The City of Allentown recently received a donation of two items:
1. A letter written in 1820 from James Allen, the town’s founder, in which he sets forth his plan for the town’s development. Independent appraisers have valued the letter at $24,000.
2. A 1920 painting of the town’s city hall. Comparable paintings by the same artist have recently been sold for $4,000.
The town intends to place the letter on public display in its city hall. It plans to sell the painting, using the proceeds to redecorate the city council’s meeting chambers.
It is the town’s policy to capitalize collectibles only when required by GASB standards to do so.
a. Prepare journal entries, as necessary, to reflect how each of the contributions should be reported on the city’s government-wide financial statements. Briefly explain and justify any apparent inconsistencies in the entries.
b. Suppose that the city had purchased each of the items. Would that affect whether or not you capitalized each of the assets?
c. Suppose that when the city accepted the painting it agreed that if it sold the painting it would use the proceeds only to acquire other works of art. Would that affect how you accounted for the painting?
d. Suppose that the city operated a museum. The museum’s building, furniture, and fixtures had cost $10 million and, on average, were now midway through their useful life. They had a replacement cost of $12 million. The art collection had a market value of $300 million. Consistent with your response to part (a), what value would you place on the art collection? What value would you place on the building, furniture, and fixtures? Briefly justify your response, commenting specifically on whether you think the resultant balance sheet would provide useful information to statement users.