timer Asked: May 12th, 2013

Question Description

[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 7-10


The accounting for bond premiums is not the mirror

image of that for bond discounts.

Pacific Independent School District issued

$100 million of general obligation bonds to finance

the construction of new schools. The bonds were

issued at a premium of $600,000.

1. Prepare the capital projects fund journal

entries to record the issue of the bonds and

the transfer of the premium to an appropriate


2. Suppose, instead, that the bonds are issued at a

discount of $600,000 but that the project still

costs $100 million. Prepare the appropriate


a. Contrast the entries in this part and in

part 1.

b. Indicate the options available to the school

district and tell how they affect the entries

required of the district.

c. Suppose the government chose to finance

the balance of the project with general

revenues. Prepare the appropriate capital

projects fund entry.


The construction and financing phase of a special assess-

ment project is accounted for in a capital projects fund;

the debt service phase is accounted for in a debt service

fund (see the next problem).

Upon annexing a recently developed sub-

division, a government undertakes to extend

sewer lines to the area. Estimated cost is $1 0

million. The project is to be funded with

$8.5 million in special assessment bonds and a

$1 .0 million reimbursement grant from the state.

The balance is to be paid by the government out

of its general fund. Property owners are to be

assessed an amount sufficient to pay both prin-

cipal and interest on the debt. The government

estimated that, during the first year of the proj-

ect, it would earn $200,000 in interest on the

temporary investment of bond proceeds, an

amount that would reduce the required transfer

from the general fund. It also estimated that

bond issue costs would be $1 80,000.

During the year, the government engaged in

the following transactions, all of which should be

recorded in a capital projects fund.

a. It issued $8.5 million in bonds at a premium of

$300,000 and incurred $180,000 in issue costs.

The premium, net of issue costs, is to be trans-

ferred to a newly established debt service fund.

b. It received the $1 million grant from the state,

recognizing it as deferred revenue until it

incurred at least $1 million in construction


c. It invested $7.62 million in short-term (less than

one-year) securities.

d. It issued purchase orders and signed construc-

tion contracts for $9.2 million.

e. It sold $5 million of its investments for $5.14

million, the excess of selling price over cost

representing interest earned. By year-end the

investments still on hand had increased in value

by $60,000, an amount that also could be attrib-

uted to interest earned.

f. It received invoices totaling $5.7 million. As

permitted by its agreement with its prime

contractor, it retained (and recorded as a pay-

able) $400,000, pending satisfactory comple-

tion of the project. It paid the balance of

$5.3 million.

g. It transferred $1 20,000 to the debt service fund.

h. It updated its accounts but did not close them,

inasmuch as the project is not completed and its

budget is for the entire project, not for a single


1. Prepare appropriate journal entries for the

capital projects fund.

2. Prepare a statement of revenues, expenditures,

and changes in fund balance, in which you

compare actual and budgeted amounts.

3. Prepare a year-end balance sheet.

4. Does your balance sheet report the construc-

tion in process? If not, where might the con-

struction in process be recorded?



for in a debt service fund (see the previous problem).

As indicated in the previous problem, a gov-

ernment issued $8.5 million of special assessment

bonds to finance a sewer-extension project. To

service the debt, it assessed property owners $8.5

million. Their obligations are payable over a period

of five years, with annual installments due on

March 31 of each year. Interest at an annual rate

of8% is to be paid on the total balance outstanding

as of that date.

The bonds require an annual principal pay-

ment of $1.5 million each year for five years, which

is due on December 31. In addition, interest on the

unpaid balance is payable twice each year, on June

30 and December 31, at an annual rate of 8%.

The government agreed to make up from its

general fund the difference between required debt

service payments and revenues.

At the start of the year, the government estab-

lished a debt service fund. It estimated that it would

collect from property owners $1.3 million in spe-

cial assessments and $500,000 of interest on the

unpaid balance of the assessments. In addition, it

expected to earn interest of $80,000 on temporary

investments. It would be required to pay interest of

$680,000 and make principal payments of $1.7

million on the outstanding debt. It anticipated

transferring $500,000 from the general fund to

cover the revenue shortage.

