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CHAPTER 17ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS,

PART II

Chapter Outline

I. Government entities sometimes obtain property by lease rather than by purchase. A. Leases are recorded as either capital leases or operating leases based upon the

criteria first established by FASB Statement 13.B. Based on this standard, a lease that meets any one of the following criteria is a capital

lease:a. The lease transfers ownership of the property to the lessee by the end of the

lease term.b. The lease contains an option to purchase the leased property at a bargain price.c. The lease term is equal to or greater than 75 percent of the economic life

of the leased property.

d. The present value of minimum lease payments equals or exceeds 90 percent of the fair value of the leased property.

C. For a state or local government, a capital lease is recorded as follows:a. In the government-wide financial statements, the lease is reported as an asset

and liability at the present value of the minimum leases payments and thendepreciation (on the asset) and interest (on the liability) are recognized in thesame manner as used by for-profit organizations.

b. In the fund-based financial statements for government funds, the present value of the minimum lease payments is recorded as an expenditure and an other financing source with later interest and principal payments recorded asexpenditures. No depreciation is recognized because the asset is not recognized.

II. Governments often establish solid waste landfills. They can be recorded within theproprietary funds, if a user fee is assessed, or as part of the general fund if the landfill isopen to the public without a charge.

A. A landfill can eventually create a large liability for the government because of closurecosts and post-closure maintenance and monitoring.

B. On government-wide financial statements, recognition of this liability is based onaccrual accounting and the economic resource measurement focus. Thus, the liabilityis recognized as the available space becomes filled. If the landfill is recorded as anEnterprise Fund, this same reporting is appropriate for fund-based financialstatements.

C. If the landfill is reported within the General Fund, the liability is only reported on thefund-based statements when there is a claim to current financial resources.

III. Governments incur a liability for compensated absences earned by governmentemployees such as school teachers and police officers.

A. Government-wide financial statements require recognition of the liability and expenseas incurred based on accrual accounting and the economic resource measurementfocus.

B. Fund-based financial statements record a liability only if the claim is to be paid fromcurrent financial resources.

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IV. Works of Art and Historical Treasures A. Artworks, historical treasures, and similar assets should be capitalized at cost (or fair

value at the date of donation) in government-wide financial statements.B. An expense rather than an asset can be recorded if the item does not generate

economic benefits and meets the following criteria.a. Held for public exhibition, education, or research in furtherance of public service,

rather than financial gain.b. Protected, kept unencumbered, cared for, and preserved.c. Subject to the policy that revenues generated from sales of items in the collection

be used to add to the collection.C. If capitalized, depreciation is not required if this type of asset is considered to be

inexhaustible.

V. Infrastructure Assets and Depreciation A. Newly-acquired infrastructure assets (such as roads, bridges, and sidewalks) should

be capitalized at historical cost in the government-wide financial statements andrecorded as an expenditure in the fund-based financial statements.

A. Major general infrastructure assets put into service since 1980 must also be capitalized

although an estimation of current book value may be necessary.B. Depreciation of all capital assets other than land and inexhaustible artworks is required

so that infrastructure items are also subject to depreciation.C. However, the “modified approach” allows the expensing of maintenance costs in lieu of

depreciation for infrastructure assets if certain criteria are met.a. A minimum acceptable condition level is established for a network of infrastructure

assets and documentation is provided to show that this minimum level has beenmaintained.

b. An asset management system must be in place to monitor the particular system of assets.

VI. The comprehensive annual financial report (CAFR) includes general purpose external

financial statements. These statements are divided into three distinct sections. A. Management’s discussion and analysis (MD&A) which provides a broad range of

information to help decision-makers evaluate the operations and financial position of the government entities.

B. Financial statementsa. Government-wide financial statements.b. Fund-based financial statements.c. Notes to the financial statements.

C. Required supplementary information.

VII. For governmental accounting, a primary government such as a city or town is a reportingentity that normally produces a comprehensive annual financial report (CAFR).

A. In addition, a special purpose government (such as a school board or water commission) qualifies as a reporting entity if it meets the following three criteria:a. It has a separately elected governing body.b. It is legally independentc. It is fiscally independent of any other state and local governments

B. Component units that meet either of the following two criteria should be reported withinthe CAFR of the reporting government even though they are independent operations.a. It must be fiscally dependent upon the primary organization or

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b. The primary government must appoint a voting majority of the governing board andeither be able to impose its will on the component organization or the componentorganization provides a financial benefit or imposes a financial burden on theprimary government.

C. Once identified, component units can be discretely presented in a separate column tothe right of the government-wide statements or blended with the primary government

as if it made up a part of the primary organization.

VIII. Public colleges are required to meet GASB standards, whereas private colleges arerequired to meet FASB standards.

A. Private colleges generally depend more on tuition and usually have greater endowments.

B. Governments provide the major support for public colleges.C. GASB No. 35 requires the application of GASB No. 34 to public colleges. However,

many of these schools assume that they function solely as an Enterprise Fund (opento the public for a user charge). Thus, these schools are allowed to produce fund-based financial statements without need for government-wide statements.

Learning Objectives

Having completed Chapter Seventeen of the textbook, “Accounting for State and LocalGovernments (Part Two),” students should be able to fulfill each of the following learningobjectives:

1. Understand how leases are classified as either capital or operating and their subsequentrecording in the government-wide and fund-based financial statements.

2. Explain the reason for the difference in the classification of the operation of solid wastelandfills as either a proprietary fund or a general fund.

3. Understand how a landfill can generate a large liability for a government and the differencein the recognition and the subsequent recording of this liability in the government-widefinancial statements and the fund-based financial statements.

4. Understand how governments incur a liability for compensated absences earned bygovernment employees and the difference in their subsequent recording in thegovernment-wide financial statements and the fund-based financial statements.

5. Explain the capitalization rules for art, historical treasures, and similar assets and their subsequent recording in the government-wide and in the fund-based financial statements.

6. Describe when an exception to the required capitalization and depreciation rules for art,historical treasures, or similar assets is justified.

7. Understand the accounting that is required for a government’s infrastructure assets suchas bridges and sidwalks.

8. Explain the criteria for the “modified approach” that allows expensing of maintenance costsin lieu of depreciation for infrastructure assets.




9. Describe the three distinct sections of the general purpose external financial statements .

10. Be able to explain when an operation (such as a school system) that is not a primarygovernment (such as a city or state) is still viewed as a reporting entity for governmentaccounting purposes.

11. Explain the criteria that must be met to be reported as a component unit and the differencein reporting between a unit that is discretely presented and one that is shown as a blendedunit.

12. Describe the two government-wide financial statements.

13. Describe the traditional fund-based financial statements, especially for the governmentalfunds and for the proprietary funds.

14. Explain the method by which governmental accounting rules are applied to public collegesand universities.

Answer to Discussion Question

Is It Part of the County?

In financial accounting for a for-profit organization, the boundary for the reporting entity and itsvarious activities (or subsidiaries) is relatively easy to determine. GAAP provides the basis for inclusion in the consolidated financial statements, which includes all entities over which acompany has control.

In accounting for state and local governments, the distinction is not so clear. What constitutesa reporting entity? Obviously, a primary government such as a city or county is a reporting

entity. What about other governmental operations and activities that exist separate from aprimary government? When do those operations qualify as special purpose governments andwhen should they be viewed as component units to be reported by a primary government?

A special purpose government is a reporting entity. It has a separately elected governingbody, it is legally independent, and it is fiscally independent. Fiscal independence constitutessetting its own budget, levying taxes, and/or issuing bonds without outside approval. Here, theindustrial development commission is not fiscally independent of Harland County. HarlandCounty has the ability to impose its will on the separate organization by its right to approve thecommission’s budget. Therefore, the industrial development commission is not a specialpurpose government.

Is the industrial development commission a component unit? Component units are not alwayseasy to determine. An activity is classified as a component unit if it is fiscally dependent on theprimary government. Because the commission’s budget must be approved by the countygovernment, the commission would appear to qualify as a component unit for Harland County.

Can the commission also be a component unit of the state? There is not fiscal dependencebut a component unit does exist if the primary government appoints a voting majority of theboard and (a) the primary government can impose its will on that board or (b) the separateorganization provides a financial benefit for the primary government or imposes a financial




burden. The state does appoint 15 out of 20 of the board members. appointment of thatnumber of board members does indicate state control. However, there is no evidence or information here that indicates that the state can impose its will on the board or that theseparate organization provides a financial benefit or imposes a financial burden on the state.Therefore, unless other information becomes available indicating that one these requirementsis present, the industrial commission is not a component unit of the state. However, because

of the appointment of the majority of the board, the commission is a related organization to thestate. In that case, the state must disclose the nature of the relationship in its financialstatements.

Answers to Questions

1. State and local governments apply FASB Statement Number 13, “Accounting for Leases,”to determine whether a lease is a capital lease or an operating lease. A lease that meetsany one of the following criteria is held to be a capital lease:a. The lease transfers ownership of the property to the lessee by the end of the lease

term.b. The lease contains an option to purchase the leased property at a bargain price.

c. The lease term is equal to or greater than 75 percent of the estimated economic life of the leased property.d. The present value of rental or other minimum lease payments equals or exceeds 90

percent of the fair value of the leased property.

2. Within the government-wide financial statements, the accounting for capitalized leases isthe same as for-profit enterprises. The asset and liability are initially recorded at thepresent value of the minimum lease payments. Accrual accounting and the economicresource measurement basis are appropriately followed. The equipment would beincreased along with the liability obligation. Subsequently, both depreciation expense andinterest expense must be recognized. The entries in the fund-based financial statementsare the same if a proprietary fund is involved.

