CPA Financial Accounting and Reporting Far Quiz: Apply Modified Accrual Accounting

What this quiz covers

This quiz focuses on Apply Modified Accrual Accounting, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. Report taxes receivable of $5,000,000 because the levy establishes a legal claim.
2. Report taxes receivable of $4,900,000, net of the estimated uncollectible amount. (correct answer)
3. Report taxes receivable of $4,700,000 because only amounts collected within 60 days are recognized under modified accrual.
4. Report taxes receivable of $4,800,000 because amounts expected after 60 days are excluded from receivables and reported only in government-wide statements.

Explanation: Under modified accrual accounting, property taxes receivable in governmental funds are reported at the gross amount of the levy less an allowance for uncollectible taxes, regardless of when collection is expected (GASB Codification Section P70). The county should report taxes receivable of $4,900,000, calculated as the$5,000,000 levy minus the $100,000 estimated uncollectible amount. The timing of collection (within or after 60 days) affects revenue recognition and deferred inflows but does not affect the receivable amount itself. Choice A incorrectly reports the gross levy without considering uncollectible amounts, Choice C incorrectly reduces receivables based on the 60-day collection period, and Choice D similarly misapplies the availability criterion to receivable measurement. The key principle is that receivables represent the legal claim to resources net of estimated uncollectibles, while the availability criterion determines the allocation between revenue and deferred inflows.

Question 2

1. Close Estimated Revenues, Appropriations, and Budgetary Fund Balance to Budgetary Fund Balance (or Fund Balance) to reverse the budgetary entries. (correct answer)
2. Leave Estimated Revenues and Appropriations open because they are part of GAAP-based operating statement presentation.
3. Reclassify Estimated Revenues and Appropriations to deferred inflows and deferred outflows to reconcile budget to actual.
4. Close actual revenues and actual expenditures to Budgetary Fund Balance, but do not close budgetary accounts because they are memorandum accounts.

Explanation: In governmental fund accounting under GASB, budgetary accounts (Estimated Revenues, Appropriations, and Budgetary Fund Balance) are temporary accounts used for budgetary control that must be closed at year-end to reverse the original budget entries and clear these accounts for the next period. The proper closing entry debits Appropriations, credits Estimated Revenues, and adjusts Budgetary Fund Balance for the difference, effectively reversing the budget adoption entry made at the beginning of the year. These budgetary accounts are not part of GAAP-based financial statements but are used for internal control and budget-to-actual comparison purposes. Choice B incorrectly treats budgetary accounts as permanent GAAP accounts, Choice C incorrectly reclassifies them to deferred items, and Choice D misunderstands the relationship between budgetary and actual accounts. The professional framework requires maintaining a clear distinction between budgetary accounting (for control) and GAAP accounting (for reporting), with budgetary accounts closed annually to maintain this separation.

Question 3

1. Record an expenditure—capital outlay of $5,500,000 and a credit to cash (or contracts payable) of$5,500,000. (correct answer)
2. Capitalize a construction in progress asset of $5,500,000 and record depreciation beginning when the asset is placed in service.
3. Record an other financing use—transfer out of $5,500,000 because capital outlays are reported only in government-wide statements.
4. Record an expenditure only when the courthouse is completed and accepted; otherwise, no recognition is permitted in governmental funds.

Explanation: Under modified accrual accounting in governmental funds, capital outlays are reported as expenditures in the period when the financial resources are expended, not capitalized as assets (GASB Codification Section 1600). The Capital Projects Fund paid $5,500,000 to the contractor for construction work, which represents a current financial resource outflow that must be recorded as an expenditure—capital outlay. This treatment differs from full accrual accounting used in government-wide statements, where the payment would be capitalized as construction in progress. Choice B incorrectly applies full accrual accounting by capitalizing the asset, Choice C mischaracterizes the transaction as a transfer when it's a direct expenditure, and Choice D incorrectly delays recognition until project completion. The key principle for governmental fund accounting is that capital asset acquisitions and construction costs are reported as expenditures when paid, reflecting the focus on current financial resources rather than economic resources.

Question 4

1. Record an expenditure of $180,000 and a credit to cash of$180,000 because the supplies were ordered before year-end.
2. Record supplies inventory of $180,000 and accounts payable of$180,000; no expenditure is recorded until the supplies are consumed. (correct answer)
3. Record supplies expense of $180,000 and a credit to accounts payable of$180,000, consistent with full accrual accounting.
4. Record an expenditure of $180,000 and a deferred outflow of resources of$180,000 because payment occurs after year-end.

