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1
Q

The standards for reporting interfund activity classifies such activity as

A

Reciprocal and nonreciprocal.

Interfund activity may be reciprocal or nonreciprocal. Reciprocal interfund activity is similar to exchange and exchange-like transactions, for example, interfund loans and services provided and used. Nonreciprocal interfund activity is similar to nonexchange transactions, for example, interfund transfers and reimbursements.

2
Q

In the current year, New City issued purchase orders and contracts of $850,000 that were chargeable against current-year budgeted appropriations of $1 million. The journal entry in the general fund to record the issuance of the purchase orders and contracts should include a

A

Credit to encumbrances outstanding of $850,000.

When a purchase order is approved or a contract is signed, an estimated liability is recorded in a budgetary account for the amount of the purchase order. The entry is a debit to encumbrances and a credit to encumbrances outstanding.

3
Q

Beginning on the first day of the new fiscal year, Modi Township’s commission approved and established a self-insurance fund by collecting insurance premiums from employees and paying medical bills directly. The fund balance classification used for this type of activity is

A

Committed.

Amounts in committed fund balance may be spent only for specific purposes established by a formal act of the entity’s highest decision maker (e.g., a county commission). However, this decision maker may redirect the resources by following the necessary due process procedures.

4
Q

The city of Pine’s fiscal year end is June 30. Pine levies property taxes in January of each year for the calendar year. One-half of the levy is due in May, and one-half is due in October. Property tax revenue is budgeted for the period in which payment is due. The following information pertains to Pine’s property taxes for the period from July 1, Year 5, to June 30, Year 6:

Year 5
Levy $2,000,000
Collected in:
May: $950,000
July: $50,000
October: $920,000
December: $80,000
Year 6
Levy: $2,400,000
Collected in:
May: $1,100,000
July: $600,000 
October
December

The $40,000 balance due for the May Year 6 installments was expected to be collected in August Year 6. What amount should Pine recognize for property tax revenue for the fiscal year ended June 30, Year 6?

A

$2,200,000

Property tax revenue should be recognized in the fiscal period for which it is levied, provided the availability criterion is met. This criterion is relevant because property taxes are accounted for in governmental funds, which use the modified accrual basis. The levy for the fiscal year ended June 30, Year 6, equals 50% of the amount for calendar year Year 5 (this part was previously deferred because it was levied in January Year 5 for the calendar year ended December 31, Year 5) and 50% of the amount for the Year 6 calendar year, or $2,200,000 [($2,000,000 + $2,400,000) × 50%]. This amount is available because it was collected within the current period or expected to be collected soon enough thereafter (generally within 60 days) to be used to pay liabilities of the current period. Accordingly, the $40,000 of taxes expected to be collected in August Year 6 is available and should be recognized as revenue.

5
Q

Which of the following statements is the most significant characteristic in determining the classification of an enterprise fund?

A

The pricing policies of the activity establish fees and charges designed to recover its cost.

Enterprise funds account for activities that benefit outside parties who are willing to pay for them. They serve defined customer groups and are generally financed through fees.

6
Q

Fund balance is reported only for a general fund. Amounts in

A

Nonspendable fund balance must be kept intact if not in a form that is nonspendable.

Nonspendable fund balance includes amounts that either (1) are in a form (e.g., inventory, prepayments, or long-term loans) that is not spendable or (2) must be kept intact (e.g., the principal of a permanent fund).

7
Q

In which situations, if any, should property taxes due to a governmental unit be recorded as deferred inflows of resources?

I. Property taxes receivable are recognized in advance of the year for which they are levied.
II. Property taxes receivable are collected in advance of the year in which they are levied.

A

Both I & II.

A property tax assessment is made to finance the budget of a specific period. Thus, the revenue produced should be recognized in the period for which the assessment was levied. When property taxes are recognized or collected in advance, they should be recorded as deferred inflows of resources in a governmental fund. They are not recognized as revenue until the period for which they are levied. A property tax assessment is an imposed nonexchange revenue transaction. In such a transaction, assets should be recognized when (1) an enforceable legal claim arises or (2) resources are received, whichever is earlier. Thus, recognition of a receivable in a year prior to that for which the property taxes were levied implies that, under the enabling statute, the enforceable legal claim existed in that prior year.

