Question 1

Many governments have extensive investments in debt and equity securities, held for income and not for hedging purposes. Which types of funds must report these investments at fair value and report unrealized gains and losses in their operating statement?

Accepted Answer

Governmental, proprietary, and fiduciary funds must report investments at fair value and include unrealized gains and losses in their operating statements, as per accounting standards for government entities.

Question 2

The State of California's general fund enters a receive variable/pay fixed interest rate swap that hedges its variable rate debt. If market interest rates fall during the year, where is the change in the value of the swap investment reported in the governmental funds balance sheet?

Accepted Answer

In governmental funds under GASB standards, derivative instruments like interest rate swaps are not reported on the balance sheet. Changes in the value of such swaps are recognized in the period they occur but do not appear directly on the balance sheet of governmental funds.

Question 3

The State of California's State College fund (enterprise fund) enters a receive variable/pay fixed interest rate swap that hedges its variable rate debt. If market interest rates fall during the year, where is the change in the value of the swap investment reported in the proprietary funds balance sheet?

Accepted Answer

The answer of The State of California's State College fund...

Question 4

A state determines that one of its swaps, reported in its enterprise fund, is no longer effective as a hedge of interest rate risk, and therefore hedge accounting is no longer appropriate. The swap was reported as an asset of $2 million. What is one of the effects of reclassifying the swap on the proprietary funds financial statements?

Accepted Answer

When hedge accounting is no longer appropriate, the swap is reclassified as an investment, and its change in fair value is recognized in investment income, increasing it by $2 million.

Question 5

Local governments often have variable rate debt and hedge the related interest rate risk with an interest rate swap. These governments incur gains on these swaps when:

Accepted Answer

DGovernments using receive variable/pay fixed interest rate swaps gain when interest rates rise because they pay a fixed rate while receiving a variable rate that increases. Conversely, with receive fixed/pay variable swaps, they gain when interest rates fall, as they pay less on the variable side while receiving a fixed rate.

Question 6

On its proprietary funds statement of net position, a state reports deferred outflows of $6 million related to derivatives. Which of the following might explain this amount?

Accepted Answer

Deferred outflows related to derivatives on a statement of net position often result from changes in the fair value of hedging derivatives, such as when a derivative swaps variable rate for fixed rate debt and interest rates decline. This situation can lead to a situation where the derivative's value changes in a way that does not immediately affect net income but is recognized in other comprehensive income and reported as a deferred outflow of resources.

Question 7

A state university's activities are reported in the state CAFR as a proprietary fund. The university issues variable rate debt and hedges its interest rate risk with a receive variable/pay fixed interest rate swap. If market interest rates increase, how is the derivative investment, reported on the state's proprietary funds statement of net position, affected?

Accepted Answer

When market interest rates increase, the value of a receive variable/pay fixed interest rate swap increases for the holder, because they benefit from receiving higher variable interest payments while their own payment obligations remain fixed.

Question 8

A debt service fund paid $2,000,000 for securities for use as income investments during the year. During the year, $30,000 of investment income is received in cash. At year-end, the fund still holds the securities, and their market value has declined to $1,990,000. How is this reported by the debt service fund?

Accepted Answer

The fund reports the investments at their market value of $1,990,000 on the balance sheet. The investment income of $30,000 is reported on the operating statement.

Question 9

Use the following information to answer Questions.
On April 1, 2020, an enterprise fund issued $2,000,000 in variable rate debt, with interest paid on March 31 of each year, the fiscal year-end. The rate is reset annually. The variable rate for fiscal 2021 is 3.5%. On the same date, the fund entered a receive variable/pay fixed interest rate swap, where the fund pays a 3.6% fixed rate to a counterparty. By the end of fiscal 2021, the variable rate fell to 3.3% and the swap declined in value by $8,000. The swap qualifies for hedge accounting, per SGAS 53.
-How is the enterprise fund's investment in derivatives reported on its statement of net position?

Accepted Answer

The decline in the swap's value by $8,000 indicates a loss in value, making it a liability for the enterprise fund. Since the swap is used for hedging and qualifies for hedge accounting per SGAS 53, changes in its value are recognized in the financial statements. Therefore, it is reported as a liability.