The recording of a capital lease in one of the governmental funds within the fund-basedstatements involves the following three steps:

a. The initial entry reports the present value of the liability as an other financingresource.

b. The present value is also recorded as an expenditure consistent with the currentfinancial resources approach being used.

c. When each payment is made, the debt and interest are both recorded asexpenditures.

3. In government-wide financial statements, the lease payment is treated the same as it is infor-profit organizations: part of the payment is considered interest and the rest is paymentof the lease obligation.

In fund-based financial statements, the recording is the same if a proprietary fund isinvolved. However, the recording of a capital lease payment in the governmental fundsinvolves the recording of the debt and interest payments as expenditures.

4. Solid waste landfills can be a significant source of liability for local governments. Thefederal government has strict rules on groundwater monitoring and post-closure activities.This legal obligations can involve large payments over an extended period of time evenafter the landfill is closed.




5. Government-wide financial statements recognize expenses on the accrual and economicresource measurement basis. Therefore, seven percent of the expected landfill closureliability cost would be accrued during the current year as an expense and to report theproper liability.

In the fund-based financial statements, the entry is the same as above if an EnterpriseFund is involved.

In the fund-based statements, if the landfill is recorded in the General Fund, the onlycharge to expenditures is a current payment, if it is made. Thus, the eventual liability isignored unless it will be paid from current financial resources.

6. Government-wide financial statements recognize expenses on the accrual and economicresource measurement basis. At the end of the first year, 11 percent is multiplied times theexpected closing and other related costs and that figure is recognized as both an expenseand a liability. At the end of the second year, 24 percent is multiplied times the expectedcosts (which may have changed since the end of year one) and the liability to be reported

is raised to this new amount. It is the change in the liability that creates the amount of expense to be reported for the second year.

For fund-based financial statements, assuming the landfill is reported in the General Fund,no recording is made unless (a) an actual payment is made because of the eventualclosure or (b) some part of that liability represents a claim to current financial resources inthis period.

7. The amount accrued, $2,000 in this case, should be recorded on the government-wide

financial statements as an expense at the end of 2008 along with the related liability. As agovernmental fund transaction, the fund-based financial statements only include anamount as a liability at the end of 2008 if it is to be paid early enough in 2009 to require the

use of current financial resources held at the end of 2008 (which does not appear to be thecase).

8. Because of the accrual recorded on the government-wide financial statements at the endof 2008, the actual payment simply reduces both cash and the liability balance.

On the fund-based financial statements, assuming no accrual was reported in 2008, thepayment in 2009 is a reduction in cash along with an Expenditure balance. If the amount ispaid with proprietary funds, it is treated the same as in government-wide statements.

9. Governments should capitalize donated works of art, historical treasures, and similar assets at the fair value at the date of the gift. However, if there is no charge for admissionto see the art, it is difficult to consider it an asset because it generates no economicbenefit. Thus, the artwork does not have to be capitalized if all of the following criteria aremet:a. Held for public exhibition, education, or research in furtherance of public service, rather

than financial gain.b. Protected, kept unencumbered, cared for, and preserved.c. Subject to an organizational policy that requires the proceeds from sales of collection

items to be used to acquire other items for collections.




If capitalized, depreciation is only required if the asset is exhaustible. This means that theasset is used up by display, education, or research. Otherwise, depreciation is notrequired.

10. A revenue still must be reported because of the donation. If the government chooses not to

record the qualifying asset in the government-wide financial statements, an expense must

be reported in place of the asset whether purchased or received as a gift. If the item isreceived by donation, the revenue portion of the entry is required.

11. The modified approach is an alternative to depreciating infrastructure assets. Thisapproach allows the government to expense all maintenance costs rather than recorddepreciation but only if certain guidelines are met. The government must accumulatecertain information about particular infrastructure assets within either a network or subsystem of a network. The government must establish a minimum acceptable level for the network or subsystem of the network and maintain documentation that this level isbeing maintained. An asset management system must be in place to monitor and providerecords of the infrastructure assets.The ongoing condition must be assessed and anannual estimation made of the cost of maintaining and preserving the infrastructure to

meet the established condition levels. Governments must determine whether this amountof work should be carried out simply to avoid the recording of depreciation.

12. Depreciation of infrastructure assets is not recorded but all maintenance is expensed. Also, in applying the modified approach, certain disclosures are required on thegovernment-wide financial statements. This includes disclosure that the government isaccumulating certain information about particular infrastructure assets within either anetwork or subsystem of a network. The disclosure must include specific information aboutthe minimum acceptable level for the network or subsystem of the network and that thislevel is being maintained and monitored by an asset management system.

13. A Management’s Discussion and Analysis (MD&A) similar to profit-making financial

statements is now required for state and local governments.The MD&A is presented beforethe financial statements and provides the following information:(1) A brief discussion of the financial statements and information provided and their

relationships to each other.(2) Condensed financial information at least including

a. Total capital and other assetsb. Total long-term and other liabilitiesc. Total net assets, including amounts invested, in capital assets net of debt, restricted

and unrestricted amounts.d. Program revenues, by major source.e. General revenues, by major source.f. Total revenues.g. Program expenses, by function.h. Total expensesi. Excess or deficiency before contributions to term and permanent fund principal,

special and extraordinary items, and transfers. j. Contributionsk. Special and extraordinary itemsl. Transfersm. Change in net assetsn. Ending net assets




(3) Overall financial position and results of operations(4) Balances and transactions analyses with explanation of significant changes(5) Analysis of significant variations between original and final budget amounts(6) Description of significant capital asset and long-term debt activity(7) Information about the modified approach for infrastructure assets(8) Any known facts, decisions, or conditions that are expected to significantly impact on

financial position or results of operations.

14. The Comprehensive Annual Financial Report (CAFR) includes three sectionsa. Introductory Section

1. Letter of transmittal2. Organizational chart3. List of principal officers

b. Financial Section1. MD&A (Management’s Discussion & Analysis)2. General purpose financial statements3. Auditor’s report4. Other required supplementary information

c. Statistical Section

15. A general purpose government is a traditional government such as a city, county, or state. A special purpose government (such as school system) can also be a primary governmentfor reporting purposes if certain requirements are met.

Classification as a special purpose government requires meeting three criteria:a. It has a separately elected governing body.b. It is legally independent. It can sue and be sued and buy, sell, and lease property.c. It is fiscally independent of other state and local governments. It can determine its own

budget, levy and set tax rates, and issue bonded debt without outside approval.

16. Classification as a component unit requires meeting one of two criteria:a. The activity is fiscally dependent on a state or local government. It cannot determine itsown budget, levy and set tax rates, and issue bonded debt without outside approval.

or

b. An outside primary government appoints a voting majority of the governing board of theactivity. The primary organization must also be able to do one or more of the following:impose its will on the board of the component organization, or provide a financialbenefit to the component organization, or the component organization provides afinancial benefit to the primary government.

17. If blended, component units are included in the primary government as if they were part of the government. The component unit is legally separate but so intertwined andsubstantially the same as the primary government so that inclusion is necessary for appropriate presentation.

A discretely presented component unit is shown separately on the far right side of thegovernment-wide financial statements because the organization is not substantially thesame as the government and can stand alone.




18. The two government-wide financial statements are the Statement of Net Assets and theStatement of Activities.

The Statement of Net Assets includes:a. All assets and long-term liabilities.b. Capital assets net of accumulated depreciation including newly acquired infrastructure

assets.c. The primary government is divided into governmental or business-type activities.d. The internal balances reflect inter-activity transactions between governmental and

business-type activities.e. Discretely presented component units are shown to the far right of the statement.

The Statement of Activities includes:a. Expenses by function.b. Interest expense on long-term debt.c. Related program revenues including charges for services, operating grants and

contributions, and capital grants and contributions.d. Net expenses and revenues for each function.

e. Net expenses and revenues for each category of the government.f. General revenues for governmental activities, business-type revenues, or componentunits.

g. Special items that are significant transactions or other events within the control of management that are either unusual or infrequent in nature.

h. Transfers between governmental and business-type activities.

19. The two fund-based financial statements for government funds are the Balance Sheet andthe Statement of Revenues, Expenditures, and Changes in Fund Balance. The BalanceSheet measures current financial resources and uses modified accrual accounting andincludes:a. Separate columns for the general fund and other major funds.

b. Non-major funds are combined and reported as “other governmental funds.”c. Totals for government funds.d. Fund Balance Reserved shows financial resources encumbered or reserved for other

purposes.

The Statement of Revenues, Expenditures, and Changes in Fund Balance includes:a. The general fund and each major fund in separate columns, with all minor funds in

another column.b. Revenues.c. Expenditures.d. Other financing sources and uses.e. Special items.f. A reconciliation between the ending change in fund balances and the ending change in

net assets for governmental activities.

20. Program revenues are those revenues derived from a specific program (such as parks andrecreation) or from outsiders seeking to contribute to the cost of the function. They includecharges rendered for services, operating grants and contributions, and capital grants andcontributions.




General revenues are those from the population as a whole including property taxes, salestaxes, unrestricted grants, and investment income. They are not traced to any individualprogram.

This distinction is important because program revenues are matched with expenses for each activity providing a net expense or revenue figure for each.

21. The net expenses and revenues format allows the users of a government’s financialstatements to determine the relative financial burden (or benefit) that each of its reportingfunctions has on its taxpayers. In other words, the users of the statement can determinewhat it costs for the government to provide benefits such as public safety.

22. On government-wide financial statements, internal service funds are combined with thegovernmental activities (or business-type activities if more appropriate). Their placement isbased on the identity of the functions that they primarily serve. If an internal service fund ismainly used to serve one or more governmental funds, then it should be included with thegovernmental activities.

