Deck 6: Expenditure Accountinggovernmental Funds

Question 1

A general government department of the City of Rocky Flats leased specialized equipment under a multi-year, noncancelable lease agreement that qualifies as a capital lease. The lease required a down payment of $500 and the present value of the minimum lease payments i.e., the capitalizable cost of the leased asset was $5,000. The implicit rate of interest on the lease is 10%. Subsequent lease payments of $750 are required annually beginning in 20X2. All amounts are in thousands of dollars.
Transactions:
1. The lease was signed on March 1, 20X1.
2. Prepare any adjusting entries required at December 31, 20X1, the end of Rocky Flats fiscal year.
3. The City made the required payment on February 28, 20X2.
Requirements:
1. Prepare the general ledger journal entries for the transactions for the General Fund. If no entry is required, do not leave it blank. State "No Entry Required" and briefly explain why.
2. Indicate the effects of the transaction on the accounting equations for the General Fund and the General Capital Assets and General Long-Term Liabilities accounts. Do not leave a cell blank.
3. How will the capital lease be reported on the General Fund financial statements for the year ended December 31, 20X1?

Answer 1

1. Journal Entries
$$\begin{array} { | r | l | r | r | } \hline \#&{ \text { Accounts } } & \text { Debit } & \text { Credit } \\\hline 1 & \text { Expenditures - Capital Outlay } & 5,000 & \\\hline & \text { Cash } & & 500 \\\hline & \text { Other Finarncirig Sources - Capital Lease } & & 4,500 \\\hline & & & \\\hline 2 & \text { No entry required at Decerrber 3 1. The lease payment is } & & \\\hline & \text { not due urtil next year, and it is ir1-5ubstarnce debt service } & & \\\hline & \text { on peneral long-term debt. Therefore, there is no accrual } & & \\\hline & \text { of interest or principal expenditures. } & & \\\hline & & & \\\hline 3 & \text { Expenditures - Debt Service - Irterest 4 } 500 \times 10 \% &450 & \\\hline & \text { Expenditures - Debt Service - Principal } & 300& \\\hline & \text { Cash } & & 750 \\\hline\end{array}$$
2. Effects on accounting equations for the General Fund and the General Capital Assets and General Long-Term Liabilities accounts.
$$\begin{array} { | r | c | c | c | c | c | c | } \hline \begin{array} { c } \text { Trarss } \\\#\end{array} & \text { Assets } & \text { Liabilities } & \begin{array} { c } \text { Fund } \\\text { Balance }\end{array} & \text { GCA } & \text { GLTL } & \begin{array} { c } \text { Net } \\\text { Position }\end{array} \\\hline 1 & 500 & \mathrm { NE } & 500 & 5,000 & 4,500 & 500 \\\hline 2 & \mathrm { NE } & \mathrm { NE } & \mathrm { NE } & \mathrm { NE } & \mathrm { NE } & \mathrm { NE } \\\hline 3 & 750 & \mathrm { NE } & 750 & \mathrm { NE } & 300 & 300 \\\hline\end{array}$$
3. Capital lease reporting in the General Fund Financial Statements
Balance Sheet - no effect. No asset or liability to report.
Operating Statement - as noted in the journal entry, Capital Outlay expenditure and OFS for capital lease will be reported.

Question 2

Which of the following is not a managerial problem associated with expenditures?

A) Misapplication of assets.
B) Overspending of appropriations.
C) Misapplication of the availability criterion.
D) Misallocation or poor allotments of appropriations.

Answer 2

C

Question 3

The General Fund reported a beginning balance of inventory of materials and supplies of $122,000. The ending balance was $150,000. Supplies received during the year purchases totaled $600,000. The county uses the purchases method. The General Fund should report expenditures for materials and supplies for the year of

A) $450,000.
B) $572,000.
C) $600,000.
D) $628,000.

Answer 3

C

Question 4

A city government purchased a new fire truck in Year 1 for $270,000. The city incurred an additional $30,000 in transportation and calibration costs to ready it for use. It has an estimated useful life of 20 years, though it is being financed over a 15 year period. The amount of depreciation that will be reported each year in the General Fund will be

A) $0.
B) $13,500.
C) $15,000.
D) $18,000.

Question 5

The purchases method of accounting is permitted for

A) Materials and supplies, but not for prepaid insurance.
B) Prepaid insurance, but not for materials and supplies.
C) Neither prepaid insurance nor materials and supplies.
D) Both prepaid insurance and materials and supplies.

Question 6

The village of Bear Creek uses General Fund resources to pay debt service payments for its sole outstanding general obligation bonds, which were issued to finance the new Village Hall. Which of the following statements is false?

