Chapter 5

Recognizing Expenditures in Governmental Funds

/(CHAPTER 5)

1. Expenditures are generally recognized when resources are acquired; expenses when resources are consumed.
2. Governmental fund liabilities are considered current only when they must be liquidated with expendable available financial resources
3. In a governmental fund, expenditures for wages and salaries should be recognized in the period in which the employees receive their paychecks.
4. When accounting for inventory items in a governmental fund, GASB standards mandate the use of the consumption method.
5. The purchases method is consistent with full accrual basis of accounting.
6. When accounting for inventory items in a governmental fund, a reclassification of the appropriate portion of fund balance as nonspendable is required at the end of the period when the consumption method is used.
7. In budgeting for governmental funds, governments appropriate the resources for general capital assets in the periods when they are to be purchased, not in the periods in which the assets will be used.
8. Per GASB standards, governments must report general capital assets or depreciation in governmental funds.
9. If recording a general long-term liability in a governmental fund upon issuing a bond, the credit should be to a bonds payable account.
10. Most governments budget (appropriate) resources for principal and interest only for the period in which a payment is due—not for future payments.
11. Government-wide statements present revenues and expenses from the perspective of the government, not of individual funds.
12. Compensated absences, such as vacation pay and sick leave, should be accounted for on the accrual basis in governmental funds.
13. A transfer of cash from the general fund to a debt service fund to pay interest on debt should be recorded in the general fund as a nonreciprocal transfer-out.
14. Proceeds of debt intended to finance general capital assets should be reported in the fund financial statements as a fund liability.
15. Prepaid expenses such as for insurance are classified as deferred outflows, rather than as assets.
16. Use of the consumption method of accounting for inventory is not acceptable for the fund financial statements.
17. In governmental funds, capital assets acquired are recorded as an expenditure of their total value in the year that they are purchased.

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MULTIPLE CHOICE (CHAPTER 5)

1. Which of the following funds would use the modified accrual basis of accounting in preparing its fund financial statements?

1. City Electric Utility Enterprise Fund.
2. City Hall Capital Projects Fund.
3. City Motor Pool Internal Service Fund.
4. City Employee Pension Trust Fund.

2. Which of the following funds would use the accrual basis of accounting in preparing its fund financial statements?

a) City General Fund.

b) City Hall Capital Projects Fund.

1. City Motor Pool Internal Service Fund.
2. None of the above.

3. As used in government accounting, expenditures are decreases in

1. Net assets.
2. Net current financial resources.
3. Net cash.
4. Net economic resources.

4. Assume that the City of Juniper maintains its books and records to facilitate the preparation of its fund financial statements. The city pays its employees bi-weekly on Friday. The fiscal year ended on Wednesday, June 30. Employees had been paid on Friday, June 25. The employees paid from the general fund had earned $90,000 on Monday, Tuesday, and Wednesday (June 28, 29, and 30). What entry, if any, should be made in the city’s general fund on June 30?

1. Debit Expenditures $90,000; credit Accrued wages and salary $90,000.
2. Debit Expenses $90,000; credit Accrued wages and salary $90,000.
3. Debit Expenditures $90,000; credit Encumbrances $90,000.
4. Debit Expenses $90,000; credit Encumbrances $90,000.

5. Assume that the City of Jacob’s Ladder maintains its books and records to facilitate the preparation of its government-wide financial statements. The city pays its employees bi-weekly on Friday. The fiscal year ended on Wednesday, June 30. Employees had been paid on Friday, June 25. The employees paid from the general fund had earned $90,000 on Monday, Tuesday, and Wednesday (June 28, 29, and 30). They will earn $60,000 on Thursday and Friday (July 1 and 2). What entry, if any, should be made on the government-wide financial statements?

1. Debit Expenditures $90,000; credit Accrued wages and salary $90,000.
2. Debit Expenses $90,000; credit Accrued wages and salary $90,000.
3. Debit Expenditures $90,000; credit Encumbrances $90,000.
4. Debit Expenses $90,000; credit Encumbrances $90,000.

6. Employees of the City of Osteospermum earn ten days paid leave for each 12 months of employment. The city has a policy that employees must take their vacation days during the year following the year in which they are earned. If they do not take vacation in the allotted period, they forfeit the vacation pay benefit. Traditionally, employees have taken 80 percent of the vacation days earned. During the current year, city employees earned $600,000 in vacation pay. Assuming the city maintains its books and records in a manner to facilitate the preparation of fund financial statements, which of the following entries should be made in the general fund to record the vacation pay earned during the current period?

1. Debit Expenditures $600,000; credit Vacation pay payable $600,000.
2. Debit Expenses $600,000; credit Vacation pay payable $600,000.
3. Debit Expenditures $480,000; credit Vacation pay payable $480,000.
4. No entry required.

7. Employees of the City of Oleander earn ten days paid leave for each 12 months of employment. The city has a policy that employees must take their vacation days during the year following the year in which they are earned. If they do not take vacation in the allotted period, they forfeit the vacation pay benefit. Traditionally, employees have taken 80 percent of the vacation days earned. During the current year, city employees earned $600,000 in vacation pay. Assuming the city maintains its books and records in a manner to facilitate the preparation of government-wide financial statements, which of the following entries should be made to record the vacation pay earned during the current period?

a) Debit Expenditures $600,000; credit Vacation payable $600,000.

b) Debit Expenses $600,000; credit Vacation payable $600,000.

c) Debit Expenses $480,000; credit Vacation payable $480,000.

d) No entry required.

8. Employees of the general fund of Scabiosa City earn ten days of vacation for each 12 months of employment. The city permits employees to carry the vacation days forward as long as they wish. During the current year employees earned $800,000 of vacation benefits, of which the city estimates $500,000 will be taken in the next year and the balance will be carried forward. Assuming that the city maintains its books and records in a manner that facilitates the preparation of fund financial statements, which of the following entries should be made in the general fund to record the vacation pay earned during the current period?

1. Debit Expenditures $800,000; credit Vacation pay payable $800,000.
2. Debit Expenditures $500,000; credit Vacation pay payable $500,000.
3. Debit Vacation expense $800,000; credit Vacation pay payable $800,000.
4. No entry required.