23. Fiduciary funds are not reported on government-wide financial statements because theseresources must be used for a purpose outside of the primary government.

24. From a reporting perspective, the FASB sets accounting standards for private collegeswhile the GASB sets standards for public universities. Operationally, public universitiesreceive signficant funding from a government (usually a state government), whereasprivate universities rely more on tuition charges. Because of the ability to generatefunding from the government, public colleges generally have smaller endowments.

25. Many public colleges and universities make the assumption that they are solely anEnterprise Fund because they are open to the public but have a user charge (tuition andother fees). For proprietary funds, government-wide financial statements and fund-based

financial statements are quite similar. Consequently, the authoritative guidelines allowsuch schools to produce only fund-based financial statements and avoid the redundancy of also creating government-wide statements.

Answers to Problems

1. A

2. D ($49,000 expenditure on the first day of the capital lease and then$70,000 more in the form of payments made over the life of the lease)

3. B

4. D

5. A

6. D




7. C

8. C

9. A

10. C

11. B

12. C

13. A

14. B

15. A

16. D

17. B

18. B

19. A

20. C

21. A

22. C

23. A

24. A

25. C

26. C

27. The lease signed by the Enterprise Fund will be accounted for in the sameway on the government-wide financial statements (as a business-typeactivity) and the fund-based financial statements (as a Proprietary Fund).

Leased Asset (present value) $28,750Depreciation Expense (6 year life) 4,792Accumulated Depreciation 4,792




Interest Expense (10 percent of $28,750) 2,875Reduction in Liability ($6,000

payment less 2,875 interest) 3,125Liability ($28,750 less $3,125) 25,625

The lease signed by the General Fund will be accounted for in the followingmanner for the government-wide financial statements (as a governmentalactivity).

Leased Asset (present value) $33,350Depreciation Expense (5 year life) 6,670Accumulated Depreciation 6,670Interest Expense (10 percent of $33,350) 3,335Reduction in Liability ($8,000

payment less 3,335 interest) 4,665Liability ($33,350 less $4,665) 28,685

This same lease will be accounted for in the following manner on the fund-based financial statements (as a General Fund).

Initial Recording:—Expenditures $33,350—Other Financing Sources 33,350Payment of $8,000:—Expenditures-Interest 3,335---Expenditures-Principal 4,665

28. a.GOVERNMENT-WIDE FINANCIAL STATEMENTSJanuary 1, 2008 Assets—Capital Lease 49,600

Capital Lease Obligation49,600

December 31, 2008 Capital Lease Obligation 6,048Interest Expense ($49,600 x 12%) 5,952

Cash 12,000

Depreciation Expense—Governmental 1,900Accumulated Depreciation (10-year life) 1,900

Depreciation Expense—Business-type 7,650Accumulated Depreciation (4-year life) 7,650

b.




FUND-BASED FINANCIAL STATEMENTSEnterprise Fund January 1, 2008 Assets—Capital Lease 30,600

Capital Lease Obligation 30,600

December 31, 2008 Capital Lease Obligation 5,328Interest Expense ($30,600 x 12%) 3,672

Cash9,000

Depreciation Expense 7,650Accumulated Depreciation—Capital Lease (4-year life) 7,650

General Fund

Expenditures—Leased Assets 19,000Other Financing Sources—

Capital Lease 19,000

Expenditures—Interest ($19,000 x 12%) 2,280Expenditures—Principal 720

Cash 3,000

29. a.GOVERNMENT-WIDE FINANCIAL STATEMENTSJanuary 1, 2008

Truck—Capital Lease 87,800Cash 22,000Capital Lease Obligation 65,800

December 31, 2008 Interest Expense ($65,800 x 8%) 5,264

Capital LeaseObligation 16,736

Cash 22,000

Depreciation Expense 17,560Accumulated Depreciation (5-year life)

17,560

December 31, 2009 (obligation is now $49,064 or $65,800 less $16,736)Interest Expense ($49,064 x 8%) 3,925Capital Lease Obligation 18,075

Cash 22,000




Depreciation Expense 17,560Accumulated Depreciation

17,560

b.FUND-BASED FINANCIAL STATEMENTSGeneral Fund January 1, 2008 Expenditures—Leased Asset 87,800

Other Financing Sources—Capital Lease 87,800

Expenditures—Lease Obligation 22,000Cash 22,000

December 31, 2008 Expenditures—Interest 5,264

Expenditures—Lease Obligation 16,736Cash 22,000

December 31, 2009Expenditures—Interest 3,925Expenditures—Lease Obligation 18,075

Cash 22,000

c.FUND-BASED FINANCIAL STATEMENTSProprietary Fund (should be same as handling in government-wide

statements)January 1, 2008 Truck—Capital Lease 87,800

Cash 22,000Capital Lease Obligation 65,800

December 31, 2008 Interest Expense ($65,800 x 8%) 5,264Capital Lease Obligation 16,736

Cash 22,000

Depreciation Expense 17,560Accumulated Depreciation 17,560

December 31, 2009Interest Expense ($49,064 x 8%) 3,925




Capital Lease Obligation 18,075Cash 22,000


30. a.GOVERNMENT-WIDE FINANCIAL STATEMENTS

Accounted for as an Enterprise Fund (within the Business-type Activities)

December 31, 2008 Expense—Landfill Closure (3% of $1.9 million) 57,000

Landfill Closure Liability 57,000

Landfill Closure Liability 50,000Cash 50,000

December 31, 2009Expense—Landfill Closure(9% of $2.1 million less $57,000) 132,000



b.GOVERNMENT-WIDE FINANCIAL STATEMENTS (same as above)

Accounted for as a General Fund (within the Governmental Activities)

December 31, 2008 Expense—Landfill Closure 57,000



December 31, 2009Expense—Landfill Closure 132,000



c.FUND-BASED FINANCIAL STATEMENTS (same as above)

Accounted for as an Enterprise Fund (within the Proprietary Funds)




December 31, 2008 Expense—Landfill Closure 57,000



December 31, 2009Expense—Landfill Closure 132,000



d.FUND-BASED FINANCIAL STATEMENTS

Accounted for as a General Fund (within the Governmental Funds)

December 31, 2008 Expenditures—Landfill Closure 50,000Cash 50,000

December 31, 2009Expenditures—Landfill Closure 50,000

Cash 50,000

31. a. GOVERNMENT-WIDE FINANCIAL STATEMENTS

December 31, 2008 Expense—Landfill Closure 1,296,000

Landfill Closure Liability 1,296,000

b. FUND-BASED FINANCIAL STATEMENTSDecember 31, 2008

Despite the huge eventual liability, there is nothing recognized at the endof 2008 because there is not a claim to any current financial resources.

32. a. GOVERNMENT-WIDE FINANCIAL STATEMENTSDecember 31, 2008 Expenses—Compensated Absences 1,200

Liability—Compensated Absences 1,200

January 2009




Liability—Compensated Absences 1,200Cash 1,200

b. FUND-BASED FINANCIAL STATEMENTSDecember 31, 2008 —This vacation is taken early enough in the following year to necessitate the use of current financial resources.

Expenditures—Compensated Absences 1,200Liability—Compensated Absences 1,200

January 2009Liability—Compensated Absences 1,200

Cash 1,200

c. December 31, 2008 —It is assumed that this vacation is taken late enoughin the following year so as not to affect current financial resources.Therefore, there is no entry in 2008. There is not a claim that will require

current financial resources.

Late in 2009Expenditures—Compensated Absences 1,200

Cash 1,200

33. a. GOVERNMENT—WIDE FINANCIAL STATEMENTSMuseum Piece—Artwork 300,000

Revenue—Donation 300,000

b.Museum Piece—Artwork 300,000Accumulated Depreciation—Museum Piece (30,000)

Book Value 270,000

Revenue—Donation 300,000

Depreciation Expense 30,000

c.Revenue – Donation 300,000Expense – Artwork 300,000

34. a. GOVERNMENT-WIDE FINANCIAL STATEMENTS (Business-type Activities)

December 31, 2008 Museum Piece—Artwork 60,000




Cash 60,000


b. FUND-BASED FINANCIAL STATEMENTS (General Fund)

December 31, 2008 Expenditures—Artwork 60,000

Cash 60,000

35.GOVERNMENT-WIDE FINANCIAL STATEMENTS

One possibility: Infrastructure assets with depreciation recorded Infrastructure Assets—Street Lights 100,000

Cash 100,000

Subsequent EntriesDepreciation Expense 10,000

Accumulated Depreciation—Infrastructure Assets 10,000

Maintenance Expense—Infrastructure Assets 6,300Cash 6,300

(if this work extends the life of the assets beyond the original expectation,the debit here would be to Accumulated Depreciation.)

