Question

Governments must now account for their capital assets, including infrastructure, and they must recognize in their accounts that the assets may not last forever (unless continually preserved). In the year a road maintenance district was established, it engaged in the transactions that follow
involving capital assets (all dollar amounts in thousands). The district maintains only a single governmental fund (a general fund).

1. Received authority over roads previously “owned” by the county. The estimated replacement cost of the roads was $60,000. On average they have a remaining useful life of 40 years.
2. Acquired machinery and equipment for $700, with general fund resources. They have a useful life of 10 years.
3. Incurred costs of $3,000 to construct a building. The construction was financed with general obligation bonds. The building has a useful life of 30 years.
4. Acquired equipment having a fair value of $60 in exchange for $20 cash (from general-fund resources) plus used equipment for which the district had paid $50. The used equipment had a fair value at the time of the trade of $40; depreciation of $25 had previously been recognized.
5. Sold land for $70 that had been acquired for $90.
6. Received a donation of land from one of the towns within the district. The land had cost the town $120, but at the time of the contribution had a fair market value of $500.
7. Incurred $1,200 in road resurfacing costs. The district estimates that its roads must be resurfaced every four years if they are to be preserved in the condition they were in when they were acquired.
8. Recognized depreciation of $100 on its building, $70 on its machinery and equipment, and $1,500 on its roads, in addition to any depreciation relating to the resurfacing costs.

a. Prepare entries to record the transactions so that they could be reflected in the district’s government-wide statements. The district has opted to depreciate its infrastructure assets.
b. Suppose instead that the district has elected not to depreciate its roads but to record as an expense only the costs necessary to preserve the roads in the condition they were in when acquired. How would your entries differ?
c. If, in fact, the roads have a useful life of 40 years, do you think it is sound accounting not to depre-ciate the roads? Explain.
d. If, in fact, the preservation costs are sufficient to preserve the roads in the condition they were in when the district acquired them, do you think it is sound accounting to depreciate the roads? Explain.

Answer 1

Journal Entries
Sl No	Journal entries		Debit	Credit
1	Roads (infrastructure) A/c	Dr	60000
	To Net capital assets A/c			60000
2	Machinery and equipment A/c	Dr	700
	To Cash A/c			700
	(To record acquisition of machinery and equipment)
3	Building A/c	Dr	3000
	To Bonds payable A/c			3000
	(To record construction in process and related bonds payable )
4	Machinery and equipment (new) A/c	Dr	45
	Accumulated depreciation—machinery and equipment A/c	Dr	25
	To Cash A/c			20
	To Machinery and equipment (old) A/c			50
	(To record trade-in transactions. )
5	Cash A/c	Dr	70
	Loss on sale of land A/c	Dr	20
	To Land A/c			90
	(To record sale of land)
6	Land A/c	Dr	500
	To Donation of land (revenue) A/c			500
	(To record donation of land )
	(The cost of the land to the donor is irrelevant)
7	Road resurfacing costs (asset) A/c	Dr	1200
	To Cash A/c			1200
	(To record improvement and maintenance of roads)
8	Depreciation expense A/c	Dr	1970
	To Accumulated depreciation—roads A/c			1500
	To Accumulated depreciation—building A/c			100
	To Accumulated depreciation—machinery and equipment A/c		70
	Accumulated depreciation—road resurfacing costs A/c			300
	(To record depreciation on roads, building, and machinery and equipment)

b ) If they using such modified approach, then they should have expensed such resurfacing costs as incurred; it would not have depreciated them.
c )If, in fact, roads have a useful life of fourty (40) years, then such acquisition cost of roads ( $60,000) should be recognized as the expense over the life of the roads. The roads, like other capital assets, are losing their service value over time
d) By contrast, if the maintenance costs are sufficient to preserve the roads in same condition as when they were acquired, then they have an infinite useful life. There would be no conceptual rationale for depreciating them. They do not lose their service value over time.