Chapter 5 - Full Page Slides.pdf

ACCT 5610/6610 Governmental and Not for Profit Accounting Allison D. Edge, CPA, CGMA  Chapter 5 General and Special Revenue Funds, Continued… 2  RECOGNITION AND MEASUREMENT ▪ Focus on spendable resources – Financial resour...

ACCT 5610/6610 Governmental and Not for Profit Accounting Allison D. Edge, CPA, CGMA  Chapter 5 General and Special Revenue Funds, Continued… 2  RECOGNITION AND MEASUREMENT ▪ Focus on spendable resources – Financial resources Cash Investments Taxes receivable – NOT capital assets ▪ Revenues recognized if resources are “measurable and available” – Available means “collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period.” 3 © CAMBRIDGE BUSINESS PUBLISHERS  RECOGNITION AND MEASUREMENT ▪ Expenditures accrued if liabilities are incurred and “normally” paid from current financial resources ▪ Modifications to accrual accounting ▪ “Unmatured long-term indebtedness of the government... is general long-term debt and should not be reported as liabilities in governmental funds....” ▪ Unmatured portion of bonds and notes payable ▪ “Noncurrent” liabilities ▪ Compensated absences ▪ Claims and judgments ▪ Pensions 4 © CAMBRIDGE BUSINESS PUBLISHERS TYPES OF LIABILITIES RECOGNIZED IN GOVERNMENTAL-TYPE FUNDS ▪ Short-term liabilities – Once incurred, normally paid in a timely manner from current financial resources Salaries, professional services, supplies, utilities, and travel ▪ “Matured” long-term liabilities normally expected to be liquidated with expendable available financial resources – Matured portion of bonds and notes payable 5 © CAMBRIDGE BUSINESS PUBLISHERS GOVERNMENTAL FUNDS ACCOUNTING EQUATION ▪ Simple equation ▪ Complete accounting equation 6 © CAMBRIDGE BUSINESS PUBLISHERS  DEFERRED OUTFLOWS OF RESOURCES ▪ Government’s consumption of net assets that is applicable to a future report period ▪ Amounts that will be recognized as expenditures in a future period rather than the current period ▪ Reported in separate section of balance sheet after assets 7 © CAMBRIDGE BUSINESS PUBLISHERS  DEFERRED INFLOWS OF RESOURCES ▪ Government’s acquisition of net assets that are applicable to a future reporting period ▪ Generally, may be thought of as amounts reported on the balance sheet that will be recognized as revenue or as a reduction of an expenditure in a future period rather than the current period ▪ Reported in separate section of balance sheet after liabilities 8 © CAMBRIDGE BUSINESS PUBLISHERS  PROPERTY TAX REVENUES ▪ Property taxes recognized as revenue – In fiscal year levied IF – Available (normally collected within at least 60 days of year-end) Defer if not collected in 60 days ▪ Reduce revenues to provide for estimated uncollectible taxes, estimated tax refunds or discounts – Establish an “allowance for…” 9 © CAMBRIDGE BUSINESS PUBLISHERS  PROPERTY TAX ASSET RECOGNITION ▪ Property taxes receivable from property tax transactions recognized when – Enforceable legal claim arises (levied) ▪ Cash recognized when – Cash received ▪ Property taxes collected in period before they are levied – Reported as deferred inflows of resources and recognize as revenue in period for which they are levied 10 © CAMBRIDGE BUSINESS PUBLISHERS  RECORD PROPERTY TAX ENTRIES ▪ Property tax levy with allowance for refunds and uncollectible accounts 1. Debit Property taxes receivable 2. Credit Allowance for refunds and uncollectible taxes 3. Credit Revenues—property taxes Bad debt expense is not reported in governmental funds. Instead, Revenues—property taxes are recorded at the net amount after being reduced by the allowance for refunds and uncollectible taxes. ▪ Property tax collections 1. Debit Cash 2. Credit Property taxes receivable 11 © CAMBRIDGE BUSINESS PUBLISHERS  PRACTICE EXERCISE 1. A city levies property taxes in the amount of $4,000,000. Experience shows