Infrastructure Assets—Street Lights 9,000Cash 9,000

Second possibility: Infrastructure assets using the modified approachInfrastructure Assets—Street Lights 100,000

Cash 100,000

Subsequent EntriesMaintenance Expense—Infrastructure Assets 6,300

Cash 6,300

Infrastructure Assets—Street Lights 9,000

Cash 9,000

36. a. The major criterion for inclusion in a government’s comprehensive annualfinancial report is financial accountability.

b. An activity is viewed as a special purpose government if it meets thefollowing criteria:

1. Has a separately elected governing board2. Is legally separate




3. Is fiscally independent of other governmentsc. Legal separation is usually demonstrated by having corporate powers such

as the right to buy and sell property as well as the right to sue and be sued.Corporate powers depends on state law so that determination of legalseparation may differ from one state to another.

d. The fiscal independence of a government is indicated by having authorityto do specific actions:

1. Determine and modify its budget without having to get the approvalof another government

2. Levy taxes and set rate fees without having to get the approval of another government

3. Issue bonded debt without having to get the approval of another government

e. A component unit is any activity that is legally separate from a primarygovernment but so closely tied to that government that some inclusion inthe government’s CAFR is warranted. The account balances of thecomponent unit are included along with the financial statements of the

primary government. However, these reported figures must be discretelypresented separate from the balances of the primary government. Thefinancial information for the components is usually reported to the right of the primary government. All component units may be shown individually,combined into a single column, or combined into separate columns for governmental and proprietary operations. As indicated in (g) below,blending is also a possible way of reporting a component unit.

f. One of the criteria for identifying a component unit includes the primarygovernment’s ability to impose its will on the component unit. A primarygovernment is assumed to have this ability if it can (1) remove anappointed board member at will, (2) modify or approve budgets, (3)

override decisions of the board, or (4) hire as well as dismiss theindividuals in charge of the day-to-day activities of the component unit.

g. Normally, as indicated above, the financial position and operations of acomponent unit are shown separately from the primary government.However, if the component unit is sufficiently intertwined with the primarygovernment it is included within the government figures. This inclusion isreferred to as blending.

h. A primary government may appoint a voting majority of an activity’s boardbut have no financial accountability. In such cases, the activity is neither apart of the primary government nor a component unit. However, becausea majority of the board is appointed by the primary government, the activityis considered a related organization. Consequently, the identity of theactivity and its relationship must be spelled out in the notes to the financialstatements of the primary government.

37. Enterprise Fund 1/1/08 Cash 90,000

Other Financial Sources—




Capital Contribution 90,0002/1/08 Cash 130,000

Notes Payable 130,0003/1/08 No Journal Entry4/1/08 Truck 110,000

Cash 110,0005/1/08 Cash 20,000

Deferred Revenue 20,0006/1/08 Prepaid Rent 12,000

Cash 12,0007/1/08 Accounts Receivable 13,000

Revenues--Services 13,000Cash 11,000

Accounts Receivable 11,0008/1/08 Interest Expense

(130,000 x 12% x 6/12) 7,800

Notes Payable 2,200Cash 10,000

9/1/08 Salaries Expense 18,000Cash 18,000

Deferred Revenue 18,000Revenue--Grant 18,000

10/1/08 Maintenance Expense 1,000

Cash 1,00011/1/08 Salaries Expense 10,000Cash 10,000

Deferred Revenue 2,000Revenue—Grant 2,000

12/31/08 Accounts Receivable 19,000Revenues--Services 19,000

Cash 3,000Accounts Receivable 3,000

ADJUSTING ENTRIES12/31/08 Interest Expense

(127,800 x 12% x 5/12) 6,390Interest Payable 6,390

12/31/08 Depreciation Expense(110,000 x 1/10 x 9/12) 8,250

Accumulated Depreciation 8,25012/31/08 Rent Expense 7,000

Prepaid Rent 7,000




(to record expiration of rent at $1,000 a month)




38. a. CITY OF WILLIAMSONSTATEMENT OF ACTIVITIES

For Year Ended December 31, 2008Net (Expense) Revenue and

Program Revenues Changes in Net AssetsOperating Capital

Charges for Grants and Grants and Governmental Business-typeFunctions/Programs Expenses Services Contributions Contributions Activities Activities Total

Governmental activities

General Government $149,000 $ 5,000 $14,000 ($130,000) $130,000)Public Safety 90,000 3,000 ( 87,000) (87,000)Health and Sanitation 70,000 42,000 (28,000) (28,000)Interest on Debt 16,000 _______ (16,000) (16,000)

Total governmental activities $325,000 $50,000 $14,000 ($261,000) $261,000

General Revenues:Property taxes $401,000 $401,000Franchise taxes 42,000 42,000Investments (gain) 13,000 13,000

Total general revenues $456,000 $456,000Change in net assets 195,000 195,000

Net assets—beginning 0 0Net assets—ending $195,000 $195,000




38. a. (continued)

Computations:General Governmental [$66,000 + 11,000 + 21,000 + 8,000 + 4,000 (salariespayable) + 13,000 (compensated absences) + 14,000 (art work) + 12,000(depreciation on building: $120,000/10 years)] = $149,000Public Safety [$39,000 + 18,000 + 5,000 + 9,000 (expired insurance) + 12,000(supplies used) + 7,000 (salaries payable)] = $90,000Health and Sanitation [$22,000 + 3,000 + 9,000 + 12,000 + 8,000 (salariespayable) + 16,000 (depreciation on equipment: $80,000/5 years)] = $70,000




38. a. (continued)

CITY OF WILLIAMSONSTATEMENT OF NET ASSETS

December 31, 2008

Governmental Business-type

Activities Activities Total AssetsCash and cash equivalents $ 62,000 $ 62,000Prepaid expenses 2,000 2,000Investments 103,000 103,000Receivables (net) 81,000 81,000Inventories 3,000 3,000

Capital assets (net) 172,000 172,000

Total assets 423,000 $423,000

LiabilitiesSalaries payable 19,000 19,000Compensating absences

liabilities 13,000 13,000Noncurrent liabilities 196,000 196,000

$228,000 $228,000

Net assetsInvested in capital assets,net of related debt (24,000) (24,000)

Unrestricted (deficit) 219,000 219,000Total net assets $195,000 $195,000




38. (continued)

b.CITY OF WILLIAMSON

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUNDBALANCES

Governmental FundsFor Year Ended December 31, 2008

Revenues: General Fund Total Government FundsProperty Taxes $401,000 $401,000Franchise Taxes 42,000 42,000Charges for Services 50,000 50,000Investments (Gain) 13,000 13,000

$506,000 $506,000Expenditures:General Government $110,000 $110,000

Public Safety 90,000 90,000Health and Sanitation 54,000 54,000

Debt Service:Principal Payment on Debt 4,000 4,000Interest on Debt 16,000 16,000

Capital outlay 200,000 200,000Total expenditures $474,000 $474,000

Excess (Deficiency) of Revenues over Expenses 32,000 32,000

Other Financing Sources:Proceeds from Long-term Note 200,000 200,000

Total Other Sources 200,000 200,000

Net Changes in Fund Balance 232,000 232,000Fund Balances (Beginning) -0- -0-Fund Balances (Ending) $232,000 $232,000




38. b. (continued)

CITY OF WILLIAMSONBALANCE SHEET

Governmental FundsDecember 31, 2008

TotalGeneral Fund Governmental Funds

AssetsCash and cash equivalents $ 62,000 $ 62,000Prepaid expenses 2,000 2,000Investments 103,000 103,000Receivables, net 81,000 81,000Inventories 3,000 3,000

Total assets $251,000 $251,000

Liabilities

Salaries payable 19,000 19,000Total Liabilities $19,000 $19,000

Fund Balances—Reserved for encumbrances 12,000 12,000—Reserved for inventories 3,000 3,000—Reserved for prepaid expenses 2,000 2,000—Unreserved 215,000 215,000Total Fund Balances 232,000 232,000

Total Liabilities

and Fund Balances $251,000 $251,000




39. a. CITY OF BERNARDSTATEMENT OF ACTIVITIES

For Year Ended December 31, 2008Net (Expense) Revenue and

Program Revenues Changes in Net Assets

Charges for Grants and GovernmentalFunctions/Programs Expenses Services Contributions Activities Total

Governmental activities:

General Government $180,000 $15,000 ($165,000) ($165,000)Public Safety 158,000 8,000 ( 150,000) ( 150,000)Public Works 159,500 12,000 (147,500) (147,500)Health and Sanitation 37,000 31,000 $25,000 19,000 19,000Interest on Debt 42,000 ______ _______ (42,000) (42,000)Total Governmental

activities $576,500 $66,000 $25,000 ($485,500) ($485,500)

General Revenues:Property Taxes $630,000 $630,000Sales Taxes 99,000 99,000Dividend Income 20,000 20,000Gain on Sale of Investments 14,000 14,000Gain on Value of Investments 5,000 5,000Total general revenues $768,000 $768,000

Change in net assets:Change During 2008 $ 282,500 $ 282,500

Net assets—beginning 120,000 120,000Net assets—ending $402,500 $402,500




39. a. (continued)

Computations:General Governmental [$90,000 + 9,000 + 25,000 + 12,000 + 14,000 (salariespayable) + 30,000 depreciation] = 180,000Public Safety [$94,000 + 16,000 + 12,000 + 10,000 + 17,000 (salariespayable) + 9,000 depreciation] = $158,000Public Works [$69,000 + 13,000 + 9,000 + 5,000 (salaries payable) +14,000 supplies expense + 39,000 landfill closing costs + 10,500 depreciation] =$159,500Health and Sanitation [$22,000 + 4,000 + 4,000 + 7,000] = 37,000Landfill [260,000 x 15%] = $39,000

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2009 17-28 Solutions Manual



39. a. (continued)

CITY OF BERNARDSTATEMENT OF NET ASSETS

December 31, 2008

GovernmentalActivities Totals

AssetsCurrent Assets:

Cash and CashEquivalents $139,000 $139,000

Prepaid Insurance 6,000 6,000Investments 116,000 116,000

Receivables (net) 120,000 120,000Inventories 6,000 6,000

Total Current Assets 387,000 387,000

Capital Assets:Building (net of depreciation) $240,000 $240,000Building (net of depreciation) 199,500 199,500Equipment (net of depreciation) 81,000 81,000Truck (capital lease) $64,000 $64,000

Total Assets $971,500 $971,500

LiabilitiesCurrent Liabilities:

Wages Payable $36,000 $36,000

Noncurrent Liabilities:Lease Obligation Payable $64,000 $64,000Closure Liability Landfill 39,000 39,000Long-term Notes Payable 430,000 430,000

Total Liabilities 569,000 569,000

Net assetsInvested in capital assets,

net of related debt 154,500 154,500Unrestricted (deficit) 248,000 248,000

Total Net Assets $402,500 $402,500

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 17-29



39. (continued)b.

