Exam 8: Long-Term Obligations

Although governments may elect to report conduit debt in their government-wide and proprietary fund statements, the GASB has ruled that note disclosure is sufficient.

Obligations issued in the name of a government on behalf of a nongovernmental entity are called

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

Industrial development bonds are issued in the name of a government with the proceeds used to attract private businesses to a community. Which of the following is a true statement about industrial development bonds?

In August 2017, the voters of Carp City approved construction of a new public library at the cost of $20 million, to be financed by general obligation bonds. The city put the contracts out to bid and approved the bid of the lowest bidder. In September 2017, the city began the long process of issuing the general obligation bonds. However, so that construction could begin immediately, the city also issued $5 million in bond anticipation notes in September 2017, maturing in March 2018. In December 2017, one of the city's major manufacturers announced that it would be closing its plant in the city, eliminating over half of the jobs currently available in the city. REQUIRED: (a) Prepare journal entries to initially record the issuance of the BANs in the city's capital projects fund as well as in its government-wide financial statements. (b) The city decided to reconsider the scope of the library project in light of the plant closure, prepare any entries necessary to change the reporting of the BANs assuming that the city negotiated a 6-month extension of the initial due date for the BANs and would not issue any general obligation bonds before issuing its June 30, 2018 financial statements.

Midway City engaged in two types of debt transactions in its fiscal year ending December 31, 2017. The city issued its financial statements for 2017 on May 15, 2018. A. In November 2017, the city issued $4 million in bond anticipation notes (BANs) to finance construction of a new maintenance facility. The proceeds were placed in a capital projects fund and the city began construction immediately. Although the city intended to refinance the BANs with long-term bonds, interest rates were higher than anticipated and as of May 15, 2018 the city had neither issued the bonds nor entered into an agreement to do so. How, if at all, should the debt be reported in the capital projects fund and the government-wide statements? Be specific. 1. Capital projects fund 2. Government-wide statements B. In October 2017, the city issued $1 million of industrial development bonds to finance the construction of a new fast-food restaurant. The city will construct the facility and lease it to a restaurant chain. The lease satisfies the criteria for a capital lease. The lease payments will be exactly equal to the debt service on the bonds. The bonds are payable exclusively from the lease payments. In the event the restaurant chain defaults on its lease payments, the bondholders have a claim only against the restaurant chain and the leased property, not against the city. In its December 31, 2017 government-wide statement of net position, the city did not report the debt as a liability. Assuming that the amount involved is material, would you as an auditor issue an unqualified opinion on the financial statements? Explain and justify your response.

Financial analysts look at the ratio of assessed value of property to total market value of property as a measure of a government's ability to issue new revenue bonds.

Voters of Valdez School District, a public school district, approved construction of a new high school at a cost not to exceed $20 million. The district will finance the construction by issuing $20 million of 6 percent term bonds payable in 20 years. Because the site had already been prepared, the school district began construction immediately but the bonds would not be issued for nearly a year. Shortly before the fiscal year-end, the school district borrowed $5 million from a local bank due in one year with interest at 6.2 percent. The note will be repaid from bond proceeds. The school district secured a financing agreement with the bank to convert the debt to a 10-year debt if the school district is unable to sell the bonds by the due date. At year-end, how should the $5 million note be displayed in the governmental fund financial statements?

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

In accounting for operating leases, the rental payments should be recognized as expenditures in a governmental fund and as expenses in the government-wide statement of activities in the periods in which they apply.

Why is information about long-term debt important to financial statement users?

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

Mod City is located in Harper County. Mod Valley School District encompasses all of Mod City and some of Harper County. Property in Mod City is assessed at $400 million; property in Harper County is assessed at $800 million; property in Mod Valley School District is assessed at $600 million. The total debt outstanding for Mod City is $30 million; Harper County is $50 million; Mod Valley School District is $45 million. REQUIRED: For Mod City, compute (a) the amount of direct debt and (b) the amount of overlapping debt.

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?

When the proceeds of general long-term debt are received by a governmental fund, the debit to cash is offset by an other financing source on the fund statement.

Clavel County leases an office building with a remaining economic life of 20 years. The fair market value of the building is $6 million. Annual lease payments are agreed at $523,107, based on a 6 percent interest rate. The lease meets the conditions for a capital lease. 1. Record the lease and the first year's interest payment (a) In a governmental fund (b) In the government-wide statements 2. Should the office building be depreciated? If so, how and where should depreciation be recorded?

Obligations of property owners within a particular government for their proportionate share of debts of other governments with whom their government shares boundaries are called

To seek protection under the Federal Bankruptcy Code, a government must

Which of the following is true about FASB leasing standards?

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?