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Governmental and Nonprofit Accounting: Theory and Practice, 10e (Freeman)
Chapter 6 Expenditure AccountingGovernmental Funds


1. Expenditures are defined as
A. Costs expired.
B. Uses of current financial resources.
C. Decreases in net financial resources.
D. Changes in liabilities and deferred inflows.
(Answer: C; Moderate; LO1)

2. Which of the following is not a typical governmental fund liability, and thus not an
expenditure that is recognized when the liability is incurred?
A. Accounts payable.
B. Long-term note payable.
C. Salaries payable.
D. Vouchers payable.
(Answer: B; Easy; LO2)

3. A city government purchased a new fire truck in Year 1 for $270,000. The city incurred an
additional $30,000 in transportation and calibration costs to ready it for use. It has an
estimated useful life of 20 years, though it is being financed over a 15 year period. The
amount of depreciation that will be reported each year in the General Fund will be
A. $0.
B. $13,500.
C. $15,000.
D. $18,000.
(Answer: A; Easy; LO2)
4. Assume that General Fund employees accrued $125,000 of compensated absences liability
during the year. Compensated absences liability, which is considered to be a long-term
liability, decreased $30,000 from the beginning of the year to the end of the year. The fund
also actually paid $550,000 in salaries and wages during the year. At the end of the fiscal
year, salaries and wages payable was $12,000. The General Fund would report salaries and
wages expenditures for the year of
A. $532,000.
B. $550,000.
C. $562,000.
D. $592,000.
(Answer: A; Moderate; LO2)

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5. Which of the following governmental fund expenditures would not be considered a current
operating expenditure?
A. Capital outlay.
B. Rent.
C. Salaries and wages.
D. Employee benefits.
(Answer: A; Moderate; LO2)
6. The village of Bear Creek uses General Fund resources to pay debt service payments for its
sole outstanding general obligation bonds, which were issued to finance the new Village
Hall. Which of the following statements is false?
A. GAAP require the village to use a Debt Service Fund to account for the payment of
principal and interest on the long-term debt if the debt covenant calls for it.
B. GAAP permit but do not require the village to use a Debt Service Fund to account for the
payment of principal and interest on the long-term debt.
C. The General Fund would record an expenditure for both the principal and interest
portions of the debt service payment.
D. The General Fund may record an expenditure for only the interest portion of the debt
service payment.
(Answer: D; Difficult; LO2)

7. Expenditures in a governmental fund are recognized when due for
A. Interest on general long-term debt.
B. Salaries and wages.
C. Capital outlay.
D. Rent.
(Answer: A; Easy; LO2)

8. Which of the following is not a managerial problem associated with expenditures?
A. Misapplication of assets.
B. Overspending of appropriations.
C. Misapplication of the availability criterion.
D. Misallocation or poor allotments of appropriations.
(Answer: C; Moderate; LO2)

9. The purchases method of accounting is permitted for
A. Materials and supplies, but not for prepaid insurance.
B. Prepaid insurance, but not for materials and supplies.
C. Neither prepaid insurance nor materials and supplies.
D. Both prepaid insurance and materials and supplies.
(Answer: D; Moderate; LO3)
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10. Assume that the Village of Hannah uses the purchases method of inventory accounting. At
the end of the year the inventory levels have increased. What entry would be made to reflect
the inventory increase?
A. Debit Expenditures, Credit Inventory of Supplies.
B. Debit Inventory of Supplies, Credit Other Financing Sources.
C. Debit Expenditures, Credit Other Financing Sources.
D. Debit Inventory of Supplies, Credit Expenditures.
(Answer: B; Moderate; LO3)

11. Assume that a government purchases $85,000 of inventory for the General Fund during the
year. The General Fund began the year with an inventory balance of $15,000 and ended the
year with a balance of $35,000. The General Fund uses the consumption method of inventory
accounting and a perpetual inventory system. The General Fund should report
A. Expenditures of $85,000 for the year.
B. Expenditures of $65,000 for the year.
C. Other financing source of $20,000 for the year.
D. Other financing use of $20,000 for the year.
(Answer: B; Moderate; LO3)

12. If a government uses a perpetual inventory system for its General Fund and there is an
inventory overage at the end of the year, the inventory asset account should
A. Be increased and the expenditure account decreased.
B. Be decreased and the expenditure account increased.
C. Remain the same. The expenditure account will be decreased, offset by an allowance for
inventory overage account.
D. Remain the same. The expenditure account will be increased, offset by an allowance for
inventory overage account.
(Answer: A; Moderate; LO3)
13. A county uses the consumption method to account for General Fund materials and supplies.
The beginning inventory of materials and supplies was $122,000. The ending inventory was
$150,000. The beginning balance of reserve for encumbrances (for supplies ordered but not
received at the beginning of the year) was $50,000; the ending balance was $20,000.
Supplies purchased during the year totaled $750,000. The county General Fund should report
expenditures for materials and supplies for the year of
A. $722,000.
B. $750,000.
C. $752,000.
D. $780,000.
(Answer: A; Difficult; LO3)

