Question 1

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

Accepted Answer

Enterprise funds may capitalize interest paid on debt incurred for construction of plant assets, as long as the assets are being constructed specifically for the enterprise fund's use. This is in accordance with generally accepted accounting principles (GAAP).

Question 2

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 3

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 their net position in three categories: net investment in capital assets, restricted, and unrestricted. Net investment in capital assets represents the value of the assets, such as buildings or equipment, less any outstanding debt used to acquire them. Restricted net position refers to funds that are legally restricted, such as grants or donations with specific conditions attached. Unrestricted net position represents any funds that are not restricted and can be used for any purpose.

Question 4

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 5

Equipment acquired under a capital 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 capital lease is treated as a capital asset and therefore will be reported as a capital asset in both the fund and government-wide financial statements.

Question 6

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

An internal service fund operates similarly to a commercial business, and therefore its statement of revenues, expenses, and changes in fund net position is also similar to an income statement prepared for a commercial business.

Question 7

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 8

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

Utility revenue bonds represent debt incurred by an enterprise fund and thus, their liability should be reported in business-type activities on the government-wide statements as well as in the enterprise fund.

Question 9

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

Accepted Answer

Public utilities such as water, sewer, electric, and gas are often owned and operated by governments as enterprise funds, which are self-supporting business operations that charge fees for their services.

Question 10

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 11

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 12

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 13

Internal service funds account for operating expenditures on the accrual basis.

Accepted Answer

Internal service funds are meant to provide services to other departments or agencies within the government, and as such, the expenditures are recorded on an accrual basis, similar to other enterprise funds.

Question 14

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

Accepted Answer

A motor pool is a facility where vehicles are housed and maintained for use by a government agency's employees. It is typically operated as an internal service fund, which is a self-supporting entity within the organization that provides goods or services to other departments or programs within the same entity. The motor pool charges fees for its services, which are used to cover the costs of operating and maintaining the vehicles.

Question 15

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 is correct. The statement of net position for proprietary funds typically follows this format.

Question 16

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 should follow generally accepted accounting principles (GAAP) for recognizing premiums or discounts on bonds payable, which is the same as those of a comparable business entity. This means that premiums should be recorded as a liability and amortized over the life of the bond, while discounts should be recorded as a reduction in the liability and also amortized over the bond's life.

Question 17

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 18

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

Enterprise funds are used for business-type activities that charge fees or charges to fully cover costs of providing services. If an activity is subsidized by the government's General Fund, it does not meet the criteria for being reported in an enterprise fund.

Question 19

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 20

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.

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