A) GAAP require the village to use a Debt Service Fund to account for the payment of principal and interest on the long-term debt if the debt covenant calls for it.
B) GAAP permit but do not require the village to use a Debt Service Fund to account for the payment of principal and interest on the long-term debt.
C) The General Fund would record an expenditure for both the principal and interest portions of the debt service payment.
D) The General Fund may record an expenditure for only the interest portion of the debt service payment.

Question 7

Expenditures in a governmental fund are recognized when due for

A) Interest on general long-term debt.
B) Salaries and wages.
C) Capital outlay.
D) Rent.

Question 8

A county uses the consumption method in accounting for insurance premium prepayments. At the beginning of the fiscal year, the county paid a $24,000 insurance premium to cover the current year and the subsequent fiscal year. At the end of the current year, the county will report in its General Fund

A) Expenditures of $24,000.
B) Expenditures of $12,000 and a $12,000 prepaid asset.
C) A $24,000 prepaid asset.
D) Other financing use of $24,000.

Question 9

The General Fund reported a beginning balance of inventory of materials and supplies of $122,000. The ending balance was $150,000. Supplies purchased during the year totaled $600,000. The county uses the consumption method. The General Fund should report expenditures for materials and supplies for the year of

A) $450,000.
B) $572,000.
C) $600,000.
D) $628,000.

Question 10

Listed below are various transactions affecting the City of Highland Flats General Fund for the fiscal year ending June 30, 20X4.
Transactions:
1. Near the beginning of the year, the City was sued by one of its residents claiming that the resident was injured due to a hazardous sidewalk. The resident is asking for damages of $500,000. The City expects to win the case.
2. Later in the year, the City decided to settle the aforementioned lawsuit on the advice of its legal counsel. The government settled the suit for $300,000, paying $100,000 now, and $50,000 on August 1 for each of the next 4 years. For these types of lawsuits, the City is self-insured for the first $50,000 and 100% insured for the remaining payments. Because of a cash flow issue, the city borrowed $50,000 on a 6 month, 3% note that comes due 2 months after year-end. No money was received from the insurance company by year-end, but the total amount due was expected by August 15.
3. The city's employees earned $25,000 in compensated absences during the year. Of this amount, $10,000 was paid during the year. In addition, $5,000 due at the end of last year was paid this year, and another $7,500 will be paid in the first 45 days of the following fiscal year. Finally, $7,000 earned in earlier years was paid this year.
4. The actuarial amount owed to the City's OPEB Plan for the year is $20,000. Of this amount, only $5,000 - the approximate amount of retiree healthcare costs paid for the year - was paid to the plan. The balance will be paid in later years.
Requirements:
1. Prepare the journal entries for the above events, including any necessary year-end adjusting entries. If a transaction requires no entry, state "No entry required" and explain why.
2. Demonstrate the effects of these transactions on the accounting equation for the General Fund and the General Capital Assets and General Long-term Liabilities accounts.

Question 11

Assume that General Fund employees accrued $125,000 of compensated absences liability during the year. Compensated absences liability, which is considered to be a long-term liability, decreased $30,000 from the beginning of the year to the end of the year. The fund also actually paid $550,000 in salaries and wages during the year. At the end of the fiscal year, salaries and wages payable was $12,000. The General Fund would report salaries and wages expenditures for the year of

A) $532,000.
B) $550,000.
C) $562,000.
D) $592,000.

Question 12

A county uses the consumption method to account for General Fund materials and supplies. The beginning inventory of materials and supplies was $122,000. The ending inventory was $150,000. The beginning balance of reserve for encumbrances for supplies ordered but not received at the beginning of the year was $50,000; the ending balance was $20,000. Supplies purchased during the year totaled $750,000. The county General Fund should report expenditures for materials and supplies for the year of

A) $722,000.
B) $750,000.
C) $752,000.
D) $780,000.

Question 13

SEQ CHAPTER \h \r 1Listed below in the left column are events that may or may not be expenditures for the General Fund. Listed in the right column are the classifications of expenditures for governmental funds. Correctly match each event with the appropriate expenditure classification. Unless specifically stated otherwise, assume all amounts have been incurred. If the event is not an expenditure, state how the event would be reported in the current year General Fund financial statements.

Question 14

Which of the following governmental fund expenditures would not be considered a current operating expenditure?

A) Capital outlay.
B) Rent.
C) Salaries and wages.
D) Employee benefits.

Question 15

A government with a beginning inventory of supplies of $100 in its General Fund and had the following transactions during the year all amounts are in thousands.
Transactions:
1. Ordered supplies with an estimated cost of $3,150.
2. Received supplies with an actual invoice cost of $2,920. No payment was made upon receipt; $2,950 was the encumbered amount.
3. Paid $2,300 on account for supplies received in #2.
4. During the year, the inventory warehouse issued $2,900 in supplies to general government departments.
5. The ending physical inventory of General Fund supplies found $150 on hand at year end.
Requirements:
A Consumption method of accounting for inventory
1. Prepare the general journal entries required to account for the previous information.
2. Indicate the effects of the general journal entries on the Balance Sheet equation
3. Indicate amounts reported on Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balance with respect to the Inventory of Supplies.

