Governmental and notforprofit accounting solution of c7.docx

Governmental and notforprofit accounting solution of c7.docx

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Governmentalandnotforprofitaccountingsolutionofc7

Chapter7

Long-LivedAssetsandInvestmentsinMarketableSecurities

QuestionsforReviewandDiscussion

1.Capitalassetsarenonfinancialresources.Theyareexcludedfromgovernmentalfundsbecausethemeasurementfocusofgovernmentalfundsisuponfinancialresources.Therefore,ingovernmentalfunds,thecostsofcapitalassetsarereportedasexpenditureswhentheassetsareacquiredratherthanfirstcapitalizedasassetsandsubsequentlywritten-offastheassetsareconsumed.

2.AtonetimetheGASBrequiredgovernmentstocapitalizeinterestonprojectsthattheyconstructed.However,GASBStatementNo.34nowspecifiesthatinterestongenerallong-termliabilitiesshouldbeaccountedforasanindirectexpense,ratherthanbeingattributedtospecificfunctionsorprograms,suchaspublicworks.Therefore,interestwouldbereportedasanexpenditureonthecapitalprojectfundstatementofrevenuesandexpendituresandchangesinfundbalanceandasanexpenseinthegovernment-widestatementofactivities.

3.Intheirgovernment-widefinancialstatements,governmentsreportassetsjustasabusinesswould.Thatis,ontheirstatementsofactivitiestheyreportanannualexpensefordepreciation;ontheirstatementsofnetassetstheyreporttheirassetsathistoricalcostlessaccumulateddepreciation.

4.AlthoughtheGASBencouragesgovernmentstocapitalizetheircollectibles,itgivesthemtheoptionofnotdoingsoifcertainconditionsaresatisfied.Theseconditionsincludetherequirementthattheassetsbeusedforpublicexhibitionorresearchratherthanfiscalgainandthatproceedsfromtheirsalebeusedonlytoacquireotheritemsforcollections.

5.Ifagovernmentsatisfiescertainconditions,mainlythatitpreservesitsinfrastructureataspecifiedlevel,thenitneednotchargedepreciation.

6.ManygovernmentofficialshaveobjectedtoStatementNo.34’sinfrastructureprovisionsbecausetheybelievethat:

∙thereisnoreasontocapitalizeinfrastructureassetssincetheycanneitherbesoldnorstolen

∙thevaluesattachedtoinfrastructureassetsarenotmeaningfulandarenotusefulinassessingtheefficiencyandeffectivenesswithwhichtheyareused（e.g.,theyarenotexpectedtogenerateareturnsothatreturnoninvestmentratiosareofnosignificance）

∙thedatawouldnotbeusefultostatementusers;thecoststomaintaintherequiredaccountingrecordsfarexceedsanybenefits.

7.Theinformationis,manybelieve,inadequatetofacilitatedecisionssuchaswhetherassetsshouldbesoldorreplaced,whethertheyarebeingusedefficiently,whetherthecityismaintainingitsassetbaseandwhethertheassetsarebeingadequatelyinsured.Forthesedecisions,theybelieve,dataonmarketvaluesarenecessary.

8.Arepurchaseagreement（referredtoasa“repo”）isashort-terminvestmentinwhichaninvestor（alender）transferscashtoabroker-dealerorotherfinancialinstitutioninexchangeforsecurities.Thebroker-dealerorotherfinancialinstitutionpromisestorepaythecashplusinterestinexchangeforthesame（orinsomecasesdifferent）securities.

Themajorrisktothegovernmentfromarepurchasetransactionisthatthebroker-dealerwillbeunabletorepaythecashandeitherthatthegovernmentwillbeunabletoobtainthesecuritiesorthatthesecuritieswilldecreaseinvalue.Sometimestheriskthatthegovernmentwillbeunabletoobtainthesecuritiescanbeattributedtothegovernment’swillingness,forsakeofconvenience,topermitthebroker-dealerorotherfinancialinstitutioneithertoholdthecollateralsecuritiesitselfortopassthemontoanagentwhoisnotindependent.

9.Marketriskistheriskofchangingprices.Inthecaseoffixedincomesecuritiessuchasbonds,themarketpriceschangemainlyinresponsetoincreasesordecreasesininterestrates.Creditriskistheriskoftheotherpartydefaulting.Legalriskisthatofthetransactionbeingdeterminedtobeprohibitedbylaw,regulationorcontract.IfagovernmentacquiresU.S.governmentbonds,thecreditriskandthelegalrisksaremostlikelytobelow（assumingthatthepurchaserispermittedtopurchaselong-termbonds）.Themarketriskissubstantial,however,inasmuchasthemarketvalueoflong-termbondsisgreatlyaffectedbyevensmallchangesinprevailinginterestrates.

10.Derivativesaredefinedassecuritieswhosevaluedependsupon（isderivedfrom）thatofsomeunderlyingasset（suchasashareofstock）,areferencerate（suchasaprevailinginterestrate）oranindex（suchastheStandard&Poor’sindexofstockprices）.Theyembraceawiderangeofsecurities,includingordinarystockoptions（suchasputsandcalls）,debtinstrumentsthatarebackedbypoolsofmortgages,andinterest-onlyorprincipal-only“strips”（bond-likesecuritiesinwhichtheobligationstopayprincipalandinterestaretradedseparately）.Mostderivativesarehighlyvolatileinstruments,sincetheirmarketpricecanbegreatlyaffectedbyevensmallchangesinthevalueoftheunderlyingassets.

