Homework Lance
Accounting for General Capital Assets and Capital Projects Quiz
What are General Capital Assets?
Answer:
General capital assets are long-lived assets used in governmental operations, such as land, buildings, equipment, and infrastructure. They are not associated with proprietary or fiduciary funds but are reported in the government-wide financial statements.
How are general capital assets accounted for?
Answer:
General capital assets are recorded at historical cost, including acquisition costs and any expenditures necessary to prepare the asset for use. If donated, they are recorded at fair market value at the time of donation.
What is the purpose of a capital project fund?
Answer:
A capital project fund is used to account for financial resources specifically designated for the acquisition, construction, or improvement of major capital facilities or assets.
How are expenditures reported in a capital project fund?
Answer:
Expenditures in a capital project fund are reported on a modified accrual basis, recognizing expenditures when the liability is incurred and measurable, rather than when cash is disbursed.
What are some examples of sources of funding for capital projects?
Answer:
- General obligation bonds
- Grants from other governments
- Transfers from other funds
- Special assessments or taxes
How are capital assets depreciated in governmental accounting?
Answer:
Depreciation is recorded only in the government-wide financial statements using the straight-line method over the useful life of the asset. Depreciation is not recorded in governmental fund financial statements.
What is the difference between infrastructure assets and other general capital assets?
Answer:
Infrastructure assets include roads, bridges, and water systems, which are immovable and provide utility over a long time. They can use the modified approach for depreciation if certain conditions are met.
What is the modified approach for reporting infrastructure assets?
Answer:
Under the modified approach, infrastructure assets are not depreciated if the government can demonstrate that the assets are being preserved at a specified condition level and expenditures for maintenance are adequately reported.
What financial statements report general capital assets and capital projects?
Answer:
- Government-Wide Financial Statements: General capital assets and depreciation are reported in the Statement of Net Position and Statement of Activities.
- Governmental Fund Financial Statements: Capital project funds are reported in the balance sheet and statement of revenues, expenditures, and changes in fund balances.
What is the importance of budgeting for capital projects?
Answer:
Budgeting ensures that sufficient resources are allocated for major capital expenditures, promotes fiscal discipline, and aligns spending with long-term strategic goals.
How are long-term liabilities for capital projects reported?
Answer:
Long-term liabilities, such as bonds issued for capital projects, are reported in the government-wide financial statements under the liabilities section. They are not reported in governmental fund statements but disclosed in notes.
What is an encumbrance, and how is it used in capital projects?
Answer:
An encumbrance represents commitments related to unperformed contracts for goods or services. It is used to ensure funds are reserved for specific purposes and not spent elsewhere.
How are construction in progress (CIP) assets recorded?
Answer:
CIP is recorded as a temporary account under general capital assets until the project is completed. Once finished, the balance is transferred to the appropriate asset account.
What are capital grants, and how are they accounted for?
Answer:
Capital grants are financial resources provided to fund specific capital projects. They are recognized as revenues in the capital projects fund when eligibility requirements are met.
Chapter 05
Accounting for General Capital Assets and Capital Projects
True / False Questions
| 1. | General capital assets should be distinguished from capital assets that are specifically associated with activities financed by proprietary and fiduciary funds, since capital assets acquired by proprietary and fiduciary funds are accounted for by those funds.
True False |
| 2. | GASB standards require that all governmental expenditures for long-lived assets be accounted for by a capital projects fund.
True False |
| 3. | If a capital projects fund starts construction of a building in one year and finishes it in a subsequent year an entry must be made in the governmental activities accounts until the building is completed, inspected, and accepted.
True False |
| 4. | The disposal of a general capital asset, resulting in no revenue or expenditure to the government, is recorded only in the governmental activities accounts.
True False |
| 5. | A government must capitalize the cost of improvements such as roads and bridges, because the GASB requires the cost of such assets to be displayed in the basic financial statements.
True False |
| 6. | Depreciation of general capital assets for the period should be reported in the operating statement for governmental activities at the government-wide level.
True False |
| 7. | Governments may choose the modified approach, whereby they are not required to record depreciation on general capital assets.
True False |
| 8. | The cost of the periodic recarpeting of the city mayor’s office should be capitalized in the governmental activities accounts.
True False |
| 9. | A government expended $200,000 to buy land to be used by the city electric utility as a site for an office building. This land should be capitalized in the utility fund, not in the governmental activities accounts.
True False |
| 10. | General capital assets acquired under capital leases should not be recorded in the governmental activities accounts.
True False |
| 11. | Cash discounts available on the purchase of capital assets but not taken should be capitalized as part of the cost of the capital assets.
True False |
| 12. | In addition to required disclosures about general capital assets, a government is required to allocate the depreciation expense on all of its general capital assets to functional categories.
True False |
| 13. | One of the required general capital asset disclosures is a report on the additions to, and deductions from, general capital assets during the course of a fiscal year.
True False |
| 14. | Capital projects funds should use the modified accrual basis of accounting for revenues and expenses.
True False |
| 15. | Capital projects funds generally do not use the Encumbrances Control account.
True False |
| 16. | At the time a bond issue is legally authorized it is usual practice to make either no entry or a memorandum entry in the capital projects fund general journal.
True False |
| 17. | Proceeds of debt issued for the construction or acquisition of capital assets are recognized by the capital projects fund as “other financing sources” and as a liability in the governmental activities journal.
True False |
| 18. | If a bond sale occurs between interest dates, accrued interest sold should be credited to Proceeds of Bonds.