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14. The General Fund reported a beginning balance of inventory of materials and supplies of
$122,000. The ending balance was $150,000. Supplies purchased during the year totaled
$600,000. The county uses the consumption method. The General Fund should report
expenditures for materials and supplies for the year of
A. $450,000.
B. $572,000.
C. $600,000.
D. $628,000.
(Answer: B; Moderate; LO3)

15. The General Fund reported a beginning balance of inventory of materials and supplies of
$122,000. The ending balance was $150,000. Supplies received during the year (purchases)
totaled $600,000. The county uses the purchases method. The General Fund should report
expenditures for materials and supplies for the year of
A. $450,000.
B. $572,000.
C. $600,000.
D. $628,000.
(Answer: C; Moderate; LO3)
16. A county uses the consumption method in accounting for insurance premium prepayments.
At the beginning of the fiscal year, the county paid a $24,000 insurance premium to cover the
current year and the subsequent fiscal year. At the end of the current year, the county will
report in its General Fund
A. Expenditures of $24,000.
B. Expenditures of $12,000 and a $12,000 prepaid asset.
C. A $24,000 prepaid asset.
D. Other financing use of $24,000.
(Answer: B; Moderate; LO3)

17. In the year a city enters into a capital lease to finance a new sanitation truck, the General
Fund will report
A. An increase in capital assets.
B. A decrease in fund balance equal to the cost of the new sanitation truck.
C. An other financing use.
D. A decrease in fund balance equal to the amount of any down payment required.
(Answer: D; Moderate; LO4)

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18. Interest expenditures of a governmental fund should include
A. Interest paid during the year, only.
B. Interest paid during the year plus any interest that matured but was not paid during the
year.
C. Interest paid during the year, any interest that matured but was not paid during the year
and accrued interest on short-term debt recorded as a fund liability.
D. Interest paid during the year, any interest that matured but was not paid during the year
and accrued interest on all general long-term liabilities.
(Answer: C; Moderate; LO4)

19. As payments are being made for debt service payments related to a capital lease, a General
Fund will report
A. An increase in capital assets equal to the amount of principal retired.
B. Expenditures for interest only.
C. Expenditures for principal reduction only.
D. Expenditures for the full amount of the debt service payment.
(Answer: D; Moderate; LO4)
20. A county accounts for its debt service payments in the General Fund. The amount of
unmatured, unpaid interest on general long-term liabilities at the beginning of the year was
$122,000. The ending balance was $165,000. The General Fund also made principal
payments of $600,000 and interest payments of $150,000 during the year. The General Fund
should report expenditures for debt service for the year of
A. $150,000.
B. $722,000.
C. $750,000.
D. $793,000.
(Answer: C; Moderate; LO4)

21. A city entered into a general government capital lease for equipment on July 1, 20X7. The
capitalizable cost of the equipment was $400,000. A down payment of $40,000 was made.
The next lease payment of $100,000 is due July 1, 20X8. The implicit rate of interest on the
lease agreement is 10%. The amount of expenditures that the city should report in its General
Fund statement of revenues, expenditures, and changes in fund balance for the year ended
December 31, 20X7 is
A. $40,000.
B. $58,000.
C. $400,000.
D. $418,000.
(Answer: C; Difficult; LO4)

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22. A government entered into a general government capital lease for equipment during the year.
The capitalizable cost of the equipment was $400,000. A down payment of $40,000 was
made. The General Fund should report in its statement of revenues, expenditures, and
changes in fund balance an
A. Other financing use of $400,000.
B. Expenditure of $360,000.
C. Other financing source of $400,000.
D. Other financing source of $360,000.
(Answer: D; Moderate; LO4)

23. The General Fund borrowed $10,000 on a six-month note, with 5.0% interest, on April 1. As
of the June 30 fiscal year end, the General Fund would report accrued interest payable in the
amount of
A. $0.
B. $125.
C. $250.
D. $500.
(Answer: B; Easy; LO4)

24. Carter County entered into capital lease to finance an Emergency-911 telecommunications
system. The capitalizable cost of the equipment was $185,000. The county made a required
down payment of $25,000. The first debt service payment will not be due until the next fiscal
year. The entry to record the inception of this lease in the General Fund would be

