Question 1

Harbor City issued 6% tax-exempt bonds and used the proceeds to acquire federal government securities yielding 7%.After paying the interest on the tax-exempt bonds, the City cleared 1%.This is an example of

Accepted Answer

This is an example of arbitrage, where the city is taking advantage of the difference in interest rates between the tax-exempt bonds and the higher-yielding federal government securities to make a profit. However, this practice is generally frowned upon and can be considered risky as it depends on interest rate fluctuations and market conditions.

Question 2

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Due to changes in the prevailing interest rates, Washington County has decided to issue new 5% bonds and place the proceeds with a trustee in a manner structured to satisfy all the GASB requirements for an in-substance defeasance of an existing 6.5% bond issue.The 6.5% bonds were originally issued to fund highway projects and the debt is reported in the Schedule of Long-term Obligations and in the governmental activities column of the government-wide financial statements.The old 6.5% bonds are still actively traded in the bond market and will be until their maturity.The new 5% bonds will be sold to an institutional buyer who may also sell them in the bond market.
-What amount of gain or loss should be recognized on this transaction?

Accepted Answer

The in-substance defeasance of the old 6.5% bonds involves setting aside cash or other assets in an irrevocable trust to make the principal and interest payments on the old debt. This method satisfies GASB requirements for removing the old debt from the financial statements as if it had been paid in full. The difference between the present value of the principal and interest payments on the old debt and the present value of the principal and interest payments on the new debt would result in a gain or loss on this transaction.

Question 3

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Due to changes in the prevailing interest rates, Washington County has decided to issue new 5% bonds and place the proceeds with a trustee in a manner structured to satisfy all the GASB requirements for an in-substance defeasance of an existing 6.5% bond issue.The 6.5% bonds were originally issued to fund highway projects and the debt is reported in the Schedule of Long-term Obligations and in the governmental activities column of the government-wide financial statements.The old 6.5% bonds are still actively traded in the bond market and will be until their maturity.The new 5% bonds will be sold to an institutional buyer who may also sell them in the bond market.
-Assuming that the government is not obligated in any manner, the debt service transactions of a special assessment bond issue should be reported in an

Accepted Answer

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Question 4

The City of Twin Falls issued $5 in special assessment bonds to finance major reconstruction of the turbines and facilities used in generating electricity that is sold to the citizens in the surrounding area.The electric power distribution activities are accounted for in an Enterprise Fund.The Enterprise Fund will service the debt.If the City is legally obligated for the debt, the appropriate entry in the City's Electric Enterprise Fund to record this event is

Accepted Answer

The City is legally obligated for the debt, so the debt should be recorded in the Electric Enterprise Fund. The debt is a liability, so it should be recorded as a credit to Bonds payable. The plant assets are being financed by the debt, so they should be recorded as a debit to Plant assets.

Question 5

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The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks.The citizens agreed to a special assessment on their property for 20 years in an amount sufficient to pay principal and interest on the bonds.The City will oversee the construction of the sidewalks and act as agent for servicing the debt.If the special assessment is not sufficient to make the principal and interest payments, the City will assume the obligations.
-When the City collects the special assessment, it should be accounted for in which fund of the City of Arlington?

Accepted Answer

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Question 6

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The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks.The citizens agreed to a special assessment on their property for 20 years in an amount sufficient to pay principal and interest on the bonds.The City will oversee the construction of the sidewalks and act as agent for servicing the debt.If the special assessment is not sufficient to make the principal and interest payments, the City will assume the obligations.
-The proceeds of the bond issue should be recorded in which fund of the City of Arlington?

Accepted Answer

The construction of sidewalks is a capital project, and therefore the bond proceeds should be recorded in the Capital Projects Fund.

Question 7

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The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks.The citizens agreed to a special assessment on their property for 20 years in an amount sufficient to pay principal and interest on the bonds.The City will oversee the construction of the sidewalks and act as agent for servicing the debt.If the special assessment is not sufficient to make the principal and interest payments, the City will assume the obligations.
-When the City of Arlington levies the special assessment tax, the best entry would be

Accepted Answer

When the special assessment tax is levied, it creates a liability for the property owners who now owe this assessment to the city. Therefore, the best entry would be to Debit Special Assessments Receivable (an asset account) and Credit Liability (a liability account). This entry recognizes the amount that the city expects to collect from property owners and the obligation the city has to repay the bondholders.

Question 8

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The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks.The citizens agreed to assess themselves for 20 years in an amount sufficient to pay principal and interest on the bonds.The City will oversee the construction of the sidewalks and act as agent for servicing the debt.The City does not guarantee the debt nor does it assume any legal or moral obligation for the bonds.
-When the City collects the special assessment, it should be accounted for in which fund of the City of Arlington?

Accepted Answer

The special assessment should be accounted for in the Special Assessment Fund because it is a fund used to account for the proceeds of special assessments levied against properties that benefit from a specific improvement, such as the construction of sidewalks.

