PPA 303 Ashford University Budget for Internal Service Fund Accounting Worksheet

AssignmentBudget for Internal Service Fund
Using Chapter 7, compute the total cost under the two separate scenarios in a 12 page document. Clearly label your calculations and explain the differences in
the two scenarios.
Budget for Internal service Fund
The City of Eagle Rock uses an Internal Service Fund to provided printing
services to its various departments. It bills departments on the basis of an
estimated rate per page of printed material, computed on the accrual basis of
accounting. From the following information, compute the total cost that will be
used to develop the cost per page. Assume that the equipment in the item 6 was
contributed by the city and that the pricing objective was to recoup the cost of
equipment in the rate charged over the life of the equipment.
•
•
•
•
•
•
Inventory of paper on hand at beginning of year: $10,000.
Estimated paper purchase during the year: $60,000.
Estimated amount of paper to be consumed during the year: $55,000.
Estimated salaries to be paid during the year: $255,000.
Estimated salaries earned during the year, including both what was paid
and what was owed at year end: $265,000.
Cost of equipment on hand at beginning of the year (estimated life was 10
years): $1,000,000.
Continuation
Assume the information presented in chapter 7, except that the city did not
contribute the equipment. Instead, the manager of the Internal Service Fund
arranged to buy the equipment, paying for it over a period of 5 years. The terms
of the acquisition required annual payments of $200,000 at the end of each year,
with interest of 8% on the unpaid balance. The first payment was made, and it is
in the second year of operation. Assume also that the fund has just enough cash
on hand to finance its working capital needs, such as inventory
requirements. Using these assumptions, determine and explain the different
calculation requirements.
Your submission must include the following:
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•
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Attach the Excel spreadsheet to your Word document with your
calculations.
A one- to two-page summary of the computations of the total cost of
printing services based on items 1-6 above.
One additional page determining and explaining your different calculation
requirements.
Budget for Internal Service Fund
Below is a copy of the Week 2 Assignment. I have colored parts Blue as an emphasis
and have made comments in Green.
Using Chapter 7, compute the total cost under the two separate scenarios in a 1-2 page
document. {Chapter 7 has all sorts of examples, but for this assignment you need to
concentrate on determining the total annual cost of the printing
services.} Clearlylabel your calculations and explain the differences in the two scenarios.
Scenario 1
The City of Eagle Rock uses an Internal Service Fund to provided printing services to its
various departments. It bills departments on the basis of an estimated rate per page of
printed material {this is what you are calculating}, computed on the accrual basis of
accounting. From the following information, compute the total cost that will be used to
develop the cost per page. Assume that the equipment in the item 6 was contributed by
the city and that the pricing objective was to recoup the cost of equipment in the rate
charged over the life of the equipment {think, how do you account of the use of
equipment over its life?}.
·
Inventory of paper on hand at beginning of year: $10,000.
·
Estimated paper purchase during the year: $60,000.
·
Estimated amount of paper to be consumed during the year: $55,000.
·
Estimated salaries to be paid during the year: $255,000.
·
Estimated salaries earned during the year, including both what was paid and what
was owed at year end: 265,000.
·
Cost of equipment on hand at beginning of the year (estimated life was 10
years): $1,000,000.
· Estimated pages of printed material per year: 1,000,000.
{Like all good academic problems, we have given you too much information. You
need the total annual cost for the printing operation. Then divide by the expected
number of pages to be printed.}
Scenario 2
Assume the information presented in chapter 7, except that the city did not contribute the
equipment. Instead, the manager of the Internal Service Fund arranged to buy the
equipment, paying for it over a period of 5 years. The terms of the acquisition
requiredannual payments of $200,000 at the end of each year, with interest of 8% on the
unpaid balance. The first payment was made, and it is in the second year of
operation. Assume also that the fund has just enough cash on hand to finance its working
capital needs, such as inventory requirements. Using these assumptions, determine and
explain the different calculation requirements.
{Ok, what has changed? What has stayed the same? Concentrate only on what has
changed.}
Your submission must include the following:
·
Attach the Excel spreadsheet to your Word document with your calculations. {Or
you can submit two documents, jut make sure you name is on both.}
·
A one- to two-page summary of the computations of the total cost of printing
services based on items 1-6 above. {This is yourScenario 1 solution.} {Try not to
tell me how to add, subtract, multiply, or divide. Summarize what you
included and why.}
·
One additional page determining and explaining your different calculation
requirements. {This is your Scenario 2 solution.} {Again concentrate on what
has changed and why.}
Chapter 7 The Governmental Fund Accounting Cycle:
Proprietary-Type Funds
Chapter Outline
Learning Objectives
Overview
o What Determines Whether a Proprietary Fund Is an Enterprise Fund or an
Internal Service Fund?
•
Specific Aspects of Internal Service Funds
o Summary of Fund Activities
o Control of Fund Activities
o Accounting for Fund Activities
▪
Operating Entries
▪
Closing Entry
o Financial Statements Illustration
▪
Governmental Accounting In Practice: Alpine School District, Utah
•
Specific Aspects of Enterprise Funds
o Summary of Fund Activities
o Control of Fund Activities
o Accounting for Fund Activities
▪
Operating Entries
▪
Closing Entry
o Financial Statements Illustration
o Use of Special Assessments
▪
Governmental Accounting in Practice: The City of Ashtabula, Ohio
▪
Governmental Accounting in Practice: Are All Enterprise Funds Designed
to Recover Costs?
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Review Questions
•
Discussion Scenarios and Issues
•
Exercises
•
Problems
•
Summary Problem
After completing this chapter, you should be able to do the following:
• ◾ Understand the similarities between Internal Service Funds and Enterprise Funds
• ◾ Explain why and how Internal Service Funds are used in governmental accounting
• ◾ Prepare the journal entries normally recorded in Internal Service Funds
• ◾ Prepare fund financial statements for Internal Service Funds
• ◾ Explain why and how Enterprise Funds are used in governmental accounting
• ◾ Prepare the journal entries normally recorded in Enterprise Funds
• ◾ Prepare fund financial statements for Enterprise Funds
This chapter discusses fund-level financial accounting and reporting for proprietary
funds, that is, Internal Service Funds and Enterprise Funds. Government-wide
financial reporting of these funds is discussed in Chapters 9 and 10.
•
•
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OVERVIEW
Proprietary funds in state and local government are used to account for certain
government-operated activities in essentially a private-sector, or business, fashion. There
are two types of proprietary funds: Internal Service Funds and Enterprise Funds. The
basic difference between the two fund types is the nature of the customer base. The
customers of Internal Service Fund activities are various departments within the same
government and, occasionally, other nearby governments. The customers of Enterprise
Funds, on the other hand, are primarily individual citizens, but can include government
departments as well.
Proprietary funds account for activities involved in providing goods and/or services to
paying customers on an exchange basis. Thus, the operating cycle of a proprietary fund is
similar to that of a business organization: During the fiscal period, the fund acquires
assets such as supplies, property, and equipment. Goods or services are provided to
paying customers, and revenues from user charges are recorded. The cost of assets used is
recorded along with other operating and nonoperating expenses. Revenues earned are
compared with expenses incurred, and the resulting profit or loss increases or decreases
net position.
Some Internal Service Funds price goods and services above cost to provide financing for
expansion or to cover anticipated inflation when equipment must be replaced. Sometimes
the services provided by Enterprise Funds (such as mass transit, discussed later in the
chapter) are “underpriced” and subsidized by General Fund revenues as a matter of
public policy. And some activities accounted for in Enterprise Funds (such as lotteries)
produce “profits” that are transferred to the General Fund. By computing the activity’s
full cost of operations and comparing these costs with the revenues earned, the extent of
the subsidy needed is determined.
Because of the need to measure all costs, proprietary funds use the total economic
resources measurement focus. Accordingly, fixed assets (and depreciation thereof) are
accounted for within proprietary funds, as is any long-term debt serviced exclusively by
proprietary fund revenues. Also, proprietary funds use the full accrual basis of
accounting, so revenues are recognized when they are earned (without regard to the
“measurable and available” considerations found in governmental-type funds), and
expenses, not expenditures, are recognized in the period in which they are incurred.
Because the focus of this type of fund is to provide information to evaluate the costrecovery of its operations, governments often report individual activities in separate
funds.
What Determines Whether a Proprietary Fund Is an
Enterprise Fund or an Internal Service Fund?
As we have mentioned, the deciding factor in whether a proprietary fund is classified as
an Enterprise Fund or an Internal Service Fund is the customer base. In this regard, the
GASB states, “Internal service funds should be used only if the reporting government is
the predominant participant [customer] in the activity. Otherwise, the activity should be
reported as an enterprise fund.”1 Thus, the GASB Codification discusses proprietary fund
accounting primarily in terms of Enterprise Funds. According to the GASB, Enterprise
Funds may be used to report any activity for which a fee is charged to external users for
goods or services. Activities are required to be accounted for as Enterprise Funds if any
one of the following criteria is met:
• a. The activity is financed with debt that is secured solely by a pledge of the net
revenues from fees and charges of the activity [debt of this kind usually is in the form
of revenue bonds]…
• b. 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.
• c. The pricing policies of the activity establish fees and charges designed to recover
its costs, including capital costs (such as depreciation or debt service).2
Governments should apply each of these criteria in the context of the activity’s principal
revenue sources. Governments are not required to use Enterprise Funds for insignificant
activities that are financed by user charges.
Although some of the services provided by proprietary funds are the same as those
provided by private-sector profit and not-for-profit entities—such as water utilities, bus
companies, and colleges—proprietary funds apply only GASB pronouncements, not
FASB pronouncements. This requirement is relatively recent; in GASB Statement 62,
“Codification of Accounting and Financial Reporting Guidance Contained in PreNovember 30, 1989, FASB and AICPA Pronouncements,” issued in December 2010, the
GASB adopted all pre-1989 FASB and AICPA pronouncements that it considered
applicable to proprietary funds. The financial statements for individual proprietary funds
are a statement of revenues, expenses, and changes in fund net position; a statement of
net position (or balance sheet); and a statement of cash flows.
Proprietary fund statements of net position should be prepared using a classified format.
Under this format, assets are classified as current assets if they are reasonably expected
to be realized in cash or sold or consumed within a year. All other assets are classified
as noncurrent. Liabilities are classified as current based on whether their liquidation is
reasonably expected to require the use of current assets or the creation of other current
liabilities. All other liabilities are noncurrent. Deferred outflows and inflows are
classified in the same manner.
