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Chapiter2 : Solution manual Governmental Nonprofit Accounting Theory – Practice 10th edition by Robert J. Freeman

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CHAPTER 2 : STATE AND LOCAL GOVERNMENT ACCOUNTING AND
FINANCIAL REPORTING MODEL: THE FOUNDATION
SOLUTIONS MANUAL

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Solution manual Governmental Nonprofit Accounting Theory – Practice
ANSWERS TO QUESTIONS

  • Question 2-1

Governments operate in a different environment than businesses. Governments must comply with the many finance-related legal and contractual requirements, regulations, restrictions, and agreements that affect their financial management and accounting. Such compliance must be demonstrable and be reported on regularly. Governments should also prepare financial statements in conformity with generally accepted accounting principles (GAAP), which provide uniform minimum national standards of and guidelines for annual financial reporting to groups and persons outside the government. Therefore, one fundamental feature of a government’s accounting system is that it must maintain and provide information that accomplishes multiple purposes.
Whereas business accounting systems must provide data both for GAAP reporting and for income tax reporting, governmental accounting systems must provide data both for external reporting in conformity with GAAP and for controlling and reporting on finance-related legal compliance matters. This necessitates having different accounting systems for businesses and governments.

Difficulty: 2
Learning Objective: 1
AACSB: Reflective thinking

  • Question 2-2

The measurement focus for the three fund categories are:

1. Proprietary Funds—economic resources (revenues and expenses) measurement focus, which is the measurement focus used by business enterprises.

2. Governmental Funds—the current financial resources measurement focus.

3. Fiduciary Funds—the same measurement focus as proprietary funds—the economic resources measurement focus.

An economic resources measurement focus results in accounting for all assets—both current and noncurrent—and all liabilities—both current and long-term. A current financial resources measurement focus results in accounting for financial assets and related liabilities. Noncurrent assets and long-term liabilities are not reported under a current financial resources measurement focus.

Difficulty: 1
Learning Objective: 2, 3
AACSB: Reflective thinking

  • Question 2-3

For governmental funds:

1. Revenues must be (1) “available”—collectible within the period or soon enough thereafter to be used to pay for the expenditure liabilities incurred during the period, as well as levied or earned—and (2) measurable to be recognized.

2. Expenditures are financial assets expended during a period for current operations, capital outlay, and debt service including (a) long-term debt principal retirement and (b) interest on both short-term and long-term indebtedness.

For proprietary funds:

1. Revenues are recognized when earned and measurable. There is no “availability” criterion for revenues recognized in proprietary funds.

2. Expenses are costs consumed or expired during a period.
Difficulty: 1
Learning Objective: 2, 3, 5
AACSB: Reflective thinking

  • Question 2-4

General capital assets are not considered appropriable resources and unmatured general long-term liabilities are not current liabilities. Hence, these assets and liabilities would not appropriately be accounted for within a municipality’s governmental (expendable) funds, which are net current financial resource entities. Further, general capital assets are considered to belong to the government as a whole, not to a particular department or enterprise; and unmatured general long-term liabilities are likewise considered obligations of the government, not of a specific fund. Thus, neither fits conveniently into the existing fund structure of state and local governmental accounting and both are accounted for through the General Capital Assets and General Long-Term Liabilities nonfund accounts. They are reported only in the government-wide financial statements.

Difficulty: 2
Learning Objective: 4
AACSB: Reflective thinking

  • Question 2-5

Capital assets and long-term liabilities are accounted for in:

General Capital Assets and General Long-Term Liabilities accounts
Enterprise Funds
Internal Service Funds
Trust Funds (some)

General capital assets and general long-term liabilities are accounted for in the General Capital Assets and General Long Term Liabilities accounts. They are related to general government (governmental) activities.

Difficulty: 1
Learning Objective: 4
AACSB: Reflective thinking

  • Question 2-6

A Special Revenue Fund should be used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects.

A Capital Projects Fund should be used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays, including the acquisition or construction of capital facilities and other capital assets.

A Debt Service Fund should be used to account for and report financial resources that are restricted, committed, or assigned to expenditure for principal and interest on general long-term liabilities.

Difficulty: 1
Learning Objective: 6
AACSB: Reflective thinking

  • Question 2-7

Proprietary funds include Enterprise Funds and Internal Service Funds. Proprietary fund financial statements include a balance sheet (statement of net assets), statement of revenues, expenses, and changes in net assets, and statement of cash flows.

