In August 2017, voters of Balcones, a medium-sized city, approved a $15 million general obligation bond issue to finance the construction of recreational facilities. In order to begin construction immediately, without waiting to complete the lengthy process of issuing long-term bonds, the city issued $4 million in bond anticipation notes (BANs). The notes matured in March 2018, but the city had the right to prepay them any time prior to maturity.
On February 15, 2018, the city issued $15 million of 6 percent, 20-year GO bonds. Upon receiving the proceeds it repaid the BANs, along with $80,000 in interest.
1. Prepare a journal entry to indicate how the city should report the BANs in its December 31, 2017, fund financial statements, assuming that it issued the statements after February 15, 2018.
2. Suppose that the city did not refinance the BANs prior to the date the financial statements were issued What other evidence must the city present to justify reporting the BANs as long-term obligations? Prepare a journal entry to indicate how the city should report the BANs if it is unable to provide this evidence.
3. Assume, also, that the city experienced a cash flow shortage in November 2017. Anticipating tax collections in January 2018, it issued $2 million in tax anticipation notes (TANs) due February 2018. In February 2018, instead of repaying the notes, it "rolled them over" for an additional six months. In which fund or account group should the city report the TANs? Explain.
4. Assume further that in July 2017 the city was awarded a $1 million reimbursement grant. It expected to receive the grant funds in January 2018. Inasmuch as it expected to incur many of the expenditures covered by the grant in 2017, it issued $1 million in six-month revenue anticipation notes (RANs). As of December 31, the city had not repaid the notes but had secured the written agreement of the lender that they could be extended for an additional six months. How should the city report the RANs on its December 31, 2017, financial statements? Explain.