Chapter 21
ACCOUNTING FOR STATE AND LOCAL GOVERNMENTAL UNITS — PROPRIETARY
AND FIDUCIARY FUNDS
Answers to Questions
1 Enterprise and internal service funds are similar in the sense that their operations are like those of similar
business enterprises. They use full accrual accounting practices (including depreciation), have a capital
maintenance or profit objective, are financed through user charges, and have the same financial reporting
requirements. The primary difference between the two fund types is that an EF provides goods and
services to citizens and customers outside the government on a user charge basis, while an ISF provides
services to other departments and agencies within the same governmental unit (or occasionally to other
governmental units).
2 Typical operations of internal service funds include motor pools, centralized risk financing activities,
data processing services, printing shops, centralized purchasing, repair shops, and storage or warehouse
operations. Internal service funds may engage in almost any kind of operations that one would find in
private enterprise.
3 An EF (and also an ISF) is required to prepare a statement of net position, a statement of revenues,
expenses, and changes in net position, and a statement of cash flows for fair presentation in accordance
with GAAP. The government-wide statement of net position and statement of activities both include
enterprise fund data.
4 In the fund financial statements, governments include internal service funds with the proprietary funds.
They are aggregated into a single column within the proprietary fund statement of net position, the
statement of revenues, expenses, and changes in net position, and the statement of cash flows. Within the
government-wide statements, governments report internal service funds with the governmental activities.
The internal service fund asset and liability accounts are generally included in the governmental activity
column of the statement of net position. The statement of activities will include only those internal
service fund transactions involving entities other than the primary reporting entity. Governments add
external internal service fund revenues and expenses to the statement of activities, but they exclude
internal governmental transactions. (See also Question 7.)
5 Internal service funds are never considered major funds and proprietary fund statements report internal
service funds in a single column with the enterprise funds. Major enterprise funds are reported in a single
column on the proprietary fund statement of net position, statement of revenues, expenses, and changes in
net position, and statement of cash flows.
6 Because proprietary funds account for transactions in much the same manner as commercial business
organizations, the GASB allows some reference to FASB statements. GASB Statement No. 20,
“Accounting and Financial Reporting for Proprietary Activities,” governs which accounting and reporting
standards apply to proprietary activities.
7 It is important to differentiate between revenues generated by interfund transactions and transactions with
external parties because of the way that these transactions are reported on the government-wide
statements. The statement of activities will include only those internal service fund transactions involving
entities other than the primary reporting entity. To avoid double counting of interfund transactions,
governments add external service fund revenues and expenses to the statement of activities, while they
exclude internal governmental transactions.
8 First, GASB Statement No. 34 makes the direct method mandatory for statement presentation. Second,
GASB Statement No. 9 requires separating financing activities into noncapital and capital related.
Copyright © 2015 Pearson Education Limited
,21-2 Accounting for State and Local Governmental Unit—Proprietary and Fiduciary Funds
9 Governments account and report for public employee retirement systems (PERS) through pension
trustfunds. There are two primary types of pension plans: defined benefit and defined contribution. A
definedbenefit plan specifies the amount of benefits that will be provided to the employee after
retirement, and adefined contribution plan specifies the amount of resources that the government will
invest on behalf ofemployee retirement during the employee’s employment. Pension plans are further
classified as singleemployerplans if they involve only one government or multiple-employer if they
include more than onegovernment. Finally, for multiple-employer plans, a cost-sharing plan pools the
cost of financing pensions,while an agent plan maintains separate actuarial calculations for each
participating government.
10 EFs follow the accrual basis of accounting and are therefore able to report long-term debt withintheir
funds. If an EF issues debt that is backed by its revenue-generating activity (i.e., revenuebackeddebt
instruments), the government must present certain detailed segment information in thenotes to the
financial statements. The information helps creditors and financial statement users todetermine if the
segment that has issued the debt is generating the proceeds to fund the debt. Thesegment disclosure
includes a description of the type of goods and services provided by the segment,as well as condensed
statements of net position; revenues, expenses, and changes in fund netposition; and cash flows.
11 Private-purpose trust funds are fiduciary funds used to account for resources (other than investment pools
and employee benefits) that are held for the benefit of parties outside the governmental entity.
Permanent funds are governmental funds which report resources whose use is permanently restricted, but
whose earnings are expendable for the benefit of the government or its citizens.
