Accounting For Governmental Nonprofit Entities 18th Edition Test Bank

Accounting for Governmental & Nonprofit Entities 18th Edition Test Bank
Accounting for Governmental & Nonprofit Entities

18th Edition Test Bank
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Accounting for Governmental and Nonprofit Entities, 18e (Reck)
Chapter 5 Accounting for General Capital Assets and Capital Projects
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.
Answer: TRUE
Difficulty: 1 Easy
Topic: Introduction to General Capital Assets
Learning Objective: 05-01 Describe the nature and characteristics of general capital assets.
Bloom's: Remember
AACSB: Knowledge Application
AICPA: FN Reporting
2) GASB standards require that all governmental expenditures for long-lived assets be accounted
for by a capital projects fund.
Answer: FALSE
Difficulty: 1 Easy
Topic: Capital Projects Funds
Learning Objective: 05-03 Explain the purpose and features of a capital projects fund.
Bloom's: Remember
AICPA: FN Reporting
3) General capital assets purchased or constructed with governmental fund resources are recorded
in the governmental activities general ledger at the government-wide level.
Answer: TRUE
Difficulty: 1 Easy
Topic: Accounting for General Capital Assets
Bloom's: Remember
AICPA: FN Reporting
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.
Answer: TRUE
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
1
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No reproduction or distribution without the prior written consent of McGraw-Hill Education.
5) Historical cost includes acquisition cost less any ancillary costs necessary to put the asset into
use.
Answer: FALSE
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
6) Depreciation of general capital assets for the period should be reported in the statement of
activities at the government-wide level.
Answer: TRUE
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
7) GASB allows governments with a population below 100,000 to choose the modified approach,
whereby they are not required to record depreciation on general capital assets.
Answer: FALSE
Difficulty: 1 Easy
Topic: Classification of General Capital Assets
Bloom's: Remember
AICPA: FN Reporting
8) Acquisition of a general capital asset represents an expenditure in a governmental fund, but

