Chapter Eighteen. Governmental Entities: Other Governmental Funds and Account Groups OTHER GOVERNMENTAL FUNDS. Scope of Chapter

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1 Chapter Eighteen Governmental Entities: Other Governmental Funds and Account Groups Scope of Chapter This chapter presents a discussion and illustration of accounting and reporting for a governmental entity s governmental funds other than the general fund, and for voluntarily maintained general capital assets and general long-term debt account groups. OTHER GOVERNMENTAL FUNDS 748 Accounting and reporting for the four governmental funds (special revenue funds, capital projects funds, debt service funds, and permanent funds) other than the general fund incorporates many of the accounting standards discussed in Chapter 17. For example, the modified accrual basis of accounting is appropriate for all governmental funds, and recording the budget (together with encumbrance accounting) is appropriate for special revenue funds and may be useful for debt service funds and capital projects funds. Accounting and Reporting for Special Revenue Funds As indicated on page 719, separate special revenue funds are established by governmental entities, as required by law and sound financial administrations, to account for the receipts and expenditures associated with specialized revenue sources that are earmarked by law or regulation to finance specified governmental operations. Fees for rubbish collection, state gasoline taxes, sin taxes on tobacco products and alcoholic beverages, and traffic violation fines are examples of governmental entity revenues that may be accounted for in separate special revenue funds. Ledger account titles, budgetary processes, and financial statements for special revenue funds are similar to those for the general fund.

2 Chapter 18 Governmental Entities: 749 To illustrate the accounting for a special revenue fund, assume that on July 1, 2006, the Town Council of the Town of Verdant Glen authorized the establishment of a special revenue fund its first such fund to account for special assessments levied on certain residents of the neighboring Village of Arbor. Those residents had requested the Town Council to provide street cleaning and streetlight maintenance services, which could not be furnished by the Village of Arbor. Because the property tax revenues of the Town of Verdant Glen, which among other services financed street cleaning and streetlight maintenance for residents of the town only, could not be used for such services elsewhere, the Town Council authorized the special assessment to finance comparable services for the requesting residents of the Village of Arbor. The Town Council adopted a budget for the Special Revenue Fund for the fiscal year ending June 30, 2007, providing for estimated revenues of $80,000 (from the special assessments) and appropriations of $75,000 (for reimbursements to the General Fund for expenditures made by that fund for the services provided to the Village of Arbor residents). Following are additional transactions or events of the Town of Verdant Glen Special Revenue Fund for the fiscal year ended June 30, 2007: 1. Special assessments totaling $82,000 were levied on the appropriate residents of the Village of Arbor, to be paid in full in 60 days. All the special assessments were expected to be collected. 2. Cash receipts from the special assessments were collected in full, $82, Of the cash receipts, $63,000 was invested in U.S. Treasury bills with a face amount of $65,000. The U.S. Treasury bills matured on June 30, 2007, and were redeemed in full on that date. 4. Billings from the Town of Verdant Glen General Fund, requesting reimbursement of expenditures of that fund, totaled $76,000; $62,000 of that amount was paid to the General Fund by June 30, On June 30, 2007, the Town Council of the Town of Verdant Glen designated the fund balance ($8,000) of the Special Revenue Fund for reimbursement of the General Fund during the fiscal year ending June 30, Journal Entries for Special Revenue Fund Journal entries of the Town of Verdant Glen Special Revenue Fund to record the foregoing events and transactions and to close the accounts for the fiscal year ended June 30, 2007, are shown on page 750. Note that the encumbrances technique is not used by this special revenue fund because it does not issue purchase orders for goods or services from outsiders. Because the $76,000 billings of the Town of Verdant Glen General Fund to the Special Revenue Fund were for reimbursement of General Fund expenditures, the General Fund credits its Expenditures ledger account in the journal entry in which it debits Receivable from Special Revenue Fund.

3 750 Part Five Accounting for Journal Entries for Special Revenue Fund of a Governmental Entity TOWN OF VERDANT GLEN SPECIAL REVENUE FUND Journal Entries Estimated Revenues: 80,000 Appropriations 75,000 Budgetary Fund Balance 5,000 To record annual budget adopted for fiscal year ending June 30, Special Assessments Receivable Current 82,000 Revenues 82,000 To record special assessments billed, all of which are estimated to be collectible. Cash 82,000 Special Assessments Receivable Current 82,000 To record collection of special assessments in full during the year. Investments 63,000 Cash 63,000 To record acquisition of $65,000 face amount of U.S. Treasury bills, maturity June 30, Cash 65,000 Investments 63,000 Revenues 2,000 To record receipt of cash for matured U.S. Treasury bills. Expenditures 76,000 Payable to General Fund 76,000 To record billings from General Fund for reimbursement of expenditures for street cleaning and streetlight maintenance for residents of the Village of Arbor. Payable to General Fund 62,000 Cash 62,000 To record payments to General Fund during the year. Appropriations 75,000 Budgetary Fund Balance 5,000 Estimated Revenues 80,000 To close budgetary ledger accounts. Revenues ($82,000 $2,000) 84,000 Expenditures 76,000 Unreserved and Undesignated Fund Balance 8,000 To close Revenues and Expenditures ledger accounts. Unreserved and Undesignated Fund Balance 8,000 Fund Balance Designated for Reimbursement of General Fund 8,000 To designate entire fund balance for reimbursement of the General Fund during the fiscal year ending June 30, 2008.

