Chapter 17 - Governmental Entities: Introduction and General Fund Accounting

Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
CHAPTER 17
GOVERNMENTAL ENTITIES: INTRODUCTION AND GENERAL FUND
ACCOUNTING
ANSWERS TO QUESTIONS
Q17-1 A fund is an independent fiscal and accounting entity with a self-balancing set of
accounts recording cash and/or other resources together with all related liabilities,
obligations, reserves, and equities which are segregated for the purpose of carrying on
specific activities or attaining certain objectives in accordance with special regulations,
restrictions, or limitations. A fund may receive resources from a variety of sources,
including collection of taxes on property, income, or commercial sales; receipt of grants,
fines, or licenses; and collection of service charges.
Q17-2 The eleven funds generally used by local and state governments are:
Governmental
a. General fund
b. Special revenue fund
c. Capital projects fund
d. Debt service fund
e. Permanent fund
Proprietary
f. Internal service fund
g. Enterprise fund
Fiduciary
h.
i.
j.
k.
Pension trust fund

Investment trust fund
Private-purpose trust fund
Agency funds
The purpose of each fund is individually discussed below:

a.
General fund: All financial resources except those required to be accounted for in
another fund are accounted for in the general fund.
b.
Special revenue fund: The proceeds of specific revenue sources that are legally
restricted for specified purposes are accounted for in the special revenue fund.
c.
Capital projects fund: Financial resources to be used for the acquisition or

construction of major capital projects that will benefit a large population are
accounted for in the capital projects fund.
17-1
Q17-2 (continued)
d.
Debt service fund: The accumulation of resources for and the payment of, general
long-term debt principal and interest are accounted for in the debt service fund.
e.
Permanent fund: Accounts for resources for which the principal must be maintained,
but for which the earnings may be used in support of governmental programs.
Internal service fund: The financing of goods or services provided by one department
or agency to other departments or agencies of the governmental unit, or to other
governmental units, are accounted for in internal service funds.
f.
g.
Enterprise fund: Operations of governmental units that charge for services provided
to the general public are accounted for in the enterprise funds.
h.
Pension trust fund: Resources held by a governmental unit in a trustee capacity for
the members and beneficiaries of pension plans, postemployment plans, or other
employee benefit plans.
i.
Investment trust funds: Accounts for the external portion of investment pools of
governing units.
j.
Private-purpose trust fund: Accounts for trust arrangements under which both
principal and interest may be used to benefit specific individuals, private organizations,
or other governmental units. Note that these resources have specific purposes as
stated by the donor or grantor, and are not available for general governmental
programs.
k.
Agency funds: Assets held by a governmental unit in an agency capacity for

employees or other individuals are accounted for in agency funds.
Q17-3 The modified accrual basis includes some aspects of accrual accounting and some
aspects of cash-basis accounting. Under the modified accrual basis, the emphasis is on
reporting how well the government performed by focusing on when the revenue and
expenditures are recognized in the accounts and reported in the financial statements. The
emphasis is not on how much was earned or on the amount of expenses.
Q17-4 The modified accrual basis is used for funds for which expendability is the concern
because the governing entity is interested in the determination of the resources still
remaining to be expended to carry out the objectives of the fund.
Q17-5 Property taxes are recognized as revenue in the general fund when the taxes are
levied, provided they apply to and are collectible within the current fiscal period, or within a
short period (< 60 days) after the end of the fiscal period.
17-2
Q17-6 GASB 33 states that taxpayer-assessed income and sales taxes should be accrued in
the general fund when they become both measurable and available to finance expenditures of
the fiscal period. Sales taxes held by other governmental units should be recognized if the
taxes are both measurable and available for expenditure. Measurability in this case is based
on an estimate of the sales taxes to be received, and availability is based on the ability of the
governing entity that will receive the future distribution to obtain current resources through
credit by using future sales tax receipts as collateral for the loan.
Q17-7 Budgetary accounting is the entering of the budgeted revenue, appropriations, and
net increase or decrease in fund balance into the formal accounting records as a formal
accounting control mechanism. Expected revenue is accounted for as estimated revenue, an
anticipatory asset account. The governmental unit anticipates receiving resources from the
revenue sources listed in the budget. Anticipated expenditures are accounted for as
appropriations, an anticipatory liability account. The governmental unit anticipates incurring
liabilities for the budgeted amount. Both the expected revenue and the appropriations
accounts are closed at the end of the fiscal period.
Q17-8 All expenditures are not encumbered. Payroll costs and other costs for goods
received from within the governmental entity are not encumbered because these are normal
and recurring costs.
Q17-9 Some governmental units do not report small amounts of inventories of supplies in
their balance sheets because the amount of inventory is not material.
Q17-10 Under the lapsing method the Reserve for Encumbrances account is shown as a
reservation of the fund balance on the fiscal year-end balance sheet. The encumbrance
account is a nominal account that is closed at the end of the fiscal period. The net effect is to
close out the remaining encumbrances against the fund balance-unreserved. Alternatively, the
GASB does allow for just footnote disclosure of the lapsing open orders at year-end that are
expected to be honored in the next fiscal period.
Under the nonlapsing method the expenditure authority from prior periods is carried over as
nonlapsing encumbrances. The budget for the next fiscal period does not include these
carryovers and is more realistic for situations in which orders placed with outside vendors
cannot easily be canceled. The encumbrances account and the budgetary reserve for
encumbrances account are still closed at the end of the first period.
When accounting for the actual expenditure in the subsequent year, the lapsing method
requires the new governing board to decide if it will honor the outstanding encumbrances from
the previous year by including them in the current budgeted appropriations. If the governing
board accepts the obligation to honor their outstanding purchase orders from the prior year,
the recording of the current years budget establishes the expenditure authority for the prior
year-ends open encumbrance. In the event the new governing board decides not to honor
the outstanding encumbrances, the reserve for outstanding encumbrances is closed to the
unreserved fund balance and the order for the goods is cancelled with the external vendor.
When accounting for the actual expenditure in the subsequent year, the nonlapsing method
separates expenditures made from spending authority carried over from prior periods. This is
done in a reclassification entry made on the first day of the next fiscal period, which dates the
reserve for encumbrances. When the goods are received in the second year, the
expenditures account is also dated to note that it refers to expenditure authority of the prior
year.
17-3
Q17-11 The expenditure for inventories is recognized in the period the supplies are
acquired under the purchase method. Under the consumption method, the expenditure for
inventories is recognized for only the amount of inventory used in the period.
Q17-12 Interfund services provided and used are interfund activities that would be treated
as revenues or expenditures if they were made with parties external to the governmental
entity. An example would be if the general fund purchased supplies from the internal
service
Interfund transfers out or in are transfers of resources between funds. An example would
be a transfer of resources from the general fund (an interfund transfer out) to the capital
projects fund (a transfer in) to assist in the construction costs of a new municipal building.
Q17-13 An interfund transfer is reported as "Other Financing Sources or Uses" in the
general fund's statement of revenues, expenditures, and changes in fund balance.
Q17-14 The loan of $2,000 from the general fund to the enterprise fund is reported on the
financial statements of the general fund on the balance sheet as a receivable. The loan is
not shown on the fund's statement of revenues, expenditures, and changes in fund
balance.
Q17-15 Governmental accounting places many controls over expenditures, and much of
the financial reporting focuses on the various aspects of an expenditure. An expenditure
can be made for a function of the governmental entity or an activity within a function.
Expenditures for an activity can be classified by object, which is the type of expenditure.
The extensive detail required to account for and cross reference an expenditure to ensure it
is properly classified at all levels requires a very comprehensive accounting system.
17-4
SOLUTIONS TO CASES
C17-1 Budget Theory
a. A governmental accounting system must make it possible to:
1. Present fairly and with full disclosure, in conformity with generally accepted accounting
principles, the financial position and results of financial operations of the funds and account
groups of the governmental unit.
2. Determine and demonstrate compliance with finance-related legal and contractual
provisions.
Because the legislative body enacts the budget into law, the budget is recorded in the
accounts of a governmental unit. This enables a governmental unit to show legal compliance
with the budget by providing an accounting system that measures actual expenditures and
obligations against amounts appropriated and actual revenue against estimated revenue.
Appropriations enacted into law constitute maximum expenditure authorizations during the
fiscal year, and they cannot legally be exceeded unless subsequently amended by the
legislative body.
b.
As the new fiscal year begins, the budget, already enacted in law by the legislative
body, is recorded. Budgetary accounts are set up to record the estimated revenue and
appropriations in the fund accounts by debiting estimated revenue and crediting
appropriations. If there is a difference between estimated revenue and appropriations, the
excess or deficit is credited or debited, respectively, to fund balance. In addition, subsidiary
ledger accounts are maintained for estimated revenue by source and for
appropriation/expenditure items.
At the end of the fiscal year, the estimated revenue and the appropriations accounts are
among other budgetary accounts closed out to the budgetary fund balance.
17-5
C17-2 Municipal versus Financial Accounting