requires capitalization of an asset at the government-wide level.
Answer: TRUE
Difficulty: 1 Easy
Learning Objective: 05-02 Account for general capital assets, including acquisition,
maintenance, depreciation, impairment, and disposition.
Bloom's: Remember
AICPA: FN Reporting
2
9) While the GASB encourages capitalization of all collections or individual works of art or
historical treasures, governments can opt not to capitalize if certain conditions exist.
Answer: TRUE
Difficulty: 1 Easy
Topic: Required Disclosures about Capital Assets
Bloom's: Remember
AICPA: FN Reporting
10) General capital assets acquired under lease agreements should not be recorded in the
governmental activities accounts.
Answer: FALSE
Difficulty: 1 Easy
Topic: General Capital Assets Acquired Under Lease Agreements
Bloom's: Remember
AICPA: FN Reporting
11) One of the required general capital asset disclosures is a schedule of the additions to, and
deductions from, general capital assets during the course of a fiscal year.
Answer: TRUE
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
12) General capital assets acquired with capital projects fund resources would be recorded in
essentially the same manner as if they had been acquired by the General Fund.
Answer: TRUE
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
3
13) Capital projects funds should use the accrual basis of accounting.
Answer: FALSE
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
14) Capital projects funds generally do not use the Encumbrances control account.
Answer: FALSE
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
15) In the capital projects fund general journal, Construction Work in Progress is the account used
to capitalize the accumulated cost of partially-completed general capital assets.
Answer: FALSE
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
16) Intangible assets are defined by the GASB as capital assets that lack physical substance, have a
useful life of more than one reporting period, and are nonfinancial in nature.
Answer: TRUE
Difficulty: 1 Easy
Topic: Intangible Assets
Bloom's: Remember
AICPA: FN Reporting
4
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.
Answer: TRUE
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
18) It is common practice for a portion of contractor payments to be withheld in the capital projects
fund until final inspection and acceptance of the asset under construction has occurred.
Answer: TRUE
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
19) The recorded premium on tax-supported bonds issued by a capital projects fund should be
amortized at both the government-wide and fund levels.
Answer: FALSE
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
20) Interest incurred during construction of general capital assets cannot be capitalized as part of
the cost of those assets.
Answer: TRUE
Difficulty: 1 Easy
Bloom's: Understand
AICPA: FN Reporting
5
21) State laws often require that assets no longer needed in a capital projects fund be transferred to
the fund that will service the debt incurred for the project, a debt service fund.
Answer: TRUE
Difficulty: 1 Easy
Learning Objective: 05-05 Prepare financial statements for a capital projects fund.
Bloom's: Remember
AICPA: FN Reporting
22) 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.
Answer: FALSE
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
23) When a government experiences delays associated with a bond issuance, it is common practice
to obtain temporary financing by use of bond anticipation notes.
Answer: TRUE
Difficulty: 1 Easy
Topic: Bond Anticipation Notes Payable
Bloom's: Remember
AICPA: FN Reporting
24) The acquisition of long-lived assets under a lease agreement does not require any asset
recognition in the accounts of any governmental fund.
Answer: TRUE
Difficulty: 1 Easy
Bloom's: Understand
AICPA: FN Reporting
6
25) Water rights purchased by a city would be considered an intangible asset.
Answer: TRUE
Difficulty: 1 Easy
Topic: Intangible Assets
Bloom's: Understand
AICPA: FN Reporting
26) Capital projects funds differ from the General Fund and special revenue funds in that the latter
categories have a year-to-year life, whereas capital projects funds have a project-life focus.
Answer: TRUE
Difficulty: 1 Easy
Topic: Capital Projects Funds; Multiple-Period and Multiple-Project Funds
Bloom's: Remember
AICPA: FN Reporting
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.
Answer: FALSE
Difficulty: 1 Easy
Bloom's: Understand
AICPA: FN Reporting
28) General capital assets financed wholly or partially through collections of special assessments
are recorded in the same manner as any other general capital assets in the governmental activities
category at the government-wide level.
Answer: TRUE
Difficulty: 1 Easy
Topic: Capital Projects Financed by Special Assessments
Bloom's: Understand
AICPA: FN Reporting
7
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.
Answer: FALSE
Difficulty: 2 Medium
Topic: Illustrative Financial Statements for a Capital Projects Fund
Bloom's: Remember
AICPA: FN Reporting
30) Under a service concession arrangement, a government transfers the rights and obligations of
an asset to another legally separate government or private sector entity.
Answer: TRUE
Topic: Service Concession Arrangement
Bloom's: Remember
AICPA: FN Reporting
31) Which of the following would be considered a general capital asset?

A) A vehicle purchased from General Fund revenues.
B) A vehicle purchased and maintained by an enterprise fund.
C) A computer purchased from revenues of an internal service fund and used by the supplies
department.
D) Real estate purchased with the assets of a pension trust fund.
Answer: A
Difficulty: 1 Easy
Bloom's: Understand
AICPA: FN Reporting
8
32) Capital assets used by governmental funds should be reported in:
A) The appropriate governmental funds.
B) The property, plant, and equipment fund.
C) Departmental memorandum records.
D) The governmental activities column of the government-wide statements.
Answer: D
Difficulty: 1 Easy
Bloom's: Understand
AICPA: FN Reporting
33) GASB standards require that general capital assets be recorded in the fund statements at:
A) Historical cost.
B) Fair value at the financial statement date.
C) Estimated cost at the financial statement date.
D) None of the options are correct.
Answer: D
Bloom's: Understand
AICPA: FN Reporting
34) GASB standards require that general capital assets be recorded in the government-wide
statements at:
A) Historical cost.
B) Fair value at the financial statement date.
C) Estimated cost at the financial statement date.
D) None of the options are correct.
Answer: A
Bloom's: Understand
AICPA: FN Reporting
9
35) The following items were included in Castle City's General Fund expenditures for the year
ended June.
Personal computer for the city treasurer $ 6,000

