A local government's General Fund incurred an expenditure of $500,000 for a new fire truck. The fire truck has an estimated useful life of 10 years. In the government-wide financial statements, how will this transaction primarily be reported in the year of acquisition?
- AAs a $500,000 increase in capital assets on the Statement of Net Position and $50,000 depreciation expense in the Statement of Activities.
- BAs a $50,000 depreciation expense in the Statement of Activities.
- CAs a $500,000 expenditure in the Statement of Activities.
- DAs a $500,000 decrease in fund balance in the governmental funds financial statements, with no impact on the government-wide statements.
Show answer & explanationAnswer & explanation
Correct answer: A. As a $500,000 increase in capital assets on the Statement of Net Position and $50,000 depreciation expense in the Statement of Activities.
Government-wide financial statements use the full accrual basis of accounting and an economic resources measurement focus. Therefore, the fire truck will be capitalized as an asset on the Statement of Net Position, and depreciation expense ($500,000 / 10 years = $50,000) will be recognized in the Statement of Activities for the year of acquisition.
Why the other options are wrong
- B. This only accounts for depreciation; the asset itself must also be recorded on the Statement of Net Position.
- C. This describes the reporting in the governmental funds, not the government-wide statements, which recognize depreciation.
- D. This describes the reporting for governmental funds. Government-wide statements are distinct and do report capital assets and depreciation.
Government-Wide Financial Statements
Financial statements of a state or local government prepared using the economic resources measurement focus and the full accrual basis of accounting, presenting a comprehensive overview of the government's financial position and activities.
- Include Statement of Net Position and Statement of Activities.
- Report all assets and liabilities, both current and long-term.
- Recognize depreciation expense for capital assets.
Memory trick: Government-Wide: A Full Economic Picture, Depreciated.