Test Bank For Accounting for Governmental and Nonprofit Entities Edition: 15th by Earl Wilso

Test Bank For Accounting for Governmental and

Nonprofit Entities Edition: 15th by Earl Wilson
Jacqueline Reck Susan Kattelus

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 c7
Student: ___________________________________________________________________________

1. Internal service funds of one government may not provide goods or services, on a cost-
reimbursement basis, to other governments.

True False

2. Revenues of internal service funds should be recognized only when they are expected to be
available in time to pay current liabilities of the fund.

True False

3. Internal service funds should account for operating expenditures on the accrual basis.

True False

4. Internal service funds account within the fund for any long-term liabilities to be serviced from
revenue derived from fund operations.

True False

5. Internal service funds should not account for depreciation of capital assets used in their
operations, since this would, in effect, charge the government twice for the same assets.

True False

6. Internal service funds are intended to operate on taxes or other financing sources authorized by
the legally enacted revenue budget for each year; therefore, they are classified as governmental
funds.

True False

7. The net assets of an internal service fund consist of contributed equity and reserves for assets
that will not be converted into cash in the normal operation of the fund.

True False
8. In the information for the Supplies Fund that follows, the account "Interfund Loan from Electric
Utility Fund" should be credited for $320,000 because this amount was borrowed from and will
have to be repaid by the Supplies Fund.

True False

9. In the information for the Supplies Fund that follows, the account "Interfund Transfer In from
General Fund" should be credited for $89,200 because this amount was transferred from the
General Fund to the Supplies Fund in a nonexchange transfer that will not have to be repaid.

True False

10. The Encumbrances account should be used by an internal service fund in the same manner as
by the General Fund.

True False

11. Proprietary funds are accounted for in a manner similar to investor-owned businesses; among
other features, the accrual basis of accounting is used and all of the capital assets used in fund
operations are accounted for by the using fund.

True False

12. If an internal service fund is created to improve the management of resources devoted to the
supply function, the supplies fund should use periodic inventory accounting instead of perpetual
physical inventory accounting.

True False

13. Capital assets acquired under a capital lease for use by an internal service fund should be
recorded in the General Fund in order to report all leased assets in one financial statement.

True False

14. A statement of revenues, expenses, and changes in net assets for an internal service fund is
similar in many respects to an income statement prepared for an investor-owned business.

True False
15. A statement of cash flows is not prepared for an internal service fund.

True False

16. An internal service fund can be liquidated only if there is a ready and willing buyer for the fund's
assets.

True False

17. Public utilities owned and operated by governments are the most common examples of enterprise
funds.

True False

18. Enterprise funds are used by state and local governments to account for services that are
provided to the general public on a user-charge basis, with prices set to recover the costs of
operations, activities financed with debt secured solely by revenues from fees of the activity,
activities required by law or regulations to recover operating costs from user charges, or any
activity that the governing body of the government has decided should be accounted for on a
"business basis."

True False

19. The liability for utility revenue bonds should be reported in business-type activities on the
government-wide statements, as well as in the enterprise fund.

True False

20. Budgets for enterprise funds should be recorded in the accounts in the same manner as budgets
for a General Fund or a special revenue fund.

True False

21. Unbilled customer accounts receivable should be reflected in the balance sheet of a
governmentally owned utility even though the exact amount of service to be billed is unknown
until the customers' meters can be read.

True False

22. General obligation bonds used to increase the capacity of a water treatment plant (part of a water
utility enterprise fund), but for which the debt service (including repayment of principal) will be
paid from general government revenues should be reported as a long-term liability in the water
utility fund balance sheet.

True False
23. Matured interest and principal on enterprise fund revenue bonds should be recorded in a debt
service fund until paid.

True False

24. The liability for long-term debt issued to provide financing for an enterprise fund and to be
serviced from revenues of the enterprise fund should be reported in the financial statements of
the enterprise fund, even though the debt also is backed by the general obligation credit of the
government.

True False

25. Utility enterprise funds that report to regulatory agencies may capitalize both actual interest paid
on debt incurred for construction of plant assets and an imputed amount on their own funds so
used.

True False

26. In the context of regulatory utility plant accounting, original cost and historical cost have the same
meaning.

True False

27. The amount of expense and liability to be reported each period for the closure and postclosure
costs of a municipal solid waste landfill (MSWLF) is proportional to the amount of landfill capacity
used during the period.

True False

28. The balance sheet format recommended for financial statements submitted to the NARUC and
FERC for utilities subject to regulatory reporting requirements displays Utility Plant before Current
and Accrued Assets and Long-Term Debt before Current and Accrued Liabilities.

True False

29. To facilitate the combination of utility financial statements with the statements of other enterprise
funds, GAAP permits utilities to follow the customary format used by nonutility business
organizations.

True False

30. Premiums or discounts on bonds payable issued by enterprise funds should be accounted for in
the same manner as those of a comparable business entity.

True False
31. Plant and equipment utilized by a governmentally owned utility should be depreciated in the same
manner as if it belonged to an investor-owned utility.

True False

32. Which of the following may properly be reported as a component of net assets in the proprietary
fund statement of net assets?

A. Retained earnings.
B. Designated equity.
C. Restricted net assets.
D. Contributed capital.

33. Which of the following funds of a government uses the same basis of accounting as a proprietary
fund?

A. Permanent trust.
B. Investment trust fund.
C. Special revenue.
D. Capital projects.

34. Internal service funds should be used only if

A. The reporting government is the predominant participant in the activity.

B. The reporting government provides services primarily to external participants.
C. The reporting government provides services primarily to other departments of the same
government.
D. The reporting government provides services to other departments at a charge that covers the
full cost of operations.

35. In which of the following funds is it appropriate to record depreciation of capital assets?

A. Internal service fund.

B. Permanent fund.
C. General fund.
D. Capital projects fund.
36. Which of the following is a difference between enterprise funds and internal service funds?

A. The use of cost accounting by enterprise funds but not internal service funds.
B. The customers who primarily benefit from the fund's service.
C. The number of basic financial statements required.
D. The measurement focus on economic resources for enterprise funds and current financial
resources for internal service funds.

37. Depreciation on capital assets used by an enterprise fund of a government

A. Should not be recorded for infrastructure assets.

B. Should be recorded in the General Fund as an expenditure.
C. Should be recorded in the governmental activities accounts.
D. Should be recorded in the enterprise fund as an expense.

38. The comprehensive annual financial report (CAFR) of a government should contain a statement
of revenues, expenses, and changes in net assets for

A. Both proprietary and governmental funds.

B. Proprietary but not governmental funds.
C. Governmental but not proprietary funds.
D. Proprietary and fiduciary funds.

