Chapter 5 Case Solutions

CHAPTER 5ACCOUNTING FOR GENERAL upper- subject area letter ASSETS AND CAPITAL PROJECTS OUTLINE NumberTopicType/TaskStatus (re 13/e) Questions 5-1Distinguishing usual smashing assets from fund capital assetsDescribeNew 5-2Capital asset disclosuresExplainNew 5-3Modified approach for root wordDescribeNew 5-4Capital lease accountingDescribe5-8 revise 5-5Asset impairmentExplainNew 5-6Use of capital switchs capitalExplain5-4 revised 5-7EncumbrancesExplainSame 5-8 structure work in progressExplainNew 5-9Multiple capital projectsExplainSame 5-10 excess assessment capital projectsExplainNew depicted objects 5-1Modified approach for infrastructure assetsEvaluate, write5-2 5-2Options for support existence infrastructureEvaluate, explainNew 5-3Political versus economic factors in financing 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 disclosure statementFinancial Statement5-4 revised 5-5 exact classification and accountingCalculate JEsNew -6Asset impairmentJEs ReportingNew 5-7Special assessment financingJEs and Explain5-6 revised 5-8Statement of grosss and expendituresCompute FS5-5 5-9 anatomical structure 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 argon those that are acquired with the re starting times of government activityal funds and that are reported only in the Governmental Activities column of the government-wide financial statements.Capital assets acquired with the resources of proprietary or fiduciary funds are reported in the financial statements of those funds, as salubrious as in the seam-type Activities column of the government-wide financial statements for enterprise fund capital assets. 5-2. Capital asset disclosures required by the GAS B are quite well illustrated by the City and County of capital of Colorados 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-year and end-of-year balances presentation accumulated depreciation separate from historical cost, (2) capital acquisitions during the year, (3) sales or other dispositions during the year, (4) depreciation set down showing measurings charged to each function in the statement of activities, and (5) disclosures regarding collections of art or historical treasures. -3. The limited approach permits a government an alternative to depreciation of certain eligible infrastructure assets. Eligible assets are parts of major ne iirks of infrastructure assets or subsystems of scratchworks, where a network efficiency be a route system, for example. If the government meets two requirements it can avoid reporting depreciation on its eligible infrastructure assets.The two requirements are (1) management of eligible infrastructure assets using a management system that includes an up-to-date breed of eligible assets, condition assessments and results using a measurement scale, and estimates of annual cost to maintain assets at the conventional and disclosed condition level, and (2) documentation that the assets are being preserved at or above the accomplished condition level. If the government fails to maintain the assets at or above the established condition level, it must revert to reporting depreciation for its nfrastructure assets and discontinue use of the modified approach. 5-4. If the lease meets one or more 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 entry on the date of inception will in clude a debit to Expenditures and a Credit to Other financial punt SourcesCapital Lease Agreements.The journal entry at the government-wide level will be the same as that used in business accountinga debit to Equipment and a credit to Capital Lease Obligations Payable. Ch. 5, Answers (Contd) 5-5. Disagree. GASBS 42 requires the government to assess assets for which value might consume become impaired. If impairment is judged to have occurred, then 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 schedule and as a reduction in the carrying value of the asset. -6. The use of a capital projects fund is ordinarily required for major construction projects requiring large amounts of financing. The use of a capital projects fund whitethorn also be useful for purchases of high-cost items such(prenominal) as acquisitions of land, buildings, and high-cost equipment. A capital projects fund must also be used whenever required by law or grant provisions. 5-7. To facilitate preparation of financial statements at the end of the fiscal year, each(prenominal) operating and budgetary accounts should be closed, including Encumbrances.However, since the project is still underway and contractual commitments still exist to conciliate contractors when billed, it is essential that Encumbrances be reestablished at the beginning of the next year in order to maintain budgetary control over outstanding 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 Progress is found 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 demeanor that will indicate to which project each applies.This can be accomplished by adding a project identifier to the Encumbrances and Construction Expenditures accounts, such as Encumbrances? Street Project or Construction Expenditures? Project No. 10. Identifying encumbrances and expenditures by project facilitates comparisons to budget for accompaniment 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 Project and the Alzmann Street Project. 