The general format for the statement of revenues, expenses, and changes in fund net
position is presented as follows:
•
Operating revenues (detailed)
o Total operating revenues
•
Operating expenses (detailed)
o Total operating expenses
o Operating income (loss)
•
Nonoperating revenues and expenses (detailed)
o Income before other revenues, expenses, gains, losses, and transfers
•
Capital contributions, special and extraordinary items, and transfers (detailed)
o Increase (decrease) in net assets
•
Net position—beginning of period
•
Net position—end of period 3
The proprietary fund statement of net position reports all assets, deferred outflows of
resources, liabilities, deferred inflows of resources, and net position. Deferred outflows of
resources and deferred inflows of resources are defined in GASB Concepts Statement 4,
“Elements of Financial Statements.” Deferred outflows represent a use of net assets by
the government that is applicable to a future reporting period—and, therefore, deferred.
Deferred inflows are an acquisition of net assets by the government that is applicable to a
future reporting period. Deferred outflows and inflows are limited to items specifically
identified as such by the GASB; they are required to be reported separately from
proprietary fund assets and liabilities. The GASB requires the net position section of the
statement of net position to be reported in three components: (1) net investment in capital
assets; (2) restricted; and (3) unrestricted.
SPECIFIC ASPECTS OF INTERNAL SERVICE
FUNDS
Summary of Fund Activities
Governments establish Internal Service Funds to account for the operations of providing
goods or services in-house to departments in circumstances where it can be done at a
lower cost, or perhaps more conveniently, than if the same goods or services were
obtained externally. Internal Service Funds typically are used to account for activities
such as central data-processing services, motor pools, risk management, and inventory
and supply (central stores) functions. In this chapter we focus on the activities of a central
motor pool. This type of service is typical for governments and is illustrative of the
general operations of Internal Service Funds.
When a central motor pool is established, the first step is to acquire capital from the
General Fund or some other fund. This money is used to acquire automobiles, trucks, and
so forth. As the vehicles are used, each fund or department using them is billed based on
the number of miles driven. Revenue from the billings is used to pay for the operating
costs of the vehicles and, possibly, for their replacement.
Control of Fund Activities
The operations of Internal Service Funds are controlled indirectly by the operating
budgets of the funds and departments using the goods or services and directly by means
of flexible budgets. Because other funds must pay for the goods or services supplied,
approval of their budgets acts as an indirect control device for Internal Service Funds.
A flexible budget is a budget in which most of the budgeted expenses are related to the
level of operations. In a central motor pool, gasoline and oil costs will vary directly with
the number of miles the vehicles are driven. Governmental-type funds, by contrast,
operate under a fixed budget. If a department is appropriated $4,000 for supplies for the
year, for example, that amount cannot be exceeded—regardless of the level of operations.
In effect, the use of a fixed budget actually sets a limit on the level of operations of
governmental-type funds.
The difference in budgeting practices between governmental-type funds and proprietary
funds results because the revenue generated by the latter increases as the level of
operations increases. Because of a general cause-and-effect relationship between the level
of operations and the revenues earned and expenses incurred, a flexible budget allows
higher levels of expenses at higher levels of operating activity. As previously explained,
no such relationship usually exists between revenues and expenditures of governmentaltype funds. For example, a Police Department usually must request an additional budget
allocation if it uses all of its appropriation; such an allocation does not result
automatically.
Typically we do not find the budget recorded in the accounts of Internal Service Funds,
nor do we usually find the use of encumbrance accounting for these funds. Without an
absolute spending limit, the use of encumbrance accounting serves no purpose. A few
state or local governments are subject to laws that require the use of encumbrances for
Internal Service Funds, but here we will assume that encumbrance accounting is not used.
Accounting for Fund Activities
OPERATING ENTRIES
To start the central motor pool Internal Service Fund, assume the General Fund makes a
transfer of $500,000 to the Motor Pool Fund. The entries to record this transfer are as
follows:
In the General Fund:
Transfer out to Motor Pool Fund
500,000
Cash
500,000
To record transfer of initial capital to Motor Pool Fund.
In the Internal Service Fund:
Cash
500,000
Transfer in from General Fund—capital contribution
500,000
To record transfer of initial capital from General Fund.
If the Internal Service Fund acquires a fleet of vehicles for $400,000, the following entry
is made:
Automobiles
300,000
Trucks
100,000
Cash
400,000
To record the acquisition of vehicles.
Billings of $57,000 to various General Fund departments for use of the vehicles are
recorded as follows:
In the Internal Service Fund:
Due from General Fund
Revenues—vehicle charges
To record charges to departments for use of vehicles.
57,000
57,000
In the General Fund, charged to department that received $8,000 worth of services:
Expenditures—vehicle usage
8,000
Due to Motor Pool Fund
8,000
To record the use of vehicles during the period.
Collections of $45,000 from the user departments accounted for within the General Fund
are recorded in the Internal Service Fund as follows:
Cash
45,000
Due from General Fund
45,000
To record payments received from departments using vehicles.
The corresponding disbursement entry in a user fund (amount assumed) would be as
follows:
Due to Motor Pool Fund
8,000
Cash
8,000
To record payment to Motor Pool Fund.
During the year, gasoline, oil, and maintenance expenses totaling $14,000 are incurred, of
which $10,000 are paid in cash. These expenses are recorded in the Motor Pool Fund as
follows:
Gasoline and oil expense
9,500
Maintenance expense
4,500
Cash
10,000
Accounts payable
4,000
To record the gasoline, oil and maintenance expenses
for the period.
Payment of salaries of $10,000, ignoring withholdings, is recorded as follows:
Salaries expense
10,000
Cash
10,000
To record salaries expense.
If the motor pool rents warehouse space from the government for $2,000 per year, the
entry to record the rental will be this:
Rent expense
2,000
Cash
2,000
To record the rent for the year.
The General Fund will record the receipt of the rent as follows:
Cash
2,000
Revenues—rental of warehouse space
2,000
To record the receipt of the rent from the Motor Pool Fund.
As previously indicated, depreciation is an expense that is recognized in Internal Service
Funds. Assuming the amounts given, the entry to record depreciation for the year
follows:
Depreciation expense—automobiles
20,000
Depreciation expense—trucks
10,000
Accumulated depreciation—automobiles
20,000
Accumulated depreciation—trucks
10,000
To record depreciation for the year.
Although additional entries can be made, these summary journal entries are sufficient to
illustrate the activities of Internal Service Funds and the recognition of related revenues
and expenses. A trial balance for the Motor Pool Fund at the end of the year is shown
in Table 7-1.
CLOSING ENTRY
The closing process for Internal Service Funds is similar to the one used for commercial
enterprises. Each of the revenue, expense, and other temporary accounts is closed, and
the change in position is recorded in the Net position account. The following entry relates
to the previous illustration:
TABLE 7-1 Trial Balance—Motor Pool Fund
City of Fort Chessie
Internal Service Fund
Motor Pool Fund
Trial Balance
December 31, 2013
Debits
Cash
Due from General Fund
Automobiles
$123,000
12,000
300,000
Accumulated depreciation—automobiles
Trucks
Accumulated depreciation—trucks
Accounts payable
Credits
$ 20,000
100,000
10,000
4,000
Transfer in from General Fund—capital contribution
500,000
Revenues—vehicle charges
57,000
Gasoline and oil expense
9,500
Maintenance expense
4,500
Salaries expense
Rent expense
10,000
2,000
Depreciation expense—automobiles
20,000
Depreciation expense—trucks
10,000
$591,000 $591,000
Revenues—vehicle charges
Transfer in from General Fund—capital contribution
57,000
500,000
Gasoline and oil expense
9,500
Maintenance expense
4,500
Salaries expense
Rent expense
10,000
2,000
Depreciation expense—automobiles
20,000
Depreciation expense—trucks
10,000
Net position
501,000
To close the revenue, expense, and transfer accounts for the
period.
Financial Statements Illustration
As indicated earlier, the individual financial statements for Internal Service Funds are a
statement of revenues, expenses, and changes in fund net position; a statement of net
position (or balance sheet); and a statement of cash flows. The general format for the
statement of revenues, expenses, and changes in fund net position was introduced in the
“Overview” section and is applied here in Table 7-2. A statement of net position format
is preferred by the GASB. It presents assets, plus deferred outflows of resources, less
liabilities, less deferred inflows of resources, to equal net position. Or a balance sheet
format (assets plus deferred outflows of resources equals liabilities plus deferred inflows
of resources, plus net position) may be used. The statement of net position format is
illustrated in Table 7-3.
TABLE 7-2 Statement of Revenues, Expenses, and
Changes in Fund Net Position—Internal Service Fund
City of Fort Chessie
Internal Service Fund
Motor Pool Fund
Statement of Revenues, Expenses, and Changes in Fund Net Position
For the Year Ended December 31, 2013
Operating Revenues
Vehicle charges
$ 57,000
Operating Expenses
Gas and oil expense
$ 9,500
Maintenance expense
4,500
Salaries expense
10,000
Rent expense
2,000
Depreciation expense—automobiles
20,000
Depreciation expense—trucks
10,000
Total operating expenses
56,000
Operating income
1,000
Transfer in from General Fund
500,000
Change in net position
501,000
Net Position at Beginning of Year
0
Net Position at End of Year
$501,000
TABLE 7-3 Statement of Net Position—Internal
Service Fund
City of Fort Chessie
Internal Service Fund
Motor Pool Fund
Statement of Net Position
December 31, 2013
Assets
Current assets:
Cash
Due from General Fund
Total current assets
Noncurrent assets:
$123,000
12,000
$135,000
Automobiles (net of accumulated depreciation of $20,000)
Trucks (net of accumulated depreciation of $10,000)
280,000
90,000
Total noncurrent assets
370,000
Total assets
505,000
Liabilities
Current liabilities:
Accounts payable
4,000
Net Position
Net investment in capital assets
370,000
Unrestricted
131,000
Total net position
$501,000
Recall that on a statement of net position, the GASB requires that the net position section
be reported in three components: (1) net investment in capital assets; (2) restricted; and
(3) unrestricted. One way to derive the balances of the three net position classifications is
to close all nominal accounts to a Net position account and then analyze that account to
determine its components for financial reporting purposes. Notice that in the statement of
net position for the Motor Pool Fund (Table 7-3), only components 1 and 3 are reported,
because the fund has no restricted net position. Restricted position results from
contractual and other restrictions placed on the use of the assets by outside parties or by
law. Restricted assets are discussed in greater detail in the next section of this chapter.
