Deck 7: Accounting for the Business-type Activities of State and Local Governments

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

A motor pool is a common example of an internal service fund.

Answer 3

True

Question 4

Proprietary funds report using three net position categories: net investment in capital assets; restricted; and unrestricted.

Question 5

If a business-type 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.

Question 6

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.

Question 7

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.

Question 8

Internal service funds account for operating expenses on the accrual basis of accounting.

Question 9

Enterprise funds may capitalize interest paid on debt incurred for construction of plant assets.

Question 10

Equipment acquired under a lease for use by an internal service fund will be reported as a capital asset in both the fund and government-wide financial statements.

Question 11

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

Question 12

An employee pension fund is a common example of an internal service fund.

Question 13

For proprietary funds, governments generally present a statement of net position in a format that displays assets, plus deferred outflows of resources, less liabilities, less deferred inflows of resources, equals net position.

Question 14

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.

Question 15

A statement of cash flows is prepared for enterprise funds but not for internal service funds.

Question 16

The net position of an internal service fund is classified as nonspendable, restricted, committed, assigned, and unassigned.

Question 17

Internal service funds utilize encumbrance accounting.

Question 18

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.

Question 19

Proprietary funds follow the current financial resources measurement focus and use the accrual basis of accounting.

Question 20

A statement of revenues, expenses, and changes in fund net position for an internal service fund is similar in many respects to an income statement prepared for a commercial business.

Question 21

Internal service funds should be used only if:

A) The reporting government funds the activity with general obligation debt.
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 below full cost.

Question 22

GASB standards require that interfund receivables and payables between governmental and business-type activities be presented as internal balances.

Question 23

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

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

Question 24

GASB requires the statement of cash flows for proprietary funds to be prepared using the direct method of presentation.

Question 25

When a supplies internal service fund records a billing to the General Fund, the journal entry in the internal service fund will include:

A) A debit to Due from General Fund.
B) A debit to Due to General Fund.
C) A debit to Billings to Department.
D) A debit to Inventory of Supplies.

Question 26

Unlike the General Fund and other major governmental funds for which a budget is legally adopted, proprietary funds are not required by GASB standards to record budgets in their accounting systems, nor are they required to present a budgetary comparison schedule.

Question 27

Consistent with accounting in capital projects funds, interest capitalization for self-constructed assets of proprietary funds is prohibited.

Question 28

The comprehensive annual financial report (CAFR) of a government should contain a statement of revenues, expenses, and changes in fund net position for:

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

Question 29

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.

Question 30

All segments within an enterprise fund are subject to segment disclosure requirements.

Question 31

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.

Question 32

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

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

Question 33

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 swimming pool.
D) Risk management.

Question 34

Enterprise funds are reported as a part of the Governmental Activities column of the government-wide financial statements when they provide services to governmental funds.

Question 35

Which of the following properly portrays the components of net position for proprietary funds?

A) Net investment in capital assets, Reserved, Unreserved.
B) Designated, Undesignated, Restricted, Unrestricted.
C) Net investment in capital assets, Restricted, Unrestricted.
D) Contributed capital, Net investment in capital assets, Reserved, Unreserved.

Question 36

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

Question 37

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 fund financial statements required.
D) The measurement focus on economic resources for enterprise funds and current financial resources for internal service funds.

Question 38

If enterprise funds are the predominant participants in an internal service fund, the government should report the internal service fund's residual assets, deferred inflows and outflows of resources, and liabilities within the business-type activities column in the statement of net position.

Question 39

Under regulatory reporting, Utility Plant in Service is stated at original cost.

Question 40

When a supplies internal service fund records a billing to the General Fund, the journal entry in the General Fund will include:

A) A debit to Cost of Supplies Issued.
B) A credit to Interfund Loans Payable.
C) A debit to Expenditures.
D) A credit to Billings to Department.

Question 41

Which of the following should be accounted for in an enterprise fund?

A) $ 65,000.
B) $ 415,000.
C) $1,250,000.
D) $1,315,000.

Question 42

The City of Crescent Hill operates a central motor pool as an internal service fund for the benefit of the city's other funds and departments. In the current year, this fund charged the Parks Department $30,000 for vehicle rentals. What account should the internal service fund use to record these charges?

A) Interfund Transfers In.
B) Interfund Exchanges.
C) Billings to Departments.
D) Cost of Providing Rentals to Other Funds and Units.

Question 43

Which of the following should be accounted for in an internal service fund?

A) $ 65,000.
B) $ 415,000.
C) $1,250,000.
D) $1,315,000.

Question 44

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 fund.
B) Private-purpose trust fund.
C) Enterprise fund.
D) Special revenue fund.

Question 45

Which of the following is not True regarding proprietary funds?

A) The difference between assets plus deferred outflows of resources and liabilities plus deferred inflows of resources of proprietary funds is called "net assets."
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.

Question 46

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.

Question 47

The Central City Golf Course, an enterprise fund, purchased a new stove for use in the course's snack shop. The debit for the entry to record the purchase should be to:

A) Expenditures.
B) Purchases.
C) Equipment.
D) General capital assets.

Question 48

Which of the following illustrates the appropriate basis of accounting for enterprise and internal service funds? $$\begin{array} { | l | l | l | } \hline & \text { Enterprise Funds } & \text { Internal Service Funds } \\\hline \text { A } & \text { Modified Accrual } & \text { Modified Accrual } \\\hline \text { B. } & \text { Modified Accrual } & \text { Accrual } \\\hline \text { C. } & \text { Accrual } & \text { Modified Accrual } \\\hline \text { D. } & \text { Accrual } & \text { Accrual } \\\hline\end{array}$$

A) Choice A.
B) Choice B.
C) Choice C.
D) Choice D.