9. Employees of the general fund of Saponaria City earn ten days of vacation for each 12 months of employment. The city permits employees to carry the vacation days forward as long as they wish. During the current year employees earned $800,000 of vacation benefits, of which the city estimates $500,000 will be taken in the next year and the balance will be carried forward. Assuming that the city maintains its books and records in a manner that facilitates the preparation of government-wide financial statements, which of the following entries should be made to record the vacation pay earned during the current period?

a) Debit Expenditures $800,000; credit Vacation pay payable $800,000.

b) Debit Expenditures $500,000; credit Vacation pay payable $500,000.

c) Debit Vacation expense $800,000; credit Vacation pay payable $800,000.

d) No entry required.

Use the following information to answer Questions 10 through 13.

Lilac City has a 6/30 fiscal year-end. The city has a policy of recognizing fund revenues/ expenditures when collected/paid or if expected to be collected/paid within 60 days of year-end.

The city has a sick leave benefit policy for its employees. The policy allows city employees one day of paid sick leave per month and permits them to accumulate sick leave that they do not take. Sick leave vests at the completion of the fifth year of employment, and unused sick leave is paid in cash upon termination or retirement. During the fiscal year ended 6/30/24, city employees who are paid from the general fund earned $2.8 million of sick leave, of which $1.0 was taken. Of the balance, the city estimates that $0.2 million will be taken in the next 60 days, $0.6 million will be taken in the next five years, $0.4 million will vest, and $0.6 million will never be taken.

10. The amount of sick leave expenditures that should appear on the general fund financial statements for the fiscal year ended 6/30/24 is

1. $1.4 million.
2. $1.3 million.
3. $0.6 million.
4. $1.0million.

11. The amount of sick leave liability that should appear on the general fund balance sheet at 6/30/24 is

1. $1.2 million.
2. $0.4 million.
3. $0.2 million.
4. No liability should appear.

12. The amount of sick leave expense that should appear on the government-wide financial statements for the fiscal year ended 6/30/24 is

1. $2.8 million.
2. $2.6 million.
3. $1.2 million.
4. $1.4 million.

13. The amount of sick leave liability that should appear on the government-wide financial statements at 6/30/24 is

1. $1.2 million.
2. $0.4 million.
3. $0.2 million.
4. No liability should appear.

14. Egret State University, a public university, has a policy of granting faculty members a one-year paid sabbatical leave after a period of seven years continuous employment. The leave is for further study, research, or public service. A particular faculty member earns $90,000 per year. Assuming that the college maintains its books and records in a manner that facilitates the preparation of fund financial statements and assuming that any appropriate accruals have been made, what is the appropriate entry to record the employee’s salary paid while on sabbatical leave?

a) Debit Expenditures $90,000; Credit Cash $90,000.

b) Debit Expenses $90,000; Credit Cash $90,000.

c) Debit Sabbatical leave payable $90,000; Credit Cash $90,000.

d) No entry required.

15. Finch State University, a public university, has a policy of granting faculty members a one-year paid sabbatical leave after a period of seven years continuous employment. The leave is for further study, research, or public service. A particular faculty member earns $90,000 per year. Assuming that the college maintains its books and records in a manner that facilitates the preparation of government-wide financial statements and assuming that any appropriate accruals have been made, what is the appropriate entry to record the employee’s salary paid while on sabbatical leave?

a) Debit Expenditures $90,000; Credit Cash $90,000.

b) Debit Expenses $90,000; Credit Cash $90,000.

c) Debit Sabbatical leave payable $90,000; Credit Cash $90,000.

d) No entry required.

16. Grackle State University, a very large public university, has a policy of granting faculty members a one-year sabbatical leave after a period of seven years of continuous employment. The leave is to be used for further study, research, or service. During the fiscal year ended 6/30/24, the university paid $3 million to faculty members on sabbatical leave and estimated that faculty members currently not on sabbatical leave earned $3.5 million toward sabbatical leaves they are likely to take in the future. The amount of sabbatical expenditures for the year ended 6/30/24 should be

1. $0 million.

b) $3 million.

c) $3.5 million.

d) $6.5 million.

17. Crocus City recognizes as revenues/expenditures those amounts collected/paid during the year or within 60 days of fiscal year-end. The city offers a pension benefit to its employees who meet certain age and years of employment criteria. The city participates in the State Pension Plan. Per its contractual arrangement, the city’s required contribution to the State Pension Plan for the fiscal year ended 6/30/24 is $5 million. Due to cash inflow shortages the city, which budgeted $5 million for pension contributions, paid only $4 million in the fiscal year ended 6/30/24. The city paid the remaining amount on September 30, 2024. Assuming the city maintains its books and records in a manner that facilitates the preparation of its fund financial statements, how should the city record the pension contribution and any associated liability for the year ended 6/30/24?

1. Debit Expenditures $5 million; Credit Cash $4 million and Pension payable $1 million.

b) Debit Expenses $5 million; Credit Cash $4 million and Pension payable $1 million.

c) Debit Expenditures $4 million; Credit Cash $4 million.

d) Debit Expenses $4 million; Credit Cash $4 million.

18. Cyclamen City recognizes as revenues/expenditures those amounts collected/paid during the year or within 60 days of fiscal year-end. The city offers a pension benefit to its employees who meet certain age and years of employment criteria. The city participates in the State Pension Plan. Per its contractual arrangement, the city’s required contribution to the State Pension Plan for the fiscal year ended 6/30/24 is $5 million. Due to cash inflow shortages the city, which budgeted $5 million for pension contributions, paid only $4 million in the fiscal year ended 6/30/24. The city paid the remaining amount on September 30, 2024. Assuming the city maintains its books and records in a manner that facilitates the preparation of government-wide financial statements, how should the city record the pension contribution and any associated liability for the year ended 6/10/24?

a) Debit Expenditures $5 million; Credit Cash $4 million and Pension contribution payable $1 million.

b) Debit Expenses $5 million; Credit Cash $4 million and Pension contribution payable $1 million.

c) Debit Expenditures $4 million; Credit Cash $4 million.

d) Debit Expenses $4 million; Credit Cash $4 million.

19. The amount of pension expenditures that a government should recognize in its general fund financial statements during the current year is

1. The amount paid.
2. The amount paid plus the amount that will be paid with available expendable financial resources.
3. The amount paid so long as it does not exceed the contractually agreed amount.
4. The contractually agreed amount.

