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Module 1: Critical Thinking


Rainbow City had the following transactions during the year.

Required: Prepare the necessary journal entries in the appropriate governmental fund general journal and the government-wide governmental activities general journal for each of the following Rainbow City transactions.

  1. The city received a donation of land that is to be used by Parks and Recreation to develop a public park. At the time of the donation, the land had an acquisition value of $4,600,000 and was recorded on the donor’s books at a historical cost of $3,800,000.
  2. The Public Works Department sold machinery with a historical cost of $35,100 and accumulated depreciation of $28,700 for $7,000. The machinery had originally been purchased with special revenue funds.
  3. A car was leased for the mayor’s use. The first payment was $1,000 and the present value of the remaining lease payments was $27,000. (Note: the initial cash payment was made by the General Fund.)
  4. During the current year, a Capital Projects Fund completed a new public safety building that was started in the prior year. The total cost of the project was $10,720,000. Financing for the project came from a $10,000,000 bond issue that was sold in the prior year and from a $720,000 federal capital grant received in the current year. Current expenditures for the project totaled $1,240,000. The full cost is attributed to the building because it was constructed on city-owned property.
  5. The city records a half year of straight-line depreciation on capital assets placed in service during the year. The building in Item 4 has an estimated 30-year life with no salvage value.
  6. Due to technological developments, the city determined that the service capacity of some of the technology equipment used by general government has been impaired. The calculated impairment loss due to technology obsolescence was $896,000.

Part B:

In the current year, the building occupied by Surf Beach City’s Culture and Recreation Department suffered several structural damage as a result of a hurricane. It had been 48 years since a hurricane had hit the Rainbow City area, although hurricanes in Rainbow City’s geographic area are not uncommon. The building had been purchased 10 years earlier at a cost of $2,000,000 and had accumulated depreciation of $500,000 as of the date of the hurricane. Based on a restoration cost analysis, city engineers estimate the impairment loss at $230,000; however, the city expects during the next fiscal year to receive insurance recoveries of $120,000 for the damage.


  1. Should the estimated impairment loss be reported as an extraordinary item? Explain.
  2. Record the estimated impairment loss in the journal for governmental activities at the government-wide level.
  3. How should the insurance recovery be reported in the following fiscal year? (You do not need to provide journal entries.)
    • Submit your responses to Part A in Excel format. The answers to Part B can be included on the spreadsheet or be submitted in a Word document.
    • Show calculations for all questions.
    • Support writing portion of the assignment, with credible sources.
    • Use terms, evidence, and concepts from class readings, including professional business language.

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