Chapter 10

Fiduciary Funds and Permanent Funds

/(CHAPTER 10)

1. Per GASB Statement No. 34, permanent funds are classified as fiduciary funds.

2. In accounting for permanent funds only the income can be spent; the principal must be preserved intact.

3. Fiduciary funds focus on current financial resources and use the modified accrual basis of accounting.

4. Fiduciary funds are excluded from the government-wide financial statements.

5. The concept of major versus nonmajor funds does not apply to permanent funds, as it does to governmental and proprietary funds.

6. Accounting for the employer’s contribution to a defined contribution pension plan is straight forward, because the employer is obligated only to make annual contributions in the amount specified in the plan terms.

7. Accounting for the employer’s contribution to a defined benefit pension plan is straight forward, because the employer is obligated only to make annual contributions in the amount specified in the plan terms.

8. Pension and OEB trust funds, custodial funds and internal service funds are examples of fiduciary funds

9. An employer may have a liability to a defined benefit pension plan other than for its annual required contributions, depending on the future financial health of the plan.

10. In an agency fund, assets always equal fund balances because there are no liabilities.

11. Colleges that use a fixed rate of return approach to manage the distribution of income from their endowments must apply the same rate to determine how much investment income to report in their financial statements.

12. GASB standards require a defined benefit pension plan to report investments at fair market value even if the plan’s actuary uses a different value in determining the employer’s contribution requirements.

13. In contrast to most private-sector pension plans, most government plans are defined contribution plans.

14. Permanent funds focus on measuring current financial resources and use a modified accrual basis of accounting.

ANSWERS TO /(CHAPTER 10)

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MULTIPLE CHOICE (CHAPTER 10)

1. A government receives a gift of cash and investments with a fair value of $200,000. The donor specified that the earnings from the gift must be used to beautify city-owned parks and the principal must be re-invested. The $200,000 gift should be accounted for in which of the following funds?

a) General fund.

b) Private-purpose trust fund.

c) Agency fund.

d) Permanent fund.

2. In previous years, Bergamot City had received a $400,000 gift of cash and investments. The donor had specified that the earnings from the gift must be used to beautify city-owned parks and the principal must be re-invested. During the current year, the earnings from this gift were $24,000. The earnings from this gift would most likely be considered revenue to which of the following funds?

a) Special revenue fund.

b) Private-purpose trust fund.

c) Agency fund.

d) Permanent fund.

Calla City received $200,000 to help maintain a local art museum that is owned and operated by a not-for-profit organization. At the time of receipt the city puts the full amount of the receipt in a trust fund. The donor specified that earnings should be provided to the museum for upkeep During the year the city transferred net earnings of $20,000 to the appropriate entity/fund.

3. The $200,000 gift would be reported in a (an):

a) Special revenue fund.

b) Private-purpose trust fund.

c) Custodial fund

d) Permanent fund.

Use the following information to answer Questions #4-5.

In the current year, Lotus City earned $24,000 on the principal of a private-purpose trust fund but disbursed only $20,000.

4. During the current year the private-purpose trust fund will recognize, related to earnings:

a) $24,000 revenues.

b) $20,000 revenues.

c) $24,000 addition to net position.

d) $20,000 addition to net position.

5. During the current year the private-purpose trust fund will recognize, related to the cash outflow:

a) $20,000 transfer-out.

b) $20,000 expenses.

c) $24,000 deduction from net position.

d) $20,000 deduction from net position.

6. Which of the following activities of a government should be accounted for in a fiduciary fund?

a) Funds received from the federal government to support public transportation activities.

b) Funds received from an individual who specified that the principal must be kept intact but the income can be used to support families of police officers killed in the line of duty.

c) Funds received from the state government that must be used to purchase capital assets.

d) Funds received from a contractor to assist with the development of utility infrastructure.

7. What basis of accounting is used to account for transactions of a government’s private-purpose trust fund?

a) Full accrual basis of accounting.

b) Modified accrual basis of accounting.

c) Cash basis of accounting.

d) Budgetary basis of accounting.

8. Which of the following would not be accounted for in a fiduciary fund of a government?

a) Nonexpendable resources held for the benefit of other governments.

b) Nonexpendable resources held for the benefit of the government holding the resources.

c) Expendable resources held for the benefit of other governments.

d) Funds held as an agent for other entities.