that about $100,000 of the amount levied will not be collected. Answer: Property taxes receivable 4,000,000 Allowance for refunds and uncollectible taxes 100,000 Revenues – property taxes 3,900,000 2. A city collects cash of $3,800,000 on the property tax levy. Answer: Cash 3,800,000 Property taxes receivable 3,800,000 12 © CAMBRIDGE BUSINESS PUBLISHERS  RECORD PROPERTY TAX ENTRIES ▪ Record appeals of tax assessments if taxpayer wins appeal 1. Debit Allowance for refunds and uncollectible taxes 2. Credit Cash (if taxes must be refunded to taxpayer) 3. Credit Property taxes receivable 13 © CAMBRIDGE BUSINESS PUBLISHERS PRACTICE EXERCISE 3. Based on tax assessment appeals, the city reduces taxes for several taxpayers by a total of $100,000. The taxpayers had not paid any of the taxes that they were appealing. Answer: Allowance for refunds and uncollectible taxes 100,000 Property taxes receivable 100,000 14 © CAMBRIDGE BUSINESS PUBLISHERS  RECORD PROPERTY TAX ENTRIES ▪ Year-end adjustment to allowance 1. Debit or credit Allowance for refunds and uncollectible taxes If allowance needs to decrease, debit allowance If allowance needs to increase, credit allowance 2. Credit or debit Revenues—property taxes Revenues—property taxes is adjusted for same amount as is the Allowance for refunds and uncollectible taxes Revenues—property taxes is reduced by the Allowance for refunds and uncollectible taxes. Therefore, an adjustment to the Allowance account affects Revenues. 15 © CAMBRIDGE BUSINESS PUBLISHERS  RECORD PROPERTY TAX ENTRIES ▪ Year-end adjustment for delinquent property taxes 1. Debit Property taxes receivable―delinquent 2. Credit Property taxes receivable – Year-end adjustment for allowance associated with delinquent property taxes 1. Debit Allowance for refunds and uncollectible taxes 2. Credit Allowance for refunds and uncollectible taxes―delinquent 16 © CAMBRIDGE BUSINESS PUBLISHERS  PRACTICE EXERCISE 4. The city declares all unpaid taxes as delinquent. Answer: Property taxes receivable―delinquent 100,000 Property taxes receivable 100,000 Property taxes levied $4,000,000 – Property taxes collected ($3,800,000) – Property taxes written off ($ 100,000) = Property taxes receivable $100,000 17 © CAMBRIDGE BUSINESS PUBLISHERS  RECORD PROPERTY TAX ENTRIES ▪ Year-end deferral for property taxes not expected to be collected within 60 days of next fiscal year. 1. Debit Revenues―property taxes 2. Credit Deferred inflow of resources―unavailable property taxes Deferred because property taxes are not available in current period even though they were levied for current period Expected to be available in a future period Classified as a part of “deferred inflows of resources” 18 © CAMBRIDGE BUSINESS PUBLISHERS PRACTICE EXERCISE 5. At its fiscal year-end, the city comptroller determines that all unpaid taxes will be collected in the next fiscal year, but that only $75,000 of the amount due will be collected in the first 60 days of the next fiscal year. Answer: Revenues―property taxes 25,000 Deferred inflow of resources― unavailable property taxes 25,000 19 © CAMBRIDGE BUSINESS PUBLISHERS  RECORD PROPERTY TAX ENTRIES ▪ Recognize property tax revenue associated with previous deferral that is collected more than 60 days into the subsequent year – Debit Deferred inflow of resources—unavailable property taxes – Credit Revenues—property taxes 20 © CAMBRIDGE BUSINESS PUBLISHERS PRACTICE EXERCISE 6. In its next fiscal year, the city collects $10,000 of the delinquent property taxes receivable 90 days after its previous fiscal year end. Answer: Cash 10,000 Property taxes receivable―delinquent 10,000 Deferred inflow of resources― unavailable property taxes 10,000 Revenues―property taxes 10,000 21 © CAMBRIDGE BUSINESS PUBLISHERS  RECORD PROPERTY TAX DISCOUNT ▪ Cash discount for early payment of taxes ▪ Establish allowance