Chapter 4

Recognizing Revenue in Governmental Funds

/(CHAPTER 4)

1. If an entity elects to focus on all economic resources, then it should adopt a modified accrual basis of accounting.

2. The majority of revenue transactions recognized by governments are exchange transactions, like those of businesses.

3. Governmental activities tend to derive most of their revenues from foreign exchange transactions.

4. In accounting for property taxes, under the modified accrual basis, existing standards provide that, except in unusual circumstances, revenues should be recognized only if cash is expected to be collected by year-end.

5. Ad valorem taxes are taxes that are based on value.

6. Income taxes are classified as ad valorem taxes.

7. Sales taxes are derived taxes on exchange transactions carried on by taxpayers.

8. Revenues that cannot be classified as general revenues are by default considered program revenues.

9. Taxes that are imposed on the reporting government’s citizens are considered general revenues, even if they are restricted to specific programs.

10. Current financial resources include cash and receivables but not investments.

11. Under the modified accrual basis, revenues are “available” if they are collected within the current period or are expected to be collected soon enough after the end of the period to be used to pay liabilities of the current period.

ANSWERS TO /(CHAPTER 4)

11.

MULTIPLE CHOICE (CHAPTER 4)

1. As used in governmental accounting, interperiod equity refers to a concept of
   1. providing the same level of services to citizens each year.
   2. measuring whether current year revenues are sufficient to pay for current year services.
   3. levying property taxes at the same rate each year.
   4. requiring that general fund budgets be balanced each year.
2. For fund financial statements, the measurement focus and basis of accounting used by governmental fund types are
   1. current financial resources and modified accrual accounting.
   2. economic resources and modified accrual accounting.
   3. current financial resources and full accrual accounting.
   4. economic resources and full accrual accounting.
3. The modified accrual basis of accounting is used in presenting the fund financial statements of the governmental funds because
   1. it is the superior method of accounting for the economic resources of any entity.
   2. it ensures the entity achieved interperiod equity.
   3. facilitates comparisons among entities by standardizing reporting for all non-Federal governments
   4. it results in accounting measurements based on the substance of transactions.
4. As used in defining the modified accrual basis of accounting, the term “available” means
5. received in cash.
6. will be received in person within 60 days after year-end.
7. collection in cash is reasonably assured.
8. collected within the current period or expected to be collected soon enough thereafter to be used to pay liabilities of the current period.

5. Under the modified accrual basis of accounting, derived nonexchange revenues are recognized when

• 1. they are anticipated to be paid.
  2. they are measurable and available to finance the expenditures of the current period.
  3. the underlying transaction occurs.
  4. the underlying transaction occurs and they are measurable and available to finance the expenditures of the current period.

6. Under the accrual basis of accounting, property tax revenues are recognized

1. when they are received in cash.
2. in the year for which they were levied.
3. in the year for which they were levied and when collection in cash is reasonably assured.
4. when they are available to finance expenditures of the fiscal period.

7. Under the modified accrual basis of accounting, the amount of property tax revenues that should be recognized by a government in the current year related to the current-year levy will be

1. the total amount of the levy.
2. the expected collectible portion of the levy.
3. the portion of the levy collected.
4. the portion of the levy collected in the current year or within sixty days after the end of the fiscal period.
5. Under the modified accrual basis of accounting, investment revenues for the current period should include
6. only interest and dividends received.
7. all interest and dividends received during the period plus all accruals of interest and dividends earned.
8. all interest and dividends received plus gains and losses on securities that were sold during the period.
9. all interest and dividends received, all gains and losses on securities sold, and all changes in market values on securities held in the portfolio at year-end.
10. Under the modified accrual basis of accounting used by governments, transactions that result in long-term liabilities
11. are included on the fund statements as an expenditure.
12. are included as a contra-account to revenue.
13. are not recorded as expenditures.
14. hidden for 10 years from the taxpayers.

10. Under the modified accrual basis of accounting, imposed nonexchange revenues (such as fines) should be recognized

• 1. when assessed.
  2. when the government has an enforceable legal claim.
  3. when collected.
  4. when the government has an enforceable legal claim and when collected within the current period or soon enough thereafter to be used to pay the liabilities of the current period.

11. Under the accrual basis of accounting, imposed nonexchange revenues (such as fines) should be recognized

a) when assessed.

b) when the government has an enforceable legal claim.

c) when collected.

d) when the government has an enforceable legal claim and when collected within the current period or soon enough thereafter to be used to pay the liabilities of the current period

12. Gifts of capital assets are recorded in

1. proprietary fund, if use is related to the purpose of that fund
2. general fund, if use is related to the overall general government function and is planned to be held (not sold)
3. capital assets, if use is related to the overall general government function and is planned to be held (not sold)
4. I
5. II
6. III
7. I and III

13. Under the accrual basis of accounting, gains and losses on disposal of capital assets

1. are not recognized.
2. are recognized when the proceeds (cash) of the sale are received (on the installment basis).
3. are recognized only if there is a gain.
4. are recognized when the sale occurs, regardless of when the cash is collected.