Debit Credit
A. Expenditures
Lease Payable
Cash
$185,000
$160,000
25,000
B. Expenditures
Other Financing Source
Cash
$185,000
$160,000
25,000
C. Capital Asset
Lease Payable
Cash
$185,000
$160,000
25,000
D. Capital Asset
Other Financing Source
Cash
$185,000
$160,000
25,000
(Answer: B; Moderate; LO4)

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25. A government has a principal and interest payment on long-term debt coming due in the next
fiscal year. Which condition must hold true for the government to treat the payment as an
expenditure in the current fiscal year?
A. The payment must come due early in the next fiscal year, and the government must
transfer the cash for the payment to the debt service fund consistently from year-to-year.
B. The payment comes due within a year of the end of the current fiscal year, and the
government must transfer the cash for the payment to the debt service fund consistently
from year-to-year.
C. The payment must come due early in the next fiscal year, but the government has some
flexibility on when the cash for the payment is transferred to the debt service fund.
D. The payment can come due at any time, and the government can make the payments from
the General Fund so long as the resources are available at the time of the payment.
(Answer: A; Difficult; LO4)

26. Nathan Township financed emergency repairs on the Township Hall by borrowing on a
$200,000, 6 month short-term note. The interest rate on the note was 6% and it was issued 2
months prior to the end of the fiscal year. Which of the following statements accurately
reflects how the General Fund will be affected in the year the financing was acquired?
A. The General Fund will report an other financing source of $200,000.
B. The General Fund will report a Note Payable of $200,000.
C. The General Fund will report interest expenditures of $12,000.
D. The General Fund will report interest expense of $2,000.
(Answer: B; Moderate; LO4)

27. A government has claims and judgments outstanding at the beginning of 20X5 of
$1,000,000. These claims and judgments are expected to result in awards against the
government of $800,000. $75,000 of these claims is due and payable from the General Fund
at December 31, 20X4. At the end of 20X5, the government has claims and judgments
outstanding of $2,000,000. These claims and judgments are expected to result in awards
against the government of $1,200,000. None of these claims are due and payable from the
General Fund at December 31, 20X5. The government paid claims and judgments of
$400,000 during 20X5. General Fund expenditures for claims and judgments for 20X5
should be reported at what amount?
A. $325,000.
B. $400,000.
C. $725,000.
D. $800,000.
(Answer: A; Difficult; LO5)

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28. A government has a liability for accrued compensated absences at the beginning of 20X5 of
$500,000. This liability did not mature in 20X4. At the end of 20X5, the government has a
liability for accrued compensated absences (not due and payable) of $600,000. In addition,
the government had $10,000 of matured compensated absences to be paid in early 20X6 from
existing fund assets. The government paid compensated absences of $400,000 during 20X5.
The General Fund expenditures for compensated absences for 20X5 should be reported at
what amount?
A. $400,000.
B. $410,000.
C. $500,000.
D. $510,000.
(Answer: B; Difficult; LO5)
29. A court judgment was rendered against a county in which they were ordered to pay $500,000
in equal installments over a five-year period to the plaintiff. The county's General Fund will
A. Report a fund liability of $500,000 in Year 1.
B. Report expenditures of $500,000 in Year 1.
C. Report expenditures of $100,000 in Year 1.
D. Report expenditures of $100,000 in Year 1 and a fund liability of $400,000.
(Answer: C; Difficult; LO5)

30. Assume that Onyx County's annual required contribution for their OPEB plan was
determined to be $35,000. The county, however, chose to only fund $10,000 of that amount
for the current year. The General Fund, which is the only fund with employees, would
recognize expenditures in the current year of
A. $45,000.
B. $35,000.
C. $25,000.
D. $10,000.
(Answer: D; Difficult; LO5)

31. A city's annual required contribution for the OPEB plan offered to their General Fund
employees is $14,000. The city does not choose to make the annual required contribution but
instead will continue to pay postretirement benefits as they come due. The current year's
benefit payments total $2,500. The General Fund would recognize an expenditure of
A. $0.
B. $2,500.
C. $14,000.
D. $16,500.
(Answer: B; Difficult; LO5)

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32. City of Alnwick makes pension contributions on behalf of its employees to both a defined
benefit plan and a defined contribution plan. Assume that the employer contributions for the
fiscal year totaled $55,000 for the defined benefit plan and $35,000 for the defined
contribution plan. The General Fund will report
A. Total expenditures of $90,000.
B. Expenditures of $55,000 and transfers out of $35,000.
C. Transfers out of $90,000.
D. Transfers out of $55,000 and expenditures of $35,000.
(Answer: A; Moderate; LO5)

33. The following benefits are examples of other postemployment benefits (OPEexcept for
A. Health care insurance.
B. Pension benefits.
C. Vision insurance.
D. Life insurance.
(Answer: B; Easy; LO5)