Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

CHAPTER 7:

ACCOUNTING FOR THE BUSINESS-TYPE

ACTIVITIES OF STATE AND LOCAL GOVERNMENTS

7-13. a. Yes, the City and County of Denver uses internal service funds. They are:
Central Services - to account for providing paper and printing goods and services to
departments of the city and other users on a cost reimbursement basis. Central
Services was closed in 2012.
Fleet Maintenance - to account for the financing of automotive repairs and services
provided to departments of the city or to other governmental units on a cost
reimbursement basis.
Asphalt Plant - to account for the expenditures and revenues of the citys Asphalt Plant
that provides a service to the metropolitan Denver area and is an essential element in
the street resurfacing program of the citys Street Maintenance division.
Workers Compensation - to account for the citys workers compensation selfinsurance activities.
b. The City and County of Denver has two major enterprise funds. They are:
Wastewater Management accounts for the citys storm and sewer operations.
Denver Airport System accounts for the operation of the citys airport system which
includes Denver International Airport.
The City and County of Denver has two non-major enterprise funds. They are:
Environmental Services - to account for the operation and activity of the citys
chemical waste disposal, phase out of hazardous materials disposal sites, and litter
prevention.
Golf Course - to account for the administration, operation, maintenance and
improvement of city-owned golf facilities.
c. Net investment in capital assets is calculated by subtracting accumulated depreciation
and debt used to acquire capital assets from the capital asset total. Any time the
accumulated depreciation plus outstanding debt related to capital assets is greater than
the recorded cost of the assets, a negative net investment in capital assets will occur.
This is affected by both the method of depreciation used for the assets and the
repayment schedule for the debt. The debt repayment may be deferred for several
years, depending on the bond indenture, so there may be little or no repayment in early
years. While the reason for a negative net position should be examined, there is no
explicit implication about the management or performance of the fund just because
there is a negative net investment in capital assets. Between 2012 and 2013, the net
position, net investment in capital assets decreased 32% from a deficit of $544,739 to
a deficit of $719,304.

7-1

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

d. Yes, the Denver Airport System has enough in restricted assets to satisfy the current
liabilities payable from restricted assets. Restricted assets total $315,377, while current
liabilities payable from restricted assets is $293,116.
e. At $190,255 interest expense is the airports largest expense. This is somewhat
connected to the answer to part (c) because it reflects the significant amount of
outstanding debt used to acquire capital assets in this fund.
f. For both funds, the largest reconciling item is depreciation expense. This is not
surprising given their significant investment in capital assets.
g. Yes, some of the enterprise and internal service funds use capital and operating leases.
The Wastewater Management fund reflects capital lease obligations in the amount of
$534,000. The method of accounting for leases is mentioned in Note D Item 9. Note
E discusses capital and operating lease agreements for the City and County of Denver,
and indicates the present value of capital lease obligations for proprietary funds is
$9,769. The note also indicates that payments for operating leases for proprietary
funds was $689,000 for the year.
h. The Central Services fund was dissolved during the year. You can see this in the detail
for internal service funds in the Proprietary Funds section of the CAFR; while there is
some activity in the statement of revenues, expenses and changes in net position, the
net position for the fund was zero at the end of the year.
i. The Workers Compensation Fund is an example of a risk-related insurance activity
accounted for in an internal service fund. The most significant reconciling item for this
fund on the statement of cash flows is the claims reserve. The fund had a significant
increase in its net position for the year, which could signal that charges are not in line
with costs. Charges for services were $11,995 while claims payments were only
$7,092. It should be noted, however, that due to the timing of insurance claims
expenses and charges may not match in any one year, thus it would be prudent to
review numerous years or assess how much the net position is increasing relative to
the total net position.
General Problem Information: City and County of Denver proprietary funds
Learning Objective: 7-4
Learning Objective: 7-5
Topic: Proprietary Funds
Blooms Taxonomy: Analyze
Accreditation Skills tag: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium

7-2

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

7-18.
CITY OF ASHVILLE
CENTRAL GARAGE FUND
GENERAL JOURNAL
Debits
1.

Internal Service Fund & Governmental Activities:

INVENTORY OF SUPPLIES

92,000

VOUCHERS PAYABLE
2.

Credits

92,000

Internal Service Fund:

COST OF SUPPLIES ISSUED

110,000

INVENTORY OF SUPPLIES

110,000

Governmental Activities:
EXPENSESGENERAL GOVERNMENT

110,000

INVENTORY OF SUPPLIES

110,000

Ch. 7, Solutions, 7-18 (Contd)

Debits
3.

Credits

Internal Service Fund:

SALARIES AND WAGES EXPENSE

235,000

CASH

235,000

Governmental Activities:
EXPENSESGENERAL GOVERNMENT

235,000

CASH
4.

235,000

Internal Service Fund:

UTILITIES EXPENSE

30,000

DUE TO OTHER FUNDS

3,000

CASH

27,000

Governmental Activities:
EXPENSESGENERAL GOVERNMENT
7-3

30,000

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

INTERNAL BALANCES

3,000

CASH
5.

