The accountant for the City of Abernethy calls the local CPA firm that audits the city’s financial statements with a question. “At the start of the current year, city officials signed a contract to lease a new police car for seven years, its entire useful life. We drove a hard bargain. The annual payments are only $18,000 per year so the liability has a present value of $98,031. I realize the city has to report the initial liability at that amount. Nevertheless, the car has a fair value of $114,000. We know that based on its sales price. Can we report the asset at $114,000 even if we have to report the liability at $98,031?”

Required

Go to www.gasb.org. Click on “Standards & Guidance.” Under “Pronouncements,” click on “More.” Under “View GASB Pronouncements,” search for GASB Statement No. 87. Click on “Full Text.” Scroll to the Table of Contents. Locate “Appendix B: Basis for Conclusions.” This section explains what options GASB considered and what decisions were made. Locate and read paragraphs B47 through B50. Based on that discussion, write a memo to officials for the City of Abernethy answering the question posed by the accountant.