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CHAPTER 15
1. GASB Statement No. 34 stipulates a new re- as control accounts to allow for budgetary
porting model that includes two separate, but comparisons in the ledgers as well as to facili-
related sets of financial statements. The first tate financial reporting of a budgetary compari-
set, the fund financial statements, focuses on son statement.
reporting activity as a collection of separate
4. The advantage of reporting designations of the
funds with a current working-capital focus that
fund balance is improved communications of
uses a modified accrual basis of accounting.
decisions made by the common council or
The second set contains government-wide
town/village board that will impact the availabili-
statements that concentrate on the government
ty of resources for other purposes. While not
as a whole with an economic long-term focus
restricted by external grantors or donors, these
using full accrual-basis accounting. The value
funds are internally designated for specific pur-
of both perspectives is the retention of a near
poses, e.g., planned purchases, reduction of
cash or working capital focus on funding gov-
taxes, and improvements in services.
ernment with a longer term focus that meas-
ures whether such services can continue 5. The encumbrance system is designed as an
without attention to condition of all capital as- early indicator or an expected expenditure to
sets and recognition of and planning for prevent overspending and to plan for payment
increased expenditures in future periods. Capi- of an expected liability. It is an estimate of an
tal assets and long-term liabilities are not ac- expenditure that may or may not be realized by
counted for in the governmental funds but will year-end but will require the use of existing or
be accounted for and reported in the future financial resources.
government-wide financial statements. Thus,
the working capital fund balance will be re- 6. The governmental funds are designed to cap-
placed with a long-term notion of net assets ture financial resources information. Therefore,
when a capital asset is acquired or sold, the re-
broken into unrestricted, restricted, and capital,
net of related debt. sources (financial resources used or acquired)
are recorded in the funds. The account groups
2. Separating activity into governmental, proprie- are designed to provide information on the
tary, and fiduciary funds allows for detailed re- number and condition of these capital assets.
porting of resources and spending. Separating The same is true for long-term liabilities. When
of activities also allows for a different debt is incurred, the cash is recorded in the
measurement focus and basis of accounting fund to capture the inflow of financial re-
depending on whether activities are general sources. But the debt is recorded in the ac-
government or business-type activities. In addi- count group. When debt is repaid, the outflow
tion, since the governmental activities are of cash is recorded in the fund, and the debt is
accounted for using a modified accrual basis of removed from the account group. Since the
accounting in order to capture financial re- fund and account groups capture different in-
source information, the account groups have formation, making a journal entry only in the
served to record (i.e., list) the long-term capital fund would adequately record flows of financial
assets and liabilities. Proponents of this model resources but not record the balances of long-
argue that information generated best serves term liabilities and/or capital assets.
the budget-planning process and answers
7. (Appendix) The 13 basic principles of govern-
questions relating to how much resources are
needed to pay for the current level of services. ment accounting are found in GASB Statement
No. 1 and in Codification of Governmental Ac-
3. Budgets are the legal authorization to raise counting and Financial Reporting Standards.
revenue, incur long-term debt, and appropriate They form a model of fund accounting theory
resources. Authorized expenditures are termed and help anchor the subsequent work of the
appropriations. Budgetary totals, including ap- GASB as detailed in Chapters 1517 of this
propriations, are recorded in the general ledger text.
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Ch. 15Exercises
EXERCISES
EXERCISE 15-1
(1) c Items (a) and (b) are Other Financing Sources, while (d) is a reduction of Expenditures.
(2) d (a), (b), and (c) represent outflows of financial resources to acquire goods and services. The
consumption, not the purchase of inventory, is an expenditure.
(3) b Representing potential inflow of assets, Estimated Revenues is debited.
(4) d Taxes ReceivableCurrent is debited with offsetting credits to an allowance for uncollectible
taxes and revenues.
(5) a Donated fixed assets are recorded in the general fixed asset account group at their estimated
fair value when received.
(6) c Long-term debt related to governmental funds may be operating debt or general long-term
capital debt.
(7) b The purchase of equipment is an outflow of resources from the general fund. An additional
entry to record the fixed asset will be made in the account group.
(8) b Expenditures are closed along with the other nominal accounts to determine an increase or a
decrease in the fund balance from the current-period operations.
(9) d When a purchase order is approved, Encumbrances is debited to reflect the expected expend-
iture. A reserve is also established by a credit to Fund BalanceReserved for Encumbrances.
(10) a The lease obligation is long-term debt and should be recorded in the account group.