4 Chapter 18 Governmental Entities: 751 Financial Statements for Special Revenue Fund The financial statements for a special revenue fund are the same as those for the general fund: a statement of revenues, expenditures, and changes in fund balance, and a balance sheet. Financial statements for the Town of Verdant Glen Special Revenue Fund for the fiscal year ended June 30, 2007, are as follows: Financial Statements of a Governmental Entity s Special Revenue Fund TOWN OF VERDANT GLEN SPECIAL REVENUE FUND Statement of Revenues, Expenditures, and Changes in Fund Balance For Year Ended June 30, 2007 Variance Favorable Budget Actual (Unfavorable) Revenues: Special assessments $80,000 $82,000 $ 2,000 Other 2,000 2,000 Total revenues $80,000 $84,000 $ 4,000 Expenditures: Reimbursement of General Fund expenditures $75,000 $76,000 $(1,000) Excess of revenues over expenditures (fund balance, end of year) $ 5,000 $ 8,000 $ 3,000 TOWN OF VERDANT GLEN SPECIAL REVENUE FUND Balance Sheet June 30, 2007 Assets Cash $22,000 Liabilities and Fund Balance Payable to General Fund $14,000 Fund balance designated for reimbursement of General Fund 8,000 Total liabilities and fund balance $22,000 Accounting and Reporting for Capital Projects Funds Capital projects funds of a governmental entity record the receipt and payment of cash for the construction or acquisition of the governmental entity s plant assets other than those financed by proprietary funds (enterprise funds and internal service funds) or trust funds. The resources for a capital projects fund generally are derived from proceeds of general obligation bonds, but the resources also may come from current tax revenues of the general fund or from grants or shared revenues of other governmental entities.

5 752 Part Five Accounting for A capital budget, rather than an annual budget, is the control device appropriate for a capital projects fund. The capital budget deals with both the authorized expenditures for the project and the bond proceeds or other financing sources for the project. Journal Entries for Capital Projects Fund On July 1, 2005, the Town of Verdant Glen authorized a $500,000, 20-year, 7% general obligation bond issue to finance an addition to the town s high school. A capital budget was approved for the amount of the bonds, but was not to be integrated in the accounting records of the capital projects fund authorized for the project. The following journal entries illustrate receipt of proceeds of the bonds and other activities of the Town of Verdant Glen Capital Projects Fund for the fiscal year ended June 30, 2006: Journal Entries for Capital Project Fund of a Governmental Entity TOWN OF VERDANT GLEN CAPITAL PROJECTS FUND Journal Entries Cash 450,518 Other Financing Uses: Discount on Bonds Issued 49,482 Other Financing Sources: Bonds Issued 500,000 To record proceeds of 20-year, 7% general obligation term bonds due July 1, 2025, interest payable Jan. 1 and July 1, to yield 8%, face amount $500,000. (Bond issue costs are disregarded.) Investments 335,000 Cash 335,000 To record acquisition of $350,000 face amount of U.S. Treasury bills, maturity 26 weeks. Encumbrances 482,000 Fund Balance Reserved for Encumbrances 482,000 To record contracts with architect and construction contractor and issuance of purchase orders. Cash 350,000 Investments 335,000 Revenues 15,000 To record receipt of cash for matured U.S. Treasury bills. Expenditures 378,000 Vouchers Payable 378,000 To record expenditures for the year. Fund Balance Reserved for Encumbrances 368,200 Encumbrances 368,200 To reverse encumbrances applicable to vouchered expenditures. Vouchers Payable 327,500 Cash 327,500 To record payment of vouchers during the year. (continued)

6 Chapter 18 Governmental Entities: 753 TOWN OF VERDANT GLEN CAPITAL PROJECTS FUND Journal Entries (concluded) Unreserved and Undesignated Fund Balance ($482,000 $368,200) 113,800 Encumbrances 113,800 To close Encumbrances ledger account. Revenues 15,000 Other Financing Sources: Bonds Issued 500,000 Expenditures 378,000 Other Financing Uses: Discount on Bonds Issued 49,482 Unreserved and Undesignated Fund Balance 87,518 To close Revenues, Expenditures, and Other Financing Sources and Uses ledger accounts. The following features of the foregoing journal entries should be noted: 1. The capital budget for the high school addition was not entered in the accounting records of the Capital Projects Fund. The indenture for the 20-year, 7% general obligation bonds (general long-term capital debt) provided adequate control. 2. The liability applicable to the 20-year general obligation bonds was not recorded in the Capital Projects Fund. The liability for the bonds is recorded at face amount in the voluntarily maintained general long-term debt account group (see page 761). 3. The face amount of the general obligation bonds is another financing source of the Capital Projects Fund; the discount on the bonds is another financing use. 1 The interest earned on the short-term investment in U.S. Treasury bills represents revenues to the Capital Projects Fund. 4. The encumbrances and expenditures accounting for the Capital Projects Fund is similar to that for the General Fund illustrated in Chapter 17. Also, the closing entries for the two types of governmental funds are similar. Expenditures for construction recorded in the Town of Verdant Glen Capital Projects Fund are accompanied in the voluntarily maintained general fixed assets account group by a journal entry at the end of the fiscal year with a debit to Construction in Progress and a credit to Investment in Capital Assets from Capital Projects Funds (see page 759). At the end of each fiscal year prior to completion of a capital project, the Revenues, Other Financing Sources, Expenditures, and Encumbrances ledger accounts of the Capital Projects Fund are closed to the Unreserved and Undesignated Fund Balance account. On completion of the project, the Capital Projects Fund is terminated by a transfer of any unused cash to the Debt Service Fund or the General Fund, as appropriate; the Unreserved and Undesignated Fund Balance ledger account of the receiving fund would be credited for this transfer. Any cash deficiency in the Capital Projects Fund (a possibility suggested by the deficit fund balance in the balance sheet on page 754) probably would be made up by the General Fund; this transfer would be credited to the Other Financing 1 Codification of Governmental Accounting and Financial Reporting Standards (Norwalk: GASB, 2003), Sec