14. Under the modified accrual basis of accounting, license fees, permits, and other miscellaneous revenue are generally recognized for practical purposes

1. when cash is received.
2. when the exchange takes place.
3. over the period during which the government obtains an enforceable legal claim.
4. when related expenditures are incurred.

15. In government-wide statements of activities are reported in ___ separate columns

a) two

b) three

c) five

d) one column for each function.

16. Echinacea City that has property taxes of $720,000 (of which 10 percent are estimated to be uncollectible) which are levied in October 2022 to finance the activities of the fiscal year 2023. During 2023, cash collections related to property taxes levied in October 2022 were $600,000. In 2024 the following amounts related to the property taxes levied in October 2022 were collected: January $30,000; March, $6,000. For the fiscal year ended 12/31/23, what amount should be recognized as property tax revenues related to the 2022 levy on the governmental fund financial statements?

a) $720,000.

b) $648,000.

c) $630,000.

1. $600,000.

17. Iberis City that has property taxes of $720,000 (of which 10 percent are estimated to be uncollectible) which are levied in October 2022 to finance the activities of the fiscal year 2023. During 2023, cash collections related to property taxes levied in October 2022 were $600,000. In 2024 the following amounts related to the property taxes levied in October 2022 were collected: January $30,000; March $6,000. For the fiscal year ended 12/31/23, what amount should be recognized as property tax revenues related to the 2022 levy on the government-wide financial statements?

• • • 1. $720,000.
      2. $648,000.
      3. $630,000.
      4. $600,000.

18. The city of Ranunculus that has a 12/31 fiscal year end has adopted a policy of recognizing property tax revenue consistent with the 60-day rule allowable period under GAAP. Property taxes of $600,000 (of which none are estimated to be uncollectible) are levied in October 2022 to finance the activities of fiscal year 2023. Property taxes are due in two installments June 20 and December 20. Cash collections related to property taxes are as follows:

1/15/23 for property taxes levied in 2015, due in 2022 $ 25,000

2/15/23 for property taxes levied in 2015, due in 2022 $ 15,000

3/15/23 for property taxes levied in 2015, due in 2022 $ 10,000

6/20/23 First installment of taxes levied in 2022, due 6/20/23 $350,000

12/20/23 Second installment of taxes levied in 2022, due 12/20/23 $150,000

1/15/24 for property taxes levied in 2022, due in 2023 $ 15,000

2/15/24 for property taxes levied in 2022, due in 2023 $ 10,000

3/15/24 for property taxes levied in 2022, due in 2023 $ 5,000

The total amount of property tax revenue that should be recognized in the governmental fund financial statements in 2023 is:

1. $600,000.
2. $575,000.
3. $535,000.
4. $525,000.

19. Ursinia City that has a 12/31 fiscal year end has adopted a policy of recognizing property tax revenue consistent with the 60-day rule allowable period under GAAP. Property taxes of $600,000 (of which none are estimated to be uncollectible) are levied in October 2022 to finance the activities of fiscal year 2023. Property taxes are due in two installments June 20 and December 20. Cash collections related to property taxes are as follows:

1/15/23 for property taxes levied in 2015, due in 2022 $ 25,000

2/15/23 for property taxes levied in 2015, due in 2022 $ 15,000

3/15/23 for property taxes levied in 2015, due in 2022 $ 10,000

6/20/23 First installment of taxes levied in 2022, due 6/20/23 $350,000

12/20/23 Second installment of taxes levied in 2022, due 12/20/23 $150,000

1/15/24 for property taxes levied in 2022, due in 2023 $ 15,000

2/15/24 for property taxes levied in 2022, due in 2023 $ 10,000

3/15/24 for property taxes levied in 2022, due in 2023 $ 5,000

The total amount of property tax revenue that will be recognized in the government-wide financial statements in 2023 is:

a) $600,000.

b) $575,000.

c) $535,000.

d) $525,000.

20. Under GAAP, property taxes levied in one fiscal period to finance the activities of the following fiscal period are recognized as revenue in the government-wide financial statements

a) in the year levied.

b) in the year for which they are intended to finance the activities.

c) when collected, regardless of when levied.

d) in the year for which they are intended to finance the activities, if collected within that period or within a period no greater than 60 days after the close of the fiscal year.

21. Uva Ursi City levies a 2 percent sales tax. Sales taxes must be remitted by the merchants to the City by the twentieth day of the month following the month in which the sale occurred. Cash received by the city related to sales taxes is as follows:

Amount received 1/20/23, applicable to December 2022 sales $100

Amount received 2/20/23, applicable to January 2023 sales $ 30

Amount received during 2023 related to February-November 2023 sales $400

Amount received 1/20/24 for December 2023 sales $110

Amount received 2/20/24 for January 2023 $ 40

Assuming the city uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize in the governmental fund financial statements as sales tax revenue for the fiscal year ended 12/31/23?

a) $430.

b) $530.

c) $540.

d) $550.

