CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsMedium
A county government maintains an investment pool for its various departments and component units, where the participating entities can invest their idle cash. The county acts as a trustee for these investments, managing the pool and distributing earnings based on participants' shares. Which type of fund would be most appropriate for accounting for this investment pool?
- AAgency Fund.
- BInvestment Trust Fund.
- CPrivate-Purpose Trust Fund.
- DPermanent Fund.
Show answer & explanationAnswer & explanation
Correct answer: B. Investment Trust Fund.
An Investment Trust Fund is a fiduciary fund used to account for the assets, liabilities, net position, and changes in net position for a government's external investment pool, where the government acts as a sponsor and trustee for other governments or component units.
Why the other options are wrong
- A. Agency Funds are used for assets held by the government in a purely custodial capacity, without a measurement focus or recognition of net position, and are generally for short-term pass-through activities.
- C. Private-Purpose Trust Funds are for resources held for individuals, private organizations, or other governments, not typically for an external investment pool with multiple governmental participants.
- D. Permanent Funds are governmental funds used to account for resources legally restricted to the extent that only earnings, not principal, may be used for purposes that support the government's programs.
Investment Trust Fund
A fiduciary fund used to account for the assets, liabilities, net position, and changes in net position for a government's external investment pool, where the government acts as a sponsor and trustee.
- Fiduciary fund type.
- Accounts for external investment pools.
- Government acts as trustee/sponsor.
- Uses full accrual accounting.
Memory trick: Fiduciary funds hold money for others, like a trusted guardian.