Question 10

Use the following information to answer Questions.
On April 1, 2020, an enterprise fund issued $2,000,000 in variable rate debt, with interest paid on March 31 of each year, the fiscal year-end. The rate is reset annually. The variable rate for fiscal 2021 is 3.5%. On the same date, the fund entered a receive variable/pay fixed interest rate swap, where the fund pays a 3.6% fixed rate to a counterparty. By the end of fiscal 2021, the variable rate fell to 3.3% and the swap declined in value by $8,000. The swap qualifies for hedge accounting, per SGAS 53.
-At what amount does the enterprise fund report interest expense on its operating statement?

Accepted Answer

$2,000,000 x 3.6% = $72,000.

Question 11

State and local governments often invest liquid assets on a short-term or long-term basis for income and capital gains. Which statement best describes the reporting for these investments, per SGAS 31?

Accepted Answer

SGAS 31 requires that investments be reported at fair value (market value), with changes in value recognized in the operating statement. This approach reflects the current financial status more accurately by showing the actual value of investments and their impact on the financial statements.

Question 12

Which statement is true with respect to reporting for compensated absences by state and local governments?

Accepted Answer

If the benefit depends on future services provided by the employee, an expense is not reported in the proprietary funds because it is contingent upon the employee continuing to work for the government and thus does not represent a current obligation.

Question 13

A working landfill is reported in a proprietary fund and is 60% filled at year-end. Total estimated closure and postclosure costs are $25,000,000, and the current balance in the liability for landfill closure and postclosure costs is $12,000,000. The operating statement of the landfill will report what amount for closure and postclosure expenses for the current year?

Accepted Answer

($25,000,000 x 60%) - $12,000,000 = $3,000,000

Question 14

Landfill operations may be reported in a governmental fund or in a proprietary fund. Assume an operating landfill is estimated to be 30% filled. Total expected costs of closure and postclosure care are estimated at $15,000,000. Which statement below is false?

Accepted Answer

The proprietary fund's liability for future closure and postclosure costs is 30% x $15,000,000 = $4,500,000.

Question 15

Use the following information to answer Questions bellow.
At the beginning of the year, a county builds a sewage treatment plant, reported in an enterprise fund. The plant is expected to be in service for 25 years. The county is responsible for the plant's retirement at the end of its life, following all safety and environmental requirements. The estimated present value of the future retirement costs is $10,000,000, to be recognized on a straight-line basis over the plant's estimated life.
-The enterprise fund reports asset retirement expense for the current year of:

Accepted Answer

$10,000,000/25 = $400,000.

Question 16

Use the following information to answer Questions bellow.
At the beginning of the year, a county builds a sewage treatment plant, reported in an enterprise fund. The plant is expected to be in service for 25 years. The county is responsible for the plant's retirement at the end of its life, following all safety and environmental requirements. The estimated present value of the future retirement costs is $10,000,000, to be recognized on a straight-line basis over the plant's estimated life.
-What amount does the enterprise fund report for deferred outflows of resources, related to its asset retirement obligation, in its year-end statement of net position?

Accepted Answer

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Question 17

At the beginning of the current year, the general fund enters a 3-year lease with these terms: $100,000 is due at signing, and payments of $100,000 per year are due at the end of each of the next two years. The lease agreement carries an interest rate of 3%. The present value of the lease payments is $291,347. At the start of the lease, the general fund:

Accepted Answer

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Question 18

At the beginning of the current year, an enterprise fund enters a 3-year lease with these terms: $100,000 is due at signing, and payments of $100,000 per year are due at the end of each of the next two years. The lease agreement carries an interest rate of 3%. The present value of the lease payments is $291,347. At the start of the lease, the enterprise fund:

Accepted Answer

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Question 19

A governmental fund issues 3% bonds for $15,000,000 and uses this money to refund 5% bonds currently carried at $14,900,000. How is this reported by the governmental fund?

Accepted Answer

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Question 20

A proprietary fund issues 3% bonds for $15,000,000 and uses this money to refund 5% bonds currently carried at $14,900,000. How is this reported by the proprietary fund?

Accepted Answer

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Quiz 11: State and Local Governments: Other Transactions