Question 1

(Journal entries to record a capital lease transaction)
A town enters into a lease-purchase agreement with Trucks,Inc.to acquire four garbage trucks.The agreement provides that the town pay $100,000 at the end of each year for four years.Upon full payment,the trucks become town property.The agreement is based on an interest rate of 7%.(The present value of an annuity of $1 for 4 periods at 7% is 3.3872. )The lease agreement is accounted for in the General Fund.
Required:
Prepare journal entries for the General Fund to record (a)the lease agreement and the lease payment (b)at the end of the first year and (c)at the end of the second year.

Accepted Answer

The answer of (Journal entries to record a capital lease...

Question 2

The largest dollar amount of resources flowing into a capital projects fund normally will come from

Accepted Answer

A) dedicated property taxes 
B) user charges 
C) bond proceeds 
D) interest on investments

Question 3

A state issues long-term debt to finance a major construction project.The first installment of debt service requires payment of principal of $75,000 and interest of $100,000.Which of the following statements is true on the day that payment for principal and interest is legally due?

Accepted Answer

A) expenditures of $175,000 should be recognized in the debt service fund. 
B) expenditures of $75,000 should be recognized in the capital projects fund and expenditures of $100,000 should be recognized in the debt service fund. 
C) expenditures of $100,000 should be recognized in the debt service fund and bonds payable should be reduced by $75,000 in the debt service fund. 
D) expenditures of $175,000 should be recognized in the debt service fund and bonds payable should be reduced by $75,000 in the capital projects fund.

Question 4

A state constructs an office building.The construction is financed with: (1)a transfer of $1 million from the General Fund; (2)a grant of $2 million from the federal government; (3)bond proceeds of $7 million;and (4)earnings of $100,000 from temporary investment of bond proceeds.All transactions occur in one year.
-Based on the preceding set of facts,how much should be reported as Other financing sources in the Capital Projects Fund?

Accepted Answer

A) $1,000,000 
B) $3,000,000 
C) $8,000,000 
D) $10,000,000

Question 5

A city acquired two vehicles in a particular year: (1)a sedan for $20,000 that was paid for through the General Fund and (2)a sanitation truck for $125,000 that was paid for through the Capital Projects Fund.How should the assets be reported in the city's fund-level financial statements?

Accepted Answer

A) $145,000 should be reported as assets in the general fund 
B) $20,000 should be reported as assets in the general fund and $125,000 should be reported as assets in the capital projects fund 
C) $145,000 should be reported as assets in the capital projects fund 
D) neither acquisition should be reported as assets in the fund-level financial statements

Question 6

What is the purpose of a Debt Service Fund?

Accepted Answer

A) to account for resources that are restricted or otherwise limited to pay the debt service on all debt of the government,including Enterprise fund debt and short-term debt used to finance General Fund operations 
B) to account for resources that are restricted or otherwise limited to pay principal and interest on general long-term debt 
C) to account for resources that are restricted or otherwise limited to pay the debt service on all long-term debt of the government,and also to show how much long-term debt is outstanding 
D) to provide a means of reporting all outstanding long-term debt of the government in a single location

Question 7

At what point should interest be recognized as an expenditure in a Debt Service Fund?

Accepted Answer

A) when it accrues 
B) when it is paid 
C) when it is due and payable 
D) when the bonds resulting in payment of interest are issued

Question 8

How should a fixed asset acquired through a capital lease agreement be recorded in a General Fund?

Accepted Answer

A) at the present value of the future lease payments,by debiting expenditures and crediting other financing sources - capital leases 
B) at the total amount of the future lease payments,by debiting expenditures and crediting other financing sources - capital leases 
C) at the present value of the future lease payments,by debiting expenditures and crediting capital leases payable. 
D) no entry is needed until payments are actually made on the capital lease agreement.

Question 9

The largest dollar amount of resources flowing into a general obligation debt service fund normally will come from

Accepted Answer

A) tax revenues and interfund transfers 
B) interest on investments and user charges 
C) fiscal agent fees and fines 
D) liquidation of encumbrances

Question 10

A city keeps its books on a calendar year basis.On April 1,2013,the city sold $500,000 of 6% general obligation bonds,payable in semi-annual installments.The first installment,due October 31,2013 covered interest of $15,000 and principal of $25,000.For the year ended December 31,2013,how much should the Debt Service Fund report as expenditures?

Accepted Answer

A) $15,000 
B) $40,000 
C) $15,000,plus an accrual for three months' interest 
D) $40,000,plus an accrual for three months' interest and principal

Question 11

A city sells $15 million of general obligation bonds on October 1,2013.The bonds mature at the rate of $1 million a year each September 30,starting September 30,2014.The amount due September 30,2014 is paid.How much should the city report as outstanding debt in the Debt Service Fund in its year-end fund level financial statements on December 31,2014?

Accepted Answer

A) $15,000,000 
B) $14,000,000 
C) $13,750,000 
D) $0

Question 12

A state constructs an office building.The construction is financed with: (1)a transfer of $1 million from the General Fund; (2)a grant of $2 million from the federal government; (3)bond proceeds of $7 million;and (4)earnings of $100,000 from temporary investment of bond proceeds.All transactions occur in one year.
-Based on the preceding set of facts,how much should be reported as Revenues in the Capital Projects Fund?

Accepted Answer

A) $100,000 
B) $2,100,000 
C) $3,100,000 
D) $8,100,000

Question 13

A government may have arbitrage when:

Accepted Answer

A) it finances capital projects through federal grants 
B) it borrows money at lower tax-exempt rate,but invests it at a higher rate 
C) it pays a higher rate on its tax-exempt debt than the rate that it receives from its investments 
D) its debt pays a lower rate of interest than federally issued debt of the same credit quality

Question 14

A city sells $5 million of 6% ten-year general obligation bonds on April 1,2013.The first installment of debt principal ($250,000)is due to be paid on September 30,2013.What entry should the city make on September 30,2013 in the Debt Service Fund regarding the bond principal?

Accepted Answer

A) It should recognize a $250,000 liability for Matured bonds payable. 
B) It should reduce the $5 million long-term liability by $250,000. 
C) It should do nothing in the Debt Service Fund,but it should reduce Bonds payable by $500,000 in the Capital Projects Fund 
D) It should make no entry anywhere until the principal is actually paid.

Question 15

Which of the following fund types is most likely to have the shortest "life"?

Accepted Answer

A) internal service 
B) capital projects 
C) enterprise 
D) special revenue

Question 16

What type of fund is most likely used to account for the spending of income earned by a Permanent Fund?

Accepted Answer

A) agency fund 
B) private-purpose trust fund 
C) enterprise fund 
D) special revenue fund

Question 17

A state constructs an office building.The construction is financed with: (1)a transfer of $1 million from the General Fund; (2)a grant of $2 million from the federal government; (3)bond proceeds of $7 million;and (4)earnings of $100,000 from temporary investment of bond proceeds.All transactions occur in one year.
-Based on the preceding set of facts,what should be reported in the financial statements of the General Fund for the year?

Accepted Answer

A) other financing uses of $1 million 
B) expenditures of $1 million 
C) other financing sources of $2 million and other financing uses of $1 million 
D) revenues of $2 million and other financing sources of $7 million

Exam 6: The Governmental Fund Accounting Cycle