chapter 18-1. chapter 18-2 introduction to accounting for state and local governmental units...

Chapter 18-1

Chapter 18-2

Introduction to Accounting For State and Local Governmental Units

Advanced Accounting, Third Edition

18181818

Chapter 18-3

1. Identify the issues involved in developing standards for nonprofit organizations.

2. Describe the broad categories of government fund entities.

3. Distinguish between a general fund and a special revenue fund.

4. Explain the use of a capital projects fund.

5. Describe the purpose of a debt service fund.

6. Explain the use of a permanent fund.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Chapter 18-4

7. Distinguish proprietary funds from government funds.

8. Describe where capital assets and long-term obligations are reported in government financial statements.

9. Describe the changes in reporting requirements under GASB Statement No. 34.

10. Explain the benefits of government-wide statements.

11. Describe the types of interfund activities.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Chapter 18-5

GASB’s Statement No. 34, issued June 1999, requires:

Financial statements using government-wide approach.

Statements emphasizing major funds.

Management’s discussion and analysis (MD&A).

GASB Statement No. 34 requires “full accrual” accounting for all government-wide statements (i.e., flow of economic resources approach).

Governmental AccountingGovernmental AccountingGovernmental AccountingGovernmental Accounting

Chapter 18-6

GASB was established (1984):

Separate board under oversight of Financial

Accounting Foundation (FAF).

Responsible for establishing financial and reporting standards for governments.

GASB endorsed prior statements and interpretations of the NCGA, as well as standards embodied in the 1974 AICPA Industry Audit Guide.

History of Governmental Accounting History of Governmental Accounting StandardsStandardsHistory of Governmental Accounting History of Governmental Accounting StandardsStandards

Chapter 18-7

Statement of net assets Governmental funds:Statement of activities Balance sheet

Statement of revenues, expenditures, and changes in fund balancesReconciliation to government-wide

statements

Proprietary funds:Balance sheet or statement of net

assetsStatement of revenues, expenses, and changes in net assetsStatement of cash flows—direct format

Fiduciary funds:Statement net assets

Statement of changes in net assets

Reporting Model: Minimum Information Reporting Model: Minimum Information RequiredRequiredReporting Model: Minimum Information Reporting Model: Minimum Information RequiredRequiredGovernment-wide Fund Financial Statements

Chapter 18-8

History of Governmental Accounting History of Governmental Accounting StandardsStandardsHistory of Governmental Accounting History of Governmental Accounting StandardsStandards

The GASB and the FASB each has primary responsibility for setting standards for entities under its jurisdiction.

Pronouncements of one Board should not be mandatory for entities under the jurisdiction of the other Board.

Hierarchy of Standards

Chapter 18-9

Eleven Categories of Fund Entities

Governmental Funds (expendable)—

Focus on sources, use, and balances of current resources.

1. General Fund

2. Special Revenue Funds

3. Capital Projects Funds

4. Debt Service Funds

5. Permanent Funds

The Structure of Governmental The Structure of Governmental AccountingAccountingThe Structure of Governmental The Structure of Governmental AccountingAccounting

Chapter 18-10


Proprietary Funds (nonexpendable)—

Focus on determination of operating income, changes in net assets, financial position, and cash flows.

6. Enterprise Funds

7. Internal Service Funds


Chapter 18-11


Fiduciary Funds

Focus reports assets held in a trustee or agency capacity for others.

8. Pension Trust Funds

9. Investment Trust Funds

10. Private-Purpose Trust Funds

11. Agency Funds


Chapter 18-12

General Fund

All revenues and expenditures of a governmental unit not accounted for in other governmental or proprietary funds.

Governmental Fund EntitiesGovernmental Fund EntitiesGovernmental Fund EntitiesGovernmental Fund Entities

Special Revenue Fund

Proceeds of specific revenue sources that are to be used to finance particular functions or activities of the governmental unit.

Chapter 18-13

In special revenue funds, as in the general fund, the following steps are taken:

1. A budget is established.

2. Encumbrances are used.

3. Fixed assets are only reported on government-wide statement.

4. Depreciation is not recorded.

5. Long-term debt is only reported on government-wide statements.


Chapter 18-14

Capital Projects Fund

Resources to acquire or construct major capital facilities.

Resources for the acquisition include 1) proceeds of long-term debt issues, 2) grants or payments from other governmental

units,3) funds from private sources, 4) transfers from other governmental funds, 5) special assessments, and 6) other sources.


Chapter 18-15

Exercise 18-12 The town of Aberdeen authorized a fire

station to be built at an estimated cost of $150,000. On

January 1, 2008, 6% bonds with a par value of $150,000 were

authorized and issued. Any difference between the par value

of the bonds and the proceeds from their sale is transferred to

the Debt Service Fund. The following transactions relating to

the Capital Project Fund occurred during 2008.

