Choice "A" is correct. Donated works of art meeting certain criteria are eligible for optional capitalization at the election of the governement receiving the works of art and depreciation is not required even if the government elects to capitalize. To qualify for this treatment, the works of art must be held for public exhibition, be protected/unencumbered and the proceeds from the sale of any of the works must be reinvested in more works of art. Nack City meets all these criteria according to the fact pattern and, therefore, although the assets may be capitalized, it is not required and depreciation is not required.
Choices "c" and "d" are incorrect. Although governments are encouraged to capitalize donated works of art even if they meet the qualifying criteria for optional capitalization (public exhibition, protection from encumbrance, and designation of proceeds from their possible sale to the acquisition of more art), there is no requirement that the government must capitalize or depreciate.
Choice "b" is incorrect. This is something of a nonsense answer. Making capitalization optional with mandatory depreciation is illogical; also incorrect. Although governments are encouraged to capitalize donated works of art, even if they meet the qualifying criteria for optional capitalization (public exhibition, protection from encumbrance, and designation of proceeds from their possible sale to the acquisition of more art), there is no requirement that the government must capitalize or depreciate.