Furniture for the mayor's office $ 20,000
How much should be classified as capital assets in Castle City's General Fund balance sheet at
June 30?
A) $0.
B) $6,000.
C) $20,000.
D) $26,000.
Answer: A
Bloom's: Understand
AICPA: FN Reporting
36) The following items were included in Castle City's General Fund expenditures for the year
ended June
Personal computer for the city treasurer $ 6,000

Furniture for the mayor's office $ 20,000
How much should be classified as capital assets in Castle City's government-wide statement of net
position at June 30?
A) $0.
B) $6,000.
C) $20,000.
D) $26,000.
Answer: D
Bloom's: Understand
AICPA: FN Reporting
10
37) During the year, a wealthy local merchant donated a building to the City of Rosewood. 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. At what amount should this contribution be recorded in the governmental activities
accounts at the government-wide level?
A) $50,000.
B) $300,000.
C) $600,000.
D) $0.
Answer: C
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
38) During the year, a wealthy local merchant donated a building to the city of Rosewood. 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. At what amount should Rosewood record this donated property in the General Fund?
A) $50,000.
B) $300,000.
C) $600,000.
D) $0.
Answer: D
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
11
39) Which of the following is not a required disclosure about each major class of capital assets?
A) Beginning-of-year and end-of-year balances showing accumulated depreciation separate from
historical cost.
B) Capital acquisitions and sales or other dispositions during the year showing the date and method
of acquisition or disposition.
C) Depreciation expense for the current period with disclosure of the amounts charged to each
function in the statement of activities.
D) Disclosures describing works of art or historical treasures that are not capitalized and
explaining why they are not capitalized.
Answer: B
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
40) 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 in the
government-wide statements?
A) $900,000.
B) $925,000.
C) $875,000.
D) $0.
Answer: A
Bloom's: Understand
AICPA: FN Reporting
12
41) The following general capital assets were owned by the Town of Otterville:
Town buildings $ 3,250,000