1. Encumbrances were recorded in the amount of $150,000.

2. Proceeds from bond issue were received in amount of

$155,000.

3. Premium on bond issue was transferred to the Debt

Service Fund.

4. Contract billings of $150,000 were approved for payment

on the completion of the fire station.

5. Contractor was paid except for retention of 5% of the

contract.

6. Final contract price was paid. The nominal accounts were

closed.

Governmental Fund Entities – Capital Governmental Fund Entities – Capital ProjectsProjectsGovernmental Fund Entities – Capital Governmental Fund Entities – Capital ProjectsProjects

Chapter 18-16

Exercise 18-12 Prepare the journal entries necessary in the Capital Projects Fund to record the transactions and events.

Encumbrance 150,000

Reserve for Encumbrances150,000

2. Proceeds of $155,000 from bond issue were

received.Cash 155,000

Bond Issue Proceeds 155,000

1. Encumbrances were recorded in the amount of $150,000.


Chapter 18-17


Transfer to Debt Service Fund 5,000

Cash5,000

3. Premium was transferred to the Debt Service Fund.


Chapter 18-18


Reserve for Encumbrances 150,000

Encumbrances150,000

4. Contract billings of $150,000 were approved for payment on the completion of the fire station.

Expenditures 150,000

Contracts Payable 150,000


Chapter 18-19


Contracts Payable 150,000

Contracts Payable - Retained7,500

5. Contractor was paid except for retention of 5% of the contract.

Cash142,500


Chapter 18-20


Contracts Payable - Retained 7,500

Cash7,500

6. Final contract price was paid. The nominal accounts were closed.

Bond Issue Proceeds 155,000

Transfer to Debt Service Fund 5,000Unreserved Fund Balance150,000

Unreserved Fund Balance 150,000



Chapter 18-21

Debt Service Fund

Resources for, and the payment of, general long-term debt principal and interest.

Financed by the following sources 1) General property tax 2) Sales tax or other specified tax revenues3) Transfers of other fund revenues4) Special assessments5) Revenue from investment of debt service

fund resources.


There is no interest payable accrual on general obligation long-term debt.

Chapter 18-22

Problem 18-1 On January 1, 2008, the City of Cape

May authorized and issued $200,000 of 5%, three-year

term bonds. Interest is payable annually on December

31. A debt service fund is established to accumulate

the necessary resources to pay the annual interest on

the bonds and to redeem the bonds when they mature.

The required annual addition for principal and interest

will be transferred annually to the debt service fund

from the general fund. It is assumed that amounts

received by the debt service fund for the payment of

principal can be invested at an annual return of 8%.

Governmental Fund Entities – Debt Governmental Fund Entities – Debt ServiceServiceGovernmental Fund Entities – Debt Governmental Fund Entities – Debt ServiceService

Chapter 18-23

Problem 18-1 Prepare a schedule to calculate the annual required additions and annual required earnings to repay the principal on the bonds assuming the first installment for principal and interest is transferred to the debt service fund from the general fund on Dec. 30, 2008.


RequiredRequired I ncrease RequiredPrincipal Required I n Fund Fund

Year Payment Earnings Balance Balance

2004 61,067 - 61,607 61,607 2005 61,607 4,929 66,536 128,143 2006 61,607 10,250 71,857 200,000

Chapter 18-24

Required Additions 71,607

Required Earnings 4,929

Appropriations ($200,000 5%) 10,000

Fund Balance66,536

Problem 18-1 Prepare the journal entries to be recorded by the debt service fund as follows:

1. The 2009 budget entry.


Chapter 18-25

Cash 71,607

Transfer from General 71,607

2. The entry to record the annual transfer from the

general fund.

Expenditures - Interest 10,000

Cash 10,000

3. The entry to record the annual payment of interest.

Governmental Fund Entities – Debt Governmental Fund Entities – Debt ServiceServiceGovernmental Fund Entities – Debt Governmental Fund Entities – Debt ServiceServiceProblem 18-1 Prepare the journal entries to be recorded by the debt service fund as follows:

Chapter 18-26

Cash 4,929

Interest income 4,929

4. The entry to record $4,929 in interest income for

2009.


Chapter 18-27

Appropriations 10,000

Expenditures 10,000

Interest Income 4,929

Transfer from General Fund 71,607

Required Additions71,607

Required Earnings4,929

5. The entry(s) to close the accounts at the end of

2009.


Chapter 18-28

Permanent Fund

Two types of Nonexpendable Trust funds:

Principal must be retained intact but earnings may be expended.

Principal and the earnings must be retained intact.

