Deck 10: Enterprise Funds

Question 1

The use of an Enterprise Fund is required by generally accepted accounting principles in each of the following situations except

A) When user fees are charged for the majority of the activity's operations.
B) When an activity is financed with debt that is secured solely by the pledge of revenues.
C) When laws and regulations require that the activity's costs be recovered with fees and charges.
D) When pricing policies of the activity establish fees and charges are designed for cost recovery.

Answer 1

A

Question 2

Which of the following statements is false concerning interest capitalization?

A) Generally accepted accounting principles require the capitalization of certain types of interest in Enterprise Funds.
B) Interest cost should not be capitalized for asset acquisitions financed by restricted gifts or grants.
C) Interest capitalization is computed differently for tax-exempt versus taxable debt.
D) Interest capitalization is not allowed in Enterprise Funds.

Answer 2

D

Question 3

Refunding bonds were issued by an Enterprise Fund with a face value of $15,000,000 at a 1% discount. Issuance costs were $225,000. The entry to record the issuance of the refunding bonds would be $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\begin{array}{lrr}&\text { Debit } &\quad \text { Credit }\end{array}$

A)
$\begin{array}{lrr}\text { Cash } & \$ 14,625,000 & \\\text { Expenditures } & 225,000 & \\\text { Other Financing Uses - Discount } & 150,000 & \\\quad \text { Other Financing Sources - Bonds } & & \$ 15,000,000 \\\end{array}$

B)
$\begin{array}{lrr}\text { Cash } & \$ 14,625,000 & \\\text { Expenditures } & 225,000 & \\\quad \text { Other Financing Sources - Bonds } & & \$ 14,850,000 \\\end{array}$


C)
$\begin{array}{lrr} \text { Cash } & \$ 14,625,000 & \\\text { Unamortized Deferred Charges/Discount } & 375,000\\\text { Bond Payable } & &\$15,000,000\\\end{array}$

D)
$\begin{array}{lrr}\text { Cash } &\quad\quad\quad\quad\quad\quad\quad\quad \$ 14,625,000 & \\\text { Bond Issuance Expense } & 225,000 & \\\text { Unamortized Discount } & 150,000 & \\\quad \text { Bonds Payable } & & \$ 15,000,000\end{array}$

Answer 3

D

Question 4

Dayton County decided to refund an outstanding term bond issue in its Enterprise Fund. The old bonds have a par value of $3,200 and an unamortized premium of $120. These bonds are scheduled to mature in 6 more years.
Transactions:
1. On January 2, 20x2, the County issued refunding bonds at par, $3,700. The bonds bear interest at 5% payable annually and mature in five years. The bond issuance costs were $250.
2. On January 2, The County paid $3,800 into an irrevocable trust in order to defease in substance the previously outstanding bonds payable of the Enterprise Fund.
3. The annual interest payment on the new bonds was made on December 31 when due.
Requirements:
1. Prepare the journal entries required in an Enterprise. If no entry is required, state "No entry required" and explain why.
2. Indicate the effects of each transaction on the accounting equation of the Enterprise Fund accounts. If an element of the equation is not affected or if the net effect is zero, put "NE" in the appropriate box.

Question 5

When accounting for inventory in an Enterprise Fund, which of the following methods should be used for external financial reporting?

A) Acquisition method.
B) Allocation method.
C) Consumption method.
D) Purchases method.

Question 6

The city, which has a December 31 year end, was awarded a $400,000 federal grant for a system hardware upgrade to meet FCC requirements. The grant was awarded and distributed to the fund in June 20X7. However, the capital project is not expected to be completed until June 20X8. As of December 31, 20X7, the Cable Enterprise Fund should

A) Report nonoperating revenues of $400,000.
B) Report nonoperating revenues of $200,000.
C) Report a capital contribution of $400,000.
D) Report a capital contribution of $200,000.

Question 7

A city's Enterprise Fund sold land, which rarely occurs in the government. The land was originally purchased at $35,000 and sold for $235,000. The Enterprise fund would record the sale as a

A) Debit to cash for $235,000 and credit to non-operating revenues for $235,000.
B) Debit to cash for $235,000 and credit to operating revenues for $235,000.
C) Debit to cash for $235,000, a credit to capital assets land for $35,000, and a credit to non-operating revenues for $200,000.
D) Debit to cash for $235,000, a credit to capital assets land for $35,000, and credit to special item for $200,000.

