Consider each of the following situations. Indicate whether (and why or why not) you think that the government should account for the transactions and resources in an agency fund, a governmental fund, or some other type of fiduciary fund. Not all the situations have been explicitly addressed in the text. Therefore, you may have to generalize from those that have been discussed. 1. A city extended sewer and water lines to a recently annexed community. Per agreement with the community, the improvements are to be paid for entirely by local residents. To finance the improvements, the city issued 10-year notes on behalf of the residents. It assessed the residents for the amount of the debt, plus interest. The city guaranteed the notes and agreed to collect the assessments from the residents and make appropriate payments to the note holders. However, the city’s role is primarily one of an intermediary. The residents, not the city, are expected to service the debt. 2. A state receives a federal law-enforcement grant intended to assist local communities in hiring additional police officers. The federal granting agency selects the cities and counties that are to receive the awards and determines the amounts they are to receive. The federal government, not the state, is responsible for monitoring grant compliance. The state’s only responsibility is to write the checks to the cities and counties. 3. A state receives a federal educational grant intended to assist local school districts in hiring additional teachers. The federal granting agency establishes the criteria that the state is to use in determining the school districts to receive the awards and the amounts they are to receive. The district has no discretion in selecting recipients other than to apply the specified criteria. 4. A county collects sales taxes that it distributes among itself and the towns within its jurisdiction. The taxes are levied by the county and are divided among the recipient governments in accordance with a formula set forth in the legislation that authorized the tax.
> Why are bond ratings of vital concern to bond issuers?
> In 2017 Marquette County opened a landfill that was expected to accept waste for four years. The following table indicates the estimates county officials made at the end of each of the four years: Determine the total expected closure costs ($10 million)
> The water and wastewater utility (enterprise) funds of three cities each paid $1 million in casualty insurance premiums. City A is insured by a small independent insurance company. City B is self-insured and accounts for its insurance activities in an in
> The following list of cash flows was taken from the statement of cash flows of Grand Junction’s internal service fund (with all amounts expressed in thousands): Cash on hand at beginning of year………………………… $ 122 Interest from investments………………………………………..
> The following data relate to the City of Spicewood’s data processing internal service fund: Billings to police and fire departments……………………………….……. $ 800,000 Billings to water utility department……………………………………..…… $ 200,000 Year-end receivable from police
> The chairman of a state legislature’s finance committee has charged that the Division of Taxation’s computer systems are in chaos and, as a consequence, the state is failing to collect hundreds of millions in income taxes to which it is entitled. Accordi
> The Louisville City bus system engaged in the following transactions: 1. It issued $10,000,000 in 8 percent revenue bonds. It used the proceeds to acquire new buses. The bonds were issued at par. 2. Consistent with a bond covenant, the system set aside 1
> William County opted to account for its duplication service center in an internal service fund. Previously the center had been accounted for in the county’s general fund. During the first month in which it was accounted for as an internal service fund th
> Select the best answer. 1. A city’s general fund has an outstanding payable to its electric utility, which is accounted for in an enterprise fund. The utility has a corresponding receivable from the general fund. In the city’s government-wide statement
> The city of Tribville recently centralized its mobile technology (phones, computers, and tablets) functions for the government in a single internal service fund. City officials want the fund to break even, so they need rates to be set appropriately. The
> The City Electric Utility (CEU), which a city accounts for in its enterprise fund, provides cash rebates to customers who install insulation, storm windows, or energy-saving appliances. The payments are intended to reduce the demand for electricity and t
> What follows are the statement of revenues, expenses, and changes in net position, and the statement of cash flows for Tucson, Arizona’s fleet services internal service fund. 1. How do you account for the difference between net operating income of $105 a
> In Year 1, as a result of routine testing, a city discovers that local wells are polluted. Investigation reveals that the source of the contamination is an abandoned waste dump that the city owns. At a cost of $25,000, the county conducts a feasibility s
> In 2018, a city opens a municipal landfill, which it will account for in an enterprise fund. It estimates capacity to be 6 million cubic feet and usable life to be 20 years. To close the landfill, the municipality expects to incur labor, material, and eq