Difficulty: 1
Learning Objective: 6, 7
AACSB: Reflective thinking

  • Question 2-8

Governmental funds include the General Fund, Special Revenue Funds, Capital Projects Funds, Debt Service Funds, and Permanent Funds. Governmental fund financial statements include a balance sheet (or statement of net assets), statement of revenues, expenditures, and changes in fund balance-GAAP basis, and statement of revenues, expenditures, and changes in fund balance-budget and actual (on the budgetary basis of accounting).

Difficulty: 1
Learning Objective: 6, 7
AACSB: Reflective thinking

  • Question 2-9

Fiduciary funds include Private-Purpose Trust Funds, Investment Trust Funds, Pension Trust Funds, and Agency Funds. Trust fund financial statements include a statement of net assets and a statement of changes in net assets. Agency Fund financial statements include a statement of net assets and a statement of changes in agency fund assets and liabilities (required in a comprehensive annual financial report but not in the basic financial statements).

Difficulty: 1
Learning Objective: 6, 7
AACSB: Reflective thinking

  • Question 2-10

One only: General Fund and General Capital Assets and General Long-Term Liabilities accounts

One, none, or many – – all other fund types:

Special Revenue Funds Internal Service Funds Private-Purpose Trust Funds
Capital Projects Funds Enterprise Funds Investment Trust Funds
Debt Service Funds Pension Trust Funds
Permanent Funds Agency Funds

Difficulty: 1
Learning Objective: 2, 6
AACSB: Reflective thinking

  • Question 2-11

Interfund loans are amounts provided by one fund to another with a requirement for and expectation of repayment. Interfund loans are the only type of interfund transaction that initially affects only balance sheet accounts. Because interfund loans are expected to be repaid, a loan is reported as a receivable (asset) in the lending fund and as a payable (liability) in the debtor fund.
Interfund transfers are flows of assets (such as cash or goods) from one fund to another without equivalent flows of assets or services in return and without a requirement for repayment.
• In governmental funds, transfers should be reported as other [nonexpenditure] financing uses in the funds making transfers and as other [nonrevenue] financing sources in the funds receiving transfers.
• In proprietary funds, transfers should be reported as the last item before the subtotal for changes in net assets.

Difficulty: 2
Learning Objective: 7
AACSB: Reflective thinking

  • Question 2-12

The Basic Financial Statements, which must be accompanied by Management’s Discussion and Analysis and certain other required supplementary information, include the government-wide financial statements (Statement of Net Assets and Statement of Activities), the three sets of fund financial statements (governmental fund financial statements, proprietary fund financial statements, and fiduciary fund financial statements), and the related notes. The Comprehensive Annual Financial Report (CAFR) of a governmental unit includes the basic financial statements, but is much more extensive. A CAFR contains:

1. Introductory materials, e.g., letter(s) of transmittal.
2. Management’s Discussion and Analysis,
3. Basic Financial Statements and notes,
4. Combining financial statements (for nonmajor governmental funds, nonmajor Enterprise Funds, Internal Service Funds, Trust Funds, and Agency Funds—if there are two or more funds in these categories. These are a minimum. Other combining statements may be presented.)
5. Individual fund financial statements and schedules (where appropriate),
6. Narrative explanations (notes for combining or individual fund financial statements), and
7. Statistical section.

Items 2 through 6, including the auditor’s report, are called the financial section of a CAFR.

Difficulty: 2
Learning Objective: 7
AACSB: Reflective thinking

  • Question 2-13

Government-wide financial statements are prepared using the same measurement and basis of accounting that is used for proprietary funds—the economic resources measurement focus and the accrual basis of accounting.

Difficulty: 1
Learning Objective: 3
AACSB: Reflective thinking

  • Question 2-14

The accounting equation for a governmental fund is:

(Financial Assets + Deferred Outflows) – (Related Liabilities + Deferred Inflows) =
Fund Balance

Difficulty: 1
Learning Objective: 2
AACSB: Reflective thinking

  • Question 2-15

The accounting equation for a proprietary fund is:

Assets + Deferred Outflows – Liabilities – Deferred Inflows = Net Position

Difficulty: 1
Learning Objective: 2
AACSB: Reflective thinking

  • Question 2-16

Deferred outflows and deferred inflows result from delaying operating statement recognition of certain changes in the net amount of assets less liabilities. The GASB requires these changes to be classified as deferred outflows instead of assets (or as deferred inflows instead of liabilities) when the GASB views the change as related to future periods.

Deferred outflows are reported similarly to assets, and changes in deferred outflows affect the operating statement in essentially the same way as changes in assets. Likewise, deferred inflows are reported similarly to liabilities, and changes in deferred inflows affect the operating statement in essentially the same manner as changes in liabilities.

