Chapter 16

Federal Government Accounting

/(CHAPTER 16)

1. If the U.S. Department of the Treasury, GAO, or OMB objects to a FASAB standard, it is returned to the FASAB for reconsideration.
2. Federal operations consist of five fund types—the general fund, special funds, trust funds, capital funds, and revolving funds.
3. Business-type activities of the federal government are reported in Proprietary funds similar to municipal governments.
4. Stewardship assets are long-lived assets that are not given balance sheet recognition by the federal government.
5. The federal agency balance sheet and statement of net cost are prepared on the full accrual basis of accounting.
6. The federal government recognizes social insurance commitments (e.g. social security) to beneficiaries as liabilities only when payments are due.
7. Federal agencies recognize the cost of loan guarantees for each individual guarantee when it is probable that the borrower will default on their payments.
8. Military assets are required to be capitalized and depreciated, but when war is declared, they are immediately expensed in their entirety.
9. Pronouncements of the IFAC’s International Public Sector Accounting Standards Board (IPSASB) state that third-world governments should prepare cash-basis financial statements..
10. All members of the FASAB are federal employees.

11. The AICPA has granted the FASAB exclusive authority to established GAAP for federal entities.

12. The unified budget of the federal government excludes Social Security, which is considered “off-budget.”

13. Natural disasters, such as hurricanes, may result in recognized liabilities of the federal government.

14. FASAB standards disallow note disclosure of investments in human capital in federal financial reports.

ANSWERS TO /(CHAPTER 16)

MULTIPLE CHOICE (CHAPTER 16)

