Freeman10 SM Ch10

CHAPTER 10
ENTERPRISE FUNDS
ANSWERS TO QUESTIONS
Question 10-1
Use of Enterprise Fund accounting is permitted whenever user charges to external users of goods
and services is a principal source of revenues for an activity. Enterprise Fund accounting is
required for activities for which user charges to external users of goods and services are a
principal source of revenues if one or more of the following are true:
a.
b.
c.
The activity is financed with debt that is secured solely by a pledge of the net revenues
from fees and charges of the activity. Debt that is secured by a pledge of net revenues
from fees and charges and the full faith and credit of a related primary government or
component uniteven if that government is not expected to make any paymentsis
not payable solely from fees and charges of the activity. (Some debt may be secured, in
part, by a portion of its own proceeds but should be considered as payable "solely" from
the revenues of the activity.)
Laws or regulations require that the activitys costs of providing services, including
capital costs (such as depreciation or debt service), be recovered with fees and charges,
rather than with taxes or similar revenues.
The pricing policies of the activity establish fees and charges designed to recover its
costs, including capital costs (such as depreciation or debt service).
(Insignificant activities are not intended to be reported as Enterprise Funds under this guidance.)
Question 10-2
Circumstances in which each of the following fund types would be appropriate accounting
vehicles for a government's garbage collection and disposal activities are as follows:
a.
General Fundwhen the activity is considered a general health and sanitation service
offered by the government, no (or a nominal) fee is charged those served, the activity is
financed principally through general appropriations, and any fee charged may be used
for general government purposes.
b.
Special Revenue FundSame as (a) above except the nominal fee charged is restricted
as to use, usually to supplement the general appropriations providing most of the
financial resources required in the conduct of the activity.
2013 Pearson Education, Inc. publishing as Prentice Hall
243
Question 10-2 (continued)

c.
Enterprise FundPermitted if user fees are charged to external service recipients.

