Professional Documents
Culture Documents
ENTERPRISE FUNDS
ANSWERS TO QUESTIONS
Question 10-1
Use of Enterprise Fund accounting is permitted whenever user charges to external users of goods
and services is a principal source of revenues for an activity. Enterprise Fund accounting is
required for activities for which user charges to external users of goods and services are a
principal source of revenues if one or more of the following are true:
a.
b.
c.
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 that is secured by a pledge of net revenues
from fees and charges and the full faith and credit of a related primary government or
component uniteven if that government is not expected to make any paymentsis
not payable solely from fees and charges of the activity. (Some debt may be secured, in
part, by a portion of its own proceeds but should be considered as payable "solely" from
the revenues of the activity.)
Laws or regulations require that the activitys 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.
The pricing policies of the activity establish fees and charges designed to recover its
costs, including capital costs (such as depreciation or debt service).
(Insignificant activities are not intended to be reported as Enterprise Funds under this guidance.)
Question 10-2
Circumstances in which each of the following fund types would be appropriate accounting
vehicles for a government's garbage collection and disposal activities are as follows:
a.
General Fundwhen the activity is considered a general health and sanitation service
offered by the government, no (or a nominal) fee is charged those served, the activity is
financed principally through general appropriations, and any fee charged may be used
for general government purposes.
b.
Special Revenue FundSame as (a) above except the nominal fee charged is restricted
as to use, usually to supplement the general appropriations providing most of the
financial resources required in the conduct of the activity.
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Question 10-3
The accounting equation (balance sheet format) for a proprietary fund is:
+
+
Current Assets
Noncurrent Assets
Deferred Outflows
=
+
+
+
Current Liabilities
Long-Term Liabilities
Deferred Inflows
Net Position
Alternatively, the accounting equation (net position format) of a proprietary fund may be stated
as:
+
+
Current Assets
Noncurrent Assets
Deferred Outflows
Current Liabilities
Long-Term Liabilities
Deferred Inflows
Net Position
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245
Question 10-7
Although the City of Cherokee Hills electricity consumption may have been minimal when it
began operating the utility many years ago, chances are that it is now significantand will
continue to grow dramatically as the city grows rapidly. The utility should bill the city at
standard rates for its level of electricity consumption and should be billed similarly for any
services performed by the city and financed through its General or other funds. Otherwise the
financial statements of both will continue to be distortedto an unknown extentand electric
utility customers who receive bills will continue to pay a hidden (also in an unknown amount)
tax based on electricity used to provide electrical power to Cherokee Hills. If the city does not
bill departments for electricity usage, GASB Statement 34 still requires the city to report
revenues for the standard amount of the charges and report a transfer out of equal amount. This
is required in order to reflect the substance of the transaction. Likewise, the funds used to
account for the user departments and activities must report expenditures (expenses) and transfers
in.
Question 10-8
The first response should be to fire the person that told the member of the Board of Directors that
the purpose of depreciation was to provide for the replacement of capital assets. Depreciation
has nothing to do with the future purchase of capital assets. The purpose of depreciation is to
allocate the cost of a capital asset in a systematic and rational manner over the use life of that
capital asset. Depreciation has nothing to do capital asset replacement. Had the government
wanted to start making provisions for capital asset replacement, the first step would have been to
establish a sinking fund to pay for those replacements. Deposits to that sinking fund could have
been based on current year depreciation. More appropriately, the Enterprise Fund should have
established a capital budget estimating when capital assets would need to be purchased and based
deposits to the sinking fund on that budget.
Also, it would be a more accurate statement that depreciation is charged in order to assure that
the dollars of capital invested (historical dollars) are retained within the entity in some fashion,
assuming that the operation at least breaks even and that dividends are not paid in excess of the
earnings retained. Although the assets retained were at one time no doubt in cash or near cash
form, the fact that assets were retained does not also indicate that a "fund" was established to
replace capital assets. This would take separate action by the board.