1. Which of the following is a unique characteristic of the federal government that necessitates special accounting and reporting practices?
2. The types of its expenditures.
3. The size of its obligations.
4. The extent of its powers.
5. The range of its influence.
6. Which of the following is a function of the U.S. Department of the Treasury?
7. Adjudicating claims for and against the federal government.
8. Monitoring the execution of the federal budget.
9. Overseeing the central accounting and reporting systems.
10. Apportioning federal appropriations.
11. Which of the following is a responsibility of the Office of Management and Budget?
12. Assisting the president in preparing the federal budget.
13. Resolving bid protests that challenge government contract awards.
14. Keeping track of monetary assets and liabilities.
15. Arranging for audits of federal agencies
16. The amount of its budgeted resources that a federal agency currently has available for spending is its
17. Appropriation.
18. Apportionment.
19. Cash balance.
20. Unencumbered obligations.
21. The CFO of the United States is
22. A position within OMB.
23. A position within GAO.
24. A position in the Department of the Treasury.
25. A cabinet position reporting to the U.S. president.
26. Which of the following has the responsibility for auditing all federal agencies and programs?
27. OMB.
28. FASAB.
29. GAO.
30. The Department of the Treasury.
31. The Government Accountability Office (GAO) is part of which branch of the federal government?
32. Executive branch.
33. Judicial branch.
34. Legislative branch.
35. None of the above; it is independent of all three branches of the federal government.
36. Which of the following is a role that GAO plays in the accounting and information management policy of the United States?
37. Prescribing standards for auditing and evaluating government programs.
38. Developing integrated accounting systems that comply with applicable accounting standards.
39. Apportioning federal appropriations.
40. Reviewing federal agencies’ spending plans.
41. Federal government accounting standards are the responsibility of which federal government agency?
42. The Department of the Treasury.
43. The Office of Management and Budget.
44. The Government Accountability Office.
45. All of the above.
46. The Federal Accounting Standards Advisory Board is responsible for
47. Reviewing FASB and GASB standards.
48. Setting federal accounting standards.
49. Implementing federal accounting standards.
50. Developing federal auditing standards.
51. Which of the following is a statement about the Federal Accounting Standards Advisory Board?
52. It is a sub-agency of the OMB.
53. It is a shared jurisdiction board created following an agreement by three federal agencies.
54. It is an executive office function.
55. It was created by and reports to Congress.
56. Which of the following categories is included in the Objectives of Federal Financial Reporting?
57. Operating performance.
58. Congressional performance.
59. Executive performance.
60. Audit performance.
61. Federal operations are accounted for in four types of funds. Which of the following is one of the types of funds used?
62. Capital funds.
63. Revolving funds.
64. Special revenue funds.
65. Fiduciary funds.
66. Federal government capital expenditures can be accounted for in which of the federal funds?
67. General fund
68. Special funds.
69. Trust funds.
70. All of the above.
71. Which of the following types of expenditures are not accounted for in the federal government’s general fund?
72. Operating expenditures.
73. Capital expenditures.
74. Medicare.
75. Interest on public debt.
76. Which of the following is a statement about federal special funds?
77. They are maintained primarily to account for resources that are designated for specific programs or activities.
78. They are typically financed by dedicated fees.
79. They account for resources used to pay for national defense.
80. They are included in the unified budget of the federal government.
81. Which of the following funds is/are included in the category federal trust funds?
82. Old-Age and Survivors Insurance Fund (Social Security).
83. Supplementary Medical Insurance Fund (Medicare).
84. Neither (a) nor (b).
85. Both (a) and (b).
86. Federal government trust funds are
87. Composed of funds restricted by the donor/contributor.
88. Like endowment funds—only the income, not the principal, can be expended.
89. Any funds designated by law as trust funds.
90. Composed of funds that by law are dedicated to certain activities or programs.
91. Which of the following federal fund types is most similar to a state or local government's enterprise fund?
92. General fund.
93. Special funds.
94. Trust funds.
95. Revolving funds.
96. The U.S. Postal Service is accounted for in which of the following fund types?
97. General fund.
98. Special fund.
99. Trust fund.
100. Revolving fund.
101. The unified budget of the federal government was originally intended to include which of the following fund types?
102. General fund, all special funds, all trust funds, and all revolving funds.
103. General fund, all special funds, some trust funds, and all revolving funds.
104. General fund, some special funds, some trust funds, and all revolving funds.
105. General fund, all special funds, and all revolving funds.
106. Which of the following federal government accounting terms is most similar to an encumbrance, as that term is used in state and local government accounting?
107. Apportionment.
108. Allotment.
109. Commitment.
110. Obligation.
111. Which of the following federal government accounting terms is most similar to an appropriation, as that term is used in state and local government accounting?
112. Apportionment.
113. Allotment.
114. Commitment.
115. Obligation.
116. Which of the following is not a criterion for a federal government “component” to be considered a reporting entity and therefore required to issue a financial report?
117. There is a management responsible for controlling and deploying the component's outputs and outcomes and for executing its budget. It is held accountable for its performance.
118. The component is of sufficient size and significance that its financial statements would provide a meaningful representation of its operations and financial condition.
119. The component is of sufficient cohesiveness of operations that its financial statements would provide a meaningful representation of a specific program or type of activity.
120. Users are interested in the information to be reported in its financial statements and could use it to make resource allocation and related decisions.
121. The Financial Report of the United States Government is prepared on which of the following bases of accounting?
122. Cash.
123. Modified accrual.
124. Budgetary.
125. Accrual.
126. The United States Government Combined Statement of Receipts, Outlays, and Balances is prepared on which of the following bases of accounting?
127. Cash.
128. Modified accrual.
129. Budgetary.
130. Accrual.
131. Which of the following is not one of the basic government-wide federal financial statements?
132. Balance sheet.
133. Statement of operations and changes in net position.
134. Statement of net cost
135. Statement of custodial assets.
136. Which of the following is not a main section of the Financial Report of the United States Government?
137. Introductory section including letter of transmittal and MD&A.
138. Other stewardship information section.
139. Required supplemental information section.
140. Statistical section.
141. Which of the following is not a basic financial statement for a federal agency?
142. Balance sheet.
143. Statement of budgetary resources.
144. Statement of financing.
145. Statement of stewardship assets.
146. The FASAB requires that federal government agencies accrue nonexchange revenues when a specifically identifiable, legally enforceable claim to resources arises, to the extent that collection is probable and the amount is measurable. Thus, fines and penalties should be accrued
147. Upon expiration of the period during which the offender may contest a court summons.
148. When the offender pays the fine before a court date.
149. When the court imposes a fine.
150. Any of the above would meet the criteria.
151. Under FASAB standards, nonexchange revenues do not include
152. Taxes and duties.
153. Fines and penalties.
154. Sales to other government entities.
155. Donations received by federal museums.

