Chapter VIII: Accounting for Proprietary Funds

Content
7.1 Introduction
7.2 Accounting principles of proprietary funds
7.1 Financial statements of proprietary funds
7.3 Illustrative entry for proprietary funds
7.4 Financial statements of proprietary funds
Summary

Objectives of the chapter:

After studying this chapter, you should be able to:

 Describe the characteristics of proprietary funds, including those unique to internal

service and enterprise funds

 Distinguish between the purposes of internal service funds and enterprise funds

 Explain the financial reporting requirements, including the differences between the
reporting of internal service and enterprise funds in the government-wide and fund
financial statements

 Describe accounting procedures and prepare journal entries and financial statements for
an internal service fund

 Describe accounting procedures and prepare journal entries and financial statements for
an enterprise fund

8.1 Introduction
Governmental funds owe their existence to legal constraints placed on the raising of revenues
and the use of resources. In contrast to the governmental funds, proprietary funds rely primarily
on exchange transactions, specifically charges for services, to generate revenues. As a result,
proprietary funds follow accounting principles that are similar to those of investor-owned
businesses.

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The focus on exchange transactions with parties outside of government is the reason that the
enterprise funds are reported in a separate Business-type Activities column at the government-
wide level, whereas governmental funds and internal service funds are reported as governmental
activities at the government-wide level.

Proprietary funds are classified into two namely internal service funds and enterprise funds. In
general, the reason for the creation of proprietary funds was to improve the management of
resources. More recently, with increased citizen resistance to tax increases, many governmental
entities have turned to user charges as a means of financing operations formerly financed by tax
revenues and intergovernmental revenues. Thus, proprietary funds are now frequently used to
account for activities formerly found in governmental funds.

In this chapter, the internal service fund and enterprise fund will be discussed emphasizing on the
principles of the funds, the accounting treatment for each fund, and the reporting of financial
statements at the end of an accounting period.

8.2 Accounting principles of proprietary funds

Since proprietary funds operate on user charges, it is important to determine whether user
charges are sufficient to cover operating costs. Administrators and governing bodies need
information that will allow them to determine that the costs of operating the fund are reasonable
in relation to the benefits provided by the fund. For these reasons, accounting and operating
activities of proprietary funds are conducted in a business-like manner, focusing on the economic
flow of resources through the use of accrual accounting.

As governments become more complex, efficiencies can be gained by combining or centralizing

services that are commonly found in several departments or funds of government. By doing so, a
primary objective of proprietary funds is to improve management of resources. As an example,
most common types of internal service funds are:

1. Motor pools management of different departments, unit, sectors

2. Central purchasing unit for different departments, unit, sectors

3. Storage of materials at central place

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4. Issuance of supplies for different units

5. Self-insurance pools

6. Central data processing unit that serve different departments, units, sections

7. Printing unit for production of printed materials, for the different colleges at central unit

Internal service funds are used to account for the production and distribution of centralized goods
and services that are provided to departments or agencies of the government, or to other
governments, on a cost-reimbursement basis. Internal service funds are sometimes called intra-
governmental service funds, working capital funds, or revolving funds. Although internal
service funds are accounted for internally as business-type activities, their transactions
predominantly involve sales of goods and services, or other transactions with the General Fund
and other governmental funds. For this reason, the Governmental Accounting Standards Board
(GASB) requires the financial balances of most internal service funds to be reported in the
Governmental Activities column at the government-wide level rather than the Business-type
Activities column. At the fund level, internal service funds are reported in a separate column of
the proprietary fund financial statements.

Enterprise funds account for activities that produce goods or services to be sold to the general
public. Activities of enterprise funds are referred to as business-type activities for purposes of
accounting and financial reporting at the government-wide level. Similar to governmental funds,
major enterprise funds must be identified and reported in separate columns of the fund financial
statements, while non-major enterprise fund information is aggregated and reported in an Other
Enterprise Funds column.

