Question 1

Premiums or discounts on bonds payable issued by enterprise funds should be accounted for in the same manner as those of a comparable business entity.

Accepted Answer

Enterprise funds are accounting entities that are used by governments to account for certain activities that are similar to those of for-profit organizations. Therefore, premiums or discounts on bonds payable issued by enterprise funds should be accounted for in the same manner as those of a comparable business entity. This means that they should be amortized over the life of the bond and recorded as an adjustment to the effective interest rate.

Question 2

Interest and principal on enterprise fund revenue bonds should be recorded in a debt service fund until paid.

Accepted Answer

Interest and principal on enterprise fund revenue bonds are recorded and paid directly within the enterprise fund itself, not in a debt service fund. Debt service funds are typically used for general obligation bonds, not revenue bonds associated with enterprise funds.

Question 3

A motor pool is a common example of an internal service fund.

Accepted Answer

A motor pool is a service provided by a government or organization to its internal customers (employees), and is typically funded through an internal service fund.

Question 4

Proprietary funds report using three net position categories: net investment in capital assets; restricted; and unrestricted.

Accepted Answer

This statement is true. Proprietary funds, such as enterprise funds and internal service funds, report using these three net position categories.

Question 5

If a business-type activity is subsidized by a government's General Fund rather than fully covering its costs of providing services with fees or charges, that activity need not be reported in an enterprise fund.

Accepted Answer

In governmental accounting, an enterprise fund is used for activities that are primarily funded through user fees. If a business-type activity is subsidized by the General Fund, it may not meet the criteria for an enterprise fund and can be reported in a different fund type.

Question 6

The liability for utility revenue bonds should be reported in business-type activities on the government-wide statements, as well as in the enterprise fund.

Accepted Answer

Liability for utility revenue bonds should be reported in business-type activities on the government-wide statements, as well as in the enterprise fund since it is associated with a proprietary fund, which is part of the business-type activities column in the government-wide financial statements.

Question 7

Internal service funds are intended to operate on taxes or other financing sources authorized by the legally enacted revenue budget for each year; therefore, they are classified as governmental funds.

Accepted Answer

Internal service funds are intended to operate from charges for the services they provide to other departments or agencies within the government, rather than from taxes or legally enacted revenue budgets, and they are classified as proprietary funds, not governmental funds.

Question 8

Internal service funds account for operating expenses on the accrual basis of accounting.

Accepted Answer

Internal service funds are used to account for services provided by one department or agency to other departments or agencies within the same government entity. These funds are accounted for on the accrual basis of accounting, meaning that expenses are recognized when incurred, rather than when cash is paid out.

Question 9

Enterprise funds may capitalize interest paid on debt incurred for construction of plant assets.

Accepted Answer

Enterprise funds, which are used to account for activities that provide goods or services primarily to the government or other departments, may capitalize interest paid on debt incurred for construction of plant assets. This is in accordance with Generally Accepted Accounting Principles (GAAP).

Question 10

Equipment acquired under a lease for use by an internal service fund will be reported as a capital asset in both the fund and government-wide financial statements.

Accepted Answer

Equipment acquired under a lease for use by an internal service fund will be considered as a capital asset according to generally accepted accounting principles (GAAP). Therefore, it will be reported as a capital asset in both the internal service fund and government-wide financial statements.

Question 11

Public utilities owned and operated by governments are common examples of enterprise funds.

Accepted Answer

Enterprise funds are used by governments to account for operations that are similar to those performed by for-profit businesses. Examples include utilities, airports, and parking facilities. These operations are expected to be self-sustaining, with revenue generated from user fees covering the costs of providing the service or product.

Question 12

An employee pension fund is a common example of an internal service fund.

Accepted Answer

An employee pension fund is typically classified as a fiduciary fund, not an internal service fund, because it is intended to benefit employees and is managed on their behalf, rather than providing services internally within the organization.

Question 13

For proprietary funds, governments generally present a statement of net position in a format that displays assets, plus deferred outflows of resources, less liabilities, less deferred inflows of resources, equals net position.

Accepted Answer

This statement is true. Proprietary funds use a statement of net position format that shows assets, deferred outflows, liabilities, and deferred inflows to determine net position.

Question 14

Revenues of internal service funds should be recognized only when they are expected to be available in time to pay current liabilities of the fund.

Accepted Answer

Revenues of internal service funds are recognized when they are earned, not only when they are expected to be available to pay current liabilities. This approach aligns with the accrual basis of accounting.

Question 15

A statement of cash flows is prepared for enterprise funds but not for internal service funds.

Accepted Answer

Both enterprise funds and internal service funds, which are types of proprietary funds, require the preparation of a statement of cash flows as part of their financial statements.

Question 16

The net position of an internal service fund is classified as nonspendable, restricted, committed, assigned, and unassigned.

Accepted Answer

The net position of an internal service fund is typically classified into three categories: net investment in capital assets, restricted, and unrestricted. The terms nonspendable, restricted, committed, assigned, and unassigned are used to describe components of fund balance in governmental funds, not the net position of internal service funds.

Question 17

Internal service funds utilize encumbrance accounting.

Accepted Answer

Internal service funds, which are used to account for the financing of goods or services provided by one department or agency to other departments or agencies of the governmental unit, or to other governmental units, on a cost-reimbursement basis, do not use encumbrance accounting. Encumbrance accounting is typically used in governmental funds to record outstanding commitments for unperformed contracts for goods or services.

Question 18

Internal service funds should not account for depreciation of capital assets used in their operations, since this would, in effect, charge the government twice for the same assets.

Accepted Answer

Internal service funds should account for depreciation of capital assets because they operate in a manner similar to private businesses, and accounting for depreciation helps in accurately reflecting the cost of services provided, ensuring that the full cost of operations, including the use of capital assets, is recovered through charges to other departments or agencies.

Question 19

Proprietary funds follow the current financial resources measurement focus and use the accrual basis of accounting.

Accepted Answer

Proprietary funds follow the economic resources measurement focus and use the accrual basis of accounting.

Question 20

A statement of revenues, expenses, and changes in fund net position for an internal service fund is similar in many respects to an income statement prepared for a commercial business.

Accepted Answer

A statement of revenues, expenses, and changes in fund net position for an internal service fund is similar to an income statement prepared for a commercial business as it provides information on the financial performance of the fund over a particular period, including its revenues, expenses, and the resulting change in net position.

Quiz 7: Accounting for the Business-type Activities of State and Local Governments