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Chapter_5_HW - Chapter 5 Accounting for General Capital...

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Unformatted text preview: Chapter 5 Accounting for General Capital Assets and Capital Projects 201 park and hiking trail improvements and that the existing one—half cent sales tax should continue to support recreational facilities. Required a. Evaluate the advantages and disadvantages of each potential financing option from the viewpoint of (l) a city council member, (2) the city manager, (3) current home- owners and business owners, and (4) potential new homeowners or new business owners. [7. Would accounting for infrastructure construction be impacted by the choice of financing method? Yes or No? Explain. 5—3 Recording and Reporting of Damaged Capital Assets. Recent river flooding damaged a part of the Town of Brownville Library. The library building is over 70 years old and is located in a part of the town that is on the national historic preservation register. Some of the costs related to the damage included the following: 1. The building wiring had to be replaced. Since the wiring was over 20 years old, replacing the wiring allowed the town to bring the wiring up to current code and accommodate the increasing technology needs of the library. 2. A large section of the interior walls (dry—wall) of the library had to be replaced and painted. The same type of material was used in replacing the interior walls. 3. All hardwood floors were replaced with the same materials. 4. Over 30,000 books suffered water damage. Required a. Discuss whether the fact that the library building is in the historic part of town has any role in determining how to record and report the damage and repairs to the library. 17. Discuss how to determine if the library should be considered impaired and, if it is impaired, how accounting and reporting should be handled. 0. Discuss whether you would classify the costs incurred to repair the building as enhancements or replacements. d. What information would you want before determining how to record and report the damage to the books? Exercises and 5—1 Examine the CAFR. Utilizing the CAFR obtained for Exercise l—l, answer these questions. a. General and Other Capital Assets: (1) Reporting of Capital Assets. Are capital assets reported as a line—item in the government—wide statement of net assets? Are nondepreciable cap- ital assets reported on a separate line from depreciable capital assets, or are they separately reported in the notes to the financial statements? Do the notes include capital asset disclosures, such as those for the City and County of Denver shown in Illustration 5—2? Does the disclosure show beginning balances, increases and decreases, and ending balances for each major class of capital assets, as well as the same information for accu— mulated depreciation for each major class? Are these disclosures pre— sented separately for the capital assets of governmental activities, business-type activities, and discretely presented component units? Do the notes specify capitalization thresholds for all capital assets, including infrastructure? Do the notes show the amounts of depreciation expense Problems 202 Part One State and Local Governments (2) Other. Is the accumulated cost 0 b. Capital Projects Funds: (1) Title and Content. What title is give (2) Statements and Schedules. What statemen (3) Financial Resource Inflows. (4) Fund Expenditures. How muc assigned to each major function or program for governmental activities at the government—wide level? Are the depreciation policies and estimated lives of major classes of depreciable assets disclosed? Do the notes include the entity’s policies regarding capitalization of collections of works of art and historical treasures? Are accounting policies disclosed for assets acquired under capital leases? f construction work in progress recorded as an asset anywhere? In your opinion, is the information disclosed about construction work in progress and construction commitments adequate? Which fund, or funds, account for cash received, or receivables created, from sales of general capital assets? Are the proceeds of sales of general financing source or as revenue? capital assets reported as an other ' ' n to the funds that function as capital projects funds, as described in this chapter? (Street Improvement Funds and Capital Improvement Funds are common t'tles, although these titles also are often used for special revenue funds that account for ongoing annual maintenance of roadways.) Where does the report state the basis of accounting used for capital projects funds? Is the basis used consistent with GASB standards discussed in this chapter? Are there separate capital for each project, are there several funds, each of which lated projects, or is only one fund used for all projects? ts and schedules pertaining to projects funds accounts for re capital projects funds are presented? In what respects (headings, arrange— ment, items