In this video, we walk through 5 BAR practice questions on the journal entries to recognize interfund activity. These questions are from BAR content area 3 on the AICPA CPA exam blueprints: State and Local Governments.
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
Journal Entries to Recognize Interfund Activity
State and local governments use separate funds to track resources that are intended for different purposes. Because these funds are part of the same government, money, goods, and services frequently move between them. These movements are known as interfund activities.
Interfund activities are divided into two general categories: reciprocal and nonreciprocal activities. The correct accounting depends on what each fund gives and receives.
Reciprocal and Nonreciprocal Activities
Reciprocal interfund activities involve an exchange between funds. One fund provides resources, goods, or services and expects to receive repayment or something else of similar value in return. Interfund loans and interfund services provided and used are the most common reciprocal activities.
Nonreciprocal interfund activities do not involve an equal exchange. One fund provides resources without receiving repayment or goods and services of similar value in return. Interfund transfers and reimbursements are generally classified as nonreciprocal activities.
Although transfers and reimbursements are both nonreciprocal, they are accounted for differently. A transfer moves resources between funds, while a reimbursement places an expenditure or expense in the fund that is actually responsible for it.
Interfund Loans
An interfund loan occurs when one fund lends money to another fund and expects repayment. The lending fund records a receivable, and the borrowing fund records a payable.
For example, if the General Fund lends $150,000 to a capital projects fund, the General Fund records:
Dr. Due from Other Funds $150,000
Cr. Cash $150,000
The capital projects fund records:
Dr. Cash $150,000
Cr. Due to Other Funds $150,000
The transaction is reciprocal because the capital projects fund is expected to repay the General Fund.
If some or all of the loan is later determined not to be collectible, the unpaid amount should no longer be reported as an interfund receivable and payable. Instead, the two funds reduce those balances and report the amount that is not expected to be repaid as an interfund transfer.
Interfund Services Provided and Used
Interfund services provided and used occur when one fund sells goods or services to another fund for approximately the amount that would be charged in an outside exchange. These activities were previously called quasi-external transactions.
For example, a city’s electric utility enterprise fund may provide electricity to the General Fund. The General Fund records an expenditure or expense for the electricity, while the enterprise fund records operating revenue.
If the electricity costs $45,000, the General Fund records:
Dr. Expenditures $45,000
Cr. Cash or Due to Other Funds $45,000
The enterprise fund records:
Dr. Cash or Due from Other Funds $45,000
Cr. Operating Revenue $45,000
This is not a transfer because the General Fund received a service in exchange for the amount paid.
Interfund Reimbursements
An interfund reimbursement occurs when one fund initially pays an expenditure or expense that properly belongs to another fund. The responsible fund then repays the fund that made the original payment.
Suppose the General Fund pays $60,000 for supplies that are actually the responsibility of a special revenue fund. When the reimbursement is made, the General Fund records:
Dr. Cash $60,000
Cr. Expenditures $60,000
The special revenue fund records:
Dr. Expenditures $60,000
Cr. Cash $60,000
The credit to expenditures removes the cost from the General Fund. The special revenue fund records the expenditure because it is responsible for the supplies.
A reimbursement is not reported as revenue or as a transfer. Its purpose is to place the expenditure or expense in the correct fund.
Interfund Transfers
An interfund transfer moves resources from one fund to another without requiring repayment or an exchange of goods or services. For example, the General Fund may transfer money to a debt service fund so that the debt service fund can make principal and interest payments.
Governmental funds report transfers as other financing sources and other financing uses. The fund providing the resources records an other financing use—transfer out, while the receiving governmental fund records an other financing source—transfer in.
Proprietary funds report transfers separately rather than classifying them as operating revenues or expenses. For example, if the General Fund transfers money to an enterprise fund, the General Fund records an other financing use—transfer out, and the enterprise fund records a transfer in.
The main question is whether repayment, goods, or services are expected. Repayment indicates a loan, an exchange of goods or services indicates an interfund service, repayment of another fund’s cost indicates a reimbursement, and a movement of resources without any exchange generally indicates a transfer.