Internal Service Fund

The purpose for the establishment of an internal service fund is to improve financial management
of scarce resources. In order to manage resource usage among different departments or units
Internal Service fund is used as an entity. It should be stressed that a fund is a fiscal entity as
well as an accounting entity. That is why the establishment of a fund is ordinarily subject to
legislative approval. The legislative action that authorizes the establishment of an internal service
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fund should also specify the source or sources of financial resources to be used for fund
operations.

To start up an internal service fund, the General Fund or an enterprise fund may contribute assets
to the fund, or the internal service fund may receive the assets in the form of a long-term inter-
fund loan to be repaid over a number of years. Alternatively, the resources initially allocated to
an internal service fund may be acquired from the proceeds of a tax-supported bond issue or by
transfer from other governments that anticipate utilizing the services to be rendered by the
internal service fund.

Since internal service funds are established to improve the management of resources, it is
generally considered that their accounting and operations should be maintained on a business
basis. The accounting and operating of a fund on a business basis can lead to conflict between
managers, who want the freedom to operate the fund like a business, and legislators, who wish to
exercise considerable control over funds.

Assume that administrators request the establishment of a fund for the purchasing, warehousing,
issuing of supplies used by a number of funds and departments. Since no internal fund exists at
the time of the request, each fund or department will include in its budget an appropriation for
supplies, an appropriation for salaries and wages of personnel engaged in purchasing and
handling the supplies, and an appropriation for any operating expense or facility costs associated
with the supply function. This is done for each user department or unit or agent will refund the
cost incurred by the internal service fund on its behalf.

The customers of an internal service fund are, by definition, other funds and departments of the
government or of other governments. Therefore, each using fund and department must include in
its appropriations budget request the justification for the amount to be spent (i.e., paid to the
internal service fund) for supplies, or other commonly used services. Departments and programs
that require legislative appropriations to expend resources for goods and services should account
for purchases of goods or services from internal suppliers (i.e., internal service funds or
enterprise funds) in essentially the same manner as goods and services purchased from external
suppliers.

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Regarding costs to be charged by internal service fund to user departments or units, it will
account prices that enable recover the cost of the service (supplies) and other factors that lead to
make certain margin above cost. It is obvious the cost charged by internal service fund is less
than outside suppliers. Payroll and other cash operating expenses of the internal service fund
must be met. If the internal service fund has received a loan from another fund or another
government, prices must be set at a level that will generate cash needed for debt retirement. If the
internal service fund is to be operated on a true business basis, it must also be able to finance
from its operations the replacement, modernization, and expansion of plant and equipment used
in fund operations.

Accounting for internal service fund

I. Budgetary account

The budgets of internal service funds are submitted to the legislative body and to the public
for information but not for legal action. Therefore, the budget is not formally recorded in
internal service fund accounts. Besides, encumbrance accounting is not used in internal
service fund. .

II. Actual transactions

Internal service fund uses accrual accounting at the fund level and the government-wide level.
However, the internal service fund is generally reported as a part of the Governmental Activities
column of the government-wide financial statements. To ensure that double counting of
revenues, expenses, and other transactions does not occur, GASB standards require the
elimination of the effect of transactions between governmental funds and internal service funds.

One should expect that funds use modified basis of accounting but internal service fund uses
accrual basis. There are times two journal entries are made: one for the fund and the other is for
governmental wide level. Hence, it should be checked that double counting does not occur at the
government-wide level when preparing financial statements at the end of the period.

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1. Assume that Town Adama obtained approval from town council to establish internal
service fund in order to centralize the purchasing, storing, and distributing function of
supplies. The objective is to minimize cost and manage resources effectively. Based on
this assumption, the general fund transferred inventory of supplies of Birr 61,500 and
cash of birr 30,000 to start up the internal service fund as at January 2017. The fund can
be stated as supplies fund or simply internal service fund unless there are other functions
to be performed by internal service fund. Please note the transferred fund is a working
capital to the supplies fund and is not refundable.

Entry
Cash Dr 30,000
Supplies Dr 61,500
Inter-fund transfer in Cr 91,500
2. Assume the internal service fund obtained a loan of Bir 130,000 from enterprise fund
payable in 20 equal installments with no interest. The fund is to be used to acquire
warehouse building for Birr 95,000, of which birr 25,000 is for land, machinery and
equipment for Birr 25,000, and delivery equipment for Birr 10,000.

