Chap 018

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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 Enterprise

Fund 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
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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 non-
expendable. 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 5 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 do not have a net fund balance.
18-2
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 do 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
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
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
C18-3 Discovery Case
Summary of major information items in the Financial Report of the United States
Government,
1. The report is prepared by the Secretary of the Treasury.
2. The Management’s Discussion and Analysis presents comparative historical

information for operations and financial position along with budget information,
both historical and projected.
3. 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.
4. 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.
5. The Statements of Net Cost present the costs and revenue for the major
departments, agencies, commissions, and other units of the federal
government.
6. 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.
7. 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.
8. The Dispositions of the Budget Surplus presents the changes in assets and
liabilities during the years reported.
9. 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
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 do 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
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
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.
1. 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.
2. 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.
3. 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.
4. Invitation to Comment (ITC). An ITC is sometimes issued when the GASB seeks
more input on one or more of the issues.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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 do 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
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
1. a
2. d
3. b
4. a
5. a
6. b
7. a $8,839,000 = assets of $14,839,000 minus liabilities of $6,000,000
8. c $7,150,000 = capital assets (net) of $12,500,000 minus long-term debt of

$5,350,000
9. 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
E18-2 Multiple-Choice Questions on Governmental Funds [AICPA Adapted]
1. d
2. b
3. a
4. c
5. c
6. b
E18-3 Multiple-Choice Questions on Proprietary Funds [AICPA Adapted]
1. b
2. d
3. d
4. b
5. c
6. c Prepaid insurance would be reported as an asset.
7. b
8. c
9. c
18-11
E18-4 Multiple-Choice Questions on Various Funds
1. c The additions - investment earnings include the $50,000 of dividends and the
$35,000 of interest earned. The contribution is reported as an addition -
contributions.
2. a The entries in the trust fund to record the resources spent would appear as
follows:
Deductions - Benefits 75,000

Vouchers Payable 75,000

Cash 75,000
3. d
4. d Income is determined as follows:
Revenue – Charges for Services $100,000

Operating Expenses (45,000)
Depreciation Expense (40,000)
Interest Expense (5,000)
Income $ 10,000
5. c The assets at June 30, 20X7 appear as follows:
Cash $ 96,000
Due from Other Funds 7,000
Computer Equipment (net) 610,000
Total Assets $713,000
6. b This is an example of an interfund services provided or used transaction. The

general fund would debit expenditures.
7. a This is an example of an interfund services provided or used transaction. The

enterprise fund would debit operating expenses.
8. b The net assets would be for the $600,000 transfer in plus the $10,000 of
income for the period.
18-12
E18-5 Multiple-Choice Questions on Financial Reporting Issues for

Government- wide and Fund-Based Financial Statements
1. c
2. c the net assets of internal service funds are included in governmental

activities
3. d
4. d
5. a $150,000 = $500,000 – $350,000
6. d $37,000 = $25,000 + $20,000 – $8,000
7. c $660,000 = $1,000,000 + $300,000 - $40,000 - $600,000
8. d $1,035,000 = $1,000,000 + $60,000 interest - $20,000 benefits paid

- $5,000 deduction for investment revaluation
18-13
E18-6 Capital Projects Fund Entries
a. Entries for capital projects fund during 20X2:

1..1. Receipt of grant, sale of bonds and transfer of premium.
January 1, 20X2
. Cash 50,000
Revenue – County Grant 50,000
Receipt of grant from county.
January 1, 20X2
Cash 156,000
Other Financing Sources – Bond Issue 150,000
Other Financing Sources – Bond Premium 6,000
Sale of $150,000 par bonds at 104.
November 3, 20X2
Other Financing Uses – Transfer
Out to Debt Service Fund 6,000
Cash 6,000
Transfer premium to debt service fund.
2. Entries to record and pay for construction:

April 5, 20X2
ENCUMBRANCES 182,000
BUDGETARY FUND BALANCE –
RESERVED FOR ENCUMBRANCES 182,000
August 8, 20X2
BUDGETARY FUND BALANCE – RESERVED
FOR ENCUMBRANCES 182,000
Expenditures—Capital Outlay 189,000

Contract Payable 189,000
Establish contract payable for walkway.
Expenditures—Capital Outlay 5,500

Establish vouchers payable for added carpeting.
November 3, 20X2
Contract Payable 189,000
Vouchers Payable 5.500
Cash 194,500
Pay contract payable and vouchers payable.
3. Close nominal accounts:

Revenue – County Grant 50,000
Fund Balance – Unreserved 206,000
18-14
E18-6 (continued)

Expenditures 194,500
4. Transfer of ending balance and close transfer account:

Cash 5,500
Record transfer of remainder to Debt Service.

