CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsMedium
A city government has legally mandated restrictions on using certain property tax revenues specifically for public safety expenditures. These revenues are collected and disbursed through a separate fund. Which type of governmental fund would be most appropriate to account for these transactions?
- AGeneral Fund
- BCapital Projects Fund
- CDebt Service Fund
- DSpecial Revenue Fund
Show answer & explanationAnswer & explanation
Correct answer: D. Special Revenue Fund
Special Revenue Funds are used to account for specific revenue sources that are legally restricted or committed to expenditures for specified purposes other than debt service or capital projects. Public safety is a specified purpose.
Why the other options are wrong
- A. The General Fund accounts for general governmental activities, not specific restricted revenues.
- B. Capital Projects Funds are for major capital acquisitions or construction, not ongoing operating expenditures like public safety.
- C. Debt Service Funds are for accumulating resources for the payment of general long-term debt, not for public safety operations.
Special Revenue Fund
A governmental fund used to account for the proceeds of specific revenue sources that are legally restricted or committed to expenditures for specified purposes other than debt service or capital projects.
- Governmental fund (uses modified accrual).
- Revenues are legally restricted for specific operating purposes.
- Examples: motor fuel taxes for road maintenance, property taxes for public safety.
Memory trick: Special Revenue: Special money for special tasks, not general use.