Difficulty: 2
Learning Objective: 2
AACSB: Reflective thinking

  • Question 2-17

The General Fund is always a major fund. In addition, any other governmental fund or Enterprise Fund that meets both of the following “size” criteria must be reported as a major fund. The quantitative major fund criteria are:

1. Total assets, liabilities, revenues, or expenditures/expenses (excluding extraordinary items) of that individual governmental fund or Enterprise Fund are at least 10% of the corresponding total (assets, liabilities, revenues, or expenditures/expenses) for all funds of that category or type (i.e., total governmental funds or total Enterprise Funds)

2. The same element that met the 10% criterion in (a) is at least 5% of the corresponding element total for all governmental funds and Enterprise Funds combined.

A governmental fund or Enterprise Fund that does not meet the size criteria may still be treated as a major fund if the government deems it of sufficient importance to statement users. Thus, a government must identify as a major fund each governmental fund or Enterprise Fund for which statement users are likely to need individual fund information.

Difficulty: 2
Learning Objective: 2
AACSB: Reflective thinking

SOLUTIONS TO EXERCISES

Exercise 2-1

1. a
2. b
3. d
4. a
5. b
6. d
7. c
8. d
9. a
10. d

Difficulty: 1
Learning Objective: 2, 3, 4
AACSB: Reflective thinking

Exercise 2-2

1. b
2. c
3. a
4. d
5. b
6. c
7. c
8. c
9. a
10. c

Difficulty: 1
Learning Objective: 2, 3, 4
AACSB: Reflective thinking

Exercise 2-3

1. Special Revenue Fund
2. Capital Projects Fund
3. Enterprise Fund
4. General Fund
5. General Capital Assets and General Long-Term Liabilities accounts
6. General Capital Assets and General Long-Term Liabilities accounts
7. General Capital Assets and General Long-Term Liabilities accounts
8. Debt Service Fund
9. Enterprise Fund
10. Internal Service Fund

Difficulty: 1
Learning Objective: 2, 4, 6
AACSB: Reflective thinking
Exercise 2-4

a. Special Revenue
b. Debt Service
c. Capital Projects
d. Special Revenue
e. Internal Service
f. Enterprise, if criteria met; otherwise Special Revenue if the revenues are restricted or committed and General Fund if not
g. Agency
h. General
i. Enterprise
j. Capital Projects
k. Debt Service
l. Permanent
m. Capital Projects
n. Pension Trust

Difficulty: 1
Learning Objective: 5
AACSB: Reflective thinking
Exercise 2-5

a, b, c, and d

Difficulty: 1
Learning Objective: 3
AACSB: Reflective thinking

Exercise 2-6

Name of Government
Governmental Fund
Statement of Revenues, Expenditures, and Changes in Fund Balances
Time Period Report Covers

Revenues (by source) c
Expenditures (by function) d, f, g, h, i
Excess of Revenues Over (Under) Expenditures
Other Financing Sources (Uses) a, (b)
Special and Extraordinary Items* e, k
Net Change in Fund Balance

Fund Balance (Total), Beginning
Fund Balance (Total), Ending

*The amounts reported for special items and extraordinary items would be proceeds received or expenditures incurred for those items, not gains and losses.
Note: Depreciation expense (j) is not recorded in this statement.

Difficulty: 2
Learning Objective: 7
AACSB: Analytical Skills
Exercise 2-7

Name of Government
Proprietary Fund
Statement of Revenues, Expenses, and Changes in Net Assets
Time Period Report Covers

Operating revenues (by source) c
Total operating revenues
Operating expenses (detailed) d, i
Total operating expenses
Operating income
Nonoperating revenues and
expenses (detailed) h, k
Income before capital contributions, special and extraordinary items, and transfers
Capital contributions
Special and extraordinary
items (detailed) e, j
Transfers b
Increase (decrease) in net assets
Net assets—beginning of period
Net assets—end of period

Note: Proceeds from issuing bonds (a), Expenditures for purchases of equipment (f), and Expenditures for principal retirement of long-term liabilities (g) are not reported in this statement.

Difficulty: 2
Learning Objective: 7
AACSB: Analytical Skills
Exercise 2-8

Name of Government
Governmental Fund
Balance Sheet
Fiscal Year-End

Assets a, d, g

Liabilities and fund balance
Liabilities j
Fund balance c, i
Total liabilities and fund balance

Note: Unrestricted net assets (b), Land (e), Bonds payable (f), Current portion of bonds payable (h), and Buildings and equipment (k) are not reported in this statement.