Intangible assets 1,000,000
Streets, sidewalks, and water lines 2,000,000
What amount should be recorded as capital assets in the town's governmental activities accounts?
A) $0.
B) $3,250,000.
C) $5,250,000
D) $6,250,000
Answer: D
Bloom's: Understand
AICPA: FN Reporting
42) Equipment 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:
A) A debit to Cash for $15,000.
B) A debit to Accumulated Depreciation for $30,000.
C) A credit to Equipment for $40,000.
D) A credit to Other Financing Sources for $5,000.
Answer: D
Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund
level and within the governmental activities category at the government-wide level.
Bloom's: Understand
AICPA: FN Reporting
13
43) Equipment 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:
A) A debit to Cash for $15,000.
B) A debit to Accumulated Depreciation for $30,000.
C) A credit to Equipment for $40,000.
D) A credit to Other Financing Sources for $5,000.
Answer: A
Bloom's: Understand
AICPA: FN Reporting
44) How should a lease for a general capital asset be recorded in the governmental activities
accounts at the inception of the lease?
A) Debit to a lease asset account.
B) Debit to a capital expense/expenditure account.
C) Credit to Lease Obligations Payable.
D) Both Debit to a lease asset account and Credit to Lease Obligations Payable are correct.
Answer: D
Bloom's: Understand
AICPA: FN Reporting
14
45) How should a lease for a general capital asset be recorded in the General Fund accounts at the
inception of the lease?
A) Debit to a lease asset account.
B) Debit to a capital expenditure account.
C) Credit to Lease Obligations Payable.
D) Both Debit to a lease asset account and Credit to Lease Obligations Payable are correct.
Answer: B
Bloom's: Understand
AICPA: FN Reporting
46) The City of Castle Rock 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?
A) Capital Projects Fund: Yes; Debt Service Fund: No
B) Capital Projects Fund: No; Debt Service Fund: Yes
C) Capital Projects Fund: Yes; Debt Service Fund: Yes
D) Capital Projects Fund: No; Debt Service Fund: No
Answer: A
Bloom's: Understand
AICPA: FN Reporting
15
47) A government enters into a lease agreement for the purchase of a new snow plow. The present
value of the future lease payments is $845,500 and there is a down payment at the inception of the
lease of $25,000. The snow plow should be recorded in the General Fund at:
A) $25,000.
B) $870,500.
C) $845,500.
D) $0.
Answer: D
Bloom's: Understand
AICPA: FN Reporting
48) A government enters into a lease agreement for the purchase of a new snow plow. The present
value of the future lease payments is $845,500 and there is a down payment at the inception of the
lease of $25,000. The snow plow should be recorded in the government-wide statement of net
position at:
A) $25,000.
B) $870,500.
C) $845,500.
D) $0.
Answer: B
Bloom's: Understand
AICPA: FN Reporting
16
49) Which of the following statements is correct regarding depreciation?
A) Depreciation expense should be recorded in the appropriate governmental funds, and recorded
in the governmental activities accounts.
B) Depreciation expense must be recorded in the governmental fund, but no depreciation expense
is recorded in the governmental activities accounts.
C) No depreciation can be recorded in any governmental fund, but depreciation expense must be
recorded in the governmental activities accounts.
D) No depreciation can be recorded in any governmental fund, nor is it permissible to record
depreciation expense in the governmental activities accounts.
Answer: C
