Chapter 3 The Government and Not-For-Profit Environment

1. Assume that the City of Pasco maintains its books and records in a manner that facilitates preparation of the fund financial statements. The City engaged in the following transactions related to its general fund during the current fiscal year. The City formally integrates the budget into the accounting records. The City does not maintain an inventory of supplies. All amounts are in thousands.

REQUIRED: Prepare, in summary form, the appropriate journal entries.

(a) The City Council approved a budget with revenues estimated to be $600 and expenditures of $590.

(b) The City ordered supplies at an estimated cost of $25 and equipment at an estimated cost of $20.

(c) The City incurred salaries and other operating expenses during the year totaling $550. The City paid for these items in cash.

(d) The City received the supplies at an actual cost of $23.

(e) The City collected revenues of $595.

2. School District #25 formally integrates the budget into the accounting system and uses the encumbrance system. All appropriations lapse at year-end. At year-end, before closing entries, the District had the following balances in its accounts. All accounts had normal balances.

REQUIRED: (a) Prepare the necessary closing entries.

(b) Prepare a balance sheet after closing.

Accounts Payable $ 50

Appropriations 590

Cash 172

Encumbrances 20

Estimated Revenues 600

Expenditures 573

Fund Balance 110

Reserve for Encumbrances 20

Revenues 595

3. Assume that the County of Katerah maintains its books and records in a manner that facilitates preparation of the fund financial statements. The County formally integrates the budget into the accounting system and uses the encumbrance system. All appropriations lapse at year-end. At the beginning of the fiscal year, the County had the following balances in its accounts. All amounts are in thousands.

REQUIRED: Prepare the necessary entries for the current fiscal year.

Cash $200

Fund Balance-Unreserved 50

Reserve for Encumbrances 150

(a) The County made the appropriate entry to restore the prior year purchase commitments.

(b) The County Board approved a budget with revenues estimated to be $800 and expenditures of $750.

(c) The County received the items that had been ordered in the prior year at an actual cost of $135.

(d) The County ordered supplies at an estimated cost of $50 and equipment at an estimated cost of $70.

(e) The County incurred salaries and other operating expenses during the year totaling $600. The County paid these items in cash.

(f) The County received the equipment at an actual cost of $75.

(g) The County earned and collected, in cash, revenues of $810.

4. Kayla County prepares its general fund financial reports in accordance with generally accepted accounting principles (GAAP) but its budgetary basis for the general fund differs from GAAP. The Budget to Actual Statement for the general fund is presented below. All numbers are in thousands.

REQUIRED: Prepare the GAAP-basis operating statement for the general fund.

(a) For budgetary purposes, the County recognizes encumbrances as expenditures in the year of the purchase commitment; it recognizes supplies as expenditures when acquired. For budgetary purposes the County recognizes all revenues in the fiscal year collected.

For GAAP-basis financial reporting, the County recognizes supplies as expenditures as consumed. It recognizes property taxes as revenue if they are collected within 60 days of fiscal year end. All other revenues are recognized on the cash basis for GAAP.

(b) The following additional information is available.

Beginning of Year End of Year

Encumbrances $ 30 $ 50

Supplies Inventory on Hand $ 5 $ 20

Property Taxes Expected to be Collected

Within 60 days of Year End $ 50 $ 40

Amended Actual

Budget (on Budget Basis)

Property Tax Revenue $ 700 $ 710

Other Revenue 500 550

Total Revenue $1200 $1260

Expenditures 1190 1150

Excess of Revenues over Expenditures $ 10 $ 110

5. Geneva County authorized the issuance of bonds and contracted with the Chessie Construction Company (CCC) to build a new convention center. During 2006, 2007, and 2008, the County engaged in the transactions that follow. All were recorded in the County’s capital projects fund.

a. In 2006, the County issued $350 million in bonds (and recorded them as bond proceeds, an account comparable to revenues.)

b. The County approved the contract proposal from CCC for $350 million and encumbered the entire amount.

c. CCC billed the County for $115 for construction to date.

d. The County paid CCC the amount due in full.

e. In 2007, CCC billed the County for additional construction to date of $190 million.

f. The County paid the amount due in full.

g. In 2008, CCC completed construction of the convention center and billed the County an additional $50 million. The County approved the additional costs, even though the total cost of the center was now $355, $5 million more than the contract initially provided for.

h. The County transferred $5 million from its General Fund to the capital projects fund.

i. The County paid the $50 million in full.

REQUIRED:

1. Prepare the journal entries to record these transactions in the capital projects fund, including closing entries. Assume that amounts originally encumbered are reappropriated each year. Hence the County need not reestablish encumbrances in each year after the first year. Instead, it can close the expenditures of the second and third years to reserve for encumbrances rather than to fund balances.

2. What other funds or schedules would be affected by the transactions listed?

6. The town of Terry began 2006 with an unreserved balance of $10 million in its street repair fund, a capital projects fund. At the start of the year, the city council appropriated $6 million to reconstruct portions of the roadbed for two of its major roads—Main Street and Koeller Avenue. Shortly after, the town signed contracts with two construction companies to perform the repairs for a total of $6 million. During the year, the town received bills from the construction companies as follows:

a. $3.2 million for the entire cost of repairs to Main Street. This amount is $.2 higher than expected due to design changes approved by the town. The town did not encumber the additional $.2 million.

b. $2.0 million, representing a progress billing for repairs to Koeller Avenue, which were not completed at the end of 2006.