9. Permanent funds are classified as

a) Governmental funds.

b) Proprietary funds.

c) Fiduciary funds.

d) Trust funds.

10. Which of the following is not a fiduciary fund?

a) Pension trust fund.

b) Investment trust fund.

c) Permanent fund.

d) Private-purpose trust fund.

11. What basis of accounting is used to account for the transactions of a government’s permanent fund?

a) Full accrual basis of accounting.

b) Modified accrual basis of accounting.

c) Cash basis of accounting.

d) Budgetary basis of accounting.

Use the following information to answer Questions #12-14

Previously a local private-sector charity received a $1 million gift, the income from which was restricted to support activities for senior citizens. During the current year the endowment earned $40,000 of interest revenues, of which the charity designated $30,000 to support senior citizen activities.

12. On its year-end statement of activities, the charity would report interest revenues of:

a) $0

b) $30,000

c) $40,000

d) None of the above.

13. On its year-end statement of financial position, the charity would report non restricted net assets of:

a) $40,000.

b) $ 0.

c) $30,000.

d) $1.04 million.

14. On its year-end statement of financial position, the charity would report restricted net assets of:

a) $1 million.

b) $1.04 million.

c) $1.03 million.

d) $1.01 million.

15. Moonflower City has a permanent fund that reported current-year investment earnings (realized and unrealized) of $80,000. The endowment principal is $800,000 and the city council has adopted a policy of considering only the inflation-adjusted rate of return to be available for transfer to the recipient fund. During the current year the council declared the inflation-adjusted rate of return to be 8 percent. How much revenue would be recognized in the permanent fund?

a) $ 0.

b) $ 64,000.

c) $ 80,000.

d) Insufficient information to determine.

16. During the year, a state-owned university received a $5 million gift. The donor specified that the principal of the gift must be held intact for 3 years, but the earnings from the gift can be used to support technology improvements in the college of business. At the end of the 3 years, the donor together with the university president and the college dean will decide how the $5 million gift can be used. The university will report the gift in what type of fund?

a) Permanent fund.

b) Private-purpose trust fund.

c) Special revenue fund

c) Plant fund.

17. A wealthy citizen provided in her will for a gift of cash and other assets to Bluebonnet City. The will specified that the gift was to be kept intact and that the earnings from the gift were to be used to support public parks. At the time of the donation, the gift had a book value in the hands of the donor of $300,000 and a fair value of $500,000. When recording this gift the city would credit

a) Contributions revenues $500,000.

b) Other financing sources—contributions $500,000.

c) Contributions revenues $300,000.

d) Other financing sources—contributions $300,000.

18. At the beginning of the year, the permanent fund of Rosebud City had an investment portfolio with a historical cost of $300,000 and a fair value of $330,000. There were no purchases or sales of securities during the year. At the end of the year the portfolio had a fair value of $360,000. At year-end, the city s account for this increase in fair value in which of the following ways?

a) Credit Investment income, $30,000.

b) Credit Investment income, $60,000.

c) Credit Fund balance, $30,000.

d) No entry should be made to recognize an increase in fair value.

19. Several years ago, a donor gave $5 million to Daylily City and specified that the principal was to be kept intact but the earnings were to be used to support the operations of city parks. During the current year, the city earned $300,000 on the gift. To what type of fund, should the city transfer the $300,000 earnings?

a) It should not make any transfers. The $300,000 should remain in the city’s permanent fund.

b) A special revenue fund.

c) The general fund.

d) An enterprise fund.

20. A defined contribution pension plan is one in which the employer agrees to do which of the following?

a) To make payments to a specified pension plan with no guarantee of a specific pension amount to be paid to the employees.

b) To make actuarially determined payments to a pension plan AND to guarantee that the employees will receive a specified pension benefit (usually determined by length of service and salary).

c) To make actuarially determined payments to a pension plan that guarantees employees will receive a specified pension (usually determined by length of service and salary).

c) To pay specified amounts (usually determined by length of service and salary) to the employees upon retirement.

