Chapter 20 AN INTRODUCTION TO ACCOUNTING FOR STATE AND LOCAL GOVERNMENTAL UNITS PROPRIETARY AND FIDUCIARY FUND

Answers to Questions 1 Enterprise and internal service funds are similar in the sense that their operations are like those of similar business enterprises. They use full accrual accounting practices (including depreciation), have a capital maintenance or profit objective, are financed through user charges, and have the same financial reporting requirements. The primary difference between the two fund types is that an EF provides goods and services to citizens and customers outside the government on a user charge basis, while an ISF provides services to other departments and agencies within the same governmental unit (or occasionally to other governmental units). Typical operations of internal service funds include motor pools, centralized risk financing activities, data processing services, printing shops, centralized purchasing, repair shops, and storage or warehouse operations. Internal service funds may engage in almost any kind of operations that one would find in private enterprise. An EF (and also an ISF) is required to prepare a statement of net assets, a statement of revenues, expenses, and changes in net assets (or fund equity), and a statement of cash flows for fair presentation in accordance with GAAP. The governmentwide statement of net assets and statement of activities both include enterprise fund data. In the fund financial statements, governments include internal service funds with the proprietary funds. They are aggregated into a single column within the proprietary fund statement of net assets, the statement of revenues, expenses, and changes in net assets, and the statement of cash flows. Within the government-wide statements, governments report internal service funds with the governmental activities. The internal service fund asset and liability accounts are generally included in the governmental activity column of the statement of net assets. The statement of activities will include only those internal service fund transactions involving entities other than the primary reporting entity. Governments add external internal service fund revenues and expenditures to the statement of activities, but they exclude internal governmental transactions. (See also Question 7.) Internal service funds are never considered major funds and proprietary fund statements report internal service funds in a single column with the enterprise funds. Major enterprise funds are reported in a single column on the proprietary fund statement of net assets and statement of revenues, expenses, and changes in net assets. Because proprietary funds account for transactions in much the same manner as commercial business organizations, the GASB allows some reference to FASB statements. GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Activities, governs which accounting and reporting standards apply to proprietary activities. It is important to differentiate between revenues generated by interfund transactions and transactions with external parties because of the way that these transactions are reported on the government-wide statements. The statement of activities will include only those internal service fund transactions involving entities other than the primary reporting entity. To avoid double counting of interfund transactions, governments add external service fund revenues and expenditures to the statement of activities, while they exclude internal governmental transactions. First, GASB Statement No. 34 makes the direct method mandatory for statement presentation. Second, GASB Statement No. 9 requires separating financing activities into noncapital and capital related.

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The fiduciary fund category includes trust funds (private-purpose, investment, and pension) and agency funds. They are reported in the fund financial statements only in a statement of fiduciary net assets and a statement of changes in fiduciary net assets. Governmental units often provide the initial financing of an ISF through a contribution of cash or operating facilities, expecting the ISF to be self-sustaining in future periods. Alternatively, the governmental unit may provide a loan to the ISF to be repaid from future operating flows of the fund. A contribution is classified as a nonreciprocal transfer, which flows through the statement of revenues, expenses, and changes in fund net assets; whereas a loan is recorded as a long-term liability of the ISF in the statement of net assets. A government records short-term interfund loans as due to Fund A and due from Fund B. Private-purpose trust funds are fiduciary funds used to account for resources (other than investment pools and employee benefits) that are held for the benefit of parties outside the governmental entity. Permanent funds are governmental funds which report resources whose use is permanently restricted, but whose earnings are expendable for the benefit of the government or its citizens. The governmentwide statement of net assets would need at least three columnsone for governmental activities (including the general fund, special revenue funds, and internal service funds), one for businesstype activities (enterprise funds), and one for the component unit. Most governments also present optional total and comparative total columns. No. The required financial statements for a pension trust fund are a statement of plan net assets and a statement of changes in plan net assets. Neither of these statements contains information as to the present value of future benefits payable by the plan. Therefore, the statements provide no indication of whether the plan is adequately funded. The statements are designed to reflect the current status of the planthe net assets available to pay pension benefits and changes therein. To determine if the plan is adequately financed, one must review the pension trust fund schedules, particularly the schedule of funding progress, that must be included in a governments required supplementary information. The accounting equation for an agency fund is Assets = Liabilities. If an enterprise fund issues debt that is backed by its revenue-generating activity (i.e., revenue-backed debt instruments), the government must present certain detailed segment information in the notes to the financial statements. Since the government-wide statement of activities and statement of net assets report all items using the accrual basis of accounting, conversion between the fund and government-wide statements is not necessary. Also, recall that governments report internal service funds with the governmental activities in the government-wide statements.