True False |
| 19. | The recorded premium on tax-supported bonds issued should be amortized at the government-wide level in the same manner as a bond premium would be amortized by a business that issued bonds.
True False |
| 20. | Interest incurred on interim or long-term financing during construction of general capital assets cannot be capitalized as part of the cost of those assets.
True False |
| 21. | Construction contracts for governmental projects often provide that a certain percentage of each billing by the contractor will be retained by the government until the project is inspected and accepted upon completion.
True False |
| 22. | When a project has been completed, inspected, and accepted, retained percentages of contract billings may be paid.
True False |
| 23. | Streets, curbs, and sidewalks constructed or acquired through use of capital projects fund resources should never be reported in the financial statements of a government because they are for the use of the public, not for use by the government.
True False |
| 24. | The acquisition of long-lived assets under an operating lease does not require any asset recognition in the accounts of any governmental fund.
True False |
| 25. | Water rights purchased by a city would be considered a capital asset.
True False |
| 26. | Even though the life of a capital projects fund is the life of the project, not year-to-year, operating statement accounts should be closed at year-end to facilitate preparation of year-end financial statements.
True False |
| 27. | If general capital assets are donated, revenue related to the donation is recognized in the governmental fund statement of revenue, expenditures and changes in fund balance.
True False |
| 28. | After all liabilities are paid and the operating statement accounts closed, it is common to transfer any remaining assets of a capital projects fund to the General Fund.
True False |
| 29. | If all asset, liability, and fund equity accounts of a capital projects fund were closed during a certain fiscal year, it is unnecessary to prepare any financial statements for that fund for that year.
True False |
| 30. | Under a service concession arrangement, a government transfers the rights and obligations of an asset to another legally separate governmental or private sector entity.
True False |
Multiple Choice Questions
| 31. | Which of the following would be considered a general capital asset?
|
| 32. | The capital assets used by government departments accounted for in the governmental funds should be reported in
|
| 33. | GASB standards require that
|
| 34. | The following items were included in Prairie City’s General Fund expenditures for the year ended June
How much should be classified as capital assets in Prairie City’s General Fund balance sheet at June 30?
|
| 35. | During the year, a wealthy local merchant donated a building to the city of Pasedena. The original cost of the building was $300,000. Accumulated depreciation at the date of the gift amounted to $250,000. The appraised fair market value of the donation at the date of the gift was $600,000, of which $40,000 was the value of the land on which the building was situated. At what amount should Rosewood record this donated property in the governmental activities accounts at the government-wide level?
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| 36. | During the year, a wealthy local merchant donated a building to the city of Pasedena. The original cost of the building was $300,000. Accumulated depreciation at the date of the gift amounted to $250,000. The appraised fair market value of the donation at the date of the gift was $600,000, of which $40,000 was the value of the land on which the building was situated. At what amount should Rosewood record this donated property in the General Fund?
|
| 37. | Which of the following is not a required disclosure about each major class of capital assets?
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| 38. | The city of Oak Park constructed a new storage facility using the city’s own public works employees. Construction costs were incurred in the amount of $900,000, plus $25,000 in interest on short-term notes used to finance construction. What amount should be capitalized as a general capital asset?
|
| 39. | The following general capital assets were owned by the town of Otterville:
What amount should be recorded as capital assets in the town’s governmental activities accounts if Otterville follows GASB standards?
|
| 40. | Equipment in general governmental service that had been acquired several years ago by a special revenue fund at a cost of $40,000 was sold for $15,000 cash. Accumulated depreciation of $30,000 existed at the time of the sale. The journal entry to be made in the governmental activities journal will include all of the following except
|
| 41. | Equipment in general governmental service that had been acquired several years ago by a special revenue fund at a cost of $40,000 was sold for $15,000 cash. Accumulated depreciation of $30,000 existed at the time of the sale. The journal entry to be made in the special revenue fund will include
|
| 42. | Which of the following funds of a government uses the modified accrual basis of accounting?
|
| 43. | How should a capital lease for a general capital asset be recorded in the governmental activities accounts at the inception of the lease?
|
| 44. | How should a capital lease for a general capital asset be recorded in the General Fund accounts at the inception of the lease?
|
| 45. | The city of Columbus issued bonds at par for the construction of a new city office building. Receipt of the bond proceeds would result in journal entries in which funds?
|
| 46. | A government enters into a capital lease for the purchase of a new fire truck. The present value of the future lease payments is $745,500 and there is a down payment at the inception of the lease of $25,000. The fire truck should be recorded in the General Fund at
|
| 47. | A government enters into a capital lease for the purchase of a new fire truck. The present value of the future lease payments is $745,500 and there is a down payment at the inception of the lease of $25,000. The fire truck should be recorded in the governmental activities accounts at
|
| 48. | With regard to depreciation of general capital assets, which of the following statements is correct?
|
| 49. | A capital projects fund might be used to account for which of the following activities?
|
| 50. | Which of the following is true regarding capital projects funds?
|
| 51. | In 2014, Canon City signed a contract in the amount of $6,000,000 for the construction of a new city hall. Expenditures were $4,000,000 in 2014 and $2,050,000 in 2015, which included a change to the original construction design in the amount of $50,000. What amount should be added to net capital assets in the governmental activities accounts in 2015?
|
| 52. | The sale of tax-supported bonds at par for the eventual construction of a new city jail would require recognition in which of the following funds and/or activities?
