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[img width=’13’ height=’13’ src=’file:///C:/Users/Doldron/Desktop/PicExportError’ alt=’*’>Problems  6-4, 6-6, 6-7, 6-9, and 6-10[img width=’13’ height=’13’ src=’file:///C:/Users/Doldron/Desktop/PicExportError’ alt=’*’>Problems 7-4, 7-5, 7-7, 7-9, and 7-106-4Theaccounting for bond premiums is not the mirrorimageof that for bond discounts.Pacific IndependentSchool District issued$100 million of generalobligation bonds to financethe construction of newschools. The bonds wereissued at a premium of$600,000.1. Prepare the capitalprojects fund journalentries to record theissue of the bonds andthe transfer of thepremium to an appropriatefund. 2. Suppose, instead, thatthe bonds are issued at adiscount of $600,000but that the project stillcosts $100 million.Prepare the appropriateentries.a. Contrast the entriesin this part and inpart 1.b. Indicate the optionsavailable to the schooldistrict and tell howthey affect the entriesrequired of thedistrict.c. Suppose thegovernment chose to financethe balance of theproject with generalrevenues. Prepare theappropriate capitalprojects fund entry.6-6The construction andfinancing phase of a special assess-ment project isaccounted for in a capital projects fund;the debt service phaseis accounted for in a debt servicefund (see the nextproblem).Upon annexing arecently developed sub-division, a governmentundertakes to extendsewer lines to thearea. Estimated cost is $1 0million. The project isto be funded with$8.5 million in specialassessment bonds and a$1 .0 millionreimbursement grant from the state.The balance is to bepaid by the government outof its general fund.Property owners are to beassessed an amountsufficient to pay both prin-cipal and interest onthe debt. The governmentestimated that, duringthe first year of the proj-ect, it would earn$200,000 in interest on thetemporary investment ofbond proceeds, anamount that wouldreduce the required transferfrom the general fund.It also estimated thatbond issue costs wouldbe $1 80,000.During the year, thegovernment engaged inthe followingtransactions, all of which should berecorded in a capitalprojects fund.a. It issued $8.5 millionin bonds at a premium of$300,000 and incurred$180,000 in issue costs.The premium, net ofissue costs, is to be trans-ferred to a newlyestablished debt service fund.b. It received the $1million grant from the state,recognizing it asdeferred revenue until itincurred at least $1million in constructioncosts.c. It invested $7.62million in short-term (less thanone-year) securities.d. It issued purchaseorders and signed construc-tion contracts for $9.2million.e. It sold $5 millionof its investments for $5.14million, the excess ofselling price over costrepresenting interestearned. By year-end theinvestments still onhand had increased in valueby $60,000, an amountthat also could be attrib-uted to interestearned.f. It received invoicestotaling $5.7 million. Aspermitted by itsagreement with its primecontractor, it retained(and recorded as a pay-able) $400,000, pendingsatisfactory comple-tion of the project. Itpaid the balance of$5.3 million.g. It transferred $120,000 to the debt service fund.h. It updated itsaccounts but did not close them,inasmuch as the projectis not completed and itsbudget is for theentire project, not for a singleperiod.1. Prepare appropriatejournal entries for thecapital projects fund.2. Prepare a statementof revenues, expenditures,and changes in fundbalance, in which youcompare actual andbudgeted amounts.3. Prepare a year-endbalance sheet.4. Does your balancesheet report the construc-tion in process? Ifnot, where might the con-struction in process berecorded?6-7Thedebtservicephasespecialassessmentbondsareaccountedfor in a debt servicefund (see the previous problem).As indicated in theprevious problem, a gov-ernment issued $8.5million of special assessmentbonds to finance asewer-extension project. Toservice the debt, itassessed property owners $8.5million. Theirobligations are payable over a periodof five years, withannual installments due onMarch 31 of each year.Interest at an annual rateof8% is to be paid onthe total balance outstandingas of that date.The bonds require anannual principal pay-ment of $1.5 millioneach year for five years, whichis due on December 31.In addition, interest on theunpaid balance ispayable twice each year, on June30 and December 31, atan annual rate of 8%.The government agreedto make up from itsgeneral fund thedifference between required debtservice payments andrevenues.At the start of theyear, the government estab-lished a debt servicefund. It estimated that it wouldcollect from propertyowners $1.3 million in spe-cial assessments and$500,000 of interest on theunpaid balance of theassessments. In addition, itexpected to earninterest of $80,000 on temporaryinvestments. It wouldbe required to pay interest of$680,000 