CITY OF BERNARDSTATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND

BALANCESGovernmental Funds

For Year Ended December 31, 2008

General FundRevenues:Property taxes $630,000Sales taxes 99,000Dividend income 20,000

Charges for services 66,000Grant 25,000

Investments (realized gain) 14,000Investments (unrealized gain) 5,000

Total $859,000

Expenditures:Current:

General governmental $150,000Public safety 149,000Public works 122,000Health and sanitation 37,000

Debt Service:Principal payment on debt 10,000

Interest on debt 42,000Capital Outlay:

Building 210,000Equipment 90,000Truck—leased 64,000

Total expenditures $874,000Excess (deficiency) of revenues

over expenses) $(15,000)

Other Financing Sources:Proceeds from long-term note 200,000Capitalized lease—truck 64,000

Total other financing sources 264,000

Net changes in fund balance 249,000

Fund balance—beginning 90,000

Fund balance—ending—unrestrictedand unreserved $339,000*




39. b. (continued)

*The fund balance shown here is $339,000. Of that amount, $31,000 is reservedfor encumbrances, leaving $308,000 as an unreserved amount. Two additionalfund balance amounts will be added to the balance sheet: one for supplies andone for prepaid expenses.

CITY OF BERNARDBALANCE SHEET

Governmental FundsDecember 31, 2008

General FundASSETSCash and cash equivalents $139,000

Investments 116,000Receivables, net 120,000Supplies 6,000Prepaid Insurance 6,000

Total Assets $387,000

LIABILITIES AND FUND BALANCESLiabilities:

Salaries Payable $ 36,000

Fund Balances:Restricted

Supplies 6,000Prepaid Insurance 6,000 12,000

UnrestrictedReserved for encumbrances

Equipment $24,000Supplies 7,000 31,000

Unrestricted, unreserved $308,000 339,000

Total Fund Balance $351,000

Total Liabilities and Fund Balance $387,000




40. One way to accumulate the information for the government-wide financialstatements is to prepare the journal entries for the listed transactions.

a.The transfer is within the governmental activities and is not recorded.

Governmental Activities—Parks and RecreationLand 20,000

Cash 20,000

b.Governmental Activities—Parks and Recreation

Cash 110,000Bonds Payable 110,000

c.Governmental Activities—General

Cash 510,000Property Tax Receivable 90,000

General Revenues—Property Taxes 600,000

d.Governmental Activities—Parks and Recreation

Building 80,000Cash 80,000

e.Governmental Activities—Parks and Recreation

Sidewalk 10,000Cash 10,000

f.Governmental Activities—Parks and Recreation

Cash 8,000Program Revenues—Park 8,000

g.Business-Type Activities—Civic Auditorium

Parking Deck 200,000Cash 20,000Notes Payable 180,000




40. (continued)

h.Governmental Activities—Education

Cash 100,000Deferred Revenues 100,000

Expenses—School Lunches 37,000Cash 37,000

Deferred Revenues 37,000Program Revenues—Operating Grant 37,000

i.Governmental Activities—Education

Cash 5,400Receivables—School Fees 600

Program Revenues—School Fees 6,000

j.Governmental Activities—Education

Supplies 22,000Cash 22,000

Expenses—Supplies 17,000Supplies 17,000

k.

Governmental Activities—EducationExpenses—Art 80,000Program Revenues—Capital Gift 80,000

l.Governmental Activities—General

Transfers 20,000Cash 20,000

Business-Type Activities—Civic AuditoriumCash 20,000

Transfers 20,000

m.No entry




40. (continued)

n.Governmental Activities—Education

School Bus 102,000Cash 102,000

o.Governmental Activities—Education

Expenses—Salaries 270,000Expenses—Vacations 23,000

Cash 240,000Salary Payable 30,000Vacations Payable 23,000

p.Business-Type Activities—Civic Auditorium


Cash 42,000Salary Payable 3,000Vacations Payable 5,000

q.Business-Type Activities—Civic Auditorium

Cash 110,000Rent Receivable 20,000

Program Revenues—Rent 130,000

r.Governmental Activities—Parks and Recreation

Expenses—Maintenance 9,000Cash 9,000

s.Governmental Activities—Parks and Recreation

Expenses—Interest 9,000Bonds Payable 5,000

Cash 14,000

t.Business-Type Activities—Civic Auditorium

Expenses—Interest 13,000Interest Payable 13,000




40. (continued)Also:

Depreciation Entries:

Governmental Activities—Education(School Building—$1,000,000/20)

Expenses—Depreciation 50,000Accumulated Depreciation 50,000

Governmental Activities—Parks and Recreation(Building—$80,000/10 x ½)


Business-Type Activities—Civic Auditorium($600,000/30)

Expenses—Depreciation 20,000

Accumulated Depreciation 20,000

Governmental Activities—Education(School Bus—$102,000/5 x 3/12)


Business-Type Activities—Parking Deck($200,000/20 x ½)





40. (continued)

City of Pfeiffer Statement of Activities

Government-Wide Financial Statements Year ending December 31, 2008

Program Grants Net (Expenses)/Revenues Component

Expenses Revenues and Gifts Governmental Business-Type Total Unit

Governmental Activities—Education $482,100 $ 6,000 $117,000 $(359,100) $(359,100)—Parks and Recreation 22,000 8,000 ( 14,000 ) ( 14,000)

Total for GovernmentalActivities $504,100 $14,000 $117,000 $(373,100) $(373,100)

Business-Type Activities—Civic Auditorium 88,000 130,000 $42,000 42,000

Total for Primary

Government $592,100 $144,000 $117,000 $(373,100) $42,000 $(331,100)

Component Unit:—Museum $ 42,000 $50,000 $8,000

General Revenues—Property Taxes 600,000 600,000

Transfers (20,000 ) 20,000 -0-

Total General Revenues and Transfers $580,000 $20,000 $600,000 -0-

Change in Net Assets $206,900 $62,000 $268,900 $8,000

Net Assets, Beginning of Year 1,123,000 662,000 1,785,000 106,000

Net Assets, End of Year $1,329,900 $724,000 $2,053,900 $114,000




40. (continued)

City of Pfeiffer Statement of Net Assets

Government-Wide Financial StatementsDecember 31, 2008

Governmental Business-Type Component

Activities Activities Total Unit

Assets:—Cash $302,400 $130,000 $432,400 $24,000—Property Tax Receivables 90,000 -0- 90,000 -0-—Receivables-School Fees 600 -0- 600 -0-—Rent Receivable -0- 20,000 20,000 -0-—Supplies 5,000 -0- 5,000 -0-—Land 20,000 -0- 20,000 -0-—Sidewalk 10,000 -0- 10,000 -0-—School Bus 96,900 -0- 96,900 -0-—Parking Deck (net) -0- 195,000 195,000 -0-—Buildings (net) 1,026,000 580,000 1,606,000 300,000

Total Assets $1,550,900 $925,000 $2,475,900 $324,000

Liabilities:—Salary Payable $30,000 $3,000 $33,000 -0-—Vacation Payable 23,000 5,000 28,000 -0-—Interest Payable -0- 13,000 13,000 -0-—Deferred Revenues 63,000 -0- 63,000 -0-—Bonds and Notes Payable 105,000 180,000 285,000 $210,000

Total Liabilities $221,000 $201,000 $422,000 $210,000

Net Assets:—Capital Assets, less

related debt $1,047,900 $582,000 $1,629,900 $ 90,000

—Unrestricted 282,000 142,000 424,000 24,000

Total Net Assets $1,329,900 $724,000 $2,053,900 $ 114,000




41. One way to accumulate the information for the fund-based financialstatements is to prepare the journal entries for the listed transactions.

a.General Fund

Other Financing Uses—Transfer 70,000Cash 70,000

Capital Projects FundCash 70,000

Other Financing Sources—Transfer 70,000

Expenditures—Land 20,000Cash 20,000

b.Capital Projects Fund

Cash 110,000Other Financing Sources—Bond 110,000

c.General Fund

Cash 510,000Property Tax Receivable 90,000

Revenues—Property Taxes 560,000Deferred Revenues 40,000

d.

Capital Projects FundExpenditures—Building 80,000Cash 80,000

e.Capital Projects Fund

Expenditures—Sidewalk 10,000Cash 10,000

f.General Fund

Cash 8,000Revenues—Park 8,000




41.(continued)

g.Enterprise Fund

Parking Deck 200,000Cash 20,000Notes Payable 180,000

h.Special Revenue Fund

Cash 100,000Deferred Revenues 100,000

Expenditures—School Lunches 37,000Cash 37,000

Deferred Revenues 37,000

Revenues—Operating Grant 37,000

i.General Fund

Cash 5,400Receivables—School Fees 600

Revenues—School Fees 6,000

j.General Fund

Expenditures—Supplies 22,000

Cash 22,000

k.No entry because there is no impact on current financial resources.

l.General Fund

Other Financing Uses—Transfer 20,000Cash 20,000

Enterprise FundCash 20,000

Other Financing Sources—Contribution 20,000




41. (continued)

m.General Fund

Encumbrances 99,000Fund Balance—Reserved For Encumbrances 99,000

n.General Fund

Fund Balance—Reserved for Encumbrances 99,000

Encumbrances 99,000

Expenditures—School Bus 102,000Cash 102,000

o.