|
| 53. | To defray engineering and other preliminary expenses incurred prior to the issuance of a long-term bond issue, a capital projects fund borrowed the sum of $50,000 on a short-term basis from National Bank.This transaction should be recorded in
|
| 54. | Interfund transfers from the General Fund to the capital projects fund to provide partial financing of a capital project would be reported by the capital projects fund as a(an)
|
| 55. | Which of the following is a true statement about governments that issue tax-supported debt to finance capital projects?
|
| 56. | Which of the following statements is correct concerning interest expenditures incurred during the period of construction of capital projects?
|
| 57. | When materials that were ordered for a capital projects fund for use on a construction project are received but the invoice has not yet been paid, what account is debited?
|
| 58. | Which of the following activities or transactions would normally not be accounted for in a capital projects fund?
|
| 59. | A city recorded an asset impairment to a Public Works facility. Which of the following is correct concerning the recording of the amount of the asset impairment?
|
| 60. | Premiums received on tax-supported bonds are generally transferred to what fund?
|
| 61. | Which of the following is not true for capital projects funds?
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| 62. | In late June, the Buildit Construction Co. submitted a $600,000 progress billing on a construction contract. On July 2, the bill was approved for payment, subject to a five percent retention, as provided by the contract. Construction expenditures should be debited when
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| 63. | In late June, the Buildit Construction Co. submitted a $600,000 progress billing on a construction contract. On July 2, the bill was approved for payment, subject to a five percent retention, as provided by the contract. The amount that should be debited to Construction Expenditures is
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| 64. | At the start of a capital lease the journal entry required in the capital projects fund will include which of the following?
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| 65. | For which of the following assets can the “modified approach” be elected in lieu of depreciation?
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| 66. | Which of the following is one of the requirements that must be met to elect the “modified approach” to reporting certain eligible infrastructure assets?
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| 67. | A capital projects fund might be used to record which of the following activities?
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| 68. | The following are the city of Beaver Creek’s capital assets:
What aggregate amount should Beaver Creek record in the governmental activities journal?
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| 69. | When a police vehicle purchased by a government is received, it should be recorded in the governmental activities general journal as a(an)
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| 70. | At the government-wide level, net position related to capital assets should be reported as
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| 71. | Equipment acquired several years ago by a capital projects fund and recorded in the governmental activities general journal was sold. The cash received was considered to be unrestricted revenue. Entries are necessary in the
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| 72. | In which of the following funds or activities general journals would it not be appropriate to record depreciation of capital assets?
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| 73. | The city of Palisades purchased a squad car for the police department. If the operations of the police department are financed by general revenues, which of the following is correct concerning where the purchase of the car would be recorded?
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| 74. | When a government transfers the rights and obligations of an asset to another legally separate governmental or private sector entity, the transaction is referred to as
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| 75. | Under a service concession arrangement,
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Short Answer Questions
| 76. | The following key terms from Chapter 5 relate to general capital assets and capital projects: A. Bond anticipation notes B. Infrastructure assets C. Service Concession Arrangements D. General capital assets E. Capital projects funds F. Asset impairment G. Capital leases H. Operating leases I. Depreciation For each of the following definitions, indicate the key term from the list above that best matches the definition by placing the appropriate letter in the blank space next to the definition. _____ 1. A rental-type lease in which the risks and benefits of ownership are primarily those of the lessor
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Essay Questions
| 77. | One of the common objections to computing depreciation of general capital assets has been that the assets are used for activities that are not expected to generate revenues sufficient to replace the assets; therefore, depreciation expense is not relevant to decisions about the acquisition or use of general capital assets. Evaluate this argument.
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| 78. | “Infrastructure assets (e.g., roads, bridges, curbs and gutters, streets, etc.) need not be capitalized since they are immovable and not likely to be stolen.” Do you agree or disagree? Explain your answer.
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| 79. | “Capital projects funds are established by a government to account for all plant or equipment acquired by construction.” Do you agree? Why or why not?
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| 80. | How should capital assets acquired under a capital lease be recorded in the capital projects fund?
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| 81. | Carsonville is considering the issuance of bonds to fund a capital project. For the following legally feasible bond issue alternatives, discuss the desirability of each alternative from the viewpoint of (1) the official in charge of administering capital projects funds, and (2) taxpayers responsible for repaying the bond issue. a) $5,000,000 face value, 10-year special assessment bonds can be sold at 98 with semiannual interest at the nominal annual rate of 6 percent. The discount would be borne by a debt service fund. b) Same as item a above, except the discount would be borne by the capital projects fund. c) The same bond issue can be sold at 103 with semiannual interest at the nominal rate of 9 percent; the premium would be transferred to the debt service fund. d) Same as item c above, except the premium would be retained by the capital projects fund.
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| 82. | If a city acquires a new office building under a capital lease agreement, 1) The cost of the building should be recorded in the ____________ general journal(s). 2) The “cost” of the building is computed as _______________. 3) A governmental fund should record the cost of the building as an Expenditure, offset by a credit to _______________. 4) The liability for the capital lease should be recorded in the __________ general journal(s). 5) The liability should be computed as _______________.
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| 83. | In the recording of costs of general capital assets, a certain city finance officer instructed the staff:
a) To ignore items costing under $5,000. For each of the three practices listed above, state whether you believe the practice is in conformity with generally accepted accounting principles. Defend your answers.
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| 84. | If bonds sold to finance a project for the construction of general capital assets are sold at a premium, what legal question arises concerning the premium? Discuss the accounting treatment appropriate to two of the common answers to the legal question.
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| 85. | If a capital project is financed partially by use of special assessments, should the capital projects fund recognize revenue from the assessments at the time of the levy or at the time that the assessments are collected? Explain your answer.