B. Purchases method of accounting for inventory
1. Prepare the general journal entries required to account for the previous information.
2. Indicate the effects of the general journal entries on the Balance Sheet equation
3. Indicate amounts reported on Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balance with respect to the Inventory of Supplies.

Question 16

Expenditures are defined as

A) Costs expired.
B) Uses of current financial resources.
C) Decreases in net financial resources.
D) Changes in liabilities and deferred inflows.

Question 17

Which of the following is not a typical governmental fund liability, and thus not an expenditure that is recognized when the liability is incurred?

A) Accounts payable.
B) Long-term note payable.
C) Salaries payable.
D) Vouchers payable.

Question 18

Assume that a government purchases $85,000 of inventory for the General Fund during the year. The General Fund began the year with an inventory balance of $15,000 and ended the year with a balance of $35,000. The General Fund uses the consumption method of inventory accounting and a perpetual inventory system. The General Fund should report

A) Expenditures of $85,000 for the year.
B) Expenditures of $65,000 for the year.
C) Other financing source of $20,000 for the year.
D) Other financing use of $20,000 for the year.

Question 19

If a government uses a perpetual inventory system for its General Fund and there is an inventory overage at the end of the year, the inventory asset account should

A) Be increased and the expenditure account decreased.
B) Be decreased and the expenditure account increased.
C) Remain the same. The expenditure account will be decreased, offset by an allowance for inventory overage account.
D) Remain the same. The expenditure account will be increased, offset by an allowance for inventory overage account.

Question 20

Assume that the Village of Hannah uses the purchases method of inventory accounting. At the end of the year the inventory levels have increased. What entry would be made to reflect the inventory increase?

A) Debit Expenditures, Credit Inventory of Supplies.
B) Debit Inventory of Supplies, Credit Other Financing Sources.
C) Debit Expenditures, Credit Other Financing Sources.
D) Debit Inventory of Supplies, Credit Expenditures.

Question 21

A city entered into a general government capital lease for equipment on July 1, 20X7. The capitalizable cost of the equipment was $400,000. A down payment of $40,000 was made. The next lease payment of $100,000 is due July 1, 20X8. The implicit rate of interest on the lease agreement is 10%. The amount of expenditures that the city should report in its General Fund statement of revenues, expenditures, and changes in fund balance for the year ended December 31, 20X7 is

A) $40,000.
B) $58,000.
C) $400,000.
D) $418,000.

Question 22

A government entered into a general government capital lease for equipment during the year. The capitalizable cost of the equipment was $400,000. A down payment of $40,000 was made. The General Fund should report in its statement of revenues, expenditures, and changes in fund balance an

A) Other financing use of $400,000.
B) Expenditure of $360,000.
C) Other financing source of $400,000.
D) Other financing source of $360,000.

Question 23

Interest expenditures of a governmental fund should include

A) Interest paid during the year, only.
B) Interest paid during the year plus any interest that matured but was not paid during the year.
C) Interest paid during the year, any interest that matured but was not paid during the year and accrued interest on short-term debt recorded as a fund liability.
D) Interest paid during the year, any interest that matured but was not paid during the year and accrued interest on all general long-term liabilities.

Question 24

Nathan Township financed emergency repairs on the Township Hall by borrowing on a $200,000, 6 month short-term note. The interest rate on the note was 6% and it was issued 2 months prior to the end of the fiscal year. Which of the following statements accurately reflects how the General Fund will be affected in the year the financing was acquired?

A) The General Fund will report an other financing source of $200,000.
B) The General Fund will report a Note Payable of $200,000.
C) The General Fund will report interest expenditures of $12,000.
D) The General Fund will report interest expense of $2,000.

Question 25

A government has a principal and interest payment on long-term debt coming due in the next fiscal year. Which condition must hold true for the government to treat the payment as an expenditure in the current fiscal year?

A) The payment must come due early in the next fiscal year, and the government must transfer the cash for the payment to the debt service fund consistently from year-to-year.
B) The payment comes due within a year of the end of the current fiscal year, and the government must transfer the cash for the payment to the debt service fund consistently from year-to-year.
C) The payment must come due early in the next fiscal year, but the government has some flexibility on when the cash for the payment is transferred to the debt service fund.
D) The payment can come due at any time, and the government can make the payments from the General Fund so long as the resources are available at the time of the payment.

Question 26

As payments are being made for debt service payments related to a capital lease, a General Fund will report

A) An increase in capital assets equal to the amount of principal retired.
B) Expenditures for interest only.
C) Expenditures for principal reduction only.
D) Expenditures for the full amount of the debt service payment.