Question 8

An Enterprise Fund contributed $85,000 to the General Fund for operations. The money is not intended to be a loan. Which of the following statements is true?

A) The Enterprise Fund will report capital contributions of $85,000.
B) The Enterprise Fund will report other financing uses of $85,000.
C) The Enterprise Fund will report advances of $85,000.
D) The Enterprise Fund will report transfers out of $85,000.

Question 9

A general government department donates a capital asset with an original cost of $50,000 to an Enterprise Fund. The net book value as of the date of donation is $17,500. The entry that should be recorded by the Enterprise Fund would be

A) A debit to capital assets of $17,500 and a credit to transfer in of $17,500.
B) A debit to capital assets of $50,000 and credits to accumulated depreciation of $32,500 and transfer in of $17,500.
C) A debit to capital assets of $17,500 and a credit to capital contribution of $17,500.
D) A debit to capital assets of $50,000 and credits to accumulated depreciation of $32,500 and capital contribution of $17,500.

Question 10

A government defeased in substance $10 million of old Enterprise Fund bonds by paying $12 million into a qualifying trust for that purpose. The refunded bonds had an unamortized premium of $200,000 and bond issue costs of $50,000. No borrowed resources were used to accomplish the defeasance. What amount of deferred interest expense adjustment should the government report?

A) $0.
B) $1,850,000 debit.
C) $1,800,000 debit.
D) $1,850,000 credit.

Question 11

The following transactions occurred in the City of Jimtown Enterprise Fund:
1. Equipment belonging to the Enterprise Fund was sold for $300.
2. The proceeds from the sale of the asset were transferred to the General Fund.
3. Cash, $2,800, was paid for construction costs. The cash was paid out of unrestricted cash available for any Enterprise Fund purpose-i.e., was not set aside strictly for capital asset construction or acquisition.
4. Paid principal, $18, and interest, $59, on a mortgage note.
5. The Enterprise Fund collected $12,500 from external customers and $2,500 from the General Fund for services.
6. The City signed a lease for equipment. The present value of the future payments and fair value of the equipment is $5,000, and the City made a down payment of $500
7. Proceeds of bonds issued to refund previously outstanding bonds which had been issued to finance plant expansion several years earlier, $18,000.
8. Interest paid on the refunding bonds, $1,080.
9. Cash proceeds from sale of investments, $900. Investments were purchased with the proceeds of debt issued to finance construction of specialized equipment that is almost completed.
10. Cash received from a capital grant, $5,000.
11. Cash paid for construction costs that qualify under the capital grant, $1,500.
12. The City acquired land for future plant expansion, $750, by issuing a 10-year bond in the same amount.
13. Cash received from operating grants, $500.
14. Cash paid for salaries covered by operating grant, $85.
15. The City had an unrealized gain on investments of $12.
16. The Enterprise Fund incurred $10,000 in operating expenses, including $1,000 in depreciation, $3,000 for employees, and $6,000 paid to suppliers. All but $500 of the salary expenses were paid by year end.
17. Cash paid for equipment purchased with the proceeds of an operating grant, $34.
18. Cash received from the General Fund to cover part of the cost of plant expansion, $1,000.
19. Cash proceeds from the sale of fund capital assets, $23.
20. Cash received from another fund as a 6-month loan for the sole purpose of financing purchase of equipment, $90.
The balance of cash and cash equivalents at October 1, 20X1, was $313. The balance of cash and cash equivalents at year end 9/30/20X2 is $26,250.
Requirement: Prepare the City of Jimtown Enterprise Fund Statement of Cash Flows for the year ended September 30, 20X2. You may exclude the reconciliation of operating income to cash flows from operating activities.

Question 12

A developer agreed to pay for water and wastewater infrastructure associated with one of his development projects. Once the work is completed and the new lines are connected, they will become part of the city's Enterprise Fund capital assets. The entry that should be recorded by the Enterprise Fund when the project is complete would be

A) A debit to capital assets and a credit to net investment in capital assets.
B) A debit to capital assets and a credit to capital contribution.
C) A debit to capital assets and a credit to transfer in.
D) A debit to capital assets and a credit to nonoperating revenues.