21. Dahlia City Light & Water (a proprietary fund) contributes to a defined benefit pension plan for its employees. During 2023, the city contributed $36 million to the pension plan. The city also made a $4 million contribution related to 2022. The actuarially determined contribution requirement for 2023 was $43 million. The amount of pension expense recognized by Dale City Light & Water for 2023 should be:

a) $ 0

b) $ 36 million

c) $ 40 million

d) $ 43 million

22. During the fiscal year ended December 31, 2022, Gladiola City’s general fund contributed $60 million to a defined benefit pension plan for city employees. On February 27, 2023, the general fund made an additional $3 million contribution related to the 2022 pension contribution requirements. The actuarially determined contribution requirement for 2022 is $65 million. The amount of pension expenditure recognized by the general fund for 2022 should be:

a) $ 0

b) $ 60 million

c) $ 63 million

d) $ 65 million

23. In which of the following funds would the account “net pension obligation” be most likely to appear?

a) General fund.

b) Enterprise fund.

c) Private-purpose trust fund.

d) Agency fund.

24. Required disclosure by the general fund of a government related to its pension plan does not include which of the following?

a) The employer’s funding policy.

b) The components of the pension cost.

c) The key assumptions used in determining the pension cost.

d) The present value of the future benefits to be paid.

25. The primary financial statements for a government-sponsored pension plan are:

a) Balance sheet and statement of activities.

b) Balance sheet, statement of activities, and cash flows statement.

c) Statement of fiduciary net assets and a statement of changes in fiduciary net assets

d) Balance sheet, statement of activities, cash flows statement, and statement of funding progress.

26. A plan’s unfunded actuarially accrued liability is the excess of the:

a) Actuarially determined plan cost over the actual contribution.

b) Actuarially determined plan cost over the plan assets.

c) Actuarially determined pension liability over the plan assets.

d) Actuarially determined pension liability over the total contributions

27. Citizens within a defined geographic area of Daphne City created a special assessment district to facilitate the construction of sidewalks. The city was responsible for overseeing the entire construction project. The city issued bonds in its own name to pay the contractor for the construction. However, the city was not responsible in any manner for the bonds. The bonds were secured by the special assessments that are levied against properties within the special assessment district. Collections of special assessments would be recorded in which of the following funds of Daphne City?

a) Special assessment fund.

b) Agency fund.

c) Special revenue fund.

d) Debt service fund.

28. Lupin City receives a federal grant to assist in nutrition programs for its senior citizens. The city will select the contractors that will provide meals and approve the participants in the program. The proceeds of this grant should be accounted for in which of the following funds of the city?

a) A governmental fund.

b) An enterprise fund.

c) An agency fund.

d) A private-purpose trust fund.

29. Armeria City receives a federal grant to assist in nutrition programs for its senior citizens. Senior citizens whose income is below a specified amount (the amount was specified by the Federal government) are eligible to participate in the program. Monthly checks of $100 (this amount was specified by the Federal government) will be mailed to eligible senior citizens. The proceeds of this grant should be accounted for in which of the following funds of the city?

a) General fund.

b) Special revenue fund.

c) Agency fund.

d) Private-purpose trust fund.

30. Financial assets reported by most investment trust funds of governments should be reported at

a) Cost

b) Amortized historical cost.

c) Fair value on the date of the financial statements.

d) Fair value computed by a weighted-average approach.

31. Assets reported in a government’s investment trust fund should include:

a) Only investments owned by external participants in the investment pool.

b) Investments of both the sponsoring government and of external participants in the investment pool.

c) Investments related to the sponsoring government’s governmental funds and of external participants in the investment pool.

d) Investments related to the sponsoring government’s other fiduciary funds and of external participants in the investment pool.

32. Financial assets reported by investment pools should be reported at

a) Fair value at the date of the financial statements.

b) Amortized historical cost.

c) Fair value computed using a weighted-average approach.

d) Cost.

33. GASB standards of accounting for other postemployment benefits (OPEB) require that governments

a) Fund their OPEB benefits on an actuarially determined basis.

b) Report actuarially determined required contributions as OPEB expense, regardless of whether the government actually makes the contributions.

c) Report OPEB costs in accordance with the FASB’s standards of accounting for OPEB.

d) Only disclose an estimate of their OPEB liabilities.

34. Liabilities reported in pension trust funds consist of

a) Liabilities accrued using the accrual basis of accounting, including the actuarial accrued liability for the plan.

b) Liabilities accrued using the modified accrual basis of accounting, excluding the actuarial accrued liability for the plan.

c) Liabilities accrued using the accrual basis of accounting, excluding the actuarial accrued liability for the plan.

d) Liabilities accrued using the modified accrual basis of accounting, including the plan benefits that will be paid with measurable and available financial resources.