39. Which of the following activities or services would most likely not be accounted for by an internal
service fund?

A. Electronic data processing.

B. Central purchasing, warehousing, and issuing of supplies.
C. Municipal golf course.
D. Risk management.

40. Which of the following is not true regarding proprietary funds?

A. The difference between assets and liabilities of proprietary funds is called "fund balance."
B. Proprietary funds record long-term debt directly in the fund accounts.
C. Proprietary funds record capital assets directly in the fund accounts.
D. Proprietary funds present a statement of cash flows.
41. Which of the following is (are) an appropriate basis of accounting for an internal service fund?

A. Modified accrual basis: Yes; accrual basis: No:

B. Modified; Accrual basis: No; accrual basis: Yes
C. Modified accrual basis: Yes; accrual basis: Yes
D. Modified accrual basis: No; accrual basis: No

42. Which of the following funds of a government would account for depreciation in the accounts of
the fund?

A. General.
B. Internal service.
C. Capital projects.
D. Special revenue.

43. An internal service fund normally uses which of the following budgetary accounts?

A. Estimated Revenues.
B. Appropriations.
C. Encumbrances.
D. An internal service fund normally does not use budgetary accounts.

44. Under GASB standards, an internal service fund should prepare all of the following financial
statements except for a

A. Statement of revenues, expenditures, and changes in fund balance.

B. Statement of revenues, expenses, and changes in net assets.
C. Statement of net assets.
D. Statement of cash flows.

45. In order to conform to GASB standards, goods and services provided by internal service funds to
other departments of the government must be priced to

A. Cover variable costs only.

B. Cover full costs (both fixed and variable).
C. Cover full costs, plus an additional charge to cover inflation and anticipated needs for
expansion.
D. GASB standards do not address appropriate fees. Each government determines its own
operating and pricing policies, which may include subsidizing the cost of operating an internal
service fund.
46. What amount of the following items should be accounted for in an internal service fund?

A. $2,100,000.
B. $1,760,000.
C. $1,640,000.
D. $350,000.

47. What amount of the following items should be accounted for in an enterprise fund?

A. $2,100,000.
B. $1,760,000.
C. $1,640,000.
D. $350,000.

48. To establish a new internal service fund with a transfer of funds (not to be repaid), which account
would be credited in the internal service fund?

A. Cash.
B. Interfund Transfer In.
C. Interfund Transfer Out.
D. Estimated Revenues.
49. GASB accounting and financial reporting standards for risk financing activities provide that an
internal service fund should recognize claims expense and a related liability when a claim has
been asserted and

A. A municipal court has awarded a judgment to a claimant fund (e.g., the General Fund).
B. It is reasonably possible that a loss has been incurred and the amount can be reasonably
estimated.
C. It is probable that a loss has been incurred and the amount can be reasonably estimated.
D. A loss has been incurred, but the amount cannot be reasonably estimated.

50. Which of the following is not a typical means of dissolving an internal service fund that a city no
longer needs or wants?

A. Conversion of the fund's noncash assets to cash and distribution of the cash to another fund or
funds.
B. Transfer the fund's assets to another fund that will continue the same or similar operating
activities.
C. Distribute the fund's assets in kind to another fund or funds that will not continue the same or
similar operating activities.
D. Transfer the fund's assets to a not-for-profit organization that provides charitable services in
the community.

51. Which of the following account balances would only be reported if a city-owned utility followed
regulatory accounting principles?

A. Depreciation expense.
B. Pumping expense.
C. Restricted Assets—Cash.
D. Utility Plant Acquisition Adjustments.

52. Customers' meter deposits, which cannot be spent for normal operating purposes, would be
classified as restricted cash in the balance sheet of which fund type?

A. Internal service.
B. Private-purpose trust fund.
C. Enterprise.
D. Special revenue.
53. Which of the following organizations or units would least likely be accounted for by an enterprise
fund?

A. A hospital.
B. An airport.
C. The computer department.
D. A sports stadium.

54. Which of the following accounts would appropriately be included in the net assets section of an
enterprise fund balance sheet?

A. Fund Balance: No; Net Assets—Unrestricted: Yes

B. Fund Balance: Yes; Net Assets—Unrestricted: No
C. Fund Balance: No; Net Assets—Unrestricted: No
D. Fund Balance: Yes: Net Assets—Unrestricted: Yes

55. The water utility fund of the City of Pikesville uses cycle billing procedures. Under these
procedures, the City of Pikesville will likely do which of the following on December 31, the end of
its fiscal year

A. Read meters and bill all customers on December 31.

B. Accrue revenue and a receivable for the number of days from the last billing date for each
customer until December 31.
C. Ignore water consumed by customers from their last billing date until December 31.
D. Call the unbilled customers and request that they read their own meters.

56. The following cash transactions were among those reported by Crawford County's Water and
Sewer Enterprise Fund for the year:

In the Water and Sewer Enterprise Fund's statement of cash flows for the year ended December
31, what amount should be reported as cash flows from capital and related financing activities?

A. $5,000,000.
B. $6,000,000.
C. $8,000,000.
D. $9,000,000.
57. Which of the following is not a true statement about the Allowance for Funds Used During
Construction (AFUDC)?

A. AFUDC may have either a debt component or an equity component.

B. The amount credited to AFUDC may exceed the amount of interest paid during the period on
bonds issued for construction.
C. AFUDC may be credited for an imputed amount of interest on the utility's own funds used for
construction.
D. AFUDC may include the total amount of borrowing during construction.

58. Which of the following items is not required to be included in the segment information that must
be reported for a municipality's enterprise funds?

A. Material enterprise fund capital assets.

B. Material enterprise fund operating income or loss.
C. Material enterprise fund tax revenues.
D. Material intergovernmental operating subsidies to an enterprise fund.

59. A municipal solid waste landfill (MSWLF) accounted for by an enterprise fund should recognize
an expense and liability for the year in the amount of

A. The estimated total current costs for closure and postclosure of the MSWLF determined at the
time the landfill is placed into initial operation divided by the estimated number of years the
landfill will be operated.
B. The estimated total current costs for closure and postclosure of the MSWLF as reevaluated at
the end of each fiscal year divided by the remaining estimated number of years the landfill will
be operated.
C. A portion of the estimated total current costs for closure and postclosure of the MSWLF,
determined at the time the landfill is placed into initial operation, equal to the ratio of landfill
used during the year to its total capacity.
D. A portion of the estimated total current costs for closure and postclosure of the MSWLF, as
reevaluated at the end of the fiscal year, equal to the ratio of landfill used during the year to its
total capacity.
60. Under utility regulatory accounting principles (RAP), the account "Utility Plant Acquisition
Adjustment" reflects

A. The difference between the amount paid for utility plant and the amount originally paid by the
utility that first placed the plant into public service, less accumulated depreciation.
B. The difference between the fair market value of the utility plant and the amount paid for it, less
accumulated depreciation.
C. The difference between the amount paid for the utility plant less its current replacement cost.
D. The difference between the amount paid for the utility plant less the fair market value of its
tangible plant assets.

