Homework answers / question archive / Chapter 08 Accounting for Fiduciary Activities—Agency and Trust Funds    True / False Questions    In accounting practice, the legalistic distinctions between trust funds and agency funds are not of major significance

Chapter 08 Accounting for Fiduciary Activities—Agency and Trust Funds    True / False Questions    In accounting practice, the legalistic distinctions between trust funds and agency funds are not of major significance

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Chapter 08

Accounting for Fiduciary Activities—Agency and Trust Funds

  

True / False Questions

  

1. In accounting practice, the legalistic distinctions between trust funds and agency funds are not of major significance.

 

 

True    False

 

2. Trust funds often exist over a longer period of time than agency funds, represent and develop vested interests of a beneficiary to a greater extent, and involve more complex administration and financial accounting and reporting.  

 

True    False

 

3. Fiduciary funds are sometimes identified in the annual reports of state and local governments as "Ancillary Funds."  

 

True    False

 

4. 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.  

 

True    False

 

5. Agency funds are used only if a government holds resources in a purely custodial capacity for others. 

 

True    False

 

6. Assets that are held in an agency fund belong to the party or parties for which the government acts as agent; however, the government retains legal right of ownership in the event of a party’s bankruptcy.

 

True    False

 

7. 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.

 

True    False

8. It is common for an agency fund to have relatively small net position balances.  

 

True    False

 

9. An agency 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.  

 

True    False

 

10. 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.

 

True    False

 

11. In regard to pass-through grants, a recipient government has administrative involvement if it is responsible for filing paperwork under a grant agreement.

 

True    False

 

12. 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.  

 

True    False

 

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

 

True    False

 

14. Agency funds should utilize the modified accrual basis of accounting. 

 

True    False

 

15. Trust funds should utilize the accrual basis of accounting. 

 

True    False

 

16. Pension trust funds should utilize budgetary accounts in the same manner that General Funds and special revenue funds do. 

 

 

True    False

 

17. 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.

 

True    False

 

18. 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.

 

True    False

 

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

 

True    False

 

20. 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.

 

True    False

 

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

 

True    False

 

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

 

True    False

 

23. 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.

 

True    False

 

24. 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.  

 

True    False

 

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

 

True    False

 

 

Multiple Choice Questions

 

26. Each of the following are reported as fiduciary funds except:  

 

1. A permanent fund. 
2. An investment trust fund. 
3. An agency fund. 
4. A private-purpose trust fund. 

 

 

27.   Which of the following statements regarding the financial reporting of agency funds is not true?  

 

A.    Agency activities are reported only in the fiduciary fund financial statements.  B.         Agency fund financial information is reported in a separate column of the government-wide statement of activities.

3. Trust funds are included in the statement of changes in fiduciary net position. 
4. GASB standards allow disclosure of the assets and liabilities of agency funds in a separate column of the statement of fiduciary net position.

 

 

 

28. Which of the following is the most reliable means of distinguishing a trust relationship from an agency relationship for purposes of deciding which type of fiduciary fund should be used?   

 

1. Examine the applicable documents and contact the GASB for a determination letter. 
2. Examine the aggregate of factors, such as the enactment that brought the relationship into existence and regulations under which it operates.
3. Examine the length of time assets will be held; agency relationships are generally in existence longer than trust relationships. 
4. Examine the wording of any agreements to determine if the word "trust" or "agency" is used. 

 

 

        

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

 

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

 

 

30. 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):  

 

1. Debt service fund. 
2. Special assessment fund. 
3. Capital projects fund. 
4. Agency fund. 

 

 

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

 

1. Contributions to Net Position. 
2. Revenues and Deferred Revenues. 
3. Due to Special Assessment Bondholders. 
4. Interfund Transfers In. 

 

 

32.   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 who 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?  

 

1. Agency grant. 
2. Fiduciary grant. 
3. Pass-through grant. 
4. Partial grant. 

 

 

        

33. Which of the following activities would most appropriately be recorded by an agency fund?  

 

1. Donations collected for improvements to the public library. 
2. Deposits held for customers of a municipal-owned electric utility. 
3. Taxes collected by a county government on behalf of cities within the county. 
4. Assets held for college scholarships to be awarded to the children of police officers. 

 

 

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

 

1. Cash.
2. Revenues.
3. Taxes receivable for other funds.
4. Due to other governments.

 

 

35.   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 transaction, the journal entry made by the debt service fund will include: 

 

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.

3. A debit to Investments in the amount of $3,000,000.
4. A credit to Investments in the amount of $3,100,000.

 

36.   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, the journal entry made by the debt service fund will include: 

 

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.

3. A debit to Investments in the amount of $2,900,000.
4. A credit to Investments in the amount of $100,000.

 

 

        

37.   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?  

 

1. Interfund Loans. 
2. Revenues. 
3. Undistributed Earnings on Pooled Investments. 
4. Interfund Receivables. 

 

 

38.   Which of these fiduciary fund types always has zero net position?  

 

1. Agency funds. 
2. Pension trust funds. 
3. Investment trust funds. 
4. Private-purpose trust funds. 

 

 

39.   Which of the statements concerning agency funds is true?   

 

1. Agency funds use the same basis of accounting as permanent funds. 
2. Agency funds are reported only on the statement of fiduciary net position. 
3. Agency funds use the temporary accounts Additions and Deductions. 
4. Agency funds never receive cash. 

