Leah Pasternak

Government & Not for Profit ACC410

Chapter 8: Governmental Activities Long-Term Activities - Homework Submission

8-4

1. Cash $200 million
Other financing sources proceeds from $200 million
Issuance of long term debt
2. No entry would be required in a government fund to record the conversion of the BANs to
actual long term bonds.
3. Other financing sources proceeds from $200 million
Issuance of long term debt
BANs payable $200 million
(To record the BAN as current fund liability)
4. In the government wide statements the BAN would be considered as liability regardless
of whether the state was able to convert. When the state were able to convert, the bond will
be shown with other long term liabilities; if not it will be shown with other short term
liabilities.

8-7

1a. Future liabilities arising out of earned leave would not need to be recorded in the government fund
statement, they would only need to be recorded when payment becomes due.

b. Legal suit which resulted in the school district having a liability of $3 million to be paid by Dec. 31,
2014, however this would not be payable in the current year so no recording is necessary.

c. Expenditure construction related $1,000,000
Cash $1,000,000

d. Expenditure lease rent payment $40,000
Cash $40,000
e. Capital assets expenditure $869,371
Other financing source capital lease $869,371
The lease payment would be recorded as follows:

Debt service expenditure $140,000
Cash $140,000
f. Use non-reciprocal transfer out:

Bond principal to debt service fund $500,000
Due to debt service fund $500,000

g. Cash $950,000
Other financing sources bond proceeds $950,000

h. Expenditure compensated absence $150,000
Cash $150,000

2a. Vacation pay expense $350,000
Accrued vacation pay $350,000

b. Legal suit expense $300,000
Accrued legal expense $300,000

c. Cash $8,000,000
Long term bond liability $8,000,000

d. Lease rent expense $40,000
Accrued lease rent $40,000

e. Vehicle held under lease $869,371
Capital lease obligation $869,371

To record the lease payment:
Lease obligations $140,000
Cash $140,000

Recording of annual depreciation as required in the government-wide statement:
Depreciation expense $108,671
Accumulated depreciation $108,671

f. The $500,000 transfer would be recorded in the governmental fund statement.

g. Cash $950,000
Bond liability $950,000

h. Expense compensated absence $150,000
Cash $150,000

8-8

1a.
Jan. 1, 2013 Cash $2,000,000
7% Demand bonds payable $2,000,000

b. Jan. 1, 2013 Cash $2,000,000
7% Demand bonds payable $2,000,000

Jan. 1, 2013 Cash a/c. Dr. $2,000,000
To 7% Demand bonds payable $2,000,000

2. Since the bondholder is able to redeem his bonds any time after Dec. 31, 2014, he can redeem them
and get his money back. Other bondholders, if they do not need the money would do best to hold the
demand bonds since they are currently enjoying an interest rate of 7%, which is better than the recently
fallen interest rates of 4%.

3. Yes the bondholder who needs money immediately and even the ones who dont can redeem the
demand bonds. Since the interest rates rose to 9%, after Dec. 31, 2014 other bondholders can redeem
their demand bonds to take advantage of the higher interest rate.

4. The financing institution would be charging 9% plus whatever the pre-decided margin is.

5. Demand bonds are issued by the borrowers to get the benefit of lower interest rates paid on short-
term obligations. Since demand bonds are very sensitive to changes in interest rates, when the interest
rates increase the lenders usually demand redemption so that they are able to use the redeemed funds
to purchase higher-yielding bonds. Regardless of the interest rate decreasing the demand bondholders
will not redeem the bonds, but the city should pay the promised interest up to the maturity date.

8-9

1. In order to report the BAN proceeds, the following entries would need to be recorded:

Cash $4,000,000
Other financing sources $4,000,000

To record liability arising out of the issue of BANs:

Expenditure debt service principal $4,000,000
Expenditure debt service interest $80,000

Matured principal payable $4,000,000
Matured interest payable $80,000

2. The city would require some kind of definitive financing agreement that would not expire within one
year and which is also not able to be cancelled by the lender. Since the city was unable to issue long-
term bonds to replace the BANs, the city would need to reflect the BAN as a short-term obligation and
would be recorded as follows:

Cash $4,000,000
Other financing sources $4,000,000

3. Yes the city should still report the TANs as a short-term financing as the maturity is within a year.

4. The city should report the RANs as a short term loan in its governmental fund statements.

8-11

1. The long-term liabilities associated with governmental activities as reported in the citys government-
wide statement is $23,762,000.

2. The long-term liabilities consisted of state loans, revenue notes, claims payable and compensated
absences.

3. The long-term liabilities increased by $19,966,000 during the year. The reduction in long-term
liabilities during the year was $19,340,000. The citys ending balance for long-term liabilities increased
by $626,000 for the entire year.