27,000

Internal Service Fund:

DEPRECIATION EXPENSEBUILDING

10,000

DEPRECIATION EXPENSEMACHINERY
AND EQUIPMENT

9,000

ALLOWANCE FOR DEPRECIATIONBUILDING

10,000

ALLOWANCE FOR DEPRECIATIONMACHINERY

AND EQUIPMENT

9,000

Governmental Activities:
EXPENSESGENERAL GOVERNMENT

19,000

ALLOWANCE FOR DEPRECIATIONBUILDING

10,000

ALLOWANCE FOR DEPRECIATIONMACHINERY

AND EQUIPMENT

9,000
Debits

6.

Credits

Internal Service Fund:

DUE FROM OTHER FUNDS

397,000

BILLINGS TO DEPARTMENTS

397,000

Governmental Activities: No entry necessary since the billings were between

governmental funds and the internal service fund.
7.

Internal Service Fund:

CASH

394,000

DUE FROM OTHER FUNDS

394,000

($9,000 + $397,000 - $12,000 = $394,000)

Governmental Activities: No entry necessary since the cash exchange was

between governmental funds and the internal service fund.

7-4

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

8.

Internal Service Fund & Governmental Activities:

VOUCHERS PAYABLE

107,000

CASH

107,000

($31,000 + $92,000 - $16,000 = $107,000)

Debits
9.

Credits

Internal Service Fund:

Closing Entries:
BILLINGS TO DEPARTMENTS

397,000

COST OF SUPPLIES ISSUED

110,000

SALARIES AND WAGES EXPENSE

235,000

UTILITIES EXPENSE

30,000

DEPRECIATION EXPENSEBUILDING

10,000

DEPRECIATION EXPENSEMACHINERY
AND EQUIPMENT

9,000

EXCESS OF NET BILLINGS OVER COSTS

EXCESS OF NET BILLINGS OVER COSTS

3,000
3,000

NET POSITIONUNRESTRICTED

3,000

NET POSITIONNET INVESTMENT IN

CAPITAL ASSETS

19,000

NET POSITIONUNRESTRICTED

7-5

19,000

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, 7-18 (Cont'd)

b.

CITY OF ASHVILLE
CENTRAL GARAGE FUND
STATEMENT OF REVENUES, EXPENSES, AND
CHANGES IN FUND NET POSITION
FOR YEAR ENDED JUNE 30, 2017

BILLINGS TO DEPARTMENTS

$397,000

OPERATING EXPENSES:
COST OF SUPPLIES ISSUED

$110,000

SALARIES AND WAGES EXPENSE

235,000

UTILITIES EXPENSE

30,000

DEPRECIATION EXPENSEBUILDING

10,000

DEPRECIATION EXPENSEMACHINERY
AND EQUIPMENT

9,000

TOTAL OPERATING EXPENSES

394,000

OPERATING INCOME

3,000

NET POSITION, JULY 1, 2016

511,000

NET POSITION, JUNE 30, 2017

$514,000

7-6

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, 7-18 (Cont'd)

c.

CITY OF ASHVILLE
CENTRAL GARAGE FUND
STATEMENT OF NET POSITION
AS OF JUNE 30, 2017

ASSETS:
CURRENT ASSETS:
CASH

$135,000

DUE FROM OTHER FUNDS

12,000

INVENTORY OF SUPPLIES

72,000

TOTAL CURRENT ASSETS

$219,000

CAPITAL ASSETS:
LAND

50,000

BUILDING

$250,000

LESS: ALLOWANCE FOR DEPRECIATION

30,000

MACHINERY AND EQUIPMENT

65,000

LESS: ALLOWANCE FOR DEPRECIATION

21,000

220,000
44,000

TOTAL CAPITAL ASSETS

314,000

TOTAL ASSETS

533,000

LIABILITIES:
VOUCHERS PAYABLE

16,000

DUE TO OTHER FUNDS

3,000

TOTAL CURRENT LIABILITIES

19,000

NET POSITION:
NET INVESTMENT IN CAPITAL ASSETS

314,000

UNRESTRICTED

200,000

TOTAL NET POSITION

$514,000

7-7

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, 7-18 (Cont'd)

d.

For the government-wide statement of activities, the internal service fund would
be reported as a part of the Governmental Activities column. Since the only
funds served by the Central Garage Fund are governmental funds, rather than
enterprise funds, the internal service fund is appropriately combined with
governmental activities at the government-wide level. As indicated by the
governmental activities journal entries, the Central Garage Fund would
recognize balances for its statement of net position accounts, excluding all
activity between the internal service fund and the governmental funds.
General Problem Information: Central Garage ISF City of Ashville
Learning Objective: 7-4
Topic: Internal Service Funds
Blooms Taxonomy: Apply
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium

7-8

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, (Cont'd)

7-19. a.