a. The most significant difference in purpose between municipal accounting and
commercial accounting is that commercial enterprises are operated for profit, which places
much emphasis on the proper determination of periodic earnings. Governmental units are
primarily concerned with providing services to their citizens at minimum cost and reporting
on the stewardship of public officials with respect to public funds, which places much
emphasis on budgetary controls. However, some municipal units perform commercial
services that are generally secondary to their tax-financed primary services.
Another difference in accounting purpose is that municipal accounting operations are
controlled by legal provisions in constitutions, charters, and regulations having the force
and effect of law. Because of these legal provisions and the diversity of its governmental
operations, a municipality cannot use a single, unified set of accounts for recording and
summarizing all financial transactions. If there is a conflict between legal provisions and
generally accepted accounting principles applicable to governmental units, legal provisions
should take precedence to the extent that the accounting system must enable the ready
disclosure of compliance. However, for financial reporting purposes, generally accepted
accounting principles must take precedence. Commercial enterprises usually are not
controlled by charters that are restrictive; therefore, their accounting systems are designed
differently.
Legislative action may limit the use of certain tax revenue for expenditure on particular
programs, the methods of tax collection, or the rates of tax assessment. Such provisions
must be reflected in the accounting system and be appropriately disclosed in the
municipality's financial statements as a report on the stewardship of public officials with
respect to public funds.
In governmental accounting all required accounts are organized on the basis of funds, each
of which is independent of the other. Each fund must be so accounted for that the identity
of its resources, obligations, revenue, expenditures, and fund balance is continually
maintained. These purposes are accomplished by providing a complete self-balancing set
of accounts for each fund.
The basis of accounting for the reporting on governmental units is often different from that
used by commercial enterprises. For example, the accrual basis of accounting is
recommended for all funds except the governmental funds. The governmental funds should
be accounted for by the modified accrual basis. The modified accrual basis is
recommended for the governmental funds because some of their revenue sources are
difficult to measure in advance and frequently become available only a short time before
cash receipt.
Generally, fair presentation of financial position and results of operations in conformity with
generally accepted accounting principles requires that the financial statements of
governmental funds (those that use the modified accrual basis) include a balance sheet
and a statement of revenues, expenditures, and changes in fund balance. In contrast,
however, a commercial enterprise would usually prepare a statement of financial position,
an earnings statement, a statement of retained earnings, and a statement of cash flows.
The statement of revenues and expenditures of the general fund and certain special
revenue funds should include a comparison with a formal budget in order to conform to
generally accepted accounting principles; there is no such requirement for a commercial
enterprise.
17-6
C17-2 (continued)
b. Inventories are often ignored in governmental accounting because of an emphasis on
budgeting revenue against outlays without looking behind the outlays to determine the extent
to which they represent actual usage or consumption. Put another way, there is an emphasis
on the cash or fiscal aspects rather than the operational aspects. This is easy to understand
when one considers that general-fund expenditures for firemen's salaries and for the purchase
of a new fire truck are accounted for in the same way.
However, inventories are not wholly ignored in governmental accounting. In those funds in
which accounting parallels commercial accounting practice, such as enterprise funds,
inventories are taken into consideration. Similarly, in an internal service fund concerned with
rendering service involving the consumption of supplies or the delivery of stores to other funds
and activities, the inventories of supplies or stores are taken into consideration in computing
billings to departments serviced.
Larger amounts of inventories can and should be taken into consideration when preparing
budgets. A fund, such as a general fund, having departments that possess large inventories at
year-end obviously can make smaller appropriations for the coming year than it would if those
departments had zero inventories.
C17-3 Revenue Issues
The following presentation describes the proper accounting and financial reporting for each
item. Note that there are two decision points: (1) when a receivable or other asset should be
recognized, and (2) when a revenue should be recognized.
a. GASB 33 states that an asset (receivable or cash) should be recognized for imposed
nonexchange revenue when the government has an enforceable claim to the resources, or
the resources are received, whichever comes first. The property taxes receivable would be
debited at the time an enforceable claim arises. In most governments, this is the levy date
(sometimes termed the lien date); in some others, it is the assessment date or other date fixed
by law. It depends on the enabling legislation permitting the government to impose property
taxes. Property tax revenue would be credited when the resources become available for use
for current expenditures. Resources received or recognized as receivables before becoming
available for use should have a credit to deferred revenues. Recording of both the asset debit
and the revenue or deferred revenue credit must be in compliance with the requirements
established by GASB 33. The estimated uncollectible should be recorded as a reduction of
the revenue, and a contra account for the Allowance for uncollectibles should be recorded.
b. For property taxes received in advance of when they can be used for current expenditures,
a debit is made to cash and a deferred revenue account, for example, property taxes received
in advance, should be credited until the taxes are available for use at which time the deferral
should be transferred to revenue.
c. GASB 33 requires that this derived tax revenue should be recognized as a receivable
when the underlying exchange transaction occurs or resources are received, whichever is
first. The revenue is recognized when the underlying exchange has occurred and the
resources are available. In the rare cases in which derived tax revenues are received before
the underlying exchange transaction has occurred, the credit should be to deferred revenues.
Estimates of collections expected in the near future should be made and the receivable
recognized in accordance with the above guidelines.
17-7
C17-3 (continued)
d. Under GASB 33, this is an example of a voluntary nonexchange transaction unless the
payment is the result of a government-mandated program. The asset will be recorded
(receivable or cash) when all eligibility requirements are met or resources are received,
whichever is first. Eligibility requirements are those established by the provider and may
state requirements for specific allowable costs or specify a time requirement. Revenue will
be recorded when all the eligibility requirements are met. On the modified accrual basis,
revenues would be recorded when all eligibility requirements are met and the resources are
available.
e. Interest earned on investments is recognized as a receivable in the period in which it is
accrued but not yet received. But interest is not recognized as revenue until it is considered
available to liquidate liabilities of the current period. Thus, interest may be accrued to a
receivable with a credit to a deferred revenue in the period prior to the actual collection of
the interest. In addition, the city should make an adjusting journal entry at each balance
sheet date to recognize any adjustments required for changes in the fair value of the
investments. Investment earnings are reported in the revenues section of the operating
statement.
f. GASB 33 specifies that this voluntary nonexchange transaction, with its time restriction
and eligibility requirements, should be recorded as an asset when the applicable eligibility
requirements are met or the resources are received, whichever is first. Under the modified
accrual basis of accounting, revenues should be recognized when all applicable eligibility
requirements are met and the resources are available. Prior to that, the community may
recognize a credit for deferred revenues if the resources have been received.
17-8
C17-4 Summarizing the Requirements of GASB 34