32. FASAB requires that federal agencies capitalize certain assets. Which of the following assets should be capitalized?

1. Stewardship assets such as national parks and national forests.
2. Assets such as weapons systems and space exploration equipment.
3. Heritage assets that have only historical, artistic, or cultural significance.
4. Human capital.

33. The FASAB allows entities to value inventories held for sale at which of the following values?

1. Historical cost, using FIFO.
2. Historical cost, using weighted average.
3. Latest acquisition cost.
4. All of the above.

34. If a federal entity reports inventories held for sale at latest acquisition cost, it must also report an allowance for unrealized holding gains or losses. The allowance should be calculated as the difference between

1. Latest acquisition cost and FIFO historical cost.
2. Latest acquisition cost and weighted average historical cost.
3. Latest acquisition cost and LIFO historical cost.
4. Either a) or b).

35. The allowance for unrealized holding gains that appears in the cost of goods sold section of a federal financial statement effectively does which of the following?

1. Adjusts the latest acquisition cost inventory valuation to the historical cost valuation.
2. Increases the cost of goods sold by the increase in market value of the inventory.
3. Decreases the cost of goods sold by the increase in market value of the inventory.
4. Adjusts the historical cost valuation to the latest acquisition cost inventory valuation.

36. The federal government is required to recognize liabilities from nonexchange transactions

1. When an exchange takes place.
2. When the event occurs and the anticipated outflows of resources are both probable and measurable.
3. When due.
4. When formally acknowledged and an amount is due and payable as a result.

37. The federal government has declared a specific area a “natural disaster” area, making residents of the area eligible for payments from the federal government. When should the liability for such payments be recorded?

1. When an exchange takes place.
2. When the event occurs and the anticipated outflows of resources can be estimated.
3. When anticipated outflows of resources are both probable and measurable.
4. When formally acknowledged and an amount is due and payable as a result.

38. Amounts due to social security beneficiaries should be “booked” (recorded as a liability)

1. As beneficiaries earn benefits.
2. When beneficiaries reach the eligibility age for benefits..
3. When benefits become due and payable.
4. When the government formally acknowledges that benefits are due and payable.

39. When the federal government makes a direct loan at an interest rate below the prevailing Treasury rate (a subsidized loan), an asset should be recorded for which of the following amounts?

1. The face amount of the loan.
2. The present value of the future principal and interest payments discounted at the stated rate.
3. The present value of the future principal and interest payments discounted at the comparable Treasury rate.
4. No asset should be recorded.

40. When the federal government makes a direct loan at an interest rate below the prevailing Treasury rate (a subsidized loan), an expense should be recorded for which of the following amounts?

1. The difference between the face value of the loan and the present value of the estimated net cash receipts.
2. The difference between the present value of the estimated net cash receipts at the stated rate of interest and the present value of the net cash receipts at the prevailing interest rate.
3. The fair value of the loans.
4. No expense is recognized.

41. When the federal government guarantees a loan made by a private lender, the federal government should record a liability for which of the following amounts?

1. The face amount of the loan.
2. The present value of the anticipated payments to the private lender discounted at the government agency’s rate.
3. The present value of the anticipated payments to the private lender discounted at the lender's rate.
4. No liability should be recorded.

