Chapter 5 Case Solutions

CHAPTER 5ACCOUNTING FOR GENERAL CAPITAL ASSETS AND CAPITAL PROJECTS OUTLINE NumberTopicType/T craveStatus (re 13/e) Questions 5-1Distinguishing general gravid assets from fund chapiter letter letter assetsDescribeNew 5-2Capital asset disclosuresExplainNew 5-3Modified allowanceler for homeDescribeNew 5-4Capital submit account statementDescribe5-8 revise 5-5Asset traumaExplainNew 5-6Use of crownwork projects notesExplain5-4 revised 5-7EncumbrancesExplainSame 5-8Construction work in progressExplainNew 5-9Multiple capital projectsExplainSame 5-10Special opinion capital projectsExplainNew Cases 5-1Modified uprise for infrastructure assetsEvaluate, write5-2 5-2Options for backing public infrastructureEvaluate, explainNew 5-3Political versus frugal factors in finance capital improvementsEvaluate, explain5-1 retitled Exercises/Problems 5-1Examine the CAFRExamine5-1 revised 5-2VariousMultiple Choice5-2 revised 5-3General capital assetsJournal EntriesSame 5-4Capital asset di sclosure statementFinancial Statement5-4 revised 5-5Lease classification and accountingCalculate JEsNew -6Asset impairmentJEs ReportingNew 5-7Special sound judgement financingJEs and Explain5-6 revised 5-8Statement of revenues and use of goods and servicessCompute FS5-5 5-9Construction fundJEs & FS5-7 revised 5-10Capital project transactionsJEs & FS5-8 revised CHAPTER 5ACCOUNTING FOR GENERAL CAPITAL ASSETS AND CAPITAL PROJECTS Answers to Questions 5-1. General capital assets atomic number 18 those that atomic number 18 acquired with the resources of governmental funds and that are reported tot some(prenominal)y in the Governmental Activities column of the government-wide monetary statements.Capital assets acquired with the resources of proprietary or fiducial funds are reported in the fiscal statements of those funds, as substanti everyy as in the Business-type Activities column of the government-wide financial statements for enterprise fund capital assets. 5-2. Capital asse t disclosures required by the GASB are quite tumefy illustrated by the City and County of Denvers capital asset disclosures shown in Illustration 5-2.In brief, the disclosures should include policies for capitalizing assets and for estimating the useful lives of depreciable assets. In addition, the disclosures should include (1) beginning-of- family and end-of-year balances showing accumulated depreciation separate from historical cost, (2) capital acquisitions during the year, (3) sales or assorted dispositions during the year, (4) depreciation cost showing amounts charged to for each one function in the statement of activities, and (5) disclosures regarding collections of art or historical treasures. -3. The modified come along permits a government an alternative to depreciation of certain eligible infrastructure assets. suitable assets are parts of major communicates of infrastructure assets or subsystems of ne devilrks, where a network might be a highway system, for e xample. If the government meets two requirements it arsehole avoid account depreciation on its eligible infrastructure assets.The two requirements are (1) oversight of eligible infrastructure assets using a management system that includes an up-to-date inventory of eligible assets, condition assessments and results using a measurement scale, and estimates of annual costs to maintain assets at the established and disclose condition level, and (2) documentation that the assets are being preserved at or above the established condition level. If the government fails to maintain the assets at or above the established condition level, it must(prenominal) revert to reporting depreciation for its nfrastructure assets and discontinue use of the modified approach. 5-4. If the lease meets one or much of the FASB SFAS 13 criteria for a capital lease, as discussed in this chapter, the lease must be reported as a capital lease. If the lease is deemed to be a capital lease, the governmental fund journal immersion on the date of inception entrust include a debit to Expenditures and a Credit to Other financial backing SourcesCapital Lease Agreements.The journal entry at the government-wide level will be the same as that use in business accountinga debit to Equipment and a mention to Capital Lease Obligations Payable. Ch. 5, Answers (Contd) 5-5. Disagree. GASBS 42 requires the government to assess assets for which value might form become impaired. If impairment is judged to have occurred, therefore the amount of impairment loss must be estimated using one of the approaches described in GASBS 42. The amount of loss will be recorded as an expense of the appropriate function or program and as a diminution in the carrying value of the asset. -6. The use of a capital projects fund is unremarkably required for major construction projects requiring heavy(p) amounts of financing. The use of a capital projects fund may also be useful for purchases of high-cost items muc h(prenominal) as acquisitions of land, buildings, and high-cost equipment. A capital projects fund must also be use whenever required by law or grant provisions. 