20. The amount of pension expense that a government should recognize in its government-wide financial statements during the current year is

1. The amount paid.
2. The amount paid plus the amount that will be paid with available expendable financial resources.
3. The amount paid so long as it does not exceed the contractually agreed amount.
4. The contractually agreed amount.

21. This year, Primula City was sued for injuries sustained when a citizen slipped and broke her hip on the icy City Hall steps. The city attorney estimates the city will be held liable by the courts and a judgment of $300,000 will result. Because of the nature of the case it will likely be four years before the city makes any payment related to the accident. The present value of the likely future payment is $251,000. In the general fund, at the end of the current fiscal year, Port City should recognize a liability of

1. $300,000.
2. $251,000.
3. $0.
4. $75,000.

22. This year, Port City was sued for injuries sustained when a citizen slipped and broke her hip on the icy City Hall steps. The city attorney estimates the city will be held liable by the courts and a judgment of $300,000 will result. Because of the nature of the case it will likely be four years before the city makes any payment related to the accident. The present value of the likely future payment is $251,000. In the government-wide financial statements, at the end of the current fiscal year, Port City should recognize a liability of

1. $300,000.
2. $251,000.
3. $0.
4. $75,000.

23. Several years ago, Gordonia County was sued by a former county employee for wrongful discharge. Although it was to be contested by the county, at the time of the lawsuit the attorneys believed that the county was likely to lose the suit and the estimated amount of the ultimate judgment would be $100,000. This year, the case was finally settled with a judgment against the county of $150,000, which was paid. Assuming that the county maintains its books and records in a manner to facilitate the preparation of its fund financial statements, the entry in the current year should be

1. Debit Expenditures $150,000; Credit Cash $150,000.
2. Debit Expenses $150,000; Credit Cash $150,000.
3. Debit Expenditures $50,000 and Claims payable $100,000; Credit Cash $150,000.
4. Debit Expenses $50,000 and Claims payable $100,000; Credit Cash $150,000.

24. Several years ago, Guava County was sued by a former county employee for

wrongful discharge. Although it was to be contested by the county, at the time of the lawsuit the attorneys believed that the county was likely to lose and the estimated amount of the ultimate judgment would be $100,000. This year, the case was finally settled with a judgment against the county of $150,000, which was paid. Assuming that the county maintains its books and records in a manner to facilitate the preparation of its government-wide financial statements, the entry in the current year should be

• 1. Debit Expenditures $150,000; Credit Cash $150,000.

b) Debit Expenses $150,000; Credit Cash $150,000.

c) Debit Expenditures $50,000 and Claims payable $100,000; Credit Cash $150,000.

d) Debit Expenses $50,000 and Claims payable $100,000; Credit Cash $150,000.

25.The City of Verbena accounts for its inventory using the purchases method. During the year the city bought $500,000 of supplies, for which it owed $100,000 at year-end. The city will pay for the supplies from available expendable financial resources. The entry that should be recorded in the city’s general fund is

1. Debit Expenditures $500,000; Credit Cash $400,000 and Accounts payable $100,000.
2. Debit Expenditures $400,000; Credit Cash $400,000.
3. Debit Supplies inventory $500,000; Credit Cash $400,000 and Accounts payable $100,000.
4. Debit Supplies inventory $400,000; Credit Cash $400,000.

26.Buttercup City uses the purchases method to account for supplies. At the beginning of the year the city had no supplies on hand. During the year the city purchased $600,000 of supplies for use by activities accounted for in the general fund. The city used $400,000 of those supplies during the year. Assuming that the city maintains its books and records in a manner that facilitates the preparation of its fund financial statements, at fiscal year-end the appropriate account balances related to supplies expenditures and supplies inventory would be

1. Expenditures $600,000; Supplies inventory $200,000.
2. Expenditures $600,000; Supplies inventory $0.
3. Expenditures $400,000; Supplies inventory $200,000.
4. Expenditures $400,000; Supplies inventory $0.

27 Spruce County uses the consumption method to account for supplies. At the beginning of the year the city had no supplies on hand. During the year the city purchased $450,000 of supplies for use by activities accounted for in the general fund. The city used $300,000 of those supplies during the year. At fiscal year-end, the appropriate account balances on the general fund financial statements would be

1. Expenditures $450,000; Supplies inventory $150,000.
2. Expenditures $450,000; Supplies inventory $0.
3. Expenditures $300,000; Supplies inventory $150,000.
4. Expenditures $300,000; Supplies inventory $0.

28. Sugar Palm County uses the consumption method to account for supplies. At the

beginning of the year the city had no supplies on hand. During the year the city purchased $450,000 of supplies for use by activities accounted for in the general fund. The city used $300,000 of those supplies during the year. At fiscal year-end the appropriate account balances on the government-wide financial statements would be

1. Expenses $450,000; Supplies inventory $150,000.
2. Expenses $450,000; Supplies inventory $0.
3. Expenses $300,000; Supplies inventory $150,000.
4. Expenses $300,000; Supplies inventory $0.

29. Scaevola City uses the purchases method to record all prepayments. The city has a 6/30 fiscal year-end. On 12/31/23, the city purchased a three-year insurance policy covering all city owned vehicles acquired by the general fund to be used in general government activities. Cost of the policy was $360,000. After the 6/30/24 closing entries, the appropriate balance sheet accounts and balances in the city’s general fund associated with this transaction are