General FundExpenditures—Salaries 270,000

Cash 240,000Salary Payable 30,000

p.Enterprise Fund


Cash 42,000Salary Payable 3,000

Vacations Payable 5,000

q.Enterprise Fund

Cash 110,000Rent Receivable 20,000

Program Revenues—Rent 130,000

r.General Fund

Expenditures—Maintenance 9,000Cash 9,000




41. (continued)

s.General Fund (no mention is made of using a separate Debt Service Fund)

Expenditures—Interest 9,000Expenditures—Bonds Payable 5,000

Cash 14,000

t.Enterprise Fund

Expenses—Interest 13,000Interest Payable 13,000

Also:Recognition of remaining supplies (from J above)

General Fund

Supplies 5,000Fund Balance—Reserved for Supplies 5,000

Depreciation Entries

Business-Type Activities—Civic Auditorium ($600,000/30)Expenses—Depreciation 20,000


Business-Type Activities—Parking Deck ($200,000/20 x ½)Expenses—Depreciation 5,000





41. (continued)

City of Pfeiffer Statement of Revenues, Expenditures, and Changes in Fund Balance

Fund-Based Financial Statements – Governmental Funds Year ending December 31, 2008

TotalGeneral Special Capital Projects Governmental

Fund Revenue Funds Funds FundsRevenues-Property Taxes $560,000 -0- -0- $560,000-Park 8,000 -0- -0- 8,000-Operating Grant -0- $ 37,000 -0- 37,000-School Fees 6,000 -0- -0- 6,000

Total Revenues $574,000 $ 37,000 -0- $611,000

Expenditures-Land -0- -0- 20,000 20,000-Buildings -0- -0- 80,000 80,000-Sidewalk -0- -0- 10,000 10,000-School Lunches -0- 37,000 -0- 37,000

-Supplies 22,000 -0- -0- 22,000-School Bus 102,000 -0- -0- 102,000-Salaries 270,000 -0- -0- 270,000-Maintenance 9,000 -0- -0- 9,000-Interest 9,000 -0- -0- 9,000-Bond Payment 5,000 -0- -0- 5,000

Total Expenditures $417,000 $37,000 $110,000 $564,000

Excess (deficiency) of revenues over expenditures $157,000 -0- $(110,000) $ 47,000

Other FinancingSources (Uses)

-Other Financing

Sources -0- -0- $180,000 $180,000-Other Financing

Uses $(90,000 ) -0- -0- (90,000 )

Total Other FinancingSources (Uses) $(90,000 ) -0- $180,000 $ 90,000

Change in Fund

Balance $ 67,000 -0- $ 70,000 $137,000

Fund Balance –Beginning 123,000 -0- -0- 123,000

Fund Balance –

Ending $190,000 -0- $70,000 $260,000




41. (continued)

City of Pfeiffer Balance Sheet

Fund-Based Financial Statements - Governmental FundsDecember 31, 2008

Total

General Special Capital Projects GovernmentalFund Revenue Funds Funds Funds

Assets-Cash $169,400 $63,000 $70,000 $302,400-Property Tax

Receivable 90,000 -0- -0- 90,000-Receivables –

School Fees 600 -0- -0- 600-Supplies 5,000 -0- -0- 5,000

Total Assets $265,000 $63,000 $70,000 $398,000

Liabilities-Salary Payable $ 30,000 -0- -0- $ 30,000-Deferred Revenues 40,000 $63,000 -0- 103,000

Total Liabilities $ 70,000 $63,000 -0- $133,000

Fund Balances-Reserved for

Supplies $ 5,000 -0- -0- $ 5,000-Unreserved 190,000 -0- $70,000 260,000

Total FundBalances $195,000 -0- $70,000 $265,000

Total LiabilitiesAnd FundBalances $265,000 $63,000 $70,000 $398,000




41. (continued)

City of Pfeiffer Statement of Revenues, Expenses, and Changes in Fund Net Assets

Fund-Based Financial Statements—Proprietary Funds Year Ending December 31, 2008

Enterprise Fund (Civic Auditorium)Operating Revenues—Rent Revenues $130,000

Operating Expenses—Salaries $ 45,000—Vacations 5,000—Depreciation 25,000

Total Operating Expenses $ 75,000

Operating Income $ 55,000

Non-operating Expenses—Interest Expense $ 13,000

Income Before Capital Contribution $ 42,000

Capital Contribution 20,000

Change in Net Assets $ 62,000

Total Net Assets—Beginning 662,000

Total Net Assets—Ending $724,000




41. (continued)

City of Pfeiffer Statement of Net Assets

Fund-Based Financial Statements—Proprietary FundsDecember 31, 2008

Enterprise Fund (Civic Auditorium)AssetsCurrent Assets—Cash $130,000—Rent Receivable 20,000

Total Current Assets $150,000

Noncurrent Assets—Parking Deck (net) $195,000

—Buildings (net) 580,000

Total Noncurrent Assets $775,000

Total Assets $925,000

LiabilitiesCurrent Liabilities—Salary Payable $ 3,000—Vacation Payable 5,000—Interest Payable 13,000

Total Current Liabilities $ 21,000

Noncurrent Liabilities—Notes Payable $180,000

Total Liabilities $201,000

Net Assets—Invested in Capital Assets,

less related debt $582,000—Unrestricted 142,000

Total Net Assets $724,000




42.a. False – A pension trust fund is one of the fiduciary funds because the

money cannot be used by officials for the benefit of the government.Fiduciary funds do not appear in the government-wide financial statementsalthough separate statements are presented as part of the fund-basedfinancial statements.

b. True – The permanent funds are included within the governmental fundsbecause the income generated from the amount being held is to be usedby the government. Although the principal cannot be utilized bygovernment officials, the income can.

c. True – A commitment of current financial resources was made when thisorder was placed. Thus, an encumbrance should have been recognized atthat time. However, the actual amount of the obligation proved to beslightly higher. When the liability was incurred, the original encumbranceshould have been removed and an expenditure recorded for the amount of

current resources that is actually required.

d. True – The expense to be recognized each year is the adjustment requiredto establish the proper liability. At the end of Year One, that liability shouldbe $96,000 or 12 percent of $800,000. At the end of the second year, theliability has grown to $172,000 (20 percent of $860,000). Increasing theliability from $96,000 to $172,000 necessitates an expense of $76,000.Even though the question relates to the fund-based financial statements,the Enterprise Funds do accrue expenses as incurred in much the sameway as a for-profit business.

e. True – The expense to be recognized each year is the adjustment requiredin the liability. At the end of Year One, that liability should be $99,000 or 11 percent of $900,000. At the end of the second year, the liability hasgrown to $170,000 (20 percent of $850,000). Increasing the liability from$99,000 to $170,000 necessitates an expense of $71,000. Even though thequestion relates to the General Fund, government-wide financialstatements always accrue expenses as incurred.

f. False – In the governmental funds, a capitalized lease is recorded basedon the present value of the future cash flows. Thus, the initial recording isan expenditure of $39,000.

g. False – An Agency Fund is used when passing money through thegovernment to a specified recipient. Thus, the only two accounts typicallyfound in an Agency Fund are cash (or similar monetary assets) and theliability to indicate where that cash is destined.

h. True – The asset is capitalized at $39,000, the present value of the futurecash flows. Over a six-year life, depreciation expense of $6,500 should berecognized each year. A related liability of $29,000 should also be




recorded (after the first payment is removed). With an interest rate of 10percent being used, interest expense of $2,900 should be recognized inthe first year. Total expenses to be reported are $9,400 ($6,500 plus$2,900).

43.a. This gift did not involve a current financial resource and should not have

been recorded in the fund-based financial statements. There is noindication that it was recorded there. The recording of the asset anddepreciation would have been made in the government-wide statements.Thus, the increase in the fund balance of $30,000 was correct and shouldnot be changed.

b. Apparently, in the government-wide financial statements, a $15,000revenue was reported along with an asset of the same value. Depreciationrecognized for the first year would have been $500 ($15,000 capitalizedamount over a 30-year life) so that a net increase in the net assets should

have been $14,500. If the allowed alternative had been followed asofficials wished, both revenues and expenses would have been increasedby $15,000 for no net effect. Consequently, removing the $14,500 increasethat was reported changes the net expense figure from $130,000 to$144,500.

c. The government officials wanted to use the alternative which was torecord an expense rather than an asset. If no entry was made by the artmuseum, there was no change created in the net asset figure. Had theappropriate entry been made, both revenues and expenses would haverisen by $15,000, but then, no net effect would have resulted. The

revenues and expenses are both understated but the net asset figure isnot affected either way. Although the individual totals are wrong, theincrease in net assets stays at $140,000

44.a. On the government-wide statements, an expense of $20,000 was reported.

Instead, an asset and liability of $62,000 should have been reported.Depreciation on the asset (over a five-year period) would have been$12,400 and interest expense would have been $6,200 (10 percent of $62,000). Thus, total expenses should have been reported as $18,600.The reported expenses ($20,000) were $1,400 too high. Removing thatamount of expense causes the increase in net assets to rise from $140,000to $141,400.

b. A $62,000 expenditure should have been recorded on the first day of theyear because of the capitalized lease. In addition, a $62,000 “other financing source” should have been recorded. Another $20,000expenditure was properly reported on the last day of the year to record thepayment. Because both the initial expenditure ($62,000) and the other financing source ($62,000) were left out, the net effect of the omission is




zero. Thus, the $30,000 increase in the fund balance as shown for theGeneral Fund is correct.