for discount on property taxes by reducing revenue when taxes levied 1. Debit Property taxes receivable 2. Credit Allowance for discounts on property taxes 3. Credit Revenues—property taxes 22 © CAMBRIDGE BUSINESS PUBLISHERS  RECORD PROPERTY TAX DISCOUNT ▪ Adjustment to allowance when property taxes collected and discount expires 1. Debit Cash 2. Debit Allowance for discounts on property taxes for amount originally recorded 3. Credit Property taxes receivable for amount collected plus reductions in receivable due to discounts taken 4. Debit or Credit Revenues—property taxes Debit Revenues if more discounts taken than originally recorded in Allowance Credit Revenues if less discounts taken than originally recorded in Allowance 23 © CAMBRIDGE BUSINESS PUBLISHERS  INTEREST ON DELINQUENT PROPERTY TAXES ▪ Recognize as revenue when available – Usually when cash received ▪ Governments often do not record receivable for interest on delinquent taxes – Immaterial – If recorded, an Allowance for uncollectible interest and penalties will also need to recorded. 24 © CAMBRIDGE BUSINESS PUBLISHERS  TAX LIENS ▪ Property tax lien – A government’s legal right to prevent sale of property in order to satisfy government’s property tax claim against property owner ▪ Record tax lien 1. Debit Tax liens receivable 2. Credit Property taxes receivable—delinquent 3. Credit Interest and penalties receivable 25 © CAMBRIDGE BUSINESS PUBLISHERS  PROPERTY TAX SALE ▪ If property owner does not satisfy lien, government may seize and sell property to highest bidder. – Government receives amount owed plus cost associated with property sale – Remainder of proceeds goes to former property owner 26 © CAMBRIDGE BUSINESS PUBLISHERS  IN CLASS EXERCISES ▪ E5-34 ▪ E5-35 ▪ P5-46 27 © CAMBRIDGE BUSINESS PUBLISHERS 28 29  DERIVED TAX REVENUES ▪ Taxes are “derived” by governments by applying their current tax rates to underlying exchange transactions – General sales taxes – Personal income taxes – Taxes on specific items 30 © CAMBRIDGE BUSINESS PUBLISHERS  DERIVED TAX REVENUES ▪ Asset and Revenue Recognition – Assets (cash or receivable) recognized when an exchange occurs. – Revenues (net of refunds and estimated uncollectible amounts) recognized when exchange occurs AND resources are available. Available means collected in the current period or soon enough thereafter to pay liabilities of current period. Could be more than 60 day “available” rule (that applies to property taxes) 31 © CAMBRIDGE BUSINESS PUBLISHERS  SALES TAX REVENUES AND RECEIVABLES ▪ Asset and Revenue Recognition 1. Debit Cash or Sales taxes receivable 2. Credit Revenues—sales taxes If a portion of sales taxes are not “available,” then a credit should be made to Deferred inflow of resources—sales taxes for the amount not available. 32 © CAMBRIDGE BUSINESS PUBLISHERS  INCOME TAX REVENUES AND RECEIVABLES ▪ Similar accounting rules as sales taxes ▪ More estimates for income taxes because income taxes may be paid several months after end of fiscal year. ▪ Taxpayers may be eligible for tax refunds, which adds an Income tax refunds payable account in the journal entries. 33 © CAMBRIDGE BUSINESS PUBLISHERS  RECORD INCOME TAX TRANSACTIONS ▪ Accrue income taxes for the current fiscal year based on actual tax receipts in first month of next fiscal year. 1. Debit Income taxes receivable 2. Credit Revenues—income taxes ▪ In addition, the state expects to receive additional tax receipts and expects to make tax refunds during “availability” period 1. Debit Income taxes receivable 2. Credit Income tax refunds payable 3. Debit or Credit Revenues—income taxes (for difference between 1 and 2) ▪ Record additional expected income tax receipts from late filers that are not “available” 1. Debit Income taxes receivable 2. Credit Deferred inflow of resources—income taxes Example: E5-36 © CAMBRIDGE