Deck 7: Capital Assets and Investments in Marketable Securities

Question 1

General capital assets are not reported in governmental funds because

A)The measurement focus of governmental funds is on current financial resources.
B)They are not used to used generate revenues.
C)The basis of accounting is accrual.
D)None of the above.

Answer 1

A

Question 2

At the government-wide level, governments must depreciate inexhaustible assets, such as land, works of art, or historical treasures.

Answer 2

False

Question 3

General capital assets are distinguished from the capital assets of proprietary funds and fiduciary funds.

Answer 3

True

Question 4

Governments are prohibited from entering into reverse repurchase agreements.

Question 5

Prior to the issuance of GASB Statement No.34, state and local governments provided virtually no information as to most of their infrastructure.

Question 6

General capital assets are not reported in governmental funds because of the funds' measurement focus (current financial resources).

Question 7

The objectives of financial reporting for capital assets should be to provide information

A)About a governmental entity's physical resources.
B)That can be used to assess the service potential of a governmental entity's physical resources.
C)To help users assess a government's long- and short-term capital needs.
D)All of the above.

Question 8

Donated assets are reported in the government-wide financial statements at

A)Historical cost to the donor.
B)Book value in the hands of the donor.
C)Fair value on date of donation.
D)Zero value because they were not purchased.
[NOTE: Guidance on the calculation of gain or loss in the next two series of questions is not covered in this chapter but is from APB Opinion 29.Students should be familiar with this pronouncement from their intermediate accounting classes.]
Use the following information to answer questions #9 - #11

Question 9

Most infrastructure assets are the responsibility of the federal government, not state and local governments.

Question 10

Governments invest in marketable securities for much the same reason that businesses do-to earn a return on cash that otherwise would be unproductive.

Question 11

Unlike businesses, governments should not capitalize interest on general capital assets that they construct themselves.

Question 12

Surfer City sold a used police car.The police car had a historical cost of $25,000, a fair value of $18,000, and was sold for $10,000.Assuming that the city maintains its books and records in a manner to facilitate the preparation of the fund financial statements, what is the appropriate entry in the general fund to record this sale?

A)Debit Cash $10,000; Credit Revenue $10,000.
B)Debit Cash $10,000 and Loss on sale $8,000; Credit Automotive equipment $18,000.
C)Debit Cash $10,000; Credit Other financing sources-sale of asset $10,000.
D)Debit Cash $10,000; Credit Automotive equipment $10,000.

Question 13

GASB has no authority to set standards for the investment practices of governments.

Question 14

Governments should depreciate general capital assets, such as police cars and snow plows, in governmental funds.

Question 15

In governmental funds, the costs of capital assets are reported as expenses when the assets are acquired.

Question 16

Governments do not have to depreciate infrastructure assets if governments can demonstrate they are preserving these assets at a specified condition level.

Question 17

A government may record long-term assets in which of the following funds?

A)General fund
B)Internal service funds.
C)Capital projects funds
D)Debt service funds.

Question 18

Joshua County bought a new backhoe using general fund cash.When the asset was acquired, what was the appropriate entry in the general fund, assuming that the entity maintains its books and records in a manner to facilitate the preparation of fund financial statements?

A)Debit Equipment; Credit Cash.
B)Debit Equipment; Credit Investment in capital assets.
C)Debit Expenditures; Credit Cash.
D)Debit Expenditures; Credit Investment in capital assets.

Question 19

Hilltop School District receives a donation of ten computers from Computer Hut, a local computer firm.The cost to Computer Hut of each computer is $2,500.The retail value of each computer is $3,000.Assuming that the district maintains its books and records in a manner that facilitates the preparation of the fund financial statements, what is the appropriate entry in the general fund to record this donation?

A)Debit Computer equipment $25,000; Credit Donation revenue $25,000.
B)Debit Computer equipment $30,000; Credit Other financing sources-donation $30,000.
C)Debit Computer equipment $30,000; Credit Donation revenue $30,000.
D)No entry.The computers are not financial resources.

Question 20

Which of the following costs will NOT be included in the cost of capital assets on the government-wide financial statements?

A)Purchase price (invoice amount).
B)Cost of demolishing existing structures that cannot be used.
C)Interest on self-constructed items.
D)Engineering costs.

Question 21

The city of Maine Creek acquired a used front-end loader from a road contractor for use at the city landfill (which is accounted for in an enterprise fund).The loader had a fair value of $54,000 and a historical cost of $90,000.The city paid the contractor $50,000 for the loader.At what amount should be front-end loader be reported in the government-wide financial statements?

A)$50,000.
B)$54,000.
C)$90,000.
D)It should not be reported in the government-wide financial statements.

Question 22

Which of the following is true with regard to deferred maintenance?