7 754 Part Five Accounting for Sources ledger account of the Capital Projects Fund and debited to the Other Financing Uses account of the General Fund. Financial Statements for Capital Projects Fund A capital projects fund issues the same financial statements as a general fund: a statement of revenues, expenditures, and changes in fund balance, and a balance sheet. For the Town of Verdant Glen Capital Projects Fund, these financial statements are as follows for the year ended June 30, 2006: Financial Statements of a Governmental Entity s Capital Projects Fund TOWN OF VERDANT GLEN CAPITAL PROJECTS FUND Statement of Revenues, Expenditures, and Changes in Fund Balance For Year Ended June 30, Revenues: Miscellaneous $ 15,000 Expenditures:* Construction contracts $ 287,600 Engineering and other 90,400 Total expenditures $ 378,000 Excess (deficiency) of revenues over expenditures $(363,000) Other financing sources (uses): Face amount of general obligation bonds $ 500,000 Discount on general obligation bonds (49,482) Excess of revenues and other sources over expenditures and other uses (fund balance, end of year) $ 87,518 * Breakdown of expenditures is assumed. TOWN OF VERDANT GLEN CAPITAL PROJECTS FUND Balance Sheet June 30, Assets Cash $138,018 Liabilities and Fund Balance Liabilities: Vouchers payable $ 50,500 Fund balance: Reserved for encumbrances $113,800 Unreserved and undesignated (26,282) 87,518 Total liabilities and fund balance $138,018 To reiterate, the plant assets constructed with resources of the Capital Projects Fund are not displayed in that fund s balance sheet. The constructed plant assets might be recorded in the governmental entity s voluntarily maintained general capital assets account group. Furthermore, the general obligation bonds issued to finance the Capital

8 Chapter 18 Governmental Entities: 755 Projects Fund are not a liability of that fund. Prior to the maturity date or dates of the bonds, the liability is carried in the voluntarily maintained general long-term debt account group, (see page 761). On the date the bonds mature, the related liability is transferred to a debt service fund or to the general fund, as appropriate, from the general long-term debt account group. Accounting and Reporting for Debt Service Funds Payments of principal and interest on long-term bonds and other long-term debt of a governmental entity, other than special assessment bonds, revenue bonds, and general obligation bonds serviced by an enterprise fund, are accounted for either in the general fund or in debt service funds. Special assessment bonds are repaid from the proceeds of special assessment levies against specific properties receiving benefits from the special assessment improvements; if these bonds finance construction projects for an enterprise fund, they are accounted for in that enterprise fund. Revenue bonds are payable from the earnings of a governmental entity s enterprise and are accounted for in the appropriate enterprise fund. In some cases, general obligation bonds, which are backed by the full faith and credit of the issuing governmental entity, will be repaid from the resources of a governmental entity enterprise. These general obligation bonds are displayed as liabilities of the appropriate enterprise fund. The liability for bonds payable from resources of the general fund or a debt service fund is not recorded in that fund until the debt matures. Prior to maturity date, the bond liability is carried in the voluntarily maintained general long-term debt account group. The two customary types of general obligation bonds whose servicing is recorded in debt service funds are the following: Serial bonds, with principal payable in annual installments over the term of the bond issue. Term bonds, with principal payable in total on a fixed maturity date, generally from proceeds of an accumulated sinking fund. Generally, legal requirements govern the establishment of debt service funds. In the absence of legal requirements or of a formal plan for accumulation of a sinking fund for repayment of a general obligation term bond, there may be no need to establish a debt service fund. Journal Entries for Debt Service Fund To illustrate the journal entries that are typical for a debt service fund, assume that the Town of Verdant Glen had only two general obligation bond issues outstanding during the fiscal year ended June 30, 2006: A $100,000, 10% serial bond issue whose final annual installment of $10,000 was payable on January 1, 2006, and a $500,000, 7% term bond issue due July 1, 2025 (see page 752). The Town Council had authorized establishment of a debt service fund for the serial bonds. However, sinking fund accumulations on the term bonds were not required to begin until July 1, 2008; therefore, a debt service fund for those bonds was unnecessary during the fiscal year ended June 30, Interest on both general obligation bond issues was payable each January 1 and July 1. Interest payments on the term bonds were recorded in the General Fund during the fiscal year ended June 30, 2006, and were included in expenditures of that fund, as illustrated on page 727. Interest payments on the serial bonds were made from the Debt Service Fund to a fiscal agent, for transfer to the bondholders.

9 756 Part Five Accounting for The June 30, 2005, balance sheet of the Town of Verdant Glen Debt Service Fund for the serial bonds was as follows: TOWN OF VERDANT GLEN DEBT SERVICE FUND Balance Sheet June 30, 2005 Assets Cash $342 Liabilities and Fund Balance Fund balance reserved for debt service $342 Aggregate journal entries for the Town of Verdant Glen Debt Service Fund for the year ended June 30, 2006, are as follows: Aggregate Journal Entries for Debt Service Fund of a Governmental Entity TOWN OF VERDANT GLEN DEBT SERVICE FUND Journal Entries Cash 11,000 Other Financing Sources Transfers In 11,000 To record receipt of cash from General Fund for payment of serial bond principal ($10,000) and interest ($1,000) maturing on July 1, 2005, and Jan. 1, Cash with Fiscal Agent 11,000 Cash 11,000 To record payment of cash to bank trust department acting as fiscal agent for payment of serial bond principal and interest. Expenditures 11,000 Matured Bonds Payable 10,000 Matured Interest Payable 1,000 To record expenditures for interest due July 1, 2005, and principal and interest due Jan. 1, Matured Bonds Payable 10,000 Matured Interest Payable 1,000 Cash with Fiscal Agent 11,000 To record fiscal agent s payments of bond principal and interest. Expenditures 342 Cash 342 To record payment of fiscal agent for services during year ended June 30, Other Financing Sources Transfers In 11,000 Fund Balance Reserved for Debt Service 342 Expenditures 11,342 To close fund on extinguishment of related serial bonds.