Enterprise Fund accounting is required if one or more of the following additional
criteria are met:
1. The activity is financed with debt that is secured solely by a pledge of the net
revenues from fees and charges of the activity. Debt that is secured by a pledge of
net revenues from fees and charges and the full faith and credit of a related primary
government or component uniteven if that government is not expected to make
any paymentsis not payable solely from fees and charges of the activity. (Some
debt may be secured, in part, by a portion of its own proceeds but should be
considered as payable "solely" from the revenues of the activity.)
2. Laws or regulations require that the activitys costs of providing services, including
capital costs (such as depreciation or debt service), be recovered with fees and
charges, rather than with taxes or similar revenues.
3. The pricing policies of the activity establish fees and charges designed to recover its
costs, including capital costs (such as depreciation or debt service).
Question 10-3
The accounting equation (balance sheet format) for a proprietary fund is:
+
+
Current Assets
Noncurrent Assets
Deferred Outflows
=
+
+
+
Current Liabilities
Long-Term Liabilities
Deferred Inflows
Net Position
Alternatively, the accounting equation (net position format) of a proprietary fund may be stated
as:
+
+
Current Assets
Noncurrent Assets
Deferred Outflows
Current Liabilities
Long-Term Liabilities
Deferred Inflows
Net Position
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There are three categories of Net Position:
Net Position Net Investment in Capital Assets
Net Position Restricted
Net Position Unrestricted
Net PositionNet Investment in Capital Assets equals the carrying value of an Enterprise Funds
capital assets plus its capital-asset-related net outflows less its capital-asset-related deferred
inflows, less its capital-asset-related borrowings. Net PositionRestricted is the difference
between assets restricted externally or by enabling legislation and liabilities payable from those
assets (including bonds payable equal to the unexpended portion of capital-asset-related bond
proceeds). Net PositionUnrestricted is the difference between all other assets and liabilities of
the Enterprise Fund.
Question 10-4
The proper year-end balances of each net position component must be computed from the asset
and liability balances at year end. Essentially, each asset must be classified either as a capital
asset; a noncapital, restricted asset; or a noncapital unrestricted asset. Each liability must be
classified as to whether it is (a) a borrowing that is related to capital assets; (b) a liability payable
from restricted assets; or (c) other (unrestricted) liabilities. Each deferred outflow should be
classified as being either related to capital assets or be unrestricted. Each deferred inflow should
be classified as being related to capital assets, restricted assets, or as being unrestricted. The
differences between the related groups of assets, liabilities, deferred outflows, and deferred
inflows determines the appropriate balance of each net position class.
Question 10-5
Balance Sheet (Statement of Net Position)
Statement of Revenues, Expenses, and Changes in Net Position
Statement of Cash Flows
Question 10-6
The transfer of General Capital Assets would not affect the General Fund, because the capital
assets are not accounted for there, but in the GCA-GLTL accounts. The asset must be recorded
in the Enterprise Fund at historical cost less accumulated depreciation (as if it had been acquired
originally for Enterprise Fund use). A corresponding increase in Capital Contributions would
also be recorded in the Enterprise Fund. (This transaction will be reported as a transfer in the
government-wide financial statements.)
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Question 10-7
Although the City of Cherokee Hills electricity consumption may have been minimal when it
began operating the utility many years ago, chances are that it is now significantand will
continue to grow dramatically as the city grows rapidly. The utility should bill the city at
standard rates for its level of electricity consumption and should be billed similarly for any
services performed by the city and financed through its General or other funds. Otherwise the
financial statements of both will continue to be distortedto an unknown extentand electric
utility customers who receive bills will continue to pay a hidden (also in an unknown amount)
tax based on electricity used to provide electrical power to Cherokee Hills. If the city does not
bill departments for electricity usage, GASB Statement 34 still requires the city to report
revenues for the standard amount of the charges and report a transfer out of equal amount. This
is required in order to reflect the substance of the transaction. Likewise, the funds used to
account for the user departments and activities must report expenditures (expenses) and transfers
in.
Question 10-8
The first response should be to fire the person that told the member of the Board of Directors that
the purpose of depreciation was to provide for the replacement of capital assets. Depreciation
has nothing to do with the future purchase of capital assets. The purpose of depreciation is to
allocate the cost of a capital asset in a systematic and rational manner over the use life of that
capital asset. Depreciation has nothing to do capital asset replacement. Had the government
wanted to start making provisions for capital asset replacement, the first step would have been to
establish a sinking fund to pay for those replacements. Deposits to that sinking fund could have
been based on current year depreciation. More appropriately, the Enterprise Fund should have
established a capital budget estimating when capital assets would need to be purchased and based
deposits to the sinking fund on that budget.
Also, it would be a more accurate statement that depreciation is charged in order to assure that
the dollars of capital invested (historical dollars) are retained within the entity in some fashion,
assuming that the operation at least breaks even and that dividends are not paid in excess of the
earnings retained. Although the assets retained were at one time no doubt in cash or near cash
form, the fact that assets were retained does not also indicate that a "fund" was established to
replace capital assets. This would take separate action by the board.
In the absence of such a "fund," it is likely that the assets retained have been invested in capital
assetsperhaps to replace those used up, perhaps in additional capital assets acquired to provide
better service. Even if a "fund" had been established, its provision would not check the effects of
inflation upon the cost of capital asset replacement nor that of supply and demand, technology, or
other factors. Even if inflation and supply and demand factors were immaterial, it is likely that
the old assets will be replaced by different and better ones, not by assets identical in every
respect to the original ones. Thus, even "replacement" often constitutes expansion of the capital
asset base to some extent rather than being purely "replacement." (Situations such as this
illustrate one reason a statement of cash flows is to be presented for Enterprise Funds.)
246
Question 10-9
If Virgie Township does not use borrowed resources to retire its debt prior to maturity, the
difference between the amount paid to retire the debt and the carrying value of the debt should be
reported in the year of the retirement as a gain or loss on the early retirement of debt. In this
case, that difference does not affect the amount of interest expense reported in subsequent years.
If Virgie Township does use borrowed resources to retire its debt prior to maturity, the difference
between the amount paid to retire the debt and the carrying value of the debt will not be
recognized in income in the year of the retirement. Rather, it will be recorded as a deferred
interest expense adjustment which will be amortized to interest expense over the shorter of the
remaining term of the old bonds or the term of the new bonds. The balance of the deferred
interest expense adjustment is either a deferred outflow (if the account has a debit balance) or a
deferred inflow (if the account has a credit balance). (In essence, the deferred interest expense
adjustment are treated in a manner similar to premiums or discounts on bonds payable, except
that the amortization period is defined differently and the adjustment is not recorded as an
adjunct or contra account to the refunding bonds as would a premium or discount.)
Question 10-10
The difference, and the reasons therefore, in accounting for bond premiums or discounts are as
follows:
a.
General Obligation Construction Bonds. A discount reduces the amount of resources

available for the construction project as compared with the sale of bonds at par, and the
project must be scaled down or other resources therefore located. A premium is
ordinarily transferred to a Debt Service Fund, though it may on occasion be the basis
upon which the project authorization is increased in practice. Regardless of the effect of
the premium or discount upon project authorization, each affects the amount reported as
Other Financing Sources or Uses, which are closed to Fund Balance at year end in the
Capital Projects Fund (if the premium is first carried there).
The bonds payable and related premium or discount are recorded in the General Capital
Assets and General Long-Term Liabilities accounts, and the net proceeds are expended
through a Capital Projects Fund that is subsequently terminated. A premium amount
that is transferred to a Debt Service Fund is not accounted for as such in the Debt
Service Fund, but as a Transfer In that adds to its Fund Balance. If the premium amount
is recorded directly in the Debt Service Fund, the Other Financing SourcesBond
Premium account is an operating account that is closed to Fund Balance at year end.
Thus, the effects of the bond issue may be scattered among three separate accounting
entities initially. Premium and discount amortization are recorded in the General
Capital Assets and General Long-Term Liabilities accounts but are reported only in the
government-wide financial statementsas are the bonds payable and any related
unamortized premium and discount.
247