> A municipality expects to use a landfill evenly throughout the 25 years from January 1, 2017, to December 31, 2041. Upon closing the landfill it estimates that it will incur closing costs of $300,000. Thereafter, it anticipates it will have to monitor th
> Sun City accounts for its telecommunication services in an internal service fund. In a recent year its records indicated the following: Billings to units accounted for in governmental funds……………………………………… $400,000 Billings to units accounted for in propr
> The president of a major state university has a problem. A group of alumni are complaining that the university’s athletic program is an embarrassment to the university and are demanding that the athletic director be fired. In response, the president has
> The State Auditor of Missouri is an elected official. In auditing the financial statements of the University of Missouri, what special problems relating to independence would he or she face that a private CPA firm would not? By conducting the audit, woul
> The data in the accompanying table were extracted from a city’s fund statements (in millions). 1. Prepare in summary form a government-wide statement of activities and a statement of net position. Although you need not prepare the state
> A city maintains an internal service fund to account for a maintenance department. The department provides services to all city departments, which—with one exception—are accounted for in the city’s general fund. The exception is the department responsibl
> The balance sheet and statement of revenues, expenses, and changes in fund net position of a mediumsized city’s “Support Services” internal service fund are as follows: Support Services Fund Statement of Net Position Assets Pooled investments and cash………
> A city maintains an internal audit department and accounts for it in its general fund. In the coming year, the department will purchase $300,000 of computer and other office equipment, all of which will be paid for out of current resources (i.e., not wit
> A school district establishes a vehicle repair shop that provides service to other departments, all of which are accounted for in its general fund. During its first year of operations the shop engages in the following transactions: • It purchases equipme
> Believing that it is more economical to manage its risks internally, a county elects not to purchase commercial insurance. Instead, it sets aside resources for potential claims in an internal service “self-insurance” fund. In a recent year, the fund reco
> It unquestionably makes sense for governments to manage certain government-wide services, such as vehicle repair and computer services, in a separate organizational unit, and to control demand by beneficiary units by charging them usage fees. In the gove
> As noted in Chapter 7, interest incurred while assets to be used for governmental activities are being constructed should not be capitalized. Does the same rule apply to assets to be used for business-type activities? Suppose that the assets used for bus
> Select the best answer. 1. What basis of accounting do enterprise and internal service funds use? 2. Which of the following is not a GASB-required statement for proprietary funds? a. Statement of net position b. Statement of revenues, expenses, and cha
> The balance sheet of an enterprise fund reports an asset as “restricted cash and investments” and shows a portion of “net position” as restricted. Provide an example of the types of
> The Office of Economic Opportunity (OEO) designed “special impact programs” to reduce unemployment, dependency, and community tensions in urban areas with large concentrations of low‐income residents and in rural areas having substantial migration to suc
> Enterprise funds are also reported differently than are internal service funds in the proprietary fund statements of net position, and in the statements of revenues, expenses, and changes in net position. Explain why.
> In government-wide statements, enterprise funds are reported differently than are internal service funds. Explain why and justify.
> You have been given the responsibility of assigning a bond rating to a municipal parking garage. Indicate the type of information you would consider essential to your assessment, noting in particular information that is unlikely to be reported on in the
> Does the government maintain any agency funds? How many and for what purposes?
> Does the CAFR indicate that the government provides other postemployment benefits? If so, what is the nature of these benefits? How are they reported?
> Did the pension fund investments have a “good year”?
> Does the CAFR include the financial statements of the pension plans? Does it indicate that the pension plans issue their own reports and that these are publicly available?
> Does the CAFR indicate the actuarial value of plan assets and liabilities? Are the plans over- or underfunded?
> Does the government report pension liabilities? If so, in which fund or funds?
> Does the government report pension expenses or expenditures? If so, in which fund or funds?
> The director of the internal audit department of a midsize city received a memo from a member of the city council that included the following: I am certain that you have followed recent press reports of the losses incurred by city and state governments o
> Does the government contribute to one or more pension plans? Are they defined benefit or defined contribution plans? If they are defined benefit plans, are they single employer (maintained by the government itself) or multiple-employer plans?