In the absence of such a "fund," it is likely that the assets retained have been invested in capital
assetsperhaps to replace those used up, perhaps in additional capital assets acquired to provide
better service. Even if a "fund" had been established, its provision would not check the effects of
inflation upon the cost of capital asset replacement nor that of supply and demand, technology, or
other factors. Even if inflation and supply and demand factors were immaterial, it is likely that
the old assets will be replaced by different and better ones, not by assets identical in every
respect to the original ones. Thus, even "replacement" often constitutes expansion of the capital
asset base to some extent rather than being purely "replacement." (Situations such as this
illustrate one reason a statement of cash flows is to be presented for Enterprise Funds.)
246
Question 10-9
If Virgie Township does not use borrowed resources to retire its debt prior to maturity, the
difference between the amount paid to retire the debt and the carrying value of the debt should be
reported in the year of the retirement as a gain or loss on the early retirement of debt. In this
case, that difference does not affect the amount of interest expense reported in subsequent years.
If Virgie Township does use borrowed resources to retire its debt prior to maturity, the difference
between the amount paid to retire the debt and the carrying value of the debt will not be
recognized in income in the year of the retirement. Rather, it will be recorded as a deferred
interest expense adjustment which will be amortized to interest expense over the shorter of the
remaining term of the old bonds or the term of the new bonds. The balance of the deferred
interest expense adjustment is either a deferred outflow (if the account has a debit balance) or a
deferred inflow (if the account has a credit balance). (In essence, the deferred interest expense
adjustment are treated in a manner similar to premiums or discounts on bonds payable, except
that the amortization period is defined differently and the adjustment is not recorded as an
adjunct or contra account to the refunding bonds as would a premium or discount.)
Question 10-10
The difference, and the reasons therefore, in accounting for bond premiums or discounts are as
follows:
a.
247
Enterprise Revenue Bonds. Premiums and discounts should be amortized and reported
in the funds in these cases (unless immaterial) because the principal focus of Enterprise
Fund accounting is income determination. Failure to amortize bond premiums and
discounts results in misstatements both of operating results and of financial position of
each period during which the bonds are outstanding and to misstatement of gain or loss
upon retirement of such bonds prior to maturity.
Question 10-11
The transaction is reported as a capital contribution, equal to the carrying amount of the capital
asset, in the Enterprise Fund Statement of Revenues, Expenses, and Changes in Net Position. It
is not an interfund transaction and cannot be reported as a transfer in the fund financial
statements. In the government-wide statement of activities, the transaction will be reported as a
transfer from governmental activities to business-type activities.
Question 10-12
A deferred interest expense credit balance should be reported as a deferred inflow. A debit
balance should be reported as a deferred outflow. The carrying value of the bonds in the
question is $5,200,000 computed as follows:
Bonds
Premium on Bonds
Carrying Value
$5,000,000
__200,000
$5,200,000
Question 10-13
Net Investment in Capital Assets may be affected by either a deferred outflow or a deferred
inflow. Restricted Net Position is normally affected only by a deferred inflow. Unrestricted Net
Position may be affected by either a deferred outflow or a deferred inflow.
248
Question 10-14
Four cash flow classifications are required by the GASB Codification. These classifications and
their descriptions are:
a.
b.
c.
d.
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Question 10-15
The key differences are that (1) governments must report cash flows in four different categories
compared to three for business enterprises and (2) the cash flow category titles that the two types
of entities have in common are defined to include significantly different transactions. Both types
of entities use the classifications of cash flows from operating activities and cash flows from
investing activities, but as the table below indicates the classifications are not equivalent for the
two types of entities. In addition to these classifications, businesses must report cash flows from
financing activities while governments must report cash flows from noncapital financing activities
and cash flows from capital and related financing activities.
