Questions for review and discussion: 6, 7, 8, and 9 Problems 4-1, 4-2, 4-7, and 4-8 6.

What is the general rule for recognizing property taxes as revenues? How are property taxes accounted for differently in the governmental fund statements as opposed to the government wide statements? Property taxes should be recognized in the period for which the taxes are levied. In the fund statements, the taxes must meet the additional criterion that they be available. 7. What is the earliest point in the sales tax collection process at which revenue may be recognized? How can you justify recognizing revenue on the basis of this event?

Sales taxes should be recognized in the period in which the underlying sales transaction takes place. Sales taxes are derived from an underlying economic event that event being the sales transaction. Hence it is appropriate to recognize revenue at the time of the event.

8. Explain the distinction between reimbursement grants and entitlements. How does this distinction affect the way each type of grant is accounted for?

Reimbursement grants are payments that are intended to pay for specified expenditures. Most typically the grantor reimburses the grantee for all or a portion of allowable costs. Entitlements, by contrast, are payments, usually from a higher level government, to which a state or local government is automatically entitled in an amount determined by a specified formula. Because expenditure-driven grants are tied directly to specific expenditures, they should be recognized as revenues in the same period as the expenditures i.e., when the grantee satisfies the eligibility requirements by incurring the allowable costs. Entitlements do not typically have any significant eligibility requirements. Hence, they

can be recognized as revenue as soon as the funds are available for expenditure. They may, however, have time requirements in that they must be spent in a specified period. If so, recognition should take place in the period or periods when resources are required to be used or when use may begin.

9. A private citizen makes an unrestricted pledge of $5 million to a citys museum. The city is confident that the donor will fulfill her pledge. However, the cash will not be received for at least two years. How does the amount of revenue recognized differ between the governmental fund statements and the government-wide statements? Explain.

The city could recognize the revenue as soon as it has made all eligibility requirements in this case none. Therefore, in its government-wide statements it can recognize revenue upon receipt of the pledge. However, in its fund statements, the donation cannot be recognized as revenue until it is available for expenditure i.e., when the cash is received.

4-1 Select the best answer. 1. Under the modified accrual basis of accounting, revenues cannot be recognized a. until cash has been collected b. unless they are collected within 60 days of year-end c. until they are subject to accrual d. until they are measurable and available 2. Available (as in measurable and available) means a. available to finance expenditures of the current period b. subject to accrual c. collectible d. available for appropriation 3. Property taxes are an example of a. an imposed exchange transaction b. an imposed non exchange transaction

c. a derived tax transaction d. a government-mandated non exchange transaction 4. To be considered available, property taxes must have been collected either during the governments fiscal year or within a. the time it takes for the government to liquidate its obligations from the prior year b. 30 days of year-end c. 60 days of year-end d. the following fiscal year 5. For its fiscal year ending September 30, 2012, Twin City levied $500 million in property taxes. It collected taxes applicable to fiscal 2012 as follows (in millions): June 1, 2011September 30, 2011 October 1, 2011September 30, 2012 October 1, 2012November 30, 2012 December 2012 $ 20 440 15 4 The city estimates that $10 million of the outstanding balance is uncollectible. For the fiscal year ending September 30, 2012, how much should Twin City recognize in property tax revenue (in millions) in its general fund? a. $440 b. $460 c. $475 d. $490 6. Assume the same facts as in the previous example. How much should Twin City recognize in property tax revenue (in millions) in its government-wide statement of activities? a. $440 b. $460 c. $475 d. $490

7. Central City was awarded two state grants during its fiscal year ending September 30, 2012: a $2 million block grant that can be used to cover any operating expenses incurred during fiscal 2013; a $1 million grant that can be used any time to acquire equipment for its police department. For the year ending September 30, 2012, Central City should recognize in grant revenue in its governmental fund statements (in millions) a. $0 b. $1 c. $2 d. $3 8. Assume the same facts as in the previous example. How much should the city recognize in grant revenue in its government-wide statements? a. $0 b. $1 c. $2 d. $3 9. Assuming that a government collects its sales taxes in sufficient time to satisfy the available criterion, it ordinarily recognizes revenue from sales taxes in its governmental fund statements a. when the underlying sales transaction takes place b. on the date the merchant must remit the taxes to the government c. on the date the merchant must file a tax return d. when the taxes are received by the government 10. Assuming that a government collects its sales taxes in sufficient time to satisfy the available criterion, it ordinarily recognizes revenue from sales taxes in its government-wide statements a. when the underlying sales transaction takes place b. on the date the merchant must remit the taxes to the government c. on the date the merchant must file a tax

return d. when the taxes are received by the government 4-2 The following information relates to Hudson City for its fiscal year ending December 31, 2012: _ On January 31, 2012 the city purchased as an investment for its debt service fund a three-year, 6%, $1 million bond, for $998,000. During the year, it received $3,000 in interest. At year-end, the market value of the bond was $999,500. _ On December 31, 2011 the Foundation for the Arts pledged to donate $1, up to a maximum of $1,000,000, to finance construction of the city-owned art museum for each $3 that the museum is able to collect from other private contributors. During 2012, the city collected $600,000. In January and February 2013 it collected an additional $2,400,000. _ During the year, the city imposed license fees on street vendors. All vendors were required to purchase the licenses by September 30, 2012. The licenses cover the one-year period from October 1, 2012 through September 30, 2013. During 2012 the city collected $240,000 in license fees. _ The city sold for $40,000 a fire truck that it had acquired five years earlier for $250,000. At the time of sale the city had charged $225,000 in depreciation. _ The city received a grant of $2 million to partially reimburse costs of training police officers. During the year, the city incurred $1,500,000 of allowable costs and received $1,200,000. It expects to incur an additional $500,000 in allowable costs in January 2013 and be reimbursed for all allowable costs by the end of February 2013. Select an answer from the following list of amounts. An amount may be selected once, more than once, or not at all. _ The city received a grant of $2 million to partially reimburse costs of training police officers. During the year, the city incurred $1,500,000 of allowable costs and received $1,200,000. It expects to incur an additional $500,000 in allowable costs in January 2013 and be reimbursed for