1. Prepaid insurance $300,000; Expenditures $60,000.
2. Prepaid insurance $300,000; Expenditures $360,000
3. Prepaid insurance $0; Expenditures $360,000.
4. Prepaid insurance $0; Expenditures $60,000.
   1. Coralberry County uses the consumption method to record all inventories and prepayments. The County has a 9/30 fiscal year-end. On April 1, 2024, the county purchased a two-year insurance policy at a total cost of $400,000, paying for the policy out of the general fund. In the fund financial statements, the amount of insurance expenditures for the fiscal year ended 9/30/24 would be
5. $400,000.
6. $300,000.
7. $200,000.
8. $100,000.
   1. On July 1, Greenheart County bought computer equipment for use in the administrative offices of the county. The equipment has an estimated useful life of three years and salvage of $10,000. The county has a 6/30 fiscal year-end. Assuming that the county maintains its books and records in a manner that facilitates the preparation of fund financial statements, the $85,000 cost of this equipment would require which of the following entries?
   2. Debit Expenditures $85,000; Credit Cash $85,000.
   3. Debit Equipment $85,000; Credit Cash $85,000.
   4. Debit Expenses $85,000; Credit Cash $85,000.
   5. No entry in the city’s governmental funds.
   6. On July 1, Gingko County bought computer equipment for use in the administrative offices of the county. The equipment has an estimated useful life of three years and salvage of $10,000. The county has a 6/30 fiscal year-end. Assuming that the county maintains its books and records in a manner that facilitates the preparation of government-wide financial statements, the $85,000 cost of this equipment would require which of the following entries?
9. Debit Expenditures $85,000; Credit Cash $85,000.
10. Debit Equipment $85,000; Credit Cash $85,000.
11. Debit Expenses $85,000; Credit Cash $85,000.
12. No entry is required.
    1. The City of Rondeletia has a 6/30 fiscal year-end. The city uses the consumption method for recognizing inventories and prepayments. On July 1, 2023, the city leased computer equipment for use in the city’s general activities. The lease is a three-year lease that qualifies as an operating lease. The city prepaid the entire three-year rental fee of $45,000. At June 30, 2024, the appropriate account balances in the general fund associated with this transaction would be
13. Prepaid lease $0; Expenditures $45,000; Fund balance-nonspendable $0.
14. Prepaid lease $45,000; Expenditures $0; Fund balance-nonspendable $45,000.
15. Prepaid lease $30,000; Expenditures $45,000; Fund balance-nonspendable $30,000.
16. Prepaid lease $30,000; Expenditures $15,000; Fund balance-nonspendable $30,000.
    1. Petunia School District, an independent public school district, financed the acquisition of a new school bus by signing a note for $105,000 plus interest on the unpaid balance at 6 percent. Annual principal payments of $35,000, plus interest, are due each July 1. Assuming that the district maintains its books and records in a manner that facilitates the preparation of the fund financial statements, the appropriate entry in the general fund at the date of acquisition is
17. Debit Expenditures $105,000; Credit Notes payable $105,000.
18. Debit Capital assets $105,000; Credit Notes payable $105,000.
19. Debit Expenditures $105,000; Credit Other financing sources $105,000.
20. Debit Capital assets $105,000; Credit Other financing sources $105,000.

35Peridot School District, an independent public school district, financed the acquisition of a new school bus by signing a note for $105,000 plus interest on the unpaid balance at 6 percent. Annual principal payments of $35,000, plus interest, are due each July 1. Assuming that the district maintains its books and records in a manner that facilitates the preparation of the government-wide financial statements, the appropriate entry at the date of acquisition is

• 1. Debit Expenditures $105,000; Credit Notes payable $105,000.
  2. Debit Capital assets $105,000; Credit Notes payable $105,000.
  3. Debit Expenditures $105,000; Credit Other financing sources $105,000.
  4. Debit Capital assets $105,000; Credit Other financing sources $105,000.

1. Solidago City leased a bulldozer for use in activities accounted for in the general fund. The city paid $40,000 and agreed to pay $40,000 per year for 3 years. The bulldozer has a useful life of six years. The lease qualified as a capital lease. Assuming that the city maintains is books and records in a manner that facilitates the preparation of the fund financial statements, the appropriate entry in the general fund at the date of acquisition would be
2. Debit Expenditures $160,000; Credit Cash $40,000 and Other financing sources $120,000.
3. Debit Expenditures $40,000 and Prepaid lease $120,000; Credit Cash $40,000 and Other financing sources $120,000.
4. Debit Equipment $160,000; Credit Cash $40,000 and Other financing sources $120,000.
5. Debit Expenditures $160,000; Credit Cash $40,000 and Lease payable $120,000.
6. Speedwell City leased a bulldozer for use in activities accounted for in the general fund. The city paid $40,000 and agreed to pay $40,000 per year for 3 years. The bulldozer has a useful life of six years. The lease qualified as a capital lease. Assuming that the city maintains is books and records in a manner that facilitates the preparation of the government-wide financial statements, the appropriate entry at the date of acquisition would be
   • • 1. Debit Expenditures $160,000; Credit Cash $40,000 and Other financing sources $120,000.
       2. Debit Expenditures $53,333 and Prepaid lease $106,667; Credit Cash $40,000 and Other financing sources $120,000.
       3. Debit Equipment $160,000; Credit Cash $40,000 and Lease payable $120,000.
       4. Debit Expenditures $160,000; Credit Cash $40,000 and Lease payable $120,000.
7. The City of Honeysuckle issued $10 million of term bonds as of April 1, 2023. The bonds bear interest at 6 percent, due and payable each October 1 and April 1. Assuming the city maintains its books and records in a manner that facilitates the preparation of its fund financial statements the appropriate entity to record interest on the debt at June 30, 2024 (the city’s fiscal year-end) is
8. Debit Expenditures $300,000; Credit Interest payable $300,000.
9. Debit Expenditures $300,000; Credit Other financing uses $300,000.
10. Debit Expenditures $300,000; Credit Due to bondholders $300,000.
11. No entry required.
12. Blackbead County has outstanding $4 million of term bonds that bear interest at 6 percent payable semiannually each January 30 and July 30. The county’s fiscal year-end is 12/31. On December 28, 2024, the County transferred $240,000 to a debt service fund. At December 31, the maximum amount the debt service fund may recognize as interest expenditure is
13. $120,000
14. $240,000.
15. $100,000.
16. $0.
17. Several years ago, Dianella City issued $1 million in zero coupon bonds due and payable in 2026. The bonds were sold at an amount to yield investors 6 percent over the life of the bonds. During the current year, how much in interest expenditures should Durham City recognize related to these bonds?
18. Difference between the present value of the bonds at the beginning of the period and the present value of the bonds at the end of the period.
19. Face amounts of bonds times 6 percent.
20. Book value of bonds times 6 percent.
21. None.
22. The City of Hellebore transferred $100,000 from the general fund to a debt service fund for payment of interest. The appropriate entry in the general fund to record this transfer would be
23. Debit Expenditures $100,000; Credit Cash $100,000.
24. Debit Nonreciprocal transfer-out $100,000; Credit Cash $100,000.
25. Debit Fund balance$100,000; Credit Cash $100,000.
26. Debit Reciprocal transfer-out $100,000; Credit Cash $100,000.
27. The City of Hollyhock transferred $100,000 from the general fund to a debt service fund for payment of interest. The appropriate entry in the debt service fund to record this transfer would be
    1. Debit Cash $100,000; Credit Revenue $100,000.
    2. Debit Cash $100,000; Credit Reciprocal transfer-in $100,000.
    3. Debit Cash $100,000; Credit Fund balance $100,000.
    4. Debit Cash $100,000; Credit Nonreciprocal transfer-in $100,000.
28. Hornbeam County transferred $300,000 from the general fund to the Motor Pool Internal Service Fund to pay for the use of automobiles during the first six months of FY 2024. The appropriate entry in the general fund to record this transfer of cash would be
29. Debit Expenditures $300,000; Credit Cash $300,000.
30. Debit Nonreciprocal transfer-out $300,000; Credit Cash $300,000.
31. Debit Fund balance—transfer out $300,000; Credit Cash $300,000.
32. Debit Nonreciprocal transfer-in $300,000; Credit Cash $300,000.

