978-1259917059 Test Bank Chapter 9 Part 3

54) On the statement of revenues, expenditures, and changes in fund balance for governmental

funds, how are capital outlays reported?

A) As a separate line item in the expenditures section of the statement.

B) Capital outlays are allocated to the functional areas, much like depreciation.

C) As a separate line item in the other financing sources (uses) section of the statement.

D) Below net change in fund balances, but before beginning fund balance.

55) Which of the following statements concerning the reporting of expenses on the statement of

activities is true?

A) Expenses are reported after program revenues.

B) Expenses are reported after general revenues.

C) Expenses are reported after program and general revenues.

D) Expenses are reported before program and general revenues.

56) Which of the following statements concerning interfund transfers is true?

A) Interfund transfers are reported in the statement of revenues, expenditures, and changes in fund

balance when transfers occur among governmental funds.

B) Interfund transfers are reported in the statement of activities when transfers occur among

governmental funds.

C) Interfund transfers are reported in the statement of revenues, expenditures, and changes in fund

balance and the statement of activities when transfers occur among governmental funds.

D) Interfund transfers are reported as internal balances on the statement of net position when

activity occurs among governmental activities and business-type activities.

57) For each of the following definitions, indicate the key term from the list that best matches by

placing the appropriate terms.

A. Component unit

B. Financial reporting entity

C. Financial accountability

D. Joint venture

E. Other stand-alone government

F. Primary government

________ 1. A separate government or agency that is combined for purposes of reporting on the

whole entity

________ 2. The responsibility that exists when a primary government appoints a voting majority

of an organization’s governing board and it is able to (a) impose its will on the organization or (b)

there is a potential for the organization to provide financial benefits or impose a financial burden

on the primary government

________ 3. A state government, general purpose local government, or special purpose

government that is independent of other state or local governments

________ 4. A legally separate governmental organization that does not have a separately elected

government body

________ 5. Primary government and all related component units

58) For the following items that require reconciliation between governmental funds financial

statements and governmental activities financial statements at the government-wide level

according to GASB standards, indicate which is the best appropriate terms.

(A) Always be subtracted from fund balances—governmental funds.

(B) Always be added to fund balances—governmental funds.

(C) May be added to or subtracted from fund balances—governmental funds in arriving at net

position of governmental activities.

________ 1. Capital assets used in governmental activities

________ 2. Long-term liabilities that are not payable in the current period

________ 3. Net position of internal service funds that are primarily governmental in nature

________ 4. Accrued interest payable not due in the current period

59) The following transactions relate to the City of Middleton, which has a fiscal year end of

December 31. The city adopts budgets for the General Fund and the debt service fund. NOTE: for

simplicity, and contrary to GASB standards, assume straight-line amortization for this problem.

1. The City of Middleton sells a $2,000,000, 3%, 16-year general obligation bond issue on January

2 at par. The bond pays interest semiannually on July 1 and January 2, with the first principal

payment scheduled for next year on January 2. A city hall annex must be constructed with the bond

proceeds. The bond premium must be used to pay interest on the debt.

2. Budgets are adjusted to account for the sale of the bond. The debt service fund budget should be

adjusted to accommodate the new debt issue. If the debt service fund does not have sufficient

resources to pay expenditures, the needed funds will be provided by the General Fund.

3. On February 1, $1,000,000 of the cash from the sale of the bonds is invested for one year at a

rate of 1.26%. Earnings on the investment are available for construction of the city hall annex.

4. July 1 the first interest payment is due.

5. December 31 adjusting entries are prepared.

Required:

For the five related transactions provided, prepare all necessary journal entries for the affected

funds and at the governmental activities level. Clearly indicate the fund journal or the

government-wide journal in which the entry is being recorded. (If no entry is required for a

transaction/event, select “No Journal Entry Required” in the first account field.)

26

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3.

Capital projects fund journal

Investments

$1,000,000

Cash

$1,000,000

Governmental activities journal

Investments

$1,000,000

Cash

$1,000,000

4.

General Fund journal

Other Financing Uses–Interfund Transfer Out

$30,000

Cash

$30,000

Debt service fund journal

Cash

$30,000

Other Financing Sources–Interfund Transfer In

$30,000

Expenditures–Interest

$30,000

Cash

$30,000

Governmental activities journal

Expenses–Interest on Long-term Debt

$30,000

Cash

$30,000

5.

Capital projects fund journal

Interest Receivable

$11,555

Revenues–(optional to put source, Interest)

$11,555

Governmental activities journal

Interest Receivable

$11,555

General Revenues–Investment Earnings–

(optional to indicate restriction, Restricted for

Capital Projects)

$11,555

Expenses–Interest on Long-term Debt

$30,000

Interest Payable

$30,000

Debt service fund

Note that there is no accrual of interest expenditure since the expenditure is not legally due until

after the first of the year.

Difficulty: 3 Hard

Topic: Preparation of Basic Financial Statements

Learning Objective: 09-04 Prepare governmental fund financial statements and

government-wide financial statements and understand how to reconcile the two.

Bloom’s: Apply

AACSB: Analytical Thinking

AICPA: FN Reporting

60) “Interim financial reports are needed for state and local governments even though external

users of financial reports have no need to assess monthly or quarterly performance of the

government.” Do you agree? Why or why not?

61) What is meant by the term “reporting entity” in accounting for state and local governments?

62) In your own words, describe the relationships between a component unit and a primary

government. Provide some examples and describe the financial reporting for a component unit.

63) Describe what the government-wide statements are intended to convey to readers and contrast

with the intent of the fund financial statements.

64) Describe the alternative processes for capturing the financial accounting information required

for government-wide financial statements.

65) Explain why special purpose frameworks (also known as other comprehensive bases of

accounting) may be used by a state or local government instead of GASB standards, which are

generally accepted accounting principles (GAAP).

66) Describe some items requiring adjustments when modified accrual basis accounting

information must be converted to accrual basis accounting in preparation of government-wide

statements.