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| 86. | If a capital projects fund receives the proceeds of a long-term debt issue that is backed primarily by collections of special assessments, but which is also backed by a primary government in the event that collections of special assessments are insufficient to pay debt service on time, what account should be credited for the debt proceeds, and how should that account be reported in the capital projects fund statement of revenues, expenditures, and changes in fund balance?
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| 87. | The city of McNeely sold bonds in the amount of $10,000,000 to finance the construction of a public health center. The bonds are serial bonds and were sold at par on July 1, 2014 the first day of a fiscal year. Shortly thereafter a construction contract in the amount of $9,000,000 was signed and the contractor commenced work. By year-end the contractor had been paid in full for all billings to date amounting to $4,000,000. Prepare, in general journal form, all journal entries that should have been made during the fiscal year ended June 30, 2015 to record the preceding information in the capital projects fund. (No closing entry is required).
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| 88. | Discuss the required disclosures for capital assets in a government’s notes to the financial statements. |
Chapter 05 Accounting for General Capital Assets and Capital Projects Answer Key
True / False Questions
| 1. | General capital assets should be distinguished from capital assets that are specifically associated with activities financed by proprietary and fiduciary funds, since capital assets acquired by proprietary and fiduciary funds are accounted for by those funds.
TRUE Long-lived assets used by activities financed by the General Fund or other governmental funds are called general capital assets. Capital assets that are specifically associated with activities financed by proprietary and fiduciary funds are not general capital assets. |
| Difficulty: Easy Question Type: Concept |
| 2. | GASB standards require that all governmental expenditures for long-lived assets be accounted for by a capital projects fund.
FALSE If the acquisition of long-lived assets can be financed from use of General Fund or special revenue fund revenues a capital projects fund need not be utilized; for example, the purchase of a computer from General Fund revenues. A capital projects fund should be created to account for resources that are raised for the express purpose of financing the construction or acquisition of capital assets. |
| Difficulty: Easy Question Type: Concept |
| 3. | If a capital projects fund starts construction of a building in one year and finishes it in a subsequent year an entry must be made in the governmental activities accounts until the building is completed, inspected, and accepted.
TRUE In each year during construction, an entry must be made in the general journal of Governmental Activities to record Construction in Progress. During the year the building is completed, Construction in Progress is reclassified to the Building account. |
| Difficulty: Medium Question Type: Concept |
| 4. | The disposal of a general capital asset, resulting in no revenue or expenditure to the government, is recorded only in the governmental activities accounts.
TRUE The transaction would not be recorded in a governmental fund since there is no inflow or outflow of current financial resources. |
| Difficulty: Medium Question Type: Concept |
| 5. | A government must capitalize the cost of improvements such as roads and bridges, because the GASB requires the cost of such assets to be displayed in the basic financial statements.
TRUE GASB standards require that improvements that enhance the utility or life of capital assets be capitalized. |
| Difficulty: Medium Question Type: Concept |
| 6. | Depreciation of general capital assets for the period should be reported in the operating statement for governmental activities at the government-wide level.
TRUE Under GASB standards depreciation expense that can be identified with particular functions or programs and be reported as part of the expenses of those functions or programs in the government-wide statement of activities. Depreciation that cannot be identified with functions or activities may be reported as a separate line item. |
| Difficulty: Medium Question Type: Concept |
| 7. | Governments may choose the modified approach, whereby they are not required to record depreciation on general capital assets.
FALSE Under the modified approach, governments elect not to record depreciation of infrastructure assets if certain requirements are met. Depreciation is recorded for general capital assets other than infrastructure assets. |
| Difficulty: Medium Question Type: Concept |
| 8. | The cost of the periodic recarpeting of the city mayor’s office should be capitalized in the governmental activities accounts.
FALSE Periodic recarpeting does not add to the utility or function of the building nor does it enhance the value of the building, or any other capital assets; therefore, redecorating is not a capitalizable cost. |
| Difficulty: Medium Question Type: Concept |
| 9. | A government expended $200,000 to buy land to be used by the city electric utility as a site for an office building. This land should be capitalized in the utility fund, not in the governmental activities accounts.
TRUE GASB standards require that capital assets acquired by or used by a proprietary fund be accounted for in that fund, thus distinguishing those capital assets from general capital assets. The land would also be reported in the business-type activities accounts. |
| Difficulty: Medium Question Type: Concept |
| 10. | General capital assets acquired under capital leases should not be recorded in the governmental activities accounts.
FALSE General capital assets acquired by capital lease should be capitalized in the governmental activities accounts in the same manner as general capital assets acquired with other resources. |
| Difficulty: Easy Question Type: Concept |
| 11. | Cash discounts available on the purchase of capital assets but not taken should be capitalized as part of the cost of the capital assets.
FALSE Cash discounts, whether or not taken, are not a cost of the asset. Cash discounts taken should be treated as a reduction of cost; those not taken are noncapitalizable expenditures of the governmental fund acquiring the assets. |
| Difficulty: Medium Question Type: Concept |
| 12. | In addition to required disclosures about general capital assets, a government is required to allocate the depreciation expense on all of its general capital assets to functional categories.
FALSE Depreciation is to be included as an expense of a functional category if it can be specifically identified with a function or program, or is a shared capital asset. Depreciation can be reported as a separate line item for capital assets that essentially serve all functions of government (such as city hall). Depreciation on infrastructure can also be reported as a separate line item. |
| Difficulty: Hard Question Type: Concept |
| 13. | One of the required general capital asset disclosures is a report on the additions to, and deductions from, general capital assets during the course of a fiscal year.
