CONTINUING PROBLEM

Review the Comprehensive Annual Financial Report (CAFR) that you have obtained.

1. How many capital projects funds does the government maintain? How can you tell? Are any of these major funds? If so, for what purposes are they maintained?
2. How many debt service funds does the government maintain? How can you tell? Are any of these major funds? If so, for what types of obligations are they maintained?
3. How are the capital projects and debt service funds reported in the governmentwide statement of net position?
4. Select one of the more recently established (and larger) capital projects funds (a major fund, if there is one).
5. From where did the fund receive most of its resources?

EX. 6-6

Governments can seldom realize an economic gain by refunding bonds in the absence of call provisions.

A government has outstanding $100 million of 20year, 10 percent bonds. They were issued at par and have 16 years (32 semiannual periods) until they mature. They pay interest semiannually.

1. Suppose current prevailing interest rates had decreased to 8 percent (4 percent per period). At what amount would you estimate the bonds were trading in the open market?
2. Suppose the government elected to purchase the bonds in the market and retire them. To finance the purchase it issued 16year (32period) bonds at the prevailing rate of 8 percent (4 percent per period). What would be the "economic cost" (i.e., the present value of anticipated cash flows) of issuing these bonds? Would the government realize an economic gain by retiring the old bonds and issuing the new?
3. Suppose a call provision permitted the government to redeem the bonds at any time for a total of $101 million. Could the government realize an economic gain by recalling the bonds and financing the purchase by issuing $101 million in new, 8 percent, 16year bonds?

EX. 8-2

1. Select thebestanswer.
2. A town signs a 10year lease by which it acquires equipment with a market value of $1 million. The lease incorporates an implicit interest rate of 8 percent per year. Accordingly, annual lease payments are $149,029. When the town makes itssecondannual lease payment, it would report in its governmentwide statements
3. interest expense of $80,000.
4. rent expense of $149,029.
5. interest expense of $74,478.
6. rent expense of $100,000.
7. State courts that have held that financing leases do not qualify as longterm debt subject to debt limitations commonly base their decision on the inclusion in the lease agreement of a
8. nonsubstitution clause.
9. nonappropriation clause.
10. nonparticipation clause.
11. forward funding clause.
12. Revenue bonds, compared with general obligation bonds, generally
13. are paid out of property or sales tax revenues.
14. bear lower interest rates.
15. are subject to the same debt limitations.
16. are not backed by the full faith and credit of the issuing government.
17. A town is located within both a school district and a county. The assessed property valuations and bonded debts of the three governments are as follows (in millions):

Assessed Valuation

Bonded Debt

Town

$800

$40

School district

$1,600

$90

County

$2,400

$18

1. The combined direct andoverlapping debt of the town is
2. $40 million
3. $51 million
4. $91 million
5. $148 million
6. Clifford City has issued $10 million of revenue bonds to help finance a factory for Travis, Inc., a private manufacturing company. The city owns the factory and leases it to the company. The bonds are payable exclusively from the lease payments. In the event the company defaults on its lease payments, the bondholders have claims only on the factory. The city has no obligation for the bonds other than to transmit to the bondholders the lease payments that it receives from the company. In its annual financial statements the city should report the bonds
7. on its governmentwide statement of net position but not in any fund statements.
8. only in notes.
9. only as required supplementary information.
10. both on its governmentwide statement of net position and in its proprietary funds balance sheet.
11. Which of the following isnota common reason for issuing revenue bonds rather than general obligation bonds?
12. To obtain lower interest rates
13. To incorporate debt service costs into user fees
14. To avoid debt limitations or voter approvals
15. To shift a portion of the burden of paying for the project to parties who reside outside the issuer's jurisdiction but nevertheless benefit from the project
16. On December 1, 2021, a city issued $20 million in BANs and $6 million in RANs. By April 15, 2022, the date the city issued its financial statements for the fiscal year ending December 31, 2021, the city had neither converted the BANs into longterm bonds nor entered into a refinancing agreement to do so. However, the city repaid the RANs on February 28, 2022. The amount the city should report as an obligation of its general fund in its December 31, 2021, financial statements is
17. $0
18. $6 million
19. $20 million
20. $26 million
21. A state authority (which is an independently legal entity) issues bonds back with a moral obligation of the state. This debt
22. is probably backed by the full faith and credit of the state
23. is probably subject to the same debt limitations as if it had been issued by the state itself
24. probably bears a lower interest rate than if there were no moral obligation associated with it
25. imposes greater pressure on the agency to repay the debt than if there were no moral obligation associated with it
26. Certificates of participation have the most in common with
27. revenue bonds.
28. pension annuities.
29. participating preferred stock
30. shortterm leases.
31. A city issues the following bonds:

Revenue bonds to fund improvements to the townowned electric utility $50 million

Conduit bonds issued to assist a fastfood franchisee to construct a restaurant for $7 million

The amount that the city should report as an obligation in its governmentwide statement of net position and its proprietary funds balance sheet is

GovernmentWide

Proprietary Fund

a.

$57 million

$57 million

b.

$57 million

$ 0

c.

$50 million

$50 million

d.

$ 0

$ 0

CONTINUING PROBLEM

Review the comprehensive annual financial report (CAFR) you obtained.

1. Per the city's schedule of longterm obligations, what is the total longterm obligation for both governmental and businesstype activities? Does this amount reconcile with the longterm liabilities as reported on the government wide statement of net position?
2. In addition to bonds payable, what other kinds of longterm debt for governmental activities did the city report in its statement of net position?
3. Did the city increase or decrease its longterm borrowings during the year? What was the effect on total longterm liabilities at year end? Explain.
4. What is the percentage of total net bonded debt to assessed value of property? What is the amount of net debt per capita?
5. What is the city's legal debt margin?
6. Does the city have any lease obligations outstanding? Are these accounted for as operating or financing leases? Can you determine if any of these leases were initiated during this year? What is the amount of payments related to financing leases?
7. Compute the total amount of the city's direct and overlapping debt?
8. Does the city have outstanding any conduit debt?

P. 8-2

Governments now report their effective liabilities and interest costs, but do not adjust for changes in market values or rates.

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

1. Prepare the journal entry that the district would make to reflect the issuance of the bonds on its governmentwide 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 governmentwide 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? [Hint:Determine the present value (based on the prevailing interest rate of 2 percent per period) of the remaining 29 coupon payments of $180,000 and the repayment of the $6 million of principal.] Comment on whether this amount would be reported in the district's financial statements (both fund and governmentwide). 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.