Chapter 21

AN INTRODUCTION TO ACCOUNTING FOR STATE AND LOCAL GOVERNMENTAL

UNITS PROPRIETARY AND FIDUCIARY FUND
Answers to Questions
1

Enterprise and internal service funds are similar in the sense that their operations are like those of similar
business enterprises. They use full accrual accounting practices (including depreciation), have a capital
maintenance or profit objective, are financed through user charges, and have the same financial reporting
requirements. The primary difference between the two fund types is that an EF provides goods and services
to citizens and customers outside the government on a user charge basis, while an ISF provides services to
other departments and agencies within the same governmental unit (or occasionally to other governmental
units).

Typical operations of internal service funds include motor pools, centralized risk financing activities, data
processing services, printing shops, centralized purchasing, repair shops, and storage or warehouse
operations. Internal service funds may engage in almost any kind of operations that one would find in
private enterprise.

An EF (and also an ISF) is required to prepare a statement of net assets, a statement of revenues, expenses,
and changes in net assets (or fund equity), and a statement of cash flows for fair presentation in accordance
with GAAP. The government-wide statement of net assets and statement of activities both include
enterprise fund data.

In the fund financial statements, governments include internal service funds with the proprietary funds.
They are aggregated into a single column within the proprietary fund statement of net assets, the statement
of revenues, expenses, and changes in net assets, and the statement of cash flows. Within the governmentwide statements, governments report internal service funds with the governmental activities. The internal
service fund asset and liability accounts are generally included in the governmental activity column of the
statement of net assets. The statement of activities will include only those internal service fund transactions
involving entities other than the primary reporting entity. Governments add external internal service fund
revenues and expenditures to the statement of activities, but they exclude internal governmental
transactions. (See also Question 7.)

Internal service funds are never considered major funds and proprietary fund statements report internal
service funds in a single column with the enterprise funds. Major enterprise funds are reported in a single
column on the proprietary fund statement of net assets and statement of revenues, expenses, and changes in
net assets.

Because proprietary funds account for transactions in much the same manner as commercial business
organizations, the GASB allows some reference to FASB statements. GASB Statement No. 20,
Accounting and Financial Reporting for Proprietary Activities, governs which accounting and reporting
standards apply to proprietary activities.

It is important to differentiate between revenues generated by interfund transactions and transactions with
external parties because of the way that these transactions are reported on the government-wide statements.
The statement of activities will include only those internal service fund transactions involving entities other
than the primary reporting entity. To avoid double counting of interfund transactions, governments add
external service fund revenues and expenditures to the statement of activities, while they exclude internal
governmental transactions.

First, GASB Statement No. 34 makes the direct method mandatory for statement presentation. Second,
GASB Statement No. 9 requires separating financing activities into noncapital and capital related.

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The fiduciary fund category includes trust funds (private-purpose, investment, and pension) and agency
funds. They are reported in the fund financial statements only in a statement of fiduciary net assets and a
statement of changes in fiduciary net assets.

10

Governmental units often provide the initial financing of an ISF through a contribution of cash or operating
facilities, expecting the ISF to be self-sustaining in future periods. Alternatively, the governmental unit
may provide a loan to the ISF to be repaid from future operating flows of the fund. A contribution is
classified as a nonreciprocal transfer, which flows through the statement of revenues, expenses, and
changes in fund net assets; whereas a loan is recorded as a long-term liability of the ISF in the statement of
net assets. A government records short-term interfund loans as due to Fund A and due from Fund B.

11

Private-purpose trust funds are fiduciary funds used to account for resources (other than investment pools
and employee benefits) that are held for the benefit of parties outside the governmental entity. Permanent
funds are governmental funds which report resources whose use is permanently restricted, but whose
earnings are expendable for the benefit of the government or its citizens.

12

The government-wide statement of net assets would need at least three columnsone for governmental
activities (including the general fund, special revenue funds, and internal service funds), one for businesstype activities (enterprise funds), and one for the component unit. Most governments also present optional
total and comparative total columns.