10 Chapter 18 Governmental Entities: 757 Following are significant aspects of these journal entries. 1. There was no journal entry to record an annual budget. Generally, indentures for general obligation bonds provide sufficient safeguards (such as restricting the fund balance of the debt service fund solely for the payment of debt and related servicing costs), so that recording the budget in the Debt Service Fund is unnecessary. (Note, however, on page 720 of Chapter 17 that the General Fund s estimated other financing use for payment of $10,000 to the Debt Service Fund had been included in the General Fund s annual budget.) 2. The first journal entry is the counterpart of the General Fund journal entry no. 8 on page 727 in Chapter Expenditures for principal and interest payments of the Debt Service Fund are recorded only on the maturity dates of the obligations. Prior to the maturity dates, the liability for the bonds principal is carried in the voluntarily maintained general long-term debt account group (see page 761). Because a debt service fund generally does not issue purchase orders, encumbrance accounting is not required. 4. The closing entry extinguishes all remaining ledger account balances of the Debt Service Fund, because the final serial principal payment had been made. The modified accrual basis of accounting is appropriate for revenues of a debt service fund. Thus, any property taxes specifically earmarked for servicing of a governmental entity s general obligation bonds may be accrued as revenues in the debt service fund. The accounting for such a tax accrual is the same as that for the general fund. For a term bond issue that requires the accumulation of a sinking fund, the journal entries for a debt service fund include the investment of cash in interest-bearing securities and the collection of interest. Under the modified accrual basis of accounting, interest revenue accrued on sinking fund investments at the end of the governmental entity s fiscal year is recognized in the accounting records of the debt service fund. Financial Statements for Debt Service Fund A balance sheet for a debt service fund is illustrated on page 755. There is no balance sheet for the Town of Verdant Glen Debt Service Fund on June 30, 2006, because the fund had been extinguished. The statement of revenues, expenditures, and changes in fund balance for the Town of Verdant Glen Debt Service Fund for the year ended June 30, 2006, is as follows: Statement of Revenues, Expenditures, and Changes in Fund Balance of a Governmental Entity s Debt Service Fund TOWN OF VERDANT GLEN DEBT SERVICE FUND Statement of Revenues, Expenditures, and Changes in Fund Balance For Year Ended June 30, 2006 Expenditures: Principal retirement $ 10,000 Interest and charges by fiscal agent 1,342 Total expenditures $ 11,342 Excess (deficiency) of revenues over expenditures $(11,342) (continued)

11 758 Part Five Accounting for TOWN OF VERDANT GLEN DEBT SERVICE FUND Statement of Revenues, Expenditures, and Changes in Fund Balance (concluded) For Year Ended June 30, 2006 Other financing sources: Transfers in 11,000 Net change in fund balance $ (342) Fund balance, beginning of year 342 Fund balance, end of year -0- Permanent Funds As indicated on page 718 of Chapter 17, permanent funds of a governmental entity report resources that are legally restricted so that principal cannot be used for programs such as ongoing maintenance of a public cemetery. 2 Because of their limited application, accounting and reporting for permanent funds are not illustrated in this chapter. GENERAL CAPITAL ASSETS AND GENERAL LONG-TERM DEBT ACCOUNT GROUPS The accounting standards for state and local governmental entities described in Chapter 17 (page 719) might make it advisable for governmental entities to use account groups to record capital (plant) assets (including infrastructure: streets, sidewalks, bridges, and the like) and long-term debt of a governmental entity not recorded in a fund. A governmental entity s voluntarily maintained general capital assets and general long-term debt account groups are not funds; they are memorandum accounting entities. Their purpose is to provide in one record the governmental entity s plant assets and long-term liabilities that are not recorded in one of the governmental entity s funds. Plant assets are recorded in enterprise, trust, and internal service funds; bonds payable and other long-term liabilities are also recorded in these funds. Accounting and Reporting for General Capital Assets Account Group Plant assets in the general capital assets account group are recorded at their cost to the governmental entity or at their current fair value if donated to the governmental entity. The offsetting credit is to a memorandum ledger account such as Investment in General Capital Assets from (the source of the asset). According to the Governmental Accounting Standards Board, except for certain infrastructure and inexhaustible (land and certain works of art) assets, depreciation must be recorded in the general capital assets account group, with a debit to the appropriate Investment in General Capital Assets ledger account and a credit to an Accumulated Depreciation account. 3 When a plant asset carried in the general capital assets account group is disposed 2 Ibid., Sec Ibid., Sec

12 Chapter 18 Governmental Entities: 759 of by the governmental entity, the carrying amount of the asset is removed from the appropriate memorandum ledger accounts in the general capital assets account group; any proceeds are recognized as miscellaneous revenue or as other financing sources in the general fund. Impairment losses of general capital assets should be recognized as they are for plant assets of a business enterprise. 4 Journal Entries for General Capital Assets Account Group The following journal entries for the Town of Verdant Glen are typical of those for a governmental entity s general capital assets account group: Journal Entries for General Capital Assets Account Group of a Governmental Entity TOWN OF VERDANT GLEN GENERAL CAPITAL ASSETS ACCOUNT GROUP Journal Entries Machinery and Equipment 126,400 Investment in General Capital Assets from General Fund Revenues 126,400 To record acquisition of equipment by General Fund. Construction in Progress 378,000 Investment in General Capital Assets from Capital Projects Funds 378,000 To record construction work in progress on high school addition. Land 500,000 Buildings 800,000 Investment in General Capital Assets from Gifts 1,300,000 To record, at current fair value, private citizen s gift of land and a building to be used as a public library. Investment in General Capital Assets from General Fund Revenues 20,000 Accumulated Depreciation of Machinery and Equipment 70,000 Machinery and Equipment 90,000 To record disposal of machinery and equipment. Investment in General Capital Assets from General Fund Revenues 40,000 Investment in General Capital Assets from Capital Projects Funds 1,280,000 Investment in General Capital Assets from Gifts 60,000 Accumulated Depreciation of Infrastructure 1,000,000 Accumulated Depreciation of Buildings 240,000 Accumulated Depreciation of Machinery and Equipment 140,000 To recognize depreciation of infrastructure, buildings, and machinery and equipment for the year ended June 30, The first of the foregoing journal entries incorporates the assumption that equipment acquisitions were included in the expenditures of the Town of Verdant Glen General Fund for the year ended June 30, 2006 (see page 726); the second journal entry was made on June 30, 2006, to record accumulated cost of the construction project of the Town of Verdant Glen 4 GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets... (Norwalk: GASB, 2003), par. 17.