35. Governments must present which of the following financial statements for fiduciary funds?

1. Statement of assets and benefits and statement of cash flows.
2. Statement of fiduciary net assets and statement of changes in benefits,
3. Statement of fiduciary net position and statement of changes in fiduciary net position.
4. Statement of net assets and statement of accrued benefit obligations.

36. Which of the following is a characteristic of fiduciary fund statements in a government’s annual financial report?

1. Consolidated statements only--no separate statements for individual pension plans.
2. A separate column in each statement for each fiduciary fund type.
3. A consolidated assets and benefits statement showing three classes of net assets.
4. Statements reporting information by major fund.
5. The liabilities related to benefits and refunds of a defined benefit pension plan are reported in a government’s fiduciary fund financial statements using the

Full Accrual Modified Economic Resources Current Financial

Basis Accrual Basis Measurement Focus Resources Measure-

ment Focus

1. No Yes Yes No
2. Yes No No Yes
3. No Yes No Yes
4. Yes No Yes No

38. A major difference between defined benefit pension plans and defined contribution pension plans is that

a) In defined benefit plans, the risk of loss is borne primarily by the employer.

b) Accounting for defined benefit plans is much simpler than accounting for defined contribution plans.

c) Employees generally are required to contribute to defined contribution plans but not to defined benefit plans.

d) There is no major difference between the two kinds of pension plans.

39. Which of the following is not of agency funds?

a) Governments use them to account for resources held as trustee or agent for another government, fund, not-for-profit entity, or individual.

b) They are required to use a modified accrual basis of accounting.

c) They have no operations and therefore are not required to prepare financial statements.

d) Agency fund assets are always offset by liabilities.

40. Whether gains on the sale of a government endowment’s investments should be considered additions to principal or expendable income for accounting purposes is:

a) An issue that has been resolved by federal law.

b) Debatable, but generally resolved in favor of adding the gains to unrestricted assets (expendable), absent donor or legal stipulations.

c) A matter for governments to decide, independent of donor or legal considerations.

d) Debatable, but generally resolved in favor of adding the gains to principal (nonexpendable assets), absent donor or legal stipulations.

41. The funded status of a defined benefit pension plan is

a) The result of comparing the actuarial value of plan assets with the plan’s actuarial accrued liability for benefits.

b) The amount by which plan assets exceed benefits due to current retirees.

c) Current-year contributions less amounts currently due but not paid to current retirees,

d) The policy as to whether the plan is being financed on a pay-as-you-go (cash) basis or through actuarially determined employer contributions.

42. Which of the following is a not a statement concerning postemployment benefits other than pensions (OPEB)?

a) OPEB comprise predominantly healthcare benefits.

b) Many governments do not provide OPEB or provide them on a pay-as-you-go basis.

c) GASB standards of accounting for OPEB are very similar to those for pension benefits.

d) OPEB plans should be accounted for in permanent funds.

43. Which of the following is a potential reform for defined benefit plans?

a) Refuse to pay benefits for more than 10 years after retirement

b) Reduce the age of retirement to allow employees to develop a second career to save for retirement

c) Eliminate “spiking” or using overtime to increase the salary on which benefits are determined

d) None of the above.

PROBLEMS (CHAPTER 10)

1. Solomon’s Seal City received a donation from the estate of the late Lisa O’Reilly to be used to support the city’s public library. The gift consisted of $200,000 cash and a portfolio of securities with a market value of $350,000. The securities have a book value of $250,000. The donor stipulated that the principal of the gift, including investment gains (realized and unrealized) but excluding investment losses, must be kept intact. The income must be used to care for and maintain the book collection at the newly renamed O’Reilly Public Library. All appropriate costs, including investment losses, may be charged against the revenues yearly to determine the amount available for the specified purposes. During the year, the city engaged in the following transactions on behalf of the library.

REQUIRED:

Prepare the appropriate entries in the city’s permanent fund.

a) Accepted the donation.

b) Received dividends and interest of $18,000.

c) Purchased securities for $200,000.

d) Sold securities that were part of the original gift (market value at date of gift $72,000; book value in hands of donor $68,000) for $78,000.

e) Sold some of the securities that were acquired in transaction (c) for $53,000. They were acquired at a price of $55,000.

f) The portfolio of securities at year-end had a market value of $432,000.

g) Closed the fund’s revenue and expense accounts and transferred the amount available for expenditure to the appropriate fund. Close the transfer account.