Close transfer out against unreserved
fund balance.
b.
City of Waterman
Capital Projects Fund
Statement of Revenues, Expenditures,
and Changes in Fund Balance
For Fiscal Year Ended December 31, 20X2
Revenue:
County Grant $ 50,000
Expenditures:
Capital Outlay 194,500
Deficiency due to excess of Expenditures over
Revenue $(144,500) )
Other Financing Sources (Uses):
Proceeds of Bond Issue $156,000
Transfer Out to Debt Service Fund--Premium (6,000) )
Transfer Out to Debt Service Fund--Remainder (5,500)
Total Other Financing Sources (Uses) 144,500
Net Change in Fund Balance $ -0-
Fund Balance, January 1, 20X2 -0-
Fund Balance, December 31, 20X2 $ -0-
18-15
E18-7 Debt Service Fund Entries and Statement
a. Entries for debt service fund during 20X2:
1. ESTIMATED REVENUES CONTROL 35,000

ESTIMATED OTHER FINANCING
SOURCES – TRANSFER IN 5,000
APPROPRIATIONS CONTROL 34,000
BUDGETARY FUND BALANCE 6,000
Record budget.
2. Property Taxes Receivable 40,000

Allowance for Uncollectibles 4,000
Revenue – Property Tax 36,000
Record tax levy.
Cash 35,000
Property Taxes Receivable 35,000
Record tax collections.
Property Taxes Receivable — Delinquent 5,000

Property Taxes Receivable 5,000
Allowance for Uncollectibles – Delinquent 1,000
Revise estimate of uncollectibles and
reclassify remaining receivables.
Cash 6,000
Other Financing Sources – Transfer
in from Capital Projects Fund 6,000
Receive bond premium.
3. Expenditures 30,000
Matured Bonds Payable ($150,000 x 1/10 due) 15,000
Matured Interest Payable ($150,000 x .10 15,000
interest)
Record matured principal and interest.
Matured Bonds Payable 15,000

Matured Interest Payable 15,000
Cash 30,000
Pay matured principal and interest.
Expenditures 1,700
Record other expenditures.

Cash 1,200
Pay approved vouchers.
18-16
E18-7 (continued)
4. Cash 5,500
In From Capital Projects Fund 5,500
Record transfer of unspent funds in
capital projects fund to debt service fund.
5. APPROPRIATIONS CONTROL 34,000

BUDGETARY FUND BALANCE 6,000
ESTIMATED REVENUES CONTROL 35,000
ESTIMATED OTHER FINANCING
SOURCES – TRANSFER IN 5,000
Close budgetary accounts.

in from Capital Projects Fund ($6,000 + $5,500) 11,500
Fund Balance – Reserved for Debt Service 18,800
Expenditures 31,700
Close nominal accounts..
b. City of Waterman
Debt Service Fund
Balance Sheet
December 31, 20X2
Assets:
Cash $15,300
Property Tax Receivables (net) 4,000
Liabilities:
Vouchers Payable $ 500
Fund Balance:
Reserved for Debt Service 18,800
Total Liabilities and Fund Balance $19,300
c. City of Waterman
Debt Service Fund
Revenue:
Property Taxes $39,000
Expenditures:
Principal Retirement $15,000
Interest 15,000
Miscellaneous 1,700
Total Expenditures 31,700
Excess of Revenue over Expenditures $ 7,300
Transfers In From Capital Projects Fund 11,500
Net Change in Fund Balance $18,800
Fund Balance, January 1, 20X2 -0-
Fund Balance, December 31, 20X2 $18,800
18-17
E18-8 Enterprise Fund Entries and Statements
a. Entries for enterprise fund:
1. Accounts Receivable 420,000

Revenue 420,000
Record charges to customers.
Cash 432,000
Accounts Receivable 432,000
Record collections on account.
2. Cash 30,000
Due to General Fund 30,000
Receive loan from general fund.
3. Plant and Equipment 75,000

Contracts Payable 75,000
Record extension of water and gas lines.