For the Motor Pool Fund, the net investment in capital assets is equal to $370,000 – 0, or
$370,000. Nothing is deducted from the capital (noncurrent) asset balances because the
fund has no related debt. The remainder of the net position, $131,000 ($501,000 $370,000), is reported as unrestricted.
The example of a cash flows statement appears in Table 7-4 and completes the
illustration of financial statements for Internal Service Funds. The statement of cash
flows required by the GASB is different from that required in the private sector in several
ways. First, use of the direct method is required for reporting operating cash flows. Major
classes of gross operating cash receipts and gross operating cash payments are reported
along with their arithmetic sum to arrive at the net cash flows from operating activities.
Proprietary funds must also provide a reconciliation of operating income to net cash
flows from operating activities at the bottom of the cash flows statement or in a separate
schedule. This reconciliation is the equivalent of the indirect method used to report
operating cash flows in the private sector. Although not shown in Table 7-4, cash
receipts and disbursements are classified in four (instead of the FASB’s three) categories:
operating activities, noncapital financing activities, capital and related financing
activities, and investing activities. The Motor Pool Fund did not have any noncapital
financing or investing activities.
TABLE 7-4 Statement of Cash Flows—Internal
Service Fund
City of Fort Chessie
Internal Service Fund
Motor Pool Fund
Statement of Cash Flows
For the Year Ended December 31, 2013
Cash Flows from Operating Activities
Receipts from customers
$ 45,000
Payments to suppliers
(10,000)
Payments to employees
(10,000)
Payments for rent
(2,000)
Cash flows from operations
$ 23,000
Cash Flows from Capital and Related Financing Activities
Purchase of capital assets
Capital contributed by municipality
$(400,000)
500,000
Cash flows from capital and related financing activities
100,000
Net increase in cash
123,000
Cash balance at beginning of year
0
Cash balance at end of year
$123,000
Reconciliation of Operating Income to Net Cash Provided by
Operating Activities
Operating income
$ 1,000
Adjustments to reconcile operating income to net cash
provided by operating activities:
Depreciation expense
30,000
Changes in assets and liabilities:
Due from General Fund
Accounts payable
Net cash provided by operations
(12,000)
4,000
$ 23,000
The combined totals for all Internal Service Funds should be reported in a separate
column on the face of the proprietary fund financial statements, to the right of the total
Enterprise Funds column.4 This aggregate information is supported by combining
statements for Internal Service Funds in the annual report.
Governmental Accounting in Practice
Alpine School District, Utah
The Alpine School District in Utah uses Internal Service Funds to account for industrial
insurance (self-insurance) services and school services (printing and central warehousing
services). For illustrative purposes, we are using the School Services Fund. The financial
statements for this fund are presented in Tables 7-5, 7-6, and 7-7. Notice that the
statement of net position contains only two components of net position, like our earlier
example.
TABLE 7-5 Statement of Revenues, Expenses, and
Changes in Fund Net Position—Internal Service
Fund—Alpine School District, Utah
Alpine School District, Utah
Internal Service Fund
School Services Fund
Statement of Revenues, Expenses, and Changes in Fund Net Position
For the Year Ended June 30, 2011
(amounts in thousands)
Operating Revenues
Charges for services
$ 945
Operating expenses
Salaries
$362
Employee benefits
184
Purchased services
56
Supplies and materials
98
Depreciation
74
Total operating expenses
774
Operating income
171
Net Position at Beginning of Year
Net Position at End of Year
2,821
$2,992
Source: Adapted from a recent annual report of the Alpine School District, Utah.
TABLE 7-6 Statement of Net Position—Internal Service
Fund—Alpine School District, Utah
Alpine School District, Utah
Internal Service Fund
School Services Fund
Statement of Net Position
June 30, 2011 (amounts in thousands)
Assets
Current assets:
Cash and investments
Accounts receivable
Inventories
$1,770
2
704
Total current assets
$2,476
Capital assets:
Land
16
Property, plant, and equipment, at cost
Less, accumulated depreciation
1,626
(898)
Net property, plant, and equipment
744
Total assets
3,220
Liabilities
Current liabilities:
Accounts payable
Compensated absences payable
202
26
Total current liabilities
228
Net Position
Net investment in capital assets
Unrestricted
Total net position
744
2,248
$2,992
Source: Adapted from a recent annual report of the Alpine School District, Utah.
TABLE 7-7 Statement of Cash Flows—Internal Service
Fund—Alpine School District, Utah
Alpine School District, Utah
Internal Service Fund
School Services Fund
Statement of Cash Flows
June 30, 2011 (amounts in thousands)
Cash Flows from Operating Activities
Receipts from interfund services provided
Payments to suppliers
Payments to employees
$946
(80)
(553)
Net cash provided by operating activities
$ 313
Cash Flows from Capital and Other Financing Activities
Acquisition of capital assets
(7)
Cash Flows from Investing Activities
Interest received
2
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
308
1,462
$1,770
Reconciliation of Operating Income to Net Cash Provided by
Operating Activities
Operating income
$ 171
Depreciation
74
Decrease (increase) in operating assets and increase
(decrease) in operating liabilities:
Inventories
(68)
Accounts payable
143
Compensated absences payable
Net cash provided by operating activities
(7)
$ 313
Source: Adapted from a recent annual report of the Alpine School District, Utah.
SPECIFIC ASPECTS OF ENTERPRISE FUNDS
Summary of Fund Activities
Enterprise Funds are used when a government provides goods or services to customers
who, to a significant extent, are not part of the government. Utility operations—providing
electric, water, and sewer service to the general public—are activities that normally
require use of Enterprise Funds. Also, Enterprise Funds are used to account for the
operations of ports, airports, public swimming pools, and golf courses.5
Many governments also have created business-type entities, called public benefit
corporations or public authorities, that use Enterprise Fund accounting. As a result, one
government may provide a service (such as electricity services) through an Enterprise
Fund that is part of the legally constituted government, and another may provide the same
type of service through a legally separate public benefit corporation. Depending on the
circumstances, discussed in Chapter 9, the legally separate corporation may or may not
be part of the government’s financial reporting entity.
Control of Fund Activities
The operations of an Enterprise Fund are controlled by many means. Because the
functions of this type of activity are to supply goods or services to a general market, the
consumer exercises some control. Whether a consumer decides to purchase a particular
good or service is true “marketplace control.” However, because many Enterprise Funds
are public utilities, they possess monopoly operating rights. As a result, there is no
competitive market to ensure the reasonableness of the charges for services. Legislative
bodies or governing boards control and approve the rates the utility can charge. These
boards use operating data extensively to determine reasonable service charges, sometimes
with the assistance of outside consultants. In these cases, accrual-basis accounting data
are invaluable for measuring the results of operations.
Flexible budgets are used to measure and control the financial operations in Enterprise
Funds in the same manner as in Internal Service Funds, and they provide an additional
element of control. However, because of their nature, flexible budgets cannot be recorded
in the accounts; the direct spending control found in governmental-type fund fixed
budgets is not present in Enterprise Funds. Nor is encumbrance accounting generally
used as a spending control for Enterprise Funds.
Accounting for Fund Activities
OPERATING ENTRIES
For illustrative purposes, assume the City of Fort Chessie owns and operates the Blanco
Landfill and Recycling Center. The center operates a municipal solid waste transfer
station, another transfer station for construction debris, and a recycling center for city
residents. The city’s own landfill was closed in 1980. A 2013 beginning trial balance for
the fund is presented in Table 7-8.
The Cash—restricted for debt service account represents the amounts the activity is
required to set aside each year according to a bond indenture. This amount will be held in
escrow until the bonds are retired and all interest is paid.
Notice the last account, Net position. At the end of each year all nominal accounts are
closed into the Net position account, and then, for reporting purposes, the total is
segregated into three components (Net investment in capital assets, Restricted for debt
service, and Unrestricted) for financial reporting purposes.
TABLE 7-8 Trial Balance—Enterprise Fund
City of Fort Chessie
Enterprise Fund
Blanco Landfill and Recycling Center Fund
Beginning Trial Balance
January 1, 2013
Debits
Cash
Accounts receivable
Supplies
Credits
$ 25,000
15,000
2,000
Cash—restricted for debt service
150,000
Land
500,000
Equipment
1,200,000
Accumulated depreciation—equipment
Buildings
$ 600,000
500,000
Accumulated depreciation—buildings
90,000
Accounts payable
20,000
Revenue bonds payable
500,000
Net position
1,182,000
$2,392,000
$2,392,000
If waste collection billings during 2013 totaled $500,000 and $5,000 of those billings
were to the city itself, the following entry should be made:
Accounts receivable
Due from General Fund
495,000
5,000
Revenue from waste collections
500,000
To record waste collection revenue for the year.
Cash collections during the year total $490,000, of which $5,000 is from the General
Fund. These are recorded as follows:
Cash
Accounts receivable
Due from General Fund
490,000
485,000
5,000
To record collections from customers.
The appropriate entries in the books of the General Fund for these two events are as
follows:
Expenditures—waste collection
5,000
Due to Blanco Landfill & Recycling Center Fund
5,000
To record cost of waste collection in 2013.
Due to Blanco Landfill & Recycling Center Fund
5,000
Cash
5,000
To record payment made to Blanco Landfill & Recycling Center Fund.
Blanco Landfill & Recycling Center Fund operating expenses before depreciation are
$400,000 for 2013. Of this amount, $50,000 is paid in cash, and the remainder is on
credit. The entry to record this information follows:
Personal services expense
180,000
Transfer expense
150,000
Repairs and maintenance expense
40,000
Other expenses
30,000
Cash
50,000
Accounts payable
350,000
To record operating expenses for 2013.
Because the city is measuring the full cost of operating the center, depreciation must be
recorded. Assuming the appropriate amounts are as indicated in the entry, the following
is recorded:
Depreciation expense—equipment
50,000
Depreciation expense—buildings
15,000
Accumulated depreciation—equipment
50,000
Accumulated depreciation—buildings
15,000
To record depreciation expense for 2013.
Payments to creditors total $350,000 during the year. These payments are recorded as
follows:
Accounts payable
Cash
350,000
350,000
To record payments on accounts payable.
Blanco Landfill & Recycling Center’s long-term debt is in the form of revenue bonds
payable. Revenue bonds are debt securities that are secured exclusively by the revenues
generated by the fund (in contrast to general obligation bonds, which are secured by the
“full faith and credit”—the general taxing power—of the government). The entry to
record interest of $40,000 on the long-term debt for the current year is this:
Interest expense
40,000
Cash
40,000
To record bond interest paid for the year.