13 760 Part Five Accounting for Capital Projects Fund (page 752); and the third journal entry incorporates the assumption that proceeds of disposal of machinery and equipment were included in revenues of the Town of Verdant Glen General Fund for the year ended June 30, Required Disclosures for General Capital Assets The Governmental Accounting Standards Board requires presentation of an analysis of changes in general capital assets of a governmental entity in a note to the financial statements discussed in Chapter The analysis of changes in general capital assets for the Town of Verdant Glen for the fiscal year ended June 30, 2006, is as follows (beginning-ofyear and end-of-year balances are assumed): CHANGES IN TOWN OF VERDANT GLEN GENERAL CAPITAL ASSETS For Year Ended June 30, 2006 Balances, Balances, July 1, June 30, 2005 Additions Disposals* 2006 General Capital Assets Infrastructure $50,000,000 $50,000,000 Land 6,200,000 $ 500,000 6,700,000 Buildings 18,700, ,000 19,500,000 Machinery and equipment 720, ,400 90, ,400 Construction in progress 378, ,000 Totals $75,620,000 $1,804,400 $ 90,000 $77,334,400 Accumulated Depreciation Infrastructure $ 7,000,000 $1,000,000 $ 8,000,000 Buildings 1,460, ,000 1,700,000 Machinery and equipment 216, ,000 $ 70, ,000 Totals $ 8,676,000 $1,380,000 $ 70,000 $ 9,986,000 Investment in General Capital Assets From General Fund revenues $10,424,000 $ 126,400 $ 60,000 $10,490,400 From Capital Projects Funds 52,618, ,000 1,280,000 51,716,000 From gifts 3,902,000 1,300,000 60,000 5,142,000 Totals $66,944,000 $1,804,400 $1,400,000 $67,348,400 * For investment in general capital assets section, includes depreciation. Broken down by function in the statement of activities described in Chapter 19. Accounting and Reporting for General Long-Term Debt Account Group General obligation bonds of a governmental entity, both serial and term, and other long-term liabilities that are not recorded in an enterprise fund might be, at the election of the entity, recorded as memorandum credits in the general long-term debt account group. The offsetting memorandum debit entry is to the Amount to Be Provided ledger account. When cash and other assets for the ultimate payment of a bond issue or other long-term liabilities have been accumulated in a debt service fund, the Amount Available in Debt Service Fund ledger account is debited and the Amount to Be Provided account is credited. When the bonds or 5 Codification, Sec

14 Chapter 18 Governmental Entities: 761 other liabilities are paid by the debt service fund, the memorandum accounts are reversed in the general long-term debt account group in a closing entry at the end of the fiscal year. Journal Entries for Long-Term Debt Account Group The following journal entries for the Town of Verdant Glen General Long-Term Debt Account Group parallel the corresponding journal entries in the Debt Service Fund (page 756) and the Capital Projects Fund (page 752), respectively: Journal Entries for General Long-Term Debt Account Group of a Governmental Entity TOWN OF VERDANT GLEN GENERAL LONG-TERM DEBT ACCOUNT GROUP Journal Entries Amount Available in Debt Service Fund 10,000 Amount to Be Provided 10,000 To record amount received by Debt Service Fund from General Fund for retirement of principal of general obligation serial bonds. Serial Bonds Payable 10,000 Amount Available in Debt Service Fund 10,000 To record Debt Service Fund payment of 10% serial bonds on January 1, Amount to Be Provided 500,000 Term Bonds Payable 500,000 To record issuance of 7% general obligation term bonds for construction of addition to high school. Required Disclosures for General Long-Term Debt The Governmental Accounting Standards Board requires presentation of an analysis of changes in general long-term debt of a governmental entity in a note to the financial statements discussed in Chapter Following is an analysis of changes in general long-term debt of the Town of Verdant Glen for the year ended June 30, 2006: CHANGES IN TOWN OF VERDANT GLEN GENERAL LONG-TERM DEBT For Year Ended June 30, 2006 Balances, Balances, July 1, June 30, 2005 Additions Payments 2006 Term Bonds 7%, 20-year general obligation bonds due July 1, 2025 $500,000 $500,000 Serial Bonds 10%, 10-year general obligation bonds, final installment due January 1, 2006 $10,000 $10,000 Totals $10,000 $500,000 $10,000 $500,000 6 Ibid., Sec

