Chapter 7 Governmental Accouting Essay Questions

According to DoD Financial Management Regulation Volume 2A, Chapter 1, O&M and MILPERS are considered expenses. Procurement and Military Construction appropriations are considered investments. RDT&E includes both characteristics of expenses and investments (p. 1-10).

The value of fixed assets typically decreases over time. The amount of the decrease each year is accounted for and is called depreciation. Depreciation for the year is expensed on the income statement and added to the accumulated depreciation account on the balance sheet. So the value of the fixed assets on the balance sheet is reduced by the accumulated depreciation.

Chapters 2 through 8 describe accounting and financial reporting by state and local governments. A continuous problem is presented to provide an overview of the reporting process, including preparation of fund basis and government-wide statements. The problem assumes the government is using fund accounting for its internal record-keeping and then at year-end makes necessary adjustments to prepare the government-wide statements. The problem that follows is presented in the same order as the textbook (beginning with Chapters 3, and

The key difference of revenues and expenses recognition is obvious. According to IFRS, the income statement records the increasing of future economic benefit as revenues, such as sales, interests, dividends, and rents, and the recognition of revenues and expenses are combined directly in the same transaction (Matching principle). But ASPE standards state that the income statement only records the existing or realizing performance as revenues. Same situation in the expenses, in IFRS’s income statement, they are recognized by a decrease in the asset or an increase in the liability for future position. In addition, under ASPE, we do not recognize an expense as a provision unless the benefit does qualifies as an asset (CICA, 2011, Section 1000).

Cash was paid by Ari’s Alarm Service to creditors on account. Which of the following entries for Ari’s Alarm Service records this transaction?

1. Materials, equipment, and facilities: All the costs or the entire cost is expensed. If these items can be used in alternative or future research and development projects then they are treated as inventory and allocated as consumed, or capitalized and depreciated as used.

Internal service funds account for operations in which goods or services are provided by one government department to other funds, departments, or agencies within the same governmental unit or occasionally to other governmental units on a user-charge or cost reimbursement basis (Granof & Khumawala, 2013). This type of funds serves as an effective way to identify the costs of providing services such as: motor pools, central duplicating and printing services, central data processing services, central purchasing, central stores, communications and self-insurance activities. (Mercer County Community College, 2010).

It is wrong to take depreciation on business expenses and to claim it as assets. Operating expenses would be distorted.

For example a depreciation on equipment is $100; $50 relates to public safety and $50 relates to general government. The journal entries would be debited expense-Public Safety, debited expense-general government for $50 each and credit Accumulated depreciation equipment for $100. Journal entries for proprietary fund would be Dr. Depreciation expense and credit accumulated depreciation for $100 each. Another differences between the two is the accounting method being used. Proprietary uses an accrual basis (similar to traditional business) and governmental fund uses a modified accrual

An asset may be disposed of in several different ways. One prevalent method is to sell the asset for cash. Sale of an asset involves two consequential considerations. First, depreciation must be recorded up to the date of sale. If the sale does not occur at the fiscal year-end, customarily December 31, depreciation must be recorded for a partial period from the

Assets such as land, factory, and machinery used in production are some of the most significant investments for businesses. Businesses must capitalize these long term assets and can allocate the costs over the useful life of the assets as they are subject to obsolescence, wear and tear. Before 1981, both tax and financial accounting calculations for depreciation were similar; tax payers choose one of the various methods available. In 1981, tax and financial accounting depreciation methods parted ways when Congress introduced the Accelerated Cost Recovery System (ACRS) for computing depreciation expense. 1

Details of the methods of apportionment used or a table showing the detailed allocations such as that shown below: Example of Support Cost Breakdown by Activity {text:bookmark-start} A reliable approach to cost allocation should be adopted but a NPO should also consider the materiality of the amounts involved and the cost benefit advantages of the approach in that greater accuracy may on occasions only be achievable at a high incremental cost. In attributing costs between activity categories, the following principles should be applied: {text:bookmark-end} Where appropriate, expenditure should be allocated directly to activity cost category. Items of expenditure which contribute directly to the output of more than one activity cost category, for example, the cost of a staff member whose time is divided between a fundraising activities and working on a charitable project, should be apportioned on a reasonable, justifiable and consistent basis. Depreciation, amortization, impairment or losses on disposal of property, plant and equipment should be attributed in accordance with the same principles. Support costs may not be attributable to single activity but rather provide the organizational infrastructure that enables output-producing activities to take place. Such costs should therefore also be apportioned on a reasonable, justifiable and consistent basis

When an asset such as new equipment is purchased by an organization, the seemingly obvious choice for reporting such an expense would be to record it entirely at the time of its purchase, and simply record income in the years following. This, however, is not the method used by accountants. Rather, they use a method of depreciating the asset. This basically means spreading the expense of the asset of the years of its useful life.

PPE item that qualifies for recognition as an asset shall be measured at recognition of costs in the carrying amount of an item of PPE ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management. Therefore, costs incurred in using an item are not included in the carrying amount of that item its cost. The initial estimate of the costs of demolish, removing and restoring the site on which an entity has incurred. Measurement incurred by an entity after recognition shall choose either the cost model in paragraph 30 or the revaluation model in paragraph 31 as its accounting policy and shall apply that policy to an entire class of property, plant and equipment. Besides, depreciation is defined in MFRS116 as ‘the systematic allocation of the depreciable amount of an asset over its estimated life. Therefore, three factors should be taken into consideration for the depreciation charge which are depreciable amount estimated useful life and allocation method. Other than that, the carrying amount of an item of PPE shall be derecognized on disposal or when no future economic benefits are expected from its use or disposal.

All PPE are stated at cost, excluding day to day services, less accumulated depreciation and amortization and any impairment in value. While land is sated at cost and is not depreciated. Necessary depreciation is computed on straight line basis over the property, plant and equipment’s useful lives. The assets depreciation, residual value, useful life and all other information which can cause the value to vary are reviewed in the year end. When assets are retired or otherwise disposed, the carrying values of those assets are removed and any gain or loss on disposal is reflected as profit or loss. Construction in progress is stated at cost and will be reclassified to the respective property, plant and equipment account when available for its intended use. The other cost incurred to obtain the PPE to function are capitalized if and only if future economic benefits will flow into the entity and can be measured reliably otherwise, the cost are expensed. The other costs may include: repairmen and replacement among the others. The PPE owned by the companies will be impaired by the group at each annual reporting period only if there is an indication of any necessary impairment. Furthermore, financial liabilities are classified as “at amortize cost”. They are derecognized when the obligation under the contract is discharged, cancelled or has expired. Finally, both the company’s