Journal entry

A. At fund level

Cash Dr 130,00

Inter-fund loan from enterprise fund – current Cr 6500

Inter-fund loan from enterprise fund – non-current Cr 123500

B. At governmental level

Cash Dr 130,000

Internal balances Cr 130,000

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3. To record the purchase of warehouse building, land, machinery and equipment, and
delivery equipment as stated above.

A. At fund level
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Machinery and Equipment—Warehouse . . . . . . . . . . . . . . . . . . 25,000
Equipment—Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,000
B. At governmental level
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,000
4. During the period, supplies worth of Birr 192,600 was purchased on account to provide
supplies to the departments

Entry at fund level

Supplies Dr 192,600

Voucher payable Cr 192,600

5. Internal service fund (Supplies Fund) distributed supplies which cost Birr 185,000 but at
markup 35 percent on cost is needed (price of Birr 249,750) to general fund department.

Cost of Supplies Issued . . . . . . . . . . . . . . . . . . . . 185,000

Inventory of Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,000

Due from General Fund . . . . . . . . . . . . . . . . . . . . . . . . 249,750

Billings to Departments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249,750

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Note: there is no entry at governmental level because this is transfer of supplies from one fund
to another fund.

6. Supplies fund collected cash of Birr 249,750 from general fund

Cash Dr 249,500

Due from General Fund Cr 249,750

7. Supplies fund paid salary of Birr 55,000 where administrative expense =19,000,
warehousing expense = 12,000, delivery expense = 13,000.

Entry at fund level

Administrative Expenses . . . . . . . . . . . . . . . . . 11,000
Purchasing Expenses . . . . . . . . . . . . . . . . . . . 19,000
Warehousing Expenses . . . . . . . . . . . . . . . . 12,000
Delivery Expenses . . . . . . . . . . . . . . . . . . 13,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000
Entry at Governmental Activities:
Expenses—General Government . . . . . . . . . . . 55,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000
8. Supplies fund paid on account of Birr 164,000 to suppliers

Entry at supplies fund and governmental activities

Vouchers Payable . . . . . . . . . . . . . .. 164,000

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 164,000

9. Paid the first installment and reclassify the second loan installment

Entry at Supplies Fund:

A. Inter-fund Loan from enterprise fund —Current . . . 6,500

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,500
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 B. Inter-fund Loan from enterprise fund —Noncurrent . . . . . . . . . . . 6,500

Inter-fund Loan from enterprise fund Fund—Current . . . . . . . . . . . . 6,500

Entry at Governmental Activities:

Internal Balances . . . . . . . . . . . . . . . . 6,500

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6,500

10. Annual depreciation was calculated on Building Birr 3500, on machinery and equipment
Birr2500, and delivery equipment Birr 2000. The total depreciation expense was
allocated to administrative expense, purchasing expense, warehousing expense, and
delivery expense at a rate of birr 350, birr 350, birr 5300, and birr 2000 respectively.
respectively.

Entry at Supplies Fund:

Administrative Expenses . . . . . . . . . . . . 350
Purchasing Expenses . . . . . . . . . . . . . . .350
Warehousing Expenses . . . . . . . . . 5,300
Delivery Expenses . . . . . . . . . . . 2,000
Allowance for Depreciation—Building . . . . . .3,500
Allowance for Depreciation—Machinery and Equipment . . . 2,500
Allowance for Depreciation—Equipment—Delivery . 2,000
Entry at Governmental Activities:
Expenses—General Government . . . . . . 8,000
Accumulated Depreciation—Building . . . . . 3,500
Accumulated Depreciation—Equipment . . . . . 4,500

Financial statements of Internal service fund

After posting all journal entries to the respective accounts, annual financial reports are prepare.
The common financial statements of Internal service fund are:
1. Statement of Fund Net Assets
2. Statement of Revenue, expenditures, and changes in Fund Net assets
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 3. Statement of cash flow

