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's accounting records?
- ADebit: Capital Outlay Expenditure $70,000; Credit: Cash $70,000
- BDebit: Investment in Capital Assets $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 Expenditure $70,000; Credit: Cash $70,000
Under modified accrual accounting, governmental funds (like the General Fund) do not capitalize assets. Instead, the purchase of a capital asset is recorded as a 'Capital Outlay Expenditure' in the period of acquisition.
Why the other options are wrong
- B. This is not a valid account title for a governmental fund under modified accrual accounting.
- C. This is incorrect for governmental funds under modified accrual, as assets are not capitalized at the fund level.
- D. While it's an outflow of resources, 'Expenditure' is the correct term for governmental funds, and 'Capital Outlay' specifies the nature.
Capital Outlay Expenditure (Governmental Funds)
Under modified accrual accounting, the acquisition of capital assets by governmental funds is recorded as a 'Capital Outlay Expenditure' rather than capitalizing the asset on the fund's balance sheet.
- Used in governmental funds.
- Modified accrual accounting.
- Represents the outflow of current financial resources for capital assets.
Memory trick: Governmental funds 'SPEND' on assets, they don't 'OWN' them directly on their books.