15 762 Part Five Accounting for Capital Leases of Governmental Entities If a capital lease is executed by a governmental entity for property not recorded in a proprietary fund (internal service fund or enterprise fund), the property is recorded in the voluntarily maintained general capital assets account group and the lease liability is recorded in the voluntarily maintained general long-term debt account group, valued in accordance with the provisions of FASB Statement No. 13, Accounting for Leases (as amended and interpreted). 7 The periodic lease payments typically are included in expenditures of the general fund. To illustrate accounting for a capital lease by a governmental entity, assume that on July 1, 2006, the Town of Verdant Glen entered into a three-year capital lease for furniture and equipment for the library building donated to the town (see page 759). The minimum lease payments were $10,000, payable each July 1, 2006 through Title to the furniture and equipment was to be vested in the town on July 1, The town adopted the straight-line method of depreciation, a 10-year economic life, and no residual value for the furniture and equipment. The interest rate implicit in the lease, known to the town and less than the town s incremental borrowing rate, was 8%. The following journal entries would be required for the capital lease for the three-year lease term: Journal Entries for Governmental Entity s Capital Lease In General Fund TOWN OF VERDANT GLEN Journal Entries for Capital Lease 2006 July 1 Expenditures 10,000 Cash 10,000 To record first lease payment on three-year capital lease for library furniture and equipment July 1 Expenditures ($1,427 interest $8,573 principal) 10,000 Cash 10,000 To record second lease payment on three-year capital lease for library furniture and equipment July 1 Expenditures ($740 interest $9,260 principal) 10,000 Cash 10,000 To record third lease payment on three-year capital lease for library furniture and equipment. In General Long-Term Debt Account Group 2006 July 1 Amount to Be Provided ($10, *) 27,833 Liability under Capital Lease (net) 27,833 To record liability under three-year capital lease for library furniture and equipment. * Present value of annuity due of l for three periods at 8%. 7 Ibid., Sec. L (continued)

16 Chapter 18 Governmental Entities: 763 TOWN OF VERDANT GLEN Journal Entries for Capital Lease (concluded) 2006 July 1 Liability under Capital Lease (net) 10,000 Amount to Be Provided 10,000 To record General Fund payment of first lease payment on three-year capital lease for library furniture and equipment July 1 Liability under Capital Lease (net) 8,573 Amount to Be Provided 8,573 To record General Fund payment of second lease payment on three-year capital lease for library furniture and equipment July 1 Liability under Capital Lease (net) 9,260 Amount to Be Provided 9,260 To record General Fund payment of third lease payment on three-year capital lease for library furniture and equipment. In General Capital Assets Account Group 2006 July 1 Leased Furniture and Equipment Capital Lease 27,833 Investment in General Capital Assets from General Fund Revenues 27,833 To record acquisition of library furniture and equipment under three-year capital lease June 30 Investment in General Capital Assets from General Fund Revenues ($27,833 10) 2,783 Accumulated Depreciation Leased Furniture and Equipment Capital Lease 2,783 To recognize depreciation of leased library furniture and equipment for the year ended June 30, (The same depreciation journal entries would be prepared on June 30, 2008, through June 30, 2016.) Accounting for Special Assessment Bonds In GASB Statement No. 6, Accounting and Financial Reporting for Special Assessments, the Governmental Accounting Standards Board terminated the use of special assessment funds to account for the construction of public improvements financed by special assessments against selected property owners and by related special assessment bonds. 8 Instead, special revenue funds, capital projects funds, and debt service funds are to be used, as appropriate, for the transactions and events related to such construction projects. With respect to special assessment bonds, which sometimes are issued by a governmental entity to finance construction projects pending the receipt of special assessments payable in annual installments, the GASB provided the following standards: 8 Ibid., Sec. S

17 764 Part Five Accounting for b. Special assessment debt for which the government is obligated in some manner... should be reported as general long-term liabilities in the government-wide statement of net assets, except for the portion, if any, that is directly related to and expected to be paid from proprietary funds. (1) The portion of the special assessment debt that will be repaid from property owner assessments should be reported as special assessment debt with governmental commitment. (2) The portion of special assessment debt that will be repaid from general resources of the government (the public benefit portion, or the amount assessed against governmentowned property) should be reported like other general long-term liabilities. (3) The portion of special assessment debt that is directly related to and expected to be paid from proprietary funds should be reported as liabilities of those funds in the proprietary fund statement of net assets. Liabilities directly related to and expected to be repaid from proprietary funds should also be reported in the government-wide statement of net assets. c. Special assessment debt for which the government is not obligated in any manner should not be displayed in the government s financial statements. 9 To illustrate application of the foregoing standards, assume that on July 1, 2006, the Town Council of Verdant Glen enacted a special assessment for paving streets and installing sidewalks in a section of the town. The total assessment was $250,000, payable by the assessed property owners in five annual installments, beginning July 1, Interest on unpaid balances at 10% a year was payable annually by the assessed property owners, beginning July 1, To help finance the cost of the construction project, the Town Council authorized the issuance on July 1, 2006, of $200,000 face amount, fouryear, 8% special assessment bonds, payable $50,000 a year plus interest payable annually, beginning July 1, The Town Council authorized the establishment of a special revenue fund and a capital projects fund to account for the construction project. Under the terms of the bond indenture for the special assessment bonds, the Town of Verdant Glen was obligated to pay the special assessment bonds at maturity if the property owners defaulted on their special assessments and proceeds of lien foreclosures on the property were insufficient. The following journal entries are required on July 1, 2006, the date of the special assessment: Journal Entries for Governmental Entity Construction Project Financed by Special Assessment TOWN OF VERDANT GLEN Journal Entries for Construction Project Financed by Special Assessment In Special Revenue Fund (different from that illustrated on pages ): Special Assessments Receivable Current 50,000 Special Assessments Receivable Deferred 200,000 Revenues 50,000 Deferred Revenues 200,000 To record special assessment levied on property owners benefited by paving and sidewalk project; special assessments receivable and related revenues applicable to year ended June 30, 2006, are current, and the balance is deferred. (continued) 9 Ibid., Sec. S b,c.