The following presents a listing of the major points in GASB 34, Basic Financial Statements
and Managements Discussion and Analysisfor State and Local Governments.
a. The managements discussion and analysis (MD&A) is required supplementary
information (RSI) but must precede the basic financial statements. GASB 34 requires the
MD&A to be an objective and easily readable analysis of the governments financial condition
and activities with comparisons to the prior year. Not only is management to provide an
analysis of the overall financial condition of the governmental entity, but also to discuss
significant changes in the funds. Also, management should discuss significant budget
variances and describe capital asset and long-term debt activities during the year. Finally,
management is to look forward and describe currently known facts or conditions that may
have a significant effect on the governments future financial condition.
b.
(1) The fund financial statements present the operating results and activities in the
individual funds.
The fund statements reflect the fund-based accountability of the
governmental entity as it raises financial resources from the public and expends those
resources in meeting the objectives for which each fund is established. The governmental
funds use a current financial resources measurement focus and the modified accrual basis of
accounting. Proprietary fund financial statements and fiduciary fund statements use the
economic resources measurement focus and the accrual basis of accounting.
(2) The government-wide financial statements present the financial position and the fiscal year
performance for the governmental entity as a whole. All capital assets, including infrastructure
assets are included along with a measure of depreciation. Long-term debt of the
governmental entity is also included in the government-wide financial statements.
The
government-wide financial statements use the economic resources measurement focus and
the accrual basis of accounting. Thus, even though the fund-based financial statements are
the foundation for the government-wide financial statements, a reconciliation schedule must
be provided for the governmental funds to go from the modified accrual basis, to the accrual
basis in the government-wide financial statements.
The government-wide financial
statements report program expenses reduced by program resources. And net assets on the
government-wide statement of net assets are reported for three categories: invested in capital
assets net of related debt, restricted, and unrestricted.
C17-5 Examining the General Fund Disclosures in a Comprehensive Annual Financial