42. The Government Performance and Results Act of 1993 requires federal agencies to do which of the following?

1. Develop strategic plans and operational objectives.
2. Develop measures of performance.
3. Report on the extent to which they have met their objectives.
4. All of the above.

43. Which of the following statements is of the International Public Sector Accounting Standards Board?

a) It has been authorized by the United Nations to set accounting and financial reporting standards for all countries with representation in the U.N.

b) It has indicated that a country’s financial statements should be on a cash basis or a modified accrual basis of accounting, consistent with the country’s tradition, until all countries’ accounting systems are more advanced.

c) It has indicated that the public sector standards promulgated by the GASB are broadly consistent with IPSASB standards.

d) It has shown little interest in convergence of its standards for governments with those promulgated by the International Accounting Standards Board for businesses.

44. Under FASAB standards, government agencies should recognize liabilities for grants

a) When Congress passes the related legislation.

b) When the grant announcement is made.

c) When the announcement is formally acknowledged by the grantee.

d) When payments are due.

45. When should federal entities recognize liabilities for natural disasters?

a) When the disaster occurs.

b) When the financial effect of the disaster is known or can be estimated.

c) When the government acknowledges financial responsibility and an amount is due and payable.

d) Never. The federal government does not accept responsibility for Acts of God.

PROBLEMS (CHAPTER 16)

• • 1. The federal government’s general fund reports the following transactions during 2023.

REQUIRED:

Prepare journal entries to record each of these transactions. If no entry is required, write “No entry required.”

• 1. The general fund contracts with a construction firm to build an Afghan and Iraqi war memorial based on a design selected by the Afghan and Iraqi War Veterans Commission. The estimated cost of the project is $3.5 million.
  2. The general fund makes a $750,000 progress payment on the Afghan and Iraqi War Memorial contract.
  3. The general fund purchases new window treatments for the living areas of the White House. The cost is $650,000.
  4. The general fund reviews and accepts a design for the 2024 White House Christmas ornament and is billed $500,000 for the design cost.
  5. The general fund contracts for the manufacture of 1.5 million 2024 Christmas ornaments. The manufacturing cost for each ornament is $2.00. The ornaments are paid for and will be available for sale in the White House beginning in August 2024.
  6. The general fund elects to record its inventory of assets held for sale at historical cost.

1. A federal agency established to provide direct loans for older Americans enrolled in school or college made a three-year, 3 percent direct loan of $3,000 to be repaid in three equal annual installments of $1,060.59. The prevailing Treasury rate on short- and intermediate-term securities is 6 percent.

REQUIRED:

Prepare journal entries to record the loan and the three payments. If no entry is required, write "No entry required."

Present value factors, if needed

Present value of an annuity for 3 periods @ 6% = 2.67301

Present value of an annuity for 3 periods @ 3% = 2.82861

Present value of $1, @ 6%, 3 periods = .83962

Present value of $1, @ 3%, 3 periods = .91513

1. A federal agency was established to provide loan guarantees for students. At the beginning of Year 1 the agency guarantees $100,000 of student loans. The payments that the agency estimates it will have to make to lenders as a result of student defaults are as listed below. The agency uses a discount rate of 6 percent.

REQUIRED:

Prepare the necessary journal entries to record the loan guarantee expense in Year 1 and the payment to the lenders in Year 2 of $400 on defaulted loans. If no entry is required, write "No entry required."

Present value factors, if needed, at 6% PV of $1 PV of an Annuity

1 period .94340 .94340

2 periods .89000 1.83339

3 periods .83962 2.67301

4 periods .79209 3.46511

5 periods .74726 4.21236

Estimates made at the end of year 1 Estimates made at the end of Year 2

End of Year Amount End of Year Amount

1 $400 2 $200

2 $200 3 $100

1. $100

4. A federal environmental agency engaged in the following transactions during a particular year.

1. It billed corporations for which it provided services $160 million. Of this, it collected $140 million.

2. It levied $150 million in fines and penalties against corporations. Of this, $90 million was collected in cash. Of the balance, the protest period has expired on $35 million, which the agency expects to collect in the following year. The remaining $25 million is in dispute and court dates have not yet been set.