During the year, the government engaged in

the following transactions, all of which affect the

debt service fund.

a. It recorded the $8.5 million of assessments

receivable, estimating that $200,000 would be


b. The special assessments bonds were issued at a

premium (net of issue costs) of $120,000. The

government recognized the anticipated transfer

of the premium to the debt service fund.

c. During the year, the government collected $2.0

million in assessments and $400,000 in interest

(with a few property owners paying their entire  assessment in the first year). During the first 60

days of the following year, it collected an addi-

tional $100,000 in assessments and $10,000 in

interest, which were due the previous year.

d. It transferred $120,000 (the premium) from the

capital projects fund.

e. It purchased $800,000 of six-month Treasury

bills as a temporary investment.

f. It made its first interest payment of $340,000.

g. It sold the investments for $850,000, the differ-

ence between selling price and cost representing

interest earned.

h. It recognized its year-end obligation for interest

of $340,000 and principal of $1.7 million but

did not actually make the required payments.

i. It prepared year-end closing entries.

1. Prepare appropriate journal entries for the

debt service fund.

2. Prepare a statement of revenues, expenditures,

and changes in fund balance in which you

compare actual and budgeted amounts.

3. Prepare a year-end balance sheet.

4. Does your balance sheet report the balance of

the bonds payable? If not, where might it be



Governments may report substantially different

amounts of interest on their government-wide and

fund financial statements.

Charter City issued $100 million of 6%,

20-year general obligation bonds on January 1,

2012. The bonds were sold to yield 6.2% and hence

were issued at a discount of $2.27 million (i.e., at a

price of $97.73 million). Interest on the bonds is

payable on July 1 and January 1 of each year.

On July 1, 2012, and January 1, 201 3, the city

made its required interest payments of $3 million


1. How much interest expenditure should the

city report in its debt service fund statement

for its fiscal year ending December 31, 2012?

During 2012 the city did not transfer resources

to the debt service fund for the interest pay-

ment that was due January 1, 2013.

2. How much interest expense should the city

report on its government-wide statements for

the year ending December 31, 2012? (It might

be helpful to prepare appropriate journal


3. On January 1, 2032 the city repaid the bonds.

How should the repayment be reflected on the

city’s (1) fund statements and (2) government-

wide statements?


Debtors may be able to realize an economic gain by

defeasing their debt ‘‘in substance.’’

A hospital has outstanding $100 million of

bonds that mature in 20 years (40 periods). The

debt was issued at par and pays interest at a rate of

6% (3% per period). Prevailing rates on compara-

ble bonds are now 4% (2% per period).

1. What would you expect to be the market price

of the bonds, assuming that they are freely  traded? Is there an economic benefit for the

hospital to refund the existing debt by acquir-

ing it at the market price and replacing it with

new, ‘‘low-cost’’ debt? (Present value at 2% of

$1 paid at the end of 40 periods ¼ $.452890;

present value at 2% of an annuity of $1 paid at

the end of each of 40 periods ¼ $27.3 5548)

2. Assume the bonds contain a provision per-

mitting the hospital to call the bonds in

another five years (1 0 periods) at a price of

$1 05 and that any invested funds could earn a

return equal to the prevailing interest rate of

4% (2% per period). What is the economic

saving that the hospital could achieve by

defeasing the bonds ‘‘in substance’’? (Pres-

ent value at 2 % of $1 paid at the end of

1 0 periods ¼ $.82 03 48; present value at 2 %

of an annuity of $1 paid at the end of each of

1 0 periods ¼ $8.98258)


Capital assets are accounted for in government-wide

statements on a full accrual basis.

The following summarizes the history of

Sharp Hall, the main foreign language classroom

building at a state university that bases its account-

ing on the reporting model applicable to cities and

other general purpose governments.

a. In 1985 the university constructed the building

at a cost of $1,500,000. Of this amount,

$1 ,000,000 was financed with bonds and the

balance from unrestricted university funds.

b. In the 10 years from 1985 through 1995, the

university recorded depreciation (as appropri-

ate) based on an estimated useful life of30 years.

c. In the same period, the university repaid

$750,000 of the bonds.

d. In 1996 the university renovated the building at

a cost of $3,000,000. The entire amount was

financed with unrestricted university funds. The

renovation was expected to extend the useful life

of the building so that it would last a total of 25

more years—that is, until 2021.

e. In the 15 years from 1996 through 2011, the

university recorded depreciation (as appro-

priate). Depreciation was calculated by dividing

the undepreciated balance of the original cost,

plus the costs of renovation, by the anticipated

remaining life of 25 years.

f. In the same period, the university repaid the

$250,000 balance of the debt.

g. In 2012 the university demolished the building

so that the land on which it was situated could  be converted into a practice field for the wom-

en’s soccer team.