Exercises

EX7-1

1.b

2.c

3.a

4.d

5.c

6.d

7.b

8.a

9.a

10.d

11.c

EX7-2

1.d

2.a

3.d

4.a

5.c

6.c

7.a

8.b

9.b

10.b

EX7-3

a.Governmentalfundentries

（1）

Expenditures—acquisitionsofcomputers$40,000

Cash $40,000

Torecordacquisitionofcomputers

（2）

Expenditures—constructioncosts$245,000

Cash $245,000

Torecordconstructioncosts

（3）

Cash $16,000

Otherfinancingsources—saleofland$16,000

Torecordsaleofland

（4）

Expenditures—acquisitionofvehicle$39,000

Cash $39,000

Torecordtrade-inofoldvehiclefornew

b.Government-widestatemententries

（1）

Computers$40,000

Cash $40,000

Torecordacquisitionofcomputers

（2）

Constructioninprocess$245,000

Cash $245,000

Torecordconstructioncosts

Buildings$2,745,000

Constructioninprocess$2,745,000

Torecordcompletionofjail

（3）

Cash $16,000

Lossonsaleofland12,000

Land $28,000

Torecordsaleofland

（4）

Vehicle—new$52,000

Accumulateddepreciation—oldvehicle10,000

Lossontrade-in4,000

Cash $39,000

Vehicle—old27,000

Torecordtrade-inofoldvehiclefornew

EX7-4

Journalentries

（1）

Building$1,500,000

Bondspayable$1,000,000

Cash 500,000

Torecordtheconstructionofthebuilding

（2）

Depreciationexpense$50,000

Accumulateddepreciation$50,000

Torecorddepreciationforoneyear.Thisentrywouldberepeatedineachoftheasset’s10yearsofusefullife,foratotalof$500,000.

（3）

Bondspayable$750,000

Cash $750,000

Torecordthepartialrepaymentofthebonds

（4）

Building$3,000,000

Cash $3,000,000

Torecordtherenovationofthebuilding

（5）

Depreciationexpense$160,000

Accumulateddepreciation$160,000

Torecorddepreciationforoneyear（thesum,dividedby25years,oftheundepreciatedbalanceof$1,000,000andtherenovationcostsof$3,000,000）.Thisentrywouldberepeatedineachyearoftheasset’s25yearsofusefullifeforatotalof$4,000,000.

（6）

Bondspayable$250,000

Cash $250,000

Torecordrepaymentofthebonds

（7）

Lossonretirementofbuilding$1,600,000

Accumulateddepreciation2,900,000

Building$4,500,000

Toeliminatethebuildingandaccumulateddepreciationandtorecognizethelossonretirement（Accumulateddepreciationequals$500,000ofdepreciationontheoriginalbuildingplus$160,000depreciationfor15years）

EX7-5

1.Journalentries

（1）

Constructioncosts—expenditures$1,500,000

Cash $1,500,000

Torecordbuildingconstructioncosts

（2）

Depreciationisnotrecordedingovernmentalfunds.

（3）

Expenditure—debtservice$750,000

Cash $750,000

Torecordrepaymentofbonds

（4）

Constructioncosts—expenditures$3,000,000

Cash $3,000,000

Torecordbuildingrenovationcosts

（5）

Depreciationisnotrecordedingovernmentalfunds.

（6）

Expenditure—debtservice$250,000

Cash $250,000

Torecordrepaymentofbonds

（7）

Thebuildingwasneverrecordedinagovernmentalfund;henceitcannotberemovedfromagovernmentalfund.

2.Accountingcontrolovertheassetsshouldbeestablishedbyrecordingtheassetsinaledgeror“list”ofsometype.Inthepast,thegeneralfixedassetaccountgroupservedasthislist.Now,however,GASBstandardsnolongeraddresstheformofthisrecord,sinceitisnotrelevantforpurposesofexternalreporting.

EX7-6

1.Theamounttobecapitalizedshouldincludeallcostsnecessarytobringtheassettoaserviceablecondition.Thus:

Actualamountpaid（listpriceless10percentdiscount）$360,000

Transportationcosts12,000

Customizationcosts4,000

Totalcosts$376,000

2.Assetsdonatedbyoutsidersshouldbestatedatthefairmarketvalueattimeofdonation—hence,$1,900,000.

3.IncontrasttoFASBstandardspertainingtocapitalizationofinterest,GASBstandardsprohibitcapitalizationofinterest.Thereforethecityshouldrecordtheassetat$2,000,000.

ContinuingProblem

CityofAustin:

CAFRFY‘08

1.PerNote7,ScheduleofCapitalAssetsandInfrastructureforGovernmentalActivities,Austinincreaseditscapitalassetsingovernmentalactivitieswith$45.078million（nottakingintoaccountdepreciation）.Thedecreasefortheyearwas$3.683million.（p.59）

2.Perthesameschedule,thegovernmentcharged$92.643millionindepreciationtogovernmentalactivities.（p.59）

3.PerNote7,AustinhascapitalizedgovernmentalinfrastructureassetsinaccordancewithGASBStatementNo.34.InasmuchasthereisasubstantialbeginningbalanceintheaccountitisclearthatitcapitalizedtheinfrastructureassetsacquiredpriortotheimplementationofGASB34（p.58）.

4.Asindicatedinthescheduleofcapital