3. It collected an additional $20 million in fines and penalties that had been assessed by federal courts in the previous period.

4. It received cash donations of $3 million and pledges of an additional $2 million. The agency’s counsel advises that the pledges are not legally enforceable.

REQUIRED:

a. Prepare journal entries to record the revenues and collections.

b. Show how the revenues and related receivables would be reported on the agency’s balance sheet and statement of net cost (i.e., an operating statement).

ANSWERS TO PROBLEMS (CHAPTER 16)

Problem 1

• • • • 1. No entry required.

b. Stewardship asset expense $750,000

Cash $750,000

c.

Capital assets—window treatments $650,000

Cash $650,000

d.

Inventory—2015 ornaments $500,000

Accounts payable $500,000

e.

Inventory—2015 ornaments $3 million

Cash $3 million

f. No entry required.

Problem 2

a) Loan receivable $2,834.97

Loan subsidy expense 165.03

Cash $3,000.00

(Present value of expected payments discounted at 6 percent¾$1,060.59 x 2.67301 = $2,834.97)

b) Cash $1,060.59

Loan receivable $890.49

Interest revenue 170.10

(Simple interest—outstanding balance $2,834.97 x 6 percent = $170.10)

c) Cash $1,060.59

Loan receivable $943.92

Interest revenue 116.67

(Simple interest—outstanding balance {$2,834.97 – 890.49} x 6 percent = $116.67)

d) Cash $1,060.59

Loan receivable $1,000.56

Interest revenue 60.03

(Simple interest—outstanding balance {$2,834.97 – 890.49 – 943.92} x 6 percent = $60.03)

Problem 3

Year NPV Year NPV

1 $400 x .94340 = $377.36 2 $200 x .94340 = $188.68

2 $200 x .89000 = $178.00 3 $100 x .89000 = $ 89.00

3 $100 x .83962 = $ 83.96 $277.68

$639.32

Interest expense $639.32

Liability for loan guarantee $639.32

[Note: Students may label the expense as “loan guarantee expense.” However, as indicated on page 760 of the text, FASAB requires the expense to be classified as “interest expense.” ]

Liability for loan guarantee $361.64

Interest expense 38.36

Cash $400.00

Problem 4

a. Journal entries (Dollar amounts in millions)

(1)

Cash $140

Accounts receivable 20

Revenues from services $160

To record services rendered and related collections

(2)

Cash $ 90

Accrued fines and penalties receivable 35

Revenues from fines and penalties $125

To record fines and penalties (only on the amounts collected and on which the protest period has expired, not on the amount in dispute.)

(3)

Cash $ 20

Accrued fines and penalties receivable $ 20

To record collection of fines and penalties (which were recognized as revenue in the previous period)

(4)

Cash $ 3

Pledges receivable 2

Revenue from donations $ 3

Deferred revenue 2

To record revenue from donations actually received and to recognize deferred revenue on those not received and not legally enforceable

b. Balance Sheet

Cash $253

Accounts receivable 20

Pledges receivable $2

Less: Deferred revenue (2) 0

Accrued fines and penalties receivable 15

Total net position $288

Operating Statement

Revenue from services $160

Revenue from fines and penalties (cash collections) $110

Add: Accrual adjustment (net) 15 125

Revenue from donations 3

Total revenues $288

ESSAYS (CHAPTER 16)

1. Why is the FASAB named an “advisory board”? What happens if the GAO or the OMB rejects one of its standards?

• 1. One of the major problems encountered by the FASAB in setting standards for the federal government-wide financial statements is how to classify future benefit payments to social security beneficiaries. What are the underlying issues related to social security? How has the FASAB resolved the issues? How is social security information presented in federal financial statements?