Statement of Fund Net Assets

TOWN OF ADAMA SUPPLIES FUND
Statement of Fund Net Assets
As of December 31, 2011
Assets
Current assets:
Cash Birr 54,250
Inventory of supplies, at average cost 69,100
Total current assets 123,350
Capital assets:
Land $25,000
Building 70,000
Less: Allowance for depreciation 3,500 66,500
Machinery and equipment—warehouse 25,000
Less: Allowance for depreciation 2,500 22,500
Equipment—delivery 10,000
Less: Allowance for depreciation 2,000 8,000
Total capital assets 122,000
Total assets 245,350
Liabilities
Current liabilities:
Vouchers payable 28,600
Current portion of long-term liabilities 6,500
Total current liabilities 35,100

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Long-term liabilities:
Inter-fund loan from water utility 117,000
Total liabilities 152,100
Net Assets Unrestricted Birr 93,250

2. Statement of Revenues, Expenses, and Changes in Fund Net Assets

TOWN OF ADAMA SUPPLIES FUND

Statement of Revenues, Expenses, and Changes in Fund Net Assets
For the Year Ended December 31, 2011
Operating revenues:
Billings to departments Birr 249,750
Less: Cost of supplies issued 185,000
Gross margin 64,750
Operating expenses:
Purchasing expenses 19,350
Administrative expenses 11,350
Warehousing expenses 17,300
Delivery expenses 15,000
Total operating expenses 63,000
Operating income 1,750
Inter-fund transfers in 91,500
Change in net assets 93,250
Net assets—January 1, 2011 –0–
Net assets—December 31, 2011 93,250

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3. Statement of cash flow
TOWN OF ADAMA SUPPLIES FUND
Statement of Cash Flows
For the Year Ended December 31, 2011
Cash Flows from Operating Activities:
Cash received from customers 249,750
Cash paid to employees for services (55,000)
Cash paid to suppliers (164,000)
Net cash provided by operating activities 30,750
Cash Flows from Noncapital Financing Activities:
Interfund transfer from General Fund 30,000
Net cash provided by noncapital financing activities 30,000
Cash Flows from Capital and Related Financing Activities:
Advance from Enterprise Fund 130,000
Partial repayment of advance from Enterprise Fund (6,500)
Acquisition of capital assets (130,000)
Net cash used for capital and related activities (6,500)
Net increase in cash and cash equivalents 54,250
Cash and cash equivalents, 1/1/2011 –0–
Cash and cash equivalents, 12/31/2011 54,250

Reconciliation of Operating Income to Net Cash Provided by Operating Activities

Operating income 1,750
Adjustments: Depreciation expense 8,000

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Increase in inventory 69,100
Less: Contributed inventory 61,500 (7,600)
Increase in vouchers payable 28,600
Net cash provided by operating activities 30,750

Closing entries for Supplies Fund: 1.to close costs and expenses
Billings to Departments . . . . . . . . . . . . . . . . . 249,750
Cost of Supplies Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,000
Administrative Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,350
Purchasing Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,350
Warehousing Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,300
Delivery Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Excess of Net Billings to Departments over Costs . . . . . . . . . . . 1,750

2. To transfer the excess of Net billings to departments over costs to income summary or Net
assets – unrestricted

Excess of Net Billings to Departments over Costs . . . . . . . . . . . . . 1,750

Net Assets—Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,750

3. To close inter-fund transfers to Net Assets – unrestricted account

Inter-fund Transfers In . . . . . . . . . . . . . . . . 91,500

Net Assets—Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,500

Enterprise Fund
Enterprise funds are used by governments to account for services provided to the general public
on a user charge basis. Enterprise funds are classified by the GASB as proprietary funds.
Enterprise funds are generally reported as part of the Business-type Activities column of the
government-wide financial statements. The financial records of the enterprise funds can simply
be added together for financial reporting purposes at the government-wide level. Any inter-fund

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transactions among enterprise funds should be eliminated because they would have no net effect
on overall business-type activities.

Under GASB standards, a government must report certain activities in an enterprise fund if any
of the following criteria are met.

1. The activity is financed with debt that is secured solely by a pledge of the revenues from fees
and charges of an activity.