Report (CAFR)
(Note to the instructor: Most local governments now produce a comprehensive annual financial
report. You might select the local city or county in which the university is located or a large city
close to the university town. Printed copies of the CAFR may be obtained directly from that
government unit and you could place these copies on reserve in your university or college library
for use by your students. Alternatively, many governments now provide their CAFRs online. A
Google web search using CAFR and the name of your city, county or state will show if your
selection provides an online copy of its CAFR. Or, you may do a Google search using CAFR
and then select one of the government units that provide an online copy of its CAFR and then
provide that link to your students or insert that link into your online syllabus.)
17-9
C17-5 (continued)
a. The budgetary comparison schedules for the general fund are reported as other required
supplementary information. This schedule for the general fund should be used to answer
questions a and b. These schedules disclose the amounts budgeted for each item of revenue,
appropriations for the various functions of government, and for estimated transfers in from
other funds and estimated transfers out to other funds in the government.
b. See the response to question a.
c. The notes to the basic financial statements should disclose the encumbrance policy
whether the government has a policy in which the outstanding encumbrances lapse at yearend or do not lapse at year-end.
d. This question reinforces the students understanding of the balance sheet equation for the
general fund: Assets = Liabilities + Fund Balance. This question also makes students aware
of the two forms of fund balance reserved and unreserved.
e. This question makes students aware that inventories are reported on the balance sheet of
the general fund if the amount is material. If reported, the next question is the accounting
method for inventories the purchase or consumption method. The notes should answer the
policy question.
f. This question makes students aware of the modified accrual method and its application to
property taxes. The notes to the financial statements should disclose that revenue from
property taxes is reported when measurable and available to finance expenditures of the
current period. The notes should also disclose the use of the 60-day rule for property tax
revenue as well as the percentage of property taxes that were estimated to be uncollectible.
g. This question focuses attention once again on MD&A and the different items that are
reported therein. In MD&A, the governments finance director should explain why revenues in
the general fund either increased or decreased during the most recent year.
h. This question addresses the issue that budgeted inflows and outflows should be compared
with the actual resource inflows and outflows for the year. Was the budget more or less
optimistic in predicting resource inflows from revenues? The same question is appropriate for
appropriations versus expenditures. This question also should help students understand that
the statement of revenues, expenditures, and changes in fund balance reports the change in
fund balance that resulted from actual resource inflows and outflows.
i. This question makes students aware that taxes may be the primary resource inflow for the
general fund, but they are not the only resource inflow. This question also emphasizes that the
revenues of the general fund come primarily from nonexchange transactions.
j. This question makes students aware of one category of interfund transactions-interfund loans and advances. The balance sheet of the general fund should report the
receivables (due from or advances to accounts) and payables (due to and advances
from accounts) associated with any interfund borrowings.
17-10
C17-6 Examining Deposit and Investment Risk Disclosures of a Governmental Entity

(Note to the Instructor: Students may become frustrated because they may feel that the
information presented in the summaries for GASB 40 and GASB 3 are not enough to fully
understand the risk disclosures required by these two standards. This case does not require an
intensive knowledge, but rather a general knowledge of the required risk disclosures. Then the
case provides students with the opportunity to see the standards in a real government annual
report, especially if they select a local governmental entity with which they are quite familiar, e.g.,
their home city or the city in which the university is located.)
a. The deposit and investment risks stated in the summary are: (1) custodial credit risk; (2)
credit risk, (3) concentration of credit risk, (4) interest rate risk, and (5) foreign currency risk.
GASB 3 and GASB 40, which your students probably would not have, define these as follows:
Custodial credit risk:: (established in GASB 3 but amended in GASB 40): The risk that
in the event of a failure of a depository financial institution or a counterparty to a
transaction, a government will not be able to recover deposits, or the value of the
investment, or the collateral that is in the possession of an outside party.
Credit risk: The risk that an issuer or other counterparty to an investment will not fulfil its
obligations.
Concentration of credit risk: The risk of loss attributes to the magnitude of a
governments investment in a single issuer.
Interest rate risk: The risk that changes in interest rates will adversely affect the fair
value of an investment.
Foreign currency risk: The risk that changes in exchange rates will adversely affect the
fair value of an investment or deposit.
b.
The summary of GASB 40 stated it well: that the disclosures provide users of the
financial statements with information about deposit and investment risks that might affect the
ability of a government to provide services and to meet its obligations as they become due.
c, d and e. These answers will depend on the selected city and most recent fiscal period.
But, the objective of these three questions is to have students look at the deposit and
investment footnotes for an actual governmental entity. Students should be able to describe
the types of deposit and investment risks faced by the selected local government, its policies
to manage those risks, and the additional financial information such as the investments
comprising each portfolio, credit ratings of the investments in bonds, discussion of the impacts
of changing interest rates, and for some governmental entities, discussion of the effects of
changing exchange rates for foreign currencies or investments.
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SOLUTIONS TO EXERCISES
E17-1 Multiple-Choice Questions on the General Fund [AICPA Adapted]
1.
2.
3.
4.
5.
6.
E17-2 Matching for General Fund Transactions [AICPA Adapted]

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
17-12
E17-3 Multiple-Choice Questions on Budgets, Expenditures, and Revenue [AICPA

Adapted]
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
17-13
E17-4 Multiple-Choice Questions on the General Fund

1.
2.
3.
The balances in the ENCUMBRANCES CONTROL and the FUND BALANCERESERVED FOR ENCUMBRANCES accounts are the same. Therefore, an
excess of one account over the other indicates a recording error.
4.
The following entry is made when a purchase order is approved:

ENCUMBRANCES CONTROL
BUDGETARY FUND BALANCE RESERVED FOR ENCUMBRANCES
5.
The 60-day rule for property tax revenues states that property taxes collected
within 60 days after the end of a fiscal year (within first 60 days of 2007) may be
classified as revenues of the prior fiscal year (2006). The entry to record the tax
levy would be:
Property Taxes Receivable
Allowance for Uncollectible Taxes
Revenue Property Taxes
Deferred Revenue (reported as a liability
on the general fund balance sheet)
[Note: The estimated uncollectibles are on the
property taxes reported as deferred revenue.]
6.
Expenditures Control
Vouchers Payable
a
10,000
600,000
90,000
Upon receipt of the order, Oak would record the following entries:
BUDGETARY FUND BALANCE RESERVED
FOR ENCUMBRANCES
ENCUMBRANCES CONTROL
7.
700,000
5,000
5,000
4,950
4,950
Johnson would record the following entry:

ESTIMATED REVENUES CONTROL
9,000,000
ESTIMATED OTHER FINANCING SOURCE
TRANSFER IN (Internal Service)
1,000,000
ESTIMATED OTHER FINANCING SOURCE
TRANSFER IN (Debt Service)
500,000
APPROPRIATIONS CONTROL
BUDGETARY FUND BALANCE UNRESERVED
8.
9.
10.
17-14
XXXXXX
XXX
E17-5 Encumbrances at Year-End

a.
Outstanding encumbrances lapse at year-end.

