Governmental and notforprofit accounting solution of c8.docx
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Governmental and notforprofit accounting solution of c8.docx
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Governmentalandnotforprofitaccountingsolutionofc8
Chapter8
Long-TermObligations
QuestionsforReviewandDiscussion
1.Unlikebusinesses,governmentshavethepowertotaxand,atleastintheory,theiravailableresourcesarelimitedonlybythewealthoftheirconstituents.Atthesametime,governmentsarechargedwithprovidingservices,someofwhich,unlikethoseprovidedbybusinesses,areessentialtothepublicwell-beingandthereforecannotbediscontinued.Nevertheless,therearepracticalconstraintsonwhattheycandemandfromtheirconstituentsandtheremaybeconsiderableroomforexpenditurecutsbeforethewellbeingofthecommunityisimperiled.Thecrucialissue,therefore,involvesbalancingtheneedsandresourcesofthepopulaceandthedemandsofthecreditors.
2.Generallong-termdebtistheobligationofthegovernmentat-largeandistherebybackedbythegovernment’sfullfaithandcredit.Revenuedebt,bycontrast,issecuredonlybydesignatedrevenuestreams,suchasfromthesaleofelectricity,highwaytolls,rents,receiptsfromstudentloansorpatientbillings.BecauserevenuedebtislesssecurethanGOdebt,italmostalwayscommandshigherinterestrates.Yet,ifasingleentityweretoissueonlygeneralobligationdebtitstotalinterestcostswouldlikelybethesameasifitweretoissueamixofbothtypes.
3.Thegovernmentwouldreportthebondsattheirfacevalueplusorminusanyunamortizedpremiumsordiscounts.Thisamountdiffersfromfacevalueinthatittakesintoaccounttheunamortizedpremiumsordiscounts.Itdiffersfrommarketvalueinthatmarketvalueisequaltothepresentvalueofallrequiredcashpaymentsdiscountedbyaprevailinginterestrate.Bookvalue,however,isequaltothepresentvalueofallrequiredcashpaymentsdiscountedbytheinterestratethatdeterminedthepriceofthebondwhenitwasfirstissued(i.e.,theyieldrate).
4.Theinterestexpenditureasreportedinthedebtservicefund(agovernmentalfund)wouldbeequaltotherequiredcashpayment.Thatreportedinthegovernment-widestatementswouldbeequaltotherequiredcashpaymentplusorminustheamortizationofthediscountsorpremiums—anamountalsoequaltothebookvalueofthedebttimestheinitialyieldrate.
5.Demandbondsareobligationsthatpermittheholder(thelender)todemandredemptionwithinaspecifiedperiodoftime,usuallyoneto30days,aftergivingnotice.Theissuercanreportthemaslong-termobligationsifithasenteredintoaqualifyingtake-outagreement(onethatisnoncancellable,doesn’texpireforatleastayear,andiswithaninstitutionfiscallycapableofhonoringit).
6.Thecourts,notGAAP,determinethetypesofobligationssubjecttodebtlimitations.Inmanyjurisdictionsthecourtshavefocusedonthenonappropriationclausesincludedincapitalleases,ratherthanontheeconomicsubstanceofthoseleases.Thenonappropriationclausespermitgovernmentstocanceltheleasesifthelegislaturefailsinanyyeartoappropriatetherequiredfundsfortheleasepayments.Therefore,thecourtshaveheldthattheleasesdonotobligategovernmentstothesameextentasdoconventionaldebtinstruments.
7.Overlappingdebtreferstotheobligationsofpropertyownerswithinaparticulargovernmentfortheproportionateshareofdebtsofothergovernmentswithoverlappinggeographicboundaries.Itrepresentsobligationsthataresupportedfromthesamesourcesasthegovernment’sdirectdebt.Overlappingdebtissignificantbecause,likedirectdebt,itbearsuponthegovernment’sfiscalcapacitytomeetitsobligationsastheycomedue.
8.Conduitdebtrepresentsbondsorsimilarinstrumentsissuedbyagovernmentonbehalfofanongovernmentalentity,suchasabusinessornot-for-profitorganization.Governmentsarenotrequiredtoreportconduitdebtontheirbalancesheetsbecausethedebtisexpectedtobeservicedentirelybytheentitybenefitingfromthedebt,notthegovernmentitself.Ineconomicsubstance,therefore,thegovernmentpermitsanongovernmentalentitytouseitsstatusasatax-exemptentitytogetthebenefitsoflowerinterestrates.
9.Moralobligationdebtconstitutesbondsornotesissuedbyoneentity(usuallyastateagency)butbackedbyapledgeofanotherentity(usuallythestateitself)toseekappropriationstocoveranydebtservicedeficiencies.Thedebtproceedsaretypicallyusedtoconstructprojectsorcarryoutactivitiesthatwouldotherwisebeundertakenbythestate.Thedebtisreferredtoas“moral”obligationdebtbecausethepromiseisnotlegallyenforceable.Moralobligationdebtprovidesameansbywhichastatecancircumventdebtlimitations.Thestatecanreapthebenefitsofthedebtwithouthavingtoactuallyissueitinitsownname.
10.Bondratingsdirectlyaffectanissuer’sinterestcosts.Thelowertheratingthehighertheinterestcosts.