Transaction
Type
Capital asset acquisition/sale
Capital debt issue/retirement
Noncapital debt issue/retirement
Interest paid on capital debt
Interest paid on noncapital debt
Receipt of investment earnings
Government
Classification
Capital and Related Financing
Capital and Related Financing
Noncapital Financing
Capital and Related Financing
Noncapital Financing
Investing
Business
Classification
Investing
Financing
Financing
Operating
Operating
Operating
Question 10-16
Transfers out of an Enterprise Fund (or any other proprietary fund) are never classified as capital
and related financing activities. GASB Statement No. 9 requires all transfers out to be classified
as noncapital financing activities. Transfers in are classified as capital and related financing
activities if they are clearly and specifically for the purpose of defraying the capital asset
construction or acquisition costs of the reporting fund. Otherwise, such transfers in must be
reported as noncapital financing activities.
Question 10-17
The purpose for which the cash was borrowed determines whether the cash flow should be
reported in capital and related financing activities or in noncapital financing activities. If a
borrowing is clearly and specifically for the purpose of defraying capital asset costs, it is reported
in capital and related financing activities. In all other cases, it should be reported in noncapital
financing activities.
250
SOLUTIONS TO EXERCISES
Exercise 10-1
1. b
2. a
3. c
4. b
5. b
6. d
7. a
8. b
9. d
10. c
Exercise 10-2
No.
1
2
3
4
5
6
7
8
9
10
Effect on
Operating
Statement?
+$75,000
None
-200,000
-36,000
-50,000
None
+300,000
+1,000,000
+40,000
-75,000
Unrestricted
+$225,000
-36,000
+1,000,000
+40,000
-75,000
Net Position
Net Investment
in
Restricted
Capital Assets
-$150,000
-50,000
+50,000
-200,000
-250,000
+200,000
+300,000
Total
+$75,000
-200,000
-36,000
-50,000
+300,000
+1,000,000
+40,000
-75,000
Note in item 9 that the restriction on the use of the assets is only that they must be used for the
Enterprise Funds purposes. Therefore, from the standpoint of the Enterprise Fund, the resources
are considered unrestricted.
251
Exercise 10-3
1.
2.
3.
Cash................................................................................
Refunding Bonds Payable........................................
To record issuance of refunding bonds.
8,000,000
Bonds Payable.................................................................
Deferred Interest Expense Adjustment............................
Discount on Bonds Payable......................................
Cash.........................................................................
To record in-substance defeasance of bonds.
7,200,000
900,000
Interest Expense..............................................................
Cash.........................................................................
To record interest paid.
640,000
ADJUSTMENT
Interest Expense ($900,000/5 years)................................
Deferred Interest Expense Adjustment.....................
To amortize deferred interest expense.
8,000,000
100,000
8,000,000
640,000
180,000
180,000
Exercise 10-4
1a.
1b.
Cash........................................................................................
Deferred Inflow Operating Grant.................................
Deferred Inflow Capital Grant......................................
To record receipt of grant proceeds in advance of expenditures.
4,000,000
Construction in Progress.........................................................
Equipment..............................................................................
Operating Expenses................................................................
Cash................................................................................
To record construction costs, operating expenses, and
equipment purchases that qualify for reimbursement under
the grants.
1,200,000
50,000
300,000
350,000
1,200,000
1,000,000
3,000,000
1,550,000
350,000
2.
3.
252
1,200,000
Capital grants are
1,000,000
5.
Capital and related financing cash flows should include the following:
Cash received from capital grants....................................
3,000,000
Cash paid for construction............................................... (1,200,000)
Cash paid for equipment..................................................
(50,000)
6.
Exercise 10-5
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
d
c
a
d
c
b
b
c
c
b
Exercise 10-6
a1.
a2.
Cash................................................................................
Deferred Inflow Capital Grant...............................
To record receipt of grant cash in advance.
3,000,000
Construction in Progress..................................................
Cash.........................................................................
To record construction costs.
