Exam 8: Long-Term Obligations

Easterly City has $47 million of debt recorded in its schedule of changes in long-term obligations, made up of $30 million of general obligation debt, $1 million of compensated absences payable, $4 million of claims and judgments, and $12 million of obligations under capital leases.The state limits the amount of general obligation debt that can be issued by a city to 20 percent of the assessed value of its taxable property.The assessed value of property in Easterly City is $250 million.The city's legal debt margin is

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Question 1

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Generally accepted accounting principles require governments to report many assets to be reported at market value.However, few liabilities are reported at market value.Present arguments for and against reporting liabilities at market value.

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Question 2

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Overall, if governments have long-term debt outstanding and also hold long-term bonds as an investment, it may appear inconsistent and misleading to show valuation changes on one side of the balance sheet while ignoring valuation changes on the other side.
The primary argument in favor of reporting long-term liabilities at historical cost rather than market value is that the market value information will not be used.Because most entities have no intention of retiring the debt until it matures, period-to-period fluctuations are irrelevant.This argument is supported by the FASB's standard (applicable to for-profit entities)which permits entities to report investments that are to be held to maturity at amortized cost, whereas all other investments must be reported at market value.
The primary argument in favor of reporting long-term liabilities at market value appears to be consistency in the treatment of assets and liabilities.Also, if an entity holds investments that are timed to mature as needed to provide proceeds to liquidate outstanding liabilities, it seems misleading to value the assets at market and the liabilities at historical cost (or present value), because the liability will be liquidated with the proceeds from the sale of the related assets.

A state created a housing authority to provide financing for low-income housing.The authority issues bonds and uses the proceeds for that purpose.Currently the authority has outstanding $200 million in bonds backed by the state's promise to cover debt service shortages should they arise.The state constitution specifically limits the state to no more than $2 million in general obligation debt.How can the state officials defend the $200 million in debt outstanding?

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Question 3

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What is "overlapping debt" and why is it important to financial analysts and others who use government financial statements?

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Question 4

What is the distinction between general obligation debt and revenue bond debt? Why might a government issue revenue bond debt instead of general obligation debt?

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Question 5

Beaver city entered into a long-term capital lease for some office equipment.The city maintains its books and records in a manner to facilitate preparation of fund financial statements.What entry should be made in its general fund to record this event?

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Question 6

Debt that is issued by one entity but backed by the promise of another entity to make up any debt service deficiency is

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Question 7

In a bond covenant, a city agreed to create and maintain a $2 million reserve.These funds can be used

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Question 8

General obligation debt is the obligation of the government at large and is thereby backed by the government's general credit and revenue-raising powers.

(True/False)

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Question 9

Revenue debt is secured only by designated revenue streams.

(True/False)

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Question 10

Salvador County issued $25 million of 5 percent demand bonds for construction of a county maintenance building.The county has no take-out agreement related to the debt.It estimates that 20 percent of the bonds would be demanded (called)by the buyers if interest rates increased by at least one percentage point.At year-end, rates on comparable debt were 7 percent.How should these demand bonds be reported in the governmental fund financial statements at year-end?

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Question 11

On December 31, 2014 Morse City issued $50 million of 8 percent, 20-year, demand bonds that give bondholders the opportunity to "put" (i.e.sell)the securities back to the issuer at face value, beginning on January 1, 2018.On December 31, 2017, prevailing interest rates on comparable bonds were 6.7 percent.Should the city report the bonds as a liability on its December 31, 2017 governmental fund financial statements? Explain, indicating any additional information you would need to make a determination.

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Question 12

A high bond rating by a recognized agency guarantees the creditworthiness of a government's debt.

(True/False)

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Question 13

Dumas County has a December 31 fiscal year-end.In November, the county borrowed $8 million from a local bank, due in six months at 6 percent interest, to finance general government operations.The county pledges property tax revenues to secure the loan.At year-end, how should the county display the bank note in the governmental fund financial statements?

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Question 14

Salvador County issued $25 million of 5 percent demand bonds for construction of a county maintenance building.Before year-end the county entered into a two-year noncancellable take-out agreement with a local bank with a 10-year payback period.The county estimates that 20 percent of the bonds would be demanded (called)by the buyers if interest rates increased by at least One percentage point.At year-end, rates on comparable debt were 7 percent.How should these demand bonds be reported in the county's government-wide financial statements at year-end?

(Multiple Choice)

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Question 15

Pacheco City issued $20 million of bonds at par.The city loaned the proceeds to Sharpe Cheese Processors to expand the size of its facility, which would allow Sharpe to hire additional workers.The loan payments from Sharpe to the city are established to match the principal and interest payments on the bond issue.The bonds are payable exclusively from the loan repayments by Sharpe.The bonds are secured by the additional plant facilities built by Sharpe.Where should the city report the bonds in its annual financial report?

(Multiple Choice)

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Question 16

Overlapping debt refers to the obligations of property owners within a government's boundaries for their proportionate share of the debt of other governments with overlapping geographic boundaries.

(True/False)

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Question 17

Governments may enter into operating leases, but may not enter into capital leases.

(True/False)

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Question 18

North City enters into a lease agreement that contains a nonappropriation clause.The clause

(Multiple Choice)

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Question 19

Governments enter into capital leases rather than conventional buy and borrow arrangements for which of the following reasons? Capital leases

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Question 20

Showing 1 - 20 of 53

Generally accepted accounting principles require governments to report many assets to be reported at market value.However, few liabilities are reported at market value.Present arguments for and against reporting liabilities at market value.

What is "overlapping debt" and why is it important to financial analysts and others who use government financial statements?

What is the distinction between general obligation debt and revenue bond debt? Why might a government issue revenue bond debt instead of general obligation debt?

Beaver city entered into a long-term capital lease for some office equipment.The city maintains its books and records in a manner to facilitate preparation of fund financial statements.What entry should be made in its general fund to record this event?

Debt that is issued by one entity but backed by the promise of another entity to make up any debt service deficiency is

In a bond covenant, a city agreed to create and maintain a $2 million reserve.These funds can be used

General obligation debt is the obligation of the government at large and is thereby backed by the government's general credit and revenue-raising powers.

Revenue debt is secured only by designated revenue streams.

A high bond rating by a recognized agency guarantees the creditworthiness of a government's debt.

Overlapping debt refers to the obligations of property owners within a government's boundaries for their proportionate share of the debt of other governments with overlapping geographic boundaries.

Governments may enter into operating leases, but may not enter into capital leases.

North City enters into a lease agreement that contains a nonappropriation clause.The clause

Governments enter into capital leases rather than conventional buy and borrow arrangements for which of the following reasons? Capital leases

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