5-7. To facilitate provision of financial statements at the end of the fiscal year, all operating and budgetary accounts should be closed, including Encumbrances.However, since the project is still underway and contractual commitments still hold up to buckle under contractors when billed, it is essential that Encumbrances be reestablished at the beginning of the next year in order to maintain budgetary control over dandy commitments. 5-8. All ordinary and necessary costs to construct the asset are appropriately reported as construction work in progress. This includes all legal costs, engineering and architectural services, site preparation, materials used, and billings from contractors, among other items.Interest incurred during construction is not capitalized for general capital assets, however. Construction Work in Pr ogress is appoint in the ledger for governmental activities at the government-wide level for general capital assets, and not in the ledger for the capital projects fund. In the capital projects fund, all capitalizable items are debited to Construction Expenditures. 5-9. For a multiple-projects fund, encumbrances and construction expenditures should be identified in a manner that will indicate to which project each applies.This groundwork be accomplished by adding a project identifier to the Encumbrances and Construction Expenditures accounts, such as Encumbrances? Street Project or Construction Expenditures? Project no(prenominal) 10. Identifying encumbrances and expenditures by project facilitates comparisons to budget for particular projects and presentation of cash and expenditure statements for multi-project operations. For example, the City of Smithville Continuous Computerized Problem that accompanies this text has two capital projects funds named the Springer Street Projec t and the Alzmann Street Project. 5-10.Capital projects fund accounting for excess assessments is virtually identical in both of these situations. The only difference is that the assign entry for issuance of finicky assessment bonds is to Other Financing Sources division from Property Owners if the government assumes no responsibility for the debt, rather than to Other Financing SourcesProceeds of Special Assessment Bonds with Governmental Commitment. Solutions to Cases 5-1. a. Discuss with students various methods of obtaining financial statements and getting benchmark data to make comparisons across entities.Professional associations such as the Government Finance Officers Association, National Association of State Auditors, Controllers and Treasurers, and Association of trail Business Officials publish best practices for various areas of public finance, accounting, and financial reporting. Since each student will have a distinct list of cities, ask them to compare their resu lts with other students and look for patterns in which types and sizes of governments make similar choices in accounting methods, particularly, in this case, regarding choice of infrastructure asset accounting methods. . An cardinal communication skill for students to master is to convey technical financial accounting information in an effective way so that decision makers muster the information useful for making informed decisions. You may wish to ask students to show their memo or essay to a finance theatre director of a city and get their opinion about whether the student has captured the key issues relating to infrastructure and communicated it in a professional and informative manner. c.During the implementation age of GASBS 34, the GFOA and some state auditors released policy statements indicating to governments that they did not have to capitalize infrastructure assets to meet minimum standards for the GFOAs Certificate of Achievement for Excellence in Financial Reportin g or the states reporting compliance regulations. Despite such statements, most governments that sought a clean audit opinion voluntarily developed inventories of infrastructure and followed GAAP for infrastructure reporting.For most general resolve governments, omitting infrastructure assets would cause their statement of net assets to be materially misstated resulting in a qualified or adverse audit opinion in all likelihood the latter. A government receiving an adverse audit opinion may insure a downgrading of its bond rating and thus face considerably higher(prenominal) cost of borrowing. 5-2a. Option (1), the sales revenue approach, offers the advantage of spreading the charge up for infrastructure improvements across a larger number of evaluatepayers, including many non-residents who blabber or shop in Desert City.From an equity standpoint, the sales valuate approach has appeal because infrastructure improvements enhance the city for visitors and shoppers, as well(p) as for residents. Disadvantages of this approach are the necessity of scheduling and conducting a special election and the political risk of advocating for a measure increase. Option (2), the maturement fee approach, has the advantage of being relatively invisible to the public and cost-effective to administer since the number of developers will be relatively small.Although real acres developers can be expected to pass the development fee to in the altogether homeowners and businesses, property values may be increased by compound infrastructure (e. g. , modify streets and highways, adequate storm