b.
Enterprise Revenue Bonds. Premiums and discounts should be amortized and reported
in the funds in these cases (unless immaterial) because the principal focus of Enterprise
Fund accounting is income determination. Failure to amortize bond premiums and
discounts results in misstatements both of operating results and of financial position of
each period during which the bonds are outstanding and to misstatement of gain or loss
upon retirement of such bonds prior to maturity.
Question 10-11
The transaction is reported as a capital contribution, equal to the carrying amount of the capital
asset, in the Enterprise Fund Statement of Revenues, Expenses, and Changes in Net Position. It
is not an interfund transaction and cannot be reported as a transfer in the fund financial
statements. In the government-wide statement of activities, the transaction will be reported as a
transfer from governmental activities to business-type activities.
Question 10-12
A deferred interest expense credit balance should be reported as a deferred inflow. A debit
balance should be reported as a deferred outflow. The carrying value of the bonds in the
question is $5,200,000 computed as follows:
Bonds
Premium on Bonds
Carrying Value
$5,000,000
__200,000
$5,200,000
Question 10-13
Net Investment in Capital Assets may be affected by either a deferred outflow or a deferred
inflow. Restricted Net Position is normally affected only by a deferred inflow. Unrestricted Net
Position may be affected by either a deferred outflow or a deferred inflow.
248
Question 10-14
Four cash flow classifications are required by the GASB Codification. These classifications and
their descriptions are:
a.
Cash Flows from Operating Activities

Operating activities generally result from providing services and producing and
delivering goods, and include all transactions and other events that are not defined as
capital and related financing, noncapital financing, or investing activities. Cash flows
from operating activities generally are the cash effects of transactions and other events
that enter into the determination of operating income.
b.
Cash Flows from Noncapital Financing Activities

Noncapital financing activities include borrowing money for purposes other than to
acquire, construct, or improve capital assets and repaying those amounts borrowed,
including interest. Also included are certain other interfund and intergovernmental
receipts and payments, including all transfers out of the reporting fund.
c.
Cash Flows from Capital and Related Financing Activities

Capital and related financing activities include (a) acquiring and disposing of capital
assets used in providing services or producing goods, (b) borrowing money for
acquiring, constructing, or improving capital assets and repaying the amounts borrowed,
including interest, (c) transfers from other funds for the specific purpose of acquiring,
constructing, or improving capital assets, (d) capital grant receipts, and (e) paying for
capital assets obtained from vendors on credit.
d.
Cash Flows from Investing Activities

Investing activities include (a) making and collecting loans (except program loans), (b)
acquiring and disposing of debt or equity instruments, and (c) collecting investment
income.
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Question 10-15
The key differences are that (1) governments must report cash flows in four different categories
compared to three for business enterprises and (2) the cash flow category titles that the two types
of entities have in common are defined to include significantly different transactions. Both types
of entities use the classifications of cash flows from operating activities and cash flows from
investing activities, but as the table below indicates the classifications are not equivalent for the
two types of entities. In addition to these classifications, businesses must report cash flows from
financing activities while governments must report cash flows from noncapital financing activities
and cash flows from capital and related financing activities.
Transaction
Type
Capital asset acquisition/sale
Capital debt issue/retirement
Noncapital debt issue/retirement
Interest paid on capital debt
Interest paid on noncapital debt
Receipt of investment earnings
Government
Classification
Capital and Related Financing
Noncapital Financing
Noncapital Financing
Investing
Business
Classification
Investing
Financing
Financing
Operating
Operating
Operating
Question 10-16
Transfers out of an Enterprise Fund (or any other proprietary fund) are never classified as capital
and related financing activities. GASB Statement No. 9 requires all transfers out to be classified
as noncapital financing activities. Transfers in are classified as capital and related financing
activities if they are clearly and specifically for the purpose of defraying the capital asset
construction or acquisition costs of the reporting fund. Otherwise, such transfers in must be
reported as noncapital financing activities.
Question 10-17
The purpose for which the cash was borrowed determines whether the cash flow should be
reported in capital and related financing activities or in noncapital financing activities. If a
borrowing is clearly and specifically for the purpose of defraying capital asset costs, it is reported
in capital and related financing activities. In all other cases, it should be reported in noncapital
financing activities.
250
SOLUTIONS TO EXERCISES
Exercise 10-1
1. b
2. a
3. c
4. b
5. b
6. d
7. a
8. b
9. d
10. c
Exercise 10-2
No.
1
2
3
4
5
6
7
8
9
10
Effect on
Operating
Statement?
+$75,000
None
-200,000
-36,000
-50,000
None
+300,000
+1,000,000
+40,000
-75,000
Unrestricted
+$225,000
-36,000
+1,000,000
+40,000
-75,000
Net Position
Net Investment
in
Restricted
Capital Assets
-$150,000
-50,000
+50,000
-200,000
-250,000
+200,000
+300,000
Total
+$75,000
-200,000
-36,000
-50,000
+300,000
+1,000,000
+40,000
-75,000
Note in item 9 that the restriction on the use of the assets is only that they must be used for the
Enterprise Funds purposes. Therefore, from the standpoint of the Enterprise Fund, the resources
are considered unrestricted.
251
Exercise 10-3
1.
2.
3.
Cash................................................................................
Refunding Bonds Payable........................................
To record issuance of refunding bonds.
8,000,000
Bonds Payable.................................................................
Deferred Interest Expense Adjustment............................
Discount on Bonds Payable......................................
Cash.........................................................................
To record in-substance defeasance of bonds.
7,200,000
900,000
Interest Expense..............................................................
Cash.........................................................................
To record interest paid.
640,000
ADJUSTMENT
Interest Expense ($900,000/5 years)................................
Deferred Interest Expense Adjustment.....................
To amortize deferred interest expense.
8,000,000
100,000
8,000,000
640,000
180,000
180,000
Exercise 10-4
1a.
1b.
Cash........................................................................................
Deferred Inflow Operating Grant.................................
Deferred Inflow Capital Grant......................................
To record receipt of grant proceeds in advance of expenditures.
4,000,000
Construction in Progress.........................................................
Equipment..............................................................................
Operating Expenses................................................................
Cash................................................................................
To record construction costs, operating expenses, and
equipment purchases that qualify for reimbursement under
the grants.
1,200,000
50,000
300,000
Deferred Inflow Operating Grant.........................................