22. Yellow Bell City levies a 2 percent sales tax. Sales taxes must be remitted by the merchants to the city by the twentieth day of the month following the month in which the sale occurred. Cash received by the city related to sales taxes is as follows:

Amount received 1/20/23, applicable to December 2022 sales $100

Amount received 2/20/23, applicable to January 2023 sales $ 30

Amount received during 2023 related to February-November 2023 sales $400

Amount received 1/20/24 for December 2023 sales $110

Amount received 2/20/24 for January 2024 $ 40

Assuming the city uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize in the government-wide financial statements as sales tax revenue for the fiscal year ended 12/31/23?

a) $430.

b) $530.

c) $540.

d) $550.

23. Zenobia City levies a 2 percent sales tax that is collected for them by the state. Sales taxes must be remitted by the merchants to the state by the 20^th day of the month following the month in which the sale occurred. The state has a policy of remitting sales taxes to the city within 30 days of collection by the state. Cash received by the state related to sales taxes is as follows:

Amount received 1/20/23, applicable to December 2022 sales $100

Amount received 2/20/23, applicable to January 2023 sales $ 30

Amount received 3/20/23, applicable to February 2023 sales $ 20

Amount received during 2023 related to March-November 2023 sales $380

Amount received 1/20/24 for December 2023 sales $110

Amount received 2/20/24 for January 2024 $ 40

Amount received 3/20/24 for February 2024 $ 10

Assuming the city uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize as sales tax revenue in its governmental fund financial statements for the fiscal year ended 12/31/23?

a) $430.

b) $530.

c) $540.

d) $550.

24. Clematis City levies a 2 percent sales tax that is collected for them by the state. Sales taxes must be remitted by the merchants to the state by the twentieth day of the month following the month in which the sale occurred. The state has a policy of remitting sales taxes to the city within 30 days of collection by the state. Cash received by the state related to sales taxes is as follows:

Amount received 1/20/23, applicable to December 2022 sales $100

Amount received 2/20/23, applicable to January 2023 sales $ 30

Amount received 3/20/23, applicable to February 2023 sales $ 20

Amount received during 2023 related to March-November 2023 sales $380

Amount received 1/20/24 for December 2023 sales $110

Amount received 2/20/24 for January 2024 $ 40

Amount received 3/20/24 for February 2024 $ 10

Assuming the city uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize as sales tax revenue in its government-wide financial statements for the fiscal year ended 12/31/23?

a) $430.

b) $530.

c) $540.

d) $550.

25. During 2023, a state has the following cash collections related to state income

taxes

Payroll withholdings and estimated payments related to 2023 income $360

4/15/23 Balance of 2022 (net of $10 refunds) income taxes $ 40

1/15/24 payroll withholdings and estimated payments related to 2023 income $ 30

2/15/24 payroll withholdings and estimated payments related to 2023 income $ 35

3/15/24 payroll withholdings and estimated payments related to 2024 income $ 25

4/15/24 Balance of 2023 (net of $5 refunds) income taxes $ 45

Assuming that the state defines “available” as the maximum period allowable for property taxes, what is the amount of revenue that will be recognized in the 2023 governmental fund financial statements related to state income taxes?

a) $400.

b) $430.

c) $465.

d) $490.

26. During 2023, a state has the following cash collections related to state income

taxes

Payroll withholdings and estimated payments related to 2023 income $360

4/15/23 Balance of 2022 (net of $10 refunds) income taxes $ 40

1/15/24 payroll withholdings and estimated payments related to 2023 income $ 30

2/15/24 payroll withholdings and estimated payments related to 2023 income $ 35

3/15/24 payroll withholdings and estimated payments related to 2023 income $ 25

4/15/24 Balance of 2023 (net of $5 refunds) income taxes $ 45

Assuming that the state defines “available” as the maximum period allowable for property taxes, what is the amount of revenue that will be recognized in the 2023 government-wide financial statements related to state income taxes?

a) $400.

b) $475.

c) $430.

d) $465.

27. Under GAAP, income tax revenues should be recognized in the government-wide financial statements in the accounting period

a) when collected in cash by the taxing authority.

b) in which the underlying income was earned, regardless of when collected.

c) in which the underlying income was earned, if collected in the current period or soon enough thereafter to pay liabilities of the current period.

d) when earned.

28. Clover City with a 12/31 fiscal year-end requires that restaurants buy a license, renewable yearly. Proceeds of the license fees are intended to pay the salaries of inspectors in the health department. Licenses are issued for a fiscal year from October 1 to September 30. During 2023, cash collections related to licenses were as follows

Licenses issued during 2022 for the 10/1/22-9/30/23 fiscal year $ 30

Licenses issued during 2023 for the 10/1/23-9/30/24 fiscal year $180

It is anticipated that during 2024 the amount collected on licenses for the 10/1/23-9/30/24 fiscal year will be $45. In September 2022 the amount collected related to 10/1/22-9/30/23 licenses was $144. What amount should be recognized as revenue in the fund financial statements for the fiscal year ended 12/31/23?