61. The liability for general obligation bonds issued for the benefit of a governmentally owned electric
utility and serviced by its earnings should be recorded in

A. An enterprise fund.
B. An enterprise fund and disclosed in the notes to the financial statements.
C. An enterprise fund and the business-like activities accounts.
D. The governmental activities accounts.

62. Sales revenues of a utility for a certain fiscal period

A. Are equivalent to total debits to Customer Accounts Receivable for that period.
B. Include receivables billed during a fiscal period, plus receivables billed early in the next year if
meters were read before year-end.
C. Should be reported on the cash basis for the sake of conservatism.
D. Include billed receivables and an accrual for unbilled receivables as of the balance sheet date.

63. For which of the following assets can the "modified approach" be elected in lieu of depreciation?

A. Eligible infrastructure assets.

B. All general capital assets.
C. Buildings and equipment.
D. All capital assets.

64. The Gotham City Golf Course, an enterprise fund, purchased new furniture for use in the golf
pro's office. The debit for the entry to record the event should be to

A. Expenditures.
B. Purchases.
C. Furniture and fixtures.
D. General capital assets.
65. Which of the following accounts would least likely be found in the general ledger of an internal
service fund?

A. Cash.
B. Expenditures.
C. Billings to Departments.
D. Machinery and equipment.

66. Which of the following would be reflected in the operating statement of a proprietary fund?

A. Incurrence of interest expense.

B. Repayment of the principal of debt.
C. Issuance of debt.
D. Purchase of a capital asset.

67. How should financial information for internal service funds be reported in the government-wide
financial statements?

A. As part of governmental activities.

B. As part of business-type activities.
C. Amounts allocated proportionately between governmental and business-type activities.
D. Usually as part of governmental activities, unless the internal service fund predominantly
serves one or more enterprise funds.

68. Primarily, the operating statement of a proprietary fund should provide information useful in
answering which of the following questions?

A. What are the transactions or events of the period that have increased or decreased the
resources available for spending in the near future?
B. Have current financial resources increased or decreased during the period?
C. Have cash balances increased or decreased as a result of transactions and events of the
period?
D. What are the transactions or events of the period that have increased or decreased the fund's
total economic resources?
69. The following are key terms in Chapter 7 that relate accounting for the business-type activities of
state and local governments:
A. Customer advances for construction
B. Revenue bonds
C. Utility plant acquisition adjustment
D. Regulatory accounting principles
E. Original cost
F. Historical cost
G. General obligation bonds

For each of the following definitions, indicate the key term from the list above that best matches
by placing the appropriate letter in the blank space next to the definition.

70. "In order to determine whether user charges are commensurate with operating costs, it is
desirable for internal service fund operations to be accounted for on a business basis." Do you
agree? Why or why not?
71. The Stores and Supplies Fund of Walnut City has quietly followed a policy of charging all actual
cost and normal overhead for materials and supplies bought from them. Annually an amount of
cash equal to the net gain by that method is transferred to the Walnut Library Fund. Is this an
appropriate pricing policy? Why or why not?

72. Explain how governmental entities that use internal service funds to account for risk financing and
risk management activities should account for those activities.

73. "Enterprise funds should not be permitted to accumulate unrestricted net assets, since to do so
would indicate overpricing of its services." Do you agree? Why or why not?
74. Enterprise funds for utilities often report in their operating statement an "Allowance for Funds
Used During Construction (AFUDC)" for interest paid or imputed during construction of plant
assets. What purposes are served by reporting AFUDC in the manner described?

75. In some local government financial reports you will find activities such as solid waste disposal and
sewage disposal accounted for as a part of the General Fund. In other reports apparently
identical activities are accounted for as enterprise funds. Under what conditions would each
treatment be proper?

76. Depreciation of general capital assets is not recorded in the accounts of any of the governmental
funds. If a building is transferred from the General Fund to an internal service fund because the
character of its use changes, should the internal service fund record building depreciation
expense each year after the transfer? Explain.
77. A government provided original financing for its supplies fund by a transfer of $40,000 cash from
the General Fund. The transferee fund credited the amount to Interfund Loan from General
Fund—Noncurrent. Assuming that the terminology is correct, how should the transfer be
classified in the statements of the supplies fund? Suggest an appropriate name for the
corresponding account in the General Fund; how should the corresponding account be shown in
the statements of the General Fund?

78. "Internal service funds used for risk financing should recognize as operating revenues the full
charges billed to other departments even if those charges substantially exceed the full cost of
providing risk financing service." Do you agree? Why or why not?

79. What are the alternative methods of dissolving an internal service fund? What factors should be
considered in choosing the appropriate method?
80. What factors should be considered in determining whether an activity or operation should be
accounted for as an enterprise fund or as a governmental fund? As an internal service fund?

81. For items reported in the restricted assets section of an enterprise fund balance sheet, how are
the related items reported in the liability and fund equity sections of the balance sheet?

82. "Reporting 'utility plant in service' as a single line on the balance sheet provides adequate
information for regulatory purposes and/or sound management." Do you agree with the
statement? Explain why or why not.
83. The Central Stores Fund of Cook City provides centralized management of purchasing, storage,
and issue of supplies for the entire City. For the following summarized transactions and events for
the year ended June 30, provide the fund level entries in general journal form required to conform
to generally accepted accounting principles. If no entry is needed, so indicate.
1) The Central Stores Fund ordered supplies at an estimated cost of $62,000.
2) The supplies ordered in (1) above were received at invoice costs of $60,400; these invoices
were approved for payment.
3) Supplies costing $51,800 were issued to the City General Fund and billed to that fund at a
markup of 20 percent on cost.
4) Expenses paid in cash during the year were: purchasing, $5,700; warehousing, $7,100; and
general and administrative, $6,200.

84. The Supplies Fund, an internal service fund, of a certain city recorded the following journal entry:

In the entry above, explain the difference between the accounts "Interfund Loan from Water Utility
Fund" and "Interfund Transfer In from General Fund."
85. On July 1, the first day of its fiscal year, Yale Township issued bonds with a face value of
$1,000,000 at 102 percent of par on the date of issue. The bonds bear annual interest at 6
percent; interest is payable semiannually. The bonds will mature in equal annual installments
over 20 years. Bond premium must be used for eventual bond redemption and is recorded as a
restricted asset. Assuming the bonds are revenue bonds sold to finance the construction of a
parking garage to be operated in a manner similar to an investor-owned business:
1) Name the type of fund in which each of the following should be recorded. (If any of the
following should not be recorded at all, enter "none" on the appropriate line.)
(a) The cash received for the sale of the bonds
(b) The liability of $1,000,000 for bonds payable
(c) The cost of the parking garage
(d) Interest paid or accrued during the period of construction
2) Show in general journal form all entries that should be made to record the sale of the bonds.
For each entry indicate the fund in which the entry is made.
 c7 Key

1. Internal service funds of one government may not provide goods or services, on a cost-
reimbursement basis, to other governments.

