Problem 4-1
The general principles of revenue recognition are the same for both governmental and government-wide statements. For each of the following situations, indicate the amount of revenue that the government should recognize in an appropriate governmental fund as well as in its government-wide statement of activities in its fiscal year ending DECEMEBER 31, 2015. Briefly justify your response, making certain that, as appropriate, you identify the key issue of concern.
In October 2014, a state received a federal grant of $300 million (in cash) to assist local law enforcement efforts. The federal government has established specific criteria governing how the funds should be distributed, and will monitor the funds to ensure that they are used in accordance with grant provisions. The grant is intended to cover any allowable expenditure incurred in the calendar years 2015 through 2015. In 2015, the state incurred $160 millions of allowable expenditures.
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Both the Governmental funds and Government-wide were $300,000,000. It can be noted that this was not a grant reimbursed because the money was received prior to any expenditures were incurred. It, therefore, follows that the total amount of revenue realized can be recognized in 2015.
On October 15, 2015, the Pleasant Valley School District invested $1 million in three-year, 6 percent U.S. Treasury notes. The district intends to hold the notes to maturity. The notes will pay interest ($30,000) on April 15 and October 31, 2015, the market value of the notes was $1,012,000.
The governmental fund was $12,000 while the Government-wide was also the same amount of $12,000. The investments have been reflected both in the statements of Governmental fund and Government-wide.
In December 2014, a city levied property taxes of $500 million for the calendar year 2015. The taxes are due June 30, 2015. The city collects the taxes as follows:
December 2014 $30 million
January 1, 2015 to December 31, 2015 $ 440 million
January 1, 2016 through March 31, 2016 ($8million per month) $ 24 million
Total of $494 million
It estimates the balance will be uncollectible.
The amount of cash in the Governmental fund was $486,000,000 while cash in government-wide was $494,000,000. The general principle applied is that revenue is recognized during the applicable period. However, it should be noted that its availability must be reflected in the statements of the fund.
In January 2015, a city received a cash gift of $1 million to support its museum of city history. Per the wishes of the donor the funds are to be invested and only the income may be expended. In 2015, the endowment generated $50,000. In come, none of which was spent during the year.
Governmental fund was $1,050,000 while Government-wide was $1,050,000. The government can recognize the entire amount of the gift together with interest as revenue. However, the principal is limited to spending. The reporting of the gift should be done in a permanent fund, which is also known to be a Governmental fund.
For the year 2015, the teachers if the Nuvorich School District earned $26 million in pension benefits. In January 2016, the state in which the district is located paid the entire amount into the State Teachers Retirement Fund.
Governmental fund was $26,000,000 and Government-wide was $26,000,000. The benefitting government would have to treat On-behalf benefits as revenue. Their accountability will be done in the same manner as both government funds and government-wide statements.
Exercise 5-2
The Eaton School District engaged in the following transactions during its fiscal year ending August 31, 2015.
It established a purchasing department, which would be accounted for in a new internal service fund, to purchase supplies and distribute them to operating units. To provide working capital for the new department it transferred $1.7 million from its general fund to the internal service fund.
During the year, operating departments that are accounted for in the general fund acquired supplies from the internal service fund for which they were billed $300,000. Of this amount the government transferred $200,000 from the general fund to the internal service fund, expecting to transfer the balance in the following fiscal year. The supplies had cost the purchasing department $190,000. During 2015, the operating departments used only $220,000 of the supplies for which they were billed. They had no supplies on hand at the start of the year.
The school district transferred $150,000 from its general fund to its debt service fund to make its required March 31, 2015 interest payment. This amount was paid from the debt service fund when due. It represented interest on $8 million of bonds that were issued, at par, on September 30, 2014. The next interest payment of $150,000 is due on September 30, 2015. The district also transferred $75,000 from the general fund to the debt service fund to provide for the eventual repayment of principal.
The district transferred $4.5 million from the general fund to its pension fund (a fiduciary fund) in partial payment of its actuarially determined contribution of $5.0 million for the year.
On August 31, the district acquired school buses at a cost of $900,000. The district gave supplier installment notes that required the district to make three annual payments of $361,903. The first payment is due in August 2016. The buses have a useful life of 10years, with no salvage value.
On March 1, the district purchased and paid $150,000 for a one-year insurance policy.
Refer to the two lists below. Select the appropriate amounts from the lettered list for each item in the numbered list. An amount may be selected one, more than once, or not at all.
Amount that the general fund should recognize as supplies expenditure, assuming that inventory is accounted for on a purchases basis. 300,000 (I)
Amount that the district should recognize as a pension expenditure in its general fund: 4.5 Million (L)
Amount that the district should recognize as a pension expense in its government-wide statements. 5 Million (M)
Amount that the general fund should recognize as nonreciprocal transfer-out: $1,925,000 (K)
Amount that the district should recognize as total debt service expenditures in its governmental funds: $150,000 (F.)
Amount that the government should recognize as total debt service expense in it government-wide statements: $275,000 (H)
Amount that the district should recognize as other financing sources in its general fund financial statements: $8,900,000 (O)
Amount that the district should recognize as capital-related expenditures, including depreciation, pertaining to its buses in its governmental fund financial statements (the district recognizes a full year’s depreciation on all capital assets in the year of acquisition): $900,000 (J).
Amount that the district should recognize as capital-related expenses, including depreciation, pertaining to its buses in its government-wide financial statements (the district recognizes a full year’s depreciation on all capital assets in the year of acquisition): $90,000 (D).