18 Chapter 18 Governmental Entities: 765 TOWN OF VERDANT GLEN Journal Entries for Construction Project Financed by Special Assessment (concluded) Cash 50,000 Special Assessments Receivable Current 50,000 To record receipt of current special assessment payments. Other Financing Uses Transfers Out 50,000 Cash 50,000 To record transfer of cash for financing of paving and sidewalk project to Capital Projects Fund established for that purpose. In Capital Projects Fund (different from that illustrated on pages ): Cash 50,000 Other Financing Sources Transfers In 50,000 To record receipt of cash from Special Revenue Fund for proceeds of current installment of special assessments. Cash 195,776 Other Financing Uses: Discount on Bonds Issued 4,224 Other Financing Sources: Bonds Issued 200,000 To record proceeds of $200,000 face amount of four-year, 8% special assessment bonds to yield 9%. In General Long-Term Debt Account Group (same as that illustrated on pages ): Amount to Be Provided 200,000 Special Assessment Bonds Payable 200,000 To record issuance of 8% special assessment bonds for paving and sidewalk project; the town is obligated to honor deficiencies on payment of the bonds. Some significant features of the foregoing journal entries are as follows: 1. The capital budget for the paving and sidewalks project is not entered in the accounting records of either the Special Revenue Fund or the Capital Projects Fund. The Town Council s approval of the special assessment and the related bonds provides adequate control. 2. Because the Special Revenue Fund will collect the special assessments as they become current, that fund also will service the special assessment bonds as they become payable. Further, the Special Revenue Fund will accrue interest receivable (at 10%) on the unpaid special assessments receivable, and interest payable (at 8%) on the special assessment bonds. 3. On June 30, 2007, 2008, 2009, and 2010, the Special Revenue Fund will prepare the following journal entry: Special Assessments Receivable Current 50,000 Deferred Revenues 50,000 Special Assessments Receivable Deferred 50,000 Revenues 50,000 To transfer special assessment installment receivable in next fiscal year and related revenues to the current category from the deferred category.

19 766 Part Five Accounting for 4. The special assessment bonds and related interest are payable serially over a four-year period by the Special Revenue Fund, from proceeds of the annual collections of special assessments and related interest. Accordingly, the present value of the 8% special assessment bonds ($195,776) at the 9% yield rate is computed as follows: Computation of Present Value of Special Assessment Bonds Principal and interest due July 1, 2007 [($50,000 $16,000) *] $ 60,550 Principal and interest due July 1, 2008 [($50,000 $12,000) *] 52,184 Principal and interest due July 1, 2009 [($50,000 $8,000) *] 44,787 Principal and interest due July 1, 2010 [($50,000 $4,000) *] 38,255 Present value (proceeds) of 8% special assessment bonds at 9% yield rate $195,776 * From present value tables. Review Questions 1. Describe the taxes, fees, or other revenues of a governmental entity that often are accounted for in special revenue funds. 2. The following journal entry was prepared for the Town of Groman Special Revenue Fund, established to account for special assessments on selected property owners of the nearby Village of Angelus: Expenditures 42,000 Payable to General Fund 42,000 To record billings from General Fund for reimbursement of expenditures for street cleaning and streetlight maintenance for residents of the Village of Angelus. What ledger account does the Town of Groman General Fund credit to offset the $42,000 debit to Receivable from Special Revenue Fund? Explain. 3. How are proceeds of general obligation bonds issued at face amount by a governmental entity to finance a construction project accounted for in a capital projects fund? Explain. 4. Is a separate debt service fund established for every issue of general obligation bonds issued by a governmental entity? Explain. 5. The following journal entry (explanation omitted) appeared in the Charter County Debt Service Fund: Cash with Fiscal Agent 83,000 Cash 83,000 What is the probable explanation for this journal entry? Explain. 6. Is the recognition of depreciation of plant assets appropriate for a governmental entity s voluntarily maintained general capital assets account group? Explain. 7. Explain the use of the Investment in General Capital Assets from Gifts ledger account of a governmental entity s general capital assets account group. 8. Is a balance sheet issued for a governmental entity s voluntarily maintained general capital assets account group? Explain. 9. The following journal entry appeared in the accounting records of the Village of Marvell voluntarily maintained General Long-Term Debt Account Group:

20 Chapter 18 Governmental Entities: 767 Amount to Be Provided 25,000 Amount Available in Debt Service Fund 25,000 To record amount received by Debt Service Fund from General Fund for retirement of principal of general obligation serial bonds. Is the foregoing journal entry prepared correctly? Explain. 10. Explain how each of the following accounting units of a governmental entity is affected by a capital lease for fire engines of the fire department: general fund, voluntarily maintained general long-term debt account group, voluntarily maintained general capital assets account group. 11. Under what circumstances, if any, is a liability for special assessment bonds recorded in a governmental entity s voluntarily maintained general long-term debt account group? Explain. Exercises (Exercise 18.1) Select the best answer for each of the following multiple-choice questions: 1. May funds other than the general fund be established by a governmental entity in response to: a. b. c. d. Legislative Action? Yes Yes No No Executive Action? Yes No Yes No 2. The governmental funds of a governmental entity include all the following except: a. Special revenue funds b. Agency funds c. Debt service funds d. Capital projects funds 3. An example of a governmental fund of a governmental entity is: a. An enterprise fund b. A special revenue fund c. An agency fund d. None of the foregoing 4. The type of governmental fund of a governmental entity whose accounting most resembles that of the entity s general fund is a: a. Capital projects fund b. Debt service fund c. Special revenue fund d. Special expenditures fund