FALSE

The definition of internal service funds quoted in the text is to provide for service to other
governments as well as to other departments or agencies of the unit operating the internal
service fund. While internal service funds exist primarily to provide goods and services to other
departments and agencies of the same government, there is no prohibition to providing the
goods or services to other governments as well.

Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #1

2. Revenues of internal service funds should be recognized only when they are expected to be
available in time to pay current liabilities of the fund.

FALSE

Revenues of internal service funds should be recognized on the accrual basis: when earned,
without regard to when they will be available to pay current liabilities of the fund.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #2

3. Internal service funds should account for operating expenditures on the accrual basis.

FALSE

This question requires careful reading. Internal service funds account for expenses, not
expenditures, and use the accrual basis.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #3
4. Internal service funds account within the fund for any long-term liabilities to be serviced from
revenue derived from fund operations.

TRUE

Since the internal service fund uses accrual accounting, it recognizes any long-term liabilities
of the fund. Long-term liabilities of an internal service fund ordinarily result from advances from
other funds or governments, not from outside creditors.

Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #4

5. Internal service funds should not account for depreciation of capital assets used in their
operations, since this would, in effect, charge the government twice for the same assets.

FALSE

As for a business enterprise, including a depreciation charge is necessary to determine the full
cost of services.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #5

6. Internal service funds are intended to operate on taxes or other financing sources authorized
by the legally enacted revenue budget for each year; therefore, they are classified as
governmental funds.

FALSE

Internal service funds and enterprise funds are intended to cover operating costs on a
continuing basis and ordinarily obtain their revenues from user charges, not taxes or other
financing sources provided for by an annual budget; therefore, these are both proprietary, not
governmental, funds. However, under GASB standards, internal service funds are reported as
governmental activities, not business-like activities, on the government-wide statements if they
primarily serve other governmental departments or functions.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #6
7. The net assets of an internal service fund consist of contributed equity and reserves for assets
that will not be converted into cash in the normal operation of the fund.

FALSE

Under GASB standards, net assets are classified into the three categories of net assets
invested in capital assets (net of related debt), restricted, and unrestricted.

Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #7

8. In the information for the Supplies Fund that follows, the account "Interfund Loan from Electric
Utility Fund" should be credited for $320,000 because this amount was borrowed from and will
have to be repaid by the Supplies Fund.

TRUE

Loan is the term described in GASB standards for such transactions. Interfund loans should
be properly classified as current or noncurrent receivables or payables.

Difficulty: Medium
Question Type: Journal Entry
Wilson - Chapter 07 #8

9. In the information for the Supplies Fund that follows, the account "Interfund Transfer In from
General Fund" should be credited for $89,200 because this amount was transferred from the
General Fund to the Supplies Fund in a nonexchange transfer that will not have to be repaid.

TRUE

"Interfund Transfer In" is a temporary account that will be closed to Net Assets—Unrestricted
at year-end.

Difficulty: Medium
Question Type: Journal Entry
Wilson - Chapter 07 #9
10. The Encumbrances account should be used by an internal service fund in the same manner
as by the General Fund.

FALSE

Internal service funds do not incorporate budgetary accounts with proprietary accounts.
Memorandum records of purchase orders and contracts should be kept, however, for
management control purposes.

Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #10

11. Proprietary funds are accounted for in a manner similar to investor-owned businesses; among
other features, the accrual basis of accounting is used and all of the capital assets used in
fund operations are accounted for by the using fund.

TRUE

The features described are characteristic of GAAP applicable to proprietary funds.

Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #11

12. If an internal service fund is created to improve the management of resources devoted to the
supply function, the supplies fund should use periodic inventory accounting instead of
perpetual physical inventory accounting.

FALSE

Perpetual inventory accounting is needed to efficiently manage the supply function. (Items of
low value which are not critical to the operations of any of the governmental departments may,
however, properly be accounted for on a periodic physical inventory basis).

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #12

13. Capital assets acquired under a capital lease for use by an internal service fund should be
recorded in the General Fund in order to report all leased assets in one financial statement.

FALSE

All capital assets used by an internal service fund, regardless of source, should be recorded in
the accounts of that fund.

Difficulty: Easy
Question Type: Concept
 Wilson - Chapter 07 #13

14. A statement of revenues, expenses, and changes in net assets for an internal service fund is
similar in many respects to an income statement prepared for an investor-owned business.

TRUE

The terminology differs somewhat, but otherwise the statement is similar in format and display
to income statements prepared for business organizations.

Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #14

15. A statement of cash flows is not prepared for an internal service fund.

FALSE

GASB standards require that a statement of cash flows be prepared for proprietary funds.
However, this statement is not required for governmental fund types.

Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #15

16. An internal service fund can be liquidated only if there is a ready and willing buyer for the
fund's assets.

FALSE

The text suggests three ways, or combinations thereof, in which liquidation of an internal
service fund may be accomplished. Even if there is no external buyer for the fund's assets, the
fund could be dissolved by either distributing the fund's assets in kind to other funds or by
simply making the fund a department of another fund.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #16

17. Public utilities owned and operated by governments are the most common examples of
enterprise funds.

TRUE

A government may operate almost any kind of enterprise, but public utilities are the most
common examples.

Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #17
18. Enterprise funds are used by state and local governments to account for services that are
provided to the general public on a user-charge basis, with prices set to recover the costs of
operations, activities financed with debt secured solely by revenues from fees of the activity,
activities required by law or regulations to recover operating costs from user charges, or any
activity that the governing body of the government has decided should be accounted for on a
"business basis."

TRUE

Even if user charges are not the primary source of revenues, the enterprise fund approach
may be used for any activities for which the governing body desires periodic determination of
revenues earned, expenses incurred, and/or net income.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #18

19. The liability for utility revenue bonds should be reported in business-type activities on the
government-wide statements, as well as in the enterprise fund.

TRUE

Utility revenue bonds, for which interest and principal are to be paid from revenues of the
enterprise fund, are a liability of that fund and should be so reported. They should also appear
as long-term liabilities of business-type activities on the government-wide statement of
financial position.

Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #19

20. Budgets for enterprise funds should be recorded in the accounts in the same manner as
budgets for a General Fund or a special revenue fund.

FALSE

Budgets for enterprise funds are prepared to assist management in the efficient use of
resources and normally are not legally binding documents. Consequently, GASB standards do
not require or recommend that budgets be recorded in the accounts of an enterprise fund.
(However, in jurisdictions in which enterprise funds are required by law to prepare budgets it
may be desirable to integrate budgetary accounts with proprietary accounts. Only the
proprietary account balances should be reported in the basic financial statements, however.)

Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #20
21. Unbilled customer accounts receivable should be reflected in the balance sheet of a
governmentally owned utility even though the exact amount of service to be billed is unknown
until the customers' meters can be read.

TRUE

Unbilled receivables represent revenues that have been earned and therefore should be
reported in the current period. These receivables/revenues should be estimated as accurately
as possible using projections based on past usage patterns for the same customers or recent
usage patterns for other customers who have been billed.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #21

22. General obligation bonds used to increase the capacity of a water treatment plant (part of a
water utility enterprise fund), but for which the debt service (including repayment of principal)
will be paid from general government revenues should be reported as a long-term liability in
the water utility fund balance sheet.

FALSE

Since water utility revenues will not be used for debt service on these bonds, the liability must
be reported in the governmental activities financial statements. However, the enterprise fund
should report a contribution from the General Fund (assumed) in the amount of the bond
proceeds used for the water treatment plant.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #22

23. Matured interest and principal on enterprise fund revenue bonds should be recorded in a debt
service fund until paid.

FALSE

Debt service for revenue bonds is paid from the revenues of the enterprise fund and therefore
should be accounted for by that fund.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #23
24. The liability for long-term debt issued to provide financing for an enterprise fund and to be
serviced from revenues of the enterprise fund should be reported in the financial statements of
the enterprise fund, even though the debt also is backed by the general obligation credit of the
government.

TRUE

Although the liability should be reported as a liability of the enterprise fund, the fact that it is
secondarily a general obligation must be disclosed as a contingent liability in the notes to the
financial statements.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #24

25. Utility enterprise funds that report to regulatory agencies may capitalize both actual interest
paid on debt incurred for construction of plant assets and an imputed amount on their own
funds so used.

TRUE

Utilities that report to regulatory agencies are usually allowed to capitalize both the net cost for
the period of construction of borrowed funds and a reasonable imputed rate on other funds so
used. FASB standards also permit such capitalization by regulated entities, providing that
imputed amounts capitalized are allowed to be recovered through rates charged to customers,
and it is probable that all capitalized costs will be recovered through future revenues.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #25

26. In the context of regulatory utility plant accounting, original cost and historical cost have the
same meaning.

FALSE

In the context of regulatory utility enterprise accounting, original cost is the cost to the owner
who first devoted the property to public service, whereas historical cost is simply the
acquisition cost to the current owner.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #26
27. The amount of expense and liability to be reported each period for the closure and postclosure
costs of a municipal solid waste landfill (MSWLF) is proportional to the amount of landfill
capacity used during the period.

TRUE

As indicated in Chapter 7, the cost estimation procedures to estimate total closure and
postclosure costs are beyond the scope of this text (and course). However, once those costs
have been estimated, an expense and liability should be recognized in an amount proportional
to the ratio of landfill usage for the period to total landfill capacity.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #27

28. The balance sheet format recommended for financial statements submitted to the NARUC and
FERC for utilities subject to regulatory reporting requirements displays Utility Plant before
Current and Accrued Assets and Long-Term Debt before Current and Accrued Liabilities.

TRUE

Utility plant and long-term debt ordinarily amount to a much greater percentage of total assets
and total long-term debt than does the total of current and accrued assets and liabilities,
respectively. It is therefore considered more informative to present the noncurrent items first.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #28

29. To facilitate the combination of utility financial statements with the statements of other
enterprise funds, GAAP permits utilities to follow the customary format used by nonutility
business organizations.

TRUE

Statements in the regulatory format cannot easily be combined with statements in the usual
nonutility format used for other fund types; therefore, governments that follow GAAP generally
use the nonregulatory, conventional format for utility enterprise fund balance sheets.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #29
30. Premiums or discounts on bonds payable issued by enterprise funds should be accounted for
in the same manner as those of a comparable business entity.

TRUE

Under GASB standards, premiums or discounts on bonds issued by enterprise funds should
be amortized in the same manner as if the bonds were business organizations.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #30

31. Plant and equipment utilized by a governmentally owned utility should be depreciated in the
same manner as if it belonged to an investor-owned utility.

TRUE

Accounting for governmentally owned enterprises should be comparable with that of investor-
owned enterprises in the same industry.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #31

32. Which of the following may properly be reported as a component of net assets in the
proprietary fund statement of net assets?

A. Retained earnings.
B. Designated equity.
C. Restricted net assets.
D. Contributed capital.
Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #32

33. Which of the following funds of a government uses the same basis of accounting as a
proprietary fund?

A. Permanent trust.
B. Investment trust fund.
C. Special revenue.
D. Capital projects.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #33
34. Internal service funds should be used only if

A. The reporting government is the predominant participant in the activity.

B. The reporting government provides services primarily to external participants.
C. The reporting government provides services primarily to other departments of the same
government.
D. The reporting government provides services to other departments at a charge that covers
the full cost of operations.
Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #34

35. In which of the following funds is it appropriate to record depreciation of capital assets?

A. Internal service fund.

B. Permanent fund.
C. General fund.
D. Capital projects fund.
Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #35

36. Which of the following is a difference between enterprise funds and internal service funds?

A. The use of cost accounting by enterprise funds but not internal service funds.
B. The customers who primarily benefit from the fund's service.
C. The number of basic financial statements required.
D. The measurement focus on economic resources for enterprise funds and current financial
resources for internal service funds.
Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #36

37. Depreciation on capital assets used by an enterprise fund of a government

A. Should not be recorded for infrastructure assets.

B. Should be recorded in the General Fund as an expenditure.
C. Should be recorded in the governmental activities accounts.
D. Should be recorded in the enterprise fund as an expense.
Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #37
38. The comprehensive annual financial report (CAFR) of a government should contain a
statement of revenues, expenses, and changes in net assets for

A. Both proprietary and governmental funds.

B. Proprietary but not governmental funds.
C. Governmental but not proprietary funds.
D. Proprietary and fiduciary funds.
Difficulty: Medium
Question Type: Essay
Wilson - Chapter 07 #38

39. Which of the following activities or services would most likely not be accounted for by an
internal service fund?

A. Electronic data processing.

B. Central purchasing, warehousing, and issuing of supplies.
C. Municipal golf course.
D. Risk management.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #39

40. Which of the following is not true regarding proprietary funds?

A. The difference between assets and liabilities of proprietary funds is called "fund balance."
B. Proprietary funds record long-term debt directly in the fund accounts.
C. Proprietary funds record capital assets directly in the fund accounts.
D. Proprietary funds present a statement of cash flows.
Difficulty: Medium
Question Type: Essay
Wilson - Chapter 07 #40

41. Which of the following is (are) an appropriate basis of accounting for an internal service fund?

A. Modified accrual basis: Yes; accrual basis: No:

B. Modified; Accrual basis: No; accrual basis: Yes
C. Modified accrual basis: Yes; accrual basis: Yes
D. Modified accrual basis: No; accrual basis: No
Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #41
42. Which of the following funds of a government would account for depreciation in the accounts
of the fund?

