CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsEasy
A municipality's General Fund transferred $1,000,000 to its Debt Service Fund to cover the principal and interest payments due on general obligation bonds. How should this transfer be reported in the governmental fund financial statements?
- AAs an interfund loan in both funds.
- BAs a reduction of net position in the General Fund and an increase in net position in the Debt Service Fund.
- CAs an other financing use in the General Fund and an other financing source in the Debt Service Fund.
- DAs an expenditure in the General Fund and revenue in the Debt Service Fund.
Show answer & explanationAnswer & explanation
Correct answer: C. As an other financing use in the General Fund and an other financing source in the Debt Service Fund.
Non-reciprocal interfund transfers between governmental funds are reported as 'Other Financing Sources (Uses)' to distinguish them from revenues and expenditures.
Why the other options are wrong
- A. Interfund loans imply repayment, which is not the case for a transfer to cover debt service.
- B. While it affects net position, the specific classification in governmental funds is 'Other Financing Sources (Uses)'.
- D. Interfund transfers are not generally treated as expenditures/revenues in governmental funds.
Interfund Transfers (Governmental Funds)
Non-reciprocal flows of assets between funds without a corresponding flow of resources or a requirement for repayment. They are reported as 'Other Financing Sources (Uses)' in governmental fund financial statements.
- Non-reciprocal transactions.
- Reported as Other Financing Sources (Uses).
- Distinguished from revenues and expenditures.
- Affects fund balance in governmental funds.
Memory trick: Funds 'transfer' assets, but it's not a 'sale' or 'loan' if it's just a movement.