1. $180.
2. $183.
3. $210.
4. $225.

29. During 2023, the city of Marigold issued $300 in fines for failure to keep real property in ‘acceptable’ condition. During that period the city spent $200 to mow and clean up the unoccupied properties for which the fines were assessed. The city estimates that $30 of the fines issued in 2023 will be uncollectible. During 2023 the city collected $230 related to 2023 fines and $20 related to 2022 fines. The amount of revenue that the city should recognize in its 2023 governmental fund financial statements related to fines is

1. $230.
2. $250.
3. $270.
4. $300.

30. Last year the city of Nemesia received notice of a $150,000 grant from the state to purchase vehicles to transport physically challenged individuals. During the current year the city received the entire $150,000, purchased a bus for $65,000, and issued a purchase order for a van for $60,000. The grant revenue that the city should recognize on the government-wide financial statements in the current year is

1. $-0-.
2. $ 65,000.
3. $125,000.
4. $150,000.

31. Ox Eye City receives notice of a $150,000 grant from the state to purchase vans to transport physically challenged individuals. Although the city did not receive any of the grant funds during the current year, the city purchased a bus for $65,000 and issued a purchase order for a van for $60,000. The grant revenue that the city should recognize in the government-wide financial statements in the current year is

1. $-0-.
2. $ 65,000.
3. $125,000.
4. $150,000.

32. Payments made to a state pension plan by the state government on behalf of a local government should

1. not be displayed or disclosed in the local government financial statements.
2. be displayed as a revenue in the local government financial statements.
3. be displayed as both a revenue and an expenditure in the local government financial statements.
4. be disclosed, but not displayed, in the local government financial statements.

33. Unrestricted grant revenues with a time requirement should be recognized

1. when the award is announced.
2. when the cash is received.
3. in the period in which the grant is required to be used.
4. when expenditures are recognized on grant-related activities.

34. Reimbursement-type grant revenues are recognized in the accounting period in

which

1. the award is made.
2. the cash is received.
3. the grantee is notified of the award.
4. expenditures are recorded on grant-related activities.

35. At the beginning of its fiscal year, the local government of Queen Anne’s Lace Township was given 100 acres that the town council voted to use as a central park and business center. The land had an historical cost of $100 but was appraised at the time of donation at $500. The amount that should be recognized on the governmental fund financial statements for the year as revenue is

1. $-0-.
2. $100
3. $400
4. $500

36. Under GAAP, investment income for governments must include

1. only dividends and interest received during the period.
2. only dividends and interest earned during the period.
3. only realized gains and losses.
4. dividends and interest received during the period and both realized and unrealized gains and losses

37. The government of Cedar County is the recipient of a bequest of a multi-story office building that the government intends to use as a new city hall. The building has a historical cost of $850,000; a book value in the hands of the benefactor of $700,000; and a fair value of $1,050,000. The city should recognize on its government-wide financial statements donations revenue of

1. $-0-.
2. $700,000.
3. $850,000.
4. $1,050,000.

38. The Bottlebrush County government is the recipient of a bequest of a multi-story office building that the government intends to sell to support program activities. The building has a historical cost of $850,000, a book value in the hands of the benefactor of $700,000, and a fair value of $1,050,000. The city had not yet begun to try to sell the building when its annual financial statements were issued. The city should recognize on its governmental fund financial statements, donations revenue of

1. $-0-.
2. $700,000.
3. $850,000.
4. $1,050,000.

39. Freesia City is the recipient of a cash bequest of $500,000 that must be used to plant flowers and shrubs in the city parks. During the year only $200,000 is actually received from the bequest and $150,000 is spent on shrubs. The amount that should be recognized as revenue by the city in its government-wide financial statements in the current year is

• • 1. $-0-.
    2. $150,000.
    3. $200,000.
    4. $500,000.

40. State governments should recognize food stamp revenue

1. when they receive the food stamps.
2. with an offsetting expenditure.
3. when the recipient uses the food stamps
4. never. Food stamps are not financial resources.

41. An anonymous benefactor has pledged to give the state of Balsa a gift of $100,000 without criteria for the state to meet. There is no reason to believe that the benefactor will not honor their pledge. The government should recognize revenue as

• • • 1. immediately as cash
      2. deferred inflow of resources until “available” to meet current liabilities
      3. ratably over 30 years.
      4. never. The contributions themselves cannot be used to support the government’s programs.

42. For purposes of recognizing property tax revenues in governmental funds, “available” is defined as

1. revenues received within 90 days after year-end.
2. revenues received within 60 days after year-end.
3. revenues received within 120 days after year-end.
4. being up to the judgment of the preparer.