TRUE These disclosures are part of the capital asset disclosures shown in Illustration 5-2 for the city of Jacksonville. |
| Difficulty: Medium Question Type: Concept |
| 14. | Capital projects funds should use the modified accrual basis of accounting for revenues and expenses.
FALSE Modified accrual accounting records revenues and expenditures, not expenses. |
| Difficulty: Medium Question Type: Concept |
| 15. | Capital projects funds generally do not use the Encumbrances Control account.
FALSE Contracts and purchase orders for a capital project may be numerous and may be outstanding for several years. Thus, it is recommended that capital projects funds use encumbrance accounting. |
| Difficulty: Easy Question Type: Concept |
| 16. | At the time a bond issue is legally authorized it is usual practice to make either no entry or a memorandum entry in the capital projects fund general journal.
TRUE There are no cash proceeds to be recognized until bonds are actually sold, so it would be inappropriate to make a formal journal entry prior to actual issuance. |
| Difficulty: Easy Question Type: Concept |
| 17. | Proceeds of debt issued for the construction or acquisition of capital assets are recognized by the capital projects fund as “other financing sources” and as a liability in the governmental activities journal.
TRUE The long-term liability would not be recorded in the capital projects fund since it is a governmental fund type. Governmental funds account for only current assets and liabilities. |
| Difficulty: Medium Question Type: Concept |
| 18. | If a bond sale occurs between interest dates, accrued interest sold should be credited to Proceeds of Bonds.
FALSE Accrued interest sold is conceptually an offset against the first semiannual interest payment after the issue; therefore, it should be recorded in a debt service fund rather than a capital projects fund. If this is not possible, the amount collected by the capital projects fund should be recorded as Due to Debt Service Fund, a current liability account, rather than as part of Proceeds of Bonds. |
| Difficulty: Medium Question Type: Concept |
| 19. | The recorded premium on tax-supported bonds issued should be amortized at the government-wide level in the same manner as a bond premium would be amortized by a business that issued bonds.
TRUE It is important to note, however, that the amortization is recorded only at the government-wide level. |
| Difficulty: Medium Question Type: Concept |
| 20. | Interest incurred on interim or long-term financing during construction of general capital assets cannot be capitalized as part of the cost of those assets.
TRUE GASB standards require that interest incurred during the period of construction not be capitalized as part of self-constructed general capital assets. Such interest should be capitalized, however, for self-constructed capital assets of a proprietary fund. |
| Difficulty: Medium Question Type: Concept |
| 21. | Construction contracts for governmental projects often provide that a certain percentage of each billing by the contractor will be retained by the government until the project is inspected and accepted upon completion.
TRUE This provision protects the government from situations in which a contractor may prematurely move equipment and/or personnel from a project, leaving project completion or minor rework to the government. It also avoids or minimizes the necessity of costly lawsuits to enforce full compliance with the contract. |
| Difficulty: Easy Question Type: Concept |
| 22. | When a project has been completed, inspected, and accepted, retained percentages of contract billings may be paid.
TRUE Upon final inspection and acceptance, if it is determined that all work on the project was satisfactorily completed and that no rework is required, there is no legal basis for continuing to retain a portion of the contractual amount. |
| Difficulty: Easy Question Type: Concept |
| 23. | Streets, curbs, and sidewalks constructed or acquired through use of capital projects fund resources should never be reported in the financial statements of a government because they are for the use of the public, not for use by the government.
FALSE GASB standards require infrastructure assets to be reported in the Governmental Activities column of the government-wide statements, in part because the long-term liabilities incurred to finance these projects are recorded. |
| Difficulty: Medium Question Type: Concept |
| 24. | The acquisition of long-lived assets under an operating lease does not require any asset recognition in the accounts of any governmental fund.
TRUE While it is true that there is no need to record an acquisition of an asset or a liability under an operating lease (particularly in a governmental fund, since those funds never report a long-lived asset), scheduled rental payments will be recorded as expenditures and use of cash in the appropriate governmental fund. |
| Difficulty: Medium Question Type: Concept |
| 25. | Water rights purchased by a city would be considered a capital asset.
TRUE As discussed in Chapter five, water rights purchased by the city would be considered an intangible asset, which is a capital asset that does not have physical existence. If such assets are separable from the government, which is the case for water rights, the assets are accounted for like any other capital assets. |
| Difficulty: Easy Difficulty: Medium Question Type: Concept |
| 26. | Even though the life of a capital projects fund is the life of the project, not year-to-year, operating statement accounts should be closed at year-end to facilitate preparation of year-end financial statements.
TRUE A year-end statement for a capital projects fund is in reality interim in the life of the project, but the capital projects fund financial information needs to be combined with that of the other funds and account groups for purposes of preparing the annual financial report. |
| Difficulty: Medium Question Type: Concept |
| 27. | If general capital assets are donated, revenue related to the donation is recognized in the governmental fund statement of revenue, expenditures and changes in fund balance.
FALSE If general capital assets are donated, revenue related to the donation is recognized in the government-wide statement of activities and classified as program revenue or general revenue consistent with the criteria discussed in Chapter 3. Since general capital assets are not recorded in the fund financial statements, no revenue will be recognized within the fund financial statements. |
| Difficulty: Easy Question Type: Medium |
| 28. | After all liabilities are paid and the operating statement accounts closed, it is common to transfer any remaining assets of a capital projects fund to the General Fund.
