Acct 217 Ch07 - CHAPTER 7: Answers to Questions 7-1....

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CHAPTER 7: ACCOUNTING FOR THE BUSINESS-TYPE ACTIVITIES OF STATE AND LOCAL GOVERNMENTS Answers to Questions 7-1. Internal service funds and enterprise funds are both proprietary funds and are presented as such in the funds financial statements. However, since the transactions of internal service funds predominately involve sales of goods or services to the General Fund and other funds that compose the governmental activities of a government, their financial balances are included in a single column of the proprietary fund financial statements. Those enterprise funds considered to be major funds are presented in separate columns of the proprietary fund financial statements, with nonmajor enterprise funds aggregated in an Other Enterprise Funds column. GASB requires that three proprietary fund financial statements be prepared: statement of revenues, expenses and changes in fund net assets; statement of net assets; and a statement of cash flows. Due to the nature of internal service funds, at the government-wide level the internal service funds balances are collapsed into the Government Activities column of the government-wide statements. Enterprise funds are considered business-type activities and are reported in the Business-type Activities column of the government-wide statements. 7-4. The pricing policy depends on the view of the internal service fund held by those who authorized its establishment. Is it supposed to recover direct cash costs, or direct and indirect costs? Is "cost" historical cost or replacement cost? Does it have to repay interfund loans? Does it have to generate revenues for capital assets replacement and expansion? 7-5. Restricted assets are assets that have been segregated, pursuant to an agreement with an external party or by law or regulation, for a specified purpose and therefore are not available for the discretionary use of management. Items typically reported in the "Restricted Assets" section of the statement of fund net assets include assets set aside for retirement of revenue bonds in conformity with bond covenants and bond proceeds, grants, and contributions restricted for capital purposes. Customer deposits are commonly reported as restricted assets by government utilities that use proprietary fund accounting. 7-6. Enterprise funds must generally capitalize interest costs, while governmental funds are not allowed to capitalize interest costs. GASBS 39 does not allow interest on long-term debt to be allocated to the functions of government; therefore, governmental funds do not capitalize interest since in doing so interest becomes a part of the capital asset cost, and hence the depreciation expense calculation. Since depreciation is allocated to the functions of government, interest would be consequently allocated to government functions. In contrast, GASB requires that interest on self-constructed enterprise fund assets be capitalized in accordance with SFAS No. 34 . The only exception to the
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Acct 217 Ch07 - CHAPTER 7: Answers to Questions 7-1....

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