43. Which of the following are not characterized as non-exchange revenues?

1. Sales taxes
2. Property taxes.
3. Fines and forfeits.
4. Charges for services.

44. Which of the following are derived tax revenues?

• • • • 1. Income taxes.
        2. Sales taxes.
        3. Both of the above.
        4. Neither of the above

45. A wealthy philanthropist donates three buildings to Hypericum. Each building has a fair market value of $5 million. The town plans to use Building 1 as a new fire station and sell Buildings 2 and 3.

Building 2 is sold after year-end, but within the availability period. Building 3 fails to sell by the time the town issues the financial statements. Which of the following correctly records revenue from these donations in the governmental fund financial statements?

a) Buildings $15 million

Revenue from donations 15 million

b) Buildings held for sale $10 million

Donated building (deferred inflow) $5 million

Revenue from donations 5 million

c) Building held for sale $5 million

Donated buildings (deferred inflow) $5 million

d) Buildings held for sale $5 million

Revenue from donations $5 million

46. Petunia City received payment of two grants from the state during its fiscal year ending September 30, 2022. Grant A can be used to cover any operating expenses incurred during fiscal 2023. Grant B can be used at any time to acquire equipment for the city’s fire department. Should the city report these grants as grant revenues or deferred inflows in its governmental fund financial statements for fiscal 2022?

State Grant--

Grant Revenue Deferred Inflow

a) Grants A and B Neither grant

b) Grant B Grant A

c) Grant A Grant B

d) Neither grant Grants A and B

47. Poinsettia City received payment of two grants from the state during its fiscal year ending September 30, 2022. Grant A can be used to cover any operating expenses incurred during fiscal 2023. Grant B can be used at any time to acquire equipment for the city’s fire department. Should the city report these grants as grant revenues or deferred inflows in its government-wide financial statements for fiscal 2022?

State Grant--

Grant Revenue Deferred Inflow

a) Grants A and B Neither grant

b) Grant B Grant A

c) Grant A Grant B

d) Neither grant Grants A and B

PROBLEMS (CHAPTER 4)

1. Begonia City maintains its books and records in a manner that facilitates the preparation of fund financial statements. Prepare all necessary journal entries to record the following events related to property tax revenues for the year ended December 31, 2023. The city has adopted the 60-day rule for property tax revenue recognition.

a. On January 3, 2023 the city council levied property taxes of $2 million to support general government operations, due in two equal installments on June 20 and December 20, 2023. The property taxes were levied to finance the 2023 budget, which had been adopted on November 3, 2022. Historically 2 percent of property taxes are uncollectible.

b. The city collected the following amounts related to property taxes

Delinquent 2022 taxes collected in January 2023 $ 22,000

Delinquent 2022 taxes collected in March 2023 $ 25,000

2023 taxes collected in June 2023 $ 1,080

2023 taxes collected in December 2023 $ 800,000

Delinquent 2023 taxes collected in January 2024 $ 20,000

Delinquent 2023 taxes collected in March 2024 $ 30,000

c. Property taxes due in 2023 but uncollected by the December due date were reclassified as delinquent.

1. $4,000 of 2015 taxes were written off during 2023.

2. The City of Kalmia levies a local sales tax that is collected by the merchants and remitted to the city by the twentieth day of the month following the month of sale. The city maintains its books and records in a manner that facilitates the preparation of fund financial statements. The city has adopted a 60-day rule for sales tax revenue recognition, where appropriate. Prepare all necessary journal entries to record the following transactions related to sales tax revenues for the year ended December 31, 2014.

a.) On January 20, the city receives sales tax returns and related payments of $7,000 from the merchants of the city for the month of December 2013.

b.) On February 20, the City receives sales tax returns and related payments of $3,000 from the merchants of the City for the month of January 2014.

1. During 2014 the City receives sales tax returns and related payments of $40,000 from the merchants for the months of February-November 2014.

d.) On January 20, 2015 the city receives sales tax returns and related payments of $7,500 from the merchants of the city for the month of December 2014.

3. The City of Knautia maintains its books and records in a manner that facilitates the preparation of fund financial statements. Prepare all necessary journal entries to record the city’s revenues from the following transactions for the year ended December 31, 2023.

a.) On January 15, the city received notification that it had been awarded a $300,000 federal grant to assist in the operation of its “Meals on Wheels” program. The federal government expects to send the cash in about three months. This is not a reimbursement type grant and all eligibility requirements have been met.

b.) In February the city spent $31,000 on “Meals on Wheels.”

c.) In March, fines of $1,800 were issued for parking tickets. Payment must be made within 30 days, when the city has an enforceable legal claim to the amounts.

d.) In April, the city received the $300,000 grant from the federal government.

e.) In April, the city received $1,200 cash in payment of parking tickets issued in March. In addition, $100 of tickets was contested and court dates have been set. Also, the city expects another that $100 of tickets will be uncollectible but the remaining amounts will be paid eventually.

f.) Restaurant licenses are issued for a one-year period, from July 1 to June 30. The license fees are used to pay restaurant inspectors. In June, the city received $11,000 in restaurant license fees.