2. Laws or regulations require that the activity’s costs of providing services, including capital
costs (such as depreciation or debt service), be recovered with fees and charges, rather than with
taxes or similar revenues.

3. Pricing policies are designed to recover the costs of the activity, including capital costs.

If an activity is subsidized by a government’s General Fund rather than fully covering its costs of
providing services with fees or charges, that activity need not be reported in an enterprise fund.
Besides, if governments support the activities primarily with general or special revenue sources
rather than user charges, accounting for the activities is more appropriate in the General Fund or
a special revenue fund.

Since the word enterprise is often used as a synonym for “business-type activity,” it is logical
that enterprise funds should use accrual accounting and account for all assets used in the
production of goods or services offered by the fund. The fund accounts long-term debt in its
book of account. The most common examples of governmental enterprises are:

 Public utilities, notably water and  toll bridges,

sewer utilities.
 produce markets,
 Electric and gas utilities,
 parking lots,
 transportation systems,
 parking garages,
 airports,
 liquor stores, and
 ports,
 public housing projects
 hospitals,
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It is recommended that governmentally owned enterprises use the accounting structures
developed for investor-owned enterprises of the same nature. Budgetary accounts should be used
only if required by law. The accounting for debt service and construction activities of a
governmental enterprise occurs within the enterprise fund rather than by separate debt service
and capital projects funds. Thus, the financial statements of enterprise funds are self-contained,
and creditors, legislators, or the general public can evaluate the performance of a govern- mental
enterprise on the same bases as they can the performance of investor-owned enterprises in the
same industry.

I: Budgetary accounting for Enterprise fund

Assume that one of the enterprise funds, utility fund was established by Akaki town to provide
water to the town. Utility or other enterprise management must prepare operating budgets and
capital expenditure budgets as management tools. It is assumed that the budgets are submitted to
the town administrators, the town legislative body, and the public for information, not for legal
action. Accordingly, the budget is not formally recorded in enterprise fund accounts.
Encumbrances need not be recorded in the accounts. Accrual basis of accounting is applied in
water utility fund as is common to enterprise funds.

II: Actual transactions of water utilities fund

1. Water Utility Fund advanced Birr 130,000 to the Supplies Fund as a long-term loan.

Entry

Interfund Loan to Supplies Fund—Noncurrent . . . 130,000

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,000

2. Sold water and issued bills to nongovernmental customers with amount of birr 696,000, bills
to the General Fund with amount of birr 30,000.
Entry
Customer Accounts Receivable . . . . . . . . . . 696,000
Due from General Fund . . . . . . . . . . . . . . . . 30,000
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 Sales of Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 726,000
3. Collected Birr 680,000 receivables from nongovernmental water customers .
Entry
Cash . . . . . . . . . . . . . . . . . . . . 680,000
Customer Accounts Receivable . . . . . . . . . . . . 680,000
4. Materials and supplies in the amount of Birr 138,000 were purchased during the year by the
Water Utility Fund

Entry

Materials and Supplies . . . . . . . . . . 138,000

Accounts Payable . . . . . . . . . . . . . . . . . . . . . 138,000

5. Materials and supplies were charged to the utility plants which are source of supply (land
and water sources), pumping fixed asset, water treatment, transmission and distribution,
construction work in progress in the amount of Birr 18,000, birr 21,000, birr 24,000,
birr13,000, Birr 66,000 respectively.

Entry
Source of Supply Expenses . . . . . . . . . . . . . . . 18,000
Pumping Expenses . . . . . . . . . . . . . . . . . . . . . . 21,000
Water Treatment Expenses . . . . . . . . . . . . . . . .24,000
Transmission and Distribution Expenses . . . . 13,000
Construction Work in Progress . . . . . . . . . . . . 66,000
Materials and Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,000
6. Water utility fund paid payroll of Birr 331,200 and pension contribution of Birr 13,800 (both
employees and employer). Employees’ income tax amounts Birr 51,750. Cash of Birr
279,450 was paid on payday. It should be noted that salary expense and related expense
accounts are affected at time of preparing the payroll. Eventually, payroll expenses are
allocated to different departments or utility plants: Source of Supply = 8,200, Pumping=
15,700, Water Treatment =17,500, Transmission and Distribution = 76,250, Customer