12 The government-wide statement of net position would need at least three columns—one for governmental
activities (including the general fund, special revenue funds, and internal service funds), one for business-
type activities (enterprise funds), and one for the component unit. Most governments also present
optional total and comparative total columns.
13 The net pension liability is now required to be reported on the balance sheet. A net pension liability
indicates the pension liability exceeds the pension plan assets, and thus the pension plan is not fully
funded. If the pension plan is fully funded, no net pension liability will be reported.
14 The accounting equation for an agency fund is Assets = Liabilities.
15 If an enterprise fund issues debt that is backed by its revenue-generating activity (i.e., revenue-backed
debt instruments), the government must present certain detailed segment information in the notes to the
financial statements.
16 Since the government-wide statement of activities and statement of net position report all items using the
accrual basis of accounting, conversion between the fund and government-wide statements is not
necessary. Also, recall that governments report internal service funds with the governmental activities in
the government-wide statements.
Copyright © 2015 Pearson Education Limited
, Chapter 21 21-3
SOLUTIONS TO EXERCISES
Solution E21-1 Solution E21-2 Solution E21-3
[AICPA adapted]
1 b 1 d 1 c
2 c 2 d 2 d
3 d 3 d 3 c
4 c 4 c 4 b
5 d 5 a 5 c
Solution E21-4 Solution E21-5
[AICPA adapted]
1 b 1 d
2 a 2 d
3 a 3 b
4 a 4 b
5 c 5 a
6 c
Solution E21-6
City of Laramee Tax Collection Agency Fund
Statement of Fiduciary Net Position
Tax Collection Agency Fund
at December 31, 2014
Assets
Taxes receivable $50,000
Total assets $50,000
Liabilities
Liability to Laramee $15,000
Liability to Bloomer County 10,000
Liability to Bloomer School District 25,000
Total liabilities $50,000
Total Net Position $0
Schedule of Taxes Receivable
Amounts Certified Balance at
Taxing Units for Collection Collections Year End
City of Laramee $ 60,000 $ 45,000 $15,000
Bloomer County 40,000 30,000 10,000
Bloomer School District 100,000 75,000 25,000
$200,000 $150,000 $50,000
NOTE: This solution assumes that the collection fee is recognized when cash is collected.
Copyright © 2015 Pearson Education Limited
ACCOUNTING FOR STATE AND LOCAL GOVERNMENTAL UNITS — PROPRIETARY
AND FIDUCIARY FUNDS
Answers to Questions
1 Enterprise and internal service funds are similar in the sense that their operations are like those of similar
business enterprises. They use full accrual accounting practices (including depreciation), have a capital
maintenance or profit objective, are financed through user charges, and have the same financial reporting
requirements. The primary difference between the two fund types is that an EF provides goods and
services to citizens and customers outside the government on a user charge basis, while an ISF provides
services to other departments and agencies within the same governmental unit (or occasionally to other
governmental units).
2 Typical operations of internal service funds include motor pools, centralized risk financing activities,
data processing services, printing shops, centralized purchasing, repair shops, and storage or warehouse
operations. Internal service funds may engage in almost any kind of operations that one would find in
private enterprise.
3 An EF (and also an ISF) is required to prepare a statement of net position, a statement of revenues,
expenses, and changes in net position, and a statement of cash flows for fair presentation in accordance
with GAAP. The government-wide statement of net position and statement of activities both include
enterprise fund data.
4 In the fund financial statements, governments include internal service funds with the proprietary funds.
They are aggregated into a single column within the proprietary fund statement of net position, the
statement of revenues, expenses, and changes in net position, and the statement of cash flows. Within the
government-wide statements, governments report internal service funds with the governmental activities.
The internal service fund asset and liability accounts are generally included in the governmental activity
column of the statement of net position. The statement of activities will include only those internal
service fund transactions involving entities other than the primary reporting entity. Governments add
external internal service fund revenues and expenses to the statement of activities, but they exclude
internal governmental transactions. (See also Question 7.)
5 Internal service funds are never considered major funds and proprietary fund statements report internal
service funds in a single column with the enterprise funds. Major enterprise funds are reported in a single
column on the proprietary fund statement of net position, statement of revenues, expenses, and changes in
net position, and statement of cash flows.
6 Because proprietary funds account for transactions in much the same manner as commercial business
organizations, the GASB allows some reference to FASB statements. GASB Statement No. 20,
“Accounting and Financial Reporting for Proprietary Activities,” governs which accounting and reporting
standards apply to proprietary activities.
