Question

A city starts a solid waste landfill that it expects to fill to capacity gradually over a 21-year period. At the end of the first year, it is 13 percent filled. At the end of the second year, it is 29 percent filled. Currently, the cost of closure and postclosure is estimated at $1 million. None of this amount will be paid until the landfill has reached its capacity.

Which of the following is true for the Year 2 government-wide financial statements?

Multiple Choice

• Both expense and liability will be $160,000.

• Both expense and liability will be zero.

• Expense will be $160,000 and liability will be $290,000.

• Expense will be $150,000 and liability will be $300,000.

Answer 1

Ans: Expense wil be $160000 and liability will be $290000

Reason As per the fundamental principles of accounts ,every company must follow accrual basis of accounitng for its expenses and income irrespective of whether they have paid / realised in that year in liaise with matchig principle

Therefore for the first year 13% has been filled , hence expense will be booked as $1million *13%=$130000 and liability will be created for $130000

for the second year , expense need to be booked =$1milllion *29%=$290000, since $130000 has been already booked in first year , therefore $160000($29-$13) has to be booked as expense in current year and liability account increases by $160000 to the first year balance $130000 making it total liability till year 2 will be $290000

hence for year 2 in government financial statements , Expense account shows balance of $160000in year 2 and liability balance shows $290000