Nonoperating RevenuesOperating Grants...................
To recognize revenues from the operating grant.
350,000
Deferred Inflow Capital Grant.............................................

RevenuesCapital Contributions...................................
To recognize contributed capital from the capital grant.
1,200,000
1,000,000
3,000,000
1,550,000
350,000
2.
Zero. Operating grants are classified as nonoperating revenues.

classified as capital contributions revenues.
3.
$350,000 of nonoperating revenues from the operating grant.

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1,200,000
Capital grants are
Exercise 10-4 (continued)

4.
Noncapital financing cash flows should include the following:

Cash received from operating grants...............................
1,000,000
5.
Capital and related financing cash flows should include the following:
Cash received from capital grants....................................
3,000,000
Cash paid for construction............................................... (1,200,000)
Cash paid for equipment..................................................
(50,000)
6.
There were no cash flows from investing activities in this exercise.
Exercise 10-5
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
d
c
a
d
c
b
b
c
c
b
Exercise 10-6
a1.
a2.
Cash................................................................................
Deferred Inflow Capital Grant...............................
To record receipt of grant cash in advance.
3,000,000
Construction in Progress..................................................
Cash.........................................................................
To record construction costs.
1,500,000
Deferred Inflow Capital Grant......................................

RevenuesCapital Contributions............................
To record capital grant revenues earned.
1,500,000
253
3,000,000
1,500,000
1,500,000

b1.
b2.
Cash................................................................................
Deferred Inflow Operating Grant..........................
To record receipt of grant cash in advance.
3,000,000
ExpensesSalaries.........................................................
Cash.........................................................................
To record construction costs.
1,500,000
Deferred Inflow Operating Grant.................................

Nonoperating RevenuesOperating Grants............
To record operating grant revenues earned.
1,500,000
3,000,000
1,500,000
1,500,000
Exercise 10-7
1.
Depreciation on capital grant financed capital assets of proprietary funds must be reported as
an operating expense.
2.
Depreciation on infrastructure assets of proprietary funds must be reported as an operating

expense (unless the modified approach is used, in which case depreciation on such assets is
not reported).
3.
Transfers from (or to) other funds are reported as the last item before changes in net
position.
4.
Cash proceeds of short-term (or long-term) debt issuances do not affect income or fund net
position. They are not to be reported in this statement.
5.
Retirement of long-term (or short-term) debt does not affect income or fund net position. It
is not to be reported in this statement.
6.
Transfers to (or from) other funds are reported as the last item before changes in net
position.
7.
Gains on sales of capital assets are reported as nonoperating revenues unless they meet the
special item criteria. In those cases, the gain should be reported as a special item.
8.
"Losses" (or gains) on advance refunding are reported as ordinary losses (or gains) in
the period of the refunding if no new debt was issued. If refunding bonds were issued, these
amounts (debit or credit balance deferred interest expense adjustments) on advance
refundings of bonds must be reported as deferred outflows (for losses) or deferred inflows
(for gains) in the year incurred and amortized as a component of interest expense over the
shorter of the life of the refunding bonds or the remaining life of the old bonds.
9.
These operating grants are reported as nonoperating revenues when qualifying expenditures
are incurred. In the described situation, 60% of the grant amount would be reported as
nonoperating revenues in the current year. The balance of the grant must be reported as
254
deferred inflow operating grant in the balance sheet since the problem indicates that the
full grant amount has been received.
255

10. This capital lease transaction (on the last day of the fiscal year) is in substance a
simultaneous long-term borrowing and capital asset acquisition. Neither impacts an
Enterprise Fund operating statement. In subsequent years, interest expense and depreciation
expense will be reported associated with the long-term liability and the capital asset
respectively.
Exercise 10-8
City of Demere
Airport Enterprise Fund
For the Year Ended December 31, 20X3
Operating revenues:
Charges for services....................................................................
Operating expenses:
Salaries........................................................................................
Contractual services....................................................................
Supplies.......................................................................................
Depreciation................................................................................
$3,500,000
$1,000,000
1,100,000
200,000
1,500,000
3,800,000
Operating income (loss).....................................................................

Nonoperating revenue (expense):
Investment income ($120,000 + $23,000).................................
Interest expense ($450,000 - $25,000).......................................
Loss on sale of capital assets......................................................
( 300,000)
143,000
(425,000)
( 4,000) (
286,000)
Income (Loss) before other revenues, expenses and transfers...........
( 586,000)
Capital contributions ($1,300,000 + $500,000).................................