> The Nebraska Institute of Science (NIS) recently acquired a commercial office building as an investment property. The cost was $12 million, and its economic life was expected to be 15 years. Upon acquiring the building, NIS signed a 15-year lease with a
> In 2015, the Rubin Center for the Arts received a $2 million endowment, the income of which was to be used to support local artists. The center invested the proceeds in securities. In 2015, owing to interest, dividends, and changes in market prices, the
> Hayward City maintains a defined benefit pension plan for its employees. In a recent year the city contributed $5 million to its pension fund. However, its annual pension cost as calculated by its actuary was $7 million. The city accounts for the pension
> The McCracken County Humane Society (MCHS), which is part of a county’s reporting entity, established a permanent fund to provide support for its pet neutering program. As of the start of the year, the fund had a balance of $600,000, composed of both cas
> Christopher City received a contribution of $520,000 to provide scholarships to the children of deceased city employees. The donor stipulated that all income, including both realized and unrealized investment gains, should be used to support the benefici
> Select the best answer. 1. A city’s annual pension expense represents a. Actual cash contributions to the pension trust fund b. Required payments to retired employees per the terms of the pension plan c. Normal cost, as determined by an appropriate actu
> Select the best answer. 1. Riverview City received a gift of $1 million. The sum is to be maintained as an endowment, with income used to preserve and improve the city’s jogging trails. The $1 million should be reported in a. A governmental fund b. An a
> The following statement was prepared for the Sewer User Fee Fund of Tucson, Arizona, a fund that “accounts for sewer user fees collected by the city and remitted to Pima County.” 1. Prepare summary journal entries to r
> The CPA firm of which you are a manager has placed you in charge of the audit of the Thornburg School District. The district receives substantial financial support from the State Education Agency. The state requires aid recipients to have annual single a
> On January 1, 2018, the balance sheet of a city’s funds for the acquisition of library books showed the following (in thousands): The endowment was established in 2014 with a contribution of cash, securities, and real estate (a building
> At the start of a year, the JKG Foundation received a $10 million bequest consisting of a commercial warehouse building and $5 million of cash. The foundation immediately invested the $5 million cash in 20-year, 7 percent corporate bonds having a face va
> On December 31, 2017, The Child Crisis Center establishes an endowment fund with a $5 million gift of securities. Income from the endowment is to be used exclusively to support a nutrition program. Expendable income is defined in the indenture agreement
> To promote computer education, a leading computer manufacturer donates $4 million to the Kerrville Independent School District. The donor stipulates that the district is to establish an endowment, from which income only is expendable. Income is defined t
> The Westmont School District provides postemployment health care benefits through a cost-sharing plan administered through the State Teachers OPEB Plan (STOP). In its financial statements for its fiscal year ending June 30, 2017, STOP reported that the c
> The following data were drawn from the required supplementary information section of the Modian School District’s annual report (all dollar amounts in thousands). 1. What is the amount that the district should report as its net OPEB obl
> A state government, concerned that one of its defined benefit pension plans is severely underfunded, is considering measures, some substantive, others merely cosmetic, that would enable it to reduce the reported pension liability and pension expense on i
> The CAFR of North Orange included the statement of fiduciary net position for its employee pension plan presented here: North Orange Employee Pension Plan Statement of Fiduciary Net Position June 3, 2018 (Dollar amounts in thousands) Assets Cash and cash
> The following was taken from a pension note of Geffen County. During the year there were no changes to employees’ benefits, no changes in actuarial assumptions, no difference between expected and actual experience, and no differences be
> Why do the balance sheets of agency funds contain only assets and liabilities, but no fund balances? Why is it often unclear whether the resources relating to a particular activity should be accounted for in an agency fund or a governmental fund?
> A Department of Housing and Urban Development (HUD) program is aimed at conserving and rehabilitating blighted but salvageable urban areas. One element of the program provides that HUD will make rehabilitation grants and low‐interest loans to property ow
> Briefly explain what is meant by an “investment pool.” How are its assets presented in the financial statements of the sponsoring government?
> A not-for-profit organization has an endowment fund that, at the start of the year, has a value of $1 million— the amount initially contributed to establish the fund. Owing to investment losses, the year-end balance decreased to $950,000. In a previous y
> A college has adopted a “fixed rate of return” approach to the distribution of investment income. Each year it transfers 6 percent of its endowment value to expendable funds, irrespective of actual earnings. Suppose that in year one the fund actually ear
> You are the sole contributor to a philanthropic foundation. You must specify whether investment gains should be expendable or nonexpendable. Present the key arguments in favor of, and against, permitting the gains to be expendable.
> Suppose that you are the independent auditor for a local performing arts association (either government or not-for-profit) that recently received a sizable endowment. The association’s president has asked whether gains, both realized and unrealized, from
> What is the rationale for accounting for nonexpendable endowment funds on a full, rather than a modified, accrual basis? Why is it important that investments, even in nonliquid assets such as commercial office buildings, be reported at fair value, with c
> What is the distinction, as drawn by the GASB, between a fiduciary fund and a permanent fund?
> Why is it likely that unfunded actuarial liabilities for postemployment health benefits of many governments will be greater than the correspondingly unfunded actuarial liabilities for pensions, even though the annual required contributions for pensions a
> Why are the problems of accounting for postemployment health care benefits similar to those of accounting for pensions? Why, however, are they even less tractable?