Established as a result of a gift, a bequest, or some other action that requires the governmental unit to act in a fiduciary capacity.


Chapter 18-29

Proprietary fund reporting focuses on determination of operating income, changes in net assets, financial position, and cash flows.

Net Assets Approach: All changes in net assets are included somewhere in the “statement of activities.”

Proprietary funds include:

Enterprise Funds.

Internal Service Funds.

Proprietary FundsProprietary FundsProprietary FundsProprietary Funds

Chapter 18-30

Enterprise Funds

Activity for which a fee is charged to external users for goods and services.

Common examples:

Public utilities (water or electricity)

Airports

Transportation systems

Parking lots and garages

Recreational facilities (swimming pools)


Chapter 18-31

Enterprise Funds

Resources may come from contributions or from the proceeds of long-term debt issues or both.

Contributions may be obtained from

Other governmental units,

Resources of the General Fund

Property owners,

Subdivision developers, or

Customers.


Chapter 18-32

Internal Service Funds

Activity that provides goods or services to other funds, departments, or agencies of the primary governmental unit and its component units, or to other governments, on a cost reimbursement basis.

Common examples:

Central computer facilities,

Central garages and motor pools,

Central purchasing and stores departments, and

Central printing departments.


Chapter 18-33

Internal Service Funds

Resources obtained from contributions from

Other funds,

Proceeds from sale of general obligation bonds, or

Long-term advances from other funds.


Chapter 18-34

Trust and Agency Funds

Fiduciary funds are used to report assets held in a trustee or agency capacity and therefore cannot be used to support the government’s own programs.

Fiduciary funds include:

Pension trust funds,

Investment trust funds,

Private-purpose trust funds, and

Agency funds.

Fiduciary FundsFiduciary FundsFiduciary FundsFiduciary Funds

Chapter 18-35

The purchase of capital assets are recorded as an expenditure in the governmental fund statements.

Proceeds from the issuance of long-term debt is recorded as Other Financing Sources in the governmental fund statements.

Under GASB Statement No. 34, governments report all capital assets, including infrastructure assets, and unmatured general long-term debt on a government-wide basis and report depreciation expense as a charge to operations in each period.

Capital Assets and Long-Term DebtCapital Assets and Long-Term DebtCapital Assets and Long-Term DebtCapital Assets and Long-Term Debt

Chapter 18-36

The following statements and disclosures are required:

Governmental Fund Financial Statements

Proprietary Fund Financial Statements

Fiduciary Funds (and Similar Component Units) Financial Statements

Government-wide Statements

Combining Statements for Major Component Units

External Reporting Requirements External Reporting Requirements (GASB (GASB No. 34)No. 34)External Reporting Requirements External Reporting Requirements (GASB (GASB No. 34)No. 34)

Chapter 18-37

Governments are required only to report the major funds in separate columns, but have flexibility to report more funds separately if desired.

Individual governmental funds and proprietary funds are major funds if the total assets, liabilities, revenues, or expenditure/expenses of that individual fund are at least 10% of the corresponding total for the relevant fund category (governmental or enterprise funds) and at least 5% of the corresponding total for all governmental and enterprise funds combined.

Government Fund-Based ReportingGovernment Fund-Based ReportingGovernment Fund-Based ReportingGovernment Fund-Based Reporting

Chapter 18-38

Primary financial statements under GASB Statement No. 34 are prepared on a government-wide basis.

Statements are prepared on the accrual basis using the flow of economic resources concept.

These primary statements include:

1. The statement of net assets.

2. The statement of activities.

Governmental-wide statement of cash flows is not required.

Government-wide ReportingGovernment-wide ReportingGovernment-wide ReportingGovernment-wide Reporting

Chapter 18-39

Statement of Net Assets

Prepared using the accrual basis.

At a minimum, assets, liabilities, and net assets should be disclosed for each of the following categories:

A. Primary Government

1. Government activities

2. Business-type activities

3. Total primary government activities

B. Discretely Presented Component Units


Chapter 18-40

Statement of Activities

Presented using a net cost format.

Separates revenues into program revenues and general revenues.

Expenses are reduced by program revenues resulting in “net (expense) revenue.”

General revenues, extraordinary items and special items, and transfers are reported separately.


Chapter 18-41

Required by GASB Statement No. 34.

Discussion should provide objective and readable analysis of the government’s financial activities.

Should present both a short-term and a long-term analysis of the government’s activities.

Should discuss the current-year results in comparison with the prior year.

Focus is on the primary government (i.e., should distinguish between the primary government and component units).

Management’s Discussion and Analysis Management’s Discussion and Analysis (MD&A)(MD&A)Management’s Discussion and Analysis Management’s Discussion and Analysis (MD&A)(MD&A)

Chapter 18-42

Service-type special assessments - Assessments levied against the benefited property owners for services

Street lighting, street cleaning, and snow plowing.

