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

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

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.

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.

Question 7

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

Question 8

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

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.

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.

Question 11

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

Question 12

Custodial funds should utilize the modified accrual basis of accounting.

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.

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.

Question 15

Trust funds should utilize the accrual basis of accounting.

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.

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.

Question 18

An investment pool could be reported as a custodial fund 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.

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.

Question 21

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

A) Donations collected for improvements to the public library.
B) Deposits held for customers of a municipal-owned electric utility.
C) Taxes collected by a county government on behalf of cities within the county.
D) Assets held for college scholarships to be awarded to the children of police officers.

Question 22

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.

Question 23

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

A) Donations collected for improvements to the public library.
B) Deposits held for customers of a municipal-owned electric utility.
C) Assets held for investment, the earnings from which are used for maintenance of the City Cemetery.
D) Assets held for college scholarships to be awarded to the children of police officers.

Question 24

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

Question 25

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

Question 26

Each of the following are reported as fiduciary funds except:

A) A permanent fund.
B) An investment trust fund.
C) An custodial fund.
D) A private-purpose trust fund.

Question 27

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):

A) Debt service fund.
B) Special assessment fund.
C) Capital projects fund.
D) Custodial fund.

Question 28

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

Question 29

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

Question 30

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

Question 31

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.

Question 32

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

A) Custodial activities are reported only in the fiduciary fund financial statements.
B) Custodial fund financial information is reported in a separate column of the government-wide statement of activities.
C) Custodial funds are included in the statement of changes in fiduciary net position.
D) GASB standards allow reporting on individual custodial funds in a government's combining fiduciary fund financial statements.

Question 33

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?

A) Agency grant.
B) Fiduciary grant.
C) Pass-through grant.
D) Partial grant.

Question 34

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?

A) The assets are controlled by the government.
B) The government is not to be involved in administrative decision-making concerning the fund assets.
C) The assets related to the activity of the fund were not generated by the government's exchange or nonexchange revenues.
D) The government does not receive any benefit from the assets in the fund.

Question 35

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

Question 36

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.

Question 37

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:

A) Contributions to Net Position.
B) Revenues and Deferred Revenues.
C) Due to Special Assessment Bondholders-Principal.
D) Interfund Transfers In.

Question 38

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.

Question 39

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

Question 40

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

Question 41

Fiduciary funds use a basis of accounting similar to which of the following funds?

A) Permanent funds.
B) Special revenue funds.
C) Enterprise funds.
D) Debt service funds.

Question 42

Which of the statements concerning custodial funds is True?

A) Custodial funds use the same basis of accounting as permanent funds.
B) Custodial funds are reported only on the statement of fiduciary net position.
C) Custodial funds use the temporary accounts Additions and Deductions.
D) Custodial funds never receive cash.

Question 43

An Olympic medalist swimmer who grew up in the city contributed $750,000 to the city stipulating that the money be invested and that the earnings thereon be used for maintenance of the swimming complex. The $750,000 would most appropriately be recorded in a(an):

A) Custodial fund.
B) Permanent fund.
C) Private-purpose trust fund.
D) Investment trust fund.

Question 44

A statement of cash flows should be prepared for which of the following fiduciary fund types?

A) Fiduciary funds do not provide a statement of cash flows.
B) Custodial.
C) Pension trust.
D) Private-purpose trust.

Question 45

Which of the following is the appropriate basis of accounting for a custodial fund?

A) Cash basis.
B) Modified cash basis.
C) Accrual basis.
D) Modified accrual basis.

Question 46

An investment trust fund is used to report the net position available to the:

A) Sponsoring government only.
B) External participants only.
C) Financial institution that acts as custodian for the fund's investments.
D) All of these answers are correct.

Question 47

The cash and investment pool of Lake City allocates dividends, interest, and capital gains and losses on a periodic basis. When the cash and investment pool accrues interest earned on investments in debt securities, pending allocation to participating funds, it would credit which of the following accounts?