13

No. The required financial statements for a pension trust fund are a statement of plan net assets and a
statement of changes in plan net assets. Neither of these statements contains information as to the present
value of future benefits payable by the plan. Therefore, the statements provide no indication of whether the
plan is adequately funded. The statements are designed to reflect the current status of the planthe net
assets available to pay pension benefits and changes therein. To determine if the plan is adequately
financed, one must review the pension trust fund schedules, particularly the schedule of funding progress,
that must be included in a governments required supplementary information. In June of 2011 the GASB
issued exposures draft on new pension reporting standards. Please see the GASB website for the most
current guidance http://www.gasb.org/

14

The accounting equation for an agency fund is Assets = Liabilities.

15

If an enterprise fund issues debt that is backed by its revenue-generating activity (i.e., revenue-backed debt
instruments), the government must present certain detailed segment information in the notes to the
financial statements.

16

Since the government-wide statement of activities and statement of net assets report all items using the
accrual basis of accounting, conversion between the fund and government-wide statements is not
necessary. Also, recall that governments report internal service funds with the governmental activities in
the government-wide statements.

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SOLUTIONS TO EXERCISES
Solution E21-1
1
2
3
4
5

b
c
d
c
d

Solution E21-4
1
2
3
4
5

b
a
a
a
c

Solution E21-2
[AICPA adapted]
d
1
d
2
d
3
c
4
a
5

Solution E21-3
c
d
c
b
c

1
2
3
4
5

Solution E21-5
[AICPA adapted]
d
1
d
2
b
3
b
4
a
5
c
6

Solution E21-6
City of Laramee Tax Collection Agency Fund
Statement of Fiduciary Net Assets
Tax Collection Agency Fund
at December 31, 2011
Assets
Taxes receivable
Total assets
Liabilities
Liability to Laramee
Liability to Bloomer County
Liability to Bloomer School District
Total liabilities
Total Net Assets

Taxing Units
City of Laramee
Bloomer County
Bloomer School District

$50,000
$50,000
$15,000
10,000
25,000
$50,000
0

Schedule of Taxes Receivable

Amounts Certified
for Collection
Collections
$ 60,000
$ 45,000
40,000
30,000
75,000
100,000
$200,000
$150,000

Balance at
Year End
$15,000
10,000
25,000
$50,000

NOTE: This solution assumes that the collection fee is recognized when cash is collected.

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Solution E21-7
1

Cash

3,000,000
Deferred operating grant revenue
To record receipt of grant.

3,000,000

Deferred grant revenue is reported as a liability in the balance sheet. Operating grant revenues are
reported as nonoperating revenues in the period qualifying costs are incurred.
2

Expenses Program A
1,200,000
Vouchers payable (or Cash)
To record expenses incurred for the program financed by the grant.

1,200,000

Deferred operating grant revenues

Revenues operating grant
To record revenues earned on the grant.

1,200,000

1,200,000

Nonoperating revenues of $1,200,000 should be reported in the enterprise funds statement of

revenues, expenses, and changes in retained earnings (fund equity).
3

Cash

7,000,000
Deferred capital grant
To record receipt of capital grant.

7,000,000

Deferred capital grants are reported as a liability in the balance sheet. When qualifying costs are
incurred, the deferred capital grant liability is reduced and contributed capital from
intergovernmental grants, not revenues, is recognized.
4

Construction in progress
4,000,000
Cash
To record construction costs incurred on capital grant project.

4,000,000

Deferred capital grant

4,000,000
Contributed capitalcapital grants
4,000,000
To record increase in contributed capital as a result of incurring qualifying costs under capital
grant.
The increase in contributed capital of $4,000,000 is reported as an addition to contributed capital. It does
not affect income or retained earnings.
Solution E21-8
1
2
3
4
5
6
7
8
9
10

Enterprise Fund
Capital Projects Fund and Debt Service Fund
Capital Projects Fund and Debt Service Fund
Private Purpose Trust Fund
Internal Service Fund
Enterprise Fund
Special Revenue Fund
General Fund
Agency Fund
Investment Trust Fund