Bloom's: Understand
AICPA: FN Reporting
17
50) Four new computers, for which the cost exceeded the city's capitalization threshold, were
purchased for use in the city clerk's office using General Fund resources. Which of the following
entries would be required to completely record this transaction?
A)
General Journal Debit Credit
General Fund:
Expenditures 8,000
Vouchers Payable 8,000
B)
Governmental Activities:
Expenses 8,000
C)
General Fund:
Expenditures 8,000
Expenses 8,000
D)
General Fund:
Expenditures 8,000
Equipment 8,000
Answer: D
Bloom's: Understand
AICPA: FN Reporting
18
51) A capital projects fund might be used to account for which of the following activities?
A) Maintaining sidewalks.
B) Building a parking garage.
C) Providing water and sewer services.
D) Servicing long-term debt.
Answer: B
Bloom's: Understand
AICPA: FN Reporting
52) Which of the following is true regarding capital projects funds?

A) Encumbrances accounting is employed.
B) Encumbrances accounting is not normally employed, but Appropriations are recorded.
C) No budgetary accounts are used.
D) All budgetary accounts are employed and budget to actual statements are prepared.
Answer: A
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
53) In 2020, Sunrise City signed a contract in the amount of $8,000,000 for the construction of a
new city hall. Expenditures were $4,000,000 in 2020 and $2,050,000 in 2021, which included a
change to the original construction design in the amount of $50,000. What amount should be added
to capital assets in the governmental activities accounts in 2021?
A) $0
B) $50,000
C) $2,050,000
D) $2,000,000
Answer: C
Bloom's: Understand
AICPA: FN Reporting
19
54) To offset engineering and design costs incurred prior to the issuance of a long-term bond issue,
a capital projects fund borrowed the sum of $75,000 on a short-term basis from First National
Bank. This transaction should be recorded in:
A) The capital projects fund.
B) The debt service fund.
C) The special revenue fund.
D) None of the options are correct. Debt is not recorded in governmental funds.
Answer: A
Bloom's: Understand
AICPA: FN Reporting
55) 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):
A) Fund balance addition.
B) Revenue.
C) Other financing source.
D) Current liability.
Answer: C
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
20
56) Which of the following statements is correct concerning interest expenditures incurred during
the period of construction of capital projects?
A) Interest expenditures may not be capitalized as part of the cost of general capital assets reported
in governmental activities.
B) Interest expenditures may be capitalized as part of the cost of general capital assets reported in
the governmental activities accounts at the government-wide level.
C) Interest expenditures must be capitalized as part of the cost of general capital assets reported in
the capital projects fund.
D) The capitalization of interest expenditures as part of the cost of general capital assets reported
in the capital projects fund is optional.
Answer: A
Bloom's: Understand
AICPA: FN Reporting
57) When part of a progress payment for construction is withheld until final settlement of the
contract, what account is credited?
A) Encumbrances.
B) Appropriations.
C) Contracts Payable—Retained Percentage.
D) Construction Expenditures.
Answer: C
Difficulty: 1 Easy
Topic: Retained Percentages
Bloom's: Remember
AICPA: FN Reporting
21
58) The following balances are included in the subsidiary records of Carrollwood:
Town hall building $ 500,000