1. The City of Jaborosa maintains its books and records in a manner that facilitates the preparation of fund financial statements. Prepare all necessary journal entries to record the city’s investment income and related transactions for the year 2023. The city has a 12/31 fiscal year-end. All of the City’s investments are required to be reported at fair value. The beginning securities portfolio held by the general fund was as follows:

January 1, 2023

Securities Historical Cost Market Value

A $90 $ 95

B $110 $100

C $300 $330

D $120 $125

a.) Dividends received related to investments held in the general fund, $75.

b.) On March 1, Security B is sold for $105.

c.) On April 1, Security E is purchased for $145

d.) On May 1 Security D is sold for $140.

1. On December 31, necessary adjusting entries are made to recognize appropriate amounts of gains/losses associated with the securities. The market values of the securities at year-end were as follows:

Dec. 31, 2023

Securities Historical Cost Market Value

A $90 $90

C $300 $310

E $145 $135

5. The City of Cosmos received two contributions during its current fiscal year:

• A developer contributed 10 acres of land as part of an agreement with the city to allow more houses to be built per acre than current zoning laws permit. The city will use the land to build a park. The developer purchased the land for $1.5 million. The fair value of the land at the time of the contribution was $1.9 million.
• A local resident contributed 30 acres of land to the city. The city agreed that it would sell the land and use the proceeds to add a new wing to the city’s senior center. The resident paid $500,000 for the land. When it was contributed, it had a fair value of $1.5 million. The city sold the land to several developers a month after its fiscal year-end for $1.7 million.
  1. Prepare journal entries to record each of these contributions in the city’s general fund.
  2. Comment on and justify any differences in the way you recognized each of these transactions.
  3. Would your answer on the contribution for the senior center be different if the city had been unable to sell the land before its financial statements were issued?
  4. How would each of these transactions be reported in the city’s government-wide financial statements?

6. Carob County reported the following transactions during its fiscal year ended December 31, 2023:

• • • On February 16, 2023, the county purchased a 15-year $100,000 bond for $99,800 with cash held in a debt sinking fund. During the year, the county received $3,000 in interest. At year-end, the market value of the bond was $99,950.
    • In December 2022, the Kunzite Foundation pledged up to $3 million to support the county’s Art Museum. The foundation will contribute $1 for every $2 in admissions revenue generated by the Art Museum. During 2023, the Art Museum reported $4.0 million in admissions revenue. During January and February 2024, it reported an additional $1.0 million. The county received the matching contributions for both admissions amounts.
    • During the year, the county agreed to impose a license fee on all tanning salons operated in the county. Licenses cover the period July 1, 2023 to June 30, 2024. The county received license revenues of $150,000.
    • The county sold two police cars for salvage totaling $7,500. It had purchased the cars five years earlier at $30,000 each. The county had fully depreciated the police cars in its government-wide financial statements and a total salvage value of $5,000 had been anticipated.
    • The county received a $1.5 million grant from the state to reimburse the cost of its DAIKON program. The county incurred DAIKON program costs of $1.0 million during 2023 and an additional $500,000 in January and February 2024.

Match the items below with the amounts that follow. All amounts are for the year ended December 31, 2023. An amount may be selected once, more than once, or never.

• 1. Amount of investment income (interest, dividends, realized and unrealized gains and losses) recognized by the county in its debt service fund.
  2. Amount of investment income (interest, dividends, realized and unrealized gains and losses) recognized by the county in its government-wide financial statements.
  3. Amount recognized in the county’s general fund on the sale of its police cars.
  4. Gain/loss recognized on the sale of police cars in the county’s government-wide financial statements.
  5. DAIKON grant revenues recognized in the County’s government-wide financial statements.
  6. DAIKON grant revenues recognized in the county’s special revenue fund.
  7. Contributions from the Kunzite Foundation in the county’s Museum Fund (a special revenue fund).
  8. Contributions from the Kunzite Foundation reported in the County’s government-wide financial statements.
  9. License fee revenue reported in the county’s general fund.
  10. License fee revenue reported in the county’s government-wide financial statements.
  11. Reported value at December 31, 2023 of the county’s investment.
      1. $0
      2. $3,150
      3. $3,000
      4. $150,000
      5. $2,000,000
      6. $1,000,000
      7. $3,000,000
      8. $500,000
      9. $100,000
      10. $99,950
      11. $99,800
      12. $2,500,000
      13. $7,500
      14. $2,500

7. In addition to exchange revenues, GASB standards discuss four categories of nonexchange revenues. For each of the following revenues recognized by a city indicate the category into which it best fits.

