Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-1
CHAPTER 5: ACCOUNTING FOR GENERAL CAPITAL ASSETS AND
CAPITAL PROJECTS
OUTLINE
Number
Topic
Type/Task
Status
(re: 17/e)
Questions:
5-1
Defining and reporting general capital assets
Define and explain
Revised
5-2
Capital asset disclosures
Explain
Revised
5-3
Capital asset valuation
Explain
Revised
5-4
Lease accounting
Describe
Revised
5-5
Intangible assets
Describe
Revised
5-6
Modified approach for infrastructure assets
Compare
Same
5-7
Encumbrances
Explain
Same
5-8
Special assessments
Explain
New
5-9
Bond anticipation notes
Explain
New
5-10
Service concession arrangements
Explain
Same
Cases:
5-11
Modified approach for infrastructure assets
Evaluate, write
Same
5-12
Standard setting for lease accounting
Evaluate, write
New
5-13
Criteria for intangible asset recognition
Evaluate, explain
5-12
5-14
Recording and reporting damaged capital
assets
Evaluate, explain
5-13
5-15 Service concession arrangements Evaluate, explain
5-14
Exercises/Problems:
5-16
Examine the CAFR
Examine
Revised
5-17
Various
Multiple Choice
Items 9, 10
and 12-15
are new
5-18
General capital assets
Journal entries
Revised
5-19
Capital asset disclosure schedule
Financial statement
Revised
5-20
Lease classification and accounting
Calculate; JEs
Revised
5-21
Asset impairment
JEs; reporting
Same
5-22
Capital projects fund
JEs
Same
5-23
Recording bond transactions
JEs
New
5-24
Statement of revenues and expenditures
FS; explain
Same
5-25
Multi-project construction fund
JEs & FS
Same
5-26
Capital project transactions
JEs & FS
Same
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-2
CHAPTER 5: ACCOUNTING FOR GENERAL CAPITAL ASSETS AND
CAPITAL PROJECTS
Answers to Questions
5-1. General capital assets are those assets acquired with the resources of governmental
funds. They are reported as assets in the Governmental Activities column of the
government-wide financial statements at historical cost. Those capital assets identified as
depreciable are shown net of accumulated depreciation. (Donated capital assets are
General Problem Information: Defining and reporting general capital assets
Learning Objective: 5-1
Topic: Accounting for General Capital Assets
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
5-2. Capital asset disclosures required by the GASB include descriptions of 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 showing
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-3
Ch. 5, Answers, Question 5-2 (Cont’d)
General Problem Information: Capital asset disclosures
Learning Objective: 5-5
Topic: Required Disclosures about Capital Assets
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
5-3. In general, the valuation principles used in government and for–profit accounting are very
similar. Assets acquired should be valued at historical cost when possible, and the
definition of historical cost is basically the same for both. However, governments are
General Problem Information: Capital asset valuation
Learning Objective: 5-2
Topic: Accounting for General Capital Assets
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
5-4. When an asset is acquired with lease financing, the governmental fund journal entry on
General Problem Information: Lease accounting
Learning Objective: 5-4
Topic: General Capital Assets Acquired under Lease Agreements
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-4
Ch. 5, Answers (Cont’d)
5-5. Under both GASB and FASB standards intangible assets are defined as assets that lack
physical substance. Intangible assets held by a government might include easements,
General Problem Information: Intangible assets
Learning Objective: 5-1
Topic: Intangible Assets
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
5-6. Under the modified approach to accounting for infrastructure assets adjusting entries
recognizing depreciation expense and accumulated depreciation are not required. 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
General Problem Information: Modified approach for infrastructure assets
Learning Objective: 5-2
Topic: Infrastructure Assets
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-5
Ch. 5, Answers (Cont’d)
5-7. To facilitate preparation of financial statements at the end of the fiscal year, all operating
accounts should be closed; however, since the project is still underway and contractual
General Problem Information: Encumbrances
Learning Objective: 5-2, 5-4, 5-5
Topic: Multi-Period and Multiple-Project Funds
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
5-8. A special assessment is a mandatory tax levy against specified properties to fund a
service or property improvement that will benefit the property owner. For example,
General Problem Information: Special Assessments
Learning Objective: 5-4
Topic: Capital Projects Financed by Special Assessments
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
5-9. Bond anticipation notes (BAN) may be classified as current or long–term depending upon
the intent of the government regarding the financing agreement. A BAN is classified as
General Problem Information: Bond Anticipation Notes
Learning Objective: 5-4
Topic: Bond Anticipation Notes Payable and the Problem of Interest Expenditures
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-6
Ch. 5, Answers (Cont’d)
5-10. Under a service concession arrangement, a government transfers the rights and
obligations of a capital asset to another legally separate governmental or private sector
General Problem Information: Service concession arrangements
Learning Objective: 5-1
Topic: Service Concession Arrangements
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
Solutions to Cases
5-11. a. Discuss with students various methods of obtaining financial statements to make
comparisons across entities. The Government Finance Officers Association (GFOA)
b. An important communication skill for students to master is the ability to convey
technical financial accounting information in an effective way so that decision makers
General Problem Information: Modified approach for infrastructure assets
Learning Objective: 5-2
Topic: Infrastructure Assets
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making
Level of Difficulty: Medium
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-7
Ch. 5, Solutions (Cont’d)
5-12. a. Answers may vary slightly depending upon where on the GASB Web site the
students search for answers. A Preliminary Views document was issued in November
2014. Thirty-eight responses to the Preliminary Views were received, and 15
b. The Board received 38 comment letters in response to the November 2014
Preliminary Views document and 71 comment letters in response to the January 2016
Exposure Draft.