Cash 75,000
Record payment for extended lines.
4. Inventory of Supplies 12,400

Operating Expenses 328,000
Interest Expense 30,000
Due to Central Stores Fund 12,400
Interest Payable 30,000
Record expenses.
Due to Central Stores Fund 12,400

Interest Payable 30,000
Cash 367,400
Record payment of approved vouchers,
interest, and payment to central stores.
5. Revenue 6,300
Reduce revenue for uncollectible accounts.
Depreciation Expense 32,000

Accumulated Depreciation 32,000
Adjust for depreciation for period.
Supplies Expense 15,200

Inventory of Supplies 15,200
Adjust for supplies on hand.
18-18
E18-8 (continued)
Closing entries:
Revenue 413,700
Interest Expense 30,000
Supplies Expense 15,200
Profit and Loss Summary 8,500
Close nominal accounts.

Net Assets – Unrestricted 8,500
Close profit and loss summary.

Net Assets – Invested in Capital
Assets, Net of Related Debt 43,000
Record increase in net assets-invested:
$43,000 = (ending balance of $563,000 net capital
assets less $500,000 related debt) minus
$20,000 beginning balance in net assets-
Invested in capital assets net of related debt
b. Augusta
MUD Enterprise Fund
Statement of Net Assets
December 31, 20X1
Assets:
Cash $111,600
Accounts Receivable $ 13,000
Less: Allowance for Uncollectibles (6,300) 6,700
Land 120,000
Plant and Equipment $555,000
Less: Accumulated Depreciation (112,000) 443,000
Liabilities:
Vouchers Payable $ 18,000
Bonds Payable, 6% 500,000
Total Liabilities $548,000
Net Assets:
Invested in Capital Assets, net of Related Debt $ 63,000
Unrestricted 75,500
Total Net Assets $138,500
18-19
E18-8 (continued)
c. Augusta
MUD Enterprise Fund
Statement of Revenue, Expenses, and
Changes in Fund Net Assets
Revenue:
Revenue from Services $413,700
Expenses:
Operating $328,000
Depreciation 32,000
Supplies 15,200 375,200
Operating Income $ 38,500
Nonoperating Expense:
Less: Interest on Capital-Related Debt 30,000
Change in Net Assets $ 8,500
Net Assets, January 1 130,000
Net Assets, December 31 $138,500
[Note that interest expense on capital-related debt is a non-operating expense.]
18-20
E18-8 (continued)
d.
Augusta
MUD Enterprise Fund
Statement of Cash Flows
For the Year Ended December 31, 20X1
Cash Flows from Operating Activities:

Cash Received from Customers $ 432,000
Cash Payments for Goods and Services (325,000)
Cash Paid to Internal Service Fund for Supplies (12,400)
Net Cash Provided by Operating Activities $ 94,600
Cash Flows from Noncapital Financing Activities:

Cash Received from General Fund for Noncapital Loan $ 30,000
Net Cash Provided by Noncapital
Financing Activities 30,000
Cash Flows from Capital and Related Financing

Activities:
Interest on Capital-Related Debt $(30,000)
Extension of Service Lines (75,000)
Net Cash Used for Capital and
Related Financing Activities (105,000)
Cash Flows from Investing Activities -0-
Net Increase in Cash $ 19,600

Cash at Beginning of Year 92,000
Cash at End of Year $111,600
Reconciliation of Operating Income to Net Cash

Provided by Operating Activities:
Operating Income $ 38,500

Adjustments to Reconcile Operating Income to Net Cash
Depreciation $ 32,000
Change in Assets and Liabilities:
Decrease in Inventory and Supplies 2,800
Decrease in net Accounts Receivable 18,300
Increase in Vouchers Payable 3,000
Total Adjustments 56,100
Net Cash Provided by Operating Activities $ 94,600
[Note that interest paid on capital-related debt is reported in cash flows from capital
and related financing activities and not in the operating activities.]
18-21
E18-9 Interfund Transfers and Transactions
General Fund
1. a. March 1, 20X8, Transfer out:

Other Financing Uses – Transfer Out to
Building Maintenance Fund 12,000
Cash 12,000
b. June 30, 20X8, Closing entry:

Other Financing Uses – Transfer Out to
Building Maintenance Fund 12,000
2. a. April 1, 20X8, Financing transaction:

Due from Building Maintenance Fund 8,000
Cash 8,000
b. Shown on the general fund balance sheet on June 30, 20X8
3. a. April 15, 20X8, Transfer out:

Cash 2,400

4. a. May 5, 20X8, Interfund services provided or used:

Expenditures 825
Due to Transportation Service Fund 825
Due to Transportation Service Fund 825

Cash 825

Fund Balance – Unreserved 825
Expenditures 825
18-22
E18-9 (continued)
Other Fund
1. Building Maintenance Internal Service Fund
a. March 1, 20X8, Transfer in:

Cash 12,000
Transfer In from General Fund 12,000

Net Assets 12,000
2. Building Maintenance Fund
a. April 1, 20X8, Financing transaction:

Cash 8,000
3. Debt Service Fund
a. April 15, 20X8, Transfer in:

Cash 2,400
Other Financing Sources –

Unreserved Fund Balance 2,400
4. Transportation Service Fund
a. May 5, 20X8, Interfund services provided or used:

Due from General Fund 825
Revenue from Billings 825
Cash 825
Due from General Fund 825

Revenue from Billings 825
Net Assets - Unrestricted 825
18-23
E18-10 Internal Service Fund Entries and Statements
a. Entries for 20X2, including closing entries:
1. Inventory of Supplies 96,000

Furniture and Equipment 4,700
Record acquisitions of supplies,
furniture, and office equipment.
2. Due from Other Funds 292,000

Billings to Departments 292,000
Record billings for jobs completed.
Cash 287,300
Record collections on billings.
Costs of Printing Jobs 204,000

Record costs of printing jobs.

Accumulated Depreciation 23,000
Record depreciation for period.

Cash 243,000
Pay approved vouchers.
Closing entries:
Billings to Departments 292,000

Costs of Printing Jobs 204,000
Close nominal accounts.

Close profit and loss summary.
Net Assets – Invested in Capital Assets,

Net of Related Debt 18,300
Net Assets - Unrestricted 18,300
Reclassify net assets as of end of period:
$18,300 = (ending balance of $191,700 net
capital assets less $0 related debt ) less
$210,000 beginning balance in net assets invested.
18-24
E18-10 (continued)
b. Bellevue
Printing Shop Fund
December 31, 20X2
Assets: $ 68,900
Cash 20,300
Inventory of Supplies $264,700
Furniture and Equipment (73,000) 191,700
Less: Accumulated Depreciation $294,300
Total Assets
Liabilities:
Vouchers Payable $ 19,300
Total Liabilities $ 19,300
Net Assets:
Invested in Capital Assets, Net of Related Debt $191,700
Unrestricted 83,300
Total Net Assets $275,000
c. Bellevue
Printing Shop Fund
Statement of Revenue, Expenses, and
Changes in Fund Net Assets
Revenue:
Billings to Departments $292,000
Expenses:
Costs of Printing Jobs $204,000
Operating 38,000
Depreciation 23,000 265,000
Income $ 27,000
Net Assets, January 1 248,000
Net Assets, December 31 $275,000
18-25
E18-10 (continued)
d.
Bellevue City
Internal Service Fund – Printing Shop
Statement of Cash Flows
For the Year Ended December 31, 20X2
Cash Flows from Operating Activities:

Cash Received from Customers $ 287,300
Cash Payments for Printing Jobs (238,300)
Net Cash Provided by Operating Activities $49,000
Cash Flows from Noncapital Financing Activities -0-
Cash Flows from Capital and

Related Financing Activities
Acquisition of Capital Assets
(furniture and copier) $ (4,700)
Net Cash Used for Capital and Related
Financing Activities (4,700)
Cash Flows from Investing Activities -0-
Net Increase in Cash $44,300

Cash at Beginning of Year 24,600
Cash at End of Year $68,900
Reconciliation of Operating Income to Net Cash

Operating Income $27,000
Adjustments to Reconcile Operating Income

to Net Cash Used by Operating Activities:
Depreciation $ 23,000
Change in Assets and Liabilities:
Increase in Due from Other Funds
from Billings (4,700)
Increase in Inventory of Supplies (3,600)
Increase in Vouchers Payable 7,300
Total Adjustments 22,000
Net Cash Provided by Operating Activities $49,000
18-26
E18-11 Multiple-Choice Questions on Government-wide Financial Statements
1. c ($1,450,000 - $120,000)
2. a [($1,450,000 - $120,000) - $780,000]
3. b
4. c For the amount of the bond issue proceeds. Note that no repayments
of debt were made during the year.
5. c The interest adjustment is from the modified accrual basis ($30,000)

to the accrual basis of measurement ($25,000).
6. d
7. c
8. b
9. c
10. b
18-27
SOLUTIONS TO PROBLEMS
P18-12 Adjusting Entries for General Fund [AICPA Adapted]
Adjusting entries to correct the general fund:
1. No entry required.
Buildings 300,000
Correct for state grant
expended for buildings.
Expenditures 22,000
Capital Outlays (equipment) 22,000
Correct for expenditures
for playground equipment.
3. Bonds Payable 1,000,000

Buildings 1,000,000
Correct for bonds used
to construct buildings.