1. Keli City received a cash gift of $125,000 from a citizen who specified that the gift must be used to support recreational activities for the city’s youth. The city accounted for this gift in the appropriate fund. During the year the city engaged in the following activities.

REQUIRED:
Prepare the appropriate journal entries. Be sure to indicate in which fund the entries should be recorded.

a) The city accepted the donation.

b) The city engaged in a fund-raising effort to provide additional funds to support youth recreational activities and raised $6,000 in pledges. The city collected $2,000 in cash with the remaining pledges collectible shortly after the end of the year.

c) The city temporarily invested $50,000 of the gift in marketable securities.

d) The city spent $26,000 on goal posts, nets, etc., for a soccer field.

e) The city received $2,000 in dividends and interest earned on the temporary investment.

f) At year-end the temporary investments had a market value of $51,000.

g) The city closed the revenue and expense accounts.

1. Willow County provides a defined benefit pension plan for its employees. The county accounts for the pension plan in a pension trust fund, which is included in the county's basic financial statements. In the years indicated, the county engaged in the following transactions related to the pension trust fund.

REQUIRED:

Prepare all necessary journal entries. Clearly indicate the fund in which the entry is being made. If no entry is needed, please write "No entry required."

a) In Year 1, the pension trust fund sent billings to the general fund and the City Utility (enterprise) Fund for the actuarially determined amount of required contributions. The general fund was billed $300,000 but paid only $220,000 during the year. The enterprise fund was billed $450,000 and paid $530,000.

b) In Year 2, the pension trust fund sent billings to the general fund and the City Utility Fund for the actuarially determined amount of required contributions. The general fund was billed $320,000 and paid the entire amount plus $30,000 of last year's underpayment. The enterprise fund was billed $480,000 and paid only $380,000.

1. Heron State University maintains accounts for each of its student groups. The monies collected by the Accounting Fraternity are deposited with the university. As the fraternity authorizes disbursements of its funds, the university disburses the monies. During the year, the fraternity engaged in the following transactions.

REQUIRED:

Prepare the appropriate entries on the books of the university. Be sure to indicate in which fund the entries should be recorded.

a) The fraternity deposited $400 in student dues.

b) The fraternity authorized payments of $350 to Delta Airlines for an airline ticket for a member to fly to the national meeting, and of $100 to the National Accounting Fraternity for registration.

c) The fraternity received a contribution of $500 from a major accounting firm to be used by the fraternity to offset the cost of attending the national meeting.

d) The fraternity operated a book exchange on a consignment basis and collected revenues of $10,000. It authorized the university to write $9,000 of checks to the students whose books the fraternity had sold. The fraternity was pleased with the $1,000 profit.

e) The fraternity received a reimbursement of $150 from the National office to offset the costs of attending the National meeting.

5. At the end of 2015, Learning Grove, a not-for-profit organization, received a $5 million contribution (fair value), consisting entirely of investment securities. The contribution is required to be used to establish a permanent endowment, the income from which must be used exclusively to provide free “chapter books” to elementary school children. The endowment specifies that both realized and unrealized gains may be used for this purpose in addition to investment income. Learning Tree applies FASB accounting standards for not-for-profit organizations.

At the start of 2022, Learning Grove had $600,000 in unrestricted net assets.

During 2022, the endowment earns $100,000 in dividends and interest. Learning Tree spends the entire amount on books and distribution costs. At year-end, the value of the endowment portfolio is $5.5 million.

During 2023, the endowment earns $100,000 in dividends and interest. The entire amount is spent on books. At year-end, the fair value of the endowment portfolio has decreased by $1 million to $4.5 million.

During 2024, the endowment earns $100,000 in dividends and interest. The entire amount is spent on books. At year-end, the fair value of the endowment portfolio has gone back up by $0.4 million to $4.9 million.

REQUIRED:

a) Assuming no other transactions, prepare a schedule showing the balances in unrestricted, temporarily restricted, and permanently restricted net assets for the years ending in 2022, 2023, and 2024.

b) What effect would there be on these three balances of net assets if the donor specified that all gains (realized and unrealized) must be reinvested?