Question 13

Listed below are selected transactions for the Rhea County Garbage Service, which is accounted for in an Enterprise Fund. All amounts are in thousands of dollars.
Transactions:
1. Services of $5,000 were provided and billed to outside customers.
2. Services of $750 were provided and billed to the General Fund.
3. $750 was collected from other funds, and $4,000 was collected on account.
4. $20 of accounts receivable were written off as uncollectible.
5. Estimated bad debts for the year were $100.
Requirements:
1. Prepare the journal entries required in the Enterprise Fund. If no entry is required, state "No entry required" and explain why.
2. Compute the amount of sales revenues that should be reported for the Enterprise Fund.
3. Indicate the effects of each transaction on the accounting equation of the Enterprise Fund accounts. If an element of the equation is not affected or if the net effect is zero, put "NE" in the appropriate box.

Question 14

An Enterprise Fund is donating a capital asset with a net book value of $25,000 to a general government department. The entry that should be recorded for the Enterprise Fund would be

A) A debit to nonoperating expense and a credit to capital assets.
B) A debit to transfer out and a credit to capital assets.
C) A debit to capital contribution and a credit to capital assets.
D) A debit to other financing use and a credit to capital assets.

Question 15

Over the course of one year, Obed County received two grants:
-$10,000 grant in cash to be used to finance half the cost of expanding the town's water treatment plant. All eligibility requirements have been met.
-$40 grant to educate users on water conservation measures and to monitor water usage by a study group.
Transactions:
1. Received the grant to assist in expanding the water treatment plant.
2. Signed a contract with Swann & Hall Construction to build the water treatment plant expansion, $20,000. The construction project is expected to take less than one year.
3. Received a $5,000 transfer from the General Fund to cover part of the cost of expanding the treatment plant.
4. Received an invoice from S&H Construction for 30% of the project. Paid the contractor the invoiced amount less a 10% retainage.
5. Received the grant to do the water study.
6. Issued $5,000 in bonds at mid-year at par to provide part of the financing for the treatment plant expansion. The bond issue costs were 1% of the face value. The bonds bear interest at 6%, payable semiannually.
7. Received a second invoice for 50% of the project. Paid the contractor the invoiced amount less a 10% retainage.
8. Expenses incurred and paid during the year under this second grant total $30.
9. Received the final invoice from the contractor. The expansion project was finished on-time and in accordance with the contract. Paid the contractor all amounts owed.
10. Make any necessary year-end adjusting entries.
Requirements:
1. Prepare the journal entries required in an Enterprise. If no entry is required, state "No entry required" and explain why.
2. Indicate the effects of each transaction on the accounting equation of the Enterprise Fund accounts. If an element of the equation is not affected or if the net effect is zero, put "NE" in the appropriate box.
3. How would these grants be reported in the statement of revenues, expenses, and changes in net position of the Enterprise Fund?
4. Assuming year-end had occurred after transaction #4, how would the grant and transfer affect the Statement of Net Position for the Enterprise Fund.

Question 16

A government defeased in substance $10 million of old Enterprise Fund bonds by paying $12 million into a qualifying trust for that purpose. The refunded bonds had an unamortized premium of $200,000 and bond issue costs of $50,000. Resources to finance the defeasance of the old bonds were provided by issuing $12,000,000 of new bonds issued at par. What amount of deferred interest expense adjustment should the government report?

A) $0.
B) $1,850,000 debit.
C) $1,800,000 debit.
D) $1,850,000 credit.

Question 17

A city's Enterprise Fund issued revenue bonds with a face value of $10,000,000. The bonds were issued with a 2% premium and the issuance costs totaled $150,000. When the bonds are issued, the Enterprise Fund will report total other financing sources in the amount of

A) $0.
B) $9,850,000.
C) $10,000,000.
D) $10,200,000.

Question 18

An Enterprise Fund entered into a capital lease for the purchase of equipment. The capitalizable cost of the asset was $300,000 and fund made a $30,000 down payment. In the year of inception the Enterprise Fund would report

A) Expenses of $30,000.
B) Capital assets of $300,000.
C) Long-term liabilities of $300,000.
D) An other financing use of $270,000 and expenses of $30,000.

Question 19

A city Enterprise Fund received an operating grant during the fiscal year. The Enterprise Fund will report this grant on the statement of revenues, expenses, and changes in net position as

A) Operating revenues.
B) Non-operating revenues.
C) Other financing sources.
D) Other financing uses.

Question 20

Which of the following conditions is not a requirement that an activity which provides services for a user fee be reported in an Enterprise Fund?

