GOVT FUND SIMS

1. Funds are self-balancing set of accounts and are established for each
category of activity. There are three broad categories of funds and these
contain 11 fund types-

(i) Governmental funds-Pertain to activities that are primarily funded by

taxation or other mandatory payments and are virtually unique to
government. There are five governmental funds
(Mnemonic: Governor General’s Special Combat Division is in Position).

1. General fund - Accounts for the general activities of a government

that are not accounted for by any other fund.
2. Special revenue fund - Accounts specific revenues from earmarked
sources that are restricted or committed to be used to finance
designated activities other than debt service or capital projects.
3. Capital projects fund - Accounts for major acquisition or construction
activities of capital assets, other than those financed by proprietary
or trust funds.
4. Debt service fund - Responsible for accumulating and making
interest and principal payments on the tax supported debts of the
governmental funds.
5. Permanent fund - Accounts and reports assets whose principal are
restricted and may not be spent but must be invested on a
permanent basis.

(ii) Proprietary funds- These are for activities that are primarily funded by
voluntary payments for goods and services by users and that resemble
businesses. There are two proprietary funds (Mnemonic: Government runs
businesses to get a share of the PIE.
a. Internal service fund - Renders service or provides goods to other
funds within the government entity charging the other funds directly for
those services.
b. Enterprise fund – Accounts for activities financed by voluntary
payments for goods and services rendered to the payers with a user fee
being paid.

(iii) Fiduciary funds- Account for resources held by a government in a

trustee or custodial capacity for other entities. There are four fiduciary
funds (Mnemonic: Finalize your Pension Investment with
a Private Custodian).

1. Pension trust fund - Accounts for government employee pension and

other post-retirement benefits for which the government is the
trustee.
2. Investment trust fund - Accounts for pooled resources that are being
invested on behalf of multiple government entities for which the
specific government entity is the trustee.
 3. Private purpose trust fund - Accounts for resources that are being
held for the benefit of private persons, organizations or other
governments.
4. Custodial fund - Accounts for collected amounts that must be
transferred to other funds or outsiders.

1 Grants and donations accepted by an University to finance Special revenue

research or fund
teaching projects

2 Municipal convention hall construction fund Capital projects

fund

3 Deferred compensation plan fund Pension trust fund

4 Investment pool held by State on behalf its County Investment trust

fund

5 Lotteries fund Enterprise fund

6 Central garages and motor pools fund Internal service

fund

7 General long-term bond redemption fund Debt service fund

8 State grant for new bridge fund Capital projects

fund
1.. The grants and donations accepted by an University to finance
research or teaching projects is restricted for research or teaching
projects is to be categorized as a special revenue fund.

2. Municipal convention hall construction fund is money set aside to

construct a convention hall, which is a capital asset.

3. Deferred compensation plan fund is an employee pension plan and

would be recorded under this fund.

4. Investment pool held by State on behalf its County is an example of

State government holding the investment on behalf of another
government (County).

5. Government makes money through lotteries and is thus a business for

the government and hence will be enterprise fund.
6. Central garages and motor pools fund is for garage services and motor
services provided by this fund to other government entities.

7. General long-term bond redemption fund is money set aside to pay

bond holders at the time of maturity.

8. State grant for new bridge would be a capital project fund.

2. Fiduciary funds consist of the following (Mnemonic: Finalize

your Pension Investment with a Private Custodian).

1. Pension Trust Funds- This accounts for resources held in trust for the
members and beneficiaries of a defined benefit pension plan or a
defined contribution plans or other postemployment benefit plans or
other employee benefit plans.
2. Investment Trust Funds- Accounts for the external portion of
investment pools reported by sponsoring governments.
3. Private Purpose Trust Funds - Accounts for all other trust
agreements where the resources benefit individuals, private
organizations or other governments.
4. Custodial Funds- Accounts for resources held by the government in
a purely custodial capacity.

Thus an ‘other employee benefit trust’ fund is a type of ‘Pension Trust’

fund and thus a fiduciary fund.

3. Fiduciary funds are used to account for resources held by a government

for other individuals or organizations. Fiduciary funds report two financial
statements: 1) Statement of fiduciary net position 2) Statement of
changes in fiduciary net position. The statement of fiduciary net position
reports the assets, liabilities, and net position for each fiduciary fund type
(custodial funds should not report net position because the funds’ assets
should equal liabilities). The statement of changes in fiduciary net position
reports additions to and deductions from net position for each fiduciary
fund type. Revenues and expenses are not reported. Because
custodial funds have no net position, they would not be reported in the
statement of changes in fiduciary net position. As pension type fund is a
type of fiduciary fund, this fund type would report additions and
deductions in the fund financial statements.
 Consolidation SIMS

stock at a purchase price that was in excess of Strand’s stockholders’

equity. On that date, the fair values of Strand’s assets and liabilities
equaled their carrying amounts. Purl has accounted for the acquisition as
a purchase. Transactions during 20X5 were as follows:

 On February 15, 20X5, Strand sold equipment to Purl at a price

higher than the equipment’s carrying amount. The equipment had a
remaining life of three years and was depreciated using the straight-
line method by both companies.
 During 20X5, Purl sold merchandise to Strand under the same terms
it offered to third parties. At December 31, 20X5, one-third of this
merchandise remained in Strand’s inventory.
 On November 15, 20X5, both Purl and Strand paid cash dividends to
their respective stockholders.
 On December 31, 20X5, Purl recorded its equity in Strand’s
earnings.