included, etc.) do they seem similar to statements illustrated or described in the text? In what respects do they differ? Are any differ— ences merely a matter of terminology or arrangement, or do they represent significant deviations from GASB accounting and reporting standards for capital projects funds? What is the nature of the financial resource 'lized by the capital projects funds? If tax-supported bonds or inflows ut1 special assessment bonds are the source, have any been sold at a premium? f the bond At a discount? If so, what was the accounting treatment 0 premium or discount? h detail is given concerning capital projects fund expenditures? Is the detail sufficient to meet the information needs of administrators? Legislators? Creditors? Grantors? Interested residents? For projects that are incomplete at the date of the financial statement, does the report compare the percentage of total authorization for each project expended to date with the percentage of completion? For those projects completed during the fiscal year, does the report compare the total expen— ditures for each project with the authorization for each project? For each cost overrun, how was the overrun financed? (5) Assets Acquired under Capital Leases. Were any general capital assets acquired by the primary government or one or more component units you have state- under a capital lease agreement during the year for which ments? If so, was the present value of minimum lease rentals recorded as an Expenditure and as an fund (or in any other gove one or more component uni Other Financing Source in a capital projects rnmental fund)? If the primary government or ts leased assets from another component unit, the CAFR of the reporting entity? 5—2 Multiple Choice. Choose the best answer. example of an intangible asset? a. A lake located on city property. completely record this transaction? . General Fund: Expenditures ........................ Vouchers Payable .................... b. Governmental Activities: Expenses, ........................... Vouchers Payable .................... c. General Fund: Expenditures ........................ Vouchers Payable .................... Governmental Activities: Expenses ........................... Vouchers Payable .................... 0’. General Fund: Expenditures ........ , ................ Vouchers Payable .................... Governmental Activities: Equipment .......................... Vouchers Payable .................... a. The city’s street lights. b. Purchased computer software. 0. The partially completed city hall. lowing assets? (such as SAP or Oracle). d. Replacing a bridge. Debits 8,000 8,000 8,000 8,000 8,000 3. Which of the following capital assets would not be depreciated? d. The art work owned and displayed in the city parks. 4. A capital projects fund would probably not be used for which of the fol- 8,000 8,000 8,000 8,000 8,000 8,000 Chapter 5 Accounting for General Capital Assets and Capital Projects 203 how are the assets, related liabilities, expenditures, and other financing sources reported in the basic financial statements or in another section of 1. Under GASB standards, which of the following would be considered an 2). Water rights associated with the springs that supply the water to the lake. c. The city’s irrigation system, which uses water from the lake. d. None of the above would be considered an intangible asset. 2. Four new desktop computers, for which the cost exceeded the city’s capital— ization threshold, were purchased for use in the city clerk’s office using Gen— eral Fund resources. Which of the following entries would be required to a. Construction and installation of new shelving in the mayor’s office. b. Financing and construction of three new fire substations. 0. Purchase and installation of an entity-wide integrated computer system 204 Part One State and Local Govemments 5. Machinery and equipment depreciation expense for general capital assets totaled $163,000 for the reporting period. Which of the following correctly defines the recording of depreciation for general capital assets? Debits Credits (1. Depreciation Expenditure ................... 163,000 Accumulated Depreciation ................. 163,000 . Depreciation Expense ...................... 163,000 Machinery and Equipment ................. 163,000 . Depreciation is allocated, and recorded at the government-wide level with a debit to the functions or programs of government and a credit to accu- mulated depreciation. . Since depreciation does not involve the use of financial resources it is not necessary for the government to record it at the fund level or government-wide level. . Which of the following is a correct statement regarding the use of the mod- ified approach for accounting for eligible infrastructure assets? a. Depreciation on eligible infrastructure assets need not be recorded if the assets are being maintained at or above the established condition level. b. Depreciation on eligible infrastructure assets must still be recorded for informational purposes only. . The government must document that it is maintaining eligible infrastruc- ture assets at the condition level prescribed by the GASB. d. All of the above are correct statements. . A government experienced significant loss of certain roadways and bridges as a result of major flooding. Which of the following estimation approaches would be most useful in estimating the amount of asset impairment that has occurred? a. Deflated depreciated replacement cost approach. b. Service units approach. 