Debt Service from Current Funds 130,000
Correct for transfer to debt service fund.
4. ENCUMBRANCES 2,800
Correct for unrecorded encumbrances.
Correct for supplies used in period.

Fund Balance – Reserved for Inventory 6,500
Correct for reserve for ending inventory.
18-28
P18-13 Entries for Funds [AICPA Adapted]
Fund Journal Entries
1. General ESTIMATED REVENUES CONTROL 400,000

Fund APPROPRIATIONS CONTROL 394,000
BUDGETARY FUND BALANCE – UNRESERVED 6,000
2. General Taxes Receivable – Current 390,000

Fund Revenue – Taxes 382,200
Allowance for Uncollectibles – Current 7,800
3. Private- Investments 50,000

Purpose Contributions 50,000
Trust Fund
Cash 5,500
Additions – Interest 5,500
4. General Other Financing Uses – Transfer

Out to Internal Service Fund 5,000
Cash 5,000
Internal Cash 5,000

Service Transfer In from General Fund 5,000
Fund
5. Capital Cash 72,000

Projects Other Financing Sources – Bond Issue 72,000
Due from General Fund 3,000

Debt Special Assessments Receivable 24,000

Service Revenue – Special Assessments 24,000
Fund
General Other Financing Uses – Transfer

Out to Capital Projects Fund 3,000
Due to Capital Projects Fund 3,000
6. General Due to Capital Projects Fund 3,000

Fund Cash 3,000
Capital Cash 3,000

Projects Due from General Fund 3,000
Fund
Debt Cash 24,000

Service Special Assessments Receivable 24,000
Fund
18-29
P18-13 (continued)
Fund Journal Entries
7. Capital ENCUMBRANCES 75,000

Projects BUDGETARY FUND BALANCE – RESERVED
Fund FOR ENCUMBRANCES 75,000

ENCUMBRANCES 75,000
Expenditures 75,000

Cash 75,000
8. Internal Inventory of Supplies 1,900

Service Cash (or Vouchers Payable) 1,900
Fund
9. General Cash 393,000

Fund Taxes Receivable – Current 386,000
Revenue – Licenses and Fees 7,000
Allowance for Uncollectibles – Current 3,800

Revenue – Taxes 3,800
Estimate $7,800
Actual (4,000)
Correction $3,800
10. Capital Cash 500,000

Projects Other Financing Sources – Bond Issue 500,000
Fund
11. General BUDGETARY FUND BALANCE – RESERVED

Fund FOR ENCUMBRANCES 15,000
ENCUMBRANCES 15,000
Expenditures 15,000
Cash 15,000
18-30
P18-14 Entries to Adjust Account Balances [AICPA Adapted]
a. General Fund
Adjusting entries:
1. Allowance for Uncollectibles – Delinquent 2,200

Reduce estimated losses on prior year's
taxes to amount of receivables of $8,000.
2. Revenue 27,000
Donated Land 27,000
Remove accounts belonging only in the
government-wide financial statements.
3. Fund Balance – Unreserved 8,800

Fund Balance – Reserved
for Encumbrances – 20X0 8,800
Record purchase orders outstanding
on June 30, 20X0.
Expenditures – 20X0 8,800

Other Expenditures 8,800
Reclassify purchases of supplies
chargeable to prior year's appropriations.
Excess of $600 actual cost over estimate
is approved and charged to current year
expenditures.
4. ENCUMBRANCES 2,100
Record encumbering of appropriations for
purchase orders outstanding on June 30, 20X1.
5. Special Assessment Bonds Payable 100,000

Due to Capital Projects Fund 100,000
Record liability to capital projects
fund for cash obtained from sale of
special assessment bonds.
6. Revenue 21,000
Tax Anticipation Notes Payable 20,000
Due to Water Utility Fund 1,000
Record tax anticipation notes payable
and liability to water utility fund for
funds obtained from sale of scrap.
18-31
P18-14 (continued)
Closing entries:

BUDGETARY FUND BALANCE – 38,000
UNRESERVED

ENCUMBRANCES 2,100

Fund Balance – Reserved for Encumbrances 2,100
Revenue 306,000
Other Expenditures 271,200
Expenditures – Building Addition Constructed 50,000
Expenditures – Serial Bonds Paid 16,000
Fund Balance – Reserved for

Encumbrances – 20X0 8,800
Expenditures – 20X0 8,800
b. Adjusting Journal Entries:
Capital Projects Fund:

5. Due from General Fund 100,000
Record receivable due from general
fund for proceeds of sale of bonds.
Water Utility Fund:

6. Due from General Fund 1,000
Revenue – Miscellaneous 1,000
Record receivable from general fund
for cash obtained from sale of scrap.
18-32
P18-15 Capital Projects Fund Entries and Statements
a. Journal entries:
1. CPF Cash 5,080,000

Other Financing Sources – Bond Issue 5,000,000

Cash 80,000
DSF Cash 80,000

In from Capital Projects Fund 80,000
2. CPF Expenditures 45,000


Cash 45,000
(Note: It is not necessary to first establish, and then immediately reverse an

encumbrance account.)
3. CPF ENCUMBRANCES 4,500,000

FOR ENCUMBRANCES 4,500,000
4. CPF BUDGETARY FUND BALANCE – RESERVED

FOR ENCUMBRANCES 2,000,000
ENCUMBRANCES 2,000,000
Expenditures 2,000,000
Contracts Payable 1,800,000
Contracts Payable – Retained 200,000
Percentage
CPF Contracts Payable 1,800,000

Cash 1,800,000
Closing entries for Capital Projects Fund:
Other Financing Sources – Bond Issue 5,000,000

Expenditures 2,045,000
Fund Balance – Unreserved 2,955,000
BUDGETARY FUND BALANCE –

RESERVED FOR ENCUMBRANCES 2,500,000
ENCUMBRANCES 2,500,000
18-33
P18-15 (continued)
Fund Balance – Unreserved 2,500,000

Fund Balance – Reserved
for Encumbrances 2,500,000
b. West City
Balance Sheet
June 30, 20X3
Assets
Cash $ 3,155,000
Total Assets $ 3,155,000
Liabilities and Fund Balance

Contracts Payable – Retained Percentage $ 200,000
Fund Balance:
Reserved for Encumbrances $2,500,000
Unreserved 455,000 2,955,000
Total Liabilities and Fund Balance $ 3,155,000
c. West City
For Fiscal Year Ended June 30, 20X3
Expenditures:
Capital Outlays:
Building Removal $ 45,000
Building Construction 2,000,000
Total Expenditures $ 2,045,000
Deficiency of Revenues over Expenditures $(2,045,000)
Proceeds of Serial Bonds 5,080,000
Transfer Out to Debt Service Fund (80,000)
Total Other Financing Sources (Uses) $ 5,000,000
Net Change in Fund Balance $ 2,955,000
Fund Balance, July 1, 20X2 -0-
Fund Balance, June 30, 20X3 $ 2,955,000
18-34
P18-16 Recording Entries in Various Funds [AICPA Adapted]
1. Entries made in the capital projects fund for 20X8:
Cash 800,000
Issued $800,000 of bonds at their face value.
Contractor’s bid is accepted.
BUDGETARY FUND BALANCE – RESERVED FOR

One-third of the project was completed during 20X8.
Actual construction cost incurred in 20X8.
2. Entries made in the special revenue fund for 20X8:

BUDGETARY FUND BALANCE – UNRESERVED 4,000
Record the budget for 20X8.
Cash 109,000
Revenues 109,000
Collected hotel room taxes.
Incurred expenditures for general promotion
and motor vehicle.

Cash 103,000
Paid expenditures.
18-35
P18-16 (continued)
3. Entry made in the general fund for 20X8:

Cash 313,500
Record transfer of resources to debt service fund.
Entries made in the debt service fund for 20X8:
Cash 313,500
In from General Fund 313,500
Record transfer of resources from general fund.
Expenditures – Interest 13,500

Record interest legally due and payable.
Expenditures – Principal 300,000

Record principal legally due and payable.

Cash 313,500
Record payment of matured bonds and interest.
4. Closing entries in the general fund for 20X8:
BUDGETARY FUND BALANCE – RESERVED FOR

ENCUMBRANCES 83,000
ENCUMBRANCES 83,000
Close outstanding encumbrances at year-end.