6. Bletilla City provides a defined benefit pension plan for its full-time employees. The city includes the plan as a pension trust fund in its fund financial statements.

REQUIRED:

Using the information below, prepare a statement of fiduciary net position and a statement of changes in fiduciary net position for the pension trust fund.

Cash at year-end $2.5 million

Investments at year-end $23.5 million

Actuarial value of plan assets at year-end $20.95 million

Accounts payable $0.06 million

Actuarial accrued liability $29.9 million

Refunds payable $0.09 million

Employer contributions $2.2 million

Employee contributions $0.4 million

Investment earnings $3.2 million

Benefits paid $0.8 million

Administrative expenses $0.5 million

Net position, held in trust

for pension benefits at beginning of year $21.35 million

7. The statement of fiduciary net position for a school district's defined benefit pension plan shows the following (in condensed form and in thousands)

Assets

Cash and short-term investments $ 66,129

Receivables 49,946

Investments at fair value 3,565,931

Total assets $3,682,006

Liabilities

Benefits payable to current employees

and retirees $ 4,212

Net position $3,677,794

• 1. The plan has been in operation for over 20 years and covers all school district employees. What is the most reasonable explanation of why the benefits payable to current employees and retirees is so small relative to plan assets?
  2. Suppose that in the current year the school district’s annual required contribution was $6,300,000. In the past, the district has always paid the annual required contribution in full. However, in the current year the district budgeted and paid into the pension trust fund only $5,000,000.
     1. Prepare the journal entry that the district (not the plan) should make to record the year's pension contribution. You need not make budgetary or closing entries. The plan is accounted for in a governmental fund.
     2. Prepare the journal entry to record the year’s pension contribution for reporting in the district’s government-wide statements.

C. The district’s annual financial report indicated that its "normal cost" was $530,000 and that the "amortization of the unfunded actuarial accrued liability" was $100,000.

1. What is meant by "normal cost?"

2. What is meant by "unfunded actuarial accrued liability"? What are its principal causes? Why must it be amortized?

ANSWERS TO PROBLEMS (CHAPTER 10)

Problem 1

a) Cash $200,000

Investments 350,000

Contributions (revenue) $550,000

b) Cash $ 18,000

Revenue $ 18,000

c) Investments $200,000

Cash $200,000

d) Cash $ 78,000

Gain (not available to beneficiary) $ 6,000

Investments $ 72,000

e) Cash $ 53,000

Loss on sale (available to beneficiary) $ 2,000

Investments $ 55,000

f) Investments $ 9,000

Unrealized gain (not available to beneficiary) $ 9,000

[(350,000 + 200,000 – 72,000 – 55,000) – 432,000]

g) Contributions (revenue) $ 550,000

Gain/revenue (not available to beneficiary) 15,000

Fund balance $565,000

Revenue (available to beneficiary) $ 18,000

Income available to beneficiary $ 16,000

Loss (available to beneficiary) 2,000

Income available to beneficiary $ 16,000

Nonreciprocal transfer-out $ 16,000

Nonreciprocal transfer-out $ 16,000

Cash $ 16,000

Problem 2

These entries are recorded in a special revenue fund.

[Note: Because all assets are indeed restricted by outside parties, some students might record the assets as restricted cash and investments.]