all allowable costs by the end of February 2013. Select an answer from the following list of amounts. An amount may be selected once, more than once, or not at all. a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q. 0 1,500 3,000 4,500 15,000 40,000 60,000 200,000 225,000 240,000 600,000 998,000 999,500 1,000,000 1,200,000 1,500,000 2,000,000 ___ 1. amount of investment income that the city should recognize in its debt service fund ___ 2. reported value of the bond in the

government-wide statements at year-end ___ 3. amount of investment income that the city should recognize in its government-wide statements ___ 4. contribution revenue from Foundation for the Arts to be recognized in the governmental fund statements ___ 5. contribution revenue from Foundation for the Arts to be recognized in the government-wide statements ___ 6. revenue from license fees to be recognized in the governmental fund statements ___ 7. increase in general fund balance, owing to the sale of the fire engine ___ 8. increase in net assets (government-wide statements), owing to the sale of the fire engine ___ 9. revenue in the governmental fund statements from the police training grant ___ 10. revenue in the government-wide statements from the police training grant

1. 2. 3. 4. 5. 6. 7. 8.

e m e h h j f c

9. p 10. p

4-7 The amount of revenue to be recognized from grants depends on the type of grant. The following information relates to three grants that the town of College Hills received from the state during its fiscal year ending December 31, 2012: a. A cash grant of $200,000 that must be used to repair roads; b. $150,000, in cash, of a total grant of $200,000, to reimburse the town for actual expenditures incurred in repairing roads. During the year, the town incurred $150,000 in allowable repair costs; c. A cash entitlement grant of $200,000 that is intended to supplement the towns 2013 budget and must be expended in that year. 1. Prepare journal entries to record the three grants in a governmental fund. 2. What amount of revenue should be reported for each grant in the towns government-wide statement of activities for 2012? Where on that statement should these revenues most likely be reported?

1. a. Road repair grant Cash $200,000 Grant revenue $200,000 To record grant revenue. Even though the grant must be used for a special purpose (and hence should be recorded in a special revenue fund), the town can recognize revenue at the time the grant is awarded.

b. Reimbursement grant Road repair expenditures Cash To record road repair expenditures Cash $150,000 $150,000

$150,000

Grant revenue $150,000 To record grant revenue. The town can recognize revenue only for the amount it is eligible to receive the amount of allowable expenditures. c. Entitlement grant Cash $200,000

Deferred revenue $200,000 To record grant revenue. The grant is subject to a time requirement and hence the town cannot recognize revenue until that requirement is satisfied i.e., in 2013. 2. Road repair grant: $200,000; reimbursement grant: $150,000 (allowable costs incurred); entitlement grant: $0. (Because of the time requirement, revenue cannot be recognized in either the funds statement or the government-wide statement until 2014.) The town is most likely to report road repairs within the public works function or as a program within that function. Thus, the road repair and reimbursement grants would be reported as program revenues of governmental activities, most likely in the capital grants and contributions column. The cash entitlement grant, in contrast, appears to be a general revenuenot associated with any specific function or program. It would be reported in the governmental activities column under general revenues.

4-8 Unrealized investment gains and losses may be difficult to explain to legislators and constituents. A government held the securities shown below (all of which are either bonds that mature in more than one year or stocks) in one of its investment portfolios. 1. Ignoring dividends and interest, what amount of gain or loss should the government recognize during the year? 2. What was the governments realized gain or loss (sales proceeds less cost) for the year? Which gain or lossthat to be reported on the financial statements (as computed in question 1) or the realized gain or lossis more indicative of the change in resources available for future expenditure? 3. Suppose that Security B is a long-term bond that the government intends to hold to maturity.

What is the most probable reason for the decline in fair value during the year? In what sense is the reported loss indicative of an economic loss? 1. Investment gain (loss): Outputs Sales Ending balance at fair value $ 250 945 $1,195

Inputs Beginning balance at fair value Purchases $ 880 330 1,210

Investment gain (loss)

($

15)

2.

The only realized gain was on the sale of Security C sales proceeds of $250 less cost of $200 a gain of $50. If the government intends to hold, rather than sell, its securities, then arguably the realized gain is the better indicator of the increase in resources available for current expenditure. However, as long as the investments will at some time be available for sale, then as the result of the changes in the fair value of the securities the government has realized an economic gain. In that sense, therefore, the reported gain is the better measure of the increase in resources available for future expenditure. The decline in fair value is most probably due to an increase in prevailing interest rates. The loss is indicative of an economic loss in that the government has incurred an opportunity cost. The government is locked into Security B, which earns interest at a lower rate than the government could have earned, had it had the opportunity to acquire bonds that pay interest at the prevailing rate.

3.