8
Q

The measurement focus of the fund-based financial statements of a governmental fund is on the determination of

Economic Resources:
Financial Position:
Statement of Financial Position:

A

No
Yes
Yes

The measurement focus refers to what is being measured or tracked by the information provided in the financial statements. The measurement focus of governmental funds financial statements is on current financial resources, specifically financial position and changes in financial position. The measurement focus of the government-wide statements, proprietary funds, and fiduciary funds is on economic resources.

9
Q

The modified accrual basis of accounting should be used in preparing the fund financial statements of which of the following funds?

A

Capital projects fund.

Governmental fund types, including the general fund and special revenue, capital projects, debt service, and permanent funds, are required by current accounting and reporting standards to use the modified accrual basis of accounting in the preparation of their fund financial statements.

10
Q

Disclosure of the significant accounting policies of a state or local government is required when

A

A policy is unique to the industry in which the government operates, even if the policy is predominantly followed in that industry.

Disclosure of significant accounting policies is required when (1) a policy is unique to the industry in which the government operates, even if the policy is predominantly followed in that industry; (2) a selection has been made from existing acceptable alternatives; and (3) GAAP have been applied in an unusual or innovative way.

11
Q

The city of Cal maintains several fund types. The following were among Cal’s cash receipts during the current year:

State grant received in a voluntary nonexchange transaction: $1,000,000
Interest on bank accounts held for employees’ pension plan: 200,000

What amount of these cash receipts should be accounted for in Cal’s general fund?

A

$1,000,000.

The general fund is used to account for all financial resources of a governmental unit that are not accounted for in another fund. The interest is accounted for in a pension trust fund. Thus, the general fund accounts for the $1 million grant only.

12
Q

Which of the following information is needed to prepare the budgetary comparison schedules for a local government?

A

Original Budget.

Budgetary comparison schedules (BCSs) are required supplementary information (RSI). They are reported for (1) the general fund and (2) each major special revenue fund with a legally adopted annual budget. A BCS includes (1) the original budgets, that is, the first complete appropriated budgets; (2) the final appropriated budgets; and (3) the actual inflows, outflows, and balances stated on the budgetary basis of accounting. A reconciliation of budgetary and GAAP information also should be provided.

13
Q

Should a special revenue fund with a legally adopted budget prepare its financial statements using the accrual basis and integrate budgetary accounts into its accounting system?

Fund Statements Use Accrual Basis:
Integrate Budgetary Accounts:

A

No
Yes

Use of the modified accrual basis is required for the fund financial statements of all governmental funds. Thus, a special revenue fund should prepare its financial statements using the modified accrual basis. The integration of budgetary accounts into the formal accounting system is a control used to assist in controlling expenditures and enforcing revenue provisions. The extent to which the budgetary accounts should be integrated varies among governmental fund types and according to the nature of fund transactions. However, integration is necessary in the general, special revenue, and other annually budgeted governmental funds with many revenues, expenditures, and transfers. Thus, a special revenue fund with a legally adopted budget should integrate its budgetary accounts into its accounting system.

14
Q

In the government-wide statement of activities, special items are transactions or other events that are

A

Unusual in nature or infrequent in occurrence and within management’s control.

Extraordinary items are both unusual in nature and infrequent in occurrence. Special items are significant transactions or other events within the control of management that are either unusual or infrequent. They are reported separately after extraordinary items.

15
Q

Financial reporting by general-purpose governments includes presentation of management’s discussion and analysis as

A

A description of currently known facts, decisions, or conditions expected to have significant effects on financial activities.

MD&A is required supplementary information (RSI) that precedes the basic financial statements and provides an overview of financial activities. It is based on currently known facts, decisions, or conditions and includes comparisons of the current and prior years, with an emphasis on the current year, based on government-wide information. Currently known facts are those of which management is aware at the audit report date.