1. One of the more difficult issues to address in state and local government accounting is the reporting entity. A similar issue exists at the federal level. Discuss the financial reporting entity issue at the federal level.
2. The federal government maintains a dual system of accounts. What are the two types of accounts? Why does the federal government keep two types?
3. What is meant by a “unified budget”? Why are Social Security and Postal Service receipts and disbursements not included in the unified budget?
4. The FASAB has explained that government liabilities are attributable to “events.” What are “events”? What types of events has FASAB identified? Give some examples of each type. When should liabilities be recognized for each type of event?
5. The board is titled “advisory” because technically it has the authority only to recommend accounting standards to the Department of the Treasury, the OMB, and the GAO — the three agencies through whose combined efforts the board was established. Proposed standards must be submitted to these agencies for their review and agreement before issuance. If either the OMB or the GAO objects to a proposed standard, the FASAB must continue to work on the standard until agreement is reached. (The Treasury voluntarily gave up its right to reject a proposed standard several years ago.) To date, neither the OMB nor the GAO has rejected a proposed standard submitted for their approval. However, both agencies (and the Treasury) are represented on the FASAB, so that it is likely that their views are taken into account before a standard is formally submitted for their approval.

2. In large measure the accounting controversy over how to report social security (and other social insurance programs) stems from different interpretations of the nature of the program. On the one hand, it is viewed as a government-sponsored pension plan involving exchange transactions, whereby employees and employers contribute to a fund during the employees’ working lives in anticipation of the employees receiving a lifetime stipend upon retirement. On the other hand, it is viewed as a government-managed income redistribution program involving nonexchange transactions, whereby the government taxes both employers and employees and dedicates the tax to program beneficiaries. The tax rate is not actuarially determined on a generally accepted basis, and the payments that beneficiaries receive upon retirement are not actuarially tied to the taxes that they or their employers paid.

3. The primary reporting entity issues for the federal government are similar to those that confront state and local governments: What types of organizations should be included in the federal reporting entity and, for those that qualify, how should they be included? FASAB is deliberating standards and is considering the following criteria that could indicate the need for inclusion:

• The organization is included in the federal budget.
• The federal government has a majority ownership interest.
• The organization is controlled by the federal government with the expectation that the government will obtain financial or nonfinancial benefits or be obligated to assume financial obligations.

1. The two types of accounts maintained by the federal government are budget accounts and proprietary accounts. Budget accounts ensure that the entity complies with budgetary mandates, does not overspend its appropriations, and is able to fulfill uniform budgetary reporting requirements. Proprietary accounts provide the information for the financial statements based on FASAB standards and are intended to provide an economic, rather than a budgetary, measure of operations and resources. The budget accounts are similar to the budget accounts used by state and local governments for the governmental funds. The proprietary accounts are similar to conventional revenue, expense, asset, liability, and net position accounts used by state and local governments to prepare both fund and government-wide financial statements.

5. The unified budget encompasses all four types of funds — general fund, special funds, trust funds, and revolving funds. When it was originally established, the unified budget was intended to capture in a single tabulation the effect of all federal activities on the national economy. However, the Congress subsequently removed Social Security and Postal Service receipts and disbursements from the official calculation of the budget and accorded them “off-budget” standing. The reason was to allow Social Security and the Postal Service to operate without being constrained by federal spending limitations in the way that other programs are.

6. The FASAB has explained that “events” encompass (a) transactions and (b) happenings of consequence. Transactions consist of two types: “Exchange transactions” and “nonexchange transactions.” In an exchange transaction, each party gives and receives something of value (e.g., a purchase/sale of goods or services). In a nonexchange transaction (sometimes referred to as a “nonreciprocal transfer”), the government provides something of value without directly receiving something of value in return. Examples include grants and entitlements, such as social security and Medicare benefits.