On June 1, 2018, a city issues $2 million in 7 percent demand bonds. Although the bonds have a term of 10 years, they contain a “put” option permitting the holder to present the bonds for redemption, at par, any time after May 31, 2019. The bonds pay interest semiannually. 1. Prepare journal entries to reflect how the bonds would be recorded in the city’s general fund or other governmental fund for fiscal year December 31, 2018, financial statements assuming: a. The city has entered into a qualifying take-out agreement. b. The city has not entered into a qualifying take-out agreement. 2. Suppose that on January 1, 2020, prevailing interest rates for bonds of similar credit risk had fallen to 4 percent. A bondholder needed immediate cash for personal reasons. Assuming that the bonds were publicly traded, do you think the bondholder would redeem his bonds? Do you think that any other bondholders would redeem their bonds? Explain. 3. Suppose, instead, that prevailing interest rates had increased to 9 percent. Do you think that the bondholder needing cash would redeem his bonds? Do you think that the other bondholders would redeem their bonds? 4. Suppose that, because it is not mandated by the applicable GASB pronouncement, the take-out agreement does not specify the interest rate at which the financing institution would provide the funds necessary for the city to redeem its bonds. If prevailing rates had increased to 9 percent, at approximately what rate is it likely that the financing institution would loan the city the required funds? 5. Comment on the extent to which the demand bonds provide the city with one of the primary benefits of issuing long-term debt—the guarantee of a fixed interest rate over the life of the bond. To what extent does it burden the city with the corresponding disadvantage—being required to pay no less than the stated rate over the life of the bond (or otherwise retire the bonds at market prices)?
> In what way must a government account for premium revenue differently if it accounts for self-insurance in an internal service fund rather than in its general fund?
> What is a service concession arrangement? Why do governments enter in to these agreements?
> It is often said that “self-insurance” is an oxymoron. Why? If it is, what are the implications for a government that is permitted to recognize self-insurance premiums as a general fund expenditure when paid to an internal service fund?
> It is sometimes asserted that the absence of specific principles as to what constitutes “cost” detracts from the objectivity of the financial statements of not only internal service funds but also financial statements of the general fund. In what sense m
> For what types of activities are internal service funds used to account? Provide several examples. Is a government required to account for the activities you cite in an internal service fund, or may it account for them instead in its general fund?
> Hospitals and other health care organizations provide services knowing that they will collect from third-party payers, such as insurance companies, considerably less than their established billing rates. In addition, they provide services to uninsured pa
> A government accounts for a municipal landfill in an enterprise fund. How will it determine how much to charge as an expense (and add to a liability) each year that the landfill is in use? Suppose instead that it accounts for the landfill in a government
> Although proprietary fund accounting is similar to business accounting, there are considerable differences in standards pertaining to the statement of cash flows. What are the main differences?
> What are the major differences in expenditures/expenses (i.e., reconciling items) as they are reported in the governmental fund and the government‐wide statements?
> How would you compare the accounting for enterprise funds with that of (a) businesses and (b) governmental funds? Summarize the reasons both for and against accounting for enterprise funds differently than governmental funds.
> You are the independent CPA for a medium-sized city. The city manager asks your guidance as to whether, according to generally accepted accounting principles, the municipal golf course should be accounted for in an enterprise fund. What would be your res
> The City of Lewisville collected $600,000 in tap fees last year. Of this amount, $400,000 covered the direct costs of connecting customers to the city’s water lines. The balance contributed to improvements in and maintenance of the overall water system.
> Do you think the current criteria for establishing enterprise funds are adequate? For example, are they too flexible in that governments may account for a wide range of activities in enterprise funds? Or are they too rigid in that governments must accoun
> The Green Hills Water District was established on January 1 to provide water service to a suburban development. It accounts for its operations in a single enterprise fund. During the year it engaged in the following transactions: 1. It issued $6,000,000
> Pearl City leases an emergency communications system. The term of the lease is 10 years, approximately the useful life of the equipment. Based on a sales price of $800,000 and an interest rate of 6 percent, the city agrees to make annual payments of $108
> The following transactions affected a city’s general fund. Prepare a table in which you indicate for each transaction the expenditure/expense and change in liabilities that the city would report in its (a) general fund, and (b) government-wide statemen
> In anticipation of issuing of long-term bonds, a state issues on May 1, 2018, $200 million of 60-day BANs to finance highway construction. It expects to roll over the BANs into long-term bonds within 60 days. Its fiscal year ends on May 31. The state iss
> What is the difference between restricted assets and assets limited as to use?
