Question 1

A drunk driver crashed into a fully loaded gasoline truck while trying to pass on a city's Main Avenue bridge. The truck exploded and the heat of the fire caused a portion of the structure of the bridge to melt. The city did not use the modified approach to report the bridge. Rather, its historical cost of $10 million was being depreciated over 20 years with no expected salvage value. The bridge was 10 years old. Its current replacement cost is $20 million. The city's engineers estimate that it will take $8 million to restore the bridge.
REQUIRED:
a. What is the deflated restoration cost for the bridge, calculated as using the restoration approach?
b. If an impairment loss is calculated by dividing the deflated restoration cost by the asset's original historical cost and then multiplying that percentage times the carrying amount of the bridge, what is the city's impairment loss?
c. Assuming the city makes the $8 million of repairs, how should the city report this cost?

Accepted Answer

The answer of A drunk driver crashed into a fully...

Question 2

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.

Accepted Answer

The answer of Government accounting does not permit depreciation to...

Question 3

The City of Baconsville engaged in the following transactions. Assume that the city maintains its books and records in a manner that facilitates the preparation of the government-wide financial statements.
Required: Prepare the appropriate journal entries. If appropriate, write "No entry required."
a) The city purchased for cash three dump trucks for $80,000 each.
b) The city sold for $4,000, a police car that had been purchased four years ago at a cost of $30,000. At the time of acquisition, the city estimated that the police car had a useful life of five years and a salvage value of $5,000.
c) During the year, the city spent $12 million to build a third lane on both sides of the major north-south highway through town.
d) The city traded in a pickup truck used in general government operations for a new pickup truck, paying a difference of $18,000. The old pickup truck was purchased four years ago at a cost of $21,000. At the time it had an estimated useful life of five years, and an estimated salvage value of $6,000. At the time of the trade, the old truck had a fair value of $10,000. The new truck has a sticker price of $29,000.
e) During the year the city began construction of a new city hall. By year-end, the city had made progress payments to the contractor of $3 million.
f) The city received a gift of land from a citizen. The land is to be used to build a city park. The land had been in the donor's family since it was homesteaded. It has a fair value when contributed of $2 million.

Accepted Answer

The answer of The City of Baconsville engaged in the...

Question 4

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

Accepted Answer

Changes in the fair value of derivative instruments that qualify as hedges are reported as deferred inflows or outflows of resources in both fund and government-wide financial statements, reflecting their future economic impact.

Question 5

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

Accepted Answer

Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. When interest rates rise, the fair value of existing bonds typically falls, and vice versa.

Question 6

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

Accepted Answer

Governments are required to disclose information about various types of investment risks, including credit risk, custodial credit risk, and foreign currency risk, to provide a comprehensive understanding of the potential risks associated with their investments.

Question 7

Disclosures about investment risks apply

Accepted Answer

Disclosures about investment risks apply to deposits, investments, and derivatives because these financial instruments can expose entities to various types of risk, such as interest rate risk, credit risk, and foreign currency risk, among others. It's important for stakeholders to understand these risks to make informed decisions.

Question 8

The following information pertains to a city government.
A. The city (1) purchased a 3-year, 7 percent U.S. Treasury note (2) used the note to enter into a 90-day short-term loan transaction that incorporated an interest rate of 6 percent and (3) used the proceeds from the short-term loan transaction to purchase another 3-year 7 percent U.S. Treasury note. What are the benefits and risks of the city's investment practices?
B. In 2015 the city constructed a new highway at a cost of $120 million. In the years following 2015, the city did not record a depreciation charge on the highway - not even in its government-wide statements. Can the omission of the depreciation charge be justified under GASB standards? Explain.

Accepted Answer

The answer of The following information pertains to a city...

Question 9

In 1991, Katie City constructed a new Fifth Avenue bridge. The city has no records of the cost of the bridge. The city's engineers estimate that the current replacement cost (2016) of the bridge is $24 million. The construction price index was 150 in 1991 and is 200 in 2016. The engineers also estimate that the bridge has a total useful life of 30 years.
REQUIRED:
a. What values should the city assign to the bridge for estimated historical cost and accumulated depreciation?
b. Suppose the city decided to use the modified approach to report its bridges. What value would the city assign to the bridge?
c. In your opinion, would a depreciation charge for the bridge add significant information to the city's financial statements? Why or why not?

Accepted Answer

The answer of In 1991, Katie City constructed a new...

Question 10

For governments, a capital asset is considered impaired

Accepted Answer

A capital asset is considered impaired when its service capacity has declined significantly and unexpectedly, reflecting a decrease in its utility and potential productivity.

Question 11

The government-wide financial statements report capital assets:

Accepted Answer

Government-wide financial statements typically report capital assets at depreciated historical cost, including ancillary charges. This method reflects the original cost of the asset plus any additional costs incurred to bring the asset to its intended use, less accumulated depreciation.

Question 12

The table below lists the types of investments reported by the Lisbet City in its general fund. All of the investments of the general fund will be needed to liquidate liabilities within the next six to twelve months. What types of investment risks should the city disclose?

Accepted Answer

The answer of The table below lists the types of...

Question 13

Which of the following are NOT examples of derivatives?

Accepted Answer

Repurchase agreements are short-term borrowing agreements and are not considered derivatives.

Question 14

Concentration of credit risk is

Accepted Answer

Concentration of credit risk refers to the risk of loss associated with a significant investment in a single issuer, indicating a lack of diversification in the investment portfolio.

Question 15

Fair value accounting is required for investments in:

Accepted Answer

Fair value accounting is required for all the options listed: external investment pools, open-end mutual funds, and bonds and other debt securities, as they all involve financial instruments that must be reported at their current market value to provide accurate financial information.

Question 16

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

Accepted Answer

Changes in the fair value of derivatives should be reported in the government-wide statement of activities, except for derivatives that qualify as hedges, which are reported differently.

Question 17

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

Accepted Answer

The answer of Which of the following can be referred...

Question 18

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

Accepted Answer

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

Question 19

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

Accepted Answer

The "restoration cost" approach focuses on estimating the cost required to restore the utility or functionality of an impaired asset back to its original or desired condition.

Question 20

The City of Baconsville engaged in the following transactions. Assume that the city maintains its books and records in a manner that facilitates the preparation of fund financial statements.
Required: Prepare the appropriate journal entries in the general fund. If appropriate, write "No entry required."
a) The city purchased for cash three dump trucks for $80,000 each.
b) The city sold for $4,000 a police car that had been purchased four years ago at a cost of $30,000. At the time of acquisition, the city estimated that the police car had a useful life of five years and a salvage value of $5,000.
c) During the year, the city spent $12 million to build a third lane on both sides of the major north-south highway through town.
d) The city traded in a pickup truck used in general government operations for a new pickup truck, paying a difference of $18,000. The old pickup truck was purchased four years ago at a cost of $21,000. At the time it had an estimated useful life of five years and an estimated salvage value of $6,000. At the time of the trade the old truck had a fair value of $10,000. The new truck has a sticker price of $29,000.
e) During the year the city began construction of a new city hall. By year-end, the city had made progress payments to the contractor of $3 million.
f) The city received a gift of land from a citizen. The land is to be used to build a city park. The land had been in the donor's family since it was homesteaded. It had a fair value when contributed of $2 million.

Accepted Answer