10

11

12

13

14 15

16

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SOLUTIONS TO EXERCISES Solution E20-1 1 b 2 c 3 d 4 c 5 d Solution E20-4 1 2 3 4 5 b a a a c Solution E20-2 1 d 2 d 3 d 4 c 5 a Solution E20-5 [AICPA adapted] 1 d 2 d 3 b 4 b 5 a 6 c Solution E20-3 1 c 2 d 3 c 4 b 5 c

Solution E20-6 City of Laramee Tax Collection Agency Fund Statement of Fiduciary Net Assets Tax Collection Agency Fund at December 31, 2008 Assets Taxes receivable Total assets Liabilities Liability to Laramee Liability to Bloomer County Liability to Bloomer School District Total liabilities Total Net Assets $50,000 $50,000 $15,000 10,000 25,000 $50,000 0

Taxing Units City of Laramee Bloomer County Bloomer School District

Schedule of Taxes Receivable Amounts Certified for Collection Collections $ 60,000 $ 45,000 40,000 30,000 100,000 75,000 $200,000 $150,000

Balance at Year End $15,000 10,000 25,000 $50,000

NOTE: This solution assumes that the collection fee is recognized when cash is collected.

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Solution E20-7 1 Cash Deferred operating grant revenue To record receipt of grant. 3,000,000 3,000,000

Deferred grant revenue is reported as a liability in the balance sheet. Operating grant revenues are reported as nonoperating revenues in the period qualifying costs are incurred. 2 Expenses Program A 1,200,000 Vouchers payable (or Cash) To record expenses incurred for the program financed by the grant. Deferred operating grant revenues Revenues operating grant To record revenues earned on the grant. 1,200,000 1,200,000

1,200,000

Nonoperating revenues of $1,200,000 should be reported in the enterprise funds statement of revenues, expenses, and changes in retained earnings (fund equity). 3 Cash Deferred capital grant To record receipt of capital grant. 7,000,000 7,000,000

Deferred capital grants are reported as a liability in the balance sheet. When qualifying costs are incurred, the deferred capital grant liability is reduced and contributed capital from intergovernmental grants, not revenues, is recognized. 4 Construction in progress 4,000,000 Cash To record construction costs incurred on capital grant project. 4,000,000

Deferred capital grant 4,000,000 Contributed capitalcapital grants 4,000,000 To record increase in contributed capital as a result of incurring qualifying costs under capital grant. The increase in contributed capital of $4,000,000 is reported as an addition to contributed capital. It does not affect income or retained earnings. Solution E20-8 1 2 3 4 5 6 7 8 9 10 Enterprise Fund Capital Projects Fund and Debt Service Fund Capital Projects Fund and Debt Service Fund Private PurposeTrust Fund Internal Service Fund Enterprise Fund Special Revenue Fund General Fund Agency Fund Investment Trust Fund

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Solution E20-9 1 Enterprise Fund Cash Operating Revenue Agency Fund Cash Due to other governmental units Capital Projects Fund Cash Other financing source proceeds from bond issue Other financing use nonreciprocal transfer to Debt Service Fund Cash Debt Service Fund Cash Other financing source nonreciprocal transfer from Capital Projects Fund 4 Private Purpose Trust Fund Cash Contributions Investments Cash 5 Internal Service Fund Cash Other financing source Nonreciprocal transfer from General Fund General Fund Other financing use - Nonreciprocal transfer to Internal Service Fund Cash 6 Enterprise Fund Cash Bonds payable 4,500

4,500

125,000 125,000 1,050,000 1,050,000 50,000

50,000

50,000 50,000 50,000 50,000 50,000 50,000

150,000 150,000 150,000 150,000 1,000,000

1,000,000

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Solution E20-9 (continued) 7 Special Revenue Fund* Cash Other Financing Source Reciprocal transfer from General Fund General Fund Other Financing Use - Reciprocal transfer to Special Revenue Highway Beautification Cash 8 General Fund Taxes Receivable current Allowance for uncollectible taxes current Revenue 50,000