drainage, and so forth). As a result, taxpayers may recoup a portion of the development fee. The main loss is the potential inequity of the development Ch. 5, Solutions, Case 5-2 (Contd) fee since a relatively high financial burden is imposed on fresh homeowners and new businesses for infrastructure expansion and improvement that may substantially benefit the perfect city.A city co uncil member may choose the development fee approach since it holds less political risk than asking residents to approve a tax increase. The city manager may prefer the sales tax approach as retail sales may be less inconstant than new construction, which can be strongly impacted by the local, regional, and guinea pig economies. Since the city manager is responsible for ensuring that infrastructure stays abreast of creation and new development, he or she may prefer a more(prenominal) stable source of infrastructure financing.Current homeowners and businesses might be expected to prefer the development fee approach since those fees would not directly impact on their property and would place the incidence of the tax on others. It would be strike if new homeowners or new businesses favored the development fee approach as they would probably view it as inequitable. b. Accounting and financial reporting would be minimally impacted by which option is ultimately chosen. both way, in that location is revenue to be recognized in a capital projects fund (a tax in one case and development fee in the other).Accounting for infrastructure construction would not be affected by the source of financing. 5-3. a. Regardless of how a student voted, he or she had plentitude of company. With a record voter turnout for such an election, the half-cent sales tax was barely approved. Only 51. 7 percent of the voters in Brown County voted for the tax. As expected, 56. 5 percent of the voters in the City of Brownville voted against it. Except for a a couple of(prenominal) precincts in other cities and towns, voters outside Brownville voted overwhelmingly in support of the tax.While there is no pay answer to this question, each student should have provided a rationale similar to one of the arguments provided in the case. A few students may develop unique arguments in support of their vote. Generally, the students who voted for the proposed tax must have thought the county-wide b enefits of improved roads and bridges were worth the extra tax costs and outweighed the possible detrimental effects on the Citys financial flexibility.Those who voted against it presumably did so using the rationale expressed by some voters in exit polls, why should I pay more for roads that will benefit rural county residents more than me. b. Although some students may profess an unselfish motivation for their vote, most are expected to reflect economic rationality. That is, they would plausibly vote for the sales tax increase if they were an owner of a large commercial or manufacturing property, and would therefore realize a net economic benefit from the property tax rollback and sales tax increase.Even then some students may justify the yes vote on the basis of the county-wide benefits of improved infrastructure rather than their financial self-interest. Ch. 5, Solutions, Case 5-3 (Contd) c. Again, there is no right answer to this question. Students (Brownville voters) who vo ted against the tax probably would get by that residents who primarily benefit should pay for the improvements (i. e. , special assessment financing should have been used). Those who voted for the tax probably would argue that the broader (county-wide) economic benefits of improved county infrastructure justifies inancial support by all county residents. round who voted for the tax may have preferred special assessment financing but possibly feared that failure to approve the sales tax would reprobate the needed improvements altogether. d. The Countys procedures for accounting for the financing and the capital projects activities will differ about for the option approved by the voters compared with those that would have been used if special assessment financing had been used.But, as explained in Chapter 5, the procedures for accounting for special assessment-financed capital projects are quite similar to those for other capital projects, especially when, as is very much the cas e, the government is committed in some manner for repaying debt issued for the project. Since bond financing is typically used for special assessment capital projects, accounting for both special assessment taxes and debt service would have been required for an extended period, probably ten years or more.Whether these differences would be termed significant accounting issues is a matter of conjecture they might be considered significant by the financial staff of the County. Solutions to Exercises and Problems 5-1. Each student will have a different annual report, so he or she will have different answers to questions in this exercise. The various kinds of capital assets and capital projects, wide variety of financing mechanisms, and different accounting policies used in and by governments should generate elicit classroom discussions. 5-2. 1. a. 6. c. 2. d. 7. d. 3. c. 8. c. 4. a 9. a. 5. b. 10. c.