7 It is important to differentiate between revenues generated by interfund transactions and transactions with
external parties because of the way that these transactions are reported on the government-wide
statements. The statement of activities will include only those internal service fund transactions involving
entities other than the primary reporting entity. To avoid double counting of interfund transactions,
governments add external service fund revenues and expenses to the statement of activities, while they
exclude internal governmental transactions.
8 First, GASB Statement No. 34 makes the direct method mandatory for statement presentation. Second,
GASB Statement No. 9 requires separating financing activities into noncapital and capital related.
Copyright © 2015 Pearson Education Limited
,21-2 Accounting for State and Local Governmental Unit—Proprietary and Fiduciary Funds
9 Governments account and report for public employee retirement systems (PERS) through pension
trustfunds. There are two primary types of pension plans: defined benefit and defined contribution. A
definedbenefit plan specifies the amount of benefits that will be provided to the employee after
retirement, and adefined contribution plan specifies the amount of resources that the government will
invest on behalf ofemployee retirement during the employee’s employment. Pension plans are further
classified as singleemployerplans if they involve only one government or multiple-employer if they
include more than onegovernment. Finally, for multiple-employer plans, a cost-sharing plan pools the
cost of financing pensions,while an agent plan maintains separate actuarial calculations for each
participating government.
10 EFs follow the accrual basis of accounting and are therefore able to report long-term debt withintheir
funds. If an EF issues debt that is backed by its revenue-generating activity (i.e., revenuebackeddebt
instruments), the government must present certain detailed segment information in thenotes to the
financial statements. The information helps creditors and financial statement users todetermine if the
segment that has issued the debt is generating the proceeds to fund the debt. Thesegment disclosure
includes a description of the type of goods and services provided by the segment,as well as condensed
statements of net position; revenues, expenses, and changes in fund netposition; and cash flows.
11 Private-purpose trust funds are fiduciary funds used to account for resources (other than investment pools
and employee benefits) that are held for the benefit of parties outside the governmental entity.
Permanent funds are governmental funds which report resources whose use is permanently restricted, but
whose earnings are expendable for the benefit of the government or its citizens.
12 The government-wide statement of net position would need at least three columns—one for governmental
activities (including the general fund, special revenue funds, and internal service funds), one for business-
type activities (enterprise funds), and one for the component unit. Most governments also present
optional total and comparative total columns.
13 The net pension liability is now required to be reported on the balance sheet. A net pension liability
indicates the pension liability exceeds the pension plan assets, and thus the pension plan is not fully
funded. If the pension plan is fully funded, no net pension liability will be reported.
14 The accounting equation for an agency fund is Assets = Liabilities.
15 If an enterprise fund issues debt that is backed by its revenue-generating activity (i.e., revenue-backed
debt instruments), the government must present certain detailed segment information in the notes to the
financial statements.
16 Since the government-wide statement of activities and statement of net position report all items using the
accrual basis of accounting, conversion between the fund and government-wide statements is not
necessary. Also, recall that governments report internal service funds with the governmental activities in
the government-wide statements.
Copyright © 2015 Pearson Education Limited
, Chapter 21 21-3
SOLUTIONS TO EXERCISES
Solution E21-1 Solution E21-2 Solution E21-3
[AICPA adapted]
1 b 1 d 1 c
2 c 2 d 2 d
3 d 3 d 3 c
4 c 4 c 4 b
5 d 5 a 5 c
Solution E21-4 Solution E21-5
[AICPA adapted]
1 b 1 d
2 a 2 d
3 a 3 b
4 a 4 b
5 c 5 a
6 c
Solution E21-6
City of Laramee Tax Collection Agency Fund
Statement of Fiduciary Net Position
Tax Collection Agency Fund
at December 31, 2014
Assets
Taxes receivable $50,000
Total assets $50,000
Liabilities
Liability to Laramee $15,000
Liability to Bloomer County 10,000
Liability to Bloomer School District 25,000
Total liabilities $50,000
Total Net Position $0
Schedule of Taxes Receivable
Amounts Certified Balance at
Taxing Units for Collection Collections Year End
City of Laramee $ 60,000 $ 45,000 $15,000
Bloomer County 40,000 30,000 10,000
Bloomer School District 100,000 75,000 25,000
$200,000 $150,000 $50,000
NOTE: This solution assumes that the collection fee is recognized when cash is collected.
Copyright © 2015 Pearson Education Limited