At the beginning of 2007, the town reappropriated the remaining $1 million for the Koeller Avenue repairs. During the year, the town received this bill:

c. $.7 million, representing the final billing for the Koeller Avenue repairs. The final cost was less than anticipated by $.3 million.

REQUIRED:

Prepare journal entries to record the events and transactions over the two-year period. Include entries to appropriate, reappropriate, encumber, and re-encumber the required resources, to record the payment of the bills, and to close the accounts at the end of each year.

Determine the reserved and unreserved fund balances for the capital projects fund at the end of the second year.

7. The Breast Cancer Fund, a not-for-profit organization, receives its funding primarily from government grants and private contributions. In turn, the Fund provides resources to other organizations and individuals for breast cancer research. Many of the government grants it receives are reimbursement-type. That is, the Fund must incur specific costs to be eligible for grants that reimburse those costs. The Fund makes the following estimates as to its next fiscal year:

• It will be awarded $7 million in government grants; all but $.5 million will be received during the fiscal year. The balance will be reimbursed in the first six months after year-end. The Institute will also receive $.2 million in reimbursement grants related to the previous year.

• It will receive $600,000 in pledges from private donors. It expects to collect $450,000 during the year and $125,000 in the following year. It estimates that $25,000 will never be received. It also expects to collect $80,000 in pledges made the prior year.

• It will pay $7 million for outside research.

• It will purchase new computer equipment costing $100,000. The Fund currently owns its own building, which it had purchased for $800,000, and additional furniture and equipment that it acquired for $250,000. The building has a useful life of twenty years; the furniture and equipment have useful lives of 5 years. It is the Fund’s policy to record a full year of depreciation expense in the year that assets are placed in service.

• Employees will earn wages and salaries of $340,000, of which they will be paid $320,000 during the forthcoming year and the balance in the next year. It will also pay another $15,000 in payroll costs incurred in the prior year.

• It will pay the $75,000 insurance deductible on an employee-related lawsuit settled the previous year.

• It will incur operating costs of $90,000, of which it will pay $70,000 in the forthcoming year and $20,000 in the following year. It will also pay another $10,000 in costs incurred in the previous year.

REQUIRED:

1. Prepare two budgets, one on the cash basis, the other on the full accrual basis. Show both on the same schedule—the full accrual basis in the first column and the cash basis in the second column.

2. Comment on which budget better shows whether the Fund is covering the economic cost of the services it provides.

3. Which is likely to be more useful to Fund managers?

8. The following schedule shows the amounts related to supplies that the City of Pascal debited and credited to the indicated accounts during the year (not necessarily year-end balances), before closing entries. The City records its budget, encumbers all of its expenditures, and initially vouchers all payments. All revenue was collected in cash.

REQUIRED:

Some information is missing in the schedule below. Reconstruct (in summary) the entries the City must have made during the year to determine the missing data.

(in thousands)

Debits Credits

Cash $ 117 $ ?

Estimated revenues ? 0

Revenues 0 ?

Vouchers payable 70 54

Appropriations 0 ?

Encumbrances ? 58

Expenditures ? 0

Reserve for encumbrances ? 93

Fund balance 115 120

9. The data presented below were taken from the books and records of the village of Denaville. All amounts are in millions. The village encumbers all outlays. As is evident from the data, some goods or services that were ordered and encumbered have not yet been received. City regulations require that all appropriations lapse at year-end.

Amounts Received

Estimated/ Amounts Estimated Actual Actual

Appropriated Encumbered Cost Cost Revenues

Revenues

Property taxes $7,900 $7,800

Sales taxes 3,900 3,600

Licenses 300 200

Other 700 400

12,800 $12,000

Expenditures/Appropriations

General government 3,000 $2,600 $2,400 $2,800

Public safety 6,000 5,900 5,000 4,900

Recreation 1,200 1,200 800 900

Health and sanitation 2,300 2,200 2,200 2,100

12,500 $11,900 $10,400 $10,700

Excess of estimated revenues

over appropriations 300

Beginning fund balance 1,200

Estimated ending fund balance $1,500

I. Prepare summary entries to record: a) the encumbrance of the goods and services

b). the receipt of the goods and services assuming all invoices were paid in cash.

II. What would be the year-end: a) fund balance (unreserved)

b) reserve for encumbrance balance

III. Suppose a city accountant prepared a schedule comparing budgeted to actual revenues and expenditures. The city’s mayor notes (correctly) that the very favorable variance between budgeted and actual expenditures was not merely a matter of luck – e.g., attributable to factors beyond the control of the city, such as less than usual snowfall and hence lower than usual snow removal costs. Rather, he boasts, it was due to a concerted effort on the part of his administration to “hold the line” on expenditures. Why, in governments and not-for-profit organization might favorable expenditure variances be an indication of inept rather than competent management?