When a capital asset is transferred from one fund to another, how should it be reported?

The correct answer is based on the principle that capital assets should be reported at their historical cost as of the date acquired by the primary government when they are transferred between funds. This method ensures consistency in financial reporting and reflects the actual investment made by the government in the asset, rather than fluctuating values that may arise from market conditions or other factors.

Using historical cost maintains the integrity of the financial statements. This approach avoids discrepancies that could occur if assets were reported at varying values at the time of transfer, providing a clearer picture of the government's financial position and resource allocation over time. Historical cost represents an objective measurement that does not rely on subjective assessments or current market conditions, which can be volatile.

The other choices suggest different methods of valuation that are not typically used in governmental accounting practices for internal transfers. Fair value assessment could lead to inconsistent reporting and misrepresentation of capital asset values if the fair market value fluctuates significantly. Replacement cost might not reflect the amount that was originally invested, while purchase price does not take into account any additional costs incurred to make the asset ready for use, which are also necessary to account for.

Thus, the established practice of reporting capital assets at their historical cost provides a stable foundation for financial reporting in governmental accounting.