and makeprincipal payments of $1.7million on theoutstanding debt. It anticipatedtransferring $500,000from the general fund tocover the revenueshortage.During the year, thegovernment engaged inthe followingtransactions, all of which affect thedebt service fund.a. It recorded the $8.5million of assessmentsreceivable, estimatingthat $200,000 would beuncollectible.b. The specialassessments bonds were issued at apremium (net of issuecosts) of $120,000. Thegovernment recognizedthe anticipated transferof the premium to thedebt service fund.c. During the year, thegovernment collected $2.0million in assessmentsand $400,000 in interest(with a few propertyowners paying their entire  assessmentin the first year). During the first 60days of the followingyear, it collected an addi-tional $100,000 inassessments and $10,000 ininterest, which weredue the previous year.d. It transferred$120,000 (the premium) from thecapital projects fund.e. It purchased$800,000 of six-month Treasurybills as a temporaryinvestment.f. It made its firstinterest payment of $340,000.g. It sold theinvestments for $850,000, the differ-ence between sellingprice and cost representinginterest earned.h. It recognized itsyear-end obligation for interestof $340,000 andprincipal of $1.7 million butdid not actually makethe required payments.i. It prepared year-endclosing entries.1. Prepare appropriatejournal entries for thedebt service fund.2. Prepare a statementof revenues, expenditures,and changes in fundbalance in which youcompare actual andbudgeted amounts.3. Prepare a year-endbalance sheet.4. Does your balancesheet report the balance ofthe bonds payable? Ifnot, where might it berecorded?6-9Governments may reportsubstantially differentamounts of interest ontheir government-wide andfund financialstatements.Charter City issued$100 million of 6%,20-year generalobligation bonds on January 1,2012. The bonds weresold to yield 6.2% and hencewere issued at adiscount of $2.27 million (i.e., at aprice of $97.73million). Interest on the bonds ispayable on July 1 andJanuary 1 of each year.On July 1, 2012, andJanuary 1, 201 3, the citymade its requiredinterest payments of $3 millioneach.1. How much interestexpenditure should thecity report in its debtservice fund statementfor its fiscal yearending December 31, 2012?During 2012 the citydid not transfer resourcesto the debt servicefund for the interest pay-ment that was dueJanuary 1, 2013.2. How much interestexpense should the cityreport on itsgovernment-wide statements forthe year endingDecember 31, 2012? (It mightbe helpful to prepareappropriate journalentries.)3. On January 1, 2032the city repaid the bonds.How should therepayment be reflected on thecity’s (1) fundstatements and (2) government-wide statements?6-10Debtors may be able torealize an economic gain bydefeasing their debt‘‘in substance.’’A hospital hasoutstanding $100 million ofbonds that mature in 20years (40 periods). Thedebt was issued at parand pays interest at a rate of6% (3% per period).Prevailing rates on compara-ble bonds are now 4%(2% per period).1. What would youexpect to be the market priceof the bonds, assumingthat they are freely  traded? Is therean economic benefit for thehospital to refund theexisting debt by acquir-ing it at the marketprice and replacing it withnew, ‘‘low-cost’’ debt?(Present value at 2% of$1 paid at the end of40 periods ¼ $.452890;present value at 2% ofan annuity of $1 paid atthe end of each of 40periods ¼ $27.3 5548)2. Assume the bondscontain a provision per-mitting the hospital tocall the bonds inanother five years (1 0periods) at a price of$1 05 and that anyinvested funds could earn areturn equal to theprevailing interest rate of4% (2% per period).What is the economicsaving that thehospital could achieve bydefeasing the bonds‘‘in substance’’? (Pres-ent value at 2 % of $1paid at the end of1 0 periods ¼ $.82 0348; present value at 2 %of an annuity of $1paid at the end of each of1 0 periods ¼ $8.98258)7-4Capital assets areaccounted for in government-widestatements on a fullaccrual basis.The followingsummarizes the history ofSharp Hall, the main foreignlanguage classroombuilding at a stateuniversity that bases its account-ing on the reportingmodel applicable to cities andother general purposegovernments.a. In 1985 theuniversity constructed the buildingat a cost of$1,500,000. Of this amount,$1 ,000,000 was financedwith bonds and thebalance fromunrestricted university funds.b. In the 10 years from1985 through 1995, theuniversity recordeddepreciation (as appropri-ate) based on anestimated useful life of30 years.c. In the same period,the university repaid$750,000 of the bonds.d. In 1996 theuniversity renovated the building ata cost of $3,000,000.The entire amount wasfinanced withunrestricted university funds. Therenovation was expectedto extend the useful lifeof the building so thatit would last a total of 25more