Question 1

Which of the following activities would most appropriately be recorded by a custodial fund?

Accepted Answer

Custodial funds are used by governments to account for resources when the government is acting as an agent or custodian for other parties. Choice C, taxes collected by a county government on behalf of cities within the county, is a classic example of a custodial activity, where the county is collecting taxes not for its own use but to pass on to other governmental entities.

Question 2

A defined benefit plan specifies the amount or rate of contribution that the employer and employees must contribute to the members' accounts in the pension plan.

Accepted Answer

A defined benefit plan specifies the benefits that a member will receive upon retirement, not the amount or rate of contribution that the employer and employees must contribute to the plan.

Question 3

Which of the following activities would most appropriately be recorded by a trust fund?

Accepted Answer

Trust funds are typically used to account for assets held by a government under a trust agreement where the principal and interest are for the benefit of individuals, private organizations, or other governments. The scenario described in option D, where assets are held for college scholarships to be awarded to the children of police officers, fits the definition of a trust fund activity, as it involves holding and managing assets for the benefit of a specific group (children of police officers) according to a specific purpose (college scholarships).

Question 4

An investment policy should help an investment trust fund achieve maximum returns within the defined boundaries of safety and liquidity.

Accepted Answer

An investment policy lays out the guidelines and strategies that an investment trust fund adheres to in order to achieve its investment goals. These policies are designed to help the fund achieve maximum returns while maintaining a level of safety and liquidity that is acceptable to its investors.

Question 5

The Internal Revenue Service limits the amount of earnings a government can make when investing the proceeds from its general obligation bonded debt.

Accepted Answer

The IRS imposes arbitrage restrictions to prevent governments from earning excessive profits by investing bond proceeds at higher yields than the interest rate on the bonds.

Question 6

Each of the following are reported as fiduciary funds except:

Accepted Answer

A permanent fund is reported as a governmental fund, not a fiduciary fund. The other options are all examples of fiduciary funds: an investment trust fund, a custodial fund, and a private-purpose trust fund.

Question 7

Billing and collection of special assessments and payment of debt principal and interest on special assessment debt for which the city is not obligated in any manner should be recorded in a(an):

Accepted Answer

Custodial funds are used to report fiduciary activities that are not held in a trust or do not meet the criteria for inclusion in other fiduciary fund types. When a city collects special assessments and pays debt principal and interest on special assessment debt for which it is not obligated, it is acting in a custodial capacity, making the custodial fund the correct choice for recording these transactions.

Question 8

The GASB requires disclosures related to three types of credit risk.

Accepted Answer

The answer of The GASB requires disclosures related to three...

Question 9

A government needs to establish an investment policy for its investment trust fund to ensure compliance with the GASB standards.

Accepted Answer

The answer of A government needs to establish an investment...

Question 10

Defined benefit pension plans are classified as either single-employer pension plans or multiple-employer pension plans.

Accepted Answer

Defined benefit pension plans can be categorized as either single-employer or multiple-employer plans based on the number of employers participating in the plan.

Question 11

GASB standards provide comprehensive guidance on pension accounting and financial reporting for defined benefit pension plan employers, but the FASB provides guidance for plan sponsors.

Accepted Answer

The FASB provides guidance on accounting and financial reporting for plan sponsors, while GASB provides guidance for state and local government employers who sponsor defined benefit pension plans.

Question 12

Which of the following statements regarding the financial reporting of custodial funds is not True?

Accepted Answer

Custodial fund financial information is not reported in a separate column of the government-wide statement of activities, as custodial funds are not considered part of the government's own operations. Custodial activities are reported only in the fiduciary fund financial statements. Custodial funds are included in the statement of changes in fiduciary net position, and GASB standards allow reporting on individual custodial funds in a government's combining fiduciary fund financial statements.

Question 13

A city will serve as a conduit for federal grant money, which is sent to the city by the state government and must be remitted to various not-for-profit organizations that will use the money. The ultimate allocation of the money is decided by the state government. Which of the following terms describes the nature of this grant?

Accepted Answer

This is a pass-through grant, meaning the city serves as a pass-through entity for the grant money, remitting the funds to the not-for-profit organizations that will use the money as decided by the state government.

Question 14

The GASB provides three criteria for determining if a fiduciary relationship exists. Which of the following four is not one of the three criterion listed by the GASB?

Accepted Answer

The GASB criteria for a fiduciary relationship include control of assets by the government, assets not generated by the government's own revenues, and the government not benefiting from the fund. Involvement in administrative decision-making is not a criterion.

Question 15

Most investment trust funds distribute investment earnings and changes in investment values on a daily basis.

Accepted Answer

Most investment trust funds do not distribute investment earnings and changes in investment values on a daily basis. Instead, they typically distribute dividends on a quarterly or semi-annual basis.

Question 16

When one participant in an investment pool withdraws part of its equity from the pool, that participant's proportionate interest is decreased and all other participants' proportionate interest is increased.

Accepted Answer

This statement is true. When one participant withdraws their equity from the pool, their percentage ownership in the pool decreases, and therefore the percentage ownership of all other participants increases. This is because the total equity in the pool remains the same, but the number of participants has decreased.

Question 17

If special assessment receivables are recorded in the accounts of a custodial fund, the appropriate account(s) to credit upon receipt of assessments from property owners will include:

Accepted Answer

In a custodial fund, when special assessment receivables are collected, the amount is credited to "Due to Special Assessment Bondholders-Principal" as the fund is responsible for passing the collected amounts to the bondholders.

Question 18

A common example of a private-purpose trust fund is a state-sponsored 529 savings plan, structured such that parents make after-tax contributions to an investment fund managed by the state government.

Accepted Answer

A 529 savings plan is a type of trust fund that is set up for the specific purpose of funding education expenses, making it a private-purpose trust fund. The contributions are made after-tax and are managed by the state government.

Question 19

Accounting for other postemployment benefits is similar to accounting for defined contribution pension plans.

Accepted Answer

Accounting for other postemployment benefits (OPEB) is different from accounting for defined contribution pension plans. With defined contribution plans, the employer only contributes a predetermined amount to the employee's retirement account, whereas with OPEB, the employer is responsible for providing healthcare, life insurance, and other benefits to retired employees. The employer must estimate the total cost of providing these benefits and record them as a liability on their financial statements.

Question 20

Other postemployment benefits (OPEB) include benefits other than pensions, such as health care, life insurance, and long-term care.

Accepted Answer

OPEB stands for Other Postemployment Benefits which are benefits provided by an employer to retired employees, and besides pensions, they may include health care, life insurance, and long-term care.

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