Fund Balance – Reserved for Encumbrances 83,000
Reserve actual fund balance for encumbrances
expected to be honored in 20X9.
5. Adjusting entry in the general fund for 20X8:
Fund Balance – Reserved for Inventories 3,000

Adjust inventory of supplies to balance
at December 31, 20X8.
18-36
P18-17 Matching Questions Involving Various Funds
1. L
2. C
3. R
4. M
5. I
6. G
7. Q
8. A
9. O
10. F
18-37
P18-18 Questions on Fund Transactions [AICPA Adapted]
1. $104,500 (Stated in item #3.)
2. $17,000 (Stated in item #4.)
3. $125,000 (Item #5 states that $83,000 is reserved for encumbrances. To this

is added the $42,000 reserve for the ending inventory.)
4. $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.)
5. $6,000 (Item #2 states that $109,000 tax revenues were received from
which $81,000 and $22,000 was expended.)
6. $104,500 (Stated in item #3.)
7. $386,000 (Item #1 states construction expenditures of $364,000 plus item #2

states a motor vehicle purchase of $22,000.)
8. $100,000 (Item #3 states a reduction in long-term debt principal of

$100,000.)
9. $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
P18-19 Matching Questions Involving the Statement of Cash Flows for a

Proprietary Fund
1. C
2. A
3. C
4. A
5. E
6. A
7. C
8. B
9. B
10. C
11. A
12. E
13. D
14. D
15. C
18-39
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
1. C
2. D
3. C
4. C
5. B
6. A
7. C
8. D
9. A
10. C
11. B
12. B
13. D
18-40
P18-21 Question on Fund Transactions [AICPA Adapted]
a.
1. G
2. K
3. L
4. L
5. E
6. J
7. D
8. A
9. F
10. B
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
18-41
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: Assets Liabilities Revenues Expenditures

Percent of: $2,112,400 $951,300 $5,790,000 $5,659,800
General fund – is always a major fund

Special Revenue 1.28%(a) 2.00% 5.65% 5.80%
Capital Project – Library 21.30%* 3.99% 7.94% 7.39%
Capital Project – Arena 1.33% 1.68% 0.71% 0.99%
Debt Service 1.94% 0.00% 5.72% 5.12%
Permanent 11.65%* 0.00% 0.19% 0.32%
Enterprise fund type: Assets Liabilities Revenues Expenses

Percent of: $3,996,000 $2,900,700 $618,000 $543,000
Enterprise – Electric 66.07%* 62.08%* 46.76%* 45.12%*

Enterprise – Water 33.93%* 37.92%* 53.24%* 54.88%*
(a)
1.28% = $27,000 / $2,112,400
* Meets the 10 percent criterion test
18-42
P18-22 (continued)
Step 2: 5 percent criterion tests
The 5 percent criterion test is applied only to those funds that met the 10 percent criterion
test.
(For each of the four 5 percent tests, the denominator is the combined amount of that
item
from the governmental funds plus the enterprise funds.)
Computation of denominators for 5 percent governmental and enterprise fund types:

Expenditures/
Assets Liabilities Revenues 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
5 percent criterion tests:

Expenditures/
Assets Liabilities Revenues Expenses
Percent of combined amount of: $6,108,400 $3,852,000 $6,408,000 $6,202,800
Governmental fund type:

General fund – is always
a major fund
Capital Project – Library 7.37%(a)** 0.99% 7.18%** 6.74%**
Permanent 4.03% 0.00% 0.17% 0.29%
Enterprise type funds:

Enterprise – Electric 43.22%** 46.75%** 4.51% 3.95%
Enterprise – Water 22.20%** 28.56%** 5.13%** 4.80%
(a)
7.37% = $450,000 / $6,108,400
** Meets the 5 percent criterion test
To be a major fund, an individual fund must meet both the 10 percent and the 5 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
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 $ 888,400

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) 4,311,000
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. 37,000
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. (460,000)
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). (5,000)
Net assets of governmental activities $4,771,400
18-44
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 $509,400

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) 100,000
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. (460,000)
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. (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. 9,000
Change in net assets of governmental activities $153,400
18-45
P18-24 True/False Questions
1. F The budgetary comparison schedule requires both the initial budget and the
final budget.
2. T
3. F A component unit is financially accountable to the primary government.
4. 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.
5. 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 5 percent of the total for all governmental and
enterprise funds combined.
6. T
7. T
8. F The internal service fund is blended into the governmental activities columns
of the government-wide financial statement of net assets and statement of
activities.
9. T
10. F 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.
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 fund-
based financial statements.
15. T
18-46
P18-25 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
1. Assets $50,000,000 $4,100,000 ( 8.2%)
(10% test failed)
2. Liabilities 22,000,000 3,900,000 (17.7%)
(10% test met)
3. Revenues 70,000,000 6,700,000 ( 9.6%)
(10% test failed)
4. 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.
Totals for Amount reported

