Ch07_LN_517.pptx

Accounting for the Business- type Activities of State and Local Governments Chapter 7  Types of Proprietary Funds Internal Service Fund: Funds used to account for the acquisition or production and the distribution of centralized goods and services that are provided to depa...

Accounting for the Business- type Activities of State and Local Governments Chapter 7  Types of Proprietary Funds Internal Service Fund: Funds used to account for the acquisition or production and the distribution of centralized goods and services that are provided to departments or agencies of the government, or to other governments, on a cost-reimbursement basis. Included in Governmental Activities for Government-Wide financial reports. Included in a separate column in the  Types of Proprietary Funds Enterprise Fund: Funds used to account for activities that produce goods or services to be sold to the general public. Included in Business-Type Activities for Government-Wide financial reports. Major enterprise funds are itemized separately, as are aggregate nonmajor enterprise funds in the Proprietary Fund financial reports. Proprietary Funds  Proprietary Fund Financial Reporting Accounted for largely like business entities. Accrual Accounting Economic Resource Measurement Revenues & Expenses; Current and Long-term Assets and Liabilities. Financial Statements Statement of Net Position (Balance Sheet) Statement of Revenues, Expenses, & Changes in Fund Net Position Statement of Cash Flows  Proprietary Fund Financial Reporting Statement of Net Position Net Position Net investment in capital assets Restricted Unrestricted Operating Statement Revenues reported by major sources Revenues reported net of discounts and allowances  Proprietary Fund Financial Reporting Statement of Cash Flows Operating Activities Noncapital Financing Activities Capital Financing Activities Investing Activities  Internal Service Funds Internal service funds are established to improve financial management of government resources. The financial objective of an internal service fund is to recover from operating revenues the full cost of operations including future needs for equipment replacements and upgrades to meet the needs of using funds and departments whose scale of operations is increasing or changing. Administrators and governing bodies need to determine that the costs of operating the fund are reasonable in relation to the benefits provided by the fund.  Town of Brighton Supplies Fund Assume that late in fiscal year 2016 the administrators of the Town of Brighton, created an internal service fund to centralize the purchasing, storing, and issuing functions. The new Supply Fund was created on December 31, 2016, by transferring cash of $30,000 and supplies having a cost of $61,500 from the General Fund. These transfers were intended as permanent contributions to the Supply Fund and are not to be repaid.  Illustrative Transactions In order to provide cash to be used for acquisition of a building and the equipment needed to handle the supply function efficiently, the town's Water Utility Fund provides a long-term interest-free interfund loan of $130,000 to the Supplies Fund. The loan is to be repaid by the Supplies Fund in 20 equal annual installments. Water Utility Fund:  Illustrative Transactions In order to provide cash to be used for acquisition of a building and the equipment needed to handle the supply function efficiently, the town's Water Utility Fund provides a long-term interest-free interfund loan of $130,000 to the Supplies Fund. The loan is to be repaid by the Supplies Fund in 20 equal annual installments. Business-type Activities:  Illustrative Transactions Assume that a warehouse building is purchased for $95,000; $25,000 of the purchase price is considered land. Machinery and equipment are purchased for $25,000,and delivery equipment is purchased for $10,000, all for cash.  Illustrative Transactions During 2017, supplies are received and related invoices are approved for payment in the amount of $192,600. When issuing supplies, the Supplies Fund will include a markup to cover costs. If the Supplies Fund has a markup of 35 percent on cost and issues $185,000 of supplies to General Fund departments, the following entries will be recorded.  Illustrative Transactions The issuance of the supplies would be recognized in the Governmental Activities at cost, without any markup. When the liability is paid, the following entry will be recorded.  Illustrative Transactions Assuming that payroll and fringe benefits totaling $55,000 during the year were all paid in cash and distributed to the functional expense accounts in the amounts shown, Entry 6 is appropriate.  Illustrative Transactions The town received a $1,000 cash grant from a state program promoting the use of compact fluorescent light bulbs in the supplies warehouse. Unlike the billing in Entry 4b, this revenue is from a source external to the town government; therefore, the transaction should be recorded in both the supplies fund and the governmental activities general journal.  Illustrative Transactions Shortly after receipt of the grant funds, the warehouse light bulbs were replaced at a cost of $1,000.  Illustrative Transactions Payments on vouchers during the year totaled $164,000. When payment is made on the interfund loan at the end of 2017, the payment and the reclassification of the next installment must be recorded.  Illustrative Transactions The building used as a warehouse was estimated at the time of purchase to have a remaining useful life of 20 years; the warehouse machinery and equipment were estimated to have useful lives of 10 years, and the delivery equipment to have a useful life of 5 years. If the administrative and clerical office space occupies 10 percent of the area of the warehouse, 10 percent of the depreciation of the warehouse, $350, may be considered administrative expense. Similarly, if the purchasing office occupies 10 percent of the space in the warehouse building, 10 percent of the building depreciation, $350, may be considered purchasing expense. The remainder of the building is devoted to warehousing; therefore, 80 percent of the total building depreciation, $2,800, is to be charged to Warehousing Expenses. This account is also charged $2,500 for machinery and equipment depreciation expense. Delivery Expense is charged $2,000 for depreciation of equipment during the year. Entry 10a illustrates the allocation of depreciation to the Supplies Fund's functions. To simplify the illustration at the Illustrative Transactions  Illustrative Transactions The operating statement accounts should be closed as of December 31, 2017:  Dissolution of an Internal Service Fund Order of payments: Outside creditors Outstanding interfund loans Liquidation procedures. Liquidation can occur in three ways: Transfer assets to another fund to continue the operations as a subsidiary activity. Distribute the assets to another fund or government. Convert all assets to cash and distribute to another fund or funds.  