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 Accounts =96,550, Sales = 17,250 , Administrative and General = 83,150, Construction
Work in Progress = 30,400

Entry
Source of Supply Expenses . . . . . . . . . . . . 8,200
Pumping Expenses . . . . . . . . . . . . . . . . . . 15,700
Water Treatment Expenses . . . . . . . . . . . . 17,500
Transmission and Distribution Expenses . . . . . 76,250
Customer Accounts Expenses . . . . . . . . . . . . . .96,550
Sales Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 17,250
Administrative and General Expenses . . . . . . . 83,150
Construction Work in Progress . . . . . . . . . . . 30,400
Pension payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .13,800
Employment income tax Payable . . . . . . . . . . . . . . 51,750
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .279,450
7. Bond interest in the amount of $105,000 was paid; the bonds were issued to finance the
acquisition of utility plant assets. Amortization of debt discount amounted to Birr 530.
Entry
Interest on Long-term Debt . . . . . . . . . . . . . .105,530
Unamortized Discount . . . . . . . . . . . . . . . . . . . . . . 530
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,000
8. Bond interest in the amount of Birr 12,900 was properly capitalized as part of construction
work in progress during the year.
Entry
Construction Work in Progress . . . . . . . . . . . . . 12,900
Interest on Long-term Debt (payable) . . . . . . . . . . 12,900
9. Construction projects on which costs totaled Birr 220,000 were completed and the assets
were placed in use.
Entry
Utility Plant in Service . . . . . . . . . . . . . . . . . . . .220,000
Construction Work in Progress . . . . . . . . . . . . . . . . . . . . . 220,000
10. Uncollectible receivables of Birr 3,410 were written off of which the customers owing the
bills had paid deposits totaling birr 2,140 to the water utility; the deposits were applied to the

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 bills, and the unpaid remainder was charged to Accumulated Provision for Uncollectible
Accounts .
Entry A: Entry to record uncollectible receivables, customers deposit, and provision of
uncollectible for receivables

Customer Deposits . . . . . . . . . . . . . . . . . . 2,140

Accumulated Provision for Uncollectible Accounts . . . .1,270
Customer Accounts Receivable . . . . . . . . . . . . . . . . . . . . 3,410

Entry B Restricted assets is reduced by Birr 2140.

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,140
Cash—Customer Deposits . . . . . . . . . . . . . . . . . . . . . . . 2,140
11. Customers’ deposits amounting to $1,320 were refunded by check to customers
discontinuing service. Deposits totaling $2,525 were received from new customers.
Entry A
Customer Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,320
Cash—Customer Deposits . . . . . . . . . . . . . . . . . . . . . . . 1,320
Entry B
Cash—Customer Deposits . . . . . . . . . . . . . 2,525
Customer Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,525
12. Customers’ advances for construction Birr 21,000 of which Birr 14,000 were applied to their
water bills and the remainder of the advances was transferred to Capital Contributions from
Customers.
Entry
Customer Advances for Construction . . . . . . . . . . . . . . . . . . 21,000
Customer Accounts Receivable . . . . . . . . . . . . . . . . . . . . . 14,000
Capital Contributions from Customers . . . . . . . . . . . . . . . . 7,000
13. Utilities fund paid accounts payable of Birr 133,200, pension payable of Birr 13500, and
employment income tax payable of Birr 50,000. .

Entry
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,200
Taxes Accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,500
Tax Collections Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
18
 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196,700
14. The Water Utility Fund agreed to pay $25,000 to the General Fund as a payment in lieu of
property taxes.

Entry

Payment in Lieu of Taxes . . . . . . . . . . . . . . . . . 25,000

Due to General Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000

15. During the year, interest amounting to Birr 44,500 in cash was received on restricted
investments. The amount Birr 1,375 is allocable to investments of customer deposit assets
and is unrestricted as to use; the remaining Birr 43,125 adds to the amount restricted for
revenue bond repayment.

