
restricted to the extent that only earnings, and not principal, may be used for purposes that support the
reporting government’s programs—that is, for the benefit of the government of its citizenry.

7

The governmental fund accounting equation is:
Current Assets - Current Liabilities = Fund Balance

8

The two types of proprietary funds are enterprise funds and internal service funds. Both charge fees for
their services that are intended to recover part, if not all, of the costs of providing goods or services. The
key distinction between the two is that the predominant customers of internal service funds are other
departments or agencies of the government, whereas the predominant customers of enterprise funds are
outside entities or individuals.

9

The accounting equation for a proprietary fund is essentially the business accounting equation—
Current
assets

+

Noncurrent
assets



Current
liabilities



Noncurrent
liabilities

=

Net Assets

10

Under the modified accrual basis of accounting, fixed assets are not recorded in the general fund, because
general fixed assets do not represent financial resources available for current expenditures, i.e., they are not
working capital items. In the fund financial statements, the general fund is used to account for unrestricted
resources that can be expended currently for operating purposes. Since fixed assets result from expending
resources for long-term needs, they are not included in the fund financial statements.
With the advent of GASB 34, the general fund is reported in the government-wide statements
under the accrual basis of accounting. General fund fixed assets – which have typically been documented
informally in the accounting records and noted in the old general fixed asset account group – will appear in
the government-wide statement of net assets.

11

Modified accrual accounting is the system of accounting in which revenues are recognized in the
accounting period in which they become available and measurable and expenditures are recognized in the
accounting period in which the related fund liability is incurred and objectively measurable. Unmatured
interest on general long-term debt is an exception for which the expenditure is recognized when due.
Modified accrual accounting applies to governmental funds (general fund, special revenue funds,
permanent funds, debt service funds, and capital projects funds) and to asset and liability accounting for
agency funds.

12

Governmental and proprietary funds use different focuses when measuring financial positions and
operating results in the fund financial statements. The two types of focuses are the “economic resources”
measurement focus and the “flow of current financial resources” measurement focus. The accrual basis
(used with proprietary funds and trust funds) refers to recognition of revenues and expenses as in business
accounting and follows the economic resources measurement focus, whereby all economic resources,
whether current or noncurrent, are reported. The modified accrual basis of accounting (used with
governmental funds) is consistent with a flow of current financial resources measurement focus, whereby
funds report on current resources and current obligations.
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19-3
Under GASB 34, both governmental funds and proprietary funds use the accrual basis of
accounting and the “economic resources” measurement focus in the government-wide statements.
13

Governmental revenue sources, addressed in GASB 33, are varied and include taxes, grant receipts, and
collections of user fees and fines. Exchange transactions are those “in which each party receives and gives
up essentially equal values.” Nonexchange transactions are those “in which a government gives (or
receives) value without directly receiving (or giving) equal value in exchange.” Many of the transactions in
governmental funds are nonexchange in nature, because general governmental activities often address the
needs of the public and are funded by taxpayers who generally do not receive benefits in direct relation to
their tax payments.

14

A short term note payable will generally be paid with current resources, thus it is accounted for as a
liability of the governmental fund. Long-term debt is not included in the fund financial statements, since it
will be repaid with future, not current financial resources. The long term debt will, however, appear as a
liability in the government-wide statement of net assets. This is one of the reconciling items between the
fund and government-wide statements.

15

Interfund transfers are not expenditures or expenses, and they are classified separately from revenues,
expenditures, and expenses in the financial statements of the various funds. Interfund transfers are
essentially shifts of resources between funds, not costs or liabilities incurred by the entity. Interfund
transfers consist of residual equity transfers (nonrecurring or nonroutine transfers of equity between
funds) and operating transfers (all other legally authorized transfers between funds). Interfund
transactions that would be treated as revenues, expenditures, or expenses if they involved an external entity
are not interfund transfers, but rather are quasi-external transactions and are treated as revenue,
expenditures, or expenses in the normal fashion.

16

An appropriation is an authorization from the legislative body to make expenditures for specified
purposes. If approval by the legislative body is for each detailed expenditure item in the budget (a line-item
budget), the legislative body will have maximum control because each detailed change would require
legislative approval. If the budget is approved in total or by major categories but not for each detailed item,
the city manager (or other chief executive) can shift resources within the categories approved without
legislative approval. An appropriation by department, for example, permits a city manager to shift
appropriations for police supplies to police equipment or overtime pay without legislative approval.