44. Which of the following items is NOT an example of an item that would be reported as Other Financing Sources/Uses in the general fund?

1. $10 million received from the issuance of bonds.
2. $7,000 received from the sale of a used bulldozer.
3. $200,000 capital lease obligation for a new bulldozer.
4. $100,000 paid to a Motor Pool Internal Service Fund for automobile usage during the period.

45. Other financing sources/uses would appear on which of the following statements?

1. Balance sheet.
2. Statement of revenues, expenditures, and changes in fund balances.
3. Cash flows statement.
4. None of the above.

46. State employees earn $10 million in vacation leave. $7 million is paid in the current year and the remaining amount is deferred to future years. Which of the following the accounts will be credited in the general fund entry and the government-wide entry?

General Fund Government-wide

1. Cash Cash & accrued vacation pay
2. Cash & accrued vacation pay Cash
3. Cash Cash
4. Cash No entry
5. No entry Cash

47. The construction of a bike path in Bluebell City was accounted for in a capital projects fund. Financing for the project came from the following sources:

Transfer from Bay City’s general fund $ 10,000

Proceeds from general obligation bond issue $100,000

Grant from state government $ 50,000

Which of the following amounts should appear in this year’s governmental funds statement of revenues, expenditures, and changes in fund balances for other financing sources?

1. $160,000
2. $110,000
3. $100,000
4. $10,000
5. $60,000

48. Which of the following is not an accepted modification of the accrual basis concerning the recognition of expenditures in governmental funds?

a) Vacations and sick leave should never be accrued.

b) Capital assets should be reported as expenditures when the assets are acquired.

c) Inventory and the costs of using supplies may be accounted for using the consumption method.

d) Claims and judgments should be reported as expenditures only insofar as they will be paid out of current financial resources.

49. Which of the following activities would be classified as a reciprocal interfund activity?

a) Cash transfer from the general fund to a debt service fund to pay for principal and interest on long-term debt

b) Transfer from a capital projects fund to the general fund to reimburse the general fund for its payment of the architect’s fee related to new construction

c) Purchase of supplies by the general fund from an internal service fund

d) Transfer of funds from the general fund to establish a new internal service fund

PROBLEMS (CHAPTER 5)

1. Employees of the City of Hyacinth are paid from the general fund semi-monthly on the 15^th day and the last day of the month. The city provides numerous employee benefits. Employees earn ten vacation days for each 12 months of employment. The employee can take the vacation during any summer months (May-September) prior to retirement. The employees also earn one sick day for each month of employment. Sick pay vests at the completion of five years of continuous service. Vested unused sick pay will be paid upon retirement or termination. The city contributes to a retirement plan that is administered by the state. Each year the city gets a statement from the state explaining the actuarially determined contribution required.

The city recognizes revenues/expenditures when collected/paid or if collected/paid within 60 days of year-end. The city’s fiscal year end is December 31. At the beginning of the current year employees had $0.4 million of earned vacation time and $7 million of vested earned sick leave. The city uses the FIFO method of accounting for vacation and sick days.

REQUIRED: Assuming that the city maintains its books and records in a manner to facilitate the preparation of fund financial statements, record the following transactions related to employee salaries and benefits.

a. During the year employees of the city earned $60 million in salaries. At year-end all but $2 million had been paid to the employees.

b. During the year the employees of the city earned $2.5 million in vacation pay. By year-end the employees had taken $2 million of vacation. Of the balance of vacation pay due to the employees, the city estimates that $0.3 million will be taken during the next year and $0.2 million will be deferred until later.

c. During the year the employees of the city earned $3 million in sick pay, of which
$2.5 million is expected to vest. Of the $2.5 million, employees are expected to take $2.0 million and $0.5 million is expected to be paid to employees upon their termination or retirement. During the year employees took $1 million in sick days.

d. The city received a statement from the state requiring a contribution to the retirement plan of $8 million for the current year. Because of a cash shortage the city paid $6 million of the required contribution during the year, $1.5 million on February 15 of the following year and $0.5 million in June of the following year.

2. During the year the City of Hosta engaged in the following transactions. The city uses the consumption method of recording inventories and prepayments. The city has a 6/30 fiscal year end.

REQUIRED: Record the following transactions related to supplies, prepaid items and fixed asset acquisitions.

a. During the year the city purchased $600,000 of expendable supplies.

b. On September 1 the city paid $360,000 for a three-year insurance policy to cover some assets used in general government activities.

c. On December 1 the city purchased four pickup trucks for general government activities. The trucks cost $100,000 in total.

d. On January 1 the city leased some office equipment for use in the administrative offices. The lease qualified as a capital lease. The present value of the minimum lease payments is $96,000.

e. On April 1 the city leased a copying machine. The lease qualified as an operating lease. The terms of the lease require yearly payments of $2,000 each April 1 for 5 years. The city prepaid the entire five years of the lease.