1,500,000
1,500,000
253
3,000,000
1,500,000
1,500,000
b2.
Cash................................................................................
Deferred Inflow Operating Grant..........................
To record receipt of grant cash in advance.
3,000,000
ExpensesSalaries.........................................................
Cash.........................................................................
To record construction costs.
1,500,000
1,500,000
3,000,000
1,500,000
1,500,000
Exercise 10-7
1.
Depreciation on capital grant financed capital assets of proprietary funds must be reported as
an operating expense.
2.
3.
Transfers from (or to) other funds are reported as the last item before changes in net
position.
4.
Cash proceeds of short-term (or long-term) debt issuances do not affect income or fund net
position. They are not to be reported in this statement.
5.
Retirement of long-term (or short-term) debt does not affect income or fund net position. It
is not to be reported in this statement.
6.
Transfers to (or from) other funds are reported as the last item before changes in net
position.
7.
Gains on sales of capital assets are reported as nonoperating revenues unless they meet the
special item criteria. In those cases, the gain should be reported as a special item.
8.
"Losses" (or gains) on advance refunding are reported as ordinary losses (or gains) in
the period of the refunding if no new debt was issued. If refunding bonds were issued, these
amounts (debit or credit balance deferred interest expense adjustments) on advance
refundings of bonds must be reported as deferred outflows (for losses) or deferred inflows
(for gains) in the year incurred and amortized as a component of interest expense over the
shorter of the life of the refunding bonds or the remaining life of the old bonds.
9.
These operating grants are reported as nonoperating revenues when qualifying expenditures
are incurred. In the described situation, 60% of the grant amount would be reported as
nonoperating revenues in the current year. The balance of the grant must be reported as
2013 Pearson Education, Inc. publishing as Prentice Hall
254
deferred inflow operating grant in the balance sheet since the problem indicates that the
full grant amount has been received.
255
$3,500,000
$1,000,000
1,100,000
200,000
1,500,000
3,800,000
( 300,000)
143,000
(425,000)
( 4,000) (
286,000)
( 586,000)
1,800,000
222,000
1,436,000
3,827,000
$5,263,000
256
SOLUTIONS TO PROBLEMS
Problem 10-1
1. d
2. c
3. b or d (The computation of restricted net position is described correctly in b.
However, the two amounts offset one another so that the balance does not change.
Therefore, d technically is correct also.)
4. c
5. a
6. a
7. d Eligibility requirements must be met before capital contributions revenues for
the capital grant are recognized. As a result, Net Position will not be affected by
the capital grant.
8. d
($7,310,500 + $1,000,000) less ($10,500,000 - $4,000,000)
9. d
10. a
257
Problem 10-2
Town of Robinson
Water and Sewer Enterprise Fund
Statement of Revenues, Expenses, and Changes in Net Position
For the Year Ended December 31, 20X6
Operating Revenues:
Charges for water services .....................................................
Charges for sewer services ....................................................
Total Operating Revenues ..............................................
$ 1,800,000
2,000,000
3,800,000
Operating Expenses:
Salaries and wages .................................................................
Contractual services ...............................................................
Depreciation ($100,000 + $75,000 + $80,000) ......................
Total Operating Expenses ...............................................
400,000
2,600,000
255,000
3,255,000
545,000
250,000
62,000
13,000
(110,000)
(120,000)
95,000
640,000
Capital contributions...........................................................................
Transfer from Special Revenue Fund.................................................
Transfer to General Fund ...................................................................
1,500,000
500,000
(127,000)
2,513,000
22,000,000
$24,513,000
$ 95,000
5,000
20,000
$120,000
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Unrestricted
Net Position
$72,100
28,600
Net Investment in
Capital Assets
$975,000
(24,000)
(3,000)
(750,000)
$225,000
$73,700
259
$ 72,100
$ 30,000
1,400
28,600
$ 100,700
200,000
700,000
64,000
250,000
111,000
636,000
139,000
Total Assets
975,000
$1,075,700
$ 24,000
3,000
Net Position:
Net Investment in Capital Assets....................