Transfer from General Fund..............................................................
1,800,000
222,000
Increase in Net Position.....................................................................
1,436,000
Net Position, January 1, 20X3...........................................................
3,827,000
Net Position, December 31, 20X3.....................................................
$5,263,000
256
SOLUTIONS TO PROBLEMS
Problem 10-1
1. d
2. c
3. b or d (The computation of restricted net position is described correctly in b.
However, the two amounts offset one another so that the balance does not change.
Therefore, d technically is correct also.)
4. c
5. a
6. a
7. d Eligibility requirements must be met before capital contributions revenues for
the capital grant are recognized. As a result, Net Position will not be affected by
the capital grant.
8. d
($7,310,500 + $1,000,000) less ($10,500,000 - $4,000,000)
9. d
10. a
257
Problem 10-2
Town of Robinson
Water and Sewer Enterprise Fund
Operating Revenues:
Charges for water services .....................................................
Charges for sewer services ....................................................
Total Operating Revenues ..............................................
$ 1,800,000
2,000,000
3,800,000
Operating Expenses:
Salaries and wages .................................................................
Contractual services ...............................................................
Depreciation ($100,000 + $75,000 + $80,000) ......................
Total Operating Expenses ...............................................
400,000
2,600,000
255,000
3,255,000
Operating Income ..............................................................................
545,000
Nonoperating Revenues (Expenses):

Operating grants ....................................................................
Investment income ($50,000 + $12,000)................................
Gain on sale of equipment .....................................................
Lossesclaims and judgments ($100,000 + $10,000) ..........
Interest expense* ...................................................................
Net Nonoperating Revenues (Expenses) ........................
250,000
62,000
13,000
(110,000)
(120,000)
95,000
Income before Capital Contributions and Transfers ...........................
640,000
Capital contributions...........................................................................
Transfer from Special Revenue Fund.................................................
Transfer to General Fund ...................................................................
1,500,000
500,000
(127,000)
Change in Net Position.......................................................................

Net Position, January 1 ......................................................................
Net Position, December 31.................................................................
*Interest expense computation:
Interest on bonds payable ..............................
Interest on short-term note .............................
Amortization of deferred interest expense
adjustment ($100,000/5) ..................
Interest expense ......................................
2,513,000
22,000,000
$24,513,000
$ 95,000
5,000
20,000
$120,000
258
Problem 10-3 (a) [Note See Excel Files for 10-3(a)]

Problem 10-3 (b)
City of Lynn
Computation of Net Position Components
At December 31, 20X0
Asset/Liability
Cash
Accounts Receivable
Capital Assets
Vouchers Payable
Interest Payable
Bonds Payable
Totals
Unrestricted
Net Position
$72,100
28,600
Net Investment in
Capital Assets
$975,000
(24,000)
(3,000)
(750,000)
$225,000
$73,700
259
Problem 10-3 (c)

City of Lynn
Airport (Enterprise) Fund
Statement of Net Position
December 31, 20X0
Assets
Current Assets:
Cash ...............................................................
Accounts Receivable .....................................
Less: Allowance for Uncollectible
Accounts ...................................................
Capital Assets:
Land. .............................................................
Structures and Improvements ........................
Less: Accumulated Depreciation. ..................
Equipment .....................................................
Less: Accumulated Depreciation .................
$ 72,100
$ 30,000
1,400
28,600
$ 100,700
200,000
700,000
64,000
250,000
111,000
636,000
139,000
Total Assets
975,000
$1,075,700
Liabilities and Governmental Equity

Liabilities:
Current Liabilities:
Vouchers Payable ........................................
Accrued Interest Payable ............................
Bonds Payable ...............................................
$ 24,000
3,000
Net Position:
Net Investment in Capital Assets....................
Unrestricted ...................................................
Total Liabilities and Government Equity..
260
$ 27,000
750,000
$225,000
73,700
$ 777,000
298,700
$1,075,700
Problem 10-3 (d)

City of Lynn
For Fiscal Year Ended December 31, 20X0
Operating revenues:
Aviation (net of allowance for bad debts, $1,300)..................
Concession ............................................................................
Airport management. .............................................................
Sales of petroleum products (after deducting
cost of sales) .....................................................................
Operating expenses:
Operating (Various) ...............................................................
Maintenance ..........................................................................
General and administrative ....................................................
Depreciation-structures and improvements ............................
Depreciation-equipment ........................................................
Operating Income .............................................................................
Nonoperating Expenses:
Interest Expense ....................................................................
Changes in Net Position.....................................................................
Net Position, January 1, 20X0 ...........................................................
Net Position, December 31, 20X0 ....................................................
Problem 10-4 (a)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
A
A
A
A
B
B
C
C
B
D
C
C
E
D
B
D
D
C
FIncluded (along with 20) as the beginning cash balance
FIncluded (along with 19) as the beginning cash balance
261
$369,200
90,000
30,000
10,500
222,000
75,000
73,000
14,000
21,000
$499,700
405,000
94,700
43,000
51,700
247,000
$298,700
Problem 10-4 (b)

NAME OF GOVERNMENT
ENTERPRISE FUND
Cash flows from operating activities:
Cash received from sales to public ........................................
$ 3,000,000
Cash received from sales to other departments ......................