50,000

50,000 50,000 5,000,000

50,000 4,950,000

* An entry recording grants receivable (debit) and deferred grant revenue (credit) is optional. Solution E20-9 1. decrease in Net Assets Invested in Capital Assets, Net of Related Debt; increase in Unrestricted Net Assets 2. decrease in Net Assets Invested in Capital Assets 3. There will be no effect on net assets, since the asset debit will be offset by the liability credit. Also the net asset amount is offset by the related debt. 4. increase in Net Assets Invested in Capital Assets, Net of Related Debt; decrease in Unrestricted Net Assets 5. increase in Unrestricted Net Assets 6. decrease in Unrestricted Net Assets SOLUTIONS TO PROBLEMS Solution P20-1 1 Cash Equipment OFS - Nonreciprocal transfer from General Fund OFS - Reciprocal transfer from General Fund Equipment Cash Due from Various Funds Service Revenue Cash Due from Various Funds 4 Salaries expense Payroll taxes OFU - Transfer to General Fund for repayment Other operating expenses Cash Depreciation Expense Accum. Depr. - Equipment (Assume half year depreciation) Solution P20-2 180,000 37,800 50,000 120,000 387,800 20,000 20,000 500,000 550,000 550,000 500,000 200,000 200,000 345,000 300,000 300,000 345,000

2 3

12/31

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1 2 3 4 5 6 7 8

Cash OFS - Nonreciprocal transfer from General Fund Building Cash Bonds payable Accounts Receivable Charges for services Cash Accounts Receivable Building improvements Cash Salaries expense Cash Interest Expense Interest Payable Cash Operating Expenses Accounts Payable Cash Depreciation Expense Accumulated Depreciation Fiedler County Utility Plant Adjusted Trial Balance Cash Accounts Receivable Building Accumulated Depreciation Interest Payable Accounts Payable OFS - Nonreciprocal transfer from General Fund Proceeds from Bond Issue Charges for Services Salaries Expense Interest Expense Operating Expenses Depreciation Expense Cash

30,000,000 30,000,000 25,250,000 5,000,000 5,000,000 4,500,000 4,400,000 4,400,000 3,500,000 700,000 700,000 400,000 100,000 300,000 100,000 1,000,000 1,050,000 3,500,000 4,500,000 25,250,000

1,100,000

10

1,050,000

$ 8,650,000 100,000 28,750,000 1,050,000 100,000 100,000 30,000,000 5,000,000 4,500,000 700,000 400,000 1,100,000 1,050,000 $40,750,000 $40,750,000

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Solution P20-3 Douwe County Motor Pool Fund Statement of Revenues, Expenses, and Changes in Fund Net Assets for the year ended June 30, 2008 Revenues Revenue from billings Expenses Supplies used Salaries expense Utilities expense Depreciation expense Operating income Operating transfers out Net loss Net assets June 30, 2007 Net assets June 30, 2008 $68,000 25,000 9,000 16,000 $120,000

118,000 2,000 12,000 (10,000) 42,000 $ 32,000

Douwe County Motor Pool Fund Statement of Net Assets On June 30, 2008 Current assets Cash Due from electric fund Supplies on hand Noncurrent assets Autos Less: Accumulated depreciation Total assets Liabilities Accounts payable Advance from general fund Total liabilities Net Assets Invested in capital assets, net of related debt Unrestricted Total net assets $37,000 4,000 14,000 $99,000 56,000

$55,000

43,000 $98,000

$11,000 5,000 $16,000 $43,000 39,000

$ 82,000

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Solution P20-3 (continued) Douwe County Motor Pool Fund Statement of Cash Flows for the Year Ended June 30, 2008 Cash Flows from Operating Activities Cash received from users (plug) Less: Cash paid to suppliers* Cash paid for salaries Cash paid for utilities Net cash provided by operating activities Cash Flows from Noncapital Financing Activities Operating transfers to general fund Cash from Capital and Related Financing Activities Purchase of automobiles Cash Flows from Investing Activities Decrease in cash for 2005 Add: Cash and cash equivalents June 30, 2007 Cash and cash equivalents June 30, 2008 $127,000 (103,000) 24,000 (12,000) (19,000) --(7,000) 44,000 $ 37,000

$(69,000) (25,000) (9,000)

* Change in supplies (12,000 beginning + 70,000 [plug] 68,000 used = 14,000 ending); Cash paid is 70,000 less change in accounts payable (11,000 10,000 = 1,000) Reconciliation of Net Operating Income to Net Cash Used by Operating Activities Cash Flows from Operating Activities Operating income Adjustments for noncash expenses, revenues, losses and gains included in income: Depreciation Change in due from general fund Change in due from electric fund Supplies on hand Accounts payable Total adjustments Cash flows from operating activities $ 2,000

