CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsHard
A local government operates a public library. The library receives significant contributions from a local foundation, which are legally restricted to be used exclusively for the acquisition of new books. Which type of governmental fund would be most appropriate to account for these contributions and their related expenditures?
- AGeneral Fund
- BCapital Projects Fund
- CPermanent 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 finance particular functions or activities of the government. In this case, contributions restricted for new books fit this definition.
Why the other options are wrong
- A. The General Fund accounts for general governmental activities; these funds are specifically restricted.
- B. Capital Projects Funds are for major capital acquisitions or construction, not ongoing operational purchases like books.
- C. Permanent Funds are used for legally restricted resources where only earnings, not principal, may be used for purposes supporting the government's programs.
Special Revenue Fund
A governmental fund used to account for the proceeds of specific revenue sources that are legally restricted or committed to expenditure for specified purposes other than debt service or capital projects.
- Governmental fund type.
- Accounts for legally restricted/committed revenue sources.
- Used for specific operating activities.
- Excludes debt service and capital projects.
Memory trick: Governmental funds are like specialized 'buckets' for different public money.