CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsMedium
A state government prepares its government-wide financial statements. A new bridge, constructed by the state's General Fund, was completed and put into service on July 1, 2024, at a total cost of $50,000,000. The bridge is estimated to have a useful life of 50 years with no salvage value. For the fiscal year ending December 31, 2024, how should this bridge be reported in the government-wide Statement of Net Position?
- AAs a $50,000,000 asset with no accumulated depreciation.
- BAs an 'Expense' of $500,000, with no asset reported.
- CAs a $50,000,000 asset, with a corresponding 'Expenditure' reported.
- DAs a $49,500,000 asset, net of accumulated depreciation.
Show answer & explanationAnswer & explanation
Correct answer: D. As a $49,500,000 asset, net of accumulated depreciation.
Government-wide financial statements use the full accrual basis of accounting, similar to business enterprises. Capital assets are capitalized and depreciated over their useful lives. For 6 months of depreciation on a $50,000,000 asset with a 50-year life: ($50,000,000 / 50 years) * (6/12) = $500,000. Thus, the net asset value is $50,000,000 - $500,000 = $49,500,000.
Why the other options are wrong
- A. This ignores the depreciation expense for the six months the asset was in service.
- B. This incorrectly treats the entire cost as an expense and miscalculates the depreciation amount if it were an expense.
- C. While it's initially an asset, 'Expenditure' is a governmental fund term, not used in government-wide statements.
Government-Wide Financial Statements - Capital Assets
Government-wide financial statements, prepared on the full accrual basis, capitalize and depreciate capital assets over their estimated useful lives, similar to commercial accounting.
- Full accrual basis.
- Capital assets are recorded at cost.
- Depreciation is recognized.
Memory trick: Government-Wide is 'FULL' of business-like rules.