Multiple Choice Questions
Identify the best answer for each of the following:
Questions 1 through 4 are based on the following scenario:
On January 1, 20X7, Clyde County issued $100 million of 5%, 20-year bonds at 102. Interest is payable semiannually. The proceeds were restricted for the construction of a new county water purification plant for its Water Enterprise Fund.
1. The bond issuance should be reflected in the Water Fund Statement of Revenues, Expenses, and Changes in Fund Net Position as
a. Revenues of $102 million.
b. Other financing sources of $102 million.
c. Revenues of $100 million.
d. The transaction does not affect this statement.

2. What effect will the bond premium amortization have on interest expense in 20X7, assuming straight-line amortization is used where appropriate?
a. No effect.
b. Increase interest expense by $100,000.
c. Decrease interest expense by $100,000.
d. Decrease interest expense and increase transfers from Debt Service Funds by $2,000,000.

3. Assume that at the fiscal year end the capital project had not yet begun; thus the debt proceeds were still unspent. What classifications of net position would be affected by this fact?
a. Net investment in capital assets would be reduced because no capital assets have been added to offset the new capital-related debt.
b. Restricted net position would include the unspent cash as well as the outstanding liability.
c. Unrestricted net position would reflect an increase due to the cash received from the debt issuance, but net investment in capital assets would decrease by the amount of unspent debt proceeds.
d. None—net position classifications are not affected by the issuance of long-term debt.
4. How would the Enterprise Fund’s statement of cash flows be affected by the debt issuance?
a. Cash flows from operating activities would increase.
b. Cash flows from noncapital financing activities would increase because bond proceeds have not yet been spent for capital purposes.
c. Cash flows from capital financing activities would increase.
d. Cash flows from investing activities would increase.

Questions 5 through 7 are based on the following scenario:
The town of Brittainville has two Enterprise Funds—one for its water and wastewater operations and another for its cable television operation. The Water and Wastewater Enterprise Fund issued $11,000,000 of 6%, 15-year refunding bonds at par during the year. It also received a $175,000 federal grant to expand water and wastewater lines to economically depressed residential neighborhoods. The Cable Enterprise Fund made its annual payment of $1,000,000 to the General Fund to subsidize operations.
It also was the recipient of a Federal Communications Commission unrestricted grant of $100,000.
5. How would the receipt of the grants be reported on the statement of cash flows for the Water and Wastewater Enterprise Fund and the Cable Enterprise Fund, respectively?
a. Cash flows from capital and related financing activities for the Water and Wastewater Enterprise Fund and cash flows from noncapital financing activities for the Cable Enterprise Fund.
b. Assuming the Cable Enterprise Fund chose to use the proceeds of its grant for capital needs, both funds would reflect the grant receipt in cash flows from capital and related financing activities.
c. Cash flows from capital and related financing activities for the Water and Wastewater Enterprise Fund and cash flows from operating activities for the Cable Enterprise Fund.
d. Both funds would report the grant receipt as cash flows from operating activities.

6. How will the interfund payment be reported on the Cable Enterprise Fund’s operating statement?
a. Transfer out of $1,000,000.
b. Operating expense of $1,000,000.
c. Nonoperating expense of $1,000,000.
d. Capital contribution out of $1,000,000.

7. How would the changes in net position amount be affected in the Water and Wastewater Enterprise Fund by the transactions listed?
a. Changes in net position would not be affected by the debt issuance; the grant would increase changes in net position.
b. Changes in net position would be decreased by any costs associated with issuing the refunding bonds; the grant would increase changes in net position.
c. Both the refunding transaction and the grant would not affect the changes in net position.
d. Changes in net position would not be affected by either transaction.

Questions 8 through 10 are based on the following facts about an Enterprise Fund for a utility operation:
Outstanding bonds issued for capital improvements . . . . . . . . . $10,500,000
Transfer to General Fund (occurs annually) . . . . . . . . . . . . . 500,000
Charges for services earned in the current year . . . . . . . . . . . 14,600,750
Unspent capital bond issue proceeds . . . . . . . . . . . . . . . . . 4,000,000
Salaries and wages expense for the current year . . . . . . . . . . . 9,600,000
Interest earnings on all investments . . . . . . . . . . . . . . . . . . 600,000
Fair market value of water lines donated by a local developer . . . . . 1,000,000
Net book value of all other existing capital assets . . . . . . . . . . . 7,310,500

8. Net investment in capital assets would be
a. $7,310,500.
b. $8,310,500.
c. $4,310,500.
d. $1,810,500.

9. Cash flows for noncapital financing activities would decrease
a. $0.
b. $10,100,000.
c. $9,500,000.
d. $500,000.

10. The operating statement of the Enterprise Fund would not be directly affected by
a. The amount of unspent bond proceeds at the end of the year.
b. The donation by the local developer.
c. The transfer to the General Fund.
d. Interest earnings on investments.