CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsEasy
A city's General Fund purchased a new police vehicle for $70,000. Under modified accrual accounting, how should this transaction be recorded in the General Fund?
- ADebit Capital Outlay $70,000; Credit Cash $70,000.
- BDebit Expenditure - Police Department $70,000; Credit Cash $70,000.
- CDebit Equipment $70,000; Credit Cash $70,000.
- DDebit Vehicle Expense $70,000; Credit Cash $70,000.
Show answer & explanationAnswer & explanation
Correct answer: A. Debit Capital Outlay $70,000; Credit Cash $70,000.
Under modified accrual accounting for governmental funds, the acquisition of capital assets is recorded as an expenditure, typically categorized as 'Capital Outlay,' rather than capitalizing the asset on the fund's balance sheet.
Why the other options are wrong
- B. While it is an expenditure for the police department, 'Capital Outlay' is the more specific and appropriate account for asset acquisition.
- C. This is incorrect. Capital assets are not capitalized in governmental funds under modified accrual accounting.
- D. This is incorrect. 'Vehicle Expense' implies a consumption of a short-term asset or service, not the acquisition of a long-lived asset.
Capital Outlay Expenditure (Governmental Funds)
In governmental funds using modified accrual accounting, the acquisition of capital assets is recorded as an expenditure (Capital Outlay) rather than an asset on the fund's balance sheet.
- Applies to governmental funds (General, Special Revenue, Capital Projects, Debt Service, Permanent).
- Assets are expensed when acquired, not capitalized.
- Capital assets are only capitalized in the government-wide financial statements.
Memory trick: Governmental funds spend, they don't 'own' big things in their books.