EXERCISE 15-2
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Ch. 15Exercises
EXERCISE 15-3
EXERCISE 15-4
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Ch. 15Exercises
EXERCISE 15-5
(2) No entry in the general fund for land. Record in the general
fixed assets account group:
Land................................................................................................ 75,000
Investment in General Fixed AssetsDonations ..................... 75,000
To record donation of park.
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Ch. 15Exercises
EXERCISE 15-6
EXERCISE 15-7
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Ch. 15Exercises
EXERCISE 15-8
Encumbrances Unobligated
Date Item Debit Credit Balance Expenditures Balance
January 1 Budget 23,000
January 15 Encumbrances 14,000 14,000 9,000
February 1 Vouchers 5,000 4,000
February 15 Vouchers 12,000 2,000 12,300 3,700
June 3 Vouchers 2,000 4,300 1,400
December 31 Inventory (1,500) 2,900
EXERCISE 15-9
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Ch. 15Exercises
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Ch. 15Exercises
EXERCISE 15-10
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Ch. 15Exercises
EXERCISE 15-11
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Ch. 15Exercises
EXERCISE 15-12
EXERCISE 15-13
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Ch. 15Exercises
EXERCISE 15-14
EXERCISE 15-15
(Note to Instructor: The GASB Web site lists all of the pronouncements of the board. Individual stan-
dards can be purchased, but current exposure drafts and discussion memoranda can be obtained for
no fee. In addition, the GASB mission, board membership, and meeting schedules are found on the
site.)
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Ch. 15Problems
PROBLEMS
PROBLEM 15-1
(1) b Funds are used to separate reporting of the diverse variety of governmental activities and to
meet legal provisions stipulating use of resources imposed on the governmental unit.
(2) a The Governmental Accounting Standards Board is the authoritative body for financial reporting
standards used by state and local governments.
(3) b The GASB stipulated that the measurement focus for governmental funds is the flow of finan-
cial resources.
(4) c Interperiod equity seeks to determine whether current-year revenues are sufficient to pay for
current-year services or whether future taxpayers will be required to assume burdens for ser-
vices previously provided. The flow of financial resources measurement focus measures the
extent to which financial resources obtained during a period are sufficient to cover claims
incurred during that period against financial resources of a governmental fund. The GASB rec-
ognized that because budgetary and fund accounting practices cause costs of government ac-
tivities to be spread among a number of funds, general purpose financial reporting must also
include the measurement of the cost of services provided during a period.
(5) a Long-term debt used to purchase fixed assets is recorded in the general fund as an other fi-
nancial resource, but the debt itself is recorded in the general long-term debt account group.
(6) d Current standards specify that neither interest nor principal on long-term debt should be ac-
crued in advance of the year in which it is due. Governments may, however, opt to accrue prin-
cipal if resources are available in the debt service fund by year-end.
(7) b Reporting outstanding encumbrances as a fund balance reserve indicates that not all of the
resources in the fund are available for new expenditures.
PROBLEM 15-2
(1) a Encumbrance control is increased when an order is placed and decreased when the voucher is
recorded. When encumbrances are closed at year end, they are decreased.
(2) a Grants from outside units are revenues unless they require the prior recording of an expendi-
ture that is then reimbursed.
(3) c The appropriation still available for use is the original appropriation less expenditures and en-
cumbrances.
(4) c These notes are short-term operating debt that will be repaid out of current revenues.
(5) d When supplies are received, the original entry to encumber the estimated cost is reversed.
(6) b A hypothetical entry to record the tax levy is:
Taxes ReceivableCurrent ............................................... 100,000
Allowance for Uncollectible Current Taxes ................... 4,000
Revenues...................................................................... 96,000
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Ch. 15Problems
Because revenues are estimated and recorded net of the uncollectible, a decrease in the al-
lowance is a revision (in this case an increase) of revenues. This is true even if the revenues
were recorded in a prior period.
(7) b Revenues are recognized when measurable and available to meet current-period expenditures.
This is interpreted to include collections of the current period or shortly after year-end (usually
within 60 days of year-end).
(8) a The general fixed assets account group records the fixed assets of governmental funds but not
proprietary funds or trust funds.
(9) c Expenditures are recorded when the liability is incurred. Under the modified accrual basis of
accounting, the noncurrent liability is recorded in the general long-term debt account group.
(10) d The fixed asset is recorded in the account group at its fair value with a credit to Investment in
General Fixed Assets identifying the original funding source.
