Question 1

By definition a fiduciary fund that does not meet the definition of a trust fund is a custodial fund.

Accepted Answer

A custodial fund is a type of fiduciary fund that holds assets for external parties but does not qualify as a trust fund because it lacks the characteristics of a trust. Therefore, the statement is true.

Question 2

According to the GASB, control of an asset means the government must have the asset in its possession.

Accepted Answer

According to GASB standards, control of an asset means the government has the ability to determine the asset's use, benefit from the asset, and bear the risk of loss or damage to the asset, even if the asset is not physically in its possession. Therefore, control can exist even when the government does not have the asset in its possession.

Question 3

Because a government does not have any administrative decision making, a custodial fund would not prepare a statement of net position.

Accepted Answer

A custodial fund is used to hold assets in trust for others and is not considered part of the government's own finances. However, the custodial fund may prepare financial statements, including a statement of net position, to provide information to the users of the fund's services.

Question 4

Pension trust funds should utilize budgetary accounts in the same manner as the General Fund and special revenue funds.

Accepted Answer

Pension trust funds, being fiduciary funds, do not use budgetary accounts as the General Fund and special revenue funds do, because they account for resources held for the benefit of parties outside the government and are not funded through taxes or governmental revenues in the traditional sense.

Question 5

It is common for a government that collects taxes on behalf of other governments to be authorized to withhold a certain percentage from the collections for each government.

Accepted Answer

This is true. It is a common practice for governments to withhold a percentage of taxes collected on behalf of other governments as a handling fee or administrative cost. This percentage varies depending on the agreements made between the respective governments.

Question 6

The collection of taxes or other revenues by one government for several of the funds it operates and for other governments often results in the creation of a trust fund.

Accepted Answer

The answer of The collection of taxes or other revenues...

Question 7

Each trust fund type must be reported in its own column on the fiduciary fund financial statements.

Accepted Answer

Each trust fund type, such as pension or investment trust fund, must be reported in its own column on the fiduciary fund financial statements in order to provide transparency and a clear understanding of the financial activity for each fund type. This is required by Generally Accepted Accounting Principles (GAAP).

Question 8

Investment trust funds and pension trust funds should be accounted for in the same manner as permanent funds.

Accepted Answer

Investment trust funds and pension trust funds are accounted for differently than permanent funds because they serve different purposes and have different accounting requirements. Investment trust funds are used to report the external investment pools managed by a government, while pension trust funds account for resources required to be held in trust for the payment of employee pensions. Permanent funds are used to report resources that are legally restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting government’s programs.

Question 9

When an investment pool is created, the assets of each fund entering the pool should be transferred to the pool at their fair value at the date of the transfer.

Accepted Answer

When an investment pool is created, the assets of each fund entering the pool should be transferred at their fair value at the date of the transfer. This ensures that each fund's contribution to the pool is fairly valued and that all investors receive an equal interest in the pool's assets.

Question 10

A custodial fund should be used to account for special assessment billing and collection, and related debt service of special assessment debt, if the government has no responsibility for the debt.

Accepted Answer

A custodial fund is used to account for assets that the government holds on behalf of others, and is appropriate for special assessment billing and collection when the government has no responsibility for the debt. In this case, the special assessment debt is the responsibility of the property owners who are subject to the assessment, and the government is simply acting as an agent in collecting and distributing the assessments and related debt service payments.

Question 11

Custodial funds are used only if a government holds resources in a custodial capacity for others.

Accepted Answer

Custodial funds are specifically used by governments to manage resources that they hold in trust for others, such as funds held in trust for a specific program or the assets of a pension plan. Therefore, custodial funds are only used in situations where the government is acting as a trustee or custodian for someone else's resources.

Question 12

Custodial funds should utilize the modified accrual basis of accounting.

Accepted Answer

Custodial funds, as part of governmental accounting, should utilize the accrual basis of accounting, not the modified accrual basis. This is because custodial funds typically involve holding assets for others, and the full accrual basis provides a more accurate reflection of these financial activities.

Question 13

Resources that are held in trust for the benefit of the government's own programs or its citizenry should be accounted for using a governmental fund rather than a fiduciary fund.

Accepted Answer

Governmental funds are used to account for resources held in trust for the benefit of the government's own programs or its citizens, whereas fiduciary funds are used to account for resources held in trust for the benefit of individuals or organizations outside of the government. Therefore, resources that are held in trust for the government or its citizens should be accounted for using a governmental fund.

Question 14

Fiduciary activities are reported only in the fiduciary fund financial statements; they have no effect on the governmental or business-type activities of the primary government reported in the government-wide financial statements.

Accepted Answer

Fiduciary activities are reported separately in fiduciary fund financial statements because they involve holding assets in trust for the benefit of others, rather than for the direct benefit of the government or its business-type activities. Therefore, they do not impact the government-wide financial statements, which focus on the primary government's overall financial position and results of operations.

Question 15

Trust funds should utilize the accrual basis of accounting.

Accepted Answer

Trust funds are managed to generate income for a specific beneficiary or purpose. To accurately measure income and expenses, the accrual accounting method should be used. This method records revenue and expenses when they are earned or incurred, regardless of when the money is actually received or paid out. This provides a more accurate representation of the trust fund's financial position and performance.

Question 16

Earnings on pooled investments and changes in fair value of investments are allocated to the participants having an equity interest in the pool in proportion to their relative contributions to the pool.

Accepted Answer

This statement is describing the principle of proportionate sharing, which is a fundamental concept in pooled investment arrangements. Earnings and changes in fair value are distributed among participants based on their contributions, which helps to ensure that each investor receives a fair return on their investment.

Question 17

In regard to pass-through grants, a recipient government has administrative involvement if it is responsible for filing paperwork under a grant agreement.

Accepted Answer

Administrative involvement typically refers to more substantial responsibilities, such as selecting recipients, monitoring performance, or having the ability to exercise discretion in how funds are used, rather than merely filing paperwork.

Question 18

An investment pool could be reported as a custodial fund on the fiduciary fund financial statements.

Accepted Answer

An investment pool is considered a custodial fund because it holds and manages assets on behalf of other entities, such as other governments or external organizations. Therefore, it would be reported on the fiduciary fund financial statements.

Question 19

Unless otherwise prohibited custodial relationships can be reported in the General Fund rather than a custodial fund.

Accepted Answer

Custodial relationships can be reported in the General Fund unless prohibited by law or accounting standards. However, they may also be reported in a custodial fund if deemed necessary for accountability or legal requirements.

Question 20

On the statement of changes in net position, custodial funds need to display on separate lines each type of addition made to the fund.

Accepted Answer

Custodial funds are not displayed on the Statement of Changes in Net Position. This statement reflects the entity's overall financial performance, and custodial funds are reported separately in the financial statements, typically in the notes or as a separate statement.

Quiz 8: Accounting for Fiduciary Activities—Custodial and Trust Funds