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Solution E21-9
1

Enterprise Fund
Cash
Operating Revenue

Agency Fund
Cash
Due to other governmental units
Capital Projects Fund
Cash
Other financing source proceeds from bond
issue
Other financing use nonreciprocal transfer to
Debt Service Fund
Cash
Debt Service Fund
Cash
Other financing source nonreciprocal
transfer from Capital Projects Fund

Private Purpose Trust Fund

Cash
Contributions
Investments
Cash

Internal Service Fund

Cash
Other financing source Nonreciprocal
transfer from General Fund
General Fund
Other financing use - Nonreciprocal transfer to
Internal Service Fund
Cash

Enterprise Fund
Cash
Bonds payable

4,500
4,500

125,000
125,000

1,050,000
1,050,000

50,000
50,000

50,000
50,000

50,000
50,000
50,000
50,000

150,000
150,000

150,000
150,000

1,000,000

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1,000,000

21-6

Solution E21-9 (continued)

7

Special Revenue Fund*

Cash
Other Financing Source Reciprocal
transfer from General Fund
General Fund
Other Financing Use - Reciprocal transfer to
Special Revenue Highway Beautification
Cash

General Fund
Taxes Receivable current
Allowance for uncollectible taxes current
Revenue

50,000
50,000

50,000
50,000

5,000,000
50,000
4,950,000

* An entry recording grants receivable (debit) and deferred grant revenue (credit) is optional.
Solution E21-10
1. decrease in Net Assets Invested in Capital Assets, Net of Related Debt; increase in Unrestricted Net Assets
2. decrease in Net Assets Invested in Capital Assets, Net of Related Debt
3. There will be no effect on net assets, since the asset debit will be offset by the liability credit. Also the net asset
amount is offset by the related debt.
4. increase in Net Assets Invested in Capital Assets, Net of Related Debt; decrease in Unrestricted Net Assets
5. increase in Unrestricted Net Assets
6. decrease in Unrestricted Net Assets
SOLUTIONS TO PROBLEMS
Solution P21-1
1

Cash
Equipment
OFS - Nonreciprocal transfer from General Fund
OFS - Reciprocal transfer from General Fund

500,000
550,000

Equipment
Cash

200,000

Due from Various Funds

Service Revenue

345,000

Cash

300,000

550,000
500,000

200,000

345,000

Due from Various Funds

4

12/31

Salaries expense
Payroll taxes
OFU - Transfer to General Fund for repayment
Other operating expenses
Cash
Depreciation Expense
Accum. Depr. - Equipment

300,000
180,000
37,800
50,000
120,000
387,800
20,000

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20,000

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Solution P21-2
1

Cash
OFS - Nonreciprocal transfer from General Fund

30,000,000

Building

25,250,000

30,000,000

Cash
3

25,250,000

Cash

5,000,000
Bonds payable

5,000,000

Accounts Receivable
Charges for services

4,500,000

Cash

4,400,000

4,500,000

Accounts Receivable
6

10

4,400,000

Building improvements
Cash

3,500,000
3,500,000

Salaries expense
Cash

700,000

Interest Expense
Interest Payable
Cash

400,000

700,000

100,000
300,000

Operating Expenses
Accounts Payable
Cash

1,100,000

Depreciation Expense
Accumulated Depreciation

1,050,000

100,000
1,000,000

1,050,000
Fiedler County Utility Plant
Adjusted Trial Balance

Cash
Accounts Receivable
Building
Accumulated Depreciation
Interest Payable
Accounts Payable
OFS - Nonreciprocal transfer from General Fund
Proceeds from Bond Issue
Charges for Services
Salaries Expense
Interest Expense
Operating Expenses
Depreciation Expense

$ 8,650,000
100,000
28,750,000
1,050,000
100,000
100,000
30,000,000
5,000,000
4,500,000
700,000
400,000
1,100,000
1,050,000
$40,750,000

