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  Chapter 4 Recognizing Revenue in Governmental Funds Questions for Review and Discussion  1.Basis of accounting refers to when transactions and events are recognized.Measurement focus refers to what is being reported upon — that is, which assets andliabilities are being measured. Once one is selected, the other is automaticallydetermined. What is reported upon i.e., measurement focus! establishes whentransactions and events are recognized basis of accounting!. or e#ample, if netfinancial resources are focused upon, then revenues and e#penditures would berecognized whenever there is an increase or decrease in net financial resources. $.%er generally accepted practices of today, the measurement focus is on&determination of financial position and changes in financial position sources, uses,and balance of financial resources!.' (overnmental funds are accounted for on amodified accrual basis. inancial resources include current financial resources — cash, and other items that can be e#pected to be transformed into cash in the normalcourse of operations. )he other items include investments and receivables but notfi#ed assets.*urrent financial resources and the modified accrual basis of accounting is acompromise between a measurement focus and basis of accounting that wouldmeasure interperiod e+uity and one that would report upon budgetary compliance.nterperiod e+uity can best be reported upon by focusing on all economic resourcesand using a full accrual basis of accounting. Budgetary compliance can be reportedon satisfactorily by focusing on the same resources as does the budget of theindividual government. -owever, all governments do not budget on the same basis,so statements on a budget basis would not be readily comparable. ./n e#change transaction is one in which each party gives and receives considerationof e+ual value. / none#change transaction is one in which one party gives or receivesvalue without directly receiving or giving e+uivalent value in e#change. 0.)he main categories of revenues per (/B tatement 2o.  are3 ã mposed none#change revenues. )hese are assessments imposed on individualsand business entities. )he most prominent of these are property ta#es and fines. ã 4erived ta# revenues. )hese are derived i.e., result! from assessments one#change transactions carried on by ta#payers. )hey include sales ta#es derivedfrom sales transactions!, and income and other ta#es on earnings derived fromvarious income5producing commercial transactions!.051  ã (overnment5mandated none#change transactions. )hese occur when agovernment at one level e.g., the federal or a state government! providesresources to a government at another level e.g., a local government or schooldistrict! and re+uires the recipient to use the resources for a specific purpose. or e#ample, a state may grant funds to a county stipulating that the resources beused for road improvements. ã 6oluntary none#change transactions. )hese result from legislative or contractualagreements entered into willingly by two or more parties. )hey include grantsgiven by one government to another and contributions from individuals e.g.,gifts to public universities!. Often the provider imposes eligibility re+uirements or restrictions as to how the funds may be used. )hese types of transactions aresimilar to the government5mandated none#change transactions, but differ in thatthe recipient government is not re+uired to accept the funds and theaccompanying re+uirements as to how they may be spent. 7.8evenues must be measurable and available to finance e#penditures of the current period. )he none#change revenues of governments are intrinsically associated withe#penditures9 they are generated solely to meet e#penditures. )herefore it isreasonable to recognize revenues only to the e#tent that they are available to cover the e#penditures with which they are associated. :.%roperty ta#es should be recognized in the period for which the ta#es are levied. nthe fund statements, the ta#es must meet the additional criterion that they be&available.' ;./s defined by (/B, “a deferred inflow of resources is the acquisition of net assetsby the government that is applicable to a future reporting period  .' When agovernmental entity receives property ta#es in the year prior to which they are dueand in which they are intended to be spent then the net assets of the governmentincrease inasmuch as the cash is received, but are not offset by a decrease in anyother asset or an increase in a liability. <.ales ta#es should be recognized in the period in which the underlying salestransaction ta=es place. ales ta#es are &derived' from an underlying economic event — that event being the sales transaction. -ence it is appropriate to recognizerevenue at the time of the event. >.)he problems associated with recognizing revenues from income ta#es include3 ã )he ta# is based on income of either a calendar year or a fiscal year elected by theta#payer, but such year might not coincide with the government?s fiscal year9 ã )a#payers pay their ta#es throughout the year based on estimates. -ence, theamount collected during a year may be more or less than the amount to which thegovernment is actually entitled.05$  ã Owing to the self5assessment process, ta#es may be collected as the result of audits many years after the period to which they are applicable. 1@.8eimbursement grants are payments that are intended to pay for specifiede#penditures. Most typically the grantor reimburses the grantee for all or a portion of allowable costs. Antitlements, by contrast, are payments, usually from a higher levelgovernment, to which a state or local government is automatically entitled in anamount determined by a specified formula.Because e#penditure5driven grants are tied directly to specific e#penditures, theyshould be recognized as revenues in the same period as the e#penditures — i.e.,when the grantee satisfies the eligibility re+uirements by incurring the allowablecosts. Antitlements do not typically have any significant eligibility re+uirements.-ence, they can be recognized as revenue as soon as the funds are available for e#penditure. )hey may, however, have time re+uirements in that they must be spentin a specified period. f so, recognition should ta=e place in the period or periodswhen resources are re+uired to be used or when use may begin.11.)he city could recognize the revenue as soon as it has made all eligibilityre+uirements — in this case none. )herefore, in its government5wide statements itcan recognize revenue upon receipt of the pledge. -owever, in its fund statements,the donation cannot be recognized as revenue until it is available for e#penditure — i.e., when the cash is received.1$.%ass5through grants are awards that a government must either transfer to, or spendon behalf of, a third party recipient. / grant recipient should report a pass5throughgrant as both a revenue and an e#penditure as long as the government serves as morethan a cash conduit — that is, if it does more than merely transmit grantor5suppliedmoneys without having &administrative involvement.' /dministrative involvementmay be indicated either by selecting recipients or monitoring performance.1.)he situation described by the student arises because the fi#ed assets are notrecognized as assets in the governmental funds. -ence, the proceeds from the sale of scrap increases fund assets. n the business sector, fi#ed assets, although recognizedon the balance sheet, are not necessarily reported at mar=et values. -ence, if an assetwere destroyed and sold either as scrap or to an insurance company as part of asettlement! the entity could also report a gain. 2either businesses nor governmentalfunds record assets at amounts indicative of their economic values. n businesses theyare recorded at historical cost, less depreciation9 in governmental funds they arerecorded at zero. n the conte#t of the governmental model, the recognition of theincrease in fund balance ma=es perfect sense.10.)he arguments would include the following3 ã air value is more relevant for most decisions9 ã nvestments are held as cash substitutes and can readily be e#changed for cash. nthat sense the increases in value are &available9'05  ã air values are obective9 price +uotes are readily available for most types of securities9 ã )he performance of investment managers, and their employer governments, ismeasured by total return — dividends, interest, and changes in fair values. Exercises EX 4-1 1.d$.a.b0.c7.c:.d;.d<.b>.b1@.a11.a EX 4-2 1.e$.m.e0.h7.h:.;.f <.c>.p1@.p050
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