A) Net revenues are pledged as the sole security for debt issued to finance the activity.
B) Laws or regulations require the activity to recover its costs, including capital costs.
C) Pricing policies require the activity to recover its costs, including capital costs.
D) The main source of revenue for the activity is charges to external users.

Question 21

A city's Enterprise Fund received $3,000,000 cash in the form of a capital grant during the fiscal year ended June 30, 20X3. The Enterprise Fund incurred and paid construction costs from that grant in the amount of $1,200,000. What amount should be reported on the Enterprise Fund Statement of Net Position as net investment in capital assets?

A) $0
B) $1,200,000
C) $1,800,000
D) $3,000,000

Question 22

A Proprietary Fund statement of cash flows reports cash flows from operating activities

A) Using the direct method.
B) Using the indirect method.
C) Equal to net income plus depreciation and plus/minus changes in appropriate current asset and current liability accounts.
D) Using either the direct or the indirect method of presentation.

Question 23

Which of the following is not a required financial statement of an Enterprise Fund?

A) Statement of net position.
B) Statement of revenues, expenses and changes in net position.
C) Statement of revenues, expenses and changes in net position-budget to actual GAAP basis.
D) Statement of cash flows.

Question 24

Payments in lieu of taxes that are not payments for services from a government's Enterprise Fund to its General Fund should be reported by the Enterprise Fund as

A) Operating expenses.
B) Nonoperating expenses.
C) Transfers out.
D) Special item.

Question 25

Which of the following statements is true about transfers into an Enterprise Fund?

A) They are always reported as capital and related financing activities in the statement of cash flows.
B) They are always reported immediately after operating income in the statement of revenues, expenses, and changes in net position.
C) They do not affect changes in net position of the proprietary fund.
D) They are always reported as noncapital financing activities in the statement of cash flows.

Question 26

The Public Utilities Enterprise Fund was ordered by the court to pay environmental damages of $500,000. The fund is to pay $100,000 immediately and the remaining $400,000 in equal installments for next four years. In the year of the judgment, the Enterprise Fund would report

A) $500,000 in expenses.
B) $500,000 in liabilities.
C) $100,000 in expenses.
D) Nothing. All amounts would be recorded in General Long-term Liabilities accounts.

Question 27

Where should a cash grant received to support the operations of an Enterprise Fund be reported on that fund's statement of revenues, expenses, and changes in fund net position?

A) Operating revenues.
B) Nonoperating revenues.
C) Reduction to operating expenses.
D) Capital contributions.

Question 28

A government borrowed $20 million by issuing general obligation bonds to finance construction of a new airport terminal for its Airport Enterprise Fund. The bonds were issued at par, and the government intends to service the bonds from Enterprise Fund revenues. At year-end, none of the bond proceeds have been spent. The bonds payable would be included in which component of net position of an Enterprise Fund?

A) Unrestricted net position.
B) Restricted net position.
C) Net investment in capital assets.
D) Temporarily restricted net position.

Question 29

An Enterprise Fund incurs $35,000 in interest during the current year related to its outstanding bonds. The $35,000 will be reported as

A) Operating expenses.
B) Non-operating expenses.
C) Other financing uses.
D) Capitalized interest because all interest must be capitalized in an Enterprise fund.

Question 30

A government borrowed $20 million by issuing general obligation bonds to finance construction of a new airport terminal for its Airport Enterprise Fund. The bonds were issued at par, and the government intends to service the bonds from Enterprise Fund revenues. The proceeds of the bonds should be reported as

A) An other financing source in the Enterprise Fund statement of revenues, expenses, and changes in net position.
B) Capital and related financing activities in the Enterprise Fund statement of cash flows.
C) Revenues in the Enterprise Fund statement of revenues, expenses, and changes in net position equity.
D) Only in the General Long-Term Liabilities account.

Question 31

The City of Alnwick received a grant from Blount County. The $8,000,000 grant is restricted to use for construction of a facility for a city enterprise activity. The grant is for half the cost of the facility. The grantor will reimburse half of the costs as they are incurred. At the end of the first fiscal year, $3,000,000 has been spent on the project. $1,500,000 has been collected from the grantor. How should the grant be reported in the statement of revenues, expenses, and changes in net position?

A) Capital contribution of $1,500,000.
B) Operating revenues of $1,500,000.
C) Nonoperating revenues of $1,500,000.
D) Special item of $1,500,000.

Question 32

Which of the following is not a cash flow classification used in a Proprietary Fund statement of cash flows?