17

Under GASB 34, the governmental and proprietary fund financial statements of a general-purpose
government include the following:
Fund financial statements
Governmental Funds
Balance sheet – governmental funds (modified accrual basis)
Statement of revenues, expenditures, and changes in fund balances (modified accrual
basis)
Proprietary Funds
Statement of net assets (accrual basis)
Statement of revenues, expenses, and changes in net assets (accrual basis)
Statement of cash flows (accrual basis, direct method)

18

A reciprocal transfer is one which is expected to be repaid by the fund borrowing the money; whereas with
a nonreciprocal transfer repayment is not expected.

19

The GAAP Guidelines, listed in descending order of authority are as follows:
1.
GASB Statements and GASB Interpretations. This category also includes AICPA and FASB
pronouncements made applicable to state and local governments by a GASB Statement or
Interpretation.

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19-4
2.

3.

4.
5.

GASB Technical Bulletins. This category also includes AICPA Industry Audit and Accounting
Guides and Statements of Position if specifically made applicable to state and local governments
by the AICPA and cleared by the GASB.
Consensus positions of GASB’s Emerging Issues Task Force (EITF) and AICPA Practice
Bulletins if specifically made applicable to state and local governments by the AICPA and
cleared by the GASB.
Implementations Guides published by the GASB staff and industry practices that are widely
recognized and prevalent in state and local government.
Other accounting literature (including FASB standards not made applicable to governments by
a GASB standard).

GASB statements are the most authoritative.
20

Interfund loans are loans that are made by one fund to another and must be repaid. Interfund transfers
occur when one fund provides resources to another for legally authorized purposes (an operating transfer)
or when one fund helps to establish or enhance another (a residual equity transfer). Interfund services
provided and used include sales and purchases between funds at approximate external market value. An
interfund reimbursement is necessary when an expenditure applicable to one fund is made by a different
fund.

21

Expenses reflect the cost of assets or services used by an entity, and they are recognized in the period
incurred. Expenditures, unique to government accounting, typically reflect the use of governmental fund
working capital. Proprietary funds recognize expenses, whereas governmental funds recognize
expenditures.

22

A comprehensive annual financial report (CAFR) contains three major sections—introductory, financial
and statistical. The introductory section of a CAFR includes a table of contents, a letter of transmittal, a list
of principal officers, and an organizational chart. The financial section includes the management’s
discussion and analysis, the auditor’s report, the government-wide financial statements, and the fund
financial statements. The statistical section contains statistical tables with comparative data from several
periods of time.

23

Fiscal accountability is the responsibility of a government to demonstrate compliance with public
decisions regarding the use of financial resources. Operational accountability measures the extent of a
government’s success at meeting operating objectives efficiently and effectively and its ability to meet
operating objectives in the future.
SOLUTIONS TO EXERCISES
E19-1
1
2
3
4
5

c
a
c
d
d

E19-2
[AICPA adapted]
d
1
c
2
c
3
a
4
c
5

E19-3
1
2
3
4
5

b
a
a
d
b

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19-5

E19-4
1
2
3
4
5

E19-5
c
1
b
2
d
3
b
4
d
5

c
b
d
c
d

E19-6
1
2
3
4
5
6
7
8

trust and agency funds
enterprise funds
general funds
debt service funds
permanent funds
special revenue funds
internal service funds
capital projects funds

E19-7
1

Current assets
Current liabilities
Fund balance

-30,000
+2,500
-32,500

2

Current assets
Current liabilities
Fund balance

+98,000
-+98,000

3

Current assets
Current liabilities
Fund balance

+60,000
+60,000
--

4

Current assets
Current liabilities
Fund balance
Assumes repayment during the same year borrowed. If the note had not matured by the
end of the year of the borrowing, interest expenditures and interest payable would be
accrued.

-63,150
-60,000
-3,150

5

Current assets
Current liabilities
Fund balance
At the same time a memo entry will be made noting a liability in the long-term debt
records. This is used to prepare the government-wide statements where long-term debts
are recorded in governmental funds.

+600,000
-+600,000

6

Current assets
Current liabilities
Fund balance
At the same time a memo entry will be made noting an asset in the fixed asset records.
This is used to prepare the government-wide statements where fixed assets are recorded
in governmental funds.