3. The City of Jamesia engaged in the following transactions during the fiscal year ended September 30, 2024.

REQUIRED: Record the following transactions related to interfund transfers. Be sure to indicate in which fund the entry is being made.

a. The city transferred $400,000 from the general fund to a debt service fund to make the interest payments due during the fiscal year. The payments due during the fiscal year were paid. The city also transferred $200,000 from the general fund to a debt service fund to advance-fund the $200,000 interest payment due October 15, 2019.

b. The city transferred $75,000 from the Air Operations Special Revenue Fund to the general fund to close out the operations of that fund.

c. The city transferred $150,000 from the general fund to the city’s Electric Utility Enterprise Fund to pay for the utilities used by the general and administrative offices during the year.

d. The city transferred the required pension contribution of $2 million from the general fund to the city’s pension trust fund.

1. The city deposited into the general fund the proceeds of a $5.5 million dollar bond issue. The bonds were sold for $5.7 million.

4. During the year, the City of Penstemon engaged in the following transactions. The city has a 12/31 fiscal year end.

REQUIRED: Assuming that the city maintains its books and records in a manner to facilitate the preparation of fund financial statements, record the following transactions related to capital asset acquisition and payments on long-term debt.

1. On April 1, 2024, the city acquired a piece of equipment for $150,000. The equipment will be used by the Streets Department. The city financed the purchase by borrowing $150,000 from the local bank at 5 percent interest. Principal payments of $20,000 plus interest are due yearly each April 1.
2. The city paid $30,000 to employees who retired during the current year. These payments were made to compensate the employees for sick pay that had been earned but unused over the many years of the employees’ service to the city
3. The city transferred $2,500,000 from the general fund to a debt service fund to make principal and interest payments during the current year.
4. The city made payments of $2 million principal and $500,000 interest on bonds that had been outstanding for several years.
5. On June 1, the City paid $4,000 on account for supplies purchased in May.
6. On September 1, 2024, the city acquired several computers through a leasing agreement that qualified as a capital lease. The terms of the lease require yearly annual payments. The present value of the minimum lease payments is $50,000.

5. A state government has the following transactions during its fiscal year ending June 30, 2024. The state defines “available” as within 60 days after year-end.

REQUIRED: Prepare journal entries to record each of these transactions in the state’s general fund. Comment on how each of these transactions would be different when reported in the state’s government-wide financial statements.

• • • • 1. The state issues $50 million of 30-year debt to finance renovations to its capitol building. Due to changes in interest rates, the state receives only $49.2 million in cash.
        2. The state workers earn $40 million in wages during the year. However, in an effort to balance its budget, the state defers payment of $2 million in wages until July 5, 2024.
        3. Required contributions for pension benefits for 2015 are $7 million, which the state transfers to its pension trust fund.
        4. The state makes grants of $4.5 million based on a formula to school districts within its boundaries. The schools must use these grants to finance operating expenditures incurred during the current fiscal year.
        5. The state agrees to share $6.0 million of its 2024 sales (derived tax) revenues with all towns within its boundaries based on a formula established by the legislature. The resources must be used by the towns during the state’s next fiscal year (2019).
        6. During the fiscal year, the state makes interest and principal payments of $18 million on its bonded debt.

6. The Saffron School District is considering six different options for purchasing new computer equipment.

REQUIRED: Show the journal entries that would be required in the district’s general fund to recognize both the acquisition of the new computers and payment for them under each of these options. Which of these options would best achieve interperiod equity for the district? Why?

Buy the computers outright with cash; cost will be $60,000

Buy the computers and finance them with a $60,000, three-year, 10 percent note. The district will repay the note and pay the entire interest with a single payment of $79,860 when the note matures.

Buy the computers and finance them with a $60,000, three-year 10 percent installment note. The district will repay the note (plus interest) in three annual installments of $24,127 each.

Lease the computers under an operating lease, but prepay the entire rent ($60,000) in advance. (Assume it is the district’s policy to use the purchases method for reporting prepayments.)

Lease the computers under a capital lease, requiring three end-of-year payments of $24,127.

Lease the computers under an operating lease, making three end-of-year payments of $24,127.

• 1. The following schedule shows the amounts related to supplies that a city debited and credited to the indicated accounts during a year (not necessarily the year-end balances), excluding closing entries. The organization records its budget, encumbers all of its expenditures, and initially vouchers all payments. It accounts for supplies on a purchases basis.
  2. Some information is missing. Determine the missing data by reconstructing the entries that the organization made during the year.. You need not show the entries; simply fill in the blanks. The city began the year with $5,000 of supplies in inventory and ended the year with $6,500.

Debits Credits

(in thousands)

Cash $ 0 $ 70

Vouchers payable ___ ___

Appropriations 0 115

Encumbrances ___ ___

Expenditures 58 0

Reserve for encumbrances 58 93

Fund balance ___ 0

Reserve for supplies inventory ___ ___

• 1. Assume instead that the city accounts for supplies on a consumption basis.
     1. Which of the above amounts (assuming that appropriations remained unchanged) would be different? What would be the new value(s)?
     2. When applying the consumption method, some governments either elect or are required to offset “supplies inventory” with “fund balance – nonspendable” rather than “fund balance –unassigned.” What is the rationale for such practice?

C. The mayor of the city requests your advice as to whether it is actually necessary to (1) incorporate the budget into the accounting system and (2) use fund accounting. What is your response?

8. The following information relates to the Cardamom School District.

In January 2024, the district acquires $500,000 of equipment by way of a capital lease. The lease, which incorporates an annual interest rate of 6 percent, requires the district to make four annual payments of $144,295 each. The equipment has a useful life of four years with no expected salvage value. In 2024, the district makes the first of the required payments.

• • 1. Prepare all journal entries that the district should make in an appropriate governmental fund to record the acquisition of the equipment and the first lease payment.
    2. How much expense relating to the equipment should the district recognize in its 2024 government-wide financial statements? Specify the account or accounts to be charged and the amount to be charged to each account.

9. Jonquil Township decides to rent a vacant garage to provide extra parking space for police vehicles, beginning June 1, 2019. The rental is to be accounted for in the general fund. The township pays $24,000 in advance for two years rent. The city’s fiscal year ends on December 31.

1. Assume that the township uses the purchases method to account for prepayments. Prepare

1. The journal entry to record the rental on June 1, 2019.

2. Any required journal entries on December 31, 2019.

3. Any required journal entries on December 31, 2020.

1. Assume that the township uses the consumption method to account for prepayments. Prepare

1. The journal entry to record the rental on June 1, 2019.

2. Any required journal entries on December 31, 2019.

3. Any required journal entries on December 31, 2020.

1. How would the unused portion of the rental payment be reported in the township’s 2019 year-end governmental fund balance sheet, assuming the township

1. used the purchases method?