BUSINESS PUBLISHERS 34 35  INTERGOVERNMENTAL GRANTS ▪ Time requirements – Specify period when resources must be used or when use may begin ▪ Purpose restrictions – Specify activities for which the grant may be used ▪ Recognize revenue when: – Eligibility requirements are met AND – Resources are available 36 © CAMBRIDGE BUSINESS PUBLISHERS  INTERGOVERNMENTAL GRANTS ▪ Expenditure-driven grants – Reimbursement based grants Allowable costs must be incurred by a government as part of eligibility requirement. ▪ Grant with purpose restriction, but no time requirement – Recognize asset (for example, Due from state government or Cash) and revenue (assuming it is available) when eligibility requirements are met. 37 © CAMBRIDGE BUSINESS PUBLISHERS  INTERGOVERNMENTAL GRANTS ▪ Grant with time requirements – Time restriction may exist which states that the resources must be expended in next fiscal year. – Entry if cash received prior to time requirement being met Debit Cash Credit Deferred inflow of resources—grant Recognize revenue and reverse deferred inflow in next fiscal year when time requirement is met. 38 © CAMBRIDGE BUSINESS PUBLISHERS  INTERGOVERNMENTAL GRANTS ▪ Pass-through grants – A government receives a grant that it transfers to or spends on behalf of another government – Generally, recognized as revenues and expenditures in primary government’s governmental-type funds. Exception—Custodial Fund generally is used if primary government is only a cash conduit for the grant and has no administrative or direct financial involvement with the program. Administrative involvement includes monitoring secondary recipients for compliance or exercising discretion over how funds are allocated to secondary recipients. Example: E5-37 39 © CAMBRIDGE BUSINESS PUBLISHERS 40  IMPOSED NONEXCHANGE REVENUES ▪ Fines and penalties ▪ Assets recognized when enforceable claim arises. ▪ Revenues recognized when enforceable legal claim arises and resources are available. – Net revenues against allowance for uncollectible accounts 41 © CAMBRIDGE BUSINESS PUBLISHERS  MISCELLANEOUS EXCHANGE REVENUES ▪ Examples – Golf course and swimming pool fees – Inspection fees – Parking fees ▪ Best recognized when cash is received ▪ Business licenses generally are not susceptible to accrual, but are recognized when cash is received. 42 © CAMBRIDGE BUSINESS PUBLISHERS REVENUE RECOGNITION SUMMARY 43 © CAMBRIDGE BUSINESS PUBLISHERS  PILOTS ▪ Payments in lieu of taxes (PILOTs) ▪ Government receives payment from another entity (government or nonprofit) to cover revenues lost because the entity is exempt from paying property taxes. ▪ For PILOTs received from federal government, revenues recognized when eligibility requirements met and resources available. 44 © CAMBRIDGE BUSINESS PUBLISHERS  RECOGNIZING EXPENDITURES AND LIABILITIES ▪ Three categories 1. Items that once incurred, normally are paid in a timely manner and in full from current financial resources. Salaries, professional services, supplies, utilities, and travel Expenditures accrued and liabilities reported in governmental funds 2. Items that create “liabilities” that governments “normally” expect to liquidate over future time periods with financial resources available in those future time periods. Claims and judgments, compensated absences, and landfill closure and postclosure care costs Recognize expenditures and liabilities in government funds as the liabilities mature (come due for payment) each year on the occurrence of relevant events. 