Entry A
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,375
Cash—Bond Repayment . . . . . . . . . . . . . . . . . . . . . 43,125
Interest and Dividend Income . . . . . . . . . . . . . . . . . . . . . 44,500
Entry B
Net Assets—Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . 43,125
Net Assets—Restricted for Bond Repayment . . . . . . . . . . . 43,125
16. Year-end adjustments: depreciation expense = 102,750, the provision for uncollectible
accounts = 3980, and accrued sales of water = 15,920

Entry
Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,750
Uncollectible Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,980
Accrued Utility Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 15,920
Accumulated Provision for Depreciation of Utility Plant . . . . . 102,750
Accumulated Provision for Uncollectible Accounts . . . . . . . . . 3,980
Sales of Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,920

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17. In accord with the revenue bond indenture, Birr 100,000 of unrestricted cash was invested in
government securities for eventual retirement of revenue bonds. Net assets are restricted in
an amount equal to the increase in restricted assets. In addition, investments totaling Birr
40,000 were made from restricted cash for eventual bond repayment.

Entry A

Investments—Bond Repayment . . . . . . . . . . . . . . . . . . . . . 140,000

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000

Cash—Bond Repayment . . . . . . . . . . . . . . . . . . . . . . . . 40,000

Entry B

Net Assets—Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000

Net Assets—Restricted for Bond Repayment . . . . . . . . . . . 100,000

18. The Supplies Fund paid its first installment of $6,500 to the Water Utility Fund as a partial
repayment of the long-term advance.

Entry

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,500

Interfund Loan to Supplies Fund—Noncurrent . . . . . . . . . . . 6,500

Financial statements of Enterprise (water Utility) fund

1. Statement of Net assets

2. Statement of Revenues, Expenses, and Changes in Fund Net Assets

3. Statement of cash flows

20
A. Statement of Net assets

AKAKI town Water Utility Fund

Statement of Net Assets
As of December 31, 2011
Assets
Current and accrued assets:
Cash 4,865
Customer accounts receivable 67,590
Less: Accumulated provision for uncollectible 5,610 61,980
Accrued utilities revenues 15,920
Due from General Fund 5,000
Materials and supplies 24,700
Total current and accrued assets 112,465
Restricted assets:
Cash 8,790
Investments 696,000 704,790
Utility plant:
Utility plant in service 3,511,825
Less: Accumulated depreciation 543,075
Utility plant—net 2,968,750
Construction work in progress 14,300
Net utility plant 2,983,050
Other noncurrent assets:
Interfund loan to supplies fund 123,500
Total assets 3,923,805
Liabilities

21
 Current liabilities:
Accounts payable 38,000
Pension payable 300
Employment income tax payable 1,750
Total current liabilities 40,050
Liabilities payable from restricted assets:
Customer deposits 22,765
Long-term liabilities:
Revenue bonds payable (net of unamortized discount of $4,770) 1,745,230
Total liabilities 1,808,045
Net Assets Invested in capital assets, net of related debt 1,237,820
Restricted for payment of debt service 682,025

Unrestricted 195,915

Total net assets 2,115,760

2. Statement of Revenues, Expenses, and Changes in Fund Net Assets

AKAKI Town Water Utility Fund

Statement of Revenues, Expenses, and Changes in Fund Net Assets
For the Year Ended December 31, 2011
Utility operating revenue:

Sales of water (net of $3,980 for uncollectible accounts) 723,140

Operating expenses:

Source of supply expenses 26,200

Pumping expenses 36,700

Water treatment expenses 41,500

Transmission and distribution expenses 89,250

Customer account expenses 96,550

22
Sales expenses 17,250

Administrative and general expenses 83,150

Depreciation expense 102,750

Payment in lieu of taxes 25,000

Total operating expenses 518,350

Utility operating income 204,790

Nonoperating income and deductions:

Interest and dividend revenue (44,500)

Interest on long-term debt 92,630

Total non-operating income and deductions 48,130

Income before contributions 156,660

Capital contributions from customers 7,000

Change in net assets 163,660

Total net assets, January 1, 2011 1,952,100

Total net assets, December 31, 2011 2,115,760

3. Statement of cash flow

AKAKI Town WATER UTILITY FUND

Statement of Cash Flows
For the Year Ended December 31, 2011
Cash Flows from Operating Activities:
Cash received from customers 680,000
Cash provided from customer deposits 1,205
Cash paid to employees for services (312,550)
Cash paid to suppliers (67,200)