Unrestricted ...................................................
Total Liabilities and Government Equity..
260
$ 27,000
750,000
$225,000
73,700
$ 777,000
298,700
$1,075,700
A
A
A
A
B
B
C
C
B
D
C
C
E
D
B
D
D
C
FIncluded (along with 20) as the beginning cash balance
FIncluded (along with 19) as the beginning cash balance
2013 Pearson Education, Inc. publishing as Prentice Hall
261
$369,200
90,000
30,000
10,500
222,000
75,000
73,000
14,000
21,000
$499,700
405,000
94,700
43,000
51,700
247,000
$298,700
$ 3,000,000
500,000
(700,000)
(1,200,000)
1,600,000
(125,000)
1,000,000
25,000
900,000
(1,500,000)
100,000
14,000,000
15,000,000
(600,000)
27,000,000
( 100,000)
80,000
123,000
103,000
29,603,000
4,500,000
$34,103,000
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(1)-(14)
(15)
Depreciation for the year ended June 30, 20X8, calculated as follows:
a. On plant in service at June 30, 20X7 .02 ($50,000,000) or $50,000,000 / 50 year life.
$1,000,000
10,000
$1,010,000
(17)
$1,000,000
125,000
1,125,000
500,000
$ 625,000
263
Asset/Liability
Cash
Due from Customers
Other Current Assets
Capital Assets
Accounts Payable and Accrued Liabilities
Unrestricted
Net Position
$2,225,000
2,120,000
130,000
Net Investment
in
Capital Assets
$45,500,000
(3,270,000)
Bonds Payable
Totals
(25,000,000)
$25,500,000
$1,230,000
City of Clifton
Electric Department (Enterprise) Fund
Computation of Net Position Components
June 30, 20X8
Asset/Liability
Cash
Due from Customers
Other Current Assets
Capital Assets
Accounts Payable and Accrued Liabilities
Unrestricted
Net Position
$4,925,000
2,320,000
140,000
Net Investment
in
Capital Assets
$50,240,000
(4,550,000)
Bonds Payable
Totals
$2,835,000
(25,000,000)
$25,240,000
264
$10,500,000
(4,280,000)
(2,295,000)
$3,925,000
(5,750,000)*
(500,000)
5,000,000
(1,250,000)
2,675,000
2,250,000
$4,925,000
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Problem 10-6
1.
2.
3a.
3b.
4.
5a.
5b.
6.
Cash .......................................................................................
Bond Issue Costs Expense .....................................................
Refunding Ponds Payable ...............................................
9,800,000
200,000
9,300,000
300,000
200,000
1,000,000
Interest Expense.....................................................................
Deferred Interest Expense Adjustment
($200,000/4) ..............................................................
50,000
266
10,000,000
9,800,000
1,000,000
50,000
680,000
600,000
80,000
37,932
92,330
130,262
113,333
113,333
227,000
85,000
142,000
Problem 10-7
7/1/X4
ConstructionCash ................................................
Bonds Payable .................................................
To record issuance of bonds at par.
7/2/X4
No entry
7/31/X4
8/29/X4
8/31/X4
8/31/X4
8/31/X4
8/31/X4
9/30,
10/31,
11/30,
and 12/31
1,200,000
1,200,000
26,000
26,000
Buildings .................................................................
1,200,000
ConstructionCash .........................................
To record payment to contractor for construction costs.
Debt ServiceCash ................................................
Cash .................................................................
To record amounts set aside for debt service.
26,000
12,000
40,000
12,000
26,000
267
1,200,000
26,000
12,000
40,000
12,000
26,000
Problem 10-8
1.
A capital grant received in cash but not yet earned would be reported as deferred
revenue (deferred inflows) on the statement of net position of the proprietary
fund. The statement of cash flows would report the receipt of the cash as a
cash flow from capital and related financing activity.