Enterprise Funds Under GASB standards, a government must report certain activities in an enterprise fund if any of the following criteria are met: Laws or regulations require The activity is that the activity’s financed with Pricing policies costs of providing debt that is are designed to services including secured solely by recover the costs capital costs be a pledge of the of the activity, recovered with fees revenues from including capital and charges, fees and charges costs rather than with of an activity taxes or similar revenues  Enterprise Funds Enterprise funds use the accrual basis of accounting, and include all assets used in the activity, as well as any long- term debt to be serviced by the fund. Governmental business-type activities generally have investor-owned counterparts, and can take advantage of the accounting structures developed in the private sector. Public utilities are the most common example of enterprise funds.  Water Utility Fund A water utility fund is used to illustrate financial reporting for an enterprise fund. These funds are subject to regulations by the National Association of Regulatory Utility Commissioners (NARUC) and Federal Energy Regulatory Commission (FERC). In part because of this regulation, some unique terminology is used in accounting and financial reporting for  Illustrative Transactions For FY 2017, it is not feasible when customers’ bills are prepared to determine whether a portion of the bill has been accrued and, if so, in what amount. The simplest procedure, therefore, is to reverse the accrual entry as of the start of the new fiscal year. Assuming that the entire December 31, 2016, Town of Brighton Water Utility Fund revenues accrual has been credited to Sales of Water, the following entry is appropriate as of January 1, 2017: Earlier in this chapter, recall that the Water Utility Fund advanced $130,000 to the Supplies Fund as a long-term loan.  Illustrative Transactions When utility customers are billed during the year, appropriate revenue accounts are credited. Assuming that during 2017 the total bills to nongovernmental customers amounted to $696,000, bills to the Town of Brighton General Fund amounted to $30,000, and all revenue was from the sale of water, the following entry summarizes the events: If collections on receivables from nongovernmental water customers totaled $680,000, Entry 4 is needed:  Illustrative Transactions Materials and supplies in the amount of $138,000 were purchased during the year by the Water Utility Fund. Materials and supplies chargeable to the accounts itemized in the following entry were issued during the year.  Illustrative Transactions Payrolls for the year were chargeable to the accounts shown in the following entry. Tax Collections Payable is the NARUC and FERC systems account for the liability for payroll deductions. Taxes Accrued is the NARUC and FERC systems account for the liability for the employer's share of social security taxes.  Illustrative Transactions Bond interest in the amount of $105,000 was paid; the bonds were issued to finance the acquisition of utility plant assets. Amortization of debt discount amounted to $530. Bond interest in the amount of $12,900 was properly capitalized as part of construction work in progress during the year. (The Town of Brighton does not impute interest on its own resources during construction.)  Illustrative Transactions Construction projects on which costs totaled $220,000 were completed and the assets placed in service were recorded: Collection efforts on bills totaling $3,410 were discontinued. The customers original deposits of $2,140 were applied to the bills, and the unpaid remainder was charged to Accumulated Provision for Uncollectible Accounts. Restricted assets (cash) is reduced by $2,140, the amount of the decrease in Customer Deposits.  Illustrative Transactions Customers’ deposits amounting to $1,320 were refunded by check to customers discontinuing service. Deposits totaling $2,525 were received from new customers. Customers’ advances for construction in the amount of $14,000 were applied to their water bills; in accord with the agreement with the customers and NARUC recommendations, the remainder of the advances was transferred to Capital Contributions from Customers.  Illustrative Transactions Payments of accounts payable for materials and supplies used in operations totaled $67,200, and payment of accounts payable for materials used in construction totaled $66,000. Payments of taxes accrued amounted to $13,500, and payments of tax collections payable amounted to $50,000. The Water Utility Fund agreed to pay $25,000 to the town General Fund as a payment in lieu of property taxes.  Illustrative Transactions During the year, interest amounting to $44,500 in cash was received on restricted investments. The amount $1,375 is allocable to investments of customer deposit assets and is unrestricted as to use; the remaining $43,125 adds to the amount restricted for revenue bond repayment.  Illustrative Transactions At year-end, entries to record depreciation expense, the provision for uncollectible accounts, and unbilled customer accounts receivable should be made as illustrated by Entry 17. In accord with regulatory terminology, Uncollectible Accounts instead of Bad Debts Expense (FASB) or Provision for Bad Debts (GASB) is debited for the amount added to Accumulated Provision for Uncollectible Accounts.  Illustrative Transactions In accord with the revenue bond indenture, $100,000 of unrestricted cash was invested in U.S. government securities for eventual retirement of revenue bonds. Net position is restricted in an amount equal to the increase in restricted assets. In addition, investments totaling $40,000 were made from restricted cash for eventual bond repayment.  Illustrative Transactions Toward the end of 2017, the Supplies Fund paid its first installment of $6,500 to the Water Utility Fund as a partial repayment of the long-term advance. Entry 9a of the illustrative entries for the supply fund shown earlier.  Illustrative Transactions In addition, Net Position—Net Investment in Capital Assets, would be decreased for depreciation and amortization of the debt discount and increased for the change in utility plant during the year. Entry 21a reflects the adjustment for depreciation (Entry 17) and amortization of the bond discount (Entry 8). The increase to capital assets (Entries 6, 7, and 9), resulting in adjustment to net position, is shown in Entry 21b.  Enterprise Fund Financial Statements An enterprise fund prepares the following financial statements: Statement of net position Statement of revenues, expenses, and changes in fund net position Statement of cash flows Enterprise funds are included in the Business-type Activities column in the government-wide financial statements  Illustrative Transactions Nominal accounts for the year were closed: Questions?