• 1. A state grant that the city must accept and use to hire air pollution inspectors

________________________

• 1. Revenue from fees charged by the police department to monitor a charity bicycle ride

_______________________

• 1. Fines for traffic violations

_______________________

• 1. A federal grant to support general education services.

_______________________

• 1. Investments in the state’s investment pool.

________________________

• 1. Hotel occupancy tax.

________________________

• 1. Local option sales tax

________________________

• 1. City library late fees

________________________

8. On December 30, 2022, Feijoa County purchases a new snow plow for $100,000. On January 2, 2023, the snow plow is seriously damaged in an accident. The plow is uninsured. Soon after the accident, the county is able to sell the snow plow for $10,000.

(a) Record the purchase of the snow plow in the county’s general fund.

(b) Record the sale of the snow plow.

(c) How would the sale of the snow plow affect the general fund’s operating statement?

(d) How would the sale of the snow plow affect the governmental activities column of the government-wide statement of activities?

(e) Explain the rationale for the difference between the information conveyed in the fund operating statement vs. the government-wide statement of activities in relation to the snow plow.

ANSWERS TO PROBLEMS (CHAPTER 4)

Problem 1

(a) Property taxes receivable $2,000,000

Allowance for uncollectible property taxes $ 40,000

Property tax revenue $1,960,000

To record property tax levy for 2023

(b) Cash $ 47,000

Property taxes receivable--delinquent $ 47,000

To record 2022 delinquent taxes receipts

Property taxes (deferred inflow) $ 25,000

Property tax revenue $ 25,000

To record 2022 revenue not “available” in 2022

(Note: This entry would be needed if a deferred inflow was recorded in 2022.)

Cash $ 1,880

Property taxes receivable $ 1,880

To record 2023 property tax receipts

Property tax revenue $ 50,000

Property tax revenue (deferred inflow) $ 50,000

To report 2023 property tax revenues not “available” to finance the current period

(c) Property taxes receivable--delinquent $ 120,000

Property taxes receivable $ 120,000

To reclassify property taxes receivable as delinquent

Allowance for uncollectible property taxes $ 40,000

Allowance for uncollectible property taxes

--delinquent $ 40,000

To reclassify allowance for delinquent property taxes receivable

(d) Allowance for uncollectible property taxes

--delinquent $ 4,000

Property taxes receivable--delinquent $ 4,000

To write-off delinquent 2015 property taxes receivable

Problem 2

(a) Cash $ 7,000

Sales taxes receivable $ 7,000

(b) Cash $ 3,000

Sales tax revenue $ 3,000

(c) Cash $40,000

Sales tax revenue $40,000

(d) Dec. 31, 2023

Sales taxes receivable $7,500

Sales tax revenue $7,500

January 20, 2024

Cash $ 7,500

Sales taxes receivable $ 7,500

Problem 3

(a) Federal grant receivable $300,000

Grant revenue $300,000

(b) Expenditures $ 31,000

Cash $ 31,000

(c) No entry required; there is no enforceable legal claim.

(d) Cash $300,000

Federal grant receivable $300,000

(e) Cash $ 1,200

Fines receivable 500

Fines revenue $ 1,200

Allowance for uncollectible

accounts—fines 100

Fines—defer inflows 400

(No entry for the $100 contested tickets; there is no enforceable legal claim.)

(f) Cash $11,000

License revenue $11,000

Problem 4

(a) Cash $ 75

Dividend revenue $ 75

(b) Cash $105

Investments $105

Or Cash $105

Investments $100

Investment gains and losses 5

(c) Investments $145

Cash $145

(d) Cash $140

Investments $140

Or Cash $140

Investments $125

Investment gains and losses 15

(e) Loss on investments $ 15

Investments $ 15

To recognize realized and unrealized changes in fair value of investments.*

Or Investment gains and losses $ 35

Investments $ 35

To recognize changes in fair value in investments.

*Change in fair value is calculated as follows:

Outputs:

Fair value at 12/31/2023 $535

Sales 245

Total outputs $ 780

Inputs:

Fair value at 1/1/2023 $650

Purchases 145

Total inputs 795

Increase (decrease) in fair value $ (15)

Problem 5

a.

Land to be used as a park

No entry. General capital assets are not recognized in governmental funds.

Land to be sold

Land held for sale $1.5

Revenue from donations $1.5

To record donation of land (at fair market value at time of contribution)

Cash   $1.7

Land held for sale $1.5

Gain on sale of land 0.2

To record the sale of the land in the second year

b. Capital assets are not generally recorded in governmental funds because their measurement focus is on current financial resources. However, owing to the intent of the city, the land held for sale has the characteristics of an investment rather than a capital asset. Therefore it should be accounted for as an investment and recorded in a governmental fund (the general fund, in this problem).

c. Yes, the entry at fair value at the time of contribution would have been to contributions—deferred inflows, not a revenue account.

d. In the city’s government-wide statements, both parcels of land would be recorded as assets and correspondingly both gifts would be recognized as revenue at their fair value at the date that they were contributed.