(1)
Order equipmentNovember 3, 20X2:

ENCUMBRANCE
BUDGETARY FUND BALANCE--RESERVED
FOR ENCUMBRANCES
Order equipment and record encumbrance.
(2)
Fund Balance Unreserved

Fund Balance Reserved for Encumbrances
Reserve actual fund balance for
outstanding encumbrances at year-end.
(4)
21,000
21,000
21,000
21,000
City Council accepts outstanding encumbrancesJanuary 1, 20X3:

Reverse prior-year encumbrance reserve.
21,000
ENCUMBRANCES
FOR ENCUMBRANCES
Establish budgetary control over
encumbrances renewed from prior year.
21,000
21,000
21.000
Equipment receivedJanuary 18, 20X3:

BUDGETARY FUND BALANCE RESERVED FOR
ENCUMBRANCES
ENCUMBRANCES
Remove budgetary reserve for goods
received.
Expenditures
Vouchers Payable
Record expenditure for goods received
at actual cost of $21,800.
(5)
21,000
Year-end entriesDecember 31, 20X3:

ENCUMBRANCES
ENCUMBRANCES
Close remaining budgeted encumbrances.
(3)
21,000
21,000
21,000
21,800
21,800
Year-end entryDecember 31, 20X3:

Fund BalanceUnreserved
Expenditures
Close 20X3 expenditures account.
17-15
21,800
21,800
E17-5 (continued)
b.
Outstanding encumbrances are nonlapsing.

(1)
Order equipmentNovember 3, 20X2:

ENCUMBRANCE
BUDGETARY FUND BALANCE--RESERVED
FOR ENCUMBRANCES
Order equipment and record encumbrance.
(2)

Reserve fund balance for outstanding
encumbrances.
21,000
21,000
21,000
21,000
21,000
Equipment receivedJanuary 18, 20X3:

Expenditures 20X2
Expenditures (20X3)
Vouchers Payable
Record actual expenditure for goods
received.
(5)
21,000
Date the encumbrances from prior yearJanuary1, 20X3::

Fund Balance Reserved for
Encumbrances 20X2
Reclassify reserve from 2002, prior year.
(4)
21,000
Year-end entriesDecember 31, 20X2:

FOR ENCUMBRANCES
ENCUMBRANCES
Close remaining budgetary encumbrances.
(3)
21,000
21,000
800
21,800
Closing entriesDecember 31, 20X3:

Encumbrances 20X2
Expenditures 20X2
Close expenditures account for
prior year encumbrances.
Expenditures (20X3)
Close expenditures for current year.
17-16
21,000
21,000
800
800
E17-5 (continued)
(Note: In entry (4), the $800 excess of actual cost over the encumbered amount must be
approved as part of 20X3's expenditures. Entry (4) records the City Councils approval
with a debit to Expenditures (20X3) which increases 20X3s total expenditures. The
expenditures for 20X3 are closed in entry (5). If the actual cost was less than the
encumbered amount, then the difference should be closed to Fund Balance-Unreserved,
although some governmental units have a policy of closing any difference between actual
and encumbered amounts for prior year encumbrances to the current year's
expenditures.)
c.
(1)
Outstanding encumbrances are nonlapsing; City Council cancels order

January 1, 20X3:
Fund BalanceReserved for Encumbrances
Fund BalanceUnreserved
City Council cancels 20X2 order for equipment.
21,000
21,000
E17-6 Accounting for Inventories of Office Supplies

a.
Consumption method of accounting for inventories:

(1)
Purchase of supplies:
August 8, 20X2
Expenditures
Vouchers Payable
Acquire inventory of supplies.
(2)
3,600
3,600
Entries at end of 20X2 fiscal year:

September 30, 20X2
Inventory of Supplies
Expenditures
Recognize ending inventory of supplies.
Fund Balance Reserved for Inventories
Establish fund reserve for ending
inventory.
Expenditures
Close expenditures account.
2,800
2,800
2,800
2,800
800
800
17-17
E17-6 (continued)
(3)
Entry at end of 20X3 fiscal year:

September 30, 20X3
Expenditures
Record expenditures for
inventories consumed.
b.
2,800
2,800

Remove fund balance reserve
for inventories consumed.
2,800

Expenditures
2,800
2,800
2,800
Purchase method of accounting for inventories:

(1)
Purchase of supplies:
August 8, 20X2
Expenditures
Vouchers Payable
Acquire inventory of supplies.
(2)
3,600
3,600

September 30, 20X2
Expenditures
(3)
2,800
2,800
3,600
3,600

September 30, 20X3
Remove fund balance reserve
for inventories consumed.
17-18
2,800
2,800
E17-7 Accounting for Prepayments and Capital Assets

(a)
Acquired three-year insurance policy:

September 1, 20X1
Expenditures
Vouchers Payable
Record acquisition of
three-year insurance policy.
(b)
5,400
5,400
New furniture for the city council meeting room:

September 17, 20X1
ENCUMBRANCES
FOR ENCUMBRANCES
Encumber for purchase orders for new furniture.
October 1, 20X1
ENCUMBRANCES
ENCUMBRANCES
Reverse reserve for furniture received.
Expenditures
Vouchers Payable
Receive furniture at actual cost.
(c)
15,600
15,600
15,600
15,600
15,200
15,200
Acquired supplies consumption method used:

November 4, 20X1
Expenditures
Vouchers Payable
Acquire supplies.
1,800
1,800
Closing entries:
December 31, 20X1
Expenditures
Inventories
Establish fund reserve for ending inventory.
Expenditures
Close expenditures account:
$ 5,400 Insurance Policy
15,200 Furniture
680 Supplies
$21,280 Total
17-19
1,120
1,120
1,120
1,120
21,280
21,280
E17-8
Computation of Revenues Reported on the Statement of Revenues,

Expenditures, and Changes in Fund Balance for the General Fund
Gilbert City
Revenue Reported by the General Fund
For the Year Ended June 30, 20X8
Property tax revenue