Cash paid to employees .........................................................
Cash paid to suppliers ............................................................
Net cash provided by operating activities .......................
500,000
(700,000)
(1,200,000)
1,600,000
Cash flows from noncapital financing activities:

Transfer to General Fund ($75,000 + $50,000).......................
Received from operating grants .............................................
Received from short-term borrowing .....................................
Net cash provided by noncapital financing
activities ....................................................................
Cash flows from capital and related financing activities:
Purchases of capital assets .....................................................
Received from sale of equipment...........................................
Received from capital grants..................................................
Received from sale of bonds...................................................
Paid for interest......................................................................
Net cash provided by capital and related
financing activities .....................................................
(125,000)
1,000,000
25,000
900,000
(1,500,000)
100,000
14,000,000
15,000,000
(600,000)
27,000,000
Cash flows from investing activities:

Cash paid for investments ......................................................
Cash received from sale of investments..................................
Cash received from investment earnings ...............................
Net cash used by investing activities ..............................
( 100,000)
80,000
123,000
103,000
Net increase in cash and cash equivalents ..........................................
29,603,000
Cash and cash equivalents at beginning of year ................................
4,500,000
Cash and cash equivalents at end of year ...........................................
$34,103,000
Noncash capital, noncapital, and investing activities:
262
Donation of capital assets by developers........................................... $ 5,000,000 Problem 10-5

(a) [Note See Excel Files for worksheet portion of 10-5 (a)]
Key
Solution Notes for 10-5 (a)
(1)-(14)
Keyed to numbered items within the problem.
(15)
Depreciation for the year ended June 30, 20X8, calculated as follows:
a. On plant in service at June 30, 20X7 .02 ($50,000,000) or $50,000,000 / 50 year life.
$1,000,000
b. On miscellaneous plant additions and improvements placed in service
at mid-year(.02) ($1,000,000) (.5) or (1/2) ($1,000,000 / 50 year

life)
10,000
$1,010,000
No depreciation is computed on the Clifton Steam Plant as it was not

placed in service until June 30, 20X8, the end of the year.
(16)
(17)
Interest expense on 5% revenue bonds, calculated as follows:

a. On $20,000,000 outstanding at June 30,20X7,
for the full year (.05) ($20,000,000)
$1,000,000
b. On $5,000,000 issued at December 31, 20X7, and accrued at June 30,

20X8
(1/2) (.05) ($5,000,000) .
Less: Paid per item (14)
Adjustment required at June 30, 20X8
125,000
1,125,000
500,000
$ 625,000
To close revenue and expense accounts and close net income to

Accumulated Earnings.
263
Problem 10-5 (b)

City of Clifton
Electric Department (Enterprise) Fund
June 30, 20X7
Asset/Liability
Cash
Due from Customers
Other Current Assets
Capital Assets
Accounts Payable and Accrued Liabilities
Unrestricted
Net Position
$2,225,000
2,120,000
130,000
Net Investment
in
Capital Assets
$45,500,000
(3,270,000)
Bonds Payable
Totals
(25,000,000)
$25,500,000
$1,230,000
City of Clifton
June 30, 20X8
Asset/Liability
Cash
Due from Customers
Other Current Assets
Capital Assets
Accounts Payable and Accrued Liabilities
Unrestricted
Net Position
$4,925,000
2,320,000
140,000
Net Investment
in
Capital Assets
$50,240,000
(4,550,000)
Bonds Payable
Totals
$2,835,000
(25,000,000)
$25,240,000
264
Problem 10-5 (c)

CITY OF CLIFTON
For the Year Ended June 30, 20X8
Cash Flows from Operating Activities:
Cash received from customers ...............................................
Cash paid to employees ........................................................
Cash paid to suppliers of goods and services
($3,045,000-750,000) ..............................................
Net Cash Flows Provided by Operating
Activities ...................................................................
Cash Flows from Capital and Related Financing Activities:
Cash paid for property, plant, and equipment ........................
Cash paid for interest on bonds ..............................................
Cash received from issuance of bonds ...................................
Net cash used by capital and related financing activities
$10,500,000
(4,280,000)
(2,295,000)
$3,925,000
(5,750,000)*
(500,000)
5,000,000
(1,250,000)
Net increase in cash and cash equivalents .........................................

Cash and cash equivalents at beginning of year .................................
Cash and cash equivalents at end of year ...........................................
2,675,000
2,250,000
$4,925,000
Reconciliation of Operating Income and Cash Flows from Operating Activities:

Operating Income...................................................................
$1,845,000
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation .........................................................................
1,010,000
Net increase in current operating liabilities ............................
1,280,000
Net increase in current receivables and inventories ...............
(210,000)
Net Cash Flows Provided by Operating Activities .................
$3,925,000
*Assumes that the $750,000 of expenditures in transaction 3 were among the liabilities paid in
transaction 12.
265
Problem 10-6
1.
2.
3a.
3b.
4.
5a.
5b.
6.
Cash .......................................................................................
Bond Issue Costs Expense .....................................................
Refunding Ponds Payable ...............................................
9,800,000
200,000
Bonds Payable (Old) ..............................................................

