A municipal utility, accounted for as an Enterprise Fund, completed the construction of a new water treatment plant at a cost of $15,000,000. It was financed by $10,000,000 in revenue bonds issued by the utility and $5,000,000 from a capital grant from the state government. In the government-wide financial statements, what amount should be reported as 'Net Investment in Capital Assets' related to this plant?
- A$0
- B$5,000,000
- C$10,000,000
- D$15,000,000
Show answer & explanationAnswer & explanation
Correct answer: C. $10,000,000
'Net Investment in Capital Assets' is calculated as capital assets less accumulated depreciation, less outstanding debt incurred to acquire, construct, or improve those assets. Capital grants received for capital asset acquisition reduce the net investment in capital assets because they are essentially free capital, not financed by the government's own debt or resources.
Why the other options are wrong
- A. This would imply either no capital assets or that all capital assets are fully depreciated and/or fully offset by related debt or grants (which is not how grants are treated here).
- B. Net Investment in Capital Assets is calculated as the cost of capital assets ($15,000,000) minus the related outstanding debt ($10,000,000). Capital grants ($5,000,000) are not deducted from this calculation; they increase the total net position but are not part of the 'investment' financed by the government's own resources or debt. Calculation: $15,000,000 (Cost) - $10,000,000 (Debt) = $5,000,000.
- D. This is the total cost, not considering how it was financed for 'Net Investment in Capital Assets'.
Net Investment in Capital Assets (Government-Wide)
A component of Net Position reported in government-wide financial statements, calculated as capital assets (net of accumulated depreciation) less any outstanding debt directly attributable to the acquisition, construction, or improvement of those assets.
- Reported in government-wide Statement of Net Position.
- Calculated as Capital Assets - Related Debt.
- Capital grants are not deducted from this amount.
- Represents the government's equity in its capital assets.
Memory trick: NET investment in assets is what's LEFT after the DEBT for those assets is paid.