A. General.
B. Internal service.
C. Capital projects.
D. Special revenue.
Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #42

43. An internal service fund normally uses which of the following budgetary accounts?

A. Estimated Revenues.
B. Appropriations.
C. Encumbrances.
D. An internal service fund normally does not use budgetary accounts.
Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #43

44. Under GASB standards, an internal service fund should prepare all of the following financial
statements except for a

A. Statement of revenues, expenditures, and changes in fund balance.

B. Statement of revenues, expenses, and changes in net assets.
C. Statement of net assets.
D. Statement of cash flows.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #44

45. In order to conform to GASB standards, goods and services provided by internal service funds
to other departments of the government must be priced to

A. Cover variable costs only.

B. Cover full costs (both fixed and variable).
C. Cover full costs, plus an additional charge to cover inflation and anticipated needs for
expansion.
D. GASB standards do not address appropriate fees. Each government determines its own
operating and pricing policies, which may include subsidizing the cost of operating an
internal service fund.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #45
46. What amount of the following items should be accounted for in an internal service fund?

A. $2,100,000.
B. $1,760,000.
C. $1,640,000.
D. $350,000.
Difficulty: Medium
Question Type: Calculation
Wilson - Chapter 07 #46

47. What amount of the following items should be accounted for in an enterprise fund?

A. $2,100,000.
B. $1,760,000.
C. $1,640,000.
D. $350,000.
Difficulty: Medium
Question Type: Calculation
Wilson - Chapter 07 #47
48. To establish a new internal service fund with a transfer of funds (not to be repaid), which
account would be credited in the internal service fund?

A. Cash.
B. Interfund Transfer In.
C. Interfund Transfer Out.
D. Estimated Revenues.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #48

49. GASB accounting and financial reporting standards for risk financing activities provide that an
internal service fund should recognize claims expense and a related liability when a claim has
been asserted and

A. A municipal court has awarded a judgment to a claimant fund (e.g., the General Fund).
B. It is reasonably possible that a loss has been incurred and the amount can be reasonably
estimated.
C. It is probable that a loss has been incurred and the amount can be reasonably estimated.
D. A loss has been incurred, but the amount cannot be reasonably estimated.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #49

50. Which of the following is not a typical means of dissolving an internal service fund that a city
no longer needs or wants?

A. Conversion of the fund's noncash assets to cash and distribution of the cash to another
fund or funds.
B. Transfer the fund's assets to another fund that will continue the same or similar operating
activities.
C. Distribute the fund's assets in kind to another fund or funds that will not continue the same
or similar operating activities.
D. Transfer the fund's assets to a not-for-profit organization that provides charitable services in
the community.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #50
51. Which of the following account balances would only be reported if a city-owned utility followed
regulatory accounting principles?

A. Depreciation expense.
B. Pumping expense.
C. Restricted Assets—Cash.
D. Utility Plant Acquisition Adjustments.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #51

52. Customers' meter deposits, which cannot be spent for normal operating purposes, would be
classified as restricted cash in the balance sheet of which fund type?

A. Internal service.
B. Private-purpose trust fund.
C. Enterprise.
D. Special revenue.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #52

53. Which of the following organizations or units would least likely be accounted for by an
enterprise fund?

A. A hospital.
B. An airport.
C. The computer department.
D. A sports stadium.
Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #53

54. Which of the following accounts would appropriately be included in the net assets section of
an enterprise fund balance sheet?

A. Fund Balance: No; Net Assets—Unrestricted: Yes

B. Fund Balance: Yes; Net Assets—Unrestricted: No
C. Fund Balance: No; Net Assets—Unrestricted: No
D. Fund Balance: Yes: Net Assets—Unrestricted: Yes
Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #54
55. The water utility fund of the City of Pikesville uses cycle billing procedures. Under these
procedures, the City of Pikesville will likely do which of the following on December 31, the end
of its fiscal year

A. Read meters and bill all customers on December 31.

B. Accrue revenue and a receivable for the number of days from the last billing date for each
customer until December 31.
C. Ignore water consumed by customers from their last billing date until December 31.
D. Call the unbilled customers and request that they read their own meters.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #55

56. The following cash transactions were among those reported by Crawford County's Water and
Sewer Enterprise Fund for the year:

In the Water and Sewer Enterprise Fund's statement of cash flows for the year ended
December 31, what amount should be reported as cash flows from capital and related
financing activities?

A. $5,000,000.
B. $6,000,000.
C. $8,000,000.
D. $9,000,000.
Difficulty: Hard
Question Type: Calculation
Wilson - Chapter 07 #56

57. Which of the following is not a true statement about the Allowance for Funds Used During
Construction (AFUDC)?

A. AFUDC may have either a debt component or an equity component.

B. The amount credited to AFUDC may exceed the amount of interest paid during the period
on bonds issued for construction.
C. AFUDC may be credited for an imputed amount of interest on the utility's own funds used
for construction.
D. AFUDC may include the total amount of borrowing during construction.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #57
58. Which of the following items is not required to be included in the segment information that
must be reported for a municipality's enterprise funds?

A. Material enterprise fund capital assets.

B. Material enterprise fund operating income or loss.
C. Material enterprise fund tax revenues.
D. Material intergovernmental operating subsidies to an enterprise fund.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #58

59. A municipal solid waste landfill (MSWLF) accounted for by an enterprise fund should
recognize an expense and liability for the year in the amount of

A. The estimated total current costs for closure and postclosure of the MSWLF determined at
the time the landfill is placed into initial operation divided by the estimated number of years
the landfill will be operated.
B. The estimated total current costs for closure and postclosure of the MSWLF as reevaluated
at the end of each fiscal year divided by the remaining estimated number of years the
landfill will be operated.
C. A portion of the estimated total current costs for closure and postclosure of the MSWLF,
determined at the time the landfill is placed into initial operation, equal to the ratio of landfill
used during the year to its total capacity.
D. A portion of the estimated total current costs for closure and postclosure of the MSWLF, as
reevaluated at the end of the fiscal year, equal to the ratio of landfill used during the year to
its total capacity.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #59

60. Under utility regulatory accounting principles (RAP), the account "Utility Plant Acquisition
Adjustment" reflects

A. The difference between the amount paid for utility plant and the amount originally paid by
the utility that first placed the plant into public service, less accumulated depreciation.
B. The difference between the fair market value of the utility plant and the amount paid for it,
less accumulated depreciation.
C. The difference between the amount paid for the utility plant less its current replacement
cost.
D. The difference between the amount paid for the utility plant less the fair market value of its
tangible plant assets.
Difficulty: Hard
Question Type: Concept
Wilson - Chapter 07 #60
61. The liability for general obligation bonds issued for the benefit of a governmentally owned
electric utility and serviced by its earnings should be recorded in

