ExpertHard1 markMultiple Choice
CPA · Question 09 · Area I: Financial Reporting
Valley City's internal service fund reported net income of $50,000 for the year. This fund provides services exclusively to the city's police and fire departments (General Fund). How should this net income be reported in the government-wide Statement of Activities?
Valley City's internal service fund reported net income of $50,000 for the year. This fund provides services exclusively to the city's police and fire departments (General Fund). How should this net income be reported in the government-wide Statement of Activities?
Answer options:
A.
As a business-type activity
B.
As a reduction of expenses in governmental activities
C.
As general revenue in governmental activities
D.
It is not reported in the government-wide statements
How to approach this question
Internal Service Funds (ISF) are proprietary funds but usually serve governmental functions. In the Govt-wide statements, they are 'rolled up' into the Governmental Activities column. The 'profit' is viewed as an overcharge to the government itself, so it reduces the reported expenses.
Full Answer
B.As a reduction of expenses in governmental activities✓ Correct
Internal Service Funds that predominantly serve governmental funds are reported in the Governmental Activities column of the government-wide financial statements. The 'profit' (change in net position) indicates that the user funds (Police/Fire) were charged more than the cost. To avoid overstating expenses, the ISF's net income is used to reduce the expenses of the functions that used the services.
Common mistakes
Classifying ISF as Business-Type (that's for Enterprise Funds). Treating the income as revenue.
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