FALSE Bond indentures usually provide that any portion of bond proceeds not needed for construction be transferred to the fund that will pay the interest on the bonds and redeem the principal upon maturity, the debt service fund in most cases. The disposition of excess amounts received under gifts or grants should be in accord with the wishes of the donors or grantors. |
| Difficulty: Easy Question Type: Concept |
| 29. | If all asset, liability, and fund equity accounts of a capital projects fund were closed during a certain fiscal year, it is unnecessary to prepare any financial statements for that fund for that year.
FALSE Even though no amounts can be shown in a balance sheet, all revenues, other financing sources, expenditures, other financing uses, and changes in fund balance during the year should be reported in the appropriate operating statements. |
| Difficulty: Medium Question Type: Concept |
| 30. | Under a service concession arrangement, a government transfers the rights and obligations of an asset to another legally separate governmental or private sector entity.
TRUE In a service concession arrangement, a government transfers the rights and obligations of an asset to another legally separate governmental or private sector entity. This external entity, the operator, provides public services through the use of the asset, collecting related fees in return for an up-front payment to the transferring government. |
| Difficulty: Easy Question Type: Concept |
Multiple Choice Questions
| 31. | Which of the following would be considered a general capital asset?
|
| Difficulty: Easy Question Type: Concept |
| 32. | The capital assets used by government departments accounted for in the governmental funds should be reported in
|
| Difficulty: Easy Question Type: Concept |
| 33. | GASB standards require that
|
| Difficulty: Easy Question Type: Concept |
| 34. | The following items were included in Prairie City’s General Fund expenditures for the year ended June
How much should be classified as capital assets in Prairie City’s General Fund balance sheet at June 30?
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| Difficulty: Medium Question Type: Concept |
| 35. | During the year, a wealthy local merchant donated a building to the city of Pasedena. The original cost of the building was $300,000. Accumulated depreciation at the date of the gift amounted to $250,000. The appraised fair market value of the donation at the date of the gift was $600,000, of which $40,000 was the value of the land on which the building was situated. At what amount should Rosewood record this donated property in the governmental activities accounts at the government-wide level?
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| Difficulty: Medium Question Type: Concept |
| 36. | During the year, a wealthy local merchant donated a building to the city of Pasedena. The original cost of the building was $300,000. Accumulated depreciation at the date of the gift amounted to $250,000. The appraised fair market value of the donation at the date of the gift was $600,000, of which $40,000 was the value of the land on which the building was situated. At what amount should Rosewood record this donated property in the General Fund?
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| Difficulty: Medium Question Type: Concept |
| 37. | Which of the following is not a required disclosure about each major class of capital assets?
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| Difficulty: Medium Question Type: Concept |
| 38. | The city of Oak Park constructed a new storage facility using the city’s own public works employees. Construction costs were incurred in the amount of $900,000, plus $25,000 in interest on short-term notes used to finance construction. What amount should be capitalized as a general capital asset?
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| Difficulty: Medium Question Type: Concept |
| 39. | The following general capital assets were owned by the town of Otterville:
What amount should be recorded as capital assets in the town’s governmental activities accounts if Otterville follows GASB standards?
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| Difficulty: Medium Question Type: Concept |
| 40. | Equipment in general governmental service that had been acquired several years ago by a special revenue fund at a cost of $40,000 was sold for $15,000 cash. Accumulated depreciation of $30,000 existed at the time of the sale. The journal entry to be made in the governmental activities journal will include all of the following except
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| Difficulty: Medium Question Type: Journal Entry |
| 41. | Equipment in general governmental service that had been acquired several years ago by a special revenue fund at a cost of $40,000 was sold for $15,000 cash. Accumulated depreciation of $30,000 existed at the time of the sale. The journal entry to be made in the special revenue fund will include
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| Difficulty: Medium Question Type: Journal Entry |
| 42. | Which of the following funds of a government uses the modified accrual basis of accounting?
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| Difficulty: Easy Question Type: Concept |
| 43. | How should a capital lease for a general capital asset be recorded in the governmental activities accounts at the inception of the lease?
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| Difficulty: Medium Question Type: Journal Entry |
| 44. | How should a capital lease for a general capital asset be recorded in the General Fund accounts at the inception of the lease?
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| Difficulty: Medium Question Type: Journal Entry |
| 45. | The city of Columbus issued bonds at par for the construction of a new city office building. Receipt of the bond proceeds would result in journal entries in which funds?
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| Difficulty: Medium Question Type: Journal Entry |
| 46. | A government enters into a capital lease for the purchase of a new fire truck. The present value of the future lease payments is $745,500 and there is a down payment at the inception of the lease of $25,000. The fire truck should be recorded in the General Fund at
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| Difficulty: Medium Question Type: Concept |
| 47. | A government enters into a capital lease for the purchase of a new fire truck. The present value of the future lease payments is $745,500 and there is a down payment at the inception of the lease of $25,000. The fire truck should be recorded in the governmental activities accounts at
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| Difficulty: Medium Question Type: Concept |
| 48. | With regard to depreciation of general capital assets, which of the following statements is correct?
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| Difficulty: Medium Question Type: Concept |
| 49. | A capital projects fund might be used to account for which of the following activities?
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| Difficulty: Easy Question Type: Concept |
| 50. | Which of the following is true regarding capital projects funds?
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| Difficulty: Medium Question Type: Concept |
| 51. | In 2014, Canon City signed a contract in the amount of $6,000,000 for the construction of a new city hall. Expenditures were $4,000,000 in 2014 and $2,050,000 in 2015, which included a change to the original construction design in the amount of $50,000. What amount should be added to net capital assets in the governmental activities accounts in 2015?