16
Q

Valley Town’s public school system is administered by a separately elected board of education. The board of education is not organized as a separate legal entity and does not have the power to levy taxes or issue bonds. Valley Town’s city council approves the school system’s budget. How should Valley Town report the public school system’s annual financial results?

Discrete presentation:
Blended:

A

No
Yes

Discrete presentation is reporting component-unit financial data separately from that of the primary government. But some component units are, in substance, the same as the primary government and should be reported as a part of it, that is, blended. The public school system is part of Valley Town’s primary government and is not legally separate. Also, Valley Town has a financial benefit or burden relationship with the school system given that the school board cannot levy taxes or issue bonds. Thus, the school system’s data should be blended with those of Valley Town.

17
Q

If a city legally adopts its annual general fund budget on the modified accrual basis of accounting, its estimated revenues should be

A

Reported on the modified accrual basis of accounting in a budgetary comparison schedule or statement.

Certain information must be presented as required supplementary information (RSI) in addition to management’s discussion and analysis (MD&A). Budgetary comparison schedules must be reported for the general fund and each major special revenue fund with a legally adopted annual budget. A schedule includes (1) the original budgets, that is, the first complete appropriated budgets; (2) the final appropriated budgets; and (3) the actual inflows, outflows, and balances stated on the budgetary basis of accounting. In this case, the budgetary basis and the GAAP basis for the general fund (a governmental fund) are the same (the modified accrual basis).

18
Q

The city of Hull has established a separate internal service (self-insurance) fund to pay claims and judgments of all of Hull’s funds. In the current year, payments to the internal service fund amounted to $500,000, but the actuarially determined amount was $400,000. The payments to the internal service fund should be accounted for by that fund as

A transfer of:
Interfund revenues of:

A

$100,000
$400,000

A governmental entity may use a single fund to account for its risk financing activities. The choice of fund depends on the nature of the activity to be reported. Thus, an entity may use a governmental fund or an internal service fund to account for risk-financing activities. But participation in such an internal service fund is not limited to governmental funds. For example, proprietary funds and trust funds of the same primary government may participate. An internal service fund may be used only if the reporting government is the predominant participant in the activity. The fund may use any basis it deems to be appropriate for charging other funds, subject to certain conditions: (1) The total periodic charge is calculated in accordance with procedures similar to those used to report contingent liabilities under GAAP for nongovernmental business enterprises, or (2) the total charge is based on an actuarial method or historical costs adjusted over a reasonable time so that internal service fund revenues and expenses are approximately equal. The second calculation also may include a reasonable provision for expected future catastrophic losses. Charges determined under (1) or (2) are revenues of the internal service fund and expenditures or expenses of the other funds. If the charge to the other funds exceeds the amount determined under (1) or (2), the excess should be reported in the internal service fund and the other funds as an interfund transfer.

19
Q

Derived tax revenues should be recognized in the government-wide financial statements in the accounting period in which

A

The exchange occurs.

Nonexchange revenues derived from an exchange or exchange-like transaction are recognized when the underlying exchange transaction occurs. The availability criterion need not be met because the accrual basis of accounting is used to report the government-wide financial statements.

20
Q

During the year ended December 31, Year 1, the city of Todd received a state grant to buy a bus and an additional grant for bus operation in Year 1. In Year 1, only 90% of the capital grant was used for the bus purchase, but 100% of the operating grant was disbursed. Todd accounts for its bus operations in an enterprise fund. In reporting the state grants for the bus purchase and operation, what should Todd include as grant revenues for the year ended December 31, Year 1?

90% of the grant:
100% of the grant:
Operating grant:

A

No
Yes
Yes

Because the bus operation is accounted for in an enterprise fund, the accrual basis of accounting is used. Thus, the purpose restriction has no bearing on revenue recognition. The recipient classifies the unused resources as restricted. Consequently, 100% of both grants should be recognized as revenues because all eligibility requirements apparently have been met given that 90% of the capital grant and 100% of the operating grant have been spent.