Question

In the current year, the building occupied by Sunshine City's Culture and Recreation Department suffered severe structural damage as a result of a hurricane. It had been 48 years since a hurricane had hit the Sunshine City area, although hurricanes in Sunshine 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. Required

a. Should the estimated impairment loss be reported as an extraordinary item? As a special item?

b. Record the estimated impairment loss in the journal for governmental activities at the government-wide level.

c. How should the insurance recovery be reported in the following fiscal year?

a. The estimated impairment loss should be reported as a special item.

b. Debit: Impairment Loss $230,000; Credit: Accumulated Depreciation $500,000; Credit: Buildings $230,000

c. Debit: Cash $120,000; Credit: Insurance Recovery $120,000

Answer 1

The estimated impairment loss should be reported as a special item. The journal entry to record the estimated impairment loss is: Debit: Impairment Loss $230,000, Credit: Accumulated Depreciation $500,000, Credit: Buildings $230,000. The insurance recovery should be reported as a gain.

Step-by-step explanation:

a. The estimated impairment loss should be reported as a special item because it is a significant and unusual event that is not likely to recur.
b. The journal entry to record the estimated impairment loss in the journal for governmental activities at the government-wide level is:
Debit: Impairment Loss $230,000
Credit: Accumulated Depreciation $500,000
Credit: Buildings $230,000
c. The insurance recovery should be reported as a gain in the following fiscal year. The journal entry would be:
Debit: Cash $120,000
Credit: Insurance Recovery $120,000