Chapter 9 Multiple Choice

1.

Which of the following statements concerning the accounting and financial reporting for capital assets is false?

A.

Capitalization thresholds differ among governments and often within governments among classes of assets.
B.

All capital assets are reported as assets of the purchasing fund.
C.

Proprietary fund capital assets are reported as assets in both the fund financial statements and the government- wide financial statements.
D.

Governments may choose the method of depreciation used for its capital assets.
E.

Governments may choose to use the modified approach in lieu of reporting depreciation for qualifying infrastructure assets.

Correct Answer
B. All capital assets are reported as assets of the purchasing fund.

Explanation
The statement that all capital assets are reported as assets of the purchasing fund is false. In governmental accounting, capital assets are typically reported in the government-wide financial statements, not in the fund financial statements. The fund financial statements focus on the financial activities of individual funds, while the government-wide financial statements provide an overview of the financial position and activities of the entire government.

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2.

Donated capital assets are valued by the recipient government at:

A.

Fair market value at the date of donation.
B.

The original cost of the donated asset per the donor’s records.
C.

The net book value of the asset at the date of donation.
D.

The assessed valuation at the date of donation.
E.

The value of any tax deduction to be claimed by the donor.

Correct Answer
A. Fair market value at the date of donation.

Explanation
When a government receives donated capital assets, it values them at their fair market value at the date of donation. This means that the assets are valued based on the price that they would fetch in the open market at the time of donation. This is the most accurate and objective way to determine the value of the assets. Valuing the assets based on the original cost per the donor's records or the net book value at the date of donation may not reflect their current market value. Similarly, valuing them based on the assessed valuation or the value of any tax deduction to be claimed by the donor may not be accurate or fair. Therefore, fair market value at the date of donation is the correct approach.

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3.

Assume that a building used by Carter County’s police department is totally destroyed by a fire. It is then discovered that the building was not properly insured and that its current net book value was $ 170,000. The controller, Austin Miller, estimated that it will cost $ 350,000 to replace the building. The loss that would be reported in the General Fund for the reporting period in which the fire occurred would be:

A.

$ 170,000 ( current net book value).
B.

$ 350,000 ( estimated replacement cost).
C.

$ 180,000 ( the difference between the net book value and the estimated replacement cost).
D.

$ 0.
E.

None of the above.

Correct Answer
D. $ 0.

Explanation
The correct answer is $ 0. The reason for this is that in governmental accounting, the loss due to the destruction of a capital asset is not recognized or reported in the General Fund. This is because the focus of governmental accounting is on the flow of financial resources rather than the determination of net income or loss. Therefore, even though the building was not properly insured and had a net book value and replacement cost, the loss would not be reported in the General Fund.

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4.

When a capital asset of a department reported in a proprietary fund is transferred to a general government department, the effect of the transaction is reported as:

A.

A transfer in both the proprietary fund and a governmental fund.
B.

A non-operating item in both the proprietary fund and a governmental fund.
C.

A non-operating expense in the proprietary fund ( nothing is reported in any governmental fund).
D.

A transfer out in the proprietary fund ( nothing is reported in any governmental fund).

Correct Answer
C. A non-operating expense in the proprietary fund ( nothing is reported in any governmental fund).

Explanation
When a capital asset of a department reported in a proprietary fund is transferred to a general government department, the effect of the transaction is reported as a non-operating expense in the proprietary fund. This means that the transfer is recorded as an expense in the proprietary fund, indicating a decrease in the value of the asset. However, nothing is reported in any governmental fund, as the transfer does not affect the financial statements of the government as a whole.

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5.

Which of the following is never reported as a general long- term liability?

A.

Capital leases.
B.

Compensated absences.
C.

Certificates of participation.
D.

Advances from other funds.

Correct Answer
D. Advances from other funds.

Explanation
Advances from other funds are not reported as a general long-term liability because they represent funds that have been transferred from one fund to another within the same entity. These transfers do not create a liability for the entity since the funds are still owned by the entity and can be used for future expenditures. Therefore, advances from other funds are not considered a long-term liability and are not reported as such.

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6.

GAAP require all of the following note disclosures for capital assets except:

A.

Current year depreciation expense by function.
B.

A differentiation between depreciable and non-depreciable assets.
C.

Capital assets that will be fully depreciated within one year.
D.

Increase in accumulated depreciation by class of asset.
E.

Retirements by class of asset.

Correct Answer
C. Capital assets that will be fully depreciated within one year.

Explanation
GAAP requires note disclosures for various aspects of capital assets, such as current year depreciation expense by function, a differentiation between depreciable and non-depreciable assets, increase in accumulated depreciation by class of asset, and retirements by class of asset. However, it does not require note disclosures specifically for capital assets that will be fully depreciated within one year.

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7.

Which of the following statements concerning the reporting of general long- term liabilities is true?

A.

General long- term liabilities are reported both in the governmental funds and the government- wide financial statements.
B.

General long- term liabilities are only reported in the government- wide financial statements.
C.

General long- term liabilities are only reported in the governmental funds.
D.

Advances from other funds that are being repaid over a 10- year period would be reported as a general long- term liability.
E.

Items b and d are true statements.

Correct Answer
B. General long- term liabilities are only reported in the government- wide financial statements.

Explanation
This statement is true because general long-term liabilities are not reported in the governmental funds. They are only reported in the government-wide financial statements, which provide a comprehensive view of the government's financial position. This is because general long-term liabilities represent obligations that extend beyond the current fiscal year and are more relevant to the overall financial health of the government.

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8.

In which of the following scenarios would a general long- term liability be reported as a governmental fund liability?

A.

The current portion of long- term debt should always be reported as a governmental fund liability.
B.

Debt that has been defeased in substance
C.

Debt that is in default.
D.

The current portion of refunding bonds.
E.

All of the above.

Correct Answer
C. Debt that is in default.

Explanation
A general long-term liability would be reported as a governmental fund liability if it is in default. This means that the entity has failed to make the required payments on the debt, and it is considered to be in default. In this scenario, the liability would be reported in the governmental fund financial statements to accurately reflect the financial position of the entity.

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