-25,000
--25,000

7

Current assets
Current liabilities
Fund balance
At the same time a memo entry will be made removing the asset from the fixed asset
records.

+1,200
-+1,200

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8

19-6
Current assets
Current liabilities
Fund balance
At the same time a memo entry will be made noting a liability in the long-term debt
records. This is used to prepare the government-wide statements where long-term debts
are recorded in governmental funds.

----

E19-8
1

Current assets
Noncurrent assets
Current liabilities
Long-term liabilities
Net Assets

-30,000
-+2,500
--32,500

2

Current assets
Noncurrent assets
Current liabilities
Long-term liabilities
Net Assets
Actually, the net asset increase is reported as a $100,000 increase (revenues) and a
$2,000 decrease (uncollectible accounts expense). Further, it is relatively uncommon to
have tax revenues in proprietary activities

+98,000
---+98,000

3

Current assets
Noncurrent assets
Current liabilities
Long-term liabilities
Net Assets
Assumes repayment during the same year borrowed. If the note had not matured by the
end of the year of the borrowing, interest expense and interest payable would be accrued.

+60,000
-+60,000
---

4

Current assets
Noncurrent assets
Current liabilities
Long-term liabilities
Net Assets

-63,150
--60,000
--3,150

5

Current assets
Noncurrent assets
Current liabilities
Long-term liabilities
Net Assets
Interest expense should be accrued on proprietary fund long-term debt as well as on
proprietary fund short-term debt.

6

Current assets
Noncurrent assets
Current liabilities
Long-term liabilities
Net Assets

7

Current assets
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+600,000
--+600,000
--

-25,000
+25,000
---+1,200


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19-7
Noncurrent assets (Fully depreciated)
Current liabilities
Long-term liabilities
Net Assets
Current assets
Noncurrent assets
Current liabilities
Long-term liabilities
Net Assets

8

0
--+1,200
---+50,000
-50,000

E19-9
debt service fund
permanent fund
special revenue fund
agency fund
capital projects fund, debt service fund

1
2
3
4
5
E19-10

capital projects fund, debt service fund
internal service fund
enterprise fund
special revenue fund
general fund

1
2
3
4
5
E19-11

pension trust fund
enterprise fund
internal service fund
general fund
general fund (may also be allocated to other funds after collection)

1
2
3
4
5
E19-12
1

2

General Fund
Current assets
Current liabilities
Fund balance

-95,000
--95,000

General Fund
Current assets
Current liabilities
Fund balance

-+25,000
-25,000

Year end accrual
Current assets
Current liabilities ($25,000  .08  .5)
Fund balance
At the same time a memo entry will be made noting an asset in the fixed asset account
records.

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-+1,000
-1,000


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3

4

5

6

19-8
General Fund
Current assets
Current liabilities
Fund balance
At the same time a memo entry will be made removing the asset from the fixed asset
records.

+30,000
-+30,000

General Fund
Current assets
Current liabilities
Fund balance

-27,000
-26,000
-1,000

General Fund
Current assets
Current liabilities
Fund balance

+500,000
-+500,000

Enterprise Fund
Current Assets
Noncurrent Assets
Current liabilities
Long-term liabilities
Net Assets

-500,000
----500,000

General Fund
Current assets
Current liabilities
Fund balance

+70,000
-+70,000

E19-13
1

2

3

4

Capital Projects Fund
Current assets
Current liabilities
Fund balance
At the same time a memo entry will be made noting a liability in the long-term debt
records. This is used to prepare the government-wide statements where long-term debts
are recorded in governmental funds.
General Fund
Current assets
Current liabilities
Fund balance
At the same time a memo entry will be made noting an asset in the fixed asset records.
Enterprise Fund
Current assets
Noncurrent assets
Current liabilities
Long-term liabilities
Net Assets
Capital Projects
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+10,000,000
-+10,000,000

-22,000
--22,000

+500,000
---+500,000


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Current assets
Current liabilities
Fund balance
At the same time a memo entry will be made noting a construction work in process asset
in the fixed asset records.
5

6

19-9
-2,000,000
--2,000,000

General Fund
Current assets
Current liabilities
Fund Balance

-4,500
+500
-5,000

General Fund
Current assets
Current liabilities
Fund balance

+7,500
+7,500
--

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