 

 

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

 

1. Statement of net position.
2. Statement of activities.
3. Statement of cash flows.
4. All of the above.

 

 

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

 

1. In the Governmental Activities column.
2. In the Business-type Activities column.
3. As an internal balance in the total column.
4. Fiduciary funds are not reported at the government-wide level.

 

 

        

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

 

1. Sponsoring government only.
2. External participants only.
3. Financial institution that acts as custodian for the fund’s investments.
4. All of the above.

 

 

 43. 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: 

 

1. An investment trust fund.
2. The General Fund.
3. A permanent fund.
4. Private-purpose trust fund.

 

 

44.   An Olympic medalist swimmer who grew up in the city contributed $75,000 to the city stipulating that the money be invested and that the earnings thereon be used for maintenance of the swimming complex. The $75,000 would most appropriately be recorded in a(an): 

 

1. Agency fund.
2. A permanent fund.
3. Private-purpose trust fund.
4. Investment trust fund.

 

 

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

 

1. Fiduciary funds do not provide a statement of cash flows.
2. Agency.
3. Pension trust.
4. Private-purpose trust.

 

 

46.   Which of the following is the appropriate basis of accounting for an agency fund?  

 

1. Cash basis. 
2. Modified cash basis. 
3. Accrual basis. 
4. Modified accrual basis. 

 

 

47.   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): 

 

1. Agency fund.
2. Private-purpose trust fund.
3. Endowment fund.
4. Permanent fund.

 

48. Fiduciary funds are accounted on a basis of accounting similar to which of the following funds? 

 

1. Permanent funds.
2. Special revenue funds.
3. Enterprise funds.
4. Debt service funds.

 

 

49.   Which of the following is the appropriate measurement focus for agency funds? 

 

1. Economic resources.
2. Current financial resources.
3. Cash and cash equivalents.
4. Accrual basis.

 

 

50.   Which of the following activities would be accounted for by a trust fund? 

 

1. Deposits held for customers of a city-owned electric utility.
2. Assets passed-through the state government to the local government.
3. Assets held for special assessment bondholders for which the city has no liability.
4. Assets which are used to assist in the preservation of a private residence.

 

 

51.   A governmental employer who makes contributions to pension plans for all employees:

 

1. Reports pension expenditures in a governmental fund in the amount actually contributed.
2. Reports pension expenses in a proprietary fund reflecting changes to the net pension liability.
3. Recognizes pension costs in the government-wide statements on the accrual basis of accounting.
4. All of the above.

 

 

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

 

1. The employer's contribution.
2. Annual required contribution.
3. 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 the above.

 

 

53.   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. 

3. Employers incur expenses related to voluntary terminations but not to involuntary terminations. 
4. Expenses related to voluntary terminations may be avoided by hiring replacement employees within 60 days of the terminations. 

 

 54.              Other postemployment benefits may include:

 

1. Health care.
2. Life insurance.
3. Long-term care.
4. All of the above.

 

55.  In pension accounting, the employer’s net pension liability:

 

1. Is measured as the total pension liability less the amount of fiduciary net position held for future pension payments.  
2. 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.

 

 

 

 

 

        

Short Answer Questions

 

56.   The following are key terms in Chapter 8 that relate to accounting for pension plans.

1. Agent multiple-employer pension plan
2. Cost-sharing multiple-employer pension plan
3. Covered payroll
4. Defined benefit plan
5. Defined contribution plan
6. Net pension liability
7. Service cost
8. Total pension liability

 

 For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.

 

 _____ 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.  

 

 

 

 

 

 Essay Questions

 

57. 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?

 

58. Why do agency funds have no fund equity? What classes of accounts are reported in agency fund financial statements?

 

59. Explain the purpose of the account "undistributed change in fair value of investments" used in a cash and investment pools. 

 

 

60. Describe the types of pension plans most often found in governmental entities and the differences between them. 

 

61. Briefly describe how GASB Statements 67 and 68 compare to prior pension accounting standards.  

 

 

 

 Problems

 

 

62. Kirby County established a tax agency fund to collect property taxes for the City of Kix, the City of Denton, and Kirby County School District. Total tax levies of the three governmental units 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 agency fund charges a 2% collection fee that it transfers to the General Fund of the County in order to cover costs incurred for agency fund operations. During the year the tax agency fund collected and remitted $150,000 of the $200,000 levies to the various governmental units. Collection fees associated with the $150,000 were remitted to Kirby County’s General Fund prior to year end.

 

For the Kirby County Tax Agency Fund prepare the journal entries to record the taxes collected during the year and the remittances made to participating governments. 

 

 

 

  

63. 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.

 Required

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.
   2. Show the entry in the Investment Trust Fund to summarize the collection of interest for the six-month period.
   3. 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.