Explanation: Under the consumption method for supplies in governmental funds, supplies are recorded as inventory assets when received and expenditures are recognized only when supplies are consumed or used (GASB Codification Section 1600.127). Since the state agency received $180,000 of supplies on June 25, 20X5, before year-end, it should record supplies inventory of$180,000 and accounts payable of $180,000, with no expenditure recognized until the supplies are actually consumed. This treatment aligns supplies accounting more closely with full accrual principles while still operating within the modified accrual framework. Choice A incorrectly recognizes an immediate expenditure which would apply under the purchases method, Choice C incorrectly refers to supplies expense (an accrual concept) rather than expenditure, and Choice D incorrectly creates a deferred outflow for a routine operating transaction. The key principle is that under the consumption method, governmental funds can carry supplies as assets similar to business-type activities, recognizing expenditures only upon consumption.

Question 5

1. General Fund, because donations are nonexchange revenues supporting general operations.
2. Debt Service Fund, because the resources are restricted and relate to long-term financing activities.
3. Capital Projects Fund, because the resources are restricted for the acquisition or construction of major capital facilities. (correct answer)
4. Permanent Fund, because the principal amount of the donation must be maintained intact for the benefit of the government.

Explanation: Under GASB standards, restricted donations for capital asset acquisition or construction should be accounted for in a Capital Projects Fund, which is specifically designed to account for financial resources restricted, committed, or assigned for the acquisition or construction of major capital facilities (GASB Codification Section 1300). The $2,000,000 donation restricted for constructing a public health clinic meets this definition perfectly, as it represents resources externally restricted for a specific capital purpose. The Capital Projects Fund will record both the donation receipt and the subsequent construction expenditures. Choice A is incorrect because the General Fund accounts for unrestricted resources, Choice B is incorrect because Debt Service Funds account for debt repayment not capital construction, and Choice D is incorrect because Permanent Funds are used when the principal must be preserved in perpetuity, which is not the case here. The decision rule is that externally restricted resources for capital acquisition or construction belong in Capital Projects Funds unless the principal must be maintained intact permanently.

Question 6

1. Recognize an expenditure and a liability for $600,000 because the leave has been earned by employees.
2. Recognize an expenditure and a liability for $90,000; disclose the remaining long-term portion in the notes and recognize it in government-wide statements. (correct answer)
3. Recognize no expenditure and no liability because compensated absences are recorded only in proprietary funds.
4. Recognize a deferred inflow of resources for $510,000 and a liability for$90,000 because payment is expected in future periods.

Explanation: Under modified accrual accounting in governmental funds, compensated absences are recognized as expenditures and liabilities only to the extent they will be paid with current financial resources, typically interpreted as amounts due and payable within 60 days after year-end (GASB Codification Section C60). The General Fund should recognize an expenditure and liability for $90,000, which represents the portion expected to be paid with currently available resources. The remaining$510,000 ($600,000 -$90,000) is a long-term obligation that is not recorded in governmental funds but is disclosed in notes and recognized in government-wide statements. Choice A incorrectly recognizes the entire obligation in governmental funds, Choice C incorrectly states that no liability is recognized, and Choice D incorrectly creates a deferred inflow for what is actually an unrecognized long-term liability. The professional framework requires bifurcating compensated absences between current (recognized in governmental funds) and long-term (recognized only in government-wide statements) portions based on expected payment timing.

Question 7

1. No adjustment is necessary because the invoice will be paid after year-end and therefore is not a current financial resource use.
2. Record an expenditure of $140,000 and an accounts payable (or accrued liabilities) of$140,000 because the liability was incurred during the period. (correct answer)
3. Capitalize an infrastructure asset of $140,000 and recognize depreciation expense in the General Fund.
4. Record an expenditure of $140,000 and a deferred outflow of resources of$140,000 because the cost benefits future periods.

Explanation: Under modified accrual accounting, governmental funds recognize expenditures when the related liability is incurred, provided it will be paid with current financial resources, which includes amounts normally paid within a short period after year-end (GASB Codification Section 1600). The street repairs were completed on June 20, 20X5, creating a liability before year-end, and the August 15 payment date (within 60 days) indicates payment with current financial resources. Therefore, the General Fund must record an expenditure of $140,000 and accounts payable of$140,000 at June 30, 20X5. Choice A incorrectly assumes that post-year-end payment prevents recognition, Choice C incorrectly attempts to capitalize routine maintenance costs, and Choice D incorrectly creates a deferred outflow for a current period expenditure. The key principle is that modified accrual accounting recognizes expenditures when liabilities are incurred if they will be liquidated with current financial resources, typically interpreted as payment within 60 days after year-end.