> The City of Fairfield issued $100 million of 20-year, 6 percent coupon bonds (3 percent per semiannual period) for $89.32 million. The price reflected a yield of 7 percent (3.5 percent period semiannual period). 1. Prepare entries to reflect how the foll
> What was the city’s largest expenditure for fiscal year 2014? By how much did this increase or decrease since FY 2013? Since FY 2008 (see statistical section)? Can you draw any inferences from this comparison as to the efficiency and effectiveness of the
> The Alpine school district engaged in the following transactions in its fiscal year ending August 31, 2018. By law, the district is required to establish a capital projects fund to account for school construction projects and a debt service fund to accou
> Select the best answer. 1. A town signs a 10-year capital 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. Wh
> Select the best answer. 1. Which of the following is true with respect to bankruptcy? a. Per the federal bankruptcy code, a municipality can be declared bankrupt but not insolvent. b. Many major cities have avoided bankruptcy by being placed under the c
> Search online for the CAFR of the city of Charlotte, North Carolina. What is the total loan guarantees for the Community Development Block Grant disclosed in the notes? How does this compare to the city’s outstanding general obligation bonds?
> A city funds the construction of a golf course by issuing $50 million in general obligation bonds. However, it accounts for the golf course in an enterprise fund, and it intends to repay the debt from green fees. Should the city, in its government-wide s
> What distinguishes moral obligation bonds from other types of debt? Why would one government assume a moral obligation for another government’s bonds?
> What is conduit debt? Who issues debt through these conduits? Why are governments required to report it only in notes to their financial statements, not on their balance sheets?
> What is overlapping debt, and why is it of significance to financial analysts and other users of a government’s financial statements?
> What are BANs, RANs, and TANs? Why are they accounted for differently?
> What are “capitation fees,” and how should they be accounted for?
> Antonio County is assessing whether it should build a new correctional facility for nonviolent offenders. Currently offenders are housed in the county jail at a cost per inmate of approximately $52,000 per year. The new facility would cost $4 million to
> If, under GAAP, capital leases are considered long-term obligations, why, in many jurisdictions, are they not subject to debt limitations?
> What are demand bonds? When can they be reported as long-term, rather than current, obligations?
> A government’s interest expenditure, as reported in its debt service fund, differs significantly from its interest expense, as reported in its government-wide statements. What is the most likely explanation for the difference?
> At what value would a government report bonds payable on its government-wide statements? Why might this value differ from the bonds’ face value? Why might it differ from their market value?
> What is the distinction between general obligation debt and revenue debt? Which one is likely to bear higher interest rates?
> What unique issues arise when a government, as opposed to a business, is declared bankrupt?
> Suppose that a city has in its portfolio debt securities that it intends to hold to maturity. Interest rates increase. Therefore the market value of the securities decreases, and accordingly the city, must recognize an investment loss. Correspondingly, t
> Zeff Township assessed property owners $1,000,000 to construct sidewalks. The assessments were payable over a period of 10 years in annual installments of $123,290, an amount that reflects interest at a rate of 4 percent. To fund the improvements, the ci
> This problem is based on a recent annual report of the City of Tucson. Dates have been changed. 1. The MD&A reports that the city’s general obligation bonds were rated AA—by Standard & Poor’s. What is the significance of an AA—rating? (Standard & Poor’s
> The following was taken from the statistical section of the City of Wyoming, Michigan’s annual report Computation of Legal Debt Margin for General Obligation Bonds as of June 30 Assessed value, estimate………………………………………………………. $1,934,971,000 Debt limit—10
> How does the government classify its governmental expenditures, by function or by “object?” Are the classifications approximately the same in both the government‐wide and the fund statements?
> Why is the statement of functional expenses required for voluntary health and welfare organizations?
> The accompanying table was drawn from the City of Fort Leah’s schedule of long-term liabilities (all amounts in thousands). 1. Prepare the entry in the city’s general fund to record the transactions affecting compensat
> The following schedule is based on the notes to the financial statements of Beth County Health District. Future minimum payments under capitalized leases and noncancellable operating leases with initial or remaining terms of one year or more 1. Where on
> The following information was taken from the City of Wyoming, Michigan’s, schedule of direct and overlapping debt. 1. What is the most likely way the applicable percentages were derived? 2. Compute the total