In this illustration, we assume the bond interest is all paid in cash; that is, $20,000 is
payable on June 30 and December 31 of each year. If the interest is not due at the end of
the year, a proportionate amount is accrued as an expense, just as in the private sector.
In this illustration, $50,000 of revenue bond principal is paid this year, and another
$50,000 will be paid next year; the $50,000 due next year is classified as a current
liability (as shown later in Table 7-11). The entry in the Center Fund to record the 2013
principal payment follows:
Revenue bonds payable
50,000
Cash
50,000
To record payment of principal of revenue bonds due in 2013.
Assume that during the year the center’s management institutes a policy of requiring a
$500 deposit from each contractor using the construction transfer station. This policy is
designed to reduce the losses suffered in prior years due to contractors not paying their
bills. The cash collected is considered a noncurrent asset because it must be refunded to
the contractors when individual transfer agreements with the Center expire. The
offsetting liability is Contractor deposits payable. If $20,000 is collected, the entry
appears as follows:
Cash—contractor deposits
20,000
Contractor deposits payable
20,000
To record amounts received for contractors’ deposits.
Also, assume that in addition to requiring deposits, management establishes a provision
for uncollectible accounts. The provision for 2013 is $5,000, which is recorded as
follows:
Estimated uncollectible accounts
5,000
Allowance for uncollectible accounts
5,000
To record the estimated uncollectible accounts as of
December 31, 2013.
The Allowance for uncollectible accounts account is a contra asset and as such is reported
as a deduction from Accounts receivable on the Center’s statement of net position. The
Estimated uncollectible accounts figure is reported in the statement of revenues,
expenses, and changes in net position as a direct reduction of Revenue from waste
collections to report net revenues.6
During the year the Center used $1,000 of supplies. The entry to record this use follows:
Supplies expense
1,000
Supplies
1,000
To record supplies used during 2013.
The preceding journal entries and trial balance reflect the typical activities of Enterprise
Funds and the resulting revenues generated and expenses incurred.
The preclosing trial balance for the Blanco Landfill & Recycling Center Fund at
December 31, 2013, is presented in Table 7-9.
CLOSING ENTRY
The closing process for Enterprise Funds involves transferring the balances of the
revenues, expenses, and other temporary accounts to the Net position account. The entry,
using the data given in the example, follows:
Revenue from waste collections
500,000
Net position
11,000
Estimated uncollectible accounts
5,000
Personal services expense
180,000
Transfer expense
150,000
Repairs and maintenance expense
40,000
Other expenses
30,000
Depreciation expense—equipment
50,000
Depreciation expense—building
15,000
Interest expense
40,000
Supplies expense
1,000
To close the revenue and expense accounts for the period.
TABLE 7-9 Trial Balance—Enterprise Fund
City of Fort Chessie
Enterprise Fund
Blanco Landfill & Recycling Center Fund
Preclosing Trial Balance
December 31, 2013
Debits
Cash
Accounts receivable
$ 25,000
25,000
Allowance for uncollectible accounts
Supplies
Credits
$ 5,000
1,000
Cash—customer deposits
20,000
Cash—restricted for debt service
150,000
Land
500,000
Buildings
500,000
Accumulated depreciation—buildings
Equipment
105,000
1,200,000
Accumulated depreciation—equipment
650,000
Accounts payable
20,000
Contractor deposits
20,000
Revenue bonds payable
450,000
Net position
1,182,000
Revenue from waste collections
Estimated uncollectible accounts
500,000
5,000
Personal services expense
180,000
Transfer expense
150,000
Repairs and maintenance expense
40,000
Other expense
30,000
Depreciation expense—equipment
50,000
Depreciation expense—building
15,000
Interest expense
40,000
Supplies expense
1,000
$2,932,000
$2,932,000
Notice the debit to Net position, which results from the use of one Net position account in
the accounting records. For financial reporting purposes, the total in the Net position
account is segregated into its three components, as discussed in the next section.
Financial Statements Illustration
Individual financial statements for Enterprise Funds are the same as those for Internal
Service Funds—that is, a statement of revenues, expenses, and changes in net position; a
statement of net position or balance sheet; and a statement of cash flows. These
statements for the Blanco Landfill & Recycling Center Enterprise Fund are illustrated for
2013 in Tables 7-10, 7-11, and 7-12.
TABLE 7-10 Statement of Revenues, Expenses, and
Changes in Fund Net Position—Enterprise Fund
City of Fort Chessie
Enterprise Fund
Blanco Landfill & Recycling Center Fund
Statement of Revenues, Expenses, and Changes in Fund Net Position
For the Year Ended December 31, 2013
Operating Revenues
Charges for services, net
$ 495,000
Operating Expenses
Personal services expense
Transfer expense
$180,000
150,000
Repairs and maintenance expense
40,000
Depreciation expense
65,000
Supplies expense
Other expenses
Total operating expenses
Operating income
1,000
30,000
466,000
29,000
Nonoperating Expenses
Interest expense
Decrease in net position
Total Net Position at Beginning of Year
Total Net Position at End of Year
(40,000)
(11,000)
1,182,000
$1,171,000
Refer to the statement of net postion in Table 7-11. The total balance of net position is
$1,171,000. This total consists of the following three components:
• 1. Net investment in capital assets, $995,000. This amount is equal to the sum of the
net carrying values of the land, the buildings, and the equipment
($500,000 1 $395,000 1 $550,000), less the related debt (current and noncurrent
revenue bonds payable) of $450,000.
• 2. Restricted net position, $150,000. This amount represents the assets restricted for
payment of revenue bonds. The $20,000 cash held as contractor deposits is not
included here because it is offset by the $20,000 liability reported for contractor
deposits.
• 3. Unrestricted net position, $26,000. This total represents the net assets that have
no restricttions on their use, or the net assets not included in the previous two
categories ($1,171,000 — $995,000 — $150,000).
TABLE 7-11 Statement of Net Position—Enterprise
Fund
City of Fort Chessie
Enterprise Fund
Blanco Landfill & Recycling Center Fund
Statement of Net Position
December 31, 2013
Assets
Current assets:
Cash
Accounts receivable (net of estimated uncollectible accounts
of $5,000)
Supplies
$25,000
20,000
1,000
Total current assets
$ 46,000
Noncurrent assets:
Cash—restricted for debt service
150,000
Cash—contractor deposits
20,000
Total noncurrent assets
170,000
Capital assets:
Land
500,000
Buildings (net of accumulated depreciation of $105,000)
395,000
Equipment (net of accumulated depreciation of $650,000)
550,000
Total capital assets
Total assets
1,445,000
1,661,000
Liabilities
Current liabilities:
Accounts payable
20,000
Current portion of revenue bonds payable
50,000
Total current liabilities
70,000
Noncurrent liabilities:
Contractor deposits
Revenue bonds payable
Total noncurrent liabilities
20,000
400,000
420,000
Total liabilities
490,000
Net Position
Net investment in capital assets
995,000
Restricted for debt service
150,000
Unrestricted
26,000
Total net position
$1,171,000
TABLE 7-12 Statement of Cash Flows—Enterprise Fund
City of Fort Chessie
Enterprise Fund
Blanco Landfill & Recycling Center Fund
Statement of Cash Flows
For the Year Ended December 31, 2013
Cash Flows from Operating Activities
Receipts from customers
Contractor deposits
Transfer payments
Payments to suppliers
Payments to employees
$490,000
20,000
(150,000)
(70,000)
(180,000)
Cash flows from operations
$110,000
Cash Flows from Capital and Related Financing Activities
Payments for debt service
(90,000)
Net increase in cash
20,000
Unrestricted cash and restricted cash balance at beginning of year
175,000
Unrestricted cash and restricted cash balance at end of year
$195,000
Reconciliation of Operating Income to Net Cash Provided by Operating Activities
Operating income
$ 29,000
Adjustments to reconcile operating income to net cash provided
by operating activities:
Depreciation expense
65,000
Changes in assets and liabilities:
Supplies
1,000
Accounts receivable (net)
(5,000)
Contractor deposits
20,000
Net cash provided by operations
$110,000
Use of Special Assessments
Special assessments are a means of financing services or capital improvements that
benefit one group of citizens more than the general public. Taxpayers who receive the
benefits of these activities are assessed for their share of the cost. Some special
assessment activities are service special assessments, such as providing special police
protection, garbage pickup, or street lighting. Service special assessments are essentially
fees designed to recover the cost of these specially provided services.
If a government wishes to charge a fee to recover the entire cost of the services or wishes
to know if a subsidy is being provided to certain citizens, it may use an Enterprise Fund
to account for the services. Because the total economic resources measurement focus is
used, this approach includes calculation of a charge for depreciation, as appropriate.
Use of an Enterprise Fund for service activities that are financed with special assessments
results in entries similar to those previously presented in this chapter. The only major
change is that the term special assessment is generally used to describe the revenues and
receivables for the activity.
Governmental Accounting in Practice
The City of Ashtabula, Ohio
The City of Ashtabula, Ohio, uses a single Enterprise Fund—its Wastewater Treatment
Fund—as well as several Internal Service Funds. Table 7-13 shows the statement of
revenues, expenses, and changes in net position for the Wastewater Treatment Fund (all
amounts are in thousands of dollars). Notice that the fund failed to recover all of its costs
through charges for services. Its $466 operating loss is offset slightly by $231 in capital
contributions, but increased by a $76 transfer out to other funds of the city.
Although not the case for this Wastewater Treatment Fund, some Enterprise Funds
generate “profits” to be used to expand their operating plant or to replace operating plant
assets when needed. Apparently, the Wastewater Treatment Fund previously issued debt
(loans payable) to finance capital assets, as shown in Table 7-14—Statement of Net
Position. Although that statement does not identify the Wastewater Treatment Fund’s
loans payable as capital debt, the net investment in capital assets reported on the
Statement of Net Position makes it clear that this was the purpose of those debts. (Net
investment in capital assets consists of capital assets net of depreciation of $13,959, less
outstanding loans payable of $3,619, equaling the reported balance of net investment in
capital assets of $10,340.)