A)Deferred maintenance costs are delayed repair, or upkeep, measured by the outlay required to restore a plant or individual asset to full operating characteristics.
B)Deferred maintenance costs should be measured as the amount necessary to bring the assets up to their expected operating condition.
C)Deferred maintenance costs may be interpreted as a potential call upon government resources-an obligation that is being passed on to taxpayers of the future.
D)Deferred maintenance costs are not useful information to readers of financial statements because they are not objective and verifiable and thus violate one of the basic qualitative characteristics of accounting information.

Question 23

Which of the following are NOT infrastructure assets?

A)Roads.
B)Sidewalks.
C)Buildings.
D)Bridges.

Question 24

If a government receives donations of works of art, the government must recognize revenue in its government-wide financial statements

A)Only if it elects to capitalize its collection.
B)Only if it elects NOT to capitalize its collection.
C)On all donations of works of art.
D)It is not permitted to recognize revenue from donations.

Question 25

The risk that the issuer or other party to an investment will not fulfill its obligation is

A)Interest rate risk.
B)Credit risk.
C)Concentration of credit risk.
D)Foreign currency risk.

Question 26

What amount of gain/loss should be reported in the government-wide financial statements?

A)$0.
B)$3,000 gain.
C)$3,000 loss.
D)$7,000 gain.

Question 27

What amount of gain/loss should be reported in the general fund financial statements?

A)$0.
B)$3,000 gain.
C)$3,000 loss.
D)$7,000 gain.

Question 28

GASB standards require that depreciation be reported on all capital assets except

A)Infrastructure accounted for using the standard approach.
B)Infrastructure assets accounted for using the modified approach.
C)Donated assets.
D)Capitalized works of art.

Question 29

If a government elects to capitalize certain works of art and similar assets, which of the following statements is true relative to depreciation on those assets?

A)Donated assets cannot be depreciated.
B)All of the capitalized assets must be depreciated.
C)All exhaustible works of art and similar assets must be depreciated.
D)The government may elect to omit all depreciation.

Question 30

If a government elects the modified approach with regard to capitalization of infrastructure

A)Costs to preserve infrastructure assets are expensed as incurred with no additional disclosure required.
B)Costs to preserve infrastructure assets are expensed as incurred and disclosure of assessed condition is required.
C)Costs to preserve infrastructure assets are capitalized as incurred and depreciated over the estimated useful with no additional disclosure required.
D)Costs to preserve infrastructure assets are capitalized as incurred and are not depreciated, but disclosure of assessed condition is required.

Question 31

With regard to accounting for infrastructure, which of the following is true?

A)Unlike other capitalized assets, infrastructure assets should never be depreciated.
B)The costs of general government infrastructure assets should be recognized as expenditures in governmental fund statements as the costs are incurred.
C)Governments that choose to apply the modified approach to accounting for infrastructure need not capitalize infrastructure assets.
D)Under the modified approach, governments should capitalize both the initial costs of infrastructure assets and subsequent outlays intended to preserve and extend the assets' useful lives.

Question 32

For a government that elects NOT to capitalize its works of art and similar assets, the appropriate entry for reporting in the government-wide financial statements when receiving a contribution of a work of art is

A)No entry is required for contributed assets.
B)Debit Asset; Credit Revenues.
C)Debit Asset; Credit Equity.
D)Debit Expense, Credit Revenue.

Question 33

To elect not to capitalize works of art and similar assets, a government must see that the assets meet all of the following criteria EXCEPT

A)The assets must be held for public exhibition, education, or research in furtherance of public service, rather than for financial gain.
B)The assets must be protected, kept unencumbered, cared for, and preserved.
C)The assets must be subject to an organizational policy that requires the proceeds from sales of the collection items be used to acquire very similar items for the collection.
D)The assets must be subject to an organizational policy that requires the proceeds from sales of the collection items be used to acquire other items for the collection.

Question 34

For a government that elects to capitalize its works of art and similar assets, the appropriate entry for reporting in the government-wide financial statements when receiving a contribution of a work of art is

A)No entry is required for contributed assets.
B)Debit Asset; Credit Revenues.
C)Debit Asset; Credit Equity.
D)Debit Expenditures; Credit Revenues.

Question 35

The risk that changes in interest rates will adversely affect the fair value of an investment is

A)Interest rate risk.
B)Credit risk.
C)Concentration of credit risk.
D)Foreign currency risk.

Question 36

Mariano County traded in a used pickup for a new pickup truck with a sticker price of $44,000.The old pickup had a fair value of $26,000, historical cost of $45,000, and accumulated depreciation of $18,000.The dealer took the old truck and $15,000 for the new truck.The new truck should be reported on the government-wide financial statements at

A)$15,000.
B)$42,000.
C)$44,000.
D)$41,000.

Question 37

The amount of gain or loss that should be recognized on this transaction in the general fund financial statements is:

A)$0.
B)$1,000 loss.
C)$4,000 gain.
D)$15,000 loss.