Interest revenue on advance
Grant revenue used to acquire computer equipment
Sales tax revenue
Liquor license revenue
Total revenue reported
$1,862,000
1,500
235,000
125,000
66,000
$2,289,500
Notes:
(1) The amount reported for property tax revenue, $1,862,000 is computed in the following
way:
Levy
$2,000,000
Less:
Property taxes expected to be collected after August 31,
20X8 the 60 day rule for property tax
(100,000)
collections report in balance sheet as deferred
revenue at June 30, 20X8, net of $2,000
allowance for uncollectible taxes (2%)
The allowance for uncollectible taxes on this periods
revenue [($2,000,000 - $100,000 deferred) X .02]
(38,000)
Property tax revenue for year ended June 30, 20X8
$1,862,000
(2) The receipt of $50,000 for the repayment of the advance is recorded in the
following manner by the general fund:
Cash
Advance to Internal Service Fund
Interest revenue
51,500
50,000
1,500
(3) Collection of property taxes during the year ended June 30, 20X8, does not affect the
recognition of revenue. The revenue was recognized at the levy date, not the collection
date.
(4) Revenue recognition related to the State grant is based upon spending the grant to
acquire computer equipment. Therefore, revenue from the State grant is $235,000, the
amount of the grant expended. The $15,000 remainder of the grant monies received is
shown as unearned revenue, a liability.
(5) Revenue from the sales tax is the amount collected during the year ended June 30,
20X8, or $125,000. The additional sales taxes of $25,000 will be revenue of the next fiscal
year when the taxes are received from the State and are available to pay for expenditures
incurred in the next fiscal year.
(6) The borrowing of the $800,000 using the property tax levy as collateral represents a
liability in the general fund. This amount is not revenue.
(7) The $30,000 received from a terminated debt service fund is reported as an other
financing source transfer in, not revenue.
17-20
E17-8 (continued)
(8) The revenue from liquor licenses is the amount collected, not the amount expected to
be collected. Therefore, revenue of $66,000 is recognized from the sale of liquor licenses
for the year ended June 30, 20X8.
(9) The $15,000 reimbursement is not reported as revenue in the general fund.
Reimbursements are recorded as reductions in expenditures.
(10) The collection of the delinquent property taxes is not reported as revenue by the
general fund for the year ended June 30, 20X8. The revenue associated with the
delinquent property taxes was reported in the preceding fiscal year, because the property
taxes were expected to be collected within 60 days of the end of the fiscal year.
E17-9 Computation of Expenditures Reported on the Statement of Revenues,

Expenditures, and Changes in Fund Balance for the General Fund
Benson City
Amount Reported for Expenditures by the General Fund
For the Year Ended June 30, 20X8
Computer equipment acquisitions in September, 20X7
Reimbursement to special revenue fund in May, 20X8
Use of city water during the fiscal year
Supplies acquisitions
Salaries and wages of general fund employees
Interest paid on loan from local bank
Employers pension contribution to pension trust
Lease payments
Total amount reported for expenditures
$ 202,000
15,000
12,000
35,000
900,000
15,000
95,000
10,000
$1,284,000
Notes:
(1) The $150,000 transfer to the capital projects fund in March, 20X8, is reported as an
other financing use transfer out. Therefore, it should not be included in the amount
reported for expenditures for the year ended June 30, 20X8.
(2) The amount paid for the computer equipment is the amount reported for expenditures.
Therefore, $202,000 is included in expenditures for equipment, not the estimated amount of
$200,000 that was recorded for the order (encumbrances).
(3) None of the $500,000 transferred to the internal service fund should be reported as
expenditures. The $200,000 that must be repaid by the internal service fund should be
accounted for as an advance (a receivable in the general fund), while the $300,000 that
represented a permanent contribution should be accounted for as an other financing use
transfer out.
(4) The $15,000 reimbursement to the special revenue fund should be included in the
expenditures of the general fund for the year ended June 30, 20X8.
17-21
E17-9 (continued)
(5) The $12,000 of billings from the water department should be accounted for as
expenditures by the general fund. Billings for water usage constitute an interfund services
provided and used transaction. Note that the amount paid by the general fund, $11,500, is
not the correct amount of the expenditures. The correct amount is $12,000.
(6) The acquisition of supplies and the payment of salaries and wages by the general fund
should be accounted for as expenditures. The entire cost of the supplies purchased should
be reported as expenditures because the general fund uses the purchase method of
accounting for supplies.
(7) The outstanding encumbrances at June 30, 20X8, are not included in expenditures.
The outstanding encumbrances will be reported on the general fund balance sheet as a
reservation of fund equity.
(8) The repayment of the principal of the bank loan is not an expenditure. However, the
amount paid for interest, $15,000, should be included in expenditures for the year ended
June 30, 20X8.
(9) The general funds $95,000 contribution to the citys pension trust should be included in
expenditures of the general fund for the year ended June 30, 20X8. The employers
contribution to a pension trust is an example of an interfund services provided or used
transaction.
(10) The general funds lease payments should be included in the amount reported for
expenditures for the year ended June 30, 20X8.
(11) For proper reporting on the statement of revenues, expenditures and changes in fund
balance, each expenditure should be associated with a governmental function, such as
General Governmental or Streets and Highways.
17-22
E17-10 Closing Entries and Balance Sheet

a.
Closing entries for the general fund:

(1)
(2)
(3)
(4)
(5)
ESTIMATED OTHER FINANCING
USES TRANSFER OUT
Close budgetary accounts.
ENCUMBRANCES
ENCUMBRANCES
Close remaining encumbrances by
reversing remaining budgetary balance.
Encumbrances
Reserve fund balance for encumbrances
that lapse, but are expected to be
honored in 20X2.
Property Tax Revenue
Miscellaneous Revenue
Expenditures
Close operating statement accounts.
Other Financing Uses Transfer Out
Close transfer out.
17-23
1,145,000
25,000
30,000
1,200,000
32,000
32,000
32,000
32,000
1,130,000
40,000
1,140,000
30,000
25,000
25,000
E17-10 (continued)
b.
General fund balance sheet:

Lone Wolf
General Fund
Balance Sheet
December 31, 20X1
Assets
Cash
Property Taxes Receivable Delinquent
Less: Allowance for Uncollectibles
Delinquent
Due from Other Funds
Total Assets
90,000
$100,000
(7,200)
92,800
14,600
$ 197,400
Liabilities and Fund Balance

Vouchers Payable
Due to Other Funds
Fund Balance:
Reserved for Encumbrances
Unreserved
Total Liabilities and Fund Balance
$ 65,000
8,400
$ 32,000
92,000
124,000
$ 197,400
E17-11 Statement of Revenues, Expenditures, and Changes in Fund Balance

Lone Wolf
General Fund
Statement of Revenues, Expenditures, and Changes
in Fund Balance
For the Fiscal Year Ended December 31, 20X1
Revenue:
Property Taxes
Miscellaneous
Expenditures
Excess of Revenue over Expenditures
Other Financing Sources (Uses):
Transfer Out
Net Change in Fund Balance
Fund Balance, January 1, 20X1
Fund Balance, December 31, 20X1
$1,130,000
40,000
$1,170,000
1,140,000
$ 30,000
(25,000)
5,000
119,000
$ 124,000
$
17-24
E17-12
Matching Questions Involving Interfund Transactions and Transfers in the

General Fund
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
SOLUTIONS TO PROBLEMS
P17-13 General Fund Entries [AICPA Adapted]
(1)
(2)
(3)
(4)

2,000,000
Record the budget.
1,940,000
60,000
Taxes Receivable
Record the property tax levy.
10,000
1,860,000

Taxes Receivable
Write off uncollectible
taxes receivable.
1,870,000
8,000
8,000
Cash
1,820,000
Taxes Receivable
Record property tax collections.
(5)
1,820,000
ENCUMBRANCES
FOR ENCUMBRANCES
Record purchase commitments.
17-25
1,070,000
1,070,000
P17-13 (continued)
(6)
(7)
(8)
(9)
(10)
(11)
(12)

ENCUMBRANCES
ENCUMBRANCES
Reverse for purchase orders received.
1,000,000
1,000,000
Expenditures
Vouchers Payable
Record actual expenditures.
1,840,000
Vouchers Payable
Cash
Record payment of vouchers
during period.
1,852,000
1,940,000
60,000
1,840,000
1,852,000

ENCUMBRANCES
ENCUMBRANCES
Close remaining encumbrances by
reversing remaining budgetary balance.
Encumbrances
purchase commitments.
Expenditures
17-26
2,000,000
70,000
70,000
70,000
70,000
1,860,000
1,840,000
20,000
P17-14 General Fund Entries [AICPA Adapted]

1.

Record the budget.
3,000,000
Taxes Receivable
Revenue from Taxes
Record tax levy.
2,870,000
Cash
Taxes Receivable
Record tax collection.
2,810,000
70,000
2,800,000
2,810,000

Taxes Receivable
Record write-off of uncollectible taxes:
July 1, 20X1, taxes receivable balance
20X2 tax levy
Less: Taxes collected
Taxes receivable final balance
Taxes written off as uncollectible
Cash
Collect miscellaneous revenue.
2.
2,980,000
20,000
40,000
40,000
$ 150,000
2,870,000
(2,810,000)
(170,000)
$ 40,000
130,000
130,000

Reverse prior reserve which has
been renewed.
60,000
ENCUMBRANCES
FOR ENCUMBRANCES
Renew encumbrances from prior period.
60,000
ENCUMBRANCES
FOR ENCUMBRANCES
Record encumbrances.
2,700,000
17-27
60,000
60,000
2,700,000
P17-14 (continued)
3.
4.
Expenditures
Due to Other Funds
Record liability to other funds
for services received.
142,000
142,000

FOR ENCUMBRANCES
ENCUMBRANCES
Reverse encumbrances for items
received.
Expenditures
Vouchers Payable
Record expenditures.
2,700,000
2,700,000
2,700,000

FOR ENCUMBRANCES
ENCUMBRANCES
Reverse reserve for encumbrances.
Expenditures (Prior Period)
Vouchers Payable
Actual expenditure for goods received.
Due to Other Funds
Vouchers Payable
Record approval for payment to
other funds.
60,000
60,000
58,000
58,000
210,000
210,000
Vouchers Payable
Cash
Record voucher payments.
5.
2,700,000
2,640,000
2,640,000
ENCUMBRANCES
FOR ENCUMBRANCES
Record May 10 encumbrance.
17-28
91,000
91,000
P17-15 General Fund Entries and Statements

a.
Entries for 20X2 budget and transactions:

1.
2.

ESTIMATED OTHER FINANCIAL
USES TRANSFER OUT
Record budget.
1,877,000
1,840,000
37,000
ENCUMBRANCES
FOR ENCUMBRANCES
Renew encumbrances from prior period.
21,000

Reverse reserve for renewed encumbrances.
21,000
21,000
21,000
Property Tax Receivable Current

Allowance for Uncollectibles Current
Record property tax levy.
1,600,000
Cash
Property Taxes Receivable Current
Collect property taxes.
1,590,000
Allowance for Uncollectibles Delinquent

Write off remaining delinquent property
taxes.
9,000

Allowance for Uncollectibles Current
Property Taxes Receivable Current
Reclassify remainder of uncollected
20X2 property taxes.
93,000
16,000
Cash
Sales Tax Revenue
Due to Motor Pool Fund
Other cash receipts.
16,000
1,584,000
1,507,000
83,000
7,000
2,000
93,000
16,000
333,000
284,000
39,000
10,000
17-29
P17-15 (continued)
3.
ENCUMBRANCES
FOR ENCUMBRANCES
Record purchase orders.
FOR ENCUMBRANCES
ENCUMBRANCES
Reverse reserve for items received.
4.
b.
1,800,000
1,800,000
1,773,000
1,773,000
Expenditures
Vouchers Payable
Actual expenditures for items
received.
1,788,000
Vouchers Payable
Cash
Vouchers paid.
1,793,000
1,788,000
1,793,000
Due from Central Stores Fund