Exercises
EX8-1
1.b
2.c
3.d
4.a
5.a
6.c
7.a
8.b
9.a
10.d
EX8-2
1.c
2.b
3.d
4.c
5.b
6.a
7.d
8.c
9.a
10.c
EX8-3
1.d$800,000
2.e$817,419
3.b$0
4.k$10,000,000
5.b$0
6.o$38,942,147
7.g$1,350,000
8.a$(34,942,147)
9.j$2,025,000
EX8-4
1.Government-widestatements
Cash $89,322
Bonddiscount10,678
Bondspayable$100,000
Torecordtheissuanceofbonds
BondInterestexpense$3,126
Cash $3,000
Bonddiscount126
Torecordfirstperiodinterestexpense(3.5percentof$89,322)
BondInterestexpense$3,131
Cash $3,000
Bonddiscount131
Torecordsecondperiodinterestexpense(3.5percentof$89,448—theinitialissuepriceof$89,322plusthe$126offirstperiodbonddiscountamortization)
2.Governmentalfundstatements
Cash $89,322
Otherfinancingsources—bondproceeds$89,322
Torecordissuanceofbonds
BondInterestexpenditure$3,000
Cash $3,000
Torecordfirstperiodinterestexpenditure
BondInterestexpenditure$3,000
Cash $3,000
Torecordsecondperiodinterestexpenditure
EX8-5
1.Torecordissuance
Cash $200M
Otherfinancingsources—proceeds
fromissuanceoflong-termdebt$200M
TorecordissuanceofBANs
2.NoentrywouldbenecessaryinagovernmentalfundtorecordtheconversionoftheBANstoactualbonds
3.Toadjustaccountsassumingstatewasunabletoconvert
Otherfinancingsources—proceeds
fromissuanceoflong-termdebt$200M
BANspayable$200M
TorecordtheBANsasacurrentfundliability.
4.Inthegovernment-widestatementstheBANswouldbereportedasaliabilityirrespectiveofwhetherthestatewasabletoconvert.Ifthestatewereabletoconvert,thebondwouldbeshownalongwithotherlong-termliabilities;ifnot,itwouldbeshownalongwithothershort-termliabilities.
EX8-6
GeneralFund
Government-wideStatements
(inmillions)
(inmillions)
1.
Expenditure
$6.6
Expense
$7.7
Increaseindebt
0.0
Increaseindebt
1.1
2.
Expenditure
$0.5
Expense
$0.0
Changeindebt
0.0
Decreaseindebt
0.5
3.
Expenditure
$10.0
Expense
$20.0
Changeindebt
0.0
Increaseindebt
10.0
4.
Expenditure
$0.0
Expense
$0.0
Changeindebt
0.0
Increaseindebt
100.0
5.
Expenditure
$4.0
Expense
$3.0
Changeindebt
0.0
Decreaseindebt
1.0
EX8-7
1.Uponinceptionoflease
Equipmentheldunderlease$800,000
Capitalleaseobligations$800,000
Torecordthesigningofthelease
2.Firstpaymentofinterest
Capitalleaseobligations(leaseprincipal)$60,694
Interestexpense(leaseinterest)48,000
Cash $108,694
Torecordthefirstleasepayment(interestequals6percentof$800,000)
Depreciationexpense$80,000
Accumulateddepreciation—equipment
heldunderlease$80,000
Torecordfirstyear’sdepreciation($800,000dividedby10years)
3.Eachyeartheallocationofthepaymentwillchange.Asthebalanceintheleaseliabilityisdecreased,theproportionallocatedtointerestwilldecreaseandthatallocatedtoprincipalwillincrease.
4.Theleasewouldberecordedintheappropriatefundwithadebitto“expendituresfortheacquisitionofanasset”andacreditto“otherfinancingsources–capitallease”
Noliabilityorassetwouldberecognized.Eachleasepaymentwouldbereportedentirelyasexpenditure.Nodepreciationwouldbecharged.
EX8-8
1.
Cash $36,321,000
Bonddiscount3,679,000
Bondspayable$40,000,000
Torecordtheissuanceofbonds(inanunrestrictedfund)
2.
BondInterestexpense$1,271,000
Bonddiscount$071,000
Cash 1,200,000
Torecordthefirstsemi-annualpaymentofinterest(Cashpaymentisequalto3percentofbonds’$40millionfacevalue;interestexpenseisequalto3.5percentofeffectiveliabilityof$36,321,000(inanunrestrictedfund))
3.
BondInterestexpense$1,274,000
Bonddiscount$074,000
Cash 1,200,000
Torecordthesecondsemi-annualpaymentofinterest(Cashpaymentisequalto3percentofbonds’$40millionfacevalue;interestexpenseisequalto3.5percentofneweffectiveliabilityof$39,322,000—thepreviouseffectiveliabilityof$36,321,000plusthe$71,000reductioninthediscount)(inanunrestrictedfund)
ContinuingProblem
CityofAustin:
CAFRFY—2008
1.Perthescheduleoflong-termobligations,thecity’stotallong-termdebtis$5,776.308million(p.70).Perthegovernment-widestatementslong-termdebtequalsonly$5,574.005million(p.17).TheCAFRdoesnotreconcilethetwoamounts.However,thedifferencesrepresentthecurrentportionsoflong-termliabilitiesthatareincludedonthebalancesheetascurrentobligationsbutinthescheduleaslong-termliabilities.
2.Asindicatedinthestatisticalsection,Table14,Austinhasarat
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