years—that is,until 2021.e. In the 15 years from1996 through 2011, theuniversity recordeddepreciation (as appro-priate). Depreciationwas calculated by dividingthe undepreciatedbalance of the original cost,plus the costs ofrenovation, by the anticipatedremaining life of 25years.f. In the same period,the university repaid the$250,000 balance of thedebt.g. In 2012 theuniversity demolished the buildingso that the land onwhich it was situated could  beconverted into a practice field for the wom-en’s soccer team.Prepare the journalentries to summarize thehistory of thebuilding, as reported in the univer-sity’s government-widestatements.7-5Capital assets areaccounted for in governmental fundstatements on a modifiedaccrual basis.Refer to thetransactions in the previousproblem.1. Prepare journalentries for the university tomake in itsgovernmental funds (e.g., its gen-eral fund or a capitalprojects fund).2. How would yourecommend that the univer-sity maintainaccounting control over the cap-ital assetsthemselves—those that you did notrecord as assets in thegovernmental funds?7-7If governments do notpreserve their infrastructureassets, they mustdepreciate them.1. In 2012 BanthamCounty incurred $80 millionin costs to construct anew highway. Engineersestimate that theuseful life of the highway is20 years. Prepare theentry that the countyshould make to recordannual depreciation(straight-line method)to facilitate preparationof its government-widestatements.2. What reservationsmight you have as to theengineers’ estimate ofuseful life? Why mightany estimate of ahighway’s useful life besuspect?7-9Similar collectiblesmay be accounted for quite differently.The City of Allentownrecently received adonation of two items: A letter written in 1820 by James Allen, thetown’s founder, inwhich he sets forth his planfor the town’sdevelopment. Independentappraisers have valuedthe letter at $24,000. A 1920 painting of the town’s city hall.Compa-rable paintings by thesame artist have recentlybeen sold for $4,000.The city intends toplace the letter on publicdisplay in its cityhall. It plans to sell the paintingand use the proceeds toredecorate the city coun-cil’s meeting chambers.The town’s policy is tocapitalize collectiblesonly when required by GASBstandards to do so.1. Prepare journalentries, as necessary, to reflecthow each of thecontributions should bereported on the city’sgovernment-wide finan-cial statements. Brieflyexplain and justify anyapparentinconsistencies in the entries.2. Suppose that thecity had purchased each ofthe items. Would thataffect whether or notyou capitalized each ofthe assets?3. Suppose that whenthe city accepted the painting,itagreed, ifitsold thepainting, to use the proceedsonlyto acquire otherworks ofart. Does that affecthow you account for thepainting?4. Suppose that thecity operates a museum. Themuseum’s building,furniture, and fixturescost $10 million and,on average, are midwaythrough their usefullife. They have a replace-ment cost of $12million. The art collectionhas a market value of$3 00 million. Consistentwith your response topart a, what value wouldyou place on the artcollection? What valuewould you place on thebuilding, furniture,and fixtures? Brieflyjustify your response,commenting specificallyon whether you thinkthe resultant statementof net assets wouldprovide usefulinformation to statement users.7-10Investment notes enablethe reader to assess both creditand interest raterisks.A note from the annualreport of a city in-cludes the following:As of September 30, theutility fund had thefollowing investments:FairValue(in thousands)Weighted-AverageMaturity(days)Local governmentinvestment pool  $  6  1U.S. Treasuries  27,600 790U.S. Agencies 80,400 520Total  $108,006  589Credit risk. As ofSeptember 30, the U.S.Treasuries and the bonds wererated AAA by Standard& Poor’s. The localgovernment investmentpool was rated AA.Interest rate risk. Asa means of minimizingrisk of loss that isdue to interest rate fluctua-tions, the investmentpolicy requires that thedollar-weighted averagematurity, using finalstated maturity dates,not exceed seven years.The portfolio’sweighted-average maturity,however, may besubstantially shorter if mar-ket conditions sodictate. As of September 30,the dollar-weightedaverage maturity was 589days (1.61 years).1. Why does the citylimit the weighted-averagematurity of itsportfolio to seven years ratherthan a greater numberof years, even thoughinvestments with alonger maturity generallyprovide a greaterinvestment yield?2. Why might the cityindicate that the averagematurity of the localgovernment investment pool is only one dayeven if, in fact, the poolholds investments thathave an average matu-rity of over 3 0 days?3. What is meant bycredit risk? How do youassess the credit riskof the U.S. Treasury andU.S. agency bonds?Explain.

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