Problem 6

• 1. 2
  2. 2
  3. 13
  4. 14
  5. 6
  6. 6
  7. 5
  8. 5
  9. 4
  10. 4
  11. 10

Problem 7

A. A state grant that the city must accept and used to hire air pollution inspectors

Government-mandated non-exchange

B. Revenue from fees charged by the police department to monitor a charity bicycle ride

Exchange

C. Fines for traffic violations

Imposed nonexchange

D. A federal grant for general education

Voluntary nonexchange

E. Investments in the state’s investment pool.

Exchange

F. Hotel occupancy tax

Derived nonexchange

G. Local option sales tax

Derived nonexchange

H. City library late fees

Imposed nonexchange

Problem 8

(a) General fund

Expenditures $100,000

Cash (or Accounts payable) $100,000

(b) General fund

Cash $10,000

Other financing source—

sale of vehicle $10,000

(c) The $10,000 other financing source would be reported below the revenue and expenditures sections as an increase in current financial resources and therefore would increase the net change in fund balance for the year and the year-end fund balance of the general fund.

(d) Assuming no depreciation has been charged, the government-wide statement of activities would report a loss of $90,000 (cost of $100,000 less sales price of $10,000).

(e) The government-wide financial statements are on full accrual/economic resources. Therefore, the purchase of the snow plow results in recording a capital asset of $100,000. Assuming no depreciation was recorded, the book value of the asset at the date of sale is $100,000. The sale proceeds of $10,000 result in a loss to the county of $90,000 (debit Cash $10,000; debit Loss on sale $90,000; credit Vehicles-snow plow $100,000. By contrast, the general fund (and all governmental funds) financial statements are on modified accrual/current financial resources. The snow plow is written off to expenditures when purchased, so the book value of the plow at date of sale is $0. Therefore, the entire proceeds of sale are an inflow of current financial resources of $10,000 with no offsetting decrease in recorded resources. The example illustrates how the government-wide financial statements and the governmental fund financial statements report different information because they view the financial results of the same events from different perspectives.ESSAYS (CHAPTER 4)

1. Governments use modified accrual accounting to determine when transactions and events will be recognized in the financial statements of the governmental fund types.

a.) What is modified accrual accounting and how does it affect revenue recognition for the following types of revenue: property taxes; sales and income taxes; fines; grants of all types; and investment income.

b.) In your opinion is modified accrual accounting the best basis of accounting for governments? Why or why not?

2. Answer the following questions with regard to the preparation of fund financial statements. At fiscal year-end, a city holds an investment portfolio in its general fund that has a fair market value of $15 million and a historical cost of $28 million. The portfolio had a fair value of $18 million at the beginning of the current fiscal year. The portfolio is composed of a variety of bonds with a face value $29 and a due date five years in the future. The bonds were acquired to meet a $29 million debt due five years in the future.

a.) At what amount should the portfolio be valued on the balance sheet?

b.) What amount, if any, should appear on the operating statement?

1. Defend the valuation method required by GAAP.
2. Argue against the valuation method required by GAAP.
3. At what amount would the city want to record these investments on its financial statements for the current year? Why?

3. Answer the following questions with regard to the preparation of fund financial statements. A city receives three grants from the state. One grant is received in cash but must be used only for the acquisition of two vans specifically equipped to transport physically challenged citizens who use wheelchairs as a means of mobility. The second grant provides for reimbursement of costs incurred in operating a public transit system. The third grant is a distribution of state general fund revenues allocated to each city in the state based on the population of the city. This grant is to be used in general government operations.

a.) Discuss the various methods of revenue recognition for grants and other similar revenues.

b.) What is the appropriate basis for revenue recognition for each of the three state grants?

1. What is the rationale for each of these methods of revenue recognition?
2. A city receives a federal grant which the city must pass through to smaller units of government who meet the eligibility requirements. The city must monitor these smaller units of government for compliance with grant requirements.
3. How should the city recognize this grant in its fund financial statements?
4. Would your answer be different if the city were not required to monitor the other governments for compliance with grant requirements? Explain.

1.

2.

1. Fair value is generally more relevant than historical cost for decision-making
2. Investments are often held as cash substitutes
3. Fair values are objective
4. Performance of the investment managers should be measured by total return—dividends, interest, and changes in fair value.
5. Changes in fair value are irrelevant if investments are to be held to maturity
6. Recognizing unrealized gains on the balance sheet could lead governments to believe they have more resources to appropriate than they actually have
7. Fair values fluctuate in response to market rates of interest. Use of fair value incorporates unnecessary variability into financial reporting
8. In this case, the city would want to report the investments at historical cost since that is a higher value. Reporting the loss reduces the amount of revenues that can be allocated to programs during the current year. Since these investments are intended to be held to maturity and are timed to meet a liability, the investments could be carried on the financial statements at amortized historical cost.

3.

4.