45 © CAMBRIDGE BUSINESS PUBLISHERS  RECOGNIZING EXPENDITURES AND LIABILITIES 3. Liabilities resulting from promises to pay pensions, retiree health care, and other postemployment benefits. Expenditures for these salary related items should be equal to (a) the amount paid by the employer to the plan and (b) the change during the period in the related government fund liability. Governmental funds recognize a liability to the extent that benefits are normally expected to be liquidated with expendable available financial resources. Therefore, a liability is only recognized in governmental funds when benefits have matured and are due for payment by the government because the plan providing the benefit does not have the resources to pay it. 46 © CAMBRIDGE BUSINESS PUBLISHERS  RECOGNIZING EXPENDITURE ACCRUALS Example: E5-38 47 © CAMBRIDGE BUSINESS PUBLISHERS 48  INTERFUND TRANSACTIONS 49 © CAMBRIDGE BUSINESS PUBLISHERS  INTERFUND SERVICES PROVIDED AND USED ▪ An activity accounted for in the General Fund purchases $50,000 of water from a Water Utility Fund. 50 © CAMBRIDGE BUSINESS PUBLISHERS  PRACTICE EXERCISE The General Fund receives a bill for $50,000 from the Motor Pool Internal Service Fund for motor vehicle services provided to city agencies in June. Answer: General Fund Expenditures―motor vehicle services 50,000 Due to Motor Pool Internal Service Fund 50,000 Motor Pool Internal Service Fund Due from General Fund 50,000 Revenues―services provided 50,000 51 © CAMBRIDGE BUSINESS PUBLISHERS  INTERFUND TRANSFERS ▪ The General Fund transfers $100,000 to a Debt Service Fund so the Debt Service Fund can pay for debt service that is soon due. 52 © CAMBRIDGE BUSINESS PUBLISHERS  PRACTICE EXERCISE The General Fund sends $75,000 cash to the Capital Projects Fund with no expectation of being repaid. Answer: General Fund Transfer out to Capital Projects Fund 75,000 Cash 75,000 Capital Projects Fund Cash 75,000 Transfer in from General Fund 75,000 53 © CAMBRIDGE BUSINESS PUBLISHERS  INTERFUND LOANS ▪ The General Fund makes a short-term loan of $75,000 to a Proprietary Fund. 54 © CAMBRIDGE BUSINESS PUBLISHERS  INTERFUND LOANS ▪ Short-term loan – Due from (Receivable) – Due to (Payable) ▪ Long-term loan – Advance to (Receivable) – Advance from (Payable) – Fund balance related to long-term interfund receivable classified as “Nonspendable” fund balance because the receivable is not a financial resource available for spending. 55 © CAMBRIDGE BUSINESS PUBLISHERS  PRACTICE EXERCISE The General Fund makes a short-term loan of $100,000 to a Capital Projects Fund. Answer: General Fund Due from Capital Projects Fund 100,000 Cash 100,000 Capital Projects Fund Cash 100,000 Due to General Fund 100,000 56 © CAMBRIDGE BUSINESS PUBLISHERS  PRACTICE EXERCISE The General Fund makes a long-term loan of $100,000 to a Capital Projects Fund. Answer: General Fund Advance to Capital Projects Fund 100,000 Cash 100,000 Capital Projects Fund Cash 100,000 Advance from General Fund 100,000 57 © CAMBRIDGE BUSINESS PUBLISHERS PRACTICE EXERCISE The General Fund makes a long-term loan of $100,000 to a Capital Projects Fund. Record the General Fund journal entry to reclassify unassigned fund balance that is not available for spending due to the long-term loan. Answer: General Fund Unassigned fund balance 100,000 Nonspendable fund balance 100,000 58 © CAMBRIDGE BUSINESS PUBLISHERS  INTERFUND REIMBURSEMENTS ▪ The General Fund paid for $7,000 of professional services for the Capital Projects Fund, which is reimbursed by the Capital Projects Fund. 59 © CAMBRIDGE BUSINESS PUBLISHERS PRACTICE EXERCISE The General Fund had previously paid $40,000 for consulting services and recorded the entire amount as expenditures. It now bills the Capital Projects Fund $20,000 for that fund’s share of the consulting services. Answer: General Fund Due from Capital Projects Fund 20,000 Expenditures―consulting services 20,000 Capital Projects Fund Expenditures―consulting services 20,000 Due to General Fund 20,000 Example: E5-40 60 © CAMBRIDGE BUSINESS PUBLISHERS 61  ACQUIRING AND DISPOSING OF CAPITAL ASSETS ▪ Acquire a capital asset in a governmental-type fund – Debit Expenditures—capital outlay – Credit Cash or Vouchers payable ▪ Sale of a capital asset for cash – Debit Cash – Credit Other financing sources—proceeds from sale of general capital assets 62 © CAMBRIDGE BUSINESS PUBLISHERS  INVENTORIES ▪ Two accounting methods 1. Consumption method Purchase of inventory Debit Supplies inventory Credit Cash or Vouchers payable Use of inventory Debit Expenditures—supplies Credit Supplies inventory Conceptually, consumption method views inventory as a financial asset. 