Below in the column A relates to accounts that may or may not be

included in Purl and Strand’s consolidated financial statements. Double-
click on the shaded cells in the column B to select the possible ways those
accounts may be reported in Purl’s consolidated financial statements for
the year ended December 31, 20X5. An answer may be selected once,
more than once, or not at all.

A B

1 Accounts Treatment
 Sum of the amounts on Purl and Strand’s separate unconsolidated
2 Cash
financial statements.

Less than the sum of the amounts on Purl and Strand’s separate
3 Equipment unconsolidated financial statements, but not the same as the amount
on either separate unconsolidated financial statement.

Investment in
4 Eliminated entirely in consolidation.
subsidiary

Shown in the consolidated financial statements but not in the

5 Minority interest
separate unconsolidated financial statements.

6 Common stock. Same as the amount for Purl only.

Beginning retained
7 Same as the amount for Purl only.
earnings

8 Dividends paid Same as the amount for Purl only.

Less than the sum of the amounts on Purl and Strand’s separate
9 Cost of goods sold unconsolidated financial statements, but not the same as the amount
on either separate unconsolidated financial statement.

1 Sum of the amounts on Purl and Strand’s separate unconsolidated

Interest expense
0 financial statements.

Less than the sum of the amounts on Purl and Strand’s separate
1
Depreciation expense unconsolidated financial statements, but not the same as the amount
1
on either separate unconsolidated financial statement.

Less than the sum of the amounts on Purl and Strand’s separate
1
Bonds Payable unconsolidated financial statements, but not the same as the
2
amount on either separate unconsolidated financial statement.

Explanation :

Answer explanation:-

1. Cash is always included in the consolidated balance sheet at their full amounts irrespective
of the percentage ownership held by the parent. When consolidated statement is prepared.
Parents and subsidiaries are treated as one economic entity.

2. When preparing consolidated financial statements, it is required to eliminate intercompany

transactions. Since Strand sold equipment to Purl at a price higher than the equipment’s
carrying amount, this transaction between the parent and the subsidiary has to be eliminated
so that only the transactions with third parties are left after the consolidating entries.
Therefore, on the consolidated balance sheet the equipment needs to be stated at its original
cost to Strand, which would make the amount of equipment in the consolidated statements
less than the sum of the amounts on Purl and Strand.

3. In the consolidated balance sheet, the parent company’s “Investment in subsidiary” should
be eliminated completely and replaced by the net assets of the subsidiary.

4. The percentage of the subsidiary’s stockholder’s equity not owned by the parent company
represents the minority interest’s share of the net assets of the subsidiary. This amount is only
reported in the equity section of consolidated balance sheet.

5. In the consolidated balance sheet, the subsidiaries common stock is not reported.
Therefore, the parent’s common stock is equal to the consolidated common stock.

6. In the consolidated balance sheet, the subsidiary’s beginning retained earnings is not
reported. Therefore, the parent’s beginning retained earnings equals the consolidated
beginning retained earnings.

7. The dividends paid by the subsidiary are eliminated in the consolidated financial
statements. Ninety percent of the dividends paid are eliminated along with the “Investment in
subsidiary” elimination. The remaining 10% is reflected in “Non-controlling Interest.”
Therefore, only the parent’s dividends paid are included on the consolidated financial
statements.

8. When preparing the consolidated income statement, the objective is to restate the accounts
as if the intercompany transactions had not occurred. Since Purl sold merchandise to Strand
under the same terms it offered to third parties, Strand would have recorded cost of sales at a
price higher than the cost of sales to Purl. The two-thirds sale made to third parties have to be
recorded at the cost of sales of Purl and not the cost of sale of Strand. Thus, the consolidated
statement on cost of goods sold would be less than the sum of the amounts on Purl and
Strand’s separate unconsolidated financial statements

9. The requirement is to determine how the interest expense is to be reported in

the consolidated financial statements. Since no information was provided on details the entire
amount is presumed to be payable to outside parties. Thus, the entire portion of
interest should be included in the consolidated financial statements.

10. When preparing consolidated financial statements, the objective is to restate the accounts
as if the intercompany transactions had not occurred. As a result of the sale of the equipment,
Purl would record a depreciation expense of an amount greater than what Strand would have
depreciated because the cost capitalized by Purl would have been higher than the carrying
value for Strand. Since this is an intercompany transaction, this depreciation expense would
have to be eliminated and the consolidated statements would record a depreciation on the
lesser carrying value of Strand.