0. Restorative cost approach. d. None of the above; each of these three approaches would be equally useful. . Callaway County issued $10,000,000 in bonds at 101 for the purpose of con— structing a new County Recreation Center. State law requires that any pre— mium on bond issues be deposited directly in a debt service hand for eventual repayment of bond principal. The journal entry to record issuance of the bonds will require a (an): a. Credit to Bonds Payable in the capital projects fund. b. Credit to Other Financing Sources—Proceeds of Bonds in the capital projects fund. 0. Credit to Other Financing Sources—Premium on Bonds in the debt ser- vice fimd. d. Both b and c are correct. . The primary reason for reestablishing the Encumbrance account balance at the beginning of the second and subsequent years of a multiple—year capital project is that: _ > a. The project continues beyond a single year; thus it is important that the Encumbrances account show the amount of contractual commitment remaining on the project. b. This procedure allows the accountant to record a normal reversal of encumbrances when the next project billing is received. 10. Chapter 5 Accounting for General Capital Assets and Capital Projects 205 c. This procedure corrects for an erroneous closure of the Encumbrances account at the end of the preceding year. (1. Failure to reestablish the Encumbrances account balance is a violation of GASB standards. In 2011 the city started and completed installation of curbs and sidewalks in a new subdivision. The project was funded through special assessments. The first $500,000 installment on $2,500,000 in special assessments was received and recorded in the capital projects fund in 2011. Over the next four years the remaining special assessments are due. How would the receipt of the special assessment funds be recorded in the capital projects fund in 2011? Debits Credits a. Cash ............................. 500,000 Special Assessments Receivable ............ 2,000,000 Revenues ......................... 500,000 Deferred Revenue ................... 2,000,000 b. Cash ............................. 500,000 Revenues ......................... 500,000 c. Cash ............................. 500,000 Other Financing Sources—Assessments ..... 500,000 0’. Cash ............................. 2,500,000 Revenues ......................... 500,000 Due to Debt Service Fund .............. 2,000,000 5—3 General Capital Assets. Make all necessary entries in the appropriate governmental fund general journal and the government-wide governmental activities general journal for each of the following transactions entered into by the City of Fordache. 1. The city received a donation of land that is to be used by Parks and Recre- ation for a park. At the time of the donation, the land had a fair value of $5,200,000 and was recorded on the donor’s books at a historical cost of $4,500,000. The Public Works Department sold machinery with a historical cost of $35,100 and accumulated depreciation of $28,700 for $6,400. The machin- ery had originally been purchased with special revenue funds. . A car was leased for the mayor’s use. Since the term of the lease exceeded 75 percent of the useful life of the car, the lease was capitalized. The first payment was $550 and the present value of the remaining lease payments was $30,000. During the current year, a capital projects fund completed a new public safety building that was started in the prior year. The total cost of the project was $9,720,000. Financing for the project came from a $9,000,000 bond issue that was sold in the prior year, and from a $720,000 federal capital grant received in the current year. Current year expenditures for the project totaled $1,176,000. The full cost is attributed to the building since it was constructed on city-owned property. . Due to technological developments, the city determined that the service capacity of some of the technology equipment used by general government had been impaired. The calculated impairment loss due to technology obso- lescence was $1,156,000. ."1a'. 