TABLE 7-13 Statement of Revenues, Expenses, and
Changes in Fund Net Position—Enterprise Fund—City
of Ashtabula, Ohio
City of Ashtabula, Ohio
Enterprise Fund
Wastewater Treatment Fund
Statement of Revenues, Expenses, and Changes in Fund Net Position
For the Year Ended December 31, 2010
(amounts in thousands)
Operating Revenues
Charges for services
Miscellaneous
$3,601
28
Total revenues
$3,629
Operating Expenses
Personal services
2,112
Contractual services
610
Materials and supplies
837
Depreciation
536
Total operating expenses
4,095
Operating loss
(466)
Nonoperating Expenses
Interest and fiscal charges
(135)
Loss Before Contributions and Transfers
(601)
Capital contributions
231
Transfers out
(76)
155
Change in net position
(446)
Net Position Beginning of Year
Net Position End of Year
12,487
$12,041
Source: Adapted from a recent annual report of the City of Ashtabula, Ohio.
TABLE 7-14 Statement of Net Position—Enterprise
Fund—City of Ashtabula, Ohio
City of Ashtabula, Ohio Enterprise Fund Wastewater Treatment Fund Statement of
Net Position December 31, 2010 (amounts in thousands)
Assets
Current assets:
Equity in pooled cash and investments
$ 262
Accounts receivable
1,891
Materials and supplies inventory
Prepaid items
1
42
Total current assets
$ 2,196
Noncurrent assets:
Capital assets, nondepreciable
595
Capital assets, depreciable, net
13,364
Total noncurrent assets
13,959
Total assets
16,155
Liabilities
Current liabilities:
Accounts payable
86
Accrued wages
15
Compensated absences payable
120
Due to other governments
2
Accrued interest payable
38
Loans payable
442
Total current liabilities
703
Noncurrent liabilities:
Compensated absences payable
Loans payable
Total noncurrent liabilities
Total liabilities
234
3,177
3,411
4,114
Net Position
Invested in capital assets, net of related debt
Unrestricted
Total net position
10,340
1,701
$12,041
Source: Adapted from a recent annual report of the City of Ashtabula, Ohio.
The Wastewater Treatment Fund has two other sources for financing its capital assets—
tap fees from customers and capital contributions from the State of Ohio. Many water and
sewer utilities and other activities with operating plants charge tap fees to their
customers. All or a portion of those fees are intended to provide financing for the utility,
for example, when it needs to expand its capacity to meet the needs of an expanding
number of customers. The Wastewater Treatment Fund reports capital contributions in
the last section of its statement of revenues, expenses, and changes in net position. The
fund’s statement of cash flows makes it clear that $226 of the $231 represents cash
payments of tap-in fees (see Table 7-15).
TABLE 7-15 Statement of Cash Flows—Enterprise
Fund—City of Ashtabula, Ohio
City of Ashtabula, Ohio
Enterprise Fund
Wastewater Treatment Fund
Statement of Cash Flows
December 31, 2010
(amounts in thousands)
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Cash received from customers
$
3,599
Cash payments to suppliers for goods and services
(1,420)
Cash payments for employee services and benefits
(2,191)
Net cash used for operating activities
(12)
Cash Flows from Noncapital Financing Activities
Transfers out
(76)
Net cash used for noncapital financing activities
(76)
Cash Flows from Capital and Related Financing Activities
Tap-in fees
226
Proceeds of loan
272
Acquisition of capital assets
(381)
Principal paid on loans
(418)
Interest paid on loans
(140)
Net cash used for capital and related financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents beginning of year
Cash and cash equivalents end of year
Reconciliation of Operating Loss to Net Cash Used for Operating Activities
(441)
(529)
791
$ 262
Operating loss
$(466)
Adjustments:
Depreciation
536
(Increase)/decrease in assets:
Accounts receivable
Materials and supplies inventory
Prepaid items
(2)
3
(5)
Increase/(decrease) in liabilities:
Accounts payable
41
Contracts payable
(40)
Accrued wages
(54)
Compensated absences payable
(10)
Due to other governments
(15)
Net cash used for operating activities
$ (12)
Noncash Capital Financing Activities
During 2010, the State of Ohio paid $8 directly to contractors on
behalf of the Wastewater Treatment Fund for capital assets.
Source: Adapted from a recent annual report of the City of Ashtabula, Ohio.
The balance of the capital contributions comes from direct payments made by the State of
Ohio to contractors building the Wastewater Treatment Fund’s capital assets (see the
bottom of the cash flows statement where significant noncash transactions are required to
be reported). Capital contributions can come in many forms—grants and contributions
required to be used to acquire capital assets; direct payments for capital assets on behalf
of the government; transfers of capital assets from governmental activities of the same
government (such as our earlier illustration of contributions used to start up an Internal
Service Fund); tap fees and similar customer charges (or charges to developers) that must
be used to expand or replace capital assets; and contributions consisting of capital assets,
such as sewer lines built by developers and then donated to the government for its use. It
is up to the reporting government to review restrictions on all of its contributions to
determine whether they are capital contributions that must be reported separately from
operating and nonoperating income and expenses.
Governmental Accounting in Practice
Are All Enterprise Funds Designed to Recover Costs?
Some governmental activities accounted for in Enterprise Funds (like lotteries) make
profits, which help to finance day-to-day activities accounted for in the General Fund.
Others break even or make enough profit to cover the inflated cost of replacing their
capital assets. And some are heavily subsidized. Principal among these are state and local
transit operations. Governments that operate trains, subways, and buses depend on capital
grants and large operating subsidies to keep prices down in order to encourage citizens to
use public transportation or simply so that the labor force can afford to travel into the city
to work. Transit authorities often recover less than half of their costs from fare box
revenues. For example, the Washington, DC Metro recovered less than 33 percent of its
operating costs from passenger fares in 2010; Atlanta’s MARTA recovered only 27
percent in 2010; San Francisco’s BART did better at 51 percent in 2010. New York
State’s Metropolitan Transportation Authority (MTA)—which runs New York City’s
subway and commuter rail lines affecting several counties—covered 50 percent of its
operating expenses from operating revenues in 2010.
The MTA’s operating statement shows that its operating expenses in 2010 were $12.7
billion, but that its operating revenues were only $6.4 billion. To partially offset its
operating loss, it received $2.9 billion in operating subsidies from the state and from local
governments within the state, as well as almost $1.7 billion from dedicated tax revenues.
Notice how the MTA’s operating statement distinguishes between subsidies that help pay
for operating expenses (which it classifies as nonoperating revenues) and grants that are
externally restricted for capital projects. This financial reporting is consistent with the
requirements for government-wide reporting (discussed in Chapter 10), which classifies
“program revenues” as either charges for services, operating grants, or capital grants.
Metropolitan Transportation Authority
(A Component Unit of the State of New York)
Consolidated Statement of Revenues, Expenses, and Changes in Net Position
Year Ended December 31, 2010
(amounts in millions)
Operating Revenues
Fare revenue
Vehicle toll revenue
Rents, freight, and other revenues
Total operating revenues
$ 4,586
1,417
416
6,419
Operating Expenses
12,709
Operating Loss
(6,290)
Nonoperating Revenues (Expenses)
Grants, appropriations, and taxes:
Tax-supported subsidies—NYS
2,025
Tax-supported subsidies—NYC and local
447
Operating subsidies—NYS
194
Operating subsidies—NYC and local
191
Build America Bond subsidy
Mobility tax
60
1,662
All other, net (mostly interest expense on long-term debt)
Net nonoperating revenues
Loss Before Capital Appropriations
Appropriations, Grants, and Other Receipts Externally Restricted
(792)
3,787
(2,503)
1,938
for Capital Projects
Change in Net Position
Net Position—Beginning of period
Net Position—End of period
(565)
17,441
$16,876
Source: Adapted from the 2010 annual report of the Metropolitan Transportation
Authority, New York, NY. To simplify the presentation, we combined certain
nonoperating revenues and expenses; the largest item, interest expense on longterm debt, was $1,299 million.
Review Questions
•
•
•
•
•
•
Q7-1 What is the cause-and-effect relationship between the revenues and the
expenses of a proprietary fund? Q7-2 Why are the revenues and expenditures of
governmental-type funds “independent” of each other? Q7-3 When should an
Internal Service Fund be used? Q7-4 What is a flexible budget?
Q7-5 How does the net position section of a balance sheet of a proprietary fund differ
from the fund balance section of a governmental-type fund?
Q7-6 Why is depreciation recorded as an expense in proprietary funds, but not as an
expenditure in governmental-type funds?
Q7-7 What is the difference between an Enterprise Fund and an Internal Service
Fund?
Q7-8 Does the accounting guidance issued by FASB apply to proprietary funds?
Explain.
Q7-9 What are revenue bonds? How do they differ from general obligation bonds?
Discussion Scenarios and Issues
•
D7-1 Discuss what type of fund you would use to account for the following activities:
a. A city is about to construct a new sports arena. It will use a Capital Projects
Fund to account for the accumulation of resources to build the arena. The city
council has passed a law calling for a special hotel–motel occupancy tax to pay the
debt service on the bonds issued to build the arena. In what fund should the
occupancy tax be accounted for?
o b. Fed up with the poor response time in restoring power resulting from damages
caused by recent storms, the city acquires the resources of a private electric
power company. The city issues revenue bonds to pay for the power company’s
assets; the bonds are secured solely by a pledge of the net revenues resulting
o
from the charges for supplying power to the citizens of the city and to city
government offices.
o c. To ensure that the city obtains the best possible price for its supplies and
equipment, the city decides that all agencies within the government must obtain
needed supplies through the city’s purchasing department. The purchasing
department will obtain a warehouse for certain items used by all departments.
• D7-2 You recently agreed to make a presentation to an accounting class at your alma
mater. Your topic will be governmental financial reporting. Review the financial
statements for the Internal Service Funds in this chapter, and contrast them with the
statements prepared for the Capital Projects Funds in Chapter 6. Identify
similarities and differences between these statements as the basis for your
presentation.
• D7-3 The mayor asks you to help establish the pricing policy for the city’s only
Internal Service Fund, the Printing Fund. The mayor has decided that all city
agencies must use the Printing Fund (which will have salaried personnel, equipment,
and supplies) for their printing needs. However, he has not yet decided whether the
General Fund should make a loan to the Internal Service Fund to acquire the
equipment or whether the General Fund should make an outright grant for that
purpose. Write a report to the mayor, describing the pricing options you perceive. In
discussing the options, cover the implications resulting from a decision as to
whether the Printing Fund will be financed with a loan or an outright grant.
• D7-4 A village needs resources to finance its operations for the remainder of 2013.
Poor internal control procedures under the previous administration created a
serious funding problem for the new administration. The new mayor feels that if he
can get through the current year, he can develop a new budget and control future
expenditures to create a surplus. After reviewing the village’s financial statements,
the mayor wants to borrow from restricted assets in an Enterprise Fund (resources
set aside, pursuant to a bond agreement, to ensure payment of debt service). The
mayor is certain that future surpluses from the village’s operating budget will allow
him to replace the borrowed funds in 3 to 5 years. How would you respond to the
mayor?