Question 8

1. Record an expenditure—debt service (principal) of $900,000 and an expenditure—debt service (interest) of$120,000, with a credit to cash of $1,020,000. (correct answer)
2. Record a long-term liability reduction of $900,000 and interest expense of$120,000, consistent with full accrual accounting.
3. Record an other financing use—bond retirement of $900,000 and defer recognition of the$120,000 interest until year-end accrual.
4. Record an expenditure—debt service (interest) of $1,020,000 because governmental funds do not recognize principal separately from interest.

Explanation: In governmental funds using modified accrual accounting, debt service payments for both principal and interest are recorded as expenditures when paid, reflecting the current financial resources measurement focus (GASB Codification Section D30). The Debt Service Fund must record the $900,000 principal payment as an expenditure—debt service (principal) and the$120,000 interest payment as an expenditure—debt service (interest), with a total credit to cash of $1,020,000. This treatment differs from full accrual accounting, where principal payments reduce long-term liabilities rather than being expensed. Choice B incorrectly applies full accrual accounting principles, Choice C misclassifies the principal payment as an other financing use and incorrectly defers interest recognition, and Choice D incorrectly combines principal and interest into a single interest expenditure category. The professional framework requires recognizing all debt service payments as expenditures in governmental funds, maintaining separate classifications for principal and interest to provide transparency in financial reporting.

Question 9

1. Recognize grant revenue of $250,000 because cash was received before year-end.
2. Recognize a deferred inflow of resources of $250,000 because the grant relates to a future period.
3. Recognize a liability (unearned revenue) of $250,000 because eligibility requirements have not been met. (correct answer)
4. Recognize an other financing source of $250,000 because the grant is nonexchange and restricted.

Explanation: Under GASB Statement 33 for nonexchange transactions, reimbursement grants require that eligibility requirements be met before revenue can be recognized, with the key requirement being that qualifying expenditures must be incurred. Since the school district received $250,000 for expenditures to be incurred in the next fiscal year, the eligibility requirements have not been met at year-end. The cash receipt must be recorded as a liability (unearned revenue) because the district has an obligation to either incur the qualifying expenditures or return the funds. Choice A incorrectly recognizes revenue based solely on cash receipt without considering eligibility requirements, Choice B incorrectly uses deferred inflow which applies to unavailable resources rather than unearned resources, and Choice D misclassifies the receipt as an other financing source. The decision framework for reimbursement grants requires verifying that qualifying expenditures have been incurred before recognizing revenue; otherwise, report the advance as a liability.

Question 10

1. $0, because the taxes are not legally due until January 31, 2025, which is after the current fiscal year
2. $1,900,000, representing the amount expected to be collected within 60 days of becoming legally due (correct answer)
3. $2,000,000, representing the full amount of property taxes assessed during the current fiscal year
4. $100,000, representing the difference between total assessment and the amount collected within 60 days

Explanation: Under modified accrual accounting, property tax revenue should be recognized if it is both measurable and available. Property taxes are considered available if collected within the current period or soon enough thereafter (typically 60 days) to pay current period liabilities. Since 95% ($1,900,000) is expected to be collected within 60 days of the due date, this amount meets the availability criterion. Choice A is incorrect because availability, not the due date, determines recognition. Choice C ignores the availability criterion. Choice D represents the wrong amount and concept.

Question 11

1. $45,000, representing only the cash purchase of the police vehicle during the current period
2. $75,000, representing the full cost of both the vehicle purchase and the capital lease obligation (correct answer)
3. $54,500, representing the vehicle cost plus six months of depreciation on both assets
4. $49,500, representing the vehicle cost plus six months of lease payments on the computer equipment

Explanation: Under modified accrual accounting in governmental funds, capital asset acquisitions are recorded as expenditures in the period acquired, regardless of the financing method. The $45,000 vehicle purchase is recorded as an expenditure when acquired. The capital lease also results in a$30,000 expenditure when the lease begins, as the city has acquired the asset and incurred the obligation. Total expenditures = $45,000 +$30,000 = $75,000. Governmental funds do not record depreciation. Choice A ignores the lease expenditure. Choice C incorrectly applies depreciation concepts. Choice D confuses lease payments with the initial lease expenditure.

Question 12

1. $230,000, representing all fines collected during 2024 plus those assessed and expected to be collected (correct answer)
2. $200,000, representing the total amount of fines actually collected during the current fiscal year
3. $250,000, representing collected fines plus assessed fines minus write-offs during the fiscal year
4. $180,000, representing only the fines collected within the established availability period during 2024

Explanation: Under modified accrual accounting with a 60-day availability period, revenue should include: (1) all fines collected during 2024 ($200,000), regardless of when they were originally assessed, because collection demonstrates availability; and (2) fines assessed in 2024 that are expected to be collected in early 2025 ($50,000), assuming 'early 2025' means within 60 days. Write-offs don't affect current year revenue recognition. Total = $200,000 +$50,000 = $230,000. Choice B ignores assessed but uncollected available revenue. Choice C incorrectly adds write-offs. Choice D misapplies the availability concept to already-collected amounts.