a) Cash $125,000

Contributions (revenue) $125,000

b) Cash $ 2,000

Pledges receivable 4,000

Contributions (revenue) $ 6,000

c) Investments $ 50,000

Cash $ 50,000

d) Expenditures $ 26,000

Cash $ 26,000

e) Cash $ 2,000

Revenues $ 2,000

f) Investments $ 1,000

Revenues (unrealized gain) $ 1,000

g) Contributions (revenue) $131,000

Revenue 3,000

Fund balance $108,000

Expenditures 26,000

Problem 3

a) PENSION TRUST FUND

Due from general fund $ 300,000

Due from enterprise fund 450,000

Revenue 750,000

Cash $ 750,000

Due from general fund 220,000

Due from enterprise fund 450,000

Nonreciprocal transfer-in

from enterprise fund 80,000

GENERAL FUND*

Pension expenditure $ 220,000

Cash $ 220,000

ENTERPRISE FUND

Pension expense $ 450,000

Nonreciprocal transfer-out

to pension trust fund 80,000

Cash $ 530,000

b) PENSION TRUST FUND

Due from general fund $ 320,000

Due from enterprise fund 480,000

Revenue $800,000

Cash $ 730,000

Due from general fund $ 350,000

Due from enterprise fund 380,000

GENERAL FUND

Pension expenditure $ 350,000

Cash $ 350,000

ENTERPRISE FUND

Pension expense $ 480,000

Due to pension trust fund $ 480,000

Due to pension trust fund $ 380,000

Cash $ 380,000

*[Note: Students may record a due to pension trust fund here. In the case of pension contributions, however, GAAP require the pension trust fund to adjust its receivable and contributions revenue to the amount that will actually be paid by the governmental fund (GASB Comprehensive Implementation Guide—2003, Question 5.55). In this way, the governmental fund does not report a fund liability and expenditure for unpaid pension contributions—that is, a “due to pension trust fund.”]

Problem 4

All journal entries are recorded in an agency fund of State University.

a) Cash $ 400

Due to fraternity $ 400

b) Due to fraternity $ 450

Cash or accounts payable $ 450

c) Cash $ 500

Due to fraternity $ 500

d) Cash $ 10,000

Due to fraternity $ 10,000

Due to fraternity $ 9,000

Cash $ 9,000

e) Cash $ 150

Due to fraternity $ 150

Problem 5

a)

Net Assets Related to Investments — 2022

Permanently Temporarily

Restricted Restricted Unrestricted Total

Beginning of year $5,000,000 $ 0 $600,000 $5,600,000

Interest and dividends 100,000 100,000

Distributions (100,000) (100,000)

Investment gains   500,000 0 500,000

End of year $5,000,000 $500,000 $600,000 $6,100,000

Net Assets Related to Investments — 2023

Permanently Temporarily

Restricted Restricted Unrestricted Total

Beginning of year $5,000,000 $500,000 $600,000 $6,100,000

Interest and dividends 100,000 100,000

Distributions (100,000) (100,000)

Investment losses   (500,000) (500,000) (1,000,000)

End of year $5,000,000 $ 0 $100,000 $5,100,000

Net Assets Related to Investments — 2024

Permanently Temporarily

Restricted Restricted Unrestricted Total

Beginning of year $5,000,000 $ 0 $100,000 $5,100,000

Interest and dividends 100,000 100,000

Distributions (100,000) (100,000)

Investment gains   0 400,000 400,000

End of year $5,000,000 $0 $500,000 $5,500,000

b) The gains would be added to the principal of the endowment, but losses would be reported first as a reduction of temporarily restricted net assets and, when temporarily restricted net assets equaled zero, as a reduction of unrestricted net assets. The treatment of losses is the same as above.

Problem 6

Problem 7

A. The statement of fiduciary net position reports only benefit obligations that are currently due and payable to retirees and non-active employees (e.g., disabled and terminated vested employees who have not yet reached retirement age). The statement does not report actuarial accrued liabilities for benefits accrued by active employees.

B. 1. Pension expenditure $5,000,000

Cash $5,000,000

2. Pension expense $6,300,000

Cash $5,000,000

Net pension obligation 1,300,000

C. 1. Normal cost is the portion of the total actuarial present value of pension plan benefits that is allocated to a particular year by an actuarial cost method. It is often referred to as “current service cost.” The portion allocated by the actuarial cost method to the past (i.e., benefits earned in prior years by current employees and retirees) is called the actuarial accrued liability.

2. The unfunded actuarial accrued liability (or “unfunded liability”) is the difference between the actuarial accrued liability and the pension plan’s assets. Unfunded liabilities can originate and change from year to year as a result of numerous factors, including:

• The actuarial methods and assumptions used to compute normal cost, actuarial accrued liabilities, and the actuarial value of plan assets
• Actuarial gains and losses, which may result from changes in actuarial methods and assumptions
• Experience gains and losses, which occur when actual amounts such as investment returns, salary increases, and employee turnover differ from expected amounts
• Increases or decreases in pension benefits due to changes made by the employer in the benefit formula or in the number of employees covered by the plan
• Contributions by the employer that are less than or more than the actuarially determined required contributions.