A. An enterprise fund.
B. An enterprise fund and disclosed in the notes to the financial statements.
C. An enterprise fund and the business-like activities accounts.
D. The governmental activities accounts.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #61

62. Sales revenues of a utility for a certain fiscal period

A. Are equivalent to total debits to Customer Accounts Receivable for that period.
B. Include receivables billed during a fiscal period, plus receivables billed early in the next
year if meters were read before year-end.
C. Should be reported on the cash basis for the sake of conservatism.
D. Include billed receivables and an accrual for unbilled receivables as of the balance sheet
date.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #62

63. For which of the following assets can the "modified approach" be elected in lieu of
depreciation?

A. Eligible infrastructure assets.

B. All general capital assets.
C. Buildings and equipment.
D. All capital assets.
Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #63

64. The Gotham City Golf Course, an enterprise fund, purchased new furniture for use in the golf
pro's office. The debit for the entry to record the event should be to

A. Expenditures.
B. Purchases.
C. Furniture and fixtures.
D. General capital assets.
Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #64
65. Which of the following accounts would least likely be found in the general ledger of an internal
service fund?

A. Cash.
B. Expenditures.
C. Billings to Departments.
D. Machinery and equipment.
Difficulty: Easy
Question Type: Concept
Wilson - Chapter 07 #65

66. Which of the following would be reflected in the operating statement of a proprietary fund?

A. Incurrence of interest expense.

B. Repayment of the principal of debt.
C. Issuance of debt.
D. Purchase of a capital asset.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #66

67. How should financial information for internal service funds be reported in the government-wide
financial statements?

A. As part of governmental activities.

B. As part of business-type activities.
C. Amounts allocated proportionately between governmental and business-type activities.
D. Usually as part of governmental activities, unless the internal service fund predominantly
serves one or more enterprise funds.
Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #67

68. Primarily, the operating statement of a proprietary fund should provide information useful in
answering which of the following questions?

A. What are the transactions or events of the period that have increased or decreased the
resources available for spending in the near future?
B. Have current financial resources increased or decreased during the period?
C. Have cash balances increased or decreased as a result of transactions and events of the
period?
D. What are the transactions or events of the period that have increased or decreased the
fund's total economic resources?
Difficulty: Medium
 Question Type: Concept
Wilson - Chapter 07 #68

69. The following are key terms in Chapter 7 that relate accounting for the business-type activities
of state and local governments:
A. Customer advances for construction
B. Revenue bonds
C. Utility plant acquisition adjustment
D. Regulatory accounting principles
E. Original cost
F. Historical cost
G. General obligation bonds

For each of the following definitions, indicate the key term from the list above that best
matches by placing the appropriate letter in the blank space next to the definition.

1. E, 2. D, 3. B, 4. A, 5. C

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #69

70. "In order to determine whether user charges are commensurate with operating costs, it is
desirable for internal service fund operations to be accounted for on a business basis." Do you
agree? Why or why not?

Agree. Internal service funds should be operated on a cost recovery basis (although, in
practice, not all are). Accrual accounting (i.e., the "business basis") is required for these funds
to determine that user charges are commensurate with operating costs, including depreciation
on capital assets.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #70
71. The Stores and Supplies Fund of Walnut City has quietly followed a policy of charging all
actual cost and normal overhead for materials and supplies bought from them. Annually an
amount of cash equal to the net gain by that method is transferred to the Walnut Library Fund.
Is this an appropriate pricing policy? Why or why not?

While this practice may be expedient, it is inexcusable. There is no justification for a library,
notwithstanding its valuable service, to be financed by collections under the guise of charges
for supplies and materials used throughout the city. Policies should be approved by the
elected officials, therefore providing justification for the practice.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #71

72. Explain how governmental entities that use internal service funds to account for risk financing
and risk management activities should account for those activities.

The internal service fund should recognize claims expense and a related liability when (1) a
claim has been asserted, (2) it is probable that an asset has been impaired or a liability has
been incurred, and (3) the amount of the loss is reasonably estimable, or if an estimable loss
has been incurred and it is probable that a claim will be asserted. As charges are made by the
internal service fund to governmental or other funds, either to cover the actual claims expense
or on some actuarial basis, the other funds will debit Expenditures or Expenses as appropriate
and the internal service fund will credit Revenues or Billings to Departments in the amount
billed.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #72

73. "Enterprise funds should not be permitted to accumulate unrestricted net assets, since to do
so would indicate overpricing of its services." Do you agree? Why or why not?

No. It is in the best interest of taxpayers that enterprise funds be self-supporting. While the
pricing policy should not permit the accumulation of excessive unrestricted net assets, policy-
makers may appropriately maintain a sufficient balance to permit replacement of inventory and
capital assets (usually at increased prices), repayment of long-term debt, and acquisition or
construction of assets as necessary to meet new or expanded operating needs.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #73
74. Enterprise funds for utilities often report in their operating statement an "Allowance for Funds
Used During Construction (AFUDC)" for interest paid or imputed during construction of plant
assets. What purposes are served by reporting AFUDC in the manner described?

As stated in Chapter 7 separate reporting of AFUDC, the amount of interest that was
capitalized during the year, as an offset to total interest expense for the year accomplishes two
things: (1) it discloses to financial statement readers the amount of interest that was
capitalized during the year, and (2) it reduces the reported interest expense, thus increasing
net income by the amount of interest capitalized.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #74

75. In some local government financial reports you will find activities such as solid waste disposal
and sewage disposal accounted for as a part of the General Fund. In other reports apparently
identical activities are accounted for as enterprise funds. Under what conditions would each
treatment be proper?

If the activities are primarily financed from tax revenues, or from charges not related to the
cost of services rendered, the activities are properly considered as General Fund (or special
revenue fund activities). If the activities are intended to be self-supporting (user-charges for
the services are intended to cover all costs), the activities should be accounted for as
enterprise funds.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #75

76. Depreciation of general capital assets is not recorded in the accounts of any of the
governmental funds. If a building is transferred from the General Fund to an internal service
fund because the character of its use changes, should the internal service fund record building
depreciation expense each year after the transfer? Explain.

Yes. After the transfer depreciation expense should be computed and recorded by the internal
service fund, assuming it is material in relation to the costs of services rendered. This is true
no matter what the source of the depreciable assets, or which fund will be responsible for their
replacement. Under GASB standards, the capital assets, when used by any of the
governmental funds, would have been depreciated in the governmental activity accounts at
the government-wide level.