Cash
Other cash payments and transfer.
13,000
37,000
50,000
Pine Ridge
General Fund
Preclosing Trial Balance
December 31, 20X2
Debit
Cash
Property Tax Receivable Delinquent
Vouchers Payable
Sales Tax Revenue
Expenditures
ESTIMATED OTHER FINANCING USES TRANSFER
OUT
ENCUMBRANCES
FOR ENCUMBRANCES
$ 191,000
93,000
$
16,000
13,000
26,000
10,000
161,000
1,586,000
284,000
39,000
1,788,000
37,000
1,877,000
1,840,000
37,000
48,000
$4,047,000
17-30
Credit
48,000
$4,047,000
P17-15 (continued)
c.
Closing entries:
ESTIMATED OTHER FINANCING
USES TRANSFER OUT
FOR ENCUMBRANCES
ENCUMBRANCES
Close remaining encumbrances.
Encumbrances
purchase orders.
Sales Tax Revenue
Expenditures
d.
1,840,000
37,000
1,877,000
48,000
48,000
48,000
48,000
1,586,000
284,000
39,000
1,788,000
37,000
84,000
Pine Ridge
General Fund
Balance Sheet
December 31, 20X2
Assets
Cash
Property Tax Receivables Delinquent
Less: Allowance for Uncollectibles Delinquent
Total Assets
Liabilities and Fund Balance
Vouchers Payable
Fund Balance:
Reserved for Encumbrances
Unreserved
Total Liabilities and Fund Balance
17-31
$191,000
$ 93,000
(16,000)
77,000
13,000
$281,000
$ 26,000
10,000
$ 48,000
197,000
245,000
$281,000
P17-15 (continued)
e.
Pine Ridge
General Fund
Statement of Revenues, Expenditures, and Changes
in Fund Balance
For Fiscal Year Ended December 31, 20X2
Revenue:
Property Taxes
Sales Taxes
Miscellaneous
Total Revenue
Expenditures:
Current
Capital Outlay Furniture
Total Expenditures
Excess of Revenue over Expenditures
Other Financing Sources (Uses):
Transfer Out
Change in Fund Balance
Fund Balance, January 1, 20X2
Fund Balance, December 31, 20X2
$1,586,000
284,000
39,000
$1,909,000
$1,746,000
42,000
$1,788,000
$ 121,000
(37,000)
84,000
161,000
$ 245,000
$
[Note that the $42,000 expenditure for the office furniture capital outlay is reported
separately. The theoretical support for this is that the expenditure will also benefit future
periods. Some governmental entities report capital outlays made in the general fund with
current expenditures because current financial resources were expended.
Some
governments integrate capital outlay expenditures into the appropriate functional categories
(e.g., fire protection, government administration, or streets and highways) rather than
separately report the expenditures for capital outlays. The choice of reporting alternative
for the general fund is up to the governmental entity because the total expenditures will be
the same regardless of how or where the capital outlay is reported.]
17-32
P17-16 Matching Governmental Terms with Descriptions

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17-33
P17-17 Identification of Governmental Accounting Terms

1. Government-wide financial statements
2. The Governmental Accounting Standards Board (GASB)
3. A fund
4. Interfund services provided or used
5. Internal service and enterprise funds
6. Infrastructure assets
7. Agency and trust funds
8. Modified accrual basis
9. Flow of total economic resources
10. The property tax levy
11. The general, special revenue, capital projects, debt service funds and permanent
funds
12. The allowance for uncollectible property taxes
13. Budgetary fund balance unreserved
14. Encumbrances
15. The consumption method
16. Other financing uses transfer out
17. Expenditures
18. Fund balance unreserved
19. Expenditures
20. Appropriations
21. Nonlapsing method
17-34
P17-18 Questions on General Fund Entries [AICPA Adapted]

1.
2.
3.
4.
5.
D
C
C
C
N
6.
7.
8.
9.
10.
D
N
C
C
N
11.
12.
13.
14.
15.
D
C
N
N
N
16.
17.
18.
19.
20.
C
D
D
C
N
21.
22.
23.
24.
25.
N
N
C
D
N
26.
27.
28.
29.
30.
C
D
D
D
C
31.
32.
33.
34.
35.
D
C
D
N
N
36.
37.
38.
39.
C
D
D
C
17-35
P17-19 Questions on Fund Items [AICPA Adapted]

a.
16
$700,000 = $630,000 of current years taxes collected plus $70,000 of 20X1

taxes expected to be collected within 60 days after the end of the year
b.
$170,000 = $80,000 of the restricted grant that has been expended, plus
$50,000 in fines plus $40,000 in fees
c.
$50,000 = the fair and present value of the lease agreement
d.
$140,000 = the capital outlay for the new police vehicles
e.
$30,000 = the amount of the transfer in received by the debt service fund and
then expended for interest for the year
f.
18
$760,000 = $260,000 for governmental services and $500,000 for public

safety and welfare services. For this problem, the capital outlay of $140,000
was separately reported in the listing of expenditures. In practice, some
governmental entities include capital outlays in the general fund as an
expenditure under the appropriate functional activity. However, in a capital
projects fund, capital outlays are generally separately reported in the
expenditures reported on the statement of revenues, expenditures, and
changes in fund balances.
g.
$150,000 = the amount of the state grant. The bond proceeds would be
reported as an other financing source.
h.
13
$500,000 = the amount of the expenditures in the capital projects fund
i.
11
$345,000 = Fund Balance-Unreserved on 1/1/X1

Add: Grant revenues
Other financing sources
Less: Expenditures
Fund balance reserved
for encumbrances
on 12/31/X1
17-36
$ 110,000
$150,000
610,000
760,000
$500,000
25,000
(525,000)
$345,000
P17-20 Identifying Types of Revenue Transactions

1. B
2. E
3. D
4. A
5. B
6. E
7. C
8. D
9. C
10. D
11. C
12. D
13. D
14. D
17-37

Chapter 17 - Governmental Entities: Introduction and General Fund Accounting

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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting

Pension trust fund

The purpose of each fund is individually discussed below:

Capital projects fund: Financial resources to be used for the acquisition or