Amount that the district should recognize as non-spendable fund-balance in its governmental fund statements: $80,000 (C).
Amount that the district should recognize as a deferred outflow of resources relating to its insurance policy: $0 (A)
$0
$75,000
$80,000
$90,000
$137,500
$150,000
$220,000
$275,000
$300,000
$900,000
$1,925,000
$4,500,000
$5,000,000
$8,000,000
$8,900,000
Problem 6-2
The transaction of a capital projects fund can be derived from its basic financial statements.
Crystal City established a capital projects find to account for the construction of a new bridge. During the year the fund was established, the city issued bonds, signed (and encumbered) $6 million in contacts with various suppliers and contractors, and incurred $4.3 millions of construction costs. It temporarily invested a portion of the bond proceeds and earned $20,000 in interest, which was received in cash. The accompanying statement of revenues, expenditures, and change in fund balance and balance sheet were taken from its year-end financial report. Based on the data in the two statements, as well as those provided on the previous paragraph, prepare journal entries to summarize the transaction in which the fund engaged. You should prepare budgetary entries, but need not to prepare closing entries.
Crystal City, capital Project Fund Statement of Revenue, Expenditures, and Changes in Fund Balance- Actual and Budget Year Ended December 31 (in thousands)
|
Actual |
Budget |
|
| Revenues | ||
| Cash grant from state |
$ 2,000 |
$ 2,000 |
| Interest |
20 |
20 |
|
Total Revenues |
$ 2,020 |
$ 2,020 |
| Expenditures | ||
| Bond issue costs |
$ 50 |
|
| Construction costs |
4,300 |
5,000 |
|
Total expenditures |
$ 4,350 |
$ 5,000 |
| Excess of revenues over expenditures |
$ (2,330) |
$ (3,000) |
| Other financing sources (uses) | ||
| Proceeds bonds |
$ 10,000 |
$ 10,000 |
| Proceeds bonds (premium) |
200 |
|
| Nonreciprocal cash transfer of bond premium (less issue costs) to debt service fund |
(150) |
|
| Increase in reserve for encumbrances |
(1,700) |
|
| Total other financing sources (uses) |
$ 8,350 |
$ 10,000 |
| Excess of revenues and net financing sources over expenditures |
$ 6,020 |
$ 7,000 |
| Fund balance, beginning of year |
0 |
0 |
| Fund balance, end of year |
$6,020 |
$7,000 |
| Crystal City, Capital Projects Fund Balance Sheet as of December 31 (in thousands) | ||
| Assets | ||
| Cash |
$5,320 |
|
| Investments |
5,000 |
|
|
Total assets |
$10,320 |
|
| Liabilities | ||
| Accounts payable (to contractors) |
$ 2,600 |
|
| Fund balance | ||
| Committed |
$ 1,700 |
|
| Assigned |
6,020 |
|
|
Total fund balance |
$ 7,720 |
|
|
Total liabilities and fund balance |
$ 10,320 |
Answer
Crystal City, Capital Projects Fund Statement of Revenues, Expenditures, and Changes
In Fund Balance—Actual and Budget Year Ended December 31 (in thousands)
Actual Budget
Revenues
Interest $20
Grant cash from state $2,000 $2,000
Total $ 2,020 $ 2,000
Expenditures
Costs of construction $4,300 $5,000
Costs of issuing bond $50
Total $ 4,350 $ 5,000
Excess of revenues over expenditures $(2,330) $(3,000)
Other financing sources (uses)
Bonds proceeds $ 10,000 $ 10,000
Proceeds of bonds (premium) 200
Non-reciprocal transfer of cash of premium bond
(Less costs of issue) to debt
Service fund (150)
Encumbrances reserve increases (1,700 ) -
Total $ 8,350 $ 10,000
Excess of revenues and net financing sources
Over expenditures $ 6,020 $ 7,000
Fund balance, beginning of year 0 0
Fund balance, year-end $ 6,020 $ 7,000
Exercise 7-6
The initial value to be assigned to an asset is not always obvious. A city acquired general capital assets as follows:
It purchased new construction equipment. List price was $400,000, but the city was granted a 10 percent “government discount.” The city also incurred 412,000 in transportation costs and paid $4,000 to its own employees to customize the equipment.
The capitalized amount should comprise of all the necessary costs that enable the asset to be brought to a condition that is serviceable. Bearing all these in mind, therefore, the amount assign should include the following:
| Actual amount paid (list price 10% discount) | $360,000 |
| Transportation costs | 12,000 |
| Customization costs | 4,000 |
| Total costs | $376,000 |
It received a donation of land to be set aside for a nature preserve. The land had cost the donor $300,000. At the time of the contribution it was valued on the city’s tax rolls at $1.7 million. However, independent appraisers estimated its fair market value at $1.9 million.
The donated assets by the outsiders should be recorded at their fair market value. This should be done at the period the donation takes place. Therefore, the amount assign here should be $1,900,000.
It constructed a new maintenance facility at a cost of $2 million. During the period of construction, the city incurred an additional $110,000 in interest on funds borrowed to finance the construction.
Indicate the value that the government should assign to these assets. Justify briefly the value you assigned and, as appropriate, indicate any other acceptable alternatives.
There is a contrasting standard between the FASB and GASB regarding capitalization of interest. Whereas FASB standards encourage capitalization of interest, GASB standards prohibit it. The city should therefore assign $2 million to the asset.