$40,750,000

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Solution P21-3
Douwe County Motor Pool Fund
Statement of Revenues, Expenses,
and Changes in Fund Net Assets
for the year ended June 30, 2012
Revenues
Revenue from billings

$120,000

Expenses
Supplies used
Salaries expense
Utilities expense
Depreciation expense

$68,000
25,000
9,000
16,000

Operating income

118,000
2,000

Operating transfers out

12,000

Net loss

(10,000)

Net assets June 30, 2011*

92,000

Net assets June 30, 2012*

$ 82,000

*Total net assets includes the contribution from the General Fund. Douwe appears to be keeping track of the
contribution in a separate account internally, but for financial statement purposes included with the account titled
net assets which perhaps is how Douwe kept internal records on all other changes in net assets other than the
general fund contribtion. Note in the statement of net assets below that total net assets is $82,000.
Douwe County Motor Pool Fund
Statement of Net Assets
On June 30, 2012
Current assets
Cash
Due from electric fund
Supplies on hand

$37,000
4,000
14,000

Noncurrent assets
Autos
Less: Accumulated depreciation
Total assets

$99,000
56,000

Liabilities
Accounts payable
Advance from general fund
Total liabilities

$11,000
5,000

Net Assets
Invested in capital assets, net of related debt
Unrestricted
Total net assets

$43,000
39,000

$55,000

43,000
$98,000

$16,000

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$ 82,000

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Solution P21-3 (continued)

Douwe County Motor Pool Fund
Statement of Cash Flows
for the Year Ended June 30, 2012
Cash Flows from Operating Activities
Cash received from users (plug)
Less: Cash paid to suppliers*
Cash paid for salaries
Cash paid for utilities
Net cash provided by operating activities
Cash Flows from Noncapital Financing Activities
Operating transfers to general fund
Cash from Capital and Related Financing Activities
Purchase of automobiles

$127,000
$(69,000)
(25,000)
(9,000)

(103,000)
24,000
(12,000)
(19,000)

Cash Flows from Investing Activities

Decrease in cash for 2012
Add: Cash and cash equivalents June 30, 2011
Cash and cash equivalents June 30, 2012

--(7,000)
44,000
$ 37,000

* Change in supplies (12,000 beginning + 70,000 [plug] 68,000 used = 14,000 ending); Cash paid is 70,000 less
change in accounts payable (11,000 10,000 = 1,000)
Reconciliation of Net Operating Income
to Net Cash Used by Operating Activities
Cash Flows from Operating Activities
Operating income
Adjustments for noncash expenses, revenues,
losses and gains included in income:
Depreciation
Change in due from general fund
Change in due from electric fund
Supplies on hand
Accounts payable
Total adjustments
Cash flows from operating activities

$ 2,000

16,000
8,000
(1,000)
(2,000)
1,000

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22,000
$24,000

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Solution P21-4
Summary Calculations for Principal Trust Fund

Cash

Investments
Building net
Dividends receivable
Held in trust for
student aid

Increase
$ 100,000
40,000
550,000
500,000
600,000
400,000
60,000
40,000
30,000
60,000
20,000

donated
rentals
bonds sold
donated bonds
stock purchases
donated
on stock
Rentals
Bond interest
Dividend income
Gain on bonds

Decrease
$600,000

Net
stock purchase
$ 90,000

500,000

bonds sold

600,000

20,000

Depreciation

380,000
60,000

20,000

Depreciation

130,000

Student Aid Principal Trust Fund

Statement of Fiduciary Net Assets
at December 31, 2011
Assets

Net Assets

Cash
Investments
Building less accumulated depreciation
Dividends receivable
Total assets

$ 90,000
600,000
380,000
60,000
$1,130,000

Held in trust for endowment

Held in trust for student aid

Total Net Assets

$1,000,000
130,000

$1,130,000

Student Aid Earnings Trust Fund

Statement of Changes in Fiduciary Net Assets
For the Year ending December 31, 2011
Additions
Contributions:
Cash
Investments
Buildings
Total contributions

$100,000
500,000
400,000
$ 1,000,000

Investment earnings
Rental income
Dividend income
Gain on bonds
Bond interest
Depreciation expense
Total earnings
Total additions

