25. Sep, 2009 
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.
In December 2007, the general fund of Millard City received $25,000 from the state as an advance on the city’s portion of sales tax revenues, and it received $20,000 from property owners for property taxes to be levied in 2008. The advance payment of sales taxes represented the amount that the state collected in 2007 that would have been distributed to Millard in the early part of 2008.
Millard used the advance to pay for expenditures incurred by the general fund in 2007. The cash received from property owners for property taxes to be levied in 2008 will be used to pay for expenditures incurred in 2008.
In accordance with GASB 33, Accounting and Reporting for Nonexchange Transactions, what amount of revenue from these transactions should be reported by Millard’s general fund on the statement of revenues, expenditures, and changes in fund balances for the year ended December 31, 2007?
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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