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153 Chapter 7 Solutions Manual

153 Chapter 7 Solutions Manual - Chapter 7 Long-Lived...

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Chapter 7 Long-Lived Assets and Investments in Marketable Securities Questions for Review and Discussion 1. Capital assets are nonfinancial resources. They are excluded from governmental funds because the measurement focus of governmental funds is upon financial resources. Therefore, in governmental funds, the costs of capital assets are reported as expenditures when the assets are acquired rather than first capitalized as assets and subsequently written-off as the assets are consumed. 2. At one time the GASB required governments to capitalize interest on projects that they constructed. However, GASB Statement No. 34 now specifies that interest on general long-term liabilities should be accounted for as an indirect expense, rather than being attributed to specific functions or programs, such as public works. Therefore, interest would be reported as an expenditure on the capital project fund statement of revenues and expenditures and changes in fund balance and as an expense in the government-wide statement of activities. 3. In their government-wide financial statements, governments report assets just as a business would. That is, on their statements of activities they report an annual expense for depreciation; on their statements of net assets they report their assets at historical cost less accumulated depreciation. 4. Although the GASB encourages governments to capitalize their collectibles, it gives them the option of not doing so if certain conditions are satisfied. These conditions include the requirement that the assets be used for public exhibition or research rather than fiscal gain and that proceeds from their sale be used only to acquire other items for collections. 5. If a government satisfies certain conditions, mainly that it preserves its infrastructure at a specified level, then it need not charge depreciation. 6. Many government officials have objected to Statement No. 34’s infrastructure provisions because they believe that: there is no reason to capitalize infrastructure assets since they can neither be sold nor stolen the values attached to infrastructure assets are not meaningful and are not useful in assessing the efficiency and effectiveness with which they are used (e.g., they are not expected to generate a return so that return on investment ratios are of no significance) 7-1
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the data would not be useful to statement users; the costs to maintain the required accounting records far exceeds any benefits. 7. The information is, many believe, inadequate to facilitate decisions such as whether assets should be sold or replaced, whether they are being used efficiently, whether the city is maintaining its asset base and whether the assets are being adequately insured. For these decisions, they believe, data on market values are necessary.
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