Unamortized Premium on Bonds ...........................................
Deferred Interest Expense Adjustment ...................................
Cash ...............................................................................
9,300,000
300,000
200,000

Cash ...............................................................................
1,000,000
Interest Expense.....................................................................
Deferred Interest Expense Adjustment
($200,000/4) ..............................................................
50,000
April 30, 20X2

Equipment Under Capital Lease ............................................
Obligation Under Capital Lease. ....................................
Cash ...............................................................................
To record capital lease, including initial payment.
(Note that no expenses are reported for 20X2)
Obligation Under Capital Lease .............................................
Cash ...............................................................................
To record lease payments made.
April 30, 20X3
Depreciation Expense ($680,000/6 years) .............................
Accumulated Depreciation-Leased Equipment .............
To record depreciation on leased buses.
Losses-Claims and Judgments ...............................................
Liability for Claims and Judgments-Current ..................
Liability for Claims and Judgments-Long-Term ............
To record claims and judgments against the
transit authority.
266
10,000,000
9,800,000
1,000,000
50,000
680,000
600,000
80,000
37,932
92,330
130,262
113,333
113,333
227,000
85,000
142,000
Problem 10-7
7/1/X4
ConstructionCash ................................................
Bonds Payable .................................................
To record issuance of bonds at par.
7/2/X4
No entry
7/31/X4
Debt ServiceCash ................................................

Cash .................................................................
To record amounts set aside for debt service
($20,000 + (1,200,000 x .06 x 1/2 x 1/6)).
8/29/X4
8/31/X4
8/31/X4
8/31/X4
8/31/X4
9/30,
10/31,
11/30,
and 12/31
1,200,000
1,200,000
26,000
26,000
Buildings .................................................................
1,200,000
ConstructionCash .........................................
To record payment to contractor for construction costs.
Cash .................................................................
To record amounts set aside for debt service.
26,000
Interest Expense ($1,200,000 x .06 x 2/12) .............

Debt ServiceAccrued Interest Payable .........
To record accrued interest.
12,000
Net Position .............................................................

Net PositionRestricted for Debt Service .......
To adjust reserve accounts.
40,000
Net Position .............................................................

Interest Expense ...............................................
To close interest expense.
12,000

Cash .................................................................
To record amounts set aside for debt service.
(Entry required at end of each month noted).
26,000
267
1,200,000
26,000
12,000
40,000
12,000
26,000
Problem 10-8
1.
A capital grant received in cash but not yet earned would be reported as deferred
revenue (deferred inflows) on the statement of net position of the proprietary
fund. The statement of cash flows would report the receipt of the cash as a
cash flow from capital and related financing activity.
2.
A capital grant earned but not collected until 90 days after year end would be
reported as capital contributions immediately following the subtotal for
Income before other revenues, expenses, and transfers on the operating
statement and as grants receivable or due from grantors on the statement of net
position. The statement of cash flows is not affected.
3.
Estimated uncollectible accounts related to current year sales would be included

in the contra-account to accounts receivable and labeled allowance for doubtful
accounts. This credit amount would be netted against the accounts receivable
amount and parenthetically disclosed. This amount is deducted from sales to
determine the amount of revenues recognized during the current year. The
statement of cash flows is not affected.
4.
A deferred interest expense adjustment credit balance of $300,000 at year end

would be reported as a deferred inflow on the statement of net position. The
statement of cash flows is not affected.
5.
The amortization of a deferred interest expense adjustment credit balance of

$50,000 reduces the interest expense reported in nonoperating expenses.
Accordingly, deferred interest expense adjustment is DEBITED and interest
expense is CREDITED, each for $50,000. The statement of cash flows is not
affected.
6.
The reclassification of a general capital asset with a net book value of $650,000
(cost, $1,000,000 and accumulated depreciation, $350,000) as an Enterprise
Fund capital asset results in additional capital assets of $650,000 (book value)
in the statement of net position and an equivalent capital contribution in the
Enterprise Funds operating statement following the subtotal for Income
before other revenues, expenses, and transfers. The statement of cash flows
not affected, however, the transaction is disclosed in the schedule of noncash
capital, financing, and investing activities if it was material.
7.
An operating grant earned and received of $89,000 is reported as nonoperating

revenue on the Enterprise Funds operating statement. The statement of cash
flows report the grant in cash flows from noncapital financing activity.
268
Problem 10-8 (cont.)

8.
Accrued interest of $100,000 on bonds payable is reported as nonoperating

expenses interest on the Enterprise Funds operating statement and as accrued
bond interest payable on the statement of net position. The statement of cash
flows is not affected.
9.
Free services provided by the Enterprise Fund to the General Fund must still be
recognized as revenue equal to the standard charges for the services.
Accordingly, in this example, the $65,000 free services would be reported as
both as transfers out and as operating revenues in the Enterprise Funds
operating statement. Net income is not affected. The statement of cash flows is
not affected.
10. If an Enterprise Fund charges other Enterprise Funds for services valued at
$20,000, operating revenues are reported. An interfund receivable is reported
on the statement of net position and, when collected, the cash flow is
categorized on the statement of cash flows as cash flows from operating
activities (identified specifically as cash received from other funds from
interfund services transactions).
269
SOLUTIONS TO CASES
Case 10-1
1.
Cash.........................................................................a
Inventories...............................................................a
Advances to other funds..........................................b
Capital assets, net....................................................b
Accounts payable and retainages.............................d
Revenue bond payable.............................................e
Unfunded pension obligation..................................e
Net investment in capital assets...............................g
2.
Charges for services.................................................a