A) Interfund Loans.
B) Revenues.
C) Undistributed Earnings on Pooled Investments.
D) Interfund Receivables.

Question 48

In financial reporting for proprietary funds and at the government-wide level, the employer's pension expense for the period is equal to:

A) The employer's contribution.
B) Annual required contribution.
C) Current year benefits, interest on prior pension liabilities, plan changes, amortization of deferred amounts, and other changes to the net pension liability.
D) All of these are correct.

Question 49

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

A) Deposits held for customers of a city-owned electric utility.
B) Assets passed-through the state government to the local government.
C) Assets held for special assessment bondholders for which the city has no liability.
D) Assets that are used to assist in the preservation of a private residence.

Question 50

A donor contributed $500,000 to the city stipulating that the money be invested and that the earnings thereon be used for maintenance of the a band shell in the city's park. The $500,000 would most appropriately be recorded in a(an):

A) Custodial fund.
B) Private-purpose trust fund.
C) Endowment fund.
D) Permanent fund.

Question 51

Which of the following accounts is least likely to be used by a tax custodial fund?

A) Cash.
B) Revenues.
C) Taxes receivable for other funds.
D) Due to other governments.

Question 52

When a cash and investment pool of a certain city was established, the debt service fund transferred investments to the pool having a cost of $3,000,000 but a current fair market value of $2,900,000. To record this transaction, a single journal entry was made by the debt service fund that included which of the following?

A) A debit to Equity in Pooled Cash and Investments in the amount of $3,000,000.
B) A debit to Revenues-Change in Fair Value of Investments in the amount of $100,000.
C) A debit to Investments in the amount of $2,900,000.
D) A credit to Investments in the amount of $100,000.

Question 53

At the government-wide level, where are fiduciary funds reported?

A) In the Governmental Activities column.
B) In the Business-type Activities column.
C) As an internal balance in the total column.
D) Fiduciary funds are not reported at the government-wide level.

Question 54

Depending on the characteristics of the fund, which of the following could be reported as a trust fund or a custodial fund?

A) Investment fund.
B) Special assessment fund.
C) Other postemployment benefit fund.
D) Pass-through fund.

Question 55

A local civic group gave the county government $25,000 cash to be used to pay the utility bills of persons with income below the poverty level. The city should account for the $25,000 contribution in:

A) An investment trust fund.
B) The General Fund.
C) A permanent fund.
D) Private-purpose trust fund.

Question 56

Which of these fiduciary fund types is allowed to aggregate its additions and deductions provided resources received are held for no more than three months?

A) Custodial funds.
B) Pension trust funds.
C) Investment trust funds.
D) Private-purpose trust funds.

Question 57

Which of the following financial statements is prepared by fiduciary funds?

A) Statement of fiduciary net position.
B) Statement of fiduciary activities.
C) Statement of fiduciary cash flows.
D) All of these answers are correct.

Question 58

Which of the following is the appropriate measurement focus for custodial funds?

A) Economic resources.
B) Current financial resources.
C) Cash and cash equivalents.
D) Accrual basis.

Question 59

When a cash and investment pool of a certain city was established, the debt service fund transferred investments to the pool having a cost of $3,000,000 but a current fair market value of $3,100,000. To record this transfer, a single journal entry was made by the debt service fund that included which of the following?

A) A debit to Equity in Pooled Cash and Investments in the amount of $3,000,000.
B) A credit to Revenues-Change in Fair Value of Investments in the amount of $100,000.
C) A debit to Investments in the amount of $3,000,000.
D) A credit to Investments in the amount of $3,100,000.

Question 60

A government employer who makes contributions to pension plans for all employees:

A) Reports pension expenditures in a governmental fund in the amount actually contributed.
B) Reports pension expenses in a proprietary fund reflecting changes to the net pension liability.
C) Recognizes pension costs in the government-wide statements on the accrual basis of accounting.
D) All of these are correct.

Question 61

Which of the following statements is True regarding termination benefits?