45. The revenue of $30,000 and the expense of $42,000 were not included in theprimary government figures for the government-wide statements. They werediscretely presented and should have been blended.

Adding these two figures to primary government-wide totals reduces theoverall increase in net assets by $12,000 ($30,000 minus $42,000) from$140,000 to $128,000.

46.a. In fund-based statements, for the General Fund, only the amount of this

liability that will be paid in the next 60 days (2 months) is viewed as aclaim against current financial resources. That amount would be $10,000(2/12 of $60,000). That expenditure must be recorded at the end of Year Four and reduces the increase in the General Fund fund balance by this

$10,000 from $30,000 to $20,000.

b. For the government-wide financial statements, the entire $60,000 liabilityshould be recorded in Year Four based on standard accrual accounting.The related expense reduces the increase in net assets by $60,000 from$140,000 to $80,000.

47.a. Apparently, the amounts recorded this year (in the parks) was in the wrong

fund; the landfill should have continued to be reported as an EnterpriseFund. By itself, that does not have any net impact on the net assets

reported for the entire government on the government-wide statements.The amounts are simply in the wrong columns. However, the clean-upliability has not been reported for the current year. An additional 8 percentwas filled in the current year so that the liability should have increased by$16,000 (8 percent of $200,000). That reduces the increase in net assetsfrom $140,000 to $124,000.

b. The revenues ($4,000) and expenses ($15,000) for the current year mustnow be moved to the Enterprise Funds ($11,000 net reduction). Inaddition, the $16,000 clean-up liability computed in (a) above should berecorded so that the overall decrease in net assets in connection with thelandfill is $27,000. For the Enterprise Funds, the net increase is net assetsis not $60,000 but rather $33,000.

c. The revenues and expenditures have been correctly reported this year within the General Fund. In addition, there is no indication that the clean-up costs will require any current financial resources so that no reportingis needed in the fund-based statements. The increase in the fund balanceof the General Fund of $30,000 appears to be correct.




48.a. The modified approach only applies to infrastructure assets and not to

machines and the like. Thus, $4,000 in depreciation expense has beenincorrectly omitted. Including the recording of depreciation reduces theincrease in net assets from $140,000 to $136,000.

b. The depreciation expense discussed in (a) above increases the netexpenses for education from $710,000 to $714,000.

49.a. False – Assuming that the next payment is not due until July 1, Year Two,

it is not a claim to current financial resources. Therefore, no liabilityshould be reported on the fund-based financial statements.

b. False – The original liability of $78,000 should be reported andimmediately reduced by $20,000 to $58,000. However, interest for the lastsix months of Year One should be accrued ($58,000 x 10 percent x 6/12

year or $2,900) to raise the liability to $60,900.

c. True – Interest for the last six months of Year One should be accrued($58,000 x 10 percent x 6/12 year) or $2,900.

d. False – On the fund-based financial statements, the expenditure totalequals the $78,000 present value of the cash flows plus the first $20,000payment.

e. True – The asset is initially capitalized at $78,000. At the end of the firstyear, depreciation of $7,800 should be recognized ($78,000 x 1/5 x 6/12)

which reduces the net leased asset to $70,200.

f. False – On the fund-based financial statements, the expenditure totalequals the $78,000 present value of the future cash flows.

g. False – There are four separate criteria for a capitalized lease. One of those is that the life of the lease is 75 percent or more of the life of theasset. If the car has an eight-year life, the five year lease is only 62.5% of the life of the asset. However, the lease contract could well meet any of the other three criteria and capitalization would still be necessary.

h. False – Payments totaling $100,000 are being made and the car will beused up. So, the total expense has to be $100,000 on the government-wide statements no matter how the reporting is done. For fund-basedstatements, the present value of the future cash flows is recognized andthen the eventual payments are also recognized as expenditures. Thistotal will be more than $100,000 (but is offset somewhat by the reportingof an other financing source).

50.




a. False – The handling in the government-wide financial statements will bethe same whether the landfill is reported as a General Fund or as anEnterprise Fund.

b. False – Assuming the city has a December 31 year-end, no claim tocurrent financial resources exists at that time.

c. False – The Enterprise Fund should report a liability equal to 26 percent of $2 million less the amount of cash that has already been paid.

d. True – In most all cases, Enterprise Funds are reported the same in thegovernment-wide financial statements and the fund-based financialstatements.

e. True – The liability is $2 million times 26 percent or $520,000. However,payments of $100,000 have already been made so the liability is now only$420,000.

f. True – In either case, $2 million will be spent. That will show up as anexpense in the government-wide financial statements and as anexpenditure in the fund-based financial statements (assuming the landfillis reported in the General Fund).

51.a. True – The amount of the liability to be reported each year would have

been based on $3 million rather than $2 million.

b. True – The government-wide financial statements accrue all liabilities

whether they are governmental activities or business-type activities.

c. False – At the end of Year Two, a liability of $420,000 is reported (26percent of $2 million less $100,000 in payments). At the end of Year Three,a liability of $1,050,000 is reported (40 percent of $3 million less $150,000in payments). Adjusting the liability balance of $420,000 to $1,050,000necessitates recognizing an expense of $630,000.

d. False – Present value is not used for landfill closure costs.

52.a. True – One of the requirements for being able to choose to not capitalize a

museum piece is that any proceeds from a future sale must be required tobe used for a similar purchase.

b. False – If the asset is viewed as being inexhaustible (the asset is alreadyover 200 years old), no depreciation is required.




c. False – The city can record the $10,000 value as an expense immediatelybut it can also choose to capitalize the asset and then depreciate it over its expected useful life.

d. False – Revenue recognition is required for gifts of this type. It is only thedecision as to whether to record an asset or an expense that is at theoption of the government.

e. True – Both a revenue and an expense can be reported for this donationso that net assets are not impacted.

53.a. False – Although the city here appoints a majority of the board members,

there is no indication that (a) the city can impose its will on this board, (b)that the library provides a financial benefit or a financial burden for thecity, or (c) that the library is financially dependent on the city. Appointinga majority of the board makes the library a related organization but not

necessarily a component unit.

b. True – If the results of the component unit are included within thegovernmental activities (like a fund), this reporting is known as blendingthe component unit. This reporting is followed when the component unitis closely entwined with the government.

c. False – Blending of a component unit is a judgment made when financialstatements are being prepared based on how entwined the activity is withthe government.

d. True – Blending of a component unit is a judgment made when financialstatements are being prepared based on how entwined the activity is withthe government.

Develop Your Skills

Research Case 1

One of the most controversial aspects of GASB 34 was the capitalization of previously acquired, infrastructure items (such as bridges, sidewalks, streets,and the like) that, in most cases, had always gone unreported. Determining areported value, for example, for miles of sidewalks constructed over a number of decades was looked at as an almost impossible feat with little or no reportingvalue to the readers of the financial statements.

Because of this criticism, GASB 34 tempered this one reporting requirementmore than any other. First, only a limited number of these earlier assets have tobe reported. According to paragraph 154, “governments are required tocapitalize and report major general infrastructure assets that were acquired




(purchased, constructed, or donated) in fiscal years after June 30, 1980, or thatreceived major renovations, restorations, or improvements during that period.”

So, the reporting of only “major general infrastructure assets” is required. Thatsize requirement was identified as a subsystem that made up at least 5 percent of the total of all general capital assets or a network that made up at least 10percent of the total of all general capital assets.

In addition, only assets acquired or renovated after June 30, 1980, had to beassessed for reporting purposes. This parameter limited the required reportingto assets that were relatively new. For example, a bridge constructed in 1922 didnot have to be reported unless renovated since June 30, 1980.

Finally, governments were given an extra four years beyond the requiredimplementation deadline for GASB 34 to report these previously obtainedinfrastructure assets. This extension was allowed to provide governments withplenty of time to make all of the necessary computations.

To make the actual computation of these figures, paragraphs 157 and 158explain: “The initial capitalization amount should be based on historical cost. If determining historical cost is not practical because of inadequate records,estimated historical cost may be used.

“A government may estimate the historical cost of general infrastructure assetsby calculating the current replacement cost of a similar asset and deflating thiscost through the use of price-level indexes to the acquisition year (or estimatedacquisition year if the actual year is unknown). There are a number of price-levelindexes that may be used, both private- and public-sector, to remove the effects

of price-level changes from current prices. Accumulated depreciation would becalculated based on the deflated amount, except for general infrastructure assetsreported according to the modified approach.”

Paragraph 160 goes on to provide additional guidance: “Other information mayprovide sufficient support for establishing initial capitalization. This informationincludes bond documents used to obtain financing for construction or acquisition of infrastructure assets, expenditures reported in capital projectfunds or capital outlays in governmental funds, and engineering documents.”

Research Case 2

A practicing accountant often faces a difficult challenge in applying a newauthoritative pronouncement, especially one as complex as GASB 34. Becausethe reporting issues have not been encountered previously, implementation of even the most carefully written statement can be mystifying. For that reason,periodicals such as the Journal of Accountancy and the CPA Journal oftenattempt to provide practical assistance. When a complicated newpronouncement is issued, such guidance is very much necessary. Studentslooking forward to entering the accounting profession need to be aware of the




help that is usually available when significant changes are made in the financialreporting process.

This particular article was written to help government accountants begin theprocess of adapting their financial statements to the requirements of GASB 34.As part of this coverage, the statement of net assets and the statement of activities for the City of Alexandria, Virginia are included because this particular government had quickly begun to issue statements according to the newregulations.

A look at both of these statements shows that some number of component unitsare being discretely reported to the far right of each statement. It is possible thatother component units also exist that have been blended. Without theaccompanying footnotes to the statements, that information cannot beascertained for certain. On the statement of net assets, the discretely-presentedcomponent units are shown as holding nearly $57 million in assets.