CITY OF SALTWATER BEACH

TRIBUTE AQUATIC CENTER FUND
STATEMENT OF REVENUE, EXPENSES, AND
CHANGES IN FUND NET POSITION
FOR THE YEAR ENDED DECEMBER 31, 2017

OPERATING INCOME:
CHARGES FOR SERVICES

$2,040,000

OPERATING EXPENSES:
PERSONNEL EXPENSE

$1,034,000

UTILITIES EXPENSE

188,500

REPAIRS AND MAINTENANCE EXPENSE

82,100

SUPPLIES EXPENSE

67,200

DEPRECIATION EXPENSE

136,960

TOTAL OPERATING EXPENSES

1,508,760

OPERATING INCOME

531,240

NONOPERATING REVENUE/EXPENSES:
INTEREST INCOME

92,500

INTEREST EXPENSE

(323,840)

TOTAL NONOPERATING INCOME (EXPENSE)

CHANGE IN NET POSITION

(231,340)
299,900

NET POSITION, JANUARY 1, 2017

1,125,040

NET POSITION, DECEMBER 31, 2017

$1,424,940

7-9

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, 7-19 (Cont'd)

b.

CITY OF SALTWATER BEACH

TRIBUTE AQUATIC CENTER FUND
STATEMENT OF NET POSITION
AS OF DECEMBER 31, 2017

ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS
ACCOUNTS RECEIVABLE
SUPPLIES
TOTAL CURRENT ASSETS
RESTRICTED CASH AND CASH EQUIVALENTS
CAPITAL ASSETS:
LAND
BUILDINGS AND EQUIPMENT
$ 925,000
LESS: ALLOW. FOR DEPRECIATION
(41,625)
IMPROVEMENTS OTHER THAN
BUILDINGS
4,715,000
LESS: ALLOW. FOR DEPRECIATION
(212,175)
TOTAL CAPITAL ASSETS
TOTAL ASSETS
LIABILITIES:
CURRENT LIABILITIES:
ACCOUNTS & ACCRUED PAYABLES
CURRENT PORTION OF LONG-TERM DEBT
TOTAL CURRENT LIABILITIES
NONCURRENT LIABILITIES:
BONDS PAYABLE
TOTAL LIABILITIES
NET POSITION:
NET INVESTMENT IN CAPITAL ASSETS*
RESTRICTED
UNRESTRICTED
TOTAL NET POSITION

$ 182,240
5,225
8,225
$ 195,690
942,000
1,400,000
883,375

4,502,825
6,786,200
7,923,890

22,150
281,600
303,750
6,195,200
6,498,950
309,400
942,000
173,540
$1,424,940

* Calculated as capital assets ($6,786,200) less related debt (6,195,200 + 281,600)

Ch. 7, Solutions, 7-19 (Cont'd)

7-10

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

c.

CITY OF SALTWATER BEACH

TRIBUTE AQUATIC CENTER FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2017

CASH FLOWS FROM OPERATING ACTIVITIES:

CASH RECEIVED FROM CUSTOMERS

$2,038,355

CASH PAID TO:

PERSONNEL

$(1,038,800)

UTILITIES

(185,800)

REPAIRS AND MAINTENANCE

(86,225)

SUPPLIERS

(65,900)

(1,376,725)

NET CASH PROVIDED BY OPERATIONS

$661,630

CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES:

PROCEEDS FROM SALE OF CAPITAL ASSETS

9,250

PRINCIPAL PAID ON CAPITAL DEBT

(281,600)

INTEREST PAID ON CAPITAL DEBT

(323,840)

NET CASH USED BY FINANCING ACTIVITIES

(596,190)

CASH FLOWS FROM INVESTING ACTIVITIES:

INTEREST RECEIVED ON INVESTMENTS

92,500

NET INCREASE IN CASH AND CASH EQUIVALENTS

157,940

CASH AND CASH EQUIVALENTS, 1/1/2017

966,300

CASH AND CASH EQUIVALENTS, 12/31/2017

$1,124,240

RECONCILIATION OF CASH AND CASH EQUIVALENTS TO THE BALANCE SHEET

CASH AND CASH EQUIVALENTS IN CURRENT

AND ACCRUED ASSETS
RESTRICTED CASH AND CASH EQUIVALENTS
TOTAL CASH AND CASH EQUIVALENTS

7-11

END
OF YEAR

BEGINNING
OF YEAR

$ 182,240
942,000
$1,124,240

$99,300
867,000
$966,300

Chapter 07 - Accounting for the Business-type Activities of State and Local Governments

Ch. 7, Solutions, 7-19 (Cont'd)

RECONCILIATION OF OPERATING INCOME TO NET CASH

PROVIDED BY OPERATIONS
OPERATING INCOME

$ 531,240

ADJUSTMENTS:
DEPRECIATION EXPENSE

136,960

INCREASE IN ACCOUNTS RECEIVABLE

(1,645)

DECREASE IN SUPPLIES

1,300

DECREASE IN ACCOUNTS AND ACCRUED PAYABLES

(6,225)

NET CASH PROVIDED BY OPERATING ACTIVITIES

$661,630

General Problem Information: Tribute Aquatic Center Enterprise Fund

Learning Objective: 7-5
Topic: Enterprise Funds
Blooms Taxonomy: Remember
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting Level
of Difficulty: Hard

7-12