Question 27

A city's annual required contribution for the OPEB plan offered to their General Fund employees is $14,000. The city does not choose to make the annual required contribution but instead will continue to pay postretirement benefits as they come due. The current year's benefit payments total $2,500. The General Fund would recognize an expenditure of

A) $0.
B) $2,500.
C) $14,000.
D) $16,500.

Question 28

City of Alnwick makes pension contributions on behalf of its employees to both a defined benefit plan and a defined contribution plan. Assume that the employer contributions for the fiscal year totaled $55,000 for the defined benefit plan and $35,000 for the defined contribution plan. The General Fund will report

A) Total expenditures of $90,000.
B) Expenditures of $55,000 and transfers out of $35,000.
C) Transfers out of $90,000.
D) Transfers out of $55,000 and expenditures of $35,000.

Question 29

A court judgment was rendered against a county in which they were ordered to pay $500,000 in equal installments over a five-year period to the plaintiff. The county's General Fund will

A) Report a fund liability of $500,000 in Year 1.
B) Report expenditures of $500,000 in Year 1.
C) Report expenditures of $100,000 in Year 1.
D) Report expenditures of $100,000 in Year 1 and a fund liability of $400,000.

Question 30

The following benefits are examples of other postemployment benefits OPEexcept for

A) Health care insurance.
B) Pension benefits.
C) Vision insurance.
D) Life insurance.

Question 31

A county accounts for its debt service payments in the General Fund. The amount of unmatured, unpaid interest on general long-term liabilities at the beginning of the year was $122,000. The ending balance was $165,000. The General Fund also made principal payments of $600,000 and interest payments of $150,000 during the year. The General Fund should report expenditures for debt service for the year of

A) $150,000.
B) $722,000.
C) $750,000.
D) $793,000.

Question 32

Carter County entered into capital lease to finance an Emergency-911 telecommunications system. The capitalizable cost of the equipment was $185,000. The county made a required down payment of $25,000. The first debt service payment will not be due until the next fiscal year. The entry to record the inception of this lease in the General Fund would be $\begin{array}{lllr}&&\text {Debit}&\text {Credit}\\\text { A. }&\text { Expenditures } & \$ 185,000 & \\&\quad \text { Lease Payable } & & \$ 160,000 \\&\quad \text { Cash } && 25,000 \\\text { B. }&\text { Expenditures } & \$ 185,000 \\&\text { Other Financing Source } & &\$160,000 \\&\quad \text { Cash } & & 25,000 \\\text { C. }&\text { Capital Asset } &\$ 185,000 & \\&\quad \text { Lease Payable } & & \$ 160,000 \\&\text { Cash } & & 25.000 \\\text { D. }&\text { Capital Asset } & \$ 185,000 &\\&\text { Other Financing Source } &&\$ 160,000 \\&\quad \text { Cash } & & 25,000 \\ \end{array}$

Question 33

In the year a city enters into a capital lease to finance a new sanitation truck, the General Fund will report

A) An increase in capital assets.
B) A decrease in fund balance equal to the cost of the new sanitation truck.
C) An other financing use.
D) A decrease in fund balance equal to the amount of any down payment required.

Question 34

Assume that Onyx County's annual required contribution for their OPEB plan was determined to be $35,000. The county, however, chose to only fund $10,000 of that amount for the current year. The General Fund, which is the only fund with employees, would recognize expenditures in the current year of

A) $45,000.
B) $35,000.
C) $25,000.
D) $10,000.

Question 35

A government has a liability for accrued compensated absences at the beginning of 20X5 of $500,000. This liability did not mature in 20X4. At the end of 20X5, the government has a liability for accrued compensated absences not due and payable of $600,000. In addition, the government had $10,000 of matured compensated absences to be paid in early 20X6 from existing fund assets. The government paid compensated absences of $400,000 during 20X5. The General Fund expenditures for compensated absences for 20X5 should be reported at what amount?

A) $400,000.
B) $410,000.
C) $500,000.
D) $510,000.

Question 36

A government has claims and judgments outstanding at the beginning of 20X5 of $1,000,000. These claims and judgments are expected to result in awards against the government of $800,000. $75,000 of these claims is due and payable from the General Fund at December 31, 20X4. At the end of 20X5, the government has claims and judgments outstanding of $2,000,000. These claims and judgments are expected to result in awards against the government of $1,200,000. None of these claims are due and payable from the General Fund at December 31, 20X5. The government paid claims and judgments of $400,000 during 20X5. General Fund expenditures for claims and judgments for 20X5 should be reported at what amount?

A) $325,000.
B) $400,000.
C) $725,000.
D) $800,000.

Question 37

The General Fund borrowed $10,000 on a six-month note, with 5.0% interest, on April 1. As of the June 30 fiscal year end, the General Fund would report accrued interest payable in the amount of

A) $0.
B) $125.
C) $250.
D) $500.