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| Difficulty: Medium Question Type: Concept |
| 52. | The sale of tax-supported bonds at par for the eventual construction of a new city jail would require recognition in which of the following funds and/or activities?
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| Difficulty: Medium Question Type: Concept |
| 53. | To defray engineering and other preliminary expenses incurred prior to the issuance of a long-term bond issue, a capital projects fund borrowed the sum of $50,000 on a short-term basis from National Bank.This transaction should be recorded in
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| Difficulty: Medium Question Type: Journal Entry |
| 54. | Interfund transfers from the General Fund to the capital projects fund to provide partial financing of a capital project would be reported by the capital projects fund as a(an)
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| Difficulty: Medium Question Type: Concept |
| 55. | Which of the following is a true statement about governments that issue tax-supported debt to finance capital projects?
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| Difficulty: Medium Question Type: Concept |
| 56. | Which of the following statements is correct concerning interest expenditures incurred during the period of construction of capital projects?
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| Difficulty: Easy Question Type: Concept |
| 57. | When materials that were ordered for a capital projects fund for use on a construction project are received but the invoice has not yet been paid, what account is debited?
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| Difficulty: Medium Question Type: Journal Entry |
| 58. | Which of the following activities or transactions would normally not be accounted for in a capital projects fund?
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| Difficulty: Medium Question Type: Concept |
| 59. | A city recorded an asset impairment to a Public Works facility. Which of the following is correct concerning the recording of the amount of the asset impairment?
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| Difficulty: Medium Question Type: Concept |
| 60. | Premiums received on tax-supported bonds are generally transferred to what fund?
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| Difficulty: Medium Question Type: Concept |
| 61. | Which of the following is not true for capital projects funds?
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| Difficulty: Concept Question Type: Medium |
| 62. | In late June, the Buildit Construction Co. submitted a $600,000 progress billing on a construction contract. On July 2, the bill was approved for payment, subject to a five percent retention, as provided by the contract. Construction expenditures should be debited when
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| Difficulty: Medium Question Type: Journal Entry |
| 63. | In late June, the Buildit Construction Co. submitted a $600,000 progress billing on a construction contract. On July 2, the bill was approved for payment, subject to a five percent retention, as provided by the contract. The amount that should be debited to Construction Expenditures is
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| Difficulty: Medium Question Type: Concept |
| 64. | At the start of a capital lease the journal entry required in the capital projects fund will include which of the following?
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| Difficulty: Medium Question Type: Journal Entry |
| 65. | For which of the following assets can the “modified approach” be elected in lieu of depreciation?
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| Difficulty: Easy Question Type: Concept |
| 66. | Which of the following is one of the requirements that must be met to elect the “modified approach” to reporting certain eligible infrastructure assets?
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| Difficulty: Medium Question Type: Concept |
| 67. | A capital projects fund might be used to record which of the following activities?
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| Difficulty: Medium Question Type: Concept |
| 68. | The following are the city of Beaver Creek’s capital assets:
What aggregate amount should Beaver Creek record in the governmental activities journal?
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| Difficulty: Medium Question Type: Concept |
| 69. | When a police vehicle purchased by a government is received, it should be recorded in the governmental activities general journal as a(an)
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| Difficulty: Medium Question Type: Concept |
| 70. | At the government-wide level, net position related to capital assets should be reported as
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| Difficulty: Easy Question Type: Concept |
| 71. | Equipment acquired several years ago by a capital projects fund and recorded in the governmental activities general journal was sold. The cash received was considered to be unrestricted revenue. Entries are necessary in the
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| Difficulty: Medium Question Type: Concept |
| 72. | In which of the following funds or activities general journals would it not be appropriate to record depreciation of capital assets?
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| Difficulty: Easy Question Type: Concept |
| 73. | The city of Palisades purchased a squad car for the police department. If the operations of the police department are financed by general revenues, which of the following is correct concerning where the purchase of the car would be recorded?
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| Difficulty: Medium Question Type: Concept |
| 74. | When a government transfers the rights and obligations of an asset to another legally separate governmental or private sector entity, the transaction is referred to as
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| Difficulty: Easy Question Type: Concept |
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| 75. | Under a service concession arrangement,
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| Difficulty: Hard Question Type: Concept |
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Short Answer Questions
| 76. | The following key terms from Chapter 5 relate to general capital assets and capital projects: A. Bond anticipation notes B. Infrastructure assets C. Service Concession Arrangements D. General capital assets E. Capital projects funds F. Asset impairment G. Capital leases H. Operating leases I. Depreciation For each of the following definitions, indicate the key term from the list above that best matches the definition by placing the appropriate letter in the blank space next to the definition. _____ 1. A rental-type lease in which the risks and benefits of ownership are primarily those of the lessor _____ 2. Short-term interest-bearing instruments issued by a government with a plan to replace with longer-term debt _____ 3. Roads, bridges, curbs and gutters, streets, sidewalks, and drainage systems installed for the common good _____ 4. Capital assets of a government that are not recorded in a proprietary or fiduciary fund _____ 5. Significant, unexpected decline in the service utility of a capital asset |
| Difficulty: Medium Question Type: Concept |
Essay Questions
| 77. | One of the common objections to computing depreciation of general capital assets has been that the assets are used for activities that are not expected to generate revenues sufficient to replace the assets; therefore, depreciation expense is not relevant to decisions about the acquisition or use of general capital assets. Evaluate this argument. |
| Difficulty: Hard Question Type: Analysis |
| 78. | “Infrastructure assets (e.g., roads, bridges, curbs and gutters, streets, etc.) need not be capitalized since they are immovable and not likely to be stolen.” Do you agree or disagree? Explain your answer.
