©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for State and Local Governmental Units – Governmental Funds Chapter 19

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Objective 1 Prepare journal entries for governmental funds.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for the General Fund Grantville Town Post-Closing Trial Balance June 30, 2001 Debits Cash$310,000 Taxes receivable-delinquent 150,000 Accounts receivable 30,000 Supplies inventory 60,000 Total debits$550,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for the General Fund Credits Allowances for uncollectible taxes – delinquent$ 10,000 Vouchers payable 140,000 Note payable (short-term) 150,000 Reserve for encumbrances 90,000 Unreserved fund balance 160,000 Total credits$550,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for the General Fund General Fund Budget Summary For Fiscal Year 7/1/01 to 6/30/02 Revenue Sources Taxes$2,075,000 Licenses and permits 205,000 Other 1,220,000 $3,500,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for the General Fund Expenditures Current services General government$ 477,500 Public safety 897,750 Other 1,945,000 Total appropriations$3,320,250 Other financing sources (uses) 115,000 Budgeted increase in fund balance$ 64,750

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Recording the Budget Estimated Revenues3,500,000 Appropriations3,320,250 Estimated Other Financing Uses – Transfers Out 115,000 Unreserved Fund Balance 64,750 To record the budget for the year July 1, 2001, to June 30, 2002

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Subsidiary Ledgers Recording estimated revenues for individual items as debits in the subsidiary revenue ledger and recording actual revenue items as credits allows the outstanding subsidiary account balances during the year to reveal differences.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for Property Taxes Taxes Receivable – Current2,000,000 Allowance for Uncollectible Taxes – Current 20,000 Revenue 1,980,000 To record the property tax levy $2,000,000 tax bills are mailed.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for Property Taxes Cash1,900,000 Taxes Receivable – Current1,760,000 Taxes Receivable – Delinquent 140,000 To record collection of property taxes The town records collection of $1,760,000 current property taxes and past-due taxes of $140,000.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for Property Taxes Allowance for Uncollectible Taxes – Delinquent$10,000 Taxes Receivable – Delinquent10,000 To record write-off of uncollectible account Specific tax bills totaling $10,000 were determined to be uncollectible.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Derived Tax Revenues Governments recognize sales tax revenue when tax returns are received from merchants and the taxes are expected to be remitted to the government by year end (or within 60 days thereafter). What is the entry to record $150,000 in sales taxes, of which three equal payments are required by 7/15, 8/15, and 9/15?

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Derived Tax Revenues Accounts Receivable150,000 Revenue100,000 Deferred Revenue 50,000 To record sales tax activity

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Recording Expenditures Under modified accrual accounting, governmental funds normally recognize expenditures when they incur the related liability.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Objective 2 Learn about accounting methods unique to governmental accounting – budgetary issues, encumbrance accounting, interfund transactions.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for Encumbrances During the year, the town orders snow-removal equipment expected to cost $150,000. What is the journal entry? Encumbrances150,000 Reserve for Encumbrances150,000 To record a purchase order for equipment What is the unencumbered balance of the appropriations?

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for Encumbrances Appropriations$3,320,250 Less encumbrances 150,000 Unencumbered appropriations$3,170,250 Assume that the actual cost of the equipment purchased is $140,000. What are the journal entries?

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for Encumbrances Reserve for Encumbrances150,000 Encumbrances150,000 To reverse the encumbrance entry for snow-removal equipment Expenditures140,000 Vouchers Payable140,000 To record expenditures

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Consumption Method Supplies Purchases Method

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Supplies The town orders supplies expected to cost $60,000. What is the journal entry under the consumption method? Encumbrances60,000 Reserve for Encumbrances60,000 To record the purchase order for operating supplies

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Supplies Reserve for Encumbrances60,000 Encumbrances60,000 To reverse the encumbrance entry upon receipt of the operating supplies Inventory of Supplies 60,000 Vouchers Payable 60,000 To record receipt of operating supplies

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Capital Lease The Town of Grantville enters into a general government capital lease agreement with a down payment of $5,000. The present value of the lease is $50,000. What is the entry at the inception of the lease?