Town pool (supported by user fees) 100,000
Police cars 20,000
Equipment 7,500
Office supplies 1,000
What is the total amount of general capital assets held by the town?
A) $527,500.
B) $528,500.
C) $627,500.
D) $628,500.
Answer: A
Bloom's: Understand
AICPA: FN Reporting
59) Which of the following activities or transactions would normally not be accounted for in a
capital projects fund?
A) Construction of a new city jail.
B) Construction of airport runways financed by revenue bonds and to be repaid from the revenues
of the city airport, an enterprise fund.
C) Lease of a building to be used as a city office building.
D) Construction of a new city park to be maintained primarily from General Fund revenues.
Answer: B
Bloom's: Understand
AICPA: FN Reporting
22
60) 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?
A) The General Fund would record a debit to Expenditures.
B) The General Fund would record a debit to Other Financing Uses—Loss due to Impairment.
C) The governmental activities accounts would record a debit to Loss due to Impairment.
D) The governmental activities accounts would record a debit to Expenses—Public Works.
Answer: D
Topic: Asset impairments and Insurance Recoveries
Bloom's: Understand
AICPA: FN Reporting
61) A government experienced significant loss of certain roadways and bridges as a result of major
flooding. Which of the following estimation approaches would be most useful in estimating the
amount of asset impairment that has occurred?
A) Deflated depreciated replacement cost approach.
B) Service units approach.
C) Restorative cost approach.
D) Each of these three approaches would be equally useful.
Answer: C
Topic: Asset impairments and Insurance Recoveries
Bloom's: Understand
AICPA: FN Reporting
62) Premiums received on tax-supported bonds are generally transferred to what fund?
A) Internal service fund.
B) Debt service.
C) General.
D) Special revenue.
Answer: B
Difficulty: 1 Easy
Topic: Bond Premium, Discount, and Accrued Interest on Bonds Sold
Bloom's: Remember
AICPA: FN Reporting
23
63) Governments can opt not to capitalize collections or individual works of art or historical
treasures if the collection is:
A) Held for public exhibition, education, or research in furtherance of public service rather than for
financial gain.
B) Protected, kept unencumbered, cared for, and preserved.
C) Subject to an organizational policy that requires the proceeds from sales of collection items to
be used to acquire other items for collections.
D) All of the options are correct.
Answer: D
Bloom's: Remember
AICPA: FN Reporting
64) Which of the following is not true for capital projects funds?
A) Capital projects funds use a Construction Work in Progress account to record costs until the
project is completed.
B) Encumbrance accounting is generally used.
C) Capital projects funds use the modified accrual basis of accounting.
D) Capital projects funds have a project-life focus.
Answer: A
Bloom's: Understand
AICPA: FN Reporting
24
65) In late April, the Acme Construction Co. submitted a $1,200,000 progress billing on a
construction contract. On May 2, the bill was approved for payment, subject to a ten percent
retention, as provided by the contract. Construction expenditures should be debited when:
A) The bill is approved for payment.
B) The contract is signed.
C) The bill is paid (except for the ten percent retention).
D) The final ten percent of the bill is paid.
Answer: A
Bloom's: Remember
AICPA: FN Reporting
66) In late April, the Acme Construction Co. submitted a $1,200,000 progress billing on a
construction contract. On May 2, the bill was approved for payment, subject to a ten percent
retention, as provided by the contract. The amount that should be debited to Construction
Expenditures is:
A) $0.
B) $12,000.
C) $1,080,000.
D) $1,200,000.
Answer: D
Bloom's: Understand
AICPA: FN Reporting
25
67) At the inception of a lease for equipment the journal entry required in the capital projects fund
will include which of the following?
A) A debit to Equipment.
B) A debit to Lease Expense.
C) A credit to Obligations under Leases.
D) A credit to Other Financing Sources—Lease Agreement.
Answer: D
Bloom's: Understand
AICPA: FN Reporting
68) Which of the following is not a requirement that must be met to elect the "modified approach"
to reporting certain eligible infrastructure assets?
A) The government gets the permission of the Government Accounting Standards Board.
B) The government documents that the eligible infrastructure assets are being preserved
approximately at (or above) the condition level established and disclosed.
C) The government manages the assets using an asset management system that includes condition
assessments of the assets and summary of results using a measurement scale.
D) The government manages the assets using an asset management system that includes estimates
each year of the annual amount needed to maintain and preserve the eligible assets at the condition
level established and disclosed by the government.
Answer: A
Topic: Infrastructure Assets
Bloom's: Understand
AICPA: FN Reporting
26
69) When a snowplow is purchased by a government, it should be recorded in the governmental
activities general journal as a(an):
A) Expenditure.
B) Capital asset.
C) Appropriation.
D) Expense.
Answer: B
Bloom's: Understand
AICPA: FN Reporting
70) A general capital asset constructed several years ago by a capital projects fund was sold by the
General Fund. Entries are necessary in the:
A) General Fund only.
B) General Fund and the capital projects fund.
C) General Fund and governmental activities.
D) Governmental activities only.
Answer: C
Bloom's: Understand
AICPA: FN Reporting
71) In which of the following would it not be appropriate to record depreciation of capital assets?
A) Capital projects fund.
B) Internal service fund.
C) Business-type activities.
D) Governmental activities.
Answer: A
Difficulty: 1 Easy
Bloom's: Understand
AICPA: FN Reporting
27
72) The Town of Golden 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 capital asset would be recorded?
A) General Fund: No; Governmental Activities: Yes
B) General Fund: No; Governmental Activities: No
C) General Fund: Yes; Governmental Activities: No
D) General Fund: Yes; Governmental Activities: Yes
Answer: A
Bloom's: Understand
AICPA: FN Reporting
73) Which of the following statements regarding capital assets is not true?
A) Proprietary funds routinely account for capital assets used in their operations within the fund
financial statements.
B) Fiduciary funds do not account for property, plant, and equipment within the fund financial
statements.
C) Because governmental funds account only for current financial resources, these funds do not
record capital assets acquired by the funds.
D) General capital assets purchased or constructed with governmental fund resources are recorded
in the governmental activities general ledger at the government-wide level.
Answer: B
Bloom's: Understand
AICPA: FN Reporting
28
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:
A) A special assessment arrangement.
B) An infrastructure agreement.
C) A service concession arrangement.
D) A sale-leaseback agreement.
Answer: C
Difficulty: 1 Easy
Bloom's: Understand
AICPA: FN Reporting
75) Under a service concession arrangement:

A) The transferring government continues to report the transferred asset as a capital asset and any
related contractual obligations as liabilities.
B) The operating government will record the transferring government's payment or receivable, a
liability for the present value of significant contractual obligations and a corresponding deferred
inflow of resources for the difference between the two.
C) Any deferred inflow of resources is recognized as revenue at the time the arrangement takes
place.
D) All of the given statements are true.
Answer: A
Bloom's: Understand
AICPA: FN Reporting
29
76) For each of the following definitions, select the key term from the list that 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. Intangible assets
H. Depreciation
________ 1. Assets that lack physical substance and are nonfinancial in nature
________ 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
Answer: 1. G, 2. A, 3. B, 4. D, 5. F
Explanation: No further explanation details are available for this problem.
Difficulty: 1 Easy
Topic: General Capital Assets
Bloom's: Remember
AICPA: FN Reporting
30
77) If a city's General Fund acquires a new copier under a lease agreement:
1) The cost of the copier should be recorded in the ________ general journal(s).
2) The "cost" of the copier is computed as ________.
3) A governmental fund should record the cost of the copier as an Expenditure, offset by a credit to
________.
4) The liability for the lease should be recorded in the ________ general journal(s).
5) The liability should be computed as ________.
Answer:
1) General Fund and governmental activities.
2) The present value of rentals and other minimum lease payments, or the fair value of the leased
property, whichever is less.
3) Other financing sources—lease agreements.
4) Governmental activities.
5) The present value of rentals and other minimum lease payments.
Bloom's: Understand
AICPA: FN Reporting
78) What is the difference between using the modified approach to accounting for infrastructure
assets and depreciating infrastructure assets?
Answer: The modified approach to accounting for infrastructure assets does not record an
adjusting entry recognizing depreciation expense and accumulated depreciation. Rather the
government reports, as an expense, the costs of maintaining the infrastructure assets at an
established level or condition. By doing this the book value of the infrastructure asset remains
unchanged (i.e., there is no accumulated depreciation). This is unlike the depreciation method,
whereby the book value of the infrastructure assets decreases each time depreciation expense is
recorded.
Topic: Accounting for General Capital Assets; Infrastructure Assets
Bloom's: Understand
AICPA: FN Reporting
31
79) Under the modified approach, what happens if infrastructure assets are not maintained at or
above the established condition level?
Answer: If the government fails to maintain the assets at or above the established condition level,
it must revert to reporting depreciation for its infrastructure assets and discontinue use of the
modified approach.
Topic: Accounting for General Capital Assets; Infrastructure Assets
Bloom's: Understand
AICPA: FN Reporting
80) If bonds are sold at a premium to finance a capital project, what important question arises
concerning the premium? Discuss the proper accounting for a bond premium in the capital projects
fund, the debt service fund, and the government-wide statements assuming that the premium must
be reserved for debt service.
Answer: If bonds sold to finance the construction of general capital assets are sold at a premium,
the question arises as to whether or not the initial issue premium is required to be set aside for debt
service or may remain in the capital projects fund. If bond indentures require that initial issue
premiums be used for debt service, only the par value of the bonds is considered as an other
financing source of the capital projects fund, and the premium is considered as an other financing
source of the debt service fund. At the government-wide level, a premium would be recorded and
should be amortized over the life of the bonds.
Topic: Bond Premium, Discount, and Accrued Interest on Bonds Sold
Bloom's: Understand
AICPA: FN Reporting
32
81) Which expenditures of a capital projects fund should be capitalized to Construction Work in
Progress? Is Construction Work in Progress included in the chart of accounts of a capital projects
fund? If not, where would it be found?
Answer: All ordinary and necessary costs to construct or acquire 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. This capital asset account is not found in the
ledger of the capital projects fund. In the capital projects fund, all capitalizable items are debited to
Construction Expenditures.
Topic: Accounting for General Capital Assets; Classification of General Capital Assets
Bloom's: Understand
AICPA: FN Reporting
33
82) The City of McNeely sold bonds in the amount of $25,000,000 to finance the construction of a
public health center. The bonds are serial bonds and were sold at par on January 1, the first day of
a fiscal year. Shortly thereafter a construction contract in the amount of $22,000,000 was signed
and the contractor commenced work. By year-end the contractor had been paid in full for all
billings to date amounting to $12,000,000.
Prepare, in general journal form, all journal entries that should have been made during the fiscal
year ended December 31 to record the preceding information in the capital projects fund. (No
closing entry is required).
Answer: CAPITAL PROJECTS FUND
Debits Credits
CASH 25,000,000
OTHER FINANCING SOURCES–
PROCEEDS OF BONDS 25,000,000
ENCUMBRANCES 22,000,000
ENCUMBRANCES OUTSTANDING 22,000,000

