On January 1, a public school district issued $6 million of 6 percent, 15-year coupon bonds to

Question:

On January 1, a public school district issued $6 million of 6 percent, 15-year coupon bonds to ﬁnance a new building. The bonds, which require semi-annual payments of interest, were issued for $6,627,909—a price that provides an annual yield of 5 percent (a semi-annual yield of 2.5 percent).

1. Prepare the journal entry that the district would make to reﬂect the issuance of the bonds on its government-wide statements. Comment on why the net reported liability differs from the face value of the bonds.

2. Prepare the entry that the district would make to reﬂect the ﬁrst payment of interest on its government-wide statements. Indicate the value at which the bonds would be reported immediately following the payment. Comment on why the reported interest expense is not equal to the amount paid.

3. Suppose that immediately following the ﬁrst payment of interest, prevailing interest rates fell to 4 percent. For how much could the district liquidate its obligations by acquiring all outstanding bonds in the open market? Comment on whether this amount would be reported in the district’s ﬁnancial statements (both fund and government-wide). Comment also on why and how this amount might be of interest to statement users.

4. Comment on how the district would report both the liability and interest costs in its fund statements.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...