2. used the consumption method?

10. Shasta City’s general fund activities for 2019 are summarized below. Accounts are maintained on a modified accrual basis consistent with GAAP.

Property-tax revenues $3,000

Utilities 50

Wages and salaries 900

Transfer to debt service fund 100

Estimated revenues 3,500

State grant 800

Annual insurance premium 200

Proceeds of long-term debt 1,000

General administration 1,200

Charges for current services 600

Public safety 2,000

Reimbursement from capital projects fund 100

Fund balance, beginning of year 20,000

Other taxes 750

Sanitation 500

Sale of capital assets 400

Prepare in good form a statement of revenues, expenditures, and changes in fund balance for 2019 for the city’s general fund. Assume that the city reports revenues by source and expenditures by function. Assume also that 75 percent of the wages and salaries are attributable to public safety and 25 percent to general administration. Insurance is attributable in total to general administration.

ANSWERS TO PROBLEMS (CHAPTER 5)

Problem 1

a. GENERAL FUND

Salary expenditures $60 million

Cash $58 million

Salaries payable 2 million

b. GENERAL FUND

Vacation pay expenditures $ 2 million

Cash $ 2 million

c. GENERAL FUND

Sick pay expenditures $ 1 million

Cash $ 1 million

d. GENERAL FUND

Pension expenditure $7.5 million

Cash $ 6 million

Pension payable 1.5 million

Problem 2

a. GENERAL FUND

Supplies inventory $600,000

Cash $600,000

b. GENERAL FUND

Prepaid insurance $360,000

Cash $360,000

c. GENERAL FUND

Expenditures $100,000

Cash $100,000

d. GENERAL FUND

Expenditures $ 96,000

Other financing sources-leases $ 96,000

e. GENERAL FUND

Prepaid lease $ 10,000

Cash $ 10,000

Problem 3

a. GENERAL FUND

Nonreciprocal transfer-out $600,000

Cash $600,000

DEBT SERVICE FUND

Cash $600,000

Nonreciprocal transfer-in $600,000

DEBT SERVICE FUND

Expenditures $600,000

Cash $400,000

Interest payable $200,000*

b. GENERAL FUND

Cash $ 75,000

Nonreciprocal transfer-in $ 75,000

SPECIAL REVENUE FUND

Nonreciprocal transfer-out $ 75,000

Cash $ 75,000

c. GENERAL FUND

Expenditures** $150,000

Cash $150,000

ENTERPRISE FUND

Cash $150,000

Revenue** $150,000

d. GENERAL FUND

Expenditures $2 million

Cash $2 million

PENSION TRUST FUND

Cash $2 million

Revenue $2 million

e. GENERAL FUND

Cash $5.7 million

Other financing sources—bond proceeds $5.7 million

*Accruing a debt service payment that is due early in the next year is optional. Students may not include this entry.

**Students may treat these as having been previously accrued. If so, the entries will be Due to or Due from accounts.

Problem 4

a. GENERAL FUND OR SPECIAL REVENUE FUND

Cash $150,000

Other financing sources—loan proceeds $150,000

Expenditures $150,000

Cash $150,000

b. GENERAL FUND

Expenditures $ 30,000

Cash $ 30,000

c. GENERAL FUND

Nonreciprocal transfer-out $2.5 million

Cash $2.5 million

DEBT SERVICE FUND

Cash $2.5 million

Nonreciprocal transfer-in $2.5 million

d. DEBT SERVICE FUND

Expenditures $2.5 million

Cash $2.5 million

e. GENERAL FUND

Accounts payable $ 4,000

Cash $ 4,000

f. GENERAL FUND

Expenditures $ 50,000

Other financing source—capital lease $ 50,000

Problem 5

($ amounts in millions)

a. General fund

Cash $49.2

Other financing sources—debt proceeds $49.2

In the government-wide statements, debt proceeds would be reported as a long-term liability in the statement of net position, not as a financing source in the operating statement. In its statement of net position, the state would report an increase in cash of $49.2 million, bonds payable of $50 million, and a discount on bonds payable of $0.8 million.

b. Expenditures $40

Cash $38

Wages payable 2

The effects of this transaction would be identical in the government-wide statements.

c. Expenditures $ 7

Cash $ 7

The effects of this transaction would be identical in the government-wide statements.

d. Expenditures $ 4.5

Cash $ 4.5

The effects of this transaction would be identical in the government-wide statements.

e. No entry is required because the grant resources have a time requirement that has not yet been met The effects of this transaction would be identical in the government-wide statements.

f. Expenditures $18

Cash $18

This transaction would be separated into two for purposes of the government-wide financial statements. The portion representing interest would be reported as a reduction of interest payable (if accrued) and as interest expense. The portion representing principal repayments would be reported as a reduction of long-term liabilities.

Problem 6

a. Expenditures $60,000

Cash $60,000

To record the acquisition of computer equipment

b. Cash $60,000

Other financing sources—Note proceeds $60,000

To record the issuance of three-year notes

Expenditures $60,000

Cash $60,000

To record the acquisition of computer equipment

Expenditures $79,860

Cash $79,860

To record repayment of three-year note

c. Cash $60,000

Other financing sources—Note proceeds $60,000

To record the issuance of three-year installment notes

Expenditures $60,000

Cash $60,000

To record the acquisition of computer equipment

Expenditures $24,127

Cash $24,127

To record repayment of three-year note

Note: This entry occurs three times, once at the end of each succeeding year.

d. Expenditures $60,000

Cash $60,000

To record the prepayment of three year operating lease

e. Expenditures $60,000

Other financing sources—capital lease $60,000

To record the acquisition of computer equipment under capital lease

Expenditures $24,127

Cash $24,127

To record capital lease payments

Note: This entry occurs three times, once at the end of each succeeding year.

f. Expenditures $24,127

Cash $24,127

To record operating lease payments

Note: This entry occurs three times, once at the end of each succeeding year)

Options a, b, and d are the least likely to promote interperiod equity. Options a and d, in effect, charge the entire cost to current-year taxpayers. Option b charges the entire amount to taxpayers in the third year. (The effect of issuing the debt and reporting an expenditure for the entire cost of the capital asset in the first year has zero effect on fund balance.) Options c, e, and f all charge a portion of the cost of the computers to each year. Assuming the computers have a three-year life, this is an appropriate allocation of costs, comparable to depreciation expense.

