Yaeger CPA Review’s CPA Exam Question of the Day for FAR: Governmental Accounting

Today’s CPA Exam Question of the Day from Yaeger CPA Review Instructor Cindy Simpson, CPA, CMA, CIA covers Governmental Accounting for the Financial and Accounting section of the Exam. Yaeger CPA Review provides these exclusively to the readers of another71.com.

2009 Wiley FAR, Module 19 (Governmental Accounting), MCQ 44, Page 894.

A. $25,000
B. $20,000
C. $0
D. $45,000

The Wiley answer on page 906 states that [A] is the correct answer because only the $25,000 received from the state as an advance of sales tax revenues meets the GASB 33 requirements for recognizing revenue under the modified accrual basis of accounting; the modified accrual basis requires that revenues be recognized when they are both measurable and available. Here is some additional explanation for why [A] is the BEST answer.

First of all, this is a question which involves the modified accrual basis of accounting. The two clues that indicate the modified accrual basis are:
(1) the general fund, which is one of the five governmental funds (the governmental funds use the modified accrual basis) and
(2) the statement of revenues, expenditures, and changes in fund balances (expenditures are used in the modified accrual basis).

Under the modified accrual basis, revenues are recognized when they are both:
(1) measurable: you can come up with a figure and
(2) available: you will collect the money by the end of the year (balance sheet date) or within a short time after the end of the year so that you can pay the bills for that year.

For example, for the money to be available in 2007, you have to be able to pay the bills for 2007 using that money. If you cannot use the money to pay the bills of 2007, then you cannot call it revenue in 2007. What makes this question so tricky is that they call the 2007 sales taxes received in 2007 an “advance” and they receive the 2008 property taxes in 2007.

Because the $25,000 of sales taxes received will be used to pay 2007 bills, you can recognize it as revenue in 2007. But, because the $20,000 of property taxes received will be used to pay 2008 bills, you cannot recognize it as revenue until 2008. Therefore, the best answer is $25,000; the answer is [A].

Some other notes: In this question, Millard City collected the money before December 31, 2007 (the balance sheet date), but that may not be the case in questions on the CPA exam. There are some tricky rules about how quickly you must collect the money after the balance sheet date in order for that money to be “available.” Specifically for property taxes, you must collect the money within 60 days of the balance sheet date; for other types of taxes, you must collect the money within a reasonable time after the balance sheet date, such as 180 days. But, don’t forget . . . you can only call it revenue in that year if you use the money to pay the bills for that year, regardless of how quickly you collect it. Also, under GASB 33, sales taxes are “derived” nonexchange revenues and property taxes are “imposed” nonexchange revenues.

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Have questions? Need help? Take advantage of this opportunity from Yaeger CPA Review.

Here are the guidelines for submitting CPA Exam questions:
1) This is open to all current CPA Exam candidates
2) Questions submitted can only be from the 2009 Wiley CPA Review 4-volume textbooks
3) Questions can only be in multiple choice format, (no simulations)
4) Questions need to be emailed directly to Yaeger CPA Review at phil4help@aol.com

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