Prepare the journal entries to summarize the

history of the building, as reported in the univer-

sity’s government-wide statements.


Capital assets are accounted for in governmental fund

statements on a modified accrual basis.

Refer to the transactions in the previous


1. Prepare journal entries for the university to

make in its governmental funds (e.g., its gen-

eral fund or a capital projects fund).

2. How would you recommend that the univer-

sity maintain accounting control over the cap-

ital assets themselves—those that you did not

record as assets in the governmental funds?


If governments do not preserve their infrastructure

assets, they must depreciate them.

1. In 2012 Bantham County incurred $80 million

in costs to construct a new highway. Engineers

estimate that the useful life of the highway is

20 years. Prepare the entry that the county

should make to record annual depreciation

(straight-line method) to facilitate preparation

of its government-wide statements.

2. What reservations might you have as to the

engineers’ estimate of useful life? Why might

any estimate of a highway’s useful life be



Similar collectibles may be accounted for quite differently.

The City of Allentown recently received a

donation of two items:

 A letter written in 1820 by James Allen, the

town’s founder, in which he sets forth his plan

for the town’s development. Independent

appraisers have valued the letter at $24,000.

 A 1920 painting of the town’s city hall. Compa-

rable paintings by the same artist have recently

been sold for $4,000.

The city intends to place the letter on public

display in its city hall. It plans to sell the painting

and use the proceeds to redecorate the city coun-

cil’s meeting chambers. The town’s policy is to

capitalize collectibles only when required by GASB

standards to do so.

1. Prepare journal entries, as necessary, to reflect

how each of the contributions should be

reported on the city’s government-wide finan-

cial statements. Briefly explain and justify any

apparent inconsistencies in the entries.

2. Suppose that the city had purchased each of

the items. Would that affect whether or not

you capitalized each of the assets?

3. Suppose that when the city accepted the painting,

itagreed, ifitsold the painting, to use the proceeds

onlyto acquire other works ofart. Does that affect

how you account for the painting?

4. Suppose that the city operates a museum. The

museum’s building, furniture, and fixtures

cost $10 million and, on average, are midway

through their useful life. They have a replace-

ment cost of $12 million. The art collection

has a market value of $3 00 million. Consistent

with your response to part a, what value would

you place on the art collection? What value

would you place on the building, furniture,

and fixtures? Briefly justify your response,

commenting specifically on whether you think

the resultant statement of net assets would

provide useful information to statement users.


Investment notes enable the reader to assess both credit

and interest rate risks.

A note from the annual report of a city in-

cludes the following:

As of September 30, the utility fund had the

following investments:



(in thousands) Weighted-




Local government

investment pool  $  6  1

U.S. Treasuries  27,600 790

U.S. Agencies 80,400 520

Total  $108,006  589

Credit risk. As of September 30, the U.S.

Treasuries and the U.S. agency bonds were

rated AAA by Standard & Poor’s. The local

government investment pool was rated AA.

Interest rate risk. As a means of minimizing

risk of loss that is due to interest rate fluctua-

tions, the investment policy requires that the

dollar-weighted average maturity, using final

stated maturity dates, not exceed seven years.

The portfolio’s weighted-average maturity,

however, may be substantially shorter if mar-

ket conditions so dictate. As of September 30,

the dollar-weighted average maturity was 589

days (1.61 years).

1. Why does the city limit the weighted-average

maturity of its portfolio to seven years rather

than a greater number of years, even though

investments with a longer maturity generally

provide a greater investment yield?

2. Why might the city indicate that the average

maturity of the local government investment pool is only one day even if, in fact, the pool

holds investments that have an average matu-

rity of over 3 0 days?

3. What is meant by credit risk? How do you

assess the credit risk of the U.S. Treasury and

U.S. agency bonds? Explain.

This question has not been answered.

Create a free account to get help with this and any other question!

Brown University

1271 Tutors

California Institute of Technology

2131 Tutors

Carnegie Mellon University

982 Tutors

Columbia University

1256 Tutors

Dartmouth University

2113 Tutors

Emory University

2279 Tutors

Harvard University

599 Tutors

Massachusetts Institute of Technology

2319 Tutors

New York University

1645 Tutors

Notre Dam University

1911 Tutors

Oklahoma University

2122 Tutors

Pennsylvania State University

932 Tutors

Princeton University

1211 Tutors

Stanford University

983 Tutors

University of California

1282 Tutors

Oxford University

123 Tutors

Yale University

2325 Tutors