40,000
60,000
20,000
30,000
(20,000)
130,000
1,130,000

Deductions
Total deductions
Change in net assets
Net assetsbeginning
Net assets -ending

0
1,130,000
0
$1,130,000

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Solution P21-5
Duchy County Trust Fund
Statement of Changes in Fiduciary Net Assets
Trust Fund
for the year ended June 30, 2012
Additions
Contributions
Investment earnings
Interest*
Total Additions

$500,000
18,750
$518,750

Deductions
Distributions to homeless shelters
Total Deductions

$ 11,250
11,250

Changes in Net Assets

Net Assets beginning of the year
Net assets end of the year

507,500
0
$507,500

* $500,000 x 4.5% x 6/12 = $11,250 received Mar 1

$500,000 x 4.5% x 4/12 = $7,500 accrued through Jun 30
Duchy County Trust Fund
Statement of Fiduciary Net Assets
at June 30, 2012
Assets
Investments
Interest receivable
Total assets

$500,000
7,500
$ 507,500

Net Assets
Held in trust for endowment
Held in trust for homeless shelters
Total Net Assets

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$ 500,000
7,500
$ 507,500

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Solution P21-6 [AICPA adapted]

CITY OF MERINGEN
Central Garage Fund
Journal Entries
July 1, 2011 to June 30, 2012
1

Inventory of Materials and Supplies

Vouchers Payable
To record purchases on account.

74,000

Materials and Supplies Expense

Inventory of Materials and Supplies
To record ending inventory and materials and supplies used.

96,000

Salaries and Wages Expense

Cash
To record salaries and wage expense paid.
Utility Expense

74,000

96,000

230,000
230,000

30,000

Cash
To record payment of utility charges.
5

Depreciation Expense Building

Depreciation Expense Machinery and Equipment
Accumulated Depreciation Buildings
Accumulated Depreciation Machinery
and Equipment
To record depreciation.

30,000

5,000
8,000
5,000
8,000

Due from General Fund

Due from Water and Sewer Fund
Due from Special Revenue Fund
Service Revenue
To record billings to departments for services.

262,000
84,000
32,000

Cash

376,000

378,000

Due from General Fund

Due from Water and Sewer Fund
Due from Special Revenue Fund
To record collection of receivables.
8

Vouchers Payable
Cash
To record payment of vouchers.

276,000
84,000
16,000

98,000
98,000

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Solution P21-6 (continued)

2

CITY OF MERINGEN
Central Garage Fund
Closing Entries
June 30, 2012
Service Revenue
Materials and Supplies Expense
Salaries and Wage Expense
Utility Expense
Depreciation Expense Building
Depreciation Expense Machinery and
Equipment
Excess of Revenues over Expenses
To close revenue and expense accounts.
Excess of Revenues over Expenses
Retained Earnings
To close Excess of Revenues over
Expenses to Retained Earnings.

378,000
96,000
230,000
30,000
5,000
8,000
9,000

9,000

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9,000

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Solution P21-7
Caleb County Enterprise Fund
Statement of Cash Flows
for the Year Ended . . .
Cash Flows from Operating Activities
Cash received from customers
Less: Cash paid to suppliers

$3,276,500
(2,694,500)

Cash paid for salaries

(479,300)

Cash paid for operations

(819,200)

Net cash provided by operating activities

(716,500)

Cash Flows from Noncapital Financing Activities

Property Taxes Received
Long-term debt repayment

217,000
(515,000)

Net cash provided by noncapital financing

activities
Cash from Capital and Related Financing Activities

(298,000)

Capital grant proceeds

750,000

Proceeds from sale of asset

522,000

Net cash provided by capital and related financing

activities
Cash Flows from Investing Activities
Purchase of equity investments
Net cash provided by investing activities
Increase in cash

1,272,000
(165,000)
(165,000)
92,500

Add: Cash and cash equivalents, beginning

$714,525

Cash and cash equivalents, ending

$807,025

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