63 © CAMBRIDGE BUSINESS PUBLISHERS  INVENTORIES ▪ Two accounting methods 2. Purchases method Purchase of inventory Debit Expenditures—supplies Credit Cash or Vouchers payable Closing entry if material amount of year-end inventory Debit Supplies inventory Credit Nonspendable fund balance Conceptually, purchases method does not view inventory as a financial asset. Example: E5-41 and E5-42 64 © CAMBRIDGE BUSINESS PUBLISHERS 65 STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE 66 © CAMBRIDGE BUSINESS PUBLISHERS  STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE ▪ Revenues – Inflows of financial resources that are available to finance expenditures of the current reporting period, resulting from transactions (such as taxes, intergovernmental grants, and charges for services) that generally increase the net assets of the entity as a whole ▪ Expenditures – Outflows of financial resources that are due and payable in the current reporting period or shortly thereafter, for current operations, capital outlays, and debt service 67 © CAMBRIDGE BUSINESS PUBLISHERS  STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE ▪ Other financing sources or uses – Increases or decreases in the assets of a fund that generally do not increase or decrease the net assets of the entity as a whole Interfund transfers Proceeds from issuance of debt Proceeds from sale of capital assets 68 © CAMBRIDGE BUSINESS PUBLISHERS  BALANCE SHEET 69 © CAMBRIDGE BUSINESS PUBLISHERS  BALANCE SHEET 70 © CAMBRIDGE BUSINESS PUBLISHERS  FUND BALANCE 71 © CAMBRIDGE BUSINESS PUBLISHERS  NONSPENDABLE FUND BALANCE ▪ Amounts not available for appropriation because they are either – Not in spendable form (inventory, prepaid items, long-term interfund loans) or – Legally or contractually required to be maintained intact (corpus of Permanent Fund) 72 © CAMBRIDGE BUSINESS PUBLISHERS  RESTRICTED FUND BALANCE ▪ Amounts can be used for no purpose other than specified in constitutional provision, enabling legislation, or contractual provision creating the restraint. – Restrictions may be externally imposed by creditors (debt covenants), grantors, contributors, or laws or regulations of other governments – Imposed by law through constitutional provisions or enabling legislation 73 © CAMBRIDGE BUSINESS PUBLISHERS  COMMITTED FUND BALANCE ▪ Amounts constrained as to use as a result of formal action (legislation, resolution, ordinance) of government’s highest level of decision- making authority. 74 © CAMBRIDGE BUSINESS PUBLISHERS  ASSIGNED FUND BALANCE ▪ Amounts constrained by government’s intent to spend resources for specific purposes. – Intent expressed by governing body or a body or person that governing body designates ▪ For all governmental funds except General Fund – Report amounts not reported as nonspendable, restricted, or committed fund balance as assigned fund balance. General Fund – Amounts encumbered from unassigned resources should be reported as Assigned fund balance at the end of the fiscal year because the authority given to the person that places an order results in that amount meeting the criteria for classification as assigned. 75 © CAMBRIDGE BUSINESS PUBLISHERS  UNASSIGNED FUND BALANCE ▪ Amounts available for spending for any legal purpose ▪ Residual classification for General Fund Example: E5-43 Other Examples: P5-48 and P5-53 76 © CAMBRIDGE BUSINESS PUBLISHERS 77 78 79