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Net cash provided by operating activities 301,455
Cash Flows from Capital and Related Financing Activities:
Acquisition and construction of capital assets (96,400)
Interest paid on long-term bonds (105,000)
Net cash used for capital and related financing activities (201,400)
Cash Flows from Investing Activities:
Interest and dividend income 44,500
Purchases of restricted investments (140,000)
Interfund loan (123,500)
Net cash used for investing activities (219,000)
Net decrease in cash and cash equivalents (118,945)
Cash and cash equivalents—January 1, 2011 132,600
Cash and cash equivalents—December 31, 2011 13,655

Closing Entries
1. Closing nominal accounts
Sales of Water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 727,120
Capital Contributions from Customers . . . . . . . . . . . . . . . . .7,000
Interest and Dividend Income . . . . . . . . . . . . . . . . . . . . . . .44,500
Source of Supply Expenses . . . . . . . . . . . . . . . . . . . . . . .26,200
Pumping Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,700
Water Treatment Expenses . . . . . . . . . . . . . . . . . . . . . . . 41,500
Transmission and Distribution Expenses . . . . . . . . . . . . 89,250
Customer Account Expenses . . . . . . . . . . . . . . . . . . . . . . 96,550
Sales Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,250
Administrative and General Expenses . . . . . . . . . . . . . . . 83,150
Interest on Long-term Debt . . . . . . . . . . . . . . . . . . . . . . . 92,630
Payment in Lieu of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,750
Uncollectible Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . 3,980
Net Assets—Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . .163,660

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 2. Net Assets—Invested in Capital Assets, Net of Related Debt, would be decreased for
depreciation and amortization of the debt discount and increased for the change in utility
plant during the year.

Entry A adjustment of net assets for depreciation and amortization of the bond discount

Net Assets—Invested in Capital Assets, Net of Related Debt . . . 103,280

Net Assets—Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . 103,280

Entry B The increase to capital assets resulting in adjustment to net assets

Net Assets—Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . 109,300

Net Assets—Invested in Capital Assets, Net of Related Debt . . 109,300

Summary

Chapter end questions

1. Describe the similarity of ISF and EF with Investor Owned Business Enterprises?

____________________________________________________________________________
________________________________________________________________

2. What Information must be known about an activity or operation to determine whether it

should be accounted for as an EF, ISF or as a Governmental fund?

____________________________________________________________________________
________________________________________________________________

25
3. Briefly describe EF accounting for debt service and Construction activities in to contrast to
the treatment with governmental debt service and construction activities.

___________________________________________________________________________
_______________________________________________________________

4. What are the categories of cash flow in a proprietary Fund statement of cash flows prepared
in conformity with GASB standards?

___________________________________________________________________________
_______________________________________________________________

5. What are the alternative methods of dissolving an ISF? What factors should be considered in
choosing the appropriate method?

___________________________________________________________________________
_______________________________________________________________

6. Explain the reason for the establishment of an ISF.

____________________________________________________________________________
________________________________________________________________

7. Describe how the original allocation of resources are made during the establishment of an
ISF.

______________________________________________________________________________
______________________________________________________________

8. Explain the reporting requirements for internal service funds and enterprise funds.?

___________________________________________________________________________
_________________________________________________________

9. When would a city establish an internal service fund? An enterprise fund?

___________________________________________________________________________
___________________________________________________
26
10. What is the purpose of the Restricted Assets section of an enterprise fund statement of fund
net assets?

___________________________________________________________________________
_________________________________________________

11. How does the statement of cash flows under GASB standards differ from the statement of
cash flows under FASB standards?

___________________________________________________________________________
___________________________________________

12. Explain the difference between operating revenues/expenses and non-operating

revenues/expenses. Why does the GASB require that operating revenues/ expenses be
reported separately on proprietary statements of revenues, expenses, and changes in fund net
assets?

___________________________________________________________________________
_________________________________________________________________

27