A) Voluntary termination benefits occur when employers provide an incentive to hasten an employee's voluntary termination of employment, such as a one-time payout.
B) Voluntary terminations relate to layoffs or reductions in workforce.
C) Employers incur expenses related to voluntary terminations but not to involuntary terminations.
D) Expenses related to voluntary terminations may be avoided by hiring replacement employees within 60 days of the terminations.

Question 62

Other postemployment benefits may include:

A) Health care.
B) Life insurance.
C) Long-term care.
D) All of these answers are correct.

Question 63

If a city has a responsibility for endowed resources, how would city management decide whether to account for the resources in a permanent fund or a trust fund? How does financial reporting of the funds differ?

Question 64

On January 1, Forrester County is holding investments for Tinsel Town valued at $500,000 in an investment pool, accounted for in an investment trust fund. On January 1, Valley School District invests $1,500,000 in the pool. Earnings on pooled investments for the six months ended June 30 totaling $300,000 were received in cash.
1) What percentage interest in the pool is held by the town and the school district?
2) (a) Show the entry in the Investment Trust Fund to record the School District's investment in the pool. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
(b) Show the entry in the Investment Trust Fund to summarize the collection of interest for the six-month period. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
(c) Show the entry in the Investment Trust Fund to record the distribution of the interest earned on pooled investments, assuming that the interest will be reinvested by the town and school district. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Question 65

Kirby County established a tax custodial fund to collect property taxes for the City of Kix, the City of Denton, and Kirby County Independent School District. Total tax levies of the three governments were $200,000 for the year, of which $60,000 was for the City of Kix, $40,000 for Denton, and $100,000 for the School District.
The tax custodial fund charges a 2% collection fee that it transfers to the General Fund of the County in order to cover costs incurred for custodial fund operations. During the year the tax custodial fund collected and remitted $150,000 of the $200,000 levies to the various governments. Collection fees associated with the $150,000 were remitted to Kirby County's General Fund prior to year end.
For the Kirby County Tax Custodial Fund prepare the journal entries to record the taxes collected during the year and the remittances made to participating governments. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Question 66

In pension accounting, the employer's net pension liability:

A) Is measured as the total pension liability less the amount of fiduciary net position held for future pension payments.
B) Represents the portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees' past periods of service.
C) Is the same as the net pension obligation.
D) Is based on actuarial valuations generally required to be performed at least every five years.

Question 67

Briefly explain the difference between a custodial fund and a trust fund.

Question 68

Which of the following types of risk is related to the financial ability and dependability of the issuer of debt securities?

A) Custodial risk.
B) Concentration risk.
C) Solvency risk.
D) Credit risk.

Question 69

Select the key term that relate to accounting for pension plans from the list that best matches with the following definition.
A. Agent multiple-employer pension plan
B. Cost-sharing multiple-employer pension plan
C. Covered payroll
D. Defined benefit plan
E. Defined contribution plan
F. Net pension liability
G. Service cost
H. Total pension liability
________ 1. A pension plan which specifies the amount or rate of contribution that the employer and employees must contribute to the members' accounts in the pension plan.
________ 2. The portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees' past periods of service.
________ 3. The portion of the actuarial present value of projected benefit payments that is attributed to the current year, interest on the total pension liability, benefit payments, and other changes to the total pension liability.
________ 4. The pension obligations of many employers are pooled and plan assets can be used to pay the benefits of the employees of any employer that provides pensions through the pension plan.
________ 5. Plan assets of numerous employers are pooled for investment purposes but accounts are maintained for the individual employer participants.

Question 70

Explain the purpose of the account "undistributed change in fair value of investments" used in an investment pool.

Question 71

Describe the types of pension plans most often found in governments and the differences between them.

Question 72

Which of the following statements is True regarding management of investments?

A) Arbitrage rules apply only to general obligation bonds issued by governments.
B) Derivatives are reported at fair value on the financial statements.
C) Total return targets should be determined based solely on maximizing return.
D) A sound investment strategy focuses on long-term returns of the fund.