At the bottom of the statement of activities, the identity of these component unitscan be determined even without footnote disclosure. Under the row of information for business-type activities, the following three component units arelisted:




Alexandria library,Alexandria transit company, andAlexandria public schools.

Students may be interested to note that the library and the transit companyprovided a financial burden for the city of only about $4 million each. The schoolsystem, though, reported net expenses of over $95 million, a significant amountthat must be borne by the citizens of this city in order to finance publiceducation.

GASB 34 provides only a limited amount of information about component units,deferring much of the guidance to the earlier GASB 14. Paragraph 20 of GASB 14indicates that component units are legally separate organizations for which theelected officials of the primary government are financially accountable. Inaddition, component units can include other organizations for which the natureand significance of their relationship with the primary government are such thatexclusion would cause the reporting entity’s financial statements to be

misleading or incomplete.

Thus, apparently, the library, the transit company, and the public schools mustqualify (based on the laws of that state) as legally separate organizations.However, despite this legal separation from the city, the financial information isstill being presented within the city’s financial statements because (a) theprimary government is financially accountable or (b) the relationship makes thestatements misleading or incomplete if the financial information were omitted.

Analysis Case 1

Probably no better indication of the true magnitude of GASB 34 can beconstructed than comparing financial statements prepared prior to the adoptionof this standard to statements produced after GASB 34. Students who look at the2000 statements found on the City of Sacramento website and the 2004statements presented in the textbook should be surprised at the magnitude of the change that took place between 2000 and 2004.

Almost an unlimited number of comparisons can be made between these twosets of statements, produced only four years apart. The differences that aparticular student chooses to emphasize will probably depend on the areas mostclosely studied. Here are a few possible examples that could be raised:

2004 statements are superior to 2000 statements:The rationale for some of the columns on the 2000 statements seems

arbitrary. For example, a column is shown for the Debt Service Funddespite its size. In 2004, on the fund-based statements, only the GeneralFund and other major funds are reported separately. Small funds areaccumulated into a single column to avoid causing distraction.




On the balance sheet for 2000, fixed assets show up in some columns and notothers. There is clearly inconsistency in the methods used within thisstatement.

For the 2000 financial statements for the individual governmental funds, thereis no way to get information other than about current financial resourceswith the application of modified accrual accounting. However, in the 2004financial statements, the reader can either choose to look at thisinformation in a relatively traditional format (fund-based financialstatements) or a basis similar to that of for-profit accounting (government-wide financial statements).

The government-wide financial statements provide all of the information for the government in a relatively concise fashion rather than being spread outover a number of different funds.

2000 statements are superior to 2004 statements:In 2004, there are a lot of different financial statements; it may be harder for

the reader to determine which statements to study.

Differences in totals may confuse readers. For example, on the statement of net assets, governmental activities show over $2.3 billion in assetswhereas, on the balance sheet for the governmental funds, only $942million in assets is shown. A reconciliation would be provided that mayhelp the reader but that amount of difference may simply be difficult for theaverage reader to comprehend. Such huge differences exist all throughthe financial statements for state and local governments.

In 2000, the budgetary information is presented within the financial statementsto emphasize the control feature of government accounting. In 2004, thebudget is most likely to be buried in required supplemental informationalthough it can be shown as an additional fund-based statement.

Analysis Case 2

One of the most significant changes in governmental accounting created byGASB 34 was the inclusion of the Management’s Discussion and Analysis.This written report is meant to be a discussion of the financial information for the government in a verbal rather than a purely quantitative fashion. Studentsoften do not understand the range of information provided by the MD&A. Inthis assignment, the student can read the MD&A for an actual city. Theinformation that is provided here is quite extensive and can cover a widerange of subjects such as the following:

An explanation of government-wide financial statements.An explanation of fund-based financial statements.An explanation of governmental funds, proprietary funds, and fiduciary funds.The reporting of infrastructure assets that were acquired before the adoption

of GASB 34.A comparison of the governmental activities and the business-type activities.The bond rating for the government.Information about proprietary operations.




The method by which the government generates revenues.The diversity of expenditures made within the governmental funds.A discussion of the budgetary process.Information about both capital assets and long-term liabilities.The purpose of the various funds such as the general fund and the debt

service fund.

Communication Case 1

Students do not always fully comprehend the evolutionary nature of financialaccounting and reporting. In connection with for-profit businesses, ongoingchanges have occurred over a number of decades under the FinancialAccounting Standards Board, the Accounting Principles Board, and a variety of other organizations. In comparison, the Governmental Accounting StandardsBoard has been in operation for a relatively short period of time. The FASB hasproduced approximately 160 statements whereas, at this time, the GASB has onlyissued about 50. Therefore, the changes that governmental accounting has gone

through over the years may be a bit easier for a student to grasp.

This assignment is simply intended to provide the student with an overview of the recent history of governmental accounting. The listed articles (and anyothers that the students may find through their own library and Internet searches)show how governmental accounting is gradually building up an official set of generally accepted accounting principles to provide a structure for reporting that,up until recently, has been very unstructured. The amount of authoritativeguidance has gone from almost nonexistent just a few decades ago to a fairlywell developed system of financial reporting.

Communication Case 2

If the city assesses a user charge, then officials always have the right to recordthe landfill as an Enterprise Fund. However, such a classification is not requiredunless the fee (a) is set at an amount intended to cover the various costs of theservice or (b) serves as the sole security for debts of the activity.

If the landfill is recorded as an Enterprise Fund, then accounting in thegovernment-wide financial statements and fund-based financial statements isquite similar. The statements measure all economic resources and timing isrecorded based on accrual accounting. Perhaps most importantly, theanticipated cost of closure and post-closure activities must be accrued in bothsets of financial statements.

Conversely, if the landfill is recorded within the General Fund, there is no impacton the government-wide financial statements except the all transactions andbalances are shown as governmental activities rather than as business-typeactivities. However, in the fund-based financial statements, as a governmentalfund, only current financial resources and the changes in those financial




resources are reported. Capital assets, in these statements, as well as long-termliabilities such as closure costs are omitted.

Excel Case

This spreadsheet would be extremely helpful for a government attempting todetermine the historical cost less depreciation of infrastructure assets notpreviously reported. This spreadsheet is designed along the guidelinesestablished in GASB Statement Number 34, paragraph 158. There are a number of different ways that a spreadsheet could be created to solve this particular problem. Here is one possible approach:

In Cell A1, enter text label “City of Loveland—Reported Value of Each Mile of Road”

In the next three rows, enter the criteria on which calculations will be based:In Cell A3, enter text label of “Per 1 Mile of Road as of 12/31/2008” and in Cell

E3 enter “$2,300,000”In Cell A4, enter text label of “Yearly Inflation” and in Cell E4 enter “8%”In Cell A5, enter text label of “Depreciation” and in Cell E5 enter “2%”

Any of the above three variables can be changed to develop different schedules.

Enter Column Headings:In Cell A7, enter text label of “# of Years.”In Cell B7, enter text label of “Date.”In Cell C7, enter text label of “Inflation Reduced Cost.”In Cell D7, enter text label of “Total Depreciation.”

In Cell E7, enter text label of “Reported Value.”

Enter Row Headings:In Cell A8, enter text label “1” and in Cell A9, enter text label “2.” Once you

establish a pattern, Excel can automatically fill in a series of numbers. Tocontinue the numbering for Years 3-20, click and drag across Cells A8 andA9. Once these cells are highlighted, you will see a small black box in thelower right corner of this selection, which is the “fill handle.” Click on thefill handle and drag across Cells A10 through A27 and release to displaynumbers 3 through 20. The numbers will be displayed in increasing order since that is the criteria that was established in Cells A8 and A9.

In Cell B8, enter text label “12/31/2007” and in Cell B9, enter text label“12/31/2006.” Perform the same click and drag operation above to fill thedate in Cells B10 through B27. The dates will be displayed in decreasingorder since that is the criteria that was established in Cells B8 and B9.

Enter Formulas:In Cell C8, enter formula to calculate Inflation Reduced Cost as of 12/31/2007.

Reduce Per Mile figure established on 12/31/2008 (in Cell E3) by YearlyInflation Rate (in Cell E4): =+E3/($E$4+100%) (NOTE: Absolute




references, which are cell references that always refer to cells in a specificlocation, can be created by placing a $ symbol before the Column letter and/or the Row number. In this problem, we need to always refer to the

Yearly Inflation figure in Cell E4 and the Depreciation figure in Cell E5.)In Cell D8, enter formula to calculate Total Depreciation. Multiply Inflation

Reduced Cost figure on 12/31/2007 by Yearly Depreciation Rate:=+C8*($E$5*A8)

In Cell E8, enter formula for Reported Value of road for current year bydeducting Depreciation from Inflation: =+C8-D8.

In Cell C9, enter formula to calculate Inflation Reduced Cost figure as of 12/31/2006: Reduce Inflation on 12/31/2007 (in Cell C8) by Yearly InflationRate (in Cell E4): =+C8/($E$4+100%)

Copy formulas from Cells D8 and E8 to Cells D9 and E9 by clicking anddragging fill handle.

Format Cells to display currency. Click and drag across Cells C8 to E9.Select Format, Cells, and under the Number tab, select Currency. Changethe Decimal places to 0 and click OK.

Copy Formulas:Click and drag across Cell C9 through Cell E9. Place the cursor on the “fillhandle” in the lower right corner of this section box and drag the cursor down toCell E27 and release. The formulas are automatically adjusted to correspond tothe current year information.

chapter 17 imsm

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