Question 49

The following cash transactions were among those reported by Genesee County's Wastewater Enterprise Fund for the year:
In the Wastewater 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) $5,300,000.
C) $6,000,000.
D) $6,300,000.

Question 50

When a new utility customer submits a deposit, the enterprise fund journal entry will include:

A) A credit to Customer Deposits.
B) A debit to Customer Deposits.
C) A debit to Sales of Water.
D) A credit to Sales of Water.

Question 51

The following cash transactions were among those reported by Genesee County's Wastewater Enterprise Fund for the year:
In the Wastewater Enterprise Fund's statement of cash flows for the year ended December 31, what amount should be reported as cash flows from investing activities?

A) $ 300,000.
B) $1,300,000.
C) $5,300,000.
D) $6,300,000.

Question 52

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

A) Accrual of interest expense.
B) Repayment of the principal of debt.
C) Issuance of debt.
D) Purchase of a capital asset.

Question 53

When a new internal service fund is established 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.

Question 54

The City of Crescent Hill operates a central motor pool as an internal service fund for the benefit of the city's other funds and departments. In the current year, this fund billed the Parks Department $30,000 for vehicle rentals. If the Parks Department is a governmental fund, which account should the Parks Department use to record these billings?

A) Interfund Transfers In.
B) Interfund Exchanges.
C) Expenditures.
D) Cost of Rentals from Other Funds and Units.

Question 55

When utility customers are billed during the year, the enterprise fund journal entry will include:

A) A debit to Sales of Water.
B) A debit to Cash - Restricted.
C) A debit to Customer Accounts Receivable.
D) A debit to Billings to Customers.  

Question 56

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

A) Statement of revenues, expenditures, and changes in fund balance.
B) Statement of revenues, expenses, and changes in net position.
C) Statement of net position.
D) Statement of cash flows.

Question 57

Goods and services provided by internal service funds to other departments of the government are typically priced to:

A) Cover variable costs only.
B) Cover full costs (both fixed and variable).
C) Cover full costs, plus an additional charge to capital maintenance and anticipated expansion needs.
D) Cover full costs, plus an additional charge to ensure a reasonable profit.

Question 58

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

A) A golf course.
B) An airport.
C)  A computer department.
D) A sports stadium.

Question 59

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 internal service fund.
C) An enterprise fund and the business-like activities accounts.
D) The governmental activities accounts.

Question 60

Which of the following accounts would appropriately be included on an enterprise fund balance sheet?

A) Fund Balance: No; Net Position-Unrestricted: Yes.
B) Fund Balance: Yes; Net Position-Unrestricted: No.
C) Fund Balance: No; Net Position-Unrestricted: No.
D) Fund Balance: Yes; Net Position-Unrestricted: Yes.

Question 61

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) Enterprise fund capital assets.
B) Enterprise fund operating income or loss.
C) Enterprise fund tax revenues.
D) Intergovernmental operating subsidies to an enterprise fund.

Question 62

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.

Question 63

During the current fiscal year, the following transactions (summarized) occurred in the Town of Berthoud Information Technology Internal Service Fund:
1. Employees were paid $290,000 wages in cash.
2. Utility bills received from the Town of Berthoud's Utility Fund during the year amounted to $23,500. The amount had previously been accrued by the Utility Fund.
3. Office expenses paid in cash during the year amounted to $10,500.
4. Service supplies purchased on account during the year totaled $157,500.
5. Parts and supplies used during the year totaled $152,300 (at cost).
6. Charges to departments during the fiscal year were as follows:

7. Payments to the Utility Fund totaled $21,800.
8. Annual depreciation totaled $30,000 for machinery and equipment.
Prepare the journal entry. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Question 64

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.

Question 65

What are the alternative methods of dissolving an internal service fund?

Question 66

Select the key term that relate to accounting for the business-type activities of state and local governments from the list that best matches with the following definition.
A. Allowance for Funds Used during Construction
B. Revenue bonds
C. Utility plant acquisition adjustment
D. Regulatory accounting principles
E. Original cost
F. Historical cost
G. General obligation bonds
________ 1. In utility accounting, the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds so used.
________ 2. Accounting principles prescribed by federal or state regulatory commissions for investor-owned and some governmentally owned utilities.
________ 3. Bonds whose principal and interest are payable exclusively from earnings of a public enterprise.
________ 4. Bonds which carry the pledge of the government entity's full faith and credit, although the intent may be to service them from proprietary revenues rather than general taxes.
________ 5. The account that captures the premium paid on a utility plant purchased by a government.

Question 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.

Question 68

Explain how capitalization of interest costs differs for enterprise funds as opposed to governmental funds.

Question 69

Legislators often believe an internal service fund function will not be subjected to annual legislative budget review and the legislature will "lose control" of the fund. Do you agree with this line of reasoning? Why or why not?

Question 70

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

Question 71

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.

Question 72

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. When is a government required to establish an enterprise fund?

Question 73

Explain the reporting requirements for internal service funds and enterprise funds. Internal service funds and enterprise funds are both proprietary funds, so why do their reporting requirements differ?

Question 74

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

Question 75

Explain the difference between operating revenues/expenses and nonoperating 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 position?