21 768 Part Five Accounting for 5. The governmental funds of a governmental entity for which the statement of revenues, expenditures, and changes in fund balance typically displays both budgeted and actual amounts are: a. Special revenue funds b. Capital projects funds c. Debt service funds d. None of the foregoing 6. A capital projects fund of a governmental entity is: a. A governmental fund b. A proprietary fund c. A fiduciary fund d. An account group 7. A Fund Balance Reserved for Encumbrances ledger account most likely is appropriate for a governmental entity s: a. Special revenue fund b. Capital projects fund c. Debt service fund d. Three foregoing governmental funds 8. To record the issuance of general obligation bonds at face amount to finance a governmental entity s capital project fund, the accountant for that fund credits: a. Revenues b. Other Financing Sources c. Unreserved and Undesignated Fund Balance d. General Obligation Bonds Payable 9. Is an annual budget always recorded by a governmental entity s: a. b. c. d. Special Revenue Capital Projects Debt Service Funds? Funds? Funds? Yes Yes Yes Yes No Yes Yes Yes No Yes No No 10. A governmental entity s voluntarily maintained general capital assets account group may be used for all plant assets of the governmental entity not recorded in: a. Capital projects funds b. Trust funds c. The general fund d. Plant asset funds 11. Are plant assets of a governmental entity accounted for in the entity s: a. b. c. d. General Fund? Yes Yes No No Capital Projects Funds? Yes No Yes No

22 Chapter 18 Governmental Entities: Excluded from the voluntarily maintained general capital assets account group of a governmental entity are: a. Donated plant assets. b. Plant assets constructed with resources of capital projects funds. c. Infrastructure. d. None of the foregoing. 13. A governmental entity s Amount to Be Provided ledger account is included in the accounting records of the entity s: a. Debt service funds. b. Capital projects funds. c. General long-term debt account group. d. General capital assets account group. 14. The typical balances of the following ledger accounts of a governmental entity s general long-term debt account group are: a. b. c. d. Amount Available in Debt Service Fund Debit Credit Debit Credit Amount to Be Provided Credit Debit Debit Credit 15. Are journal entries for a capital lease (for property not recorded in a proprietary fund) entered into by a governmental entity typically required in the entity s: a. b. c. d. General Long-Term General Capital Assets General Fund? Debt Account Group? Account Group? No Yes Yes Yes No Yes Yes Yes No Yes Yes Yes 16. For the transactions and events related to construction of public improvements financed by special assessments, does a governmental entity use a: a. b. c. d. Special Revenue Capital Projects Debt Service Fund? Fund? Fund? Yes Yes Yes Yes Yes No No Yes No No Yes Yes (Exercise 18.2) (Exercise 18.3) On July 1, 2005, property taxes totaling $480,000, of which 1 1 2% was estimated to be uncollectible, were levied by the County of Larchmont Special Revenue Fund. Property taxes collected by the Special Revenue Fund during July 2005 totaled $142,700. Prepare journal entries for the County of Larchmont Special Revenue Fund for the foregoing transactions and events. On July 1, 2005, the City of Garbo Capital Projects Fund received the proceeds of a $1 million face amount, 6% five-year serial bond issue, $200,000 principal plus interest payable

23 770 Part Five Accounting for CHECK FIGURE Present value of bonds, $949,636. (Exercise 18.4) (Exercise 18.5) (Exercise 18.6) (Exercise 18.7) annually, to finance the construction of a new elementary school. The bonds were issued to yield 8%. Prepare a working paper to compute the proceeds (present value) of the City of Garbo 6% serial bonds on July 1, On July 1, 2005, the County of Pinecrest issued at face amount $1,200,000 of 30-year, 5% general obligation term bonds, interest payable each January 1 and July 1, to finance the construction of a public health center. Prepare journal entries on July 1, 2005, to record the foregoing transaction for all County of Pinecrest funds or voluntarily maintained account groups affected. Identify the funds or account groups. On April 30, 2006, the fiscal agent for the Town of Wallen Debt Service Fund paid the final serial payment of $50,000 on the town s 8% general obligation bonds, together with semiannual interest. The Debt Service Fund had provided sufficient cash to the fiscal agent a few days earlier. Prepare a journal entry for the Town of Wallen Debt Service Fund to record the fiscal agent s payment of bond principal and interest on April 30, On March 18, 2006, the Bucolic Township General Fund transferred $140,000 to the Debt Service Fund for the semiannual $100,000 serial maturity (payable March 31, 2006) on $800,000 face amount of outstanding 10% general obligation bonds, plus interest of $40,000. Prepare journal entries (omit explanations) on March 18, 2006 only, for the appropriate funds and voluntarily maintained account group of Bucolic Township. Among the activities of Nemo County for the fiscal year beginning July 1, 2005, and ending June 30, 2006, was the following: Sept. 1, 2005 Acquired for cash, from proceeds of general tax revenues, equipment costing $80,000 (the related purchase order was for $79,600). The equipment was to be used by the general government of Nemo County. The county uses encumbrance accounting. Prepare journal entries (omit explanations) for the foregoing activity of Nemo County. Identify by initials the funds or voluntarily maintained account groups (for example, GF, SRF, CPF, GCAAG) in which the journal entries are recorded. (Exercise 18.8) (Exercise 18.9) On March 24, 2006, Wildwood Village sold to a scrap dealer for $40,000 an old fire engine with a cost of $200,000 and carrying amount of $20,000 in Wildwood s general capital assets account group. The $40,000 cash was received by Wildwood s general fund, which simultaneously acquired another fire engine for $450,000 cash, compared with the $446,000 amount of the purchase order that had been issued on February 10, The village uses encumbrance accounting and a general capital assets account group. Prepare journal entries (omit explanations) for Wildwood Village s general fund and general capital assets account group on March 24, 2006 only. On June 30, 2006, the end of the fiscal year, the following journal entry was prepared by the accountant for the Town of Backwoods Town Hall Capital Projects Fund: Expenditures 950,000 Vouchers Payable 950,000 To record first progress billings of architect and contractor for town hall under construction.