Exercises
E7-1 (Interpreting the operating statement for an Internal Service Fund)
Fort Chessie maintains a policy that its Internal Service Funds operate on a breakeven basis; that is, revenues must equal expenses. Did the Motor Pool Fund
illustrated in this chapter operate at a break-even level during 2013? Explain.
• E7-2 (Journal entries for an Internal Service Fund)
The following transactions occurred regarding the Central Purchasing Fund, an
Internal Service Fund. Record the entries for the transaction, and identify the fund(s)
used.
o 1. The General Fund transferred $100,000 as a capital contribution to establish
the fund.
o 2. The Purchasing Fund billed revenues of $200,000.
o 3. The Purchasing Fund incurred expenses of $300,000. Hint: Credit Cash for
$250,000 and Accumulated depreciation for $50,000.
•
4. The General Fund subsidized the operations of the Purchasing Fund by
transferring an additional $100,000 tothefund.
E7-3 (Relationship of a fixed asset to depreciation)
Since the Motor Pool Fund illustrated in this chapter records the acquisition of an
automobile by debiting an asset account, does the cost of that automobile ever enter
into the determination of income? Explain.
E7-4 (Fill in the blanks)
o 1. An Internal Service Fund is used when goods and/or services are provided to
______________.
o 2. A budget that is based on the level of activity attained in a fund is called a
______________.
o 3. The ______________ basis of accounting is used in Internal Service Funds.
o 4. If the General Fund transfers cash to an Internal Service Fund as a permanent
transfer of equity, the Internal Service Fund will credit the ______________ account.
o 5. When an Internal Service Fund acquires a truck, the account that is debited is
______________.
E7-5 (True or false)
Indicate whether the following statements are true or false. For any false statement,
indicate why it is false.
o 1. A direct cause-and-effect relationship exists between the revenues and
expenses of an Internal Service Fund.
o 2. Internal Service Funds are used to account for activities that involve providing
services and/or products to the general public.
o 3. Internal Service Funds use the modified accrual basis of accounting.
o 4. All capital contributions received by an Internal Service Fund are credited
directly to the Net position account.
o 5. A fixed budget is used to control an Internal Service Fund.
o 6. The budget is not usually recorded for an Internal Service Fund.
o 7. Fixed assets used in an Internal Service Fund are not reported in the fund-level
statements.
o 8. Depreciation expense is not recorded in an Internal Service Fund that uses
fixed assets.
o 9. An increase or decrease in Net position is calculated for Internal Service Funds.
o 10. Internal Service Funds do not have restricted net position accounts.
E7-6 (True or false)
Indicate whether the following statements are true or false. For any false statement,
indicate why it is false.
o 1. Enterprise Funds are not used to account for the construction of major
highways financed from tax revenues.
o 2. User charges must be assessed if an Enterprise Fund is to be used for
accounting purposes.
o 3. Flexible budgets are used to control Enterprise Fund operations.
o 4. Depreciation is recorded in an Enterprise Fund.
o 5. Nonoperating expenses are separated from operating expenses in an
Enterprise Fund.
o 6. Restricted assets are separately reported on an Enterprise Fund balance sheet.
E7-7 (Billings and collections between an Enterprise Fund and the General Fund)
o
•
•
•
•
•
•
A city used an Enterprise Fund to provide electricity services to the General Fund
and its citizens. A total of $50,000 was billed to the General Fund and collected 30
days later. Prepare the journal entries necessary to record these transactions, and
label the fund(s) used.
E7-8 (Closing entries for an Enterprise Fund)
The Municipal Park Fund for Putnam Village had the following preclosing trial
balance. Prepare the closing entry necessary at June 30, 2013, and compute the
components of net assets as they should be reported as of that date.
Putnam Village
Enterprise Fund
Municipal Park Fund
Preclosing Trial Balance
June 30, 2013
Debits
Cash
$ 1,500
Membership dues receivable
10,200
Land
7,600
Equipment
2,000
Accumulated depreciation—equipment
$ 400
Accounts payable
500
Revenues from fees
Salaries expense
Credits
14,000
4,500
Depreciation expense—equipment
300
Utilities expense
400
Miscellaneous expense
700
Net position
12,300
$27,200
$27,200
E7-9 (Comparison of accounting for long-term debt and acquisition of fixed assets,
using governmental-type funds and proprietary-type funds)
The Village of Peak’s Kill acquired a computer for $300,000. The computer was
financed through a bond issue. Prepare the journal entries necessary to record these
events, assuming the computer was acquired using (a) the General Fund and (b) an
Enterprise Fund. Also, label the fund(s) used.
• E7-10 (Setting prices for an Internal Service Fund)
Yorktown uses an Internal Service Fund to account for its motor pool activities.
Based on the following information, calculate the price per trip that the Internal
Service Fund needs to charge users of the motor pool during calendar year 2013 in
order to break even:
o Automobiles:
•
The motor pool uses two sedans, each costing $25,000 and each estimated to
have a 5-year life when they were acquired in 2012.
o Driver salaries:
▪
The motor pool has a driver-administrator, who earns $45,000 a year, and a
driver, who earns $35,000. The city uses a rate of 30 percent (to cover
pensions and other payroll fringe benefits) for planning purposes.
o Insurance:
▪
In 2012 the city purchased a 3-year automobile accident policy at a cost of
$3,000.
o Fuel and maintenance costs:
▪
Based on experience, the driver-administrator estimates that total fuel and
maintenance costs for the year will be $5,000.
o Billing units:
•
To simplify record keeping, the fund charges a fixed price per trip. Yorktown’s
budget office estimates that 800 trips will be taken in 2013.
• E7-11 (Journal entries for an Internal Service Fund)
The Yorktown Motor Pool Internal Service Fund had the following transactions and
events during January 2013. Using the data in exercise E7-10 where applicable, as
well as your solution to the exercise, prepare journal entries to record the
transactions.
o 1. Paid salaries for the month in cash (1/12 of $80,000)
o 2. Paid $600 cash for fuel and maintenance expenses
o 3. Recorded depreciation expense for the month
o 4. Recorded insurance expense for the month
o 5. Accrued fringe benefits expense for the month
o 6. Billed for motor vehicle services as follows: General Fund, 80 trips; Water
Enterprise Fund, 10 trips
▪
Problems
•
P7-1 (Journal entries and financial statements for an Internal Service Fund)
Pleasantville’s Data Processing Fund, an Internal Service Fund, had the following
transactions and events during calendar year 2013. The fund provides services for a
fee to all departments of Pleasantville’s government. Assume the fund uses a voucher
system. Prepare (a) the journal entries necessary to record the transactions and
events in the Data Processing Fund; (b) a statement of revenues, expenses, and
changes in net position for the Data Processing Fund for 2013; and (c) a statement of
net position as of December 31, 2013.
o 1. The General Fund made a $2,000,000 transfer of cash to establish the Data
Processing Fund.
o 2. The Data Processing Fund paid $1,900,000 for a computer.
o 3. Supplies costing $4,500 were purchased on credit.
o 4. Bills totaling $650,000 were sent to the various city departments.
o 5. Repairs to the computer were made at a cost of $2,400. A voucher was
prepared for that amount.
o 6. Collections from city departments for services were $629,000.
o 7. Salaries of $200,000 were paid to the employees.
8. Vouchers totaling $5,900 were paid.
9. As of the end of the year, $300 of supplies had not been used.
10. Depreciation on the computer for the year was $250,000.
11. The city charged the computer center $2,000 for the rental of office space and
$500 for the rental of office equipment for the year. This amount was not paid at
the end of the year.
o 12. Miscellaneous expenses not paid by the end of the year totaled $700. These
amounts were owed to businesses outside the governmental unit.
• P7-2 (Journal entries and financial statements for an Internal Service Fund)
Lilly County, faced with the prospect of declining revenues, decides it can save
money by doing all printing in-house. The county creates the Lilly Printing Fund (an
Internal Service Fund), directs departments to fulfill their bulk printing needs
through that fund, and directs departments to pay the fund promptly to minimize its
working capital needs. The fund had the following transactions and events during
2013. Prepare (a) journal entries to record these transactions in the Lilly Printing
Fund; (b) a statement of net position as of December 31, 2013; and (c) a statement of
revenues, expenses, and changes in net position for the year ended December 31,
2013.
o 1. Received a loan on January 2 from the county in the amount of $6,000, to be
repaid in four equal annual installments of $1,500, starting December 31, 2013,
with interest at the rate of 1 percent per annum on the outstanding balance. The
specified purpose of the loan was to purchase equipment for $4,800 and to use
the balance of $1,200 to meet working capital needs.
o 2. Purchased reproduction equipment for $4,800 on January 2, using cash
provided in transaction 1. The equipment has an estimated useful life of 4 years
and no salvage value.
o 3. Purchased paper and supplies for $4,500 on credit. (Because inventories are
kept to a minimum, charge the purchase to Supplies expense.)
o 4. Sent invoices for $65,000 to departments financed by the General Fund.
o 5. Received cash in the amount of $63,000 as a result of transaction 4.
o 6. Paid the $4,500 invoice received in transaction 3.
o 7. Paid salaries in the amount of $50,000 and utility bills in the amount of $6,000.
o 8. Repaid the county $1,500 of principal on the loan, plus interest of 1 percent.
o 9. In preparation for year-end financial statements, recorded depreciation on the
equipment for 12 months.
• P7-3 (Journal entries for several funds and statements for an Internal Service Fund)
The following transactions relate to the City of Monticello for the fiscal year ended
June 30, 2013. Prepare (a) all the journal entries necessary to record these
transactions, and identify the fund(s) used. Also, prepare (b) a statement of
revenues, expenses, and changes in net position for the Central Supplies Fund for
fiscal 2012–2013 and (c) a statement of net position as of June 30, 2013.
o 1. The city established a Central Supplies Fund for the purpose of handling the
acquisition and disbursement of supplies for the entire government. The General
Fund made an initial capital contribution of $75,000 to the fund.
o 2. The Police Department ordered equipment at a total cost of $34,000.
o 3. The Central Supplies Fund purchased supplies for $29,000. This amount will be
paid later.
o 4. The Debt Service Fund paid $120,000 of interest not previously recorded.
o
o
o
o
5. Central Supplies Fund billings to departments totaled $31,000. These supplies
cost $25,000. Record the cost of the supplies as an expense: Cost of sales.
o 6. A Capital Projects Fund paid a contractor $100,000 for a previously submitted
progress billing of $110,000. The difference between the billing and the amount
paid is the retained percentage. The billing was recorded correctly when received
by the fund.
o 7. The Central Supplies Fund acquired office equipment for $2,000. A 90-day note
was signed for that amount.
o 8. Collections from the departments by the Central Supplies Fund totaled $27,500.
o 9. Salaries paid to Central Supplies Fund employees were $22,500.
o 10. The Police Department equipment ordered in transaction 2 was delivered at a
cost of $35,000. The invoice price will be paid later. Assume the excess was
approved.
o 11. Depreciation on the office equipment of the Central Supplies Fund was $400.
o 12. The Central Supplies Fund paid $25,000 to various creditors outside the
governmental unit.
o 13. Interest expense of $50 on the note payable was accrued by the Central
Supplies Fund.
