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 recognized $1.5 million for claims filed during the year. Of these it paid $1.3 million. Based on the calculations of an independent actuary, the insurance fund billed, and collected, $2.0 million in premiums from the other county departments insured by the fund. Of this amount, $1.2 million was billed to departments accounted for in the general fund and $0.8 million was billed to the county utility fund. The total charge for premiums was based on historical experience and included a reasonable provision for future catastrophe losses. 1. Prepare the journal entries in the internal service fund to record: a. The claims recognized and paid. b. The premiums billed and collected. 2. Suppose instead that the county accounted for self-insurance within its general fund. As in part 1, of the $2.0 million in premiums charged, $1.2 million were billed to the other departments accounted for in the general fund and $0.8 million were billed to the utility department. a. Prepare the general fund journal entry to record the claims recognized and paid. b. Prepare the general fund entry to record the premiums billed and collected from the utility fund. (Those billed and collected from the other general fund departments would “net out” against their premium expenditures for purposes of external reporting.) 3. What would be the net expenses (i.e., expenditures less premium revenues) reported by the general fund if the self-insurance were accounted for: (1) in the internal service fund, and (2) in the general fund? What would be the total expenses charged by the utility fund if the self-insurance were accounted for: (1) in the internal service fund, and (2) in the general fund? Comment on the rationale for standards that permit such differences.
> What are derivatives? Why can they be especially high-risk securities?
> What are the differences between market risk, credit risk, and legal risk? Suppose that a local government invests in 20-year U.S. government bonds. Assess each of the three risks, and discuss the disclosures required by a government on its financial sta
> Per the provisions of Statement No. 34, governments must report their capital assets similar to businesses in their government-wide statements. Yet the information provided is still inadequate to facilitate the major types of decisions and judgments made
> What are deferred maintenance costs, and when and how must a government report them (as they relate to infrastructure) in its financial statements?
> Why have many government officials objected to Statement No. 34’s requirement that infrastructure assets be accounted for similar to other capital assets?
> Although Statement No. 34 requires that infrastructure assets be accounted for similar to other capital assets, it allows for a major exception with regard to depreciation. What is that exception?
> A city establishes an art museum. What options does it have in accounting for its collection of paintings?
> How should governments report their long-lived assets in their government-wide financial statements?
> Although many governments prepare budgets for both capital projects and debt service funds and integrate them into their accounts, budgetary control over these funds is not as essential as it is for other governmental funds. Do you agree? Explain. If bud
> The following descriptions relate to an independent CPA firm that includes among its audit clients municipalities, school districts, and not‐for‐profit organizations, all of which receive federal financial assistance. Each description presents a possible
> Does the city have outstanding any conduit debt?
> Compute the total amount of the city’s direct and overlapping debt?
> Does the city have any lease obligations outstanding? Are these accounted for as operating or capital leases? Can you determine if any of these leases were initiated during this year? What is the amount of payments related to capital leases?
> What is the city’s legal debt margin?
> What is the percentage of total net bonded debt to assessed value of property? What is the amount of net debt per capita?
> Did the city increase or decrease its long-term borrowings during the year? What was the effect on total long-term liabilities at year end? Explain.
> The Cleveland Historical Society issues $40 million of 6 percent, 15-year bonds at a price of $36,321,000 to finance the construction of a new museum. The price reflects an annual yield of 7.0 percent. 1. Prepare the journal entry to record the issuance
> Has the city entered into any service concession arrangements? Which specific ones, and why?
> What was the total operating income? What was total net cash provided by operating activities? What accounts for the largest difference between these two amounts?
> Do the financial statements include a statement of cash flows for proprietary funds? Is the statement on a direct or an indirect basis? In how many categories are the cash flows presented? Which of these categories resulted in net cash inflows? Which res
> The City on the Lake Convention Center was constructed at a cost of $250 million with the aim of attracting visitors to the area. Taxpayers were assured that the convention center would be self‐supporting: that convention center revenue would be sufficie
> Does the government have revenue bonds outstanding that are related to business-type activities? If so, for what activities?
> Were any of the government’s enterprise funds “profitable” during the year? If so, what has the government done with the “earnings”? Has it transferred them to the general fund?
> Did any of the internal service funds report significant operating surpluses or deficits for the year? Were any accumulated significant net asset balances over the years not invested in capital assets?
> How are the internal service fund activities reported in the government-wide statement of net position? How are they reported in the proprietary funds statement of net position?
> Indicate the activities accounted for in both internal service funds and major enterprise funds. Comment on whether any of these activities could also have been accounted for in a general or other governmental fund.
> 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
> 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
> 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 sit
> 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?
