The City of Havisham has a fiscal year ending December 31, Year 5. If the city were to produce financial statements right now, the following figures would be included:
– Governmental activities: Assets = $800,000, Liabilities = $300,000, and Change in Net Position for the period = increase of $100,000
– Business-type activities: Assets = $500,000, Liabilities = $200,000, and Change in Net Position
for the period = increase of $60,000
– Governmental funds: Assets = $300,000, Liabilities = $100,000, and Change in Fund Balances
= increase of $40,000
– Proprietary funds: Assets = $700,000, Liabilities = $300,000, and Change in Net Assets for the
period = increase of $70,000
Other information: The city council is considered the highest level of decision-making authority
for the government. Where applicable, current financial resources are viewed by the government as available if collected within 75 days of the end of a fiscal year.
For each of the following, indicate whether the overall statement is true or false. Assume that
each situation is independent of all others.
a. In the information provided about the city, an error has apparently been made because the amount of proprietary fund assets ($700,000) cannot be greater than the amount of business-type activity assets ($500,000).
b. A separate governmental fund (such as money designated for the construction of Highway 61)
is reporting assets totaling $32,000. Based on that information alone, this fund must be reported
separately as a major fund.
c. The city starts a bus system to help eliminate traffic congestion. Passengers are charged a nickel
for each trip although that fee will not come close to covering the cost of the bus system or pay
for its debts. The bus system must be reported as a part of the general fund rather than as a sepa-
rate enterprise fund.
d. The city council passes an annual budget for all general fund activities. Revenues are expected
to be $1 million and approved expenditures are $900,000. These budgetary amounts are
recorded through a journal entry at the beginning of the year (an entry that is removed at the end
of the year). In recording this budget, an estimated revenue account is debited for $1 million.
e. The city council passes an annual budget for all general fund activities. Revenues are expected
to be $1 million and approved expenditures are $900,000. These budgetary amounts are
recorded through a journal entry at the beginning of the year (that entry is removed at the end of
the year). In recording this budget, an expenditures account is debited for $900,000.
f. The government paid for a 3-year insurance policy on January 1, Year 5, for its school system.
If the purchases method had been used, the amount of expenditures reported by the city would
be larger for that year than if the consumption method had been used.
g. Money received from an income tax is classified as derived tax revenue.
h. After the provided figures were determined, officials learned that the city was entitled to an
additional $100,000 in taxes on income earned during Year 5. Starting on January 1, Year 6, the
city will collect $1,000 per day of this amount for the next 98 days (the final $2,000 is expected
to be uncollectible). As a result of this discovery, the reported change in net position for the
governmental activities in government-wide statements for Year 5 will go up by $98,000.
i. The police department ordered equipment on October 17, Year 5, for $43,000. The equipment
was received on December 29, Year 5, but at a cost of $44,000. In the general fund, the encum-
brance account was credited for $44,000 and the expenditure account was debited for $44,000
to indicate the switch from monetary commitment to liability.
j. The police department ordered equipment on October 17, Year 5, for $43,000. The equipment
was not received prior to the end of Year 5. The police chief authorized the department to accept
and pay for the equipment when it arrived in Year 6. In reporting fund financial statements at
the end of Year 5, a fund balance—committed of $43,000 should be reported on the balance
sheet for the governmental funds.
k. A cash amount of $32,000 is transferred from the general fund to a capital projects fund. On the
statement of activities, for the government-wide financial statements, this transaction is shown
as both a transfer in and a transfer out.