Disagree. Under GASB standards, infrastructure assets are required to be capitalized at the government-wide level. The rationale for capitalizing includes planning for capital asset replacement, projecting future capital financing needs, increasing public awareness of the existence of infrastructure assets and the amounts and sources of investment in such assets. The government has the option of depreciating infrastructure or using the modified approach to reporting certain eligible infrastructure assets. |
| Difficulty: Medium Question Type: Concept |
| 79. | “Capital projects funds are established by a government to account for all plant or equipment acquired by construction.” Do you agree? Why or why not?
Disagree. Capital projects funds are used to account for revenues and other financing sources, and expenditures related to construction or acquisition of general capital assets. The capital projects fund would not account for transactions related to proprietary or fiduciary funds of a government. Nor would it be necessary to use a capital projects fund to account for transactions related to the construction of a capital asset that can be accomplished using resources available in a governmental fund. For example, the construction of a utility shed might easily be funded using resources and labor of the General Fund. Additionally, capital projects funds are not used to account for the capital assets themselves as the quoted statement seems to imply, rather these assets are recorded in the governmental activities accounts at the government-wide level. |
| Difficulty: Medium Question Type: Concept |
| 80. | How should capital assets acquired under a capital lease be recorded in the capital projects fund? |
| Difficulty: Medium Question Type: Concept |
| 81. | Carsonville is considering the issuance of bonds to fund a capital project. For the following legally feasible bond issue alternatives, discuss the desirability of each alternative from the viewpoint of (1) the official in charge of administering capital projects funds, and (2) taxpayers responsible for repaying the bond issue. a) $5,000,000 face value, 10-year special assessment bonds can be sold at 98 with semiannual interest at the nominal annual rate of 6 percent. The discount would be borne by a debt service fund. b) Same as item a above, except the discount would be borne by the capital projects fund. c) The same bond issue can be sold at 103 with semiannual interest at the nominal rate of 9 percent; the premium would be transferred to the debt service fund. d) Same as item c above, except the premium would be retained by the capital projects fund. |
| Difficulty: Hard Question Type: Analysis |
| 82. | If a city acquires a new office building under a capital lease agreement, 1) The cost of the building should be recorded in the ____________ general journal(s). 2) The “cost” of the building is computed as _______________. 3) A governmental fund should record the cost of the building as an Expenditure, offset by a credit to _______________. 4) The liability for the capital lease should be recorded in the __________ general journal(s). 5) The liability should be computed as _______________. |
| Difficulty: Medium Question Type: Concept |
| 83. | In the recording of costs of general capital assets, a certain city finance officer instructed the staff:
a) To ignore items costing under $5,000. For each of the three practices listed above, state whether you believe the practice is in conformity with generally accepted accounting principles. Defend your answers. |
| Difficulty: Medium Question Type: Analysis |
| 84. | If bonds sold to finance a project for the construction of general capital assets are sold at a premium, what legal question arises concerning the premium? Discuss the accounting treatment appropriate to two of the common answers to the legal question. |
| Difficulty: Medium Question Type: Concept |
| 85. | If a capital project is financed partially by use of special assessments, should the capital projects fund recognize revenue from the assessments at the time of the levy or at the time that the assessments are collected? Explain your answer.
Capital projects funds are supposed to use the same basis of accounting as all other governmental funds—modified accrual. Therefore, revenue from assessments (or installments of assessments) that are available for expenditure by capital projects funds should be recognized at the time of the levy, to the extent that the assessments (installments) are expected to be collectible in time to pay fund liabilities. |
| Difficulty: Medium Question Type: Concept |
| 86. | If a capital projects fund receives the proceeds of a long-term debt issue that is backed primarily by collections of special assessments, but which is also backed by a primary government in the event that collections of special assessments are insufficient to pay debt service on time, what account should be credited for the debt proceeds, and how should that account be reported in the capital projects fund statement of revenues, expenditures, and changes in fund balance?
Proceeds of Debt would be an appropriate account title to credit. That account should be reported in the capital projects fund operating statement as an other financing source. |
| Difficulty: Medium Question Type: Concept |
| 87. | The city of McNeely sold bonds in the amount of $10,000,000 to finance the construction of a public health center. The bonds are serial bonds and were sold at par on July 1, 2014 the first day of a fiscal year. Shortly thereafter a construction contract in the amount of $9,000,000 was signed and the contractor commenced work. By year-end the contractor had been paid in full for all billings to date amounting to $4,000,000. Prepare, in general journal form, all journal entries that should have been made during the fiscal year ended June 30, 2015 to record the preceding information in the capital projects fund. (No closing entry is required). |
| Difficulty: Medium Question Type: Journal Entry |
| 88. | Discuss the required disclosures for capital assets in a government’s notes to the financial statements.
There are several required disclosures relating to capital assets in addition to disclosing the general policy for capitalizing assets and estimating the useful lives of depreciable assets. Other disclosures include: (1) beginning-of-year and end-of-year balances showing accumulated depreciation separate from historical cost, (2) capital acquisitions during the year, (3) sales or other dispositions during the year, (4) depreciation expense for the current period with disclosure of the amounts charged to each function in the statement of activities, and (5) the reason why collections of works of art or historical treasures are not capitalized, if any. Also important, assets that are depreciated must be shown separately from assets that are not depreciated. |
| Difficulty: Medium Question Type: Concept |
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