Governmental and by Special
Items Tested Enterprise Funds Revenue Fund
2. Liabilities $37,000,000 $3,900,000 (10.5%)
(5% test met)
4. Expenditures/expenses 82,000,000 6,500,000 ( 7.9%)
(5% test met)
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
P18-26 Preparation of a Statement of Net Assets for a Governmental Entity
Gibson City
December 31, 20X2
Governmental Business-type
Activities Activities Total
Assets
Cash and cash equivalents $ 68,000 $ 28,000 $ 96,000
Taxes receivable (net) 52,000 52,000
Accounts receivable (net) 12,000 12,000
Internal balances (5,000) 5,000
Inventories 10,000 7,000 17,000
Investments 25,000 15,000 40,000
Capital assets:
Land 100,000 50,000 150,000
Infrastructure 60,000 60,000
Other depreciable assets (net) 75,000 45,000 120,000
Total assets $385,000 $162,000 $547,000
Liabilities
Vouchers payable $ 32,000 $ 4,000 $ 36,000
Accrued interest payable 1,500 2,000 3,500
Revenue bonds payable 80,000 80,000
General obligation bonds payable 60,000 60,000
Total liabilities $ 93,500 $ 86,000 $179,500
Net assets
Invested in capital assets,
net of related debt $175,000* $ 15,000** $190,000
Restricted 55,000 5,000 60,000
Unrestricted 61,500*** 56,000*** 117,500
Total net assets $291,500 $ 76,000 $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

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GOVERNMENTAL ENTITIES: SPECIAL FUNDS AND

Special Revenue Enterprise

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

Financial statements Governmental type Commercial type

Q18-8 A permanent fund is a governmental fund for which the principal is

Q18-10 Because the measurement focus of the governmental funds is on current

Q18-11 Agency funds must be self-balancing with assets equalling liabilities.

Q18-15 The government-wide financial statements present the infrastructure assets,

C18-1 Basis of Accounting and Reporting Issues

a. In the accrual basis of accounting, revenue should be recognized in the

In the modified accrual basis of accounting, revenue should be recognized in the

C18-2 Capital Projects, Debt Service, and Internal Service Funds

C18-3 Discovery Case

1. The report is prepared by the Secretary of the Treasury.

2. The Management’s Discussion and Analysis presents comparative historical

6. The Statement of Operations and Changes in Net Position presents the

7. The Reconciliation of Net Operating Revenue (Cost) to the Budget Surplus

C18-4 Becoming Familiar With a Local Government’s Comprehensive Annual

b. Because there is so much information contained in a CAFR, it is important to see what

C18-5 The GASB’s Decision-Making Process

And then, the Board continues to work on the next project!

C18-6 Summarizing a Recent GASB Exposure Draft

E18-1 Multiple-Choice Questions on Government Financial Reporting

7. a $8,839,000 = assets of $14,839,000 minus liabilities of $6,000,000

8. c $7,150,000 = capital assets (net) of $12,500,000 minus long-term debt of

9. c $1,035,000 = net assets of $8,839,000 minus $7,150,000 minus $654,000

E18-2 Multiple-Choice Questions on Governmental Funds [AICPA Adapted]

E18-3 Multiple-Choice Questions on Proprietary Funds [AICPA Adapted]

6. c Prepaid insurance would be reported as an asset.

E18-4 Multiple-Choice Questions on Various Funds

Deductions - Benefits 75,000

Vouchers Payable 75,000

4. d Income is determined as follows:

Revenue – Charges for Services $100,000

5. c The assets at June 30, 20X7 appear as follows:

6. b This is an example of an interfund services provided or used transaction. The

7. a This is an example of an interfund services provided or used transaction. The

E18-5 Multiple-Choice Questions on Financial Reporting Issues for

2. c the net assets of internal service funds are included in governmental

5. a $150,000 = $500,000 – $350,000

6. d $37,000 = $25,000 + $20,000 – $8,000

7. c $660,000 = $1,000,000 + $300,000 - $40,000 - $600,000

8. d $1,035,000 = $1,000,000 + $60,000 interest - $20,000 benefits paid

E18-6 Capital Projects Fund Entries

a. Entries for capital projects fund during 20X2:

2. Entries to record and pay for construction:

Expenditures—Capital Outlay 189,000

Expenditures—Capital Outlay 5,500

3. Close nominal accounts:

Fund Balance – Unreserved 200,500

4. Transfer of ending balance and close transfer account:

Fund Balance – Unreserved 5,500

E18-7 Debt Service Fund Entries and Statement

a. Entries for debt service fund during 20X2:

1. ESTIMATED REVENUES CONTROL 35,000

2. Property Taxes Receivable 40,000

Property Taxes Receivable — Delinquent 5,000

Matured Bonds Payable 15,000

Vouchers Payable 1,200