• P7-4 (Journal entries and financial statements for an Enterprise Fund)
The following transactions relate to the City of Arlington’s Municipal Airport Fund
for the fiscal year ended June 30, 2013. Prepare (a) the journal entries necessary to
record these transactions in the Municipal Airport Fund; (b) a trial balance as of June
30, 2013; (c) a statement of revenues, expenses, and changes in net position for the
2012–2013 fiscal year, and (d) a statement of net position as of June 30, 2013.
o 1. The General Fund made a permanent contribution of $2,000,000 for working
capital to start a municipal airport. The city used part of that money, together
with the proceeds from a $25,000,000 revenue bond issue, to purchase an airport
from a private company. The fair values of the assets and liabilities were as
follows:
o
Accounts receivable
Land
$ 8,000
19,000,000
Buildings
5,000,000
Equipment
1,800,000
Accounts payable
o
o
o
o
o
o
o
(12,000)
The city purchased the airport for the fair market value of its net assets.
2. Airlines were billed $3,900,000 for rental rights to use ticket counters and
landing and maintenance space. Of this amount, $3,890,000 is expected to be
collectible.
3. Supplies totaling $4,500 were purchased on credit.
4. Collections from airlines totaled $3,850,000.
5. Salaries of $200,000 were paid to airport personnel employed by the city.
6. Utility bills totaling $100,000 were paid.
7. A notice was received from the Last District Bankruptcy Court. Air Chance was
declared bankrupt. The airport collected only $1,000 on its bill of $3,000.
o
o
o
o
o
o
o
o
o
o
o
8. The airport obtained $3,000,000 of additional permanent contributions from
the General Fund to help finance improvements at the airport.
9. Interest of $1,825,000 was paid to the bondholders.
10. Supplies used during the year totaled $3,600.
11. The General Fund made an advance to the airport of $1,500,000. Airport
management plans to repay the advance in full in 2016.
12. A contract was signed with The Construction Company for the new facilities
for a total price of $5,000,000.
13. The Municipal Airport Fund invested $2,000,000 in CDs.
14. The Municipal Airport Fund received $315,000 upon redeeming $300,000 of
the CDs mentioned in transaction 13.
15. The airport purchased additional equipment for $300,000 cash.
16. Interest expense of $350,000 was accrued at the end of the year.
17. Other accrued expenses totaled $55,000.
18. Depreciation was recorded as follows:
Buildings
$500,000
Equipment
180,000
19. $12,500 of accounts payable was paid.
20. $150,000 of interest revenue was received.
21. Excess cash of $4,500,000 was invested in CDs.
P7-5 (Computation of proprietary fund net position)
Given here is the December 31, 2013, preclosing trial balance for the City of Hudson
Golf Course Enterprise Fund. Compute as of December 31, 2013, (a) total net
position; (b) net investment in capital assets, net of related debt; (c) restricted net
position; and (d) unrestricted net position.
o
o
o
•
City of Hudson
Golf Course Enterprise Fund
Preclosing Trial Balance
December 31, 2013
Debits
Cash
Accounts receivable
$ 15,045
37,000
Estimated uncollectible accounts
Cash—restricted for debt service
Cash—restricted for customer deposits
$ 5,000
150,000
23,000
Land
900,000
Equipment
325,000
Accumulated depreciation—equipment
Buildings
Accumulated depreciation—buildings
Credits
105,000
1,500,000
650,000
Accounts payable
20,000
Customers’ deposits payable
23,000
Interest payable on customer deposits
835
Revenue bonds payable
1,000,000
Accrued interest payable—revenue bonds
6,500
Net position, January 1, 2013
940,740
Revenue from rentals
800,000
Personal services expense
380,000
Utilities expense
63,000
Repairs and maintenance expense
47,000
Depreciation expense—equipment
15,000
Depreciation expense—building
50,000
Interest expense
40,030
Estimated uncollectible accounts
5,000
Supplies expense
1,000
$3,551,075
•
$3,551,075
P7-6 (Journal entries and financial statements for an Enterprise Fund)
The Metro Central Railroad is a commuter railroad that stops at the Village of
Katonah. Katonah, a growing community, decides to construct and operate a parking
lot near the railroad station to accommodate the needs of its citizens. The activities
of the parking lot will be accounted for in an Enterprise Fund, known as the Katonah
Metro Parking Fund, because the activity will be financed with debt secured solely by
pledge of the facility’s net revenues from parking fees. This problem covers
transactions and events during calendar years 2012 and 2013. Prepare journal
entries for the following Parking Fund transactions and events during 2012:
o 1. Receives $5,000,000 from the sale of revenue bonds at par. The revenue bonds
were sold on July 1, 2012. They mature at the rate of $250,000 a year over a
period of 20 years, starting July 1, 2013. Interest on the bonds is payable annually,
also starting July 1, 2013, at 4 percent per annum on the outstanding debt.
o 2. Pays $1,000,000 to acquire a vacant lot near the railroad station. (Note: Debit
the account “Capital assets not being depreciated.”)
o 3. Pays $4,000,000 to construct the parking lot. (Note: Debit the account
“Depreciable capital assets.”) The lot is completed and ready for opening as of
December 31, 2012.
o 4. Accrues interest for 6 months on the serial bonds. (Although interest during the
construction period should be capitalized in Enterprise Funds, the village
considers the amount immaterial and charges it to expense.)
o 5. Receives an invoice for $80,000 from the Village of Katonah General Fund for
all expenses incurred in financing and planning for constructing the parking lot.
Based on the foregoing transactions and events, the Katonah Metro Parking Fund
starts calendar year 2013 with the following trial balance:
Debits
Capital assets not being depreciated
Depreciable capital assets
$1,000,000
4,000,000
Accrued interest payable
$ 100,000
Due to Village of Katonah
80,000
Revenue bonds payable
Net position
Totals
Credits
5,000,000
180,000
$5,180,000
$5,180,000
Prepare journal entries to record the following transactions and events of the
Katonah Metro Parking Fund for calendar year 2013. Then prepare a statement of
revenues, expenses, and changes in net position for the year and a statement of net
position as of December 31, 2013.
o 1. Receives cash from parking fees in the amount of $800,000.
o 2. Receives cash of $60,000 in December 2013 from parking lot customers who
rent space for the month of January 2014.
o 3. Pays the amount due at the start of the year to the Village of Katonah.
o 4. Pays the following expenses: salaries—$125,000; insurance—$20,000;
utilities—$35,000.
o 5. Pays the first installment of principal and interest on the revenue bonds, due
July 1, 2013.
o 6. Accrues interest on the revenue bonds as of December 31, 2013.
o 7. Records one year’s depreciation on the depreciable assets. The depreciable
assets are estimated to have a useful life of 20 years.
• P7-7 (Explanation of basis of accounting and fixed assets for different funds)
The accounting system of the municipality of Kemp is organized and operated on a
fund basis. Among the types of funds used are a General Fund, a Special Revenue
Fund, and an Enterprise Fund.
o 1. Explain the basic differences in revenue recognition between the accrual basis
of accounting and the modified accrual basis of accounting, as it relates to
governmental accounting.
o 2. What basis of accounting should be used in fund-level accounting for each of
the following funds and why?
▪
• General Fund
▪
• Special Revenue Funds
▪
• Enterprise Funds
o 3. How should fixed assets and long-term liabilities related to the General Fund
and to the Enterprise Fund be accounted for in the funds? (AICPA adapted)
• P7-8 (Budget for an Internal Service Fund)
The City of Oscar uses an Internal Service Fund to provide printing services to its
various departments. It bills departments on the basis of an estimated rate per page
of printed material, computed on the accrual basis of accounting. From the following
information, compute the amount per page that the fund will charge during 2013.
Based on past experience, the fund estimates that it will print 1,000,000 pages
during the year. (Assume that the equipment in item 6 was contributed by the city
and that the pricing objective was to recoup the cost of equipment in the rate
charged over the life of the equipment.)
o 1. Inventory of paper on hand at beginning of year: $10,000
o 2. Estimated paper purchases during the year: $60,000
o 3. Estimated amount of paper to be consumed during the year: $55,000
o 4. Estimated salaries to be paid during the year: $255,000
o 5. Estimated salaries earned during the year, including both what was paid and
what was owed at year end: $265,000
o 6. Cost of equipment on hand at beginning of the year (estimated life of 10 years):
$1,000,000
• P7-9 (Accounting for and reporting on selected transactions and events)
Rochester Rapid Transit (RRT), an Enterprise Fund of Orange County, provides bus
service for county residents. Because fare revenues are insufficient to cover
operating expenses, RRT—as a matter of public policy—receives operating subsidies
and capital grants from Orange County, the state, and the federal government. RRT’s
financial reporting policies provide for distinguishing operating subsidies from
capital grants in its statement of revenues, expenses, and changes in net position; the
former are reported as “nonoperating revenues,” while the latter are reported as
capital contributions. RRT operates on a calendar year basis. Answer the questions
raised regarding each of the following transactions and events that relate to RRT’s
calendar year 2013.
o 1. RRT sold revenue bonds in the amount of $2,000,000 on September 1, 2012,
maturing in 10 years at the rate of $100,000 every 6 months, starting March 1,
2013, with interest at the rate of 4 percent per annum on the unpaid balance.