d. Some respondents to the Preliminary Views disagreed with the foundational principle
that leases are financing arrangements and, instead, believe that there are different
General Problem Information: Standard setting for lease accounting
Learning Objective: 5-2
Topic: General Capital Assets Acquired under Lease Agreements
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making
Level of Difficulty: Medium
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-8
Ch. 5, Solutions (Cont’d)
5-13. a. The GASB issued guidelines for the accounting treatment of intangible assets (GASB
Codification Section 1400.138–154). To really understand this particular issue, we
need to first understand the definition of an asset and then the characteristics that
describe an intangible asset.
b. Given these definitions, does the government’s power to tax meet the definition of an
intangible asset? Consider the three characteristics of an intangible asset. First, the
General Problem Information: Intangible assets
Learning Objective: 5-1
Topic: Intangible assets
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making
Level of Difficulty: Medium
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-9
Ch. 5, Solutions (Cont’d)
5-14. a. In determining whether an impairment has occurred the city will need to determine
whether there was a significant and unexpected decline in service utility. If it is
determined that an impairment has occurred, the restorative approach to measuring
the impairment appears to be appropriate. Police operations are governmental
b. In all cases identified (wiring, walls, flooring) the work appears to be a combination
of enhancement and replacement. As such, the town will probably want to remove
any capital costs allocated to the items listed and replace them with the new costs.
c. The description of the furniture as surplus that is being replaced suggests that it was
old and possibly fully depreciated. If fully depreciated, no impairment would be
recognized. Any historical cost and accumulated depreciation would be removed
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-10
Ch. 5, Solutions, Case 5-14 (Cont’d)
5-15. a. Some relevant questions might include:
Are there any alternative uses for the parking operations that the town might like to
exercise in the next 20 years?
b. On a short-term basis, the proposal appears favorable. The town receives a cash
infusion that may help to alleviate current budget woes. Citizens will be relieved that
the town’s finances are stable, and they will likely not notice much difference in
c. It depends. In the case of the City of Chicago and the State of Arizona, bond rating
agencies downgraded bond ratings, because they viewed such arrangements as one–
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-11
Ch. 5, Solutions, Case 5-15 (Cont’d)
General Problem Information: Service concession arrangements
Learning Objective: 5-1
Topic: Service Concession Arrangements
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
Solutions to Exercises and Problems
5-16. Each student will have a different annual report, so he or she will have different answers
General Problem Information: Examine the CAFR
Learning Objective: 5-5
Topic: Various
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
5-17. 1. b. 6. a. 11. a.
2. c. 7. b. 12. d.
General Problem Information: Various
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-12
Ch. 5, Solutions (Cont’d)
5-18. CITY OF LOVELAND
Debits Credits
1. General Fund:
THERE WOULD BE NO ENTRY SINCE THERE IS NO FLOW OF FINANCIAL
RESOURCES.
Governmental Activities:
2. General Fund:
CASH 6,000
OTHER FINANCING SOURCES—PROCEEDS
OF CAPITAL ASSET SALE 6,000
Governmental Activities:
3. General Fund:
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-13
Ch. 5, Solutions, Exercise 5-18 (Cont’d)
Debits Credits
Governmental Activities:
LEASED ASSETS—MACHINERY AND EQUIPMENT 30,000
4. Capital Projects Fund:
CASH 720,000
REVENUE 720,000
5. General Fund:
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-14
Ch. 5, Solutions, Exercise 5-18, part 5 (Cont’d)
Debits Credits
Governmental Activities:
(9,720,000/30 years × ½ year = 162,000)
6. General Fund:
THERE WOULD BE NO ENTRY SINCE THERE IS NO FLOW OF FINANCIAL
RESOURCES.
General Problem Information: General Capital Assets
Learning Objective: 5-2, 5–4
Topic: Various chapter topics
Bloom’s Taxonomy: Apply
Accreditation Skills tag: AACSB: Knowledge Application; AICPA: FN Reporting
Level of Difficulty: Medium
5-19. a. No, the note does not comply with GASB requirements. The following
changes would help bring the note into compliance.
1. Instead of one change column there should be two columns—one
identifying additions to capital assets and one identifying deletions
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-15
Ch. 5, Solutions, Exercise 5-19 (Cont’d)
b. Yes. Infrastructure is listed with “Total capital assets not being
5-20. a. Debits Credits
Capital Projects Fund:
EXPENDITURES 12,000,000
CASH 822,441
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-16
Ch. 5, Solutions (Cont’d)
5-21. a. Because Sunshine City is located in an area that is susceptible to
hurricanes, the unusual criterion would not be met for the loss to be
reported as extraordinary. To be reported as a special item requires that
the event be either unusual or infrequent in occurrence (but not both)
and be within management’s control. Since this is the first hurricane to
5-17
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consent of McGraw-Hill Education.
Ch. 5, Solutions (Cont’d)
5-22. FULBRIGHT COUNTY
Debits Credits
1. Capital Projects Fund:
CASH 6,000,000
OTHER FINANCING SOURCES—
PROCEEDS OF BONDS 6,000,000
2. Capital Projects Fund:
CASH 650,000
3. Capital Projects Fund:
Chapter 05 – Accounting for General Capital Assets and Capital Projects
5-18
Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Chapter 5, Solutions, Exercise 5-22, part 3 (Cont’d)
Governmental Activities:
NO ENTRY WHEN TRANSFERS ARE BETWEEN GOVERNMENTAL
FUNDS
(Note: There would also be an entry in the special revenue fund.)
4. Debits Credits
Capital Projects Fund:
5. Capital Projects Fund:
ENCUMBRANCES OUTSTANDING 6,800,000
ENCUMBRANCES 6,800,000