16,000 8,000 (1,000) (2,000) 1,000 22,000 $24,000

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Solution P20-4 Summary Calculations for Principal Trust Fund Cash Investments Building net Dividends receivable Held in trust for student aid Increase $ 100,000 40,000 550,000 500,000 600,000 400,000 60,000 40,000 30,000 60,000 20,000 donated rentals bonds sold donated bonds stock purchases donated on stock Rentals Bond interest Dividend income Gain on bonds Decrease $600,000 500,000 20,000 20,000 Net stock purchase $ 90,000 bonds sold Depreciation Depreciation 130,000 600,000 380,000 60,000

Student Aid Principal Trust Fund Statement of Fiduciary Net Assets at December 31, 2008 Assets Cash Investments Building less accumulated depreciation Dividends receivable Total assets $ 90,000 600,000 380,000 60,000 $1,130,000 Net Assets Held in trust for endowment Held in trust for student aid Total Net Assets $1,000,000 130,000 $1,130,000

Student Aid Earnings Trust Fund Statement of Changes in Fiduciary Net Assets For the Year ending December 31, 2006 Additions Contributions: Cash Investments Buildings Total contributions Investment earnings Rental income Dividend income Gain on bonds Bond interest Depreciation expense Total earnings Total additions Deductions Total deductions Change in net assets Net assetsbeginning Net assets -ending

$100,000 500,000 400,000 $ 1,000,000 40,000 60,000 20,000 30,000 (20,000) 130,000 1,130,000 0 1,130,000 0 $1,130,000

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Solution P20-5 Duchy County Trust Fund Statement of Changes in Fiduciary Net Assets Trust Fund for the year ended June 30, 2009 Additions Contributions Investment earnings Interest Total Additions Deductions Distributions to homeless shelters Total Deductions Changes in Net Assets Net Assets beginning of the year Net assets end of the year Duchy County Trust Fund Statement of Fiduciary Net Assets at June 30, 2009 Assets Investments Interest receivable Total assets $500,000 6,250 $ 506,250 Net Assets Held in trust for endowment Held in trust for homeless shelters Total Net Assets $ 500,000 6,250 $ 506,250 $500,000 18,750 $518,750 $ 12,500 12,500 506,250 0 $506,250

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Solution P20-6 [AICPA adapted] CITY OF MERINGEN Central Garage Fund Journal Entries July 1, 2008 to June 30, 2009 1 Inventory of Materials and Supplies Vouchers Payable To record purchases on account. Materials and Supplies Expense Inventory of Materials and Supplies To record ending inventory and materials and supplies used. Salaries and Wages Expense Cash To record salaries and wage expense paid. Utility Expense Cash To record payment of utility charges. 74,000 74,000

96,000

96,000

230,000

230,000

30,000

30,000

Depreciation Expense Building Depreciation Expense Machinery and Equipment Accumulated Depreciation Buildings Accumulated Depreciation Machinery and Equipment To record depreciation. Due from General Fund Due from Water and Sewer Fund Due from Special Revenue Fund Service Revenue To record billings to departments for services. Cash Due from General Fund Due from Water and Sewer Fund Due from Special Revenue Fund To record collection of receivables.

5,000 8,000 5,000 8,000 262,000 84,000 32,000 378,000 376,000 276,000 84,000 16,000 98,000 98,000

Vouchers Payable Cash To record payment of vouchers.

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Solution P20-6 (continued) 2 CITY OF MERINGEN Central Garage Fund Closing Entries June 30, 2009 Service Revenue Materials and Supplies Expense Salaries and Wage Expense Utility Expense Depreciation Expense Building Depreciation Expense Machinery and Equipment Excess of Revenues over Expenses To close revenue and expense accounts. Excess of Revenues over Expenses Retained Earnings To close Excess of Revenues over Expenses to Retained Earnings. 378,000 96,000 230,000 30,000 5,000 8,000 9,000 9,000

9,000

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Solution P20-7 Caleb County Enterprise Fund Statement of Cash Flows for the Year Ended . . . Cash Flows from Operating Activities Cash received from customers Less: Cash paid to suppliers Cash paid for salaries Cash paid for operations Net cash provided by operating activities Cash Flows from Noncapital Financing Activities Propety Taxes Received 0 Long-term debt repayment Net cash provided by noncapital financing activities Cash from Capital and Related Financing Activities Capital grant proceeds 0 Proceeds from sale of asset 0 Net cash provided by capital and related financing activities Cash Flows from Investing Activities Purchase of equity investments Net cash provided by investing activities Increase in cash Add: Cash and cash equivalents, beginning Cash and cash equivalents, ending 1,272,000 (165,000) (165,000) 92,500 $714,525 $807,025 522,00 (515,000) (298, 000) 750,00

$3,276,500 (2,694,500) (479,300) (819,200) (716,500) 217,00

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