A) Cash flows from operating activities.
B) Cash flows from financing activities.
C) Cash flows from investing activities.
D) Cash flow from noncapital financing activities.

Question 33

Which of the following would be included in determining operating income of an Enterprise Fund?

A) Transfers.
B) Depreciation expense.
C) Interest expense.
D) Capital contributions.

Question 34

A government received a grant from another government. The $8,000,000 grant is restricted to use for construction of a facility for one of the grantee government's enterprise activities. The grant is for half the cost of the facility. The grantor will reimburse half of the costs as they are incurred. At the end of the first fiscal year, $3,000,000 has been spent on the project. $1,500,000 has been collected from the grantor. How should the grantee's Enterprise Fund statement of cash flows report the cash inflows?

A) Operating activities.
B) Noncapital financing activities.
C) Capital and related financing activities.
D) Investing activities.

Question 35

The Water Enterprise Fund customers are billed on a monthly basis. As of the end of the fiscal year, water valued at $3,956,000 was sold. The accounts receivable for the fund was $256,000 at the beginning of the year and was $326,000 at the end of the year. Given these facts, the revenue in the Water Enterprise Fund should be

A) $3,956,000.
B) $3,886,000.
C) $3,700,000.
D) $3,630,000.

Question 36

The Utility Enterprise Fund is in Year 2 of a three year construction project that is projected to cost $3,000,000. The fund incurred $300,000 of costs in Year 1 and $1,800,000 in Year 2. The fund will report

A) Expenses of $300,000 in Year 1 and $1,800,000 in Year 2.
B) Total construction in progress in Year 2 of $1,800,000.
C) Total construction in progress in Year 2 of $2,100,000.
D) Expenditures of $300,000 in Year 1 and $1,800,000 in Year 2.

Question 37

Cash received from a transfer from the General Fund to subsidize operations of an Enterprise Fund is reported in which section of a statement of cash flows?

A) Cash flows from operating activities.
B) Cash flows from noncapital financing activities.
C) Cash flows from capital and related financing activities.
D) Cash flows from investing activities.

Question 38

An Enterprise fund receives a $100,000 capital grant and uses the funds to partially finance the purchase of a $175,000 capital asset. The Enterprise Fund will report

A) Revenues of $100,000 and expenses of $175,000.
B) Non-operating revenues of $100,000 and capital assets of $175,000.
C) Capital contributions of $100,000 and expenses of $175,000.
D) Capital contributions of $100,000 and capital assets of $175,000.

Question 39

A city's Enterprise Fund received $3,000,000 cash in the form of a capital grant during the fiscal year ended June 30, 20X3. The Enterprise Fund incurred and paid construction costs from that grant in the amount of $1,200,000. What amount should be reported on the Enterprise Fund Statement of Net Position as restricted for capital outlay?

A) $0
B) $1,200,000
C) $1,800,000
D) $3,000,000

Question 40

An Enterprise Fund made a debt service payment of $75,000 $45,000 principal, $30,000 interest. The Enterprise Fund will report

A) $0 expenses.
B) $30,000 of expense.
C) $75,000 of expense.
D) a liability reduction of $75,000.

Question 41

Which of the following equity classifications would not apply to an Enterprise Fund?

A) Retained earnings.
B) Net investment in capital assets.
C) Unrestricted net position.
D) Restricted net position.

Question 42

On January 1, an Enterprise Fund issues $1,000,000 of 6%, ten-year tax-exempt bonds to finance the construction of a new water treatment plant. During the year the Enterprise Fund earned $40,000 of interest income on the bond proceeds and incurred $600,000 of construction costs. What amount of interest cost should be capitalized for the year?

A) $0.
B) $20,000.
C) $36,000.
D) $60,000.

Question 43

Which of the following would not be reported as a component of net position of an Enterprise Fund?

A) Unrestricted net position.
B) Restricted net position.
C) Net Investment in capital assets.
D) Permanently restricted net position.

Question 44

A long-term liability for compensated absences would typically be included in which component of net position of an Enterprise Fund?

A) Unrestricted net position.
B) Restricted net position.
C) Net investment in capital assets.
D) Net position would not be affected.

Question 45

Inventory in an Enterprise Fund will most likely affect which equity classification?

A) Nonspendable net position.
B) Net investment in capital assets.
C) Restricted net position.
D) Unrestricted net position.