Question

On January 1, 2017, the City of Graf pays $52,000 for a work of art to display in the local library. The city will take appropriate measures to protect and preserve the piece. However, if the work is ever sold, the money received will go into unrestricted funds. The work is viewed as inexhaustible, but the city has opted to depreciate this cost over 20 years (using the straight-line method).

1. How is this work to be reported on the government-wide financial statements for the year ended December 31, 2017?

2. How is this work to be reported in the fund financial statements for the year ended December 31, 2017?

Answer 1

Answer 2

The reporting of the work of art on the government-wide financial statements and fund financial statements for the year ended December 31, 2017, would be as follows:

Government-wide Financial Statements:

1. Statement of Net Position (or Balance Sheet):Under the government-wide financial statements, the work of art would be reported as a capital asset. The initial cost of the work, which is $52,000, would be recorded as a capital asset under the category of "Art and Cultural Assets" or a similar category. Since the city has chosen to depreciate the cost over 20 years using the straight-line method, the accumulated depreciation for the first year would also be recorded.

Assuming there is no residual value at the end of the 20-year period, the depreciation for the first year would be $52,000 / 20 = $2,600.

Statement of Net Position: Assets: Art and Cultural Assets (Cost) $52,000 Less: Accumulated Depreciation ($2,600) Total Assets $49,400

2. Statement of Activities:In the government-wide financial statements, the depreciation expense of $2,600 would be recorded as a program expense in the Statement of Activities.

Statement of Activities: Expenses: Depreciation Expense - Art and Cultural Assets $2,600

Fund Financial Statements:

1. Balance Sheet:In the fund financial statements, the work of art would be reported as a nonspendable fund balance. The initial cost of the work, which is $52,000, would be recorded as a nonspendable fund balance since it cannot be spent or liquidated. The accumulated depreciation would not be recorded in the fund financial statements since it does not represent spendable resources.

Balance Sheet: Fund Balance: Nonspendable: Art and Cultural Assets (Cost) $52,000

It's important to note that the government-wide financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting, while the fund financial statements are prepared using the current financial resources measurement focus and the modified accrual basis of accounting. This leads to differences in reporting, as shown above.

Answer 3

On the government-wide financial statements for the year ended December 31, 2017:

1. The work of art will be reported as a capital asset under the "Infrastructure, Facilities, and Equipment" category. Since the city has opted to depreciate the cost of the art over 20 years, the net book value of the asset will be reported. Assuming no other depreciation has been recorded for the year, the net book value will be the original cost of $52,000 minus the depreciation expense for 2017.

2. The depreciation expense for the year will be calculated using the straight-line method, which spreads the cost of the asset evenly over its useful life. The depreciation expense for 2017 can be calculated as follows: Depreciation Expense = (Original Cost of Asset) / (Useful Life) Depreciation Expense = $52,000 / 20 = $2,600

3. The government-wide financial statements will also disclose information about the art piece's service potential and how it contributes to the city's overall infrastructure and cultural assets.

On the fund financial statements for the year ended December 31, 2017:

1. In the governmental fund financial statements, the purchase of the art piece will be reported as an expenditure in the "Capital Outlay" section. This means that the full cost of $52,000 will be deducted from the fund's available resources for the year.

2. In the proprietary fund financial statements (if applicable), the art piece will be recorded as a capital asset, similar to the government-wide financial statements. The depreciation expense will also be recorded as an expense in the appropriate expense category.

3. In the fiduciary fund financial statements, the art piece will be reported if the city is holding it as a trustee for someone else, and any related transactions will be recorded in the fiduciary fund accounts.

It's important to note that the specific presentation and disclosures on the financial statements may vary depending on the accounting standards and reporting requirements applicable to the City of Graf.