Difficulty: Medium
 Question Type: Concept
Wilson - Chapter 07 #76

77. A government provided original financing for its supplies fund by a transfer of $40,000 cash
from the General Fund. The transferee fund credited the amount to Interfund Loan from
General Fund—Noncurrent. Assuming that the terminology is correct, how should the transfer
be classified in the statements of the supplies fund? Suggest an appropriate name for the
corresponding account in the General Fund; how should the corresponding account be shown
in the statements of the General Fund?

Interfund Loan from General Fund should be reported as a long-term liability of the supplies
fund, if the intent is to repay the amount transferred from the General Fund. If a portion of the
loan is due within one year, that portion should be shown as a current liability, the remaining
portion a noncurrent liability. Similarly, Interfund Loan to Supplies Fund should be reported as
a receivable on the balance sheet of the General Fund. (Note: As discussed in Chapter 4, the
long-term receivable in the General Fund would also require a reservation of fund balance in
the same amount.)

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #77

78. "Internal service funds used for risk financing should recognize as operating revenues the full
charges billed to other departments even if those charges substantially exceed the full cost of
providing risk financing service." Do you agree? Why or why not?

No. The statement is incorrect. GASB accounting and financial reporting standards require
that charges that substantially exceed the full cost of providing risk financing service be
reported as a nonoperating revenue or a capital contribution, as appropriate by the internal
service fund and as another financing use by the other funds.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #78
79. What are the alternative methods of dissolving an internal service fund? What factors should
be considered in choosing the appropriate method?

As Chapter 7 explains, dissolution of an internal service fund may be accomplished in any of

three ways, or in any combinations thereof: (1) The fund's assets are transferred to another
fund that will continue the operations as a subsidiary activity, (2) distribution of the fund's
assets (and liabilities), in kind, to another fund or another government, and (3) liquidation of
noncash assets and transferring the net cash (after settlement of liabilities) to another fund.
Legal counsel should be obtained to ensure the dissolution, including distribution of assets, is
according to law and legislative intent.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #79

80. What factors should be considered in determining whether an activity or operation should be
accounted for as an enterprise fund or as a governmental fund? As an internal service fund?

Under GASB standards, certain activities are required to be reported as enterprise funds. The
GASB requirements for enterprise fund reporting are 1) if an activity is financed with debt
secured solely by user charges and fees of the activity, or 2) law or regulations require that the
activity's costs be recovered with fees and charges. Generally, if operations of a fund are
largely financed from user charges rather than taxes or special assessments, the fund is either
an internal service fund or an enterprise fund, not a governmental fund. If the fund serves the
general public rather than other departments of the government, it is an enterprise fund, not an
internal service fund. Additionally, if the governing body has decided that a fund should be on
the accrual basis for purposes of cost determination or net income determination it may be
classified as an enterprise fund.

Difficulty: Medium
Question Type: Analysis
Wilson - Chapter 07 #80

81. For items reported in the restricted assets section of an enterprise fund balance sheet, how
are the related items reported in the liability and fund equity sections of the balance sheet?

If a current liability is to be paid from restricted assets it is recommended that the liability be
reported under a caption such as "liabilities payable from restricted assets," although such
reporting is not mandatory under GAAP. Under GASB standards, an appropriate amount
should be reported as net assets - restricted (for payment of debt service, for example).

Difficulty: Medium
 Question Type: Concept
Wilson - Chapter 07 #81

82. "Reporting 'utility plant in service' as a single line on the balance sheet provides adequate
information for regulatory purposes and/or sound management." Do you agree with the
statement? Explain why or why not.

No. Utility plant in service is a control account that may be adequate for external financial
reporting. For regulatory reporting purposes, special reports to creditors, and sound internal
management, a more detailed set of subsidiary plant accounts such as those described in
Chapter 7 under the heading "utility plant" must be used.

Difficulty: Medium
Question Type: Concept
Wilson - Chapter 07 #82

83. The Central Stores Fund of Cook City provides centralized management of purchasing,
storage, and issue of supplies for the entire City. For the following summarized transactions
and events for the year ended June 30, provide the fund level entries in general journal form
required to conform to generally accepted accounting principles. If no entry is needed, so
indicate.
1) The Central Stores Fund ordered supplies at an estimated cost of $62,000.
2) The supplies ordered in (1) above were received at invoice costs of $60,400; these invoices
were approved for payment.
3) Supplies costing $51,800 were issued to the City General Fund and billed to that fund at a
markup of 20 percent on cost.
4) Expenses paid in cash during the year were: purchasing, $5,700; warehousing, $7,100; and
general and administrative, $6,200.

Difficulty: Medium
Question Type: Journal Entry
Wilson - Chapter 07 #83
84. The Supplies Fund, an internal service fund, of a certain city recorded the following journal
entry:

In the entry above, explain the difference between the accounts "Interfund Loan from Water
Utility Fund" and "Interfund Transfer In from General Fund."

The interfund loan is a loan from the water utility fund to the supplies fund and will have to be
repaid over the agreed-upon time. By contrast, interfund transfer in is a permanent
contribution that will not have to be repaid by the supplies fund. Interfund Loan from Water
Utility Fund is thus a liability account whereas Interfund Transfer In is a temporary operating
statement account that will be closed out to increase unrestricted net assets (fund equity).

Difficulty: Medium
Question Type: Analysis
Wilson - Chapter 07 #84
85. On July 1, the first day of its fiscal year, Yale Township issued bonds with a face value of
$1,000,000 at 102 percent of par on the date of issue. The bonds bear annual interest at 6
percent; interest is payable semiannually. The bonds will mature in equal annual installments
over 20 years. Bond premium must be used for eventual bond redemption and is recorded as
a restricted asset. Assuming the bonds are revenue bonds sold to finance the construction of
a parking garage to be operated in a manner similar to an investor-owned business:
1) Name the type of fund in which each of the following should be recorded. (If any of the
following should not be recorded at all, enter "none" on the appropriate line.)
(a) The cash received for the sale of the bonds
(b) The liability of $1,000,000 for bonds payable
(c) The cost of the parking garage
(d) Interest paid or accrued during the period of construction
2) Show in general journal form all entries that should be made to record the sale of the
bonds. For each entry indicate the fund in which the entry is made.

1) (a) Enterprise Fund.

(b) Enterprise Fund.
(c) Enterprise Fund.
(d) Enterprise Fund. (Net interest cost during construction should be capitalized.)

2)

Difficulty: Hard
Question Type: Journal Entry
Wilson - Chapter 07 #85
Test Bank For Accounting for Governmental and Nonprofit Entities Edition: 15th by Earl Wilso

c7 Summary

Category # of Questions
Difficulty: Easy 24
Difficulty: Hard 3
Difficulty: Medium 58
Question Type: Analysis 2
Question Type: Calculation 3
Question Type: Concept 74
Question Type: Essay 2
Question Type: Journal Entry 4
Wilson - Chapter 07 85

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