> What is a cost-sharing plan? What does an employer who is a member of a cost-sharing plan have to report as a pension obligation?
> What are the key features of a performance audit report?
> How should it determine its expense in full accrual statements?
> How should an employer determine the amount to report on its government-wide statements as its pension liability?
> The City of Acton maintains a defined contribution pension plan for its employees. Employees contribute 6 percent of their salaries; the city contributes 8 percent. The city has fiduciary duty for the plan, but outsources its management to a well-known p
> Does the report contain all of the statistical information?
> What schedules or other information does the government report as “required supplementary information” (RSI)?
> Has the government entered into any joint ventures? If so, how are they reported?
> How are they presented in the fund statements?
> How are the component units presented in the government‐wide financial statements?
> The statements, schedules, tables, and other types of data that follow are found in the annual report of a typical municipality. For each of these items indicate whether it would be found in the: • Introductory section • Financial section • Statistical s
> What steps might auditors take to discern the objectives of a program or activity?
> A town’s library system is a legally constituted government entity. It is governed by a 10‐person board. Six of the members are appointed by the town’s council; the other 4 are selected by the other members of the board. The members serve staggered terms
> The data that follow were taken from the CAFR of Chaseville, a midsized midwestern city with a population of 82,000. All dollar amounts are in thousands. Total assessed value of property………………………….. $2,300,000 Total property tax levy………………………………………………..
> A city’s reporting entity includes the following component units: 1. A capital projects financing authority purchases capital assets and leases them exclusively to the city. It finances the acquisitions by issuing revenue bonds, which are payable out of
> A city is considering whether and how it should include the following associated organizations in its reporting entity. 1. Its school system, although not a legally separate government, is managed by a school board elected by city residents. The system i
> Select the best answer. 1. Which of the following should not be included in the introductory section of a city’s CAFR? a. Management’s discussion and analysis b. Letter of transmittal c. Government Finance Officers’ certificate of achievement for excell
> Select the best answer. 1. New York State has unlimited authority to control and regulate Yonkers as well as all other municipalities within its jurisdiction. Consistent with GASB standards: a. Both New York State and Yonkers could be considered primary
> Suppose Riverside has unfunded pension liabilities of $15 million and another $15 million in retiree health care liabilities. By way of contrast, Lakeview has unfunded pension liabilities of $4 million, and $13 million in retiree health care liabilities.
> Explain the significance of each of the following ratios. For each of the ratios indicate whether an increase can be interpreted as a sign of (1) increasing or (2) decreasing fiscal strength. Where appropriate, show how an increase in the ratio can be in
> You are a CPA in charge of auditing a midsize school district. You recognize that the risk of financial failure is dependent as much on factors not reported in the basic financial statements as on factors that are reported. Accordingly, you conduct a com
> The following information was taken from the CAFRs of two cities of approximately the same size in the same state. 1. Compare the financial condition of the two cities based on the following indicators: a. Per capita operating expenditures b. Per capita
> What are the general criteria that audit organizations use in selecting programs and activities for performance audits?
> The data that follow were drawn from the city of Boulder, Colorado’s CAFR. Dates have been changed. They are from two statistical‐section schedules showing the mix of revenue and expenditures for a 10‐
> The U.S. Environmental Protection Agency (EPA) requires owners of municipal solid waste landfills to demonstrate that they are financially capable of satisfying the costs of closing and subsequently caring for the landfills that they operate. Per EPA reg
> The following data were drawn from the CAFRs of two northern Virginia cities (all dollar amounts are in thousands): 1. Based on the limited data provided, which city has the greater resources on which to draw? 2. Which city imposes the greater tax burden
> Hawkins Township has two component units that it is required to include in its reporting entity. The first, a housing authority, maintains two funds: a general fund and a special revenue fund. The second, a transportation authority, has but one fund: an
> A state established the Mohansic River Power Authority to construct and operate dams and to provide electric power to rural areas. The authority, a state‐owned corporation, is governed by an independent board of directors, the 10 members of which are app
> The bylaws of the Wells City Downtown Development Authority state that of the seven members of its governing board, two must be members of the Wells City Council, one must be a member of the City Zoning Board, and one must be a member of the City Plannin
> Newville City accounts for and reports on the Newville Housing Authority as a discretely presented component unit. It engages in numerous transactions with the housing authority (e.g., providing grants and occasionally buying or selling properties). How