CONSTRUCTION EXPENDITURES 12,000,000

CONTRACTS PAYABLE 12,000,000

FUND BALANCE–RESTRICTED 13,000,000
Explanation: No further explanation details are available for this problem.

Difficulty: 3 Hard
Bloom's: Understand
AICPA: FN Reporting
34
83) Prepare journal entries for the following related transactions in the fund and activity journals
affected: (If no entry is required for a transaction/event, select "No Journal Entry Required"
in the first account field.)
1. A capital projects fund issued $5,000,000, 4 percent bonds for $5,050,000 to finance
improvements of a park. Premiums received are to be used to service the debt issue.
2. The Parks and Recreation Special Revenue Fund transferred $250,000 for use in construction.
3. A construction contract was awarded in the amount of $5,200,000.
4. A bill was received from the contractor for $2,600,000.
5. The contractor's bill is paid, and 5% retainage is withheld.
6. The park renovations were completed and the final bill of $2,600,000 was received. The
contractor's bill and retainages are approved for payment in full. Total construction expenditures
were allocated as follows: $5,000,000 to building, and the remainder to equipment.
7. The capital projects fund temporary accounts were closed, and the capital projects fund was
closed by transferring remaining funds to the debt service fund for use in debt repayment.
Answer: 1.
Debits Credits
Capital Projects Fund:
CASH 5,000,000
CASH 5,050,000
BONDS PAYABLE 5,000,000
PREMIUM ON BONDS PAYABLE 50,000
Debt Service Fund:

CASH 50,000
BOND PREMIUM 50,000
(Note: This assumes the premium and interest are recorded directly in the debt service fund. If the
premium and interest were first recorded in the capital projects fund, the capital projects fund
would also credit Due to Debt Service Fund for $50,000.)
35
2.
CASH 250,000
INTERFUND TRANSFERS IN 250,000
Special Revenue Fund:

OTHER FINANCING USES–
CASH 250,000
3.
4.

CONSTRUCTION WORK IN PROGRESS 2,600,000
5.
Capital Projects Fund and Governmental
Activities:
CONTRACTS PAYABLE–RETAINED
PERCENTAGE 130,000
CASH 2,470,000
36
6.


PERCENTAGE 130,000
CASH 2,730,000
CONSTRUCTION WORK IN PROGRESS 2,600,000

PERCENTAGE 130,000
CASH 2,730,000
PARK BUILDING 5,000,000

EQUIPMENT 200,000
CONSTRUCTION WORK IN
PROGRESS 5,200,000
37
Accounting for Governmental & Nonprofit Entities 18th Edition Test Bank
7.
To close nominal accounts:
FUND BALANCE–RESTRICTED OR
ASSIGNED 50,000
To close the fund:

INTERFUND TRANSFERS OUT 50,000
CASH 50,000
FUND BALANCE–RESTRICTED OR
ASSIGNED 50,000
INTERFUND TRANSFERS OUT 50,000
Debt Service Fund:

CASH 50,000
Difficulty: 3 Hard
Bloom's: Understand
AICPA: FN Reporting
38
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8) Acquisition of a general capital asset represents an expenditure in a governmental fund, but

31) Which of the following would be considered a general capital asset?

Personal computer for the city treasurer $ 6,000

Personal computer for the city treasurer $ 6,000

Town buildings $ 3,250,000

52) Which of the following is true regarding capital projects funds?

Town hall building $ 500,000

75) Under a service concession arrangement:

A. Bond anticipation notes

Answer: CAPITAL PROJECTS FUND

ENCUMBRANCES OUTSTANDING 12,000,000

CONSTRUCTION EXPENDITURES 12,000,000

OTHER FINANCING SOURCES–

Explanation: No further explanation details are available for this problem.

Debt Service Fund:

Special Revenue Fund:

ENCUMBRANCES OUTSTANDING 2,600,000

ENCUMBRANCES OUTSTANDING 2,600,000

CONTRACTS PAYABLE 2,600,000

CONTRACTS PAYABLE 2,600,000

PARK BUILDING 5,000,000

To close the fund:

Debt Service Fund:

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