Salaries, supplies, and miscellaneous expenses......b
Depreciation expense...............................................b
Transfers out............................................................e
Investment income...................................................c
Interest expense.......................................................d
Amortization of deferred refunding charges...........b*
*A student who assumes that deferred charges means deferred interest expense
adjustment would select d.
3.
Transfers to other funds...........................................b

Principal payments on capital-related long-term
obligations........................................................c
Receipts from customers and users.........................a
Capital purchases on account..................................e*
Payments to employees...........................................a
Interest payments on capital-related long-term
obligations........................................................c
Proceeds from maturities of investments................d**
Contributed capital assets........................................e
Investment income received....................................d**
*This should be choice d given the solution categories in the first printing of the text. Cash
flows from investing activities, which should have been category d, was omitted in that printing,
however. Similarly, the category for Noncash investing, capital, and financing activities was
listed as d instead of e.
**The correct classification is Cash flows from investing activities, which was omitted from
the first printing.
270
Case 10-2
DuPage County
Convalescent Center Enterprise Fund
Statement of Net Position
November 30, 20X6
Assets
Current assets:
Cash................................................................
Accounts receivable, net.................................
Due from other funds......................................
Inventory........................................................
Total current assets..................................
$ 231,752
5,465,885
24,333
373,372
6,095,342
Capital assets:
Land. .............................................................
Buildings and improvements .........................
Vehicles..........................................................
Equipment .....................................................
Construction in progress.................................
Less: Accumulated Depreciation .................
Total capital assets, net............................
784,360
28,005,704
265,583
4,544,660
101,629
(22,493,255)
11,208,681
Total assets.................................................................
17,304,023
Liabilities
Current liabilities:
Accounts payable ........................................
Accrued payroll...........................................
Due to other funds ......................................
Total current liabilities.............................
1,440,009
1,431,020
200,000
3,071,029
Noncurrent liabilities:
Accrued vacation.........................................
Capital lease obligation................................
Total noncurrent liabilities.......................
985,759
34,986
1,020,745
Total liabilities............................................................
4,091,774
Net Position
Net investment in capital assets..................................
Unrestricted ...............................................................
Total net position...........................................................
11,173,695
2,038,554
271
$13,212,249
Case 10-2 (continued)

DuPage County
Convalescent Center Enterprise Fund
November 30, 20X6
Operating revenues:
Patient revenues......................................................................
$24,949,646
Operating expenses:
Personnel services..................................................................
Supplies..................................................................................
Contractual services................................................................
Depreciation expense..............................................................
Total operating expenses.................................................
22,974,937
4,912,013
4,475,447
1,292,015
33,654,412
Operating income (loss)......................................................................
(8,704,766)
Nonoperating revenues (expenses):

Investment income.................................................................
Intergovernmental...................................................................
Interest expense......................................................................
Loss on disposal of assets.......................................................
Total nonoperating revenues (expenses)..........................
9,333
694,852
(3,249)
(1,816)
699,120
Income (loss) before contributions and transfers................................
(8,005,646)
Capital contributions...........................................................................
Transfers in ........................................................................................
4,362,635
2,700,000
Changes in Net Position ....................................................................
(943,011)
Net Position, December 1, 20X5 .......................................................
14,155,260
Net Position, December 31, 20X0 ....................................................
$13,212,249
272

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CHAPTER 10

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Question 10-2 (continued)

Enterprise FundPermitted if user fees are charged to external service recipients.

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Question 10-3 (continued)

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General Obligation Construction Bonds. A discount reduces the amount of resources

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Question 10-10 (continued)

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Cash Flows from Operating Activities

Cash Flows from Noncapital Financing Activities

Cash Flows from Capital and Related Financing Activities

Cash Flows from Investing Activities

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Deferred Inflow Operating Grant.........................................

Deferred Inflow Capital Grant.............................................

Zero. Operating grants are classified as nonoperating revenues.

$350,000 of nonoperating revenues from the operating grant.

Exercise 10-4 (continued)

Noncapital financing cash flows should include the following:

There were no cash flows from investing activities in this exercise.

Deferred Inflow Capital Grant......................................

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Exercise 10-6 (continued)

Deferred Inflow Operating Grant.................................

Depreciation on infrastructure assets of proprietary funds must be reported as an operating

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Exercise 10-7 (continued)

Operating income (loss).....................................................................

Income (Loss) before other revenues, expenses and transfers...........

Capital contributions ($1,300,000 + $500,000).................................

Increase in Net Position.....................................................................

Net Position, January 1, 20X3...........................................................

Net Position, December 31, 20X3.....................................................

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Operating Income ..............................................................................

Nonoperating Revenues (Expenses):

Income before Capital Contributions and Transfers ...........................

Change in Net Position.......................................................................

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Problem 10-3 (a) [Note See Excel Files for 10-3(a)]

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Problem 10-3 (c)

Liabilities and Governmental Equity

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Problem 10-3 (d)

Problem 10-4 (b)

Cash received from sales to other departments ......................

Cash flows from noncapital financing activities:

Cash flows from investing activities:

Net increase in cash and cash equivalents ..........................................

Cash and cash equivalents at beginning of year ................................

Cash and cash equivalents at end of year ...........................................

Noncash capital, noncapital, and investing activities:

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Donation of capital assets by developers........................................... $ 5,000,000 Problem 10-5

Solution Notes for 10-5 (a)