Question 9

In early 2010, Jackson City issued $10 million of 6% term bonds to finance a highway construction project.Because of problems related to the Endangered Species Act, the City deferred highway construction that year.In early 2011, the City entered into contracts for construction that will begin in summer 2011 and be completed by summer 2012.When the City realized they would not need the bond proceeds in 2011, they invested the proceeds in risk-free federal government securities bought to yield 7%.What potential arbitrage liability, if any, should the City recognize as a result of the year 2010 transactions?

Accepted Answer

The City invested the bond proceeds in risk-free federal government securities bought to yield 7%, which is higher than the 6% interest rate on the term bonds. Therefore, the City has no potential arbitrage liability.

Question 10

The City of St.Joe had outstanding $5 million of 6% bonds with a call provision.Due to changes in the prevailing interest rates, the City issued new bonds at 4.5% and used the proceeds to call the 6% bonds.This is an example of

Accepted Answer

This scenario is an example of debt refunding, where the City issued new bonds at a lower interest rate to pay off the outstanding higher interest rate bonds with a call provision. This process helps the City to save money on interest payments.

Question 11

Adams County has outstanding $10 million in bonds issued by the County to construct a sewer system in a specific area of the county.The taxpayers in that area voted for the construction and the bonds and agreed to assess themselves to pay the principal and interest on the bonds.The County contracted for the construction and issued the bonds but the City assumed no legal or moral obligation for the bonds.If the special assessment payments are not sufficient to make the required principal and interest payments, the County will not make up the difference.The $10 million of bonds should appear in which fund financial statements or schedule?

Accepted Answer

The bonds should not appear on the face of the financial statements of Adams County because the County has no legal or moral obligation to pay the bonds if the special assessments are insufficient.

Question 12

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Due to changes in the prevailing interest rates, Washington County has decided to issue new 5% bonds and place the proceeds with a trustee in a manner structured to satisfy all the GASB requirements for an in-substance defeasance of an existing 6.5% bond issue.The 6.5% bonds were originally issued to fund highway projects and the debt is reported in the Schedule of Long-term Obligations and in the governmental activities column of the government-wide financial statements.The old 6.5% bonds are still actively traded in the bond market and will be until their maturity.The new 5% bonds will be sold to an institutional buyer who may also sell them in the bond market.
-A governmental entity has elected to issue new debt and use the proceeds to redeem existing debt because there is an economic gain in doing so.There is, however, an "accounting loss" associated with these events.An accounting loss is defined as

Accepted Answer

The present value of the principal and interest payments on the new debt is less than the present value of the principal and interest payments on the old debt, resulting in an accounting loss.

Question 13

The City of Twin Falls issued $5 in special assessment bonds to finance major reconstruction of the turbines and facilities used in generating electricity that is sold to the citizens in the surrounding area.The electric power distribution activities are accounted for in an Enterprise Fund.The Enterprise Fund will service the debt.If the City is NOT legally obligated for the debt, the appropriate entry in the City's Electric Enterprise Fund to record this event is

Accepted Answer

Since the City is not legally obligated for the debt, no entry should be made in the Electric Enterprise Fund.

Question 14

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Due to changes in the prevailing interest rates, Washington County has decided to issue new 5% bonds and place the proceeds with a trustee in a manner structured to satisfy all the GASB requirements for an in-substance defeasance of an existing 6.5% bond issue.The 6.5% bonds were originally issued to fund highway projects and the debt is reported in the Schedule of Long-term Obligations and in the governmental activities column of the government-wide financial statements.The old 6.5% bonds are still actively traded in the bond market and will be until their maturity.The new 5% bonds will be sold to an institutional buyer who may also sell them in the bond market.
-The City of Williamsburg decided to defease old 6% bonds carried in its Electric Enterprise Fund with new 4.5% bonds.As a result of the defeasance, the City incurred an accounting loss.This loss should be recognized

Accepted Answer

The accounting loss from the defeasance should be recognized over the remaining life of the old bonds or the new bonds, whichever is shorter, as per GASB standards.

Question 15

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Due to changes in the prevailing interest rates, Washington County has decided to issue new 5% bonds and place the proceeds with a trustee in a manner structured to satisfy all the GASB requirements for an in-substance defeasance of an existing 6.5% bond issue.The 6.5% bonds were originally issued to fund highway projects and the debt is reported in the Schedule of Long-term Obligations and in the governmental activities column of the government-wide financial statements.The old 6.5% bonds are still actively traded in the bond market and will be until their maturity.The new 5% bonds will be sold to an institutional buyer who may also sell them in the bond market.
-Which bonds should be recognized in the Schedule of Long-Term Obligations?

Accepted Answer

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Quiz 6: Accounting for Capital Projects and Debt Service

Harbor City issued 6% tax-exempt bonds and used the proceeds to acquire federal government securities yielding 7%.After paying the interest on the tax-exempt bonds, the City cleared 1%.This is an example of

The City of St.Joe had outstanding $5 million of 6% bonds with a call provision.Due to changes in the prevailing interest rates, the City issued new bonds at 4.5% and used the proceeds to call the 6% bonds.This is an example of