5-10.Capital projects fund ac counting for peculiar(a) assessments is virtually identical in both of these situations. The only difference is that the credit entry for issuance of spare assessment bonds is to Other pay SourcesContribution 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 School Business Officials publish best practices for various areas of public finance, accounting, and financial reporting. Since each student will have a different list of cities, ask them to compare their results with other students and look for patterns in which types a nd sizes of governments make alike(p) choices in accounting methods, particularly, in this case, regarding choice of infrastructure asset accounting methods. . An important communication skill for students to stamp down is to convey technical financial accounting information in an effective way so that ending makers find the information useful for making informed decisions. You may wish to ask students to show their memoranda or essay to a finance director of a city and get their opinion around whether the student has captured the fundamental issues relating to infrastructure and communicated it in a professional and informative manner. c.During the implementation years of GASBS 34, the GFOA and more or less state auditors released policy statements indicating to governments that they did not have to capitalize infrastructure assets to meet minimum standards for the GFOAs certification of Achievement for Excellence in Financial Reporting or the states reporting compliance regu lations. Despite such statements, most governments that sought a clean audit opinion voluntarily developed inventories of infrastructure and followed generally accepted accounting principles for infrastructure reporting.For most general purpose governments, omitting infrastructure assets would cause their statement of net assets to be materially misstated resulting in a qualified or adverse audit opinionlikely the latter. A government receiving an adverse audit opinion may experience a downgrading of its bond rating and thus facial expression considerably higher cost of borrowing. 5-2a. Option (1), the sales tax approach, offers the advantage of spreading the burden for infrastructure improvements across a larger number of taxpayers, including many non-residents who visit or shop in vacate City.From an equity standpoint, the sales tax approach has appeal because infrastructure improvements enhance the city for visitors and shoppers, as well as for residents. Disadvantages of this approach are the necessity of scheduling and conducting a circumscribed election and the political hazard of advocating for a tax increase. Option (2), the development fee approach, has the advantage of being relatively invisible to the public and efficient to administer since the number of developers will be relatively small.Although real estate developers can be expected to pass the development fee to rising homeowners and businesses, property values may be change magnitude by enhanced infrastructure (e. g. , improved streets and highways, adequate storm drainage, and so forth). As a result, taxpayers may recoup a portion of the development fee. The main disadvantage is the potential inequity of the development Ch. 5, Solutions, Case 5-2 (Contd) fee since a relatively high financial burden is imposed on untested homeowners and naked businesses for infrastructure expansion and improvement that may substantially benefit the entire city.A city council member may prefer the dev elopment 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 volatile than new construction, which can be strongly wedged by the local, regional, and national economies. Since the city manager is responsible for ensuring that infrastructure stays abreast of population and new development, he or she may prefer a more 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 surprising 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. Either way, on that point is revenue to be recognized in a ca pital 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 plenty of company. With a record voter semi 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 few precincts in other cities and towns, voters right(prenominal) Brownville voted overwhelmingly in support of the tax.While there is no right 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 funny arguments in support of their vote. Generally, the students who voted for the proposed tax must have thought the county-wide benefits of improved roads and bridges were expenditure 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 likely 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 voted against the tax probably would argue that residents who pri marily 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. Some who voted for the tax may have preferred special assessment financing but possibly feared that failure to approve the sales tax would doom the needed improvements altogether. d. The Countys procedures for accounting for the financing and the capital projects activities will differ slightly 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 often the case, the government is committed in some manner for repaying debt issued for t he 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 revolution of financing mechanisms, and different accounting policies used in and by governments should generate interesting classroom discussions. 5-2. 1. a. 6. c. 2. d. 7. d. 3. c. 8. c. 4. a 9. a. 5. b. 10. c.