Question

The City of Knoxville expended $200,000 to buy land to be used by the city electric utility as a site for an office building. This land should be capitalized in the utility fund, not in the governmental activities accounts.

a. True
b. False

Answer 1

It is true that the land bought by the City of Knoxville for the city electric utility should be capitalized in the utility fund. This aligns with government accounting principles, where enterprise funds account for activities like utilities that operate similarly to private businesses.

Step-by-step explanation:

The statement that the land purchased by the City of Knoxville for $200,000 to be used by the city electric utility as a site for an office building should be capitalized in the utility fund and not in the governmental activities accounts is true. This is consistent with accounting principles for government entities, where the utility fund is an enterprise fund. Enterprise funds, which are used to account for activities that are financed, at least in part, by fees charged to external users, are considered proprietary funds and operate similar to private businesses. Therefore, the costs of tangible assets such as land that will provide benefit in producing revenue should be capitalized in the utility fund rather than the governmental activities accounts, which are typically used for governmental services that are not intended to be self-sustaining.