Unit 3: State and Local Governments (BAR-specific depth)

• Topic 01

  Governmental Financial Reporting

  41 questions
• Topic 02

  Governmental Accounting Standards

  46 questions
• Topic 03

  Special-Purpose Entities and Component Units

  36 questions
• Topic 04

  Long-Term Debt and Capital Assets for Governments

  41 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. A city enters a GASB 87 lease for a fleet of police vehicles. Annual lease payments are $200,000 for 5 years. The present value of payments at the city's 3.5% borrowing rate is $892,000. In the government-wide statements, how is interest expense determined in year 1?

   • A
     Interest expense = ($1,000,000 total undiscounted payments − $892,000 present value) / 5 years = $21,600 per year
   • B
     Interest expense equals zero because police vehicles are governmental assets, not proprietary assets
   • C
     No interest expense is recognised; the entire $200,000 payment reduces the lease liability
   • D
     Interest expense = $892,000 lease liability × 3.5% = $31,220 in year 1; the liability is reduced by the payment less interest ($200,000 − $31,220 = $168,780 principal reduction).
     Correct answer
   Explanation

   Under GASB 87, interest on the lease liability is calculated using the effective interest method: beginning liability balance × interest rate = interest expense. Year 1: $892,000 × 3.5% = $31,220 interest expense. Principal reduction = $200,000 − $31,220 = $168,780. The ending lease liability after year 1 = $892,000 − $168,780 = $723,220. This is the same approach as for bonds payable.

2. A government presents discretely presented component unit financial data in its government-wide statements. The component unit has a different fiscal year-end (June 30) compared to the primary government (December 31). Under GASB 34, what financial data does the government use for the component unit?

   • A
     The component unit's most recently ended fiscal year data (June 30 year-end); the different fiscal year-end must be disclosed in the notes.
     Correct answer
   • B
     The component unit's most recently ended fiscal year data is used only if the component unit has obtained an independent audit.
   • C
     The component unit is excluded from the government-wide statements because its fiscal year-end differs from the primary government's.
   • D
     The primary government uses the component unit's December 31 interim data to align with the primary government's year-end.
   Explanation

   Under GASB 34, when a discretely presented component unit has a different fiscal year-end than the primary government, the component unit's most recently completed fiscal year data (June 30 year-end) is used. The different fiscal year-end must be disclosed in the notes to the financial statements. Requiring restatement to the primary government's year-end would be overly burdensome; using the most recent complete year is the GASB-required approach.

3. Which of the following correctly describes the auditor's responsibility over required supplementary information (RSI) such as MD&A and pension schedules?

   • A
     The auditor issues a separate opinion on RSI distinct from the opinion on the basic financial statements.
   • B
     The auditor provides the same level of assurance over RSI as over the basic financial statements.
   • C
     The auditor provides positive assurance that RSI is fairly presented in all material respects.
   • D
     The auditor applies limited procedures — reading for consistency and making inquiries — but does not provide full audit assurance over RSI.
     Correct answer
   Explanation

   Under SAS No. 137 (AU-C Section 730), the auditor applies limited procedures to RSI: inquiring of management about methods of preparing RSI, comparing RSI to the basic statements and underlying records, and reading RSI for consistency. Limited procedures do not provide the same assurance as audit procedures. If the auditor cannot complete limited procedures, a departure is reported. RSI is not covered by the full opinion on the basic financial statements.