2.
A capital grant earned but not collected until 90 days after year end would be
reported as capital contributions immediately following the subtotal for
Income before other revenues, expenses, and transfers on the operating
statement and as grants receivable or due from grantors on the statement of net
position. The statement of cash flows is not affected.
3.
4.
5.
6.
The reclassification of a general capital asset with a net book value of $650,000
(cost, $1,000,000 and accumulated depreciation, $350,000) as an Enterprise
Fund capital asset results in additional capital assets of $650,000 (book value)
in the statement of net position and an equivalent capital contribution in the
Enterprise Funds operating statement following the subtotal for Income
before other revenues, expenses, and transfers. The statement of cash flows
not affected, however, the transaction is disclosed in the schedule of noncash
capital, financing, and investing activities if it was material.
7.
268
9.
Free services provided by the Enterprise Fund to the General Fund must still be
recognized as revenue equal to the standard charges for the services.
Accordingly, in this example, the $65,000 free services would be reported as
both as transfers out and as operating revenues in the Enterprise Funds
operating statement. Net income is not affected. The statement of cash flows is
not affected.
10. If an Enterprise Fund charges other Enterprise Funds for services valued at
$20,000, operating revenues are reported. An interfund receivable is reported
on the statement of net position and, when collected, the cash flow is
categorized on the statement of cash flows as cash flows from operating
activities (identified specifically as cash received from other funds from
interfund services transactions).
269
SOLUTIONS TO CASES
Case 10-1
1.
Cash.........................................................................a
Inventories...............................................................a
Advances to other funds..........................................b
Capital assets, net....................................................b
Accounts payable and retainages.............................d
Revenue bond payable.............................................e
Unfunded pension obligation..................................e
Net investment in capital assets...............................g
2.
3.
*This should be choice d given the solution categories in the first printing of the text. Cash
flows from investing activities, which should have been category d, was omitted in that printing,
however. Similarly, the category for Noncash investing, capital, and financing activities was
listed as d instead of e.
**The correct classification is Cash flows from investing activities, which was omitted from
the first printing.
270
Case 10-2
DuPage County
Convalescent Center Enterprise Fund
Statement of Net Position
November 30, 20X6
Assets
Current assets:
Cash................................................................
Accounts receivable, net.................................
Due from other funds......................................
Inventory........................................................
Total current assets..................................
$ 231,752
5,465,885
24,333
373,372
6,095,342
Capital assets:
Land. .............................................................
Buildings and improvements .........................
Vehicles..........................................................
Equipment .....................................................
Construction in progress.................................
Less: Accumulated Depreciation .................
Total capital assets, net............................
784,360
28,005,704
265,583
4,544,660
101,629
(22,493,255)
11,208,681
Total assets.................................................................
17,304,023
Liabilities
Current liabilities:
Accounts payable ........................................
Accrued payroll...........................................
Due to other funds ......................................
Total current liabilities.............................
1,440,009
1,431,020
200,000
3,071,029
Noncurrent liabilities:
Accrued vacation.........................................
Capital lease obligation................................
Total noncurrent liabilities.......................
985,759
34,986
1,020,745
Total liabilities............................................................
4,091,774
Net Position
Net investment in capital assets..................................
Unrestricted ...............................................................
Total net position...........................................................
11,173,695
2,038,554
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$13,212,249
$24,949,646
Operating expenses:
Personnel services..................................................................
Supplies..................................................................................
Contractual services................................................................
Depreciation expense..............................................................
Total operating expenses.................................................
22,974,937
4,912,013
4,475,447
1,292,015
33,654,412
(8,704,766)
9,333
694,852
(3,249)
(1,816)
699,120
(8,005,646)
Capital contributions...........................................................................
Transfers in ........................................................................................
4,362,635
2,700,000
(943,011)
14,155,260
$13,212,249
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