Interest on the bonds had been accrued in RRT’s financial statements for the year
ended December 31, 2012. What journal entries are needed to record the debt
service payments on March 1, 2013, and September 1, 2013?
o 2. An RRT bus accidentally sideswiped a parked vehicle in December 2013. The
vehicle owner filed a claim against RRT, which does not carry insurance to cover
such claims. RRT’s attorneys acknowledge that the RRT bus was at fault. They
believe the claim can be settled out of court for about $5,000, but the vehicle
owner is seeking $7,000. The claim had not been settled at the time RRT prepared
its 2013 financial statements. How should RRT report this matter in its financial
statements?
o 3. RRT applied for a grant of $300,000 from the federal government in 2013. RRT
met the eligibility requirements for the grant and received a check for $300,000.
The grant was to be used solely to acquire buses, but no time requirement was
imposed on RRT. As of December 31, 2013, no part of the grant had been spent.
What journal entry should RRT make when it receives the cash? (Hint: See section
on “Intergovernmental Grants” in Chapter 5.) How does the transaction affect
financial reporting by RRT?
o 4. RRT received cash subsidies from Orange County ($500,000) and the state
($100,000) to help cover its operating deficits. What journal entries are needed to
•
record each subsidy? How should each subsidy be reported in RRT’s statement of
revenues, expenses, and changes in net position?
P7-10 (Journal entries and financial statements for an Enterprise Fund)
The City of Paradise Falls plans to develop a golf course during 2013 and account for
it as the Golf Enterprise Fund (GEF). The course will be built on a parcel of land to be
purchased from a private party. The planned out-of-pocket costs for the new course
and their financing are as follows:
Spending
Acquisition of land from private party
$ 500,000
Installation of sod, sprinklers, landscaping, and fencing
1,000,000
Construction of clubhouse
3,000,000
$4,500,000
Financing
Contribution from the General Fund
Term revenue bonds at 8 percent per annum, interest payable semiannually
$1,500,000
3,000,000
$4,500,000
The city plans to sell the bonds on February 1, 2013. Because the bonds are a term
issue, bond principal matures in full on February 1, 2023. Interest is payable each
August 1 and February 1, beginning August 1, 2013. The bond covenant requires that
assets equal to one-tenth of the bond principal be transferred to a restricted account
within the GEF on December 31 of each year. Paradise Falls observes a calendar
fiscal year.
Kowitt Design and Construction, Inc. has been awarded the contract to develop the
golf course. Construction will commence February 15, 2013, and be completed no
later than May 31, so it can open for business during June. The contract stipulates
that progress billings from Kowitt will be paid within 30 days of receipt, with 5
percent retainage held pending completion and acceptance of the project. The city
engineer will inspect the contractor’s work and approve progress payments.
Accounting for the GEF will be done by the city’s existing accounting department (a
General Fund department), which will bill the GEF for services rendered at the end of
the year. To help the GEF get on its feet financially, no interfund payables will be
settled in cash during 2013.
Prepare (a) journal entries (including closing entries) to record the following events
and transactions for the year ended December 31, 2013, in the Golf Enterprise Fund.
The corresponding entries that would be made in other funds are not required. In
addition, prepare (b) the statement of net position and (c) the statement of revenues,
expenses, and changes in net position for the Golf Enterprise Fund as of and for the
fiscal year ending December 31, 2013.
o 1. January 3, 2013: Paradise Falls formally established the GEF; the fund’s first
transaction was the receipt, in cash, of the capital contribution from the General
Fund.
o 2. January 24: The city acquired the adjacent parcel of land from the private
owner for the planned
o
o
o
o
o
o
o
o
o
o
$500,000.
3. February 1: The revenue bonds were sold at par ($3,000,000).
4. February 15: Development of the golf course itself and construction of the
clubhouse commenced.
5. March 31: Kowitt submitted the first progress billing of $1,800,000. The billing
was approved and vouchered after deducting the 5 percent retainage. (Because of
the short duration of the construction period, no construction in progress
accounts will be used.) $400,000 of the amount billed represents the cost of sod,
sprinklers, landscaping, and fencing (which the city classifies as “improvements
other than buildings”). The balance applies to the cost of the clubhouse
(“buildings”).
6. April 25: The amount currently due Kowitt was paid.
7. April 30: The second progress billing from Kowitt, $1,500,000, was approved
and vouchered after deducting the 5 percent retainage; $600,000 applies to sod,
sprinklers, landscaping, and fencing (which is now fully installed).
8. May 19: The amount currently due Kowitt was paid.
9. May 23: Kowitt’s third and final progress billing, $700,000 (all of which
represents clubhouse construction costs), was approved and vouchered after
deducting the 5 percent retainage.
10. May 30: The amount currently due Kowitt was paid.
11. June 1: The new golf course was formally accepted by the city (without need
for “touch-up” work), and all remaining amounts due to Kowitt were vouchered
for payment.
12. June 1: Golf course maintenance equipment costing $300,000 was acquired by
means of a 5-year capital lease. The lease required no down payment. Lease
payments are due quarterly, beginning September 1. The amortization table for
the lease for the first six payments is as follows:
Due Date
Payment
Interest
Principal Reduction
Carrying Value
$300,000
Sept. 1, 2013
$19,244
$7,500
$11,744
288,256
Dec. 1, 2013
19,244
7,206
12,038
276,218
Mar. 1, 2014
19,244
6,905
12,339
263,879
June 1, 2014
19,244
6,597
12,647
251,232
Sept. 1, 2014
19,244
6,281
12,963
238,269
Dec. 1, 2014
19,244
5,957
13,287
224,982
o
o
o
13. June 2: Inventory in the amount of $12,000 was acquired for the pro shop; the
purchase was vouchered for payment.
14. June 4: The course opened for business. Greens fees (charges for services)
aggregated $209,000 for June. Pro shop sales (all for cash) amounted to $5,000.
15. June 30: Expenses for June were as follows. (Charge all expenses to “Operating
expenses—cost of sales and services.”)
Maintenance and pro shop labor (paid in cash)
48,000
Maintenance supplies, from the Parks Department—a Special Revenue Fund
(invoice received, but not paid)
Water, supplied by the Paradise Falls water utility—an Enterprise Fund
(invoice received, but not paid)
Cost of merchandise sold by the pro shop
o
o
o
o
o
4,000
80,000
2,200
16. August 1: The first debt service payment on the revenue bonds was made.
17. September 1: The first payment on the lease was made.
18. December 1: The second payment on the lease was made.
19. December 31: Greens fee revenues for the second half of 2013 totaled
$370,000; pro shop sales for the same period were $21,200.
20. December 31: Second-half 2013 expenses were as follows:
Maintenance and pro shop labor (paid in cash)
Maintenance supplies, from the Parks Department—a Special Revenue Fund
(invoice received, but not paid)
Water, supplied by the Paradise Falls water utility—an Enterprise Fund
(invoice received, but not paid)
Cost of merchandise sold by the pro shop
$ 70,000
4,000
80,000
2,900
Accounting and administrative services provided by the accounting
department—
General Fund (invoice received, but not paid)
Total expenses
o
o
o
o
9,000
$165,900
21. December 31: Interest was accrued on the revenue bonds and the capital lease
liability (make separate entries).
22. December 31: The GEF recorded depreciation for 2013 using the half-year
convention. The building’s useful life is estimated at 20 years (salvage value,
$200,000) and will be depreciated straight line. Improvements other than
buildings will be depreciated straight line over 10 years, with no salvage value.
Equipment will be depreciated straight line over 5 years, with no salvage value.
23. The current portion of the capital lease liability was reclassified to a current
liability to aid in balance sheet preparation.
24. December 31: The restricted asset account—Cash restricted for bond
principal retirement—was established pursuant to the requirements of the bond
covenant.
Summary Problem
Leisure City has an Electric Utility Enterprise Fund (EUEF) that provides electric power
to its residents and to city agencies. Following is the EUEF opening trial balance at
January 1, 2013 (all amounts are in thousands of dollars):
Debits
Cash
Accounts receivable
Short-term investments
Capital assets
Credits
$ 2,300
960
1,000
48,000
Accumulated depreciation, capital assets
$ 14,000
Accrued interest payable
260
Serial bonds payable
26,000
Net position
12,000
Totals
$ 52,260
$ 52,260
The EUEF had the following transactions during 2013 (amounts in thousands of dollars):
1. EUEF billed residents of Leisure City $4,000 for electric power.
2. EUEF collected $4,500 of its accounts receivable.
3. EUEF established a $40 allowance for uncollectible accounts.
4. EUEF billed Leisure City’s General Fund $200 for electric power provided to city
departments.
• 5. EUEF collected the entire amount billed to the city’s General Fund.
• 6. EUEF paid $1,300 in salaries to its employees and $400 in other operating
expenses.
• 7. The outstanding serial bonds of $26,000 are being paid at the rate of $2,000 every
year, starting October 1, 2013, with interest of 4 percent per annum on the
outstanding debt. (The $260 interest payable shown in the trial balance had been
accrued on December 31, 2012.) EUEF paid the debt service due on October 1, 2013.
• 8. The short-term investments shown in the trial balance matured. EUEF received
$1,050, which included investment income of $50.
• 9. At year-end, EUEF accrued interest on its outstanding debt.
• 10. At year-end, EUEF recorded $1,600 depreciation on its capital assets.
• 11. At year-end, EUEF made an adjusting entry to report the current portion of its
serial bonds payable as a current liability.
Use the preceding information to do the following:
• a. Prepare the journal entries necessary to record these transactions in the EUEF.
• b. Prepare a statement of revenues, expenses, and changes in net position.
• c. Prepare a statement of net position for the EUEF.
GASB Cod. Sec. 1300.110.
GASB Cod. Sec. 1300.109.
GASB Statement 34, “Basic Financial Statements—and Management’s Discussion
and Analysis—for State and Local Governments,” par. 98, as amended by GASB
Statement 63, “Financial Reporting of Deferred Outflows of Resources, Deferred
Inflows of Resources, and Net Position.”
GASB Cod. Sec. 2200.165.
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Some Enterprise Funds routinely serve other departments of the government in
addition to third-party customers, but the revenues obtained from governmental
customers are only a small portion of the Enterprise Fund’s total revenues. Prime
examples are utility operations that supply water and electricity to a government’s
buildings and facilities as well as to the citizenry.
GASB 2010-2011 Comprehensive Implementation Guide, Q&A7.72.2, states that
“revenues in proprietary funds should be reported net of all related allowances . . .
[including] the increase or decrease in the estimate of uncollectible accounts.” This
treatment differs from that of private-sector accounting, which distinguishes
between revenue reductions (nonrevenues, such as sales returns and allowances)
and expenses of doing business (such as bad debts). We return to this issue
in Chapter 13, regarding hospital accounting. Meantime, you can be the judge as to
which is the more logical financial reporting treatment.
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