Chapter 7 Governmental Accouting Essay Questions

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Ch 7

Question 69 Essay
Question The following are key terms in Chapter 7 that relate accounting for the business-type activities of state and local governments: A. Customer advances for construction
B. Revenue bonds
C. Utility plant acquisition adjustment
D. Regulatory accounting principles
E. Original cost
F. Historical cost
G. General obligation bonds
For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.

Answer 1. E, 2. D, 3. B, 4. A, 5. C

Question 70 Essay
Question "In order to determine whether user charges are commensurate with operating costs, it is desirable for internal service fund operations to be accounted for on a business basis." Do you agree? Why or why not?

Answer Agree. Internal service funds should be operated on a cost recovery basis (although, in practice, not all are). Accrual accounting (i.e., the "business basis") is required for these funds to determine that user charges are commensurate with operating costs, including depreciation on capital assets.

Question 71 Essay
Question The Stores and Supplies Fund of Walnut City has quietly followed a policy of charging all actual cost and normal overhead for materials and supplies bought from them. Annually an amount of cash equal to the net gain by that method is transferred to the Walnut Library Fund. Is this an appropriate pricing policy? Why or why not?

Answer While this practice may be expedient, it is inexcusable. There is no justification for a library, notwithstanding its valuable service, to be financed by collections under the guise of charges for supplies and materials used throughout the city. Policies should be approved by the elected officials, therefore providing justification for the practice.

Question 72 Essay
Question Explain how governmental entities that use internal service funds to account for risk financing and risk management activities should account for those activities.

Answer The internal service fund should recognize claims expense and a related liability when (1) a claim has been asserted, (2) it is probable that an asset has been impaired or a liability has been incurred, and (3) the amount of the loss is reasonably estimable, or if an estimable loss has been incurred and it is probable that a claim will be asserted. As charges are made by the internal service fund to governmental or other funds, either to cover the actual claims expense or on some actuarial basis, the other funds will debit Expenditures or Expenses as appropriate and the internal service fund will credit Revenues or Billings to Departments in the amount billed.

Question 73 Essay
Question "Enterprise funds should not be permitted to accumulate unrestricted net assets, since to do so would indicate overpricing of its services." Do you agree? Why or why not?

Answer No. It is in the best interest of taxpayers that enterprise funds be self-supporting. While the pricing policy should not permit the accumulation of excessive unrestricted net assets, policy-makers may appropriately maintain a sufficient balance to permit replacement of inventory and capital assets (usually at increased prices), repayment of long-term debt, and acquisition or construction of assets as necessary to meet new or expanded operating needs.

Question 74 Essay
Question Enterprise funds for utilities often report in their operating statement an "Allowance for Funds Used During Construction (AFUDC)" for interest paid or imputed during construction of plant assets. What purposes are served by reporting AFUDC in the manner described?

Answer As stated in Chapter 7 separate reporting of AFUDC, the amount of interest that was capitalized during the year, as an offset to total interest expense for the year accomplishes two things: (1) it discloses to financial statement readers the amount of interest that was capitalized during the...
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