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Expenditures (capital outlay)50,000 Cash 5,000 Other Financing Sources – Capital Lease45,000 Capital Lease

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Interfund Transactions Other Financing Uses – Nonreciprocal Transfer to CPF100,000 Other Financing Uses – Reciprocal Transfer to SRF 50,000 Other Financing Uses – Nonreciprocal Transfer to DSF 14,250 Cash164,250 To record transfers to CPF, SRF, and DSF

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Supplies inventory of $90,000 are on hand at year end. Year-End Procedures $60,000 BI + Purchases $60,000 = $120,000 $120,000 – $90,000 = $30,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Year-End Procedures The $240,000 uncollected taxes are past due. Taxes Receivable – Delinquent240,000 Allowance for Uncollectible Taxes – Current 20,000 Taxes Receivable – Current 240,000 Allowance for Uncollectible Taxes – Delinquent 20,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Closing Entries Dr. Appropriations Estimated Other Financing Sources Revenues Cr. Estimated Revenues Expenditures Encumbrances Other Financing Uses The budgeted and actual Unreserved Fund Balance can be either a debit or credit.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Objective 3 Determine the appropriate governmental fund to be used.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Special Revenue Funds A SRF is the entity that a government uses to account for the proceeds of specific revenue sources. Typically, all or part of resources are restricted.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Special Revenue Funds: Grants Governments often receive grants from other governments or private sources. Grant revenues can be recognized when all eligibility requirements have been met.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Permanent Funds They account for contributions for which the grantor specifies that a principal amount must be maintained but for which interest accumulation or asset appreciation or both are to be used for a specified purpose.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Capital Projects Funds The purpose of capital projects funds (CPF) is to account for resources that are used to acquire major long-lived general government capital facilities.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Sources of Financing Proceeds of bond issues Transfers from other funds Grants and shared revenues Contributions from property owners

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for a Capital Project Fund On 9/1/2001, the Town of Grantville authorized the construction of a new town hall expected to cost $1,000,000. Sources of financing: Bond issue proceeds $ 500,000 Federal grant 400,000 Transfer from GF 100,000 Total$1,000,000

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for a Capital Project Fund Creation of the CPF requires a memorandum entry. The town transfers $100,000 from the general fund to the CPF. Cash100,000 Other Financing Sources – Nonreciprocal Transfer 100,000 To record receipt of funds from the GF

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for a Capital Project Fund Planning and architect’s fees are paid. Expenditures40,000 Cash40,000 To record payments for planning and architect’s fees

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for a Capital Project Fund A contract is awarded for $950,000. Encumbrances950,000 Reserve for Encumbrances 950,000 To record encumbrances for the amount of the contract

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for a Capital Project Fund Cash502,000 Other Financing Sources – Proceeds from Bond Issue 502,000 To record sale of bonds Bonds were issued at a premium of $2,000.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for a Capital Project Fund Other Financing Uses – Nonreciprocal Transfer to DSF 2,000 Cash 2,000 To transfer the premium to DSF Premium is transferred to the debt service fund.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for a Capital Project Fund Construction is certified to be 50% complete and a bill for $475,000 is received from the contractor. Reserve for Encumbrances475,000 Encumbrances475,000 To reverse half of the amount encumbered

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for a Capital Project Fund Expenditures475,000 Contracts Payable427,500 Retained Percentage 47,500 To record expenditures and a 10% retained percentage on the construction

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for a Capital Project Fund Contracts payable427,500 Cash427,500 To record partial payment to the contractor Contracts payable, less a 10% Retained percentage, is paid.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for a Capital Project Fund The town hall construction project has not been completed and the statements for the CPF are interim statements from the standpoint of the project. At the end of the year the CPF books are closed.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Accounting for a Capital Project Fund Intergovernmental revenue Due from Federal Government400,000 Revenue400,000 To recognize revenue from the federal grant

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Closing Entries Revenues – federal grant 400,000 OFS – nonreciprocal transfer from general fund 100,000 OFS – bond proceeds502,000 Expenditures515,000 OFU – nonreciprocal transfer to DSF 2,000 Encumbrances475,000 Unreserved fund balance 10,000 To close the books at the end of 2001

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Other Items Special assessment activities Debt service funds

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Objective 4 Prepare governmental fund financial statements.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Governmental Fund Statements Statement of net assets or balance sheet Statement of revenues, expenditures, and changes in fund balance (GAAP basis) Statement of revenues, expenditures, and changes in fund balance – budget and actual

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Governmental Fund Statements An original budget column is required as well as the final revised budget column. Budgetary comparisons are required for the general fund and for each annually budgeted major special revenue fund.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Objective 5 Convert fund financial statements to government-wide financial statements.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Preparing the Government-Wide Financial Statements – Fund basis – Financial resources measurement focus – Modified accrual – Fund basis – Financial resources measurement focus – Modified accrual – Aggregate basis – Economic resources measurement focus – Accrual accounting – Aggregate basis – Economic resources measurement focus – Accrual accounting

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Conversion of Governmental Activities Statement 34 requires a reconciliation between the changes in fund balance reported on the fund statement of changes in revenues, expenditures, and changes in fund balance and the changes in net assets reported in the statement of activities.

©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn End of Chapter 19