PROBLEM 15-3
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Ch. 15Problems
PROBLEM 15-4
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Ch. 15Problems
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Ch. 15Problems
PROBLEM 15-5
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Ch. 15Problems
PROBLEM 15-6
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Ch. 15Problems
668
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Ch. 15Problems
669
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Ch. 15Problems
January 1 December 31
*The total of the fund balances consists of:
Fund balancereserved for inventory ....................................... $ 0 $ 2,000
Fund balancereserved for encumbrances .............................. 15,000 20,000
Fund balanceunreserved, undesignated ................................ (180,000) 198,100
Total fund balances ............................................................ $ (165,000) $220,100
PROBLEM 15-7
(1) Year 1:
General
Long-Term Amount to Be Provided............................................. 1,000,000
Debt Account Unfunded Pension Obligation ............................. 1,000,000
Group To record the portion of the actuarial
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Ch. 15Problems
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Ch. 15Problems
(2) Year 2:
PROBLEM 15-8
(1) Expenditures
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Ch. 15Problems
PROBLEM 15-9
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Ch. 15Problems
PROBLEM 15-10
Trans- Fund or
action Group Entry
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Ch. 15Problems
PROBLEM 15-11
(c) Proprietary funds maintain their own record of fixed assets as will be illustrated in the next
chapter. These business-type activities will not be recorded in the general fixed assets account
group, but will be shown on the capital assets schedule.
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Ch. 15Problems
PROBLEM 15-12
(b) 20X6
Jan. 1 Amount to Be Provided for Payment of Serial Bonds ........... 1,000,000
Serial Bonds Payable ..................................................... 1,000,000
To record issuance of serial bonds to finance city
hall and center.
2 Amount Available in Debt Service FundsSerial Bonds ..... 70,000
Amount to Be Provided for Payment of Serial Bonds ..... 70,000
To record January 2, 20X6, deposit in debt service
fund. The same entry would be repeated at the
beginning of each year until maturity.
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Ch. 15Problems
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Ch. 15Problems
20X9
Jan. 1 Serial Bonds Payable ........................................................... 100,000
Amount Available in Debt Service Funds
Serial Bonds ............................................................. 100,000
To record retirement of serial bonds
maturing January 1, 20X9.
(c) No entry in general long-term debt account group, because proprietary funds maintain their own
records of long-term debt.
(d) 20X7
Jan. 1 Amount to Be Provided for Payment of Term Bonds ........... 400,000
Term Bonds Payable ...................................................... 400,000
To record issuance of term bonds.
Note: The following entry would be made annually to record the contribution to the sinking fund:
Amount Available in Debt Service FundsTerm Bonds ...... 40,000
Amount to Be Provided for Payment of Term Bonds...... 40,000
Note: The general long-term debt account group would not record the earnings of the sinking fund
because they are to be applied to the semiannual interest payments.
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Ch. 15Problems
PROBLEM 15-13
(1) Purchase MethodThe purchase method is the preferred accounting treatment. When the pur-
chase method is used, a portion of the fund balance is reserved for the amount in inventory at
year-end. This reflects the expected expenditure in future periods as inventory is consumed or ex-
pended.
(2) $79,000 = $21,000 reserved for supplies (equal to the inventory balance as of December 31,
20X8) and $58,000 ($43,000 + $15,000) reserved for encumbrance.
(3) $811,000 = $825,000 less $14,000 net balance in receivables.
(4) $89,000Vouchers payable is the amount due suppliers.
(5) $100,000The capital outlay expenditures amount is capitalized in the general fixed assets ac-
count group.
(6) $52,000The debt service principal is calculated as $74,000 debt service expenditures less
$22,000 interest amount.
(7) $1,392,000 = $1,349,000 expenditures for 20X9 + $43,000 open encumbrances.
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Ch. 15Problems
PROBLEM 15-14
Encumbrances ................................................................ .......... .......... (e) 250,000 (g) 183,000 ............ ...... 67,000
........................................................................................
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Ch. 15Problems
Fund BalanceReserved for Encumbrances ................. .......... .......... (g) 183,000 (e) 250,000 ............ ...............
............................................................................. 67,000
Excess of Revenues over Expenditures .......................... .......... .......... ............... ............... 228,400 .......... ...............
........................................................................... 228,400
.......... .......... 2,405,000 2,405,000447,400 447,400 1,193,000
1,193,000
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Ch. 15Problems
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Ch. 15Problems
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