Question 13

1. $60,800, representing actual costs received plus the favorable variance from prior year encumbrances
2. $61,000, representing the actual invoice amounts for all goods and services received during the fiscal year
3. $65,000, representing the total amount of purchase orders placed and outstanding during the year
4. $60,200, representing the actual cost of all goods and services received during the fiscal year (correct answer)

Explanation: When you encounter encumbrance questions in governmental accounting, focus on what constitutes actual expenditures under modified accrual accounting. Expenditures are recognized when goods or services are received, not when purchase orders are placed or when encumbrances are established. Let's trace through 2024's expenditures step by step. First, the city received goods that were encumbered in 2023 with an actual cost of $24,200. This creates a 2024 expenditure of$24,200. Second, the city received goods from 2024 orders with actual costs of $35,500 but invoiced at$36,000. Under modified accrual, you record expenditures at the actual amount owed (the invoice amount), so this creates an expenditure of $36,000. Total 2024 expenditures: $24,200 +$36,000 = $60,200. Answer A ($60,800) incorrectly adds the$600 favorable variance from the 2023 encumbrance to actual costs received, but expenditures should reflect amounts actually paid or owed, not encumbrance variances. Answer B ($61,000) uses invoice amounts for both transactions, but the 2023 goods should be recorded at their actual invoice amount ($24,200), not some other figure. Answer C ($65,000) incorrectly includes the$40,000 in new purchase orders placed during 2024, but placing orders creates encumbrances, not expenditures. Remember: In governmental accounting, expenditures equal the invoice amounts for goods and services actually received during the year, regardless of when they were originally encumbered. Encumbrances themselves never become expenditures.

Question 14

1. $150,000, representing the total grant funds received during the current fiscal year from the state
2. $90,000, representing the portion of the grant designated for current year eligible expenditures
3. $85,000, representing only the amount of current year eligible expenditures actually incurred by year-end (correct answer)
4. $145,000, representing reimbursable expenditures incurred plus the advance for future expenditures

Explanation: Under modified accrual accounting, grant revenue should be recognized only when eligibility requirements are met. For the reimbursement portion, revenue should equal the eligible expenditures actually incurred ($85,000). The$5,000 of remaining 2024-eligible expenditures haven't been incurred yet, so that portion cannot be recognized. The $60,000 advance should be recorded as deferred revenue until the 2025 expenditures are incurred. Choice A incorrectly recognizes all cash received. Choice B ignores the requirement to incur expenditures first. Choice D incorrectly includes both unearned reimbursement and advance funding.

Question 15

1. $80,000, representing all license fees and penalties received during the current fiscal year
2. $75,000, representing current year license fees collected plus penalties, excluding advance collections
3. $85,000, representing current year license fees earned plus penalties, including estimated collections (correct answer)
4. $65,000, representing only the portion of current year license fees actually collected during 2024

Explanation: Under modified accrual accounting, revenue should be recognized when it is both measurable and available. For license fees, this includes: (1) current year fees collected ($60,000), (2) penalties collected ($5,000), and (3) current year fees expected to be collected soon enough to pay current liabilities ($20,000). The$15,000 received for 2025 licenses should be deferred. Total revenue = $60,000 +$5,000 + $20,000 =$85,000. Choice A incorrectly includes deferred revenue for 2025. Choice B excludes available but uncollected current year fees. Choice D ignores the availability concept for fees earned but not yet collected.

Question 16

1. $200,000, representing the amount of eligible expenditures incurred during the current fiscal year (correct answer)
2. $500,000, representing the full grant amount received during the current fiscal year
3. $300,000, representing the remaining grant funds available for future eligible expenditures
4. $0, because the grant funds are restricted and cannot be recognized until the program is completed

Explanation: Under modified accrual accounting, revenue from reimbursement-type grants should be recognized when the qualifying expenditures are incurred and all eligibility requirements are met. Since the city incurred $200,000 in eligible expenditures during 2024, it should recognize$200,000 in grant revenue. Choice B is incorrect because receiving the cash doesn't determine revenue recognition under modified accrual. Choice C incorrectly focuses on future expenditures. Choice D is wrong because restriction doesn't prevent revenue recognition when eligibility requirements are met.