Question 38

The amount of gain or loss that should be recognized on this transaction in the government-wide financial statements is

A)$0.
B)$1,000 loss.
C)$3,000 gain.
D)$12,000 loss.
Use the following information to answer questions #12 - #14
Rory City traded in a used pickup for a new pickup with a sticker price of $44,000.The old truck had a historical cost of $40,000, accumulated depreciation of $16,000, and a fair value of $27,000.The dealer took the old truck and $10,000 cash for the new truck.

Question 39

At what value should the new truck be reported in the government-wide financial statements?

A)$44,000.
B)$43,000.
C)$40,000.
D)$37,000.

Question 40

Which of the following is NOT a benefit to cities of participating in their state's investment pool?

A)Lower trading costs.
B)Concentration on the latest innovative investment instruments.
C)Shared costs of receiving expert investment advice.
D)Greater opportunity to diversify.

Question 41

Government investment policies have been sharply criticized because of significant losses incurred by certain governments.What is the nature of the problem that is being criticized? What should be the role of accounting in determining and reporting investment strategies?

Question 42

How should changes in the fair value of derivatives be reported in a government's financial statements?

A)Gains or losses in the government-wide statement of activities.
B)Losses but not gains in general fund statements of revenues, expenditures, and changes in fund balance.
C)Gains or losses in the government-wide statement of activities, except for derivatives that qualify as hedges.
D)Only disclosed in the notes.

Question 43

GASB standards allow a major exception for reporting depreciation expense on certain capital assets.What is this exception? What is the notion behind the exception?

Question 44

For governments, a capital asset is considered impaired

A)When its service capacity has declined significantly and unexpectedly.
B)When it is reported in a governmental fund.
C)When it no longer generates any cash flows.
D)When it no longer generates the cash flows expected of it.

Question 45

What is infrastructure? Give some examples.Why should governments capitalize infrastructure assets? What are some of the objections raised by critics of the GASB's standards for general government infrastructure? What is the GASB's position on those criticisms?

Question 46

Which of the following can be referred to as a derivative?

A)A reference rate, such as a prevailing interest rate.
B)A security whose value depends on (is derived from)that of some underlying asset, such as a share of stock.
C)An index, such as the Standard & Poor's index of stock prices.
D)All of the above.

Question 47

The government-wide financial statements report capital assets:

A)At estimated fair value
B)At depreciated historical cost, including ancillary charges
C)Only in the notes, if they are infrastructure assets
D)Only in the notes, if they are donated capital assets

Question 48

The risk that changes in currency exchange rates will adversely affect the fair value of an investment is

A)Interest rate risk.
B)Credit risk.
C)Concentration of credit risk.
D)Foreign currency risk.

Question 49

Government accounting does not permit depreciation to be charged on the operating statements of governmental funds.Present arguments FOR reporting depreciation and arguments AGAINST reporting depreciation.

Question 50

Disclosures about investment risks apply

A)To investments only.
B)To deposits, investments, and derivatives.
C)To deposits and investments.
D)Only to investments held by governmental and proprietary funds.

Question 51

The "restoration cost" approach to determining the extent of a capital asset impairment

A)First calculates the percentage decline in the number of service units caused by the impairment.
B)First determines the current cost of an asset that would provide the current (impaired)level of service.
C)Estimates the cost to restore the utility of an impaired asset.
D)Estimates the change in future cash flows generated by an impaired asset.

Question 52

Governments must disclose information about investment risks in which of the following categories?

A)Credit risk.
B)Custodial credit risk.
C)Foreign currency risk.
D)All of the above.

Question 53

Fair value accounting is required for investments in:

A)External investment pools
B)Open-end mutual funds
C)Bonds and other debt securities
D)All of the above

Question 54

What is "deferred maintenance?" What is its possible role in government financial reporting?

Question 55

What are the differences among the various elements of risk: market risk, credit risk, concentrations of credit risk, and interest rate risk? Describe how each of these risks could affect a government's investment in a 20-year Treasury note.

Question 56

Changes in the fair value of derivative instruments that qualify as hedges should be reported as

A)Gains or losses in the government-wide statement of activities.
B)Deferred inflows or outflows of resources in fund and government-wide operating statements.
C)Losses but not gains in general fund statements of revenues, expenditures, and changes in fund balance.
D)Disclosures only.

Question 57

Which of the following are NOT examples of derivatives?

A)Stock options.
B)Interest-only strips.
C)Debt instruments backed by pools of mortgages.
D)Repurchase agreements.

Question 58

Concentration of credit risk is

A)The risk that an issuer or other counterparty to an investment will not fulfill its obligations.
B)The risk of loss attributed to participating in a state investment pool.
C)The risk of loss attributed to the magnitude of a government's investment in a single issuer.
D)The risk that changes in exchange rates with blocs of countries that have pooled their currencies will adversely affect the fair value of an investment.