Capital improvement special assessments - Assessments levied against the benefited property owners for capital improvements

Paving or widening of residential streets or the construction of sidewalks or storm sewers.

Special AssessmentsSpecial AssessmentsSpecial AssessmentsSpecial Assessments

Chapter 18-43

Interfund activity within governmental, proprietary, and fiduciary funds should be reported as follows:

A. Reciprocal interfund activity

1. Interfund loans

2. Interfund services provided and used

B. Nonreciprocal interfund activity

1. Interfund transfers

2. Interfund reimbursements

Interfund ActivityInterfund ActivityInterfund ActivityInterfund Activity

Chapter 18-44

Cash 2,000,000

1. Bond proceeds of $1,000,000 were received to be used in constructing a firehouse. An equal amount is contributed from general revenues.

Governmental Fund Journal EntriesGovernmental Fund Journal EntriesGovernmental Fund Journal EntriesGovernmental Fund Journal Entries

Problem 18-7 Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded.

Capital Projects

Fund Bond issue proceeds 1,000,000

Transfer from General Fund 1,000,000

Transfer to Capital Projects 1,000,000

Cash 1,000,000

General Fund

Chapter 18-45


2. $800,000 of serial bonds matured. Interest of $120,000 was paid on these and other serial bonds outstanding.



Debt Service Fund Cash 920,000

Chapter 18-46

Cash 8,000

3. $8,000 was received as insurance proceeds from the accidental destruction of a police car costing

$24,000.



General Fund

Revenue 8,000

Chapter 18-47

Transfer to Special Revenue 120,000

4. $120,000 in expendable funds was transferred from the City Parks Endowment Fund to the City Parks Special

Revenue Fund.



Trust Fund

Cash 120,000

Cash 120,000Special Revenue Fund Transfer from Trust Fund 120,000

Chapter 18-48

Cash 40,000

5. Equipment purchased from general revenues at a cost of $200,000 was sold for $40,000.



GeneralFund

Revenue 40,000

Chapter 18-49

Due from General Fund 800

6. The City Water Company (an enterprise fund) issued a bill for $800 for water provided to the street department’s street cleaner.



Enterprise Fund

Revenue 800

Expenditures 800General Fund

Due to Enterprise Fund 800

Chapter 18-50

Transfer to General Fund 400,000

7. The City Water Company transferred $400,000 in excess funds to the General Fund.



Enterprise Fund

Cash 400,000

Cash 400,000General Fund

Transfer from Enterprise Fund 400,000

Chapter 18-51

Cash 400,000

8. A central motor pool was established by a contribution of $120,000 from the General Fund, a long-term loan of $80,000 from the City Parks Special Revenue Fund, and general obligation bond issue proceeds of $200,000.


Problem 18-7 Prepare journal entries to record the following transactions in the proper fund(s).

Internal Service Fund Contributions from General Fund 120,000

Due to Special Revenue Fund 80,000

Contributions from bonds 200,000

Continued

Chapter 18-52

Transfer to Internal Service 120,000

8. A central motor pool was established by a contribution of $120,000 from the General Fund, a long-term loan of $80,000 from the City Parks Special Revenue Fund, and general obligation bond issue proceeds of $200,000.



General Fund

Cash 120,000

Due from Internal Service fund 80,000

Cash 80,000

Special RevenueFund

Chapter 18-53

Due from General Fund 10,000

9. The Motor Pool Fund billed the General Fund $10,000 and the City Parks Fund $4,000 for the use of motor vehicles.



Internal ServcieFund Due from Special Revenue 4,000

Expenditures 10,000

Due to Internal Service 10,000

General Fund

Revenue 14,000

Chapter 18-54


10. Special Assessment Bonds in the amount of $400,000 were retired. The city has indicated a willingness to guarantee the payment of principal.



Debt ServcieFund Cash 400,000

Chapter 18-55

11. Customers’ deposits of $8,000 for water meters were received by the City Water Company during the

year. The monies are to be held in trust until the customers request that their services be disconnected and the final bills are collected.

Cash 8,000



Agency Fund

Customer Deposit Agency Fund 8,000

Chapter 18-56

12. It is determined that the Service Fund will require an annual contribution of $60,000 and earnings of

$6,000 in the current year to accumulate the amounts necessary to retire general obligation term bonds.

Required additions 60,000



Debt ServiceFund Retained earnings 6,000

Unreserved fund balance 66,000

Chapter 18-57

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chapter 18-1. chapter 18-2 introduction to accounting for state and local governmental units...

Documents

government funds

permanent funds

enterprise funds

major funds

gasb statement

debt service funds

capital projects funds

net assets statement