The objective of actuarial funding of a pension plan is to ensure that sufficient funds will be available to pay all benefits as they become due over future years. Unfunded liabilities (assets less than benefits earned) constitute a shortfall that has to be made up in order to meet the funding objective. To make up for shortfalls, a portion of the unfunded liability is included in the employer’s annual required contribution each year until the shortfall is paid off—similar to payments on a long-term loan or home mortgage. This process in pensions is called “amortization of the unfunded actuarial accrued liability.” When there is no unfunded liability, the employer’s annual required contribution consists only of normal (current service) cost. When an unfunded liability is being amortized, the employer’s contribution consists of normal cost and amortization of the unfunded liability.

1. How does a defined contribution pension plan differ from a defined benefit pension plan? What are some of the advantages and disadvantages of each type of plan? How do they differ for accounting and financial reporting? Which type of plan would you prefer to belong to? Why?

2. A donor gives your city $100,000 to be used to support youth recreational programs. What type of fund should be used to account for this gift? How or why did you select this fund? Include in your answer other types of funds that could be considered to account for similar donations and why you did not select one of those funds.

3. Under GASB standards, agency funds are excluded from the face of the government-wide financial statements. What are agency funds? Do you believe they should be presented in the government-wide statements? Could they--or should they--be presented elsewhere?

4. Investment trust funds are one of four types of fiduciary funds. What is the purpose of investment trust funds? What is the nature of the assets and liabilities that they report? Can the government that provides an investment trust fund invest its own assets in that fund?

5. You are asked by a wealthy businesswoman to help construct a permanent endowment for a local university. She asks you whether you believe the university should be required to add investment gains to the principal of the endowment or whether it would be preferable for the gains to be available for spending. How would you respond and why?

1. Under a defined contribution pension plan, an employer agrees to make a series of contributions (payments) to the plan for its employees. The contributions usually are a percentage of each employee’s salary. Generally, employees also are required to contribute to the plan. The plan management (frequently a third party independent of the employer) invests the funds, often with some direction provided by employees, if they wish. Employees can begin withdrawing funds when they retire, or earlier if permitted by the plan terms. The employer is not responsible for the amount of the employees’ eventual benefits, which will depend on the fund’s investment performance and amounts allocated to individual employees’ accounts. Thus, in this type of plan, the employees bear all of the investment risks, including the risk of outliving the amounts available in their accounts at retirement. Employees generally receive statements of their individual account balances, which can help them understand the likelihood that their future benefits will or will not be sufficient.

2. The gift should be reported in a special revenue fund, which would indicate the restricted purpose and spendable nature of the gift. One alternative could be a permanent fund. However, the problem does not state that the principal of the gift must be maintained intact and only the earnings can be spent. Without that stipulation, use of a permanent fund is not appropriate. Another alternative to consider is a fiduciary fund. However, fiduciary funds are used only when the assets are held for the benefit of individuals, private organizations, or other governments. A private-purpose trust (fiduciary) fund, for example, could be indicated if the beneficiaries were a narrow segment of the population, such as when contributions are received to benefit the child of a slain police officer. However, the gift in question is intended to benefit all youth in the city, so it would not be appropriate to use a private-purpose trust fund or any other fiduciary fund.

3. Agency funds account for resources held by one entity acting as the agent of another entity. In a agency relationship, the holder of the resources has no decision-making authority. The holder is a steward, and accounting for his/her stewardship should be the primary concern. Agency funds do not carry out operations; therefore, they have no operating accounts.

4. Investment trust funds are used by governments that sponsor an external investment pool as a service to other governments within their jurisdiction. Investment pools are like mutual funds without all the related fees. Sometimes the sponsoring government invests its own money in the pool. However, the only assets that should be reported in the financial statements of an investment trust fund are the assets held for other governments. Investments of the sponsoring government are required to be reported in the fund financial statements, within the fund that “owns” the investments. The sponsoring government’s investments also should be reported in the government-wide financial statements. Liabilities reported in an investment trust fund are amounts due to other governments.

5. By making the investment gains nonexpendable (adding them to principal), you will help protect the endowment from inflation. Assuming that at least a portion of net investment gains can be attributable to changes in the value of the monetary unit, the policy will help ensure that the endowment principal retains its initial earning power--and hence its purchasing power. The disadvantage of this policy, however, is that it assumes a direct relationship between the rate of inflation and investment gains. It uses investment gains as a surrogate for inflation, rather than taking inflation into account directly. Moreover, if there is a need for immediate income, the policy may encourage the university endowment managers to adopt investment strategies that will maximize current interest and dividends at the expense of overall return on investment.