Difficulty: 2
Learning Objective: 7
AACSB: Analytical Skills

Exercise 2-9

Name of Government
Proprietary Fund
Balance Sheet
Fiscal Year-End

Assets

Current Assets: a, d, g
Noncurrent Assets:
Capital Assets e, k
Total Assets

Liabilities
Current liabilities h, j
Noncurrent liabilities f
Total liabilities

Net Assets b

Total liabilities and net assets

Note: Nonspendable fund balance (c) and Unassigned fund balance (i) are not reported in this statement.
Difficulty: 2
Learning Objective: 7
AACSB: Analytical Skills
Exercise 2-10

(1) Proprietary fund
ILLUSTRATION 2–6 Analysis of Transactions for Business-Type Activities

Proprietary Funds
CA + NCA – CL – LTL = NA

a. ($5,100) $200 ($5,300)
b. 3,000 3,000
c1. 2,000 2,000
c2. 150 (150)
d. (2,200) (2,150) (50)
e. 200 $200
f. 1,000 $1,000
g. (100) (100)
h. (800) (800)
i. (900) $900
j. (280) (280)
k. 35 (60) (25)

*Calculations for:
c2. Interest accrual at year-end, $2,000 x .10 x 9/12 = $150
d. Liability reduction equals principal of $2000 plus accrued interest payable of $150.
k. Capital asset carrying value at disposal equals $60 (Cost of $900 less accumulated depreciation after three years of $840). Proprietary fund loss on sale of the capital asset is $35 (proceeds) less $60 (carrying value) or $25.

(2) Governmental fund and nonfund accounts
ILLUSTRATION 2–7 Analysis of Transactions for General Government Activities

Governmental Funds
General Capital Assets and General Long-Term Liabilities Accounts
FA – RL = FB GCA – GLTL = NA
a. ($5,100) $200 ($5,300)
b. 3,000 3,000
c1 2,000 2,000
c2. 150 (150)
d. (2,200) (2,150) (50)
e. 200 200
f. 1,000 1,000 $1,000 ($1,000)
g. (100) (100)
h. (800) (800) (800) 800
i. (900) (900) $900 900
j. (280) (280)
k. 35 35 (60) (60)
Exercise 2-10 (Continued)
Legend
Proprietary Funds Governmental Fund;
General Capital Assets and
General Long-Term Liabilities Accounts
CA Current Assets
CL Current Liabilities
LTL Long-Term Liabilities
NA Net Asset
NCA Noncurrent Assets (including capital assets) FA Financial Assets
RL Related Liabilities
FB Fund Balance
GCA General Capital Assets
GLTL General Long-Term Liabilities
NA Net Assets

Difficulty: 3
Learning Objective: 4
AACSB: Analytical Skills
SOLUTIONS TO PROBLEMS

Problem 2-1 (a)
Analysis of Transactions for General Government Activities

Governmental Funds
General Capital Assets and General Long-Term Liabilities Accounts

Fund FA – RL = FB GCA – GLTL = NA
E. GF 8,000† 8,000†
1. GF $75,000 ($75,000)
2. CPF $9,000,000 9,000,000 $9,000,000 ($9,000,000)
3. CPF (5,000,000) (5,000,000) $5,000,000 5,000,000
4. GF 60,000 (60,000) 60,000 60,000
4* GF 1,200** (1,200)
5. GF (8,000,000) (8,000,000)
6. 3,000,000 (3,000,000)
7. DSF (11,000,000) (11,000,000) (10,000,000) 10,000,000
8. GF 1,500 1,500 (1,000) (1,000)

†The text (page 64) shows parenthesis around this number. It is an increase, therefore should not be in parenthesis.
*Year-end entry.
**($60,000 x .06 x 4/12)

Legend
FA Financial Assets GF General Fund
RL Related Liabilities CPF Capital Projects Fund
FB Fund Balance DSF Debt Service Fund
GCA General Capital Assets GLTL General Long-Term Liabilities

NA Net Assets
ILLUSTRATION 2–6 Analysis of Transactions for Business-Type Activities

Airport Enterprise Fund
CA + NCA – CL – LTL = NA

5. $8,000,000 $8,000,000
Problem 2-1 (b)

1. Expenditures of $75,000 reported in General Fund.
2. Other Financing Sources—Bond Proceeds of $9,000,000 reported in Capital Projects Fund.
3. Expenditures of $5,000,000 reported in Capital Projects Fund.
4. Expenditures of $60,000 reported in General Fund.
At year-end, expenditures of $1,200 interest reported in General Fund.
5. Other Financing Uses (Transfer to Other Fund) of $8,000,000 reported in General Fund.
Transfers from Other Fund of $8,000,000 reported in Airport Enterprise Fund.
6. No operating statements are prepared for GCA-GLTL accounts.
7. Expenditures of $11,000,000 reported in Debt Service Fund.
8. Other Financing Sources of $1,500 reported in General Fund.

Solution manual Governmental Nonprofit Accounting Theory – Practicee 

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