5—4 Capital Asset Disclosures. Lynn County has prepared the following schedule related to its capital asset activity for the fiscal year 2011. Lynn County has gov— emmental activities only, with no business—type activities. LYNN COUNTY Capital Asset Disclosures For the Year Ended December 31, 2011 January 1 Change December 31 Total capital assets not being depreciated (land, infrastructure, and construction work in progress) $61,721,000 $ 9,158,000 $70,879,000 Total capital assets being ‘ depreciated (buildings, equipment, and collections) 13,421,000 1,647,000 15,068,000 Less total accumulated depreciation (3,464,000) (558,000) (4,022,000) $71,678,000 $10,247,000 $81,925,000 Capital assets, net Required (1. Does the above capital asset f0 requirements? Explain. b. Does the county use the modified app Explain. c. What percentage of the useful life 0 5—5 Capital Assets Acquired under Lease Agreements. Crystal City signed a lease agreement with East Coast Builders, Inc., under which East Coast will con- struct a new office building for the city at a cost of $12 million and lease it to the city for 30 years. The city agrees to make an initial payment of $847,637 and annual payments in the same amount for the next 29 years. An assumed borrowing rate of 6 percent was used in calculating lease payments. Upon com- pletion, the building had an appraised market value of $13 million and an esti- mated life of 40 years. otnote disclosure comply with the GASB roach to account for infrastructure assets? f the depreciable assets remains? Required (1. Using the criteria presented in this chapter, determine whether Crystal City should consider this lease agreement a capital lease. Explain your decision. b. Provide the journal entries Crystal City should make for both the capital projects fund and governmental activities at the government-wide level to record the lease at the date of inception. 5—6 Asset Impairment. On July 20, 2011, the building occupied by Sunshine City’s Parks and Recreation Department suffered severe structural damage as a result of a hurricane. It had been 48 years since a hurricane had hit the Sunshine City area, although hurricanes in Sunshine City’s geographic area are not uncommon. The building had been purchased in 2001 at a cost of $2,000,000 and had accu— mulated depreciation of $500,000 as of July 2011. Based on a restoration cost ate the impairment loss at $230,000; however, the analysis, city engineers estim city expects during the next fiscal year to receive insurance recoveries of $120,000 for the damage. Chapter 5 Accounting for General Capital Assets and Capital Projects 207 Required a. Should the estimated impairment loss be reported as an extraordinary item? As a special item? Explain. b. Record the estimated impairment loss in the journal for governmental activ- ities at the government-wide level. c. How should the insurance recovery be reported in the following fiscal year? (You need not provide the journal entry or entries here.) 5—7 Recording Capital Projects Fund Transactions. In Erikus County, the Parks and Recreation Department constructed a library in one of the county’s high growth areas. The construction was funded by a number of sources. Below is selected information related to the funding and closing of the Library Capital Project Fund. All activity related to the library construction occurred within the 2011 fiscal year. 1. The county issued $6,000,000, 4 percent bonds, with interest payable semi- annually on June 30 and December 31. The bonds sold for 101 on July 30, 2010. Proceeds from the bonds were to be used for construction of the library, with all interest and premiums received to be used to service the debt issue. 2. A $650,000 federal grant was received to help finance construction of the library. 3. The Library Special Revenue Fund transferred $250,000 for use in construc- tion of the library. 4. A construction contract was awarded in the amount of $6,800,000. 5. The library was completed on June 1, 2011, four months ahead of sched- ule. Total construction expenditures for the library amounted to $6,890,000. When the project was completed, the cost of the library was allocated as follows: $200,000 to land, $6,295,000 to building, and the remainder to equipment. 6. The capital projects fund was closed. It was determined that remaining funds were related to the bond issue, and thus they were appropriately transferred to the debt service fund. Required Make all necessary entries in the capital projects fund general journal and the governmental activities general journal at the government—wide level. 5—8 Statement of Revenues, Expenditures, and Changes in Fund Balance. The pre-closing trial balance for the Annette County Public Works Capital Project Fund is provided below. Debits Credits Cash is 701,000 Grant Receivable 500,000 Investments 800,000 Contract Payable $ 835,000 Contract Payable—Retained Percentage 24,000 Resen/e for Encumbrances 1,500,000 Revenues 680,000 Encumbrances 1,500,000 Construction Expenditures 3,338,000 Other Financing Sources—Proceeds of Bonds 3,800,000 $6,839,000 $6,839,000 l. 208 Part One State and Local Governments Required a. Prepare the June 30, 2011, statement of revenues, expenditures, and changes in fund balance for the capital projects fund. b. Has the capital project been completed? Explain your answer. 5—9 Construction Fund. During FY 2011, the voters of the Town of Dex approved constructing and equi...
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