Problem 7

A.

Debits Credits

(in thousands)

Cash $ 0 $ 70

Vouchers payable 70 58

Appropriations 0 115

Encumbrances __93 58

Expenditures 58 0

Reserve for encumbrances 58 93

Fund balance 115 0

Reserve for supplies inventory 5.0* 6.5*

*Or simply a credit of $1.5

B.

1. Expenditures would be $1,500 less – i.e. $56,500

2. Governments are required to offset inventory when they must maintain a minimum inventory balance that is not available for use and therefore cannot be expended. Even when not required, many governments establish a portion of fund balance as nonspendable to indicate that the fund balance offsetting the inventory is not available for appropriation.

C.

Budgetary entries and fund accounting are means to enhance internal controls. They help ensure that (1) the government does not overspend its budget and (2) that restricted resources are expended only for appropriate purposes. The key issue is whether the added inconvenience (and cost) of budgetary entries and fund accounting is worth the added benefits.

Problem 8

1. Expenditure – acquisition of equipment $500,000

Other financing sources – Capital lease $500,000

Interest expenditure $ 30,000

Principal expenditure 114,295

Cash $144,295

2.

Depreciation expense, $125,000

Interest expense, $30,000

Problem 9

A. Purchases method

1. Expenditures—rent $24,000

Cash (or Accounts payable) $24,000

2. No entry

3. No entry

B. Consumption method

1. Prepaid Rent $24,000

Cash (or Accounts payable) $24,000

2. Expenditures—rent $ 7,000

Prepaid rent $ 7,000

3. Expenditures—rent $12,000

Prepaid rent $12,000

(Entries 2 and 3 assume no entries to record rental expenditures were made during the year.)

C.

1. Purchases method

Unlike the requirements for inventory, there is no requirement to report material amounts of prepayments in the fund balance sheet.

2. Consumption method

Assets:

Prepaid rent $17,000

Fund balance:

Nonspendable $17,000

Problem 10

Shasta City

General Fund

Statement of Revenues, Expenditures, and Changes in Fund Balance

For the year 2019

Revenues

Property taxes $3,000

Other taxes 750

State grant 800

Charges for current services 600

Total revenues $5,150

Expenditures

Public safety $2,225

General administration 2,125

Sanitation 500

Total expenditures (4,850)

Excess of revenues over expenditures $ 300

Other financing sources and uses, including transfers

Sale of capital assets $ 400

Proceeds of long-term debt 1,000

Transfer to debt service fund (100)

Total other financing sources and uses 1,300

Net change in fund balance $1,600

Fund balance beginning of 2019 20,000

Fund balance end of 2019 $21,600

Notes: Estimated revenues is a budgetary account. It would be closed at year end and would not be included on the fund balance sheet. The reimbursement received from the capital projects fund would be for an expenditure attributable to the capital projects funds but initially paid from the general fund. The amount would be recorded and reported as an expenditure in the capital projects fund. Neither the expenditure nor the reimbursement would be included in the general fund’s financial statements.

ESSAYS (CHAPTER 5)

1. When a government finances the purchase of a capital asset from a governmental fund, the acquisition is treated as an expenditure and reduces net current financial resources during the year of acquisition. During the years that principal and interest payments are being made on the debt incurred to finance the capital asset acquisition, the principal and interest amounts are also treated as expenditures. This appears to reduce the net current financial resources by twice the cost of the capital asset. Discuss these transactions and their overall effect on the net current financial resources of the government.
2. In the governmental fund types, expenditures are generally recognized when resources are acquired. Liabilities are generally recognized if they will be liquidated with available expendable financial resources. Define “available.” Relate the definition of available to the recognition of liabilities and expenditures in governmental fund financial statements. Discuss the reporting deficiencies that are directly associated with the use of the available criterion in the governmental funds.

3. Paid vacations, paid sick leave, and pensions are employee benefits frequently offered by governments. Discuss the reporting requirements related to each of these benefits and explain, if necessary, any differences between reporting for vacation pay earned but unused, sick leave earned but unused, and pensions earned during the current period.

1. Although it appears that the cost of the asset has been expensed twice, the apparent double counting of the expenditures does not misstate fund balance. At the time of acquisition the asset is treated as an expenditure and reduces fund balance by the amount of the acquisition. Simultaneously, the financing mechanism (note proceeds, bond proceeds, capital lease obligations, etc.) is treated as another financing source, which increases fund balance by the amount of the financing. In the year of acquisition, a fully financed asset will have zero effect on fund balance even though it is treated as an expenditure. During the following periods, the principal payments on the financing mechanism are treated as expenditures and reduce fund balance (usually in a debt service fund) over the financing period.
2. Expenditures are generally recognized as resources are acquired. This means that supplies, prepaid items, and capital assets acquired during the period are generally treated as expenditures and appear on the operating statement as reductions of fund balance. Liabilities are recognized if they will use available expendable financial resources. Since “available” means “collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period,” problems arise when items are acquired in the current period but will not require the use of available expendable resources until future periods. Since there is no notion of “current” related to the governmental funds, it is difficult to determine what expenditures and their associated liabilities should be recognized in the current period. Vacation benefits, sick pay benefits to be paid upon termination, pension contribution requirements, and claims to be paid in the future are but a few examples of costs associated with the current period that may not be recognized in the governmental fund operating statements of the current period. The liabilities are recognized in the governmental activities column in the government-wide statement of net position, but no expenditure or liability is recognized in the governmental funds. The current standards frequently understate the costs incurred by the government in the current period. As a result it is easier for governments to pass on to future generations the costs of goods and services consumed by current period taxpayers. Interperiod equity is generally not accomplished by using the current accounting model. Fortunately, the requirement to report these obligations in the government-wide financial statements ameliorates this shortcoming.
3. The value of all employee benefits should be accrued as a liability as the benefits are earned by the employees if both of the following benefits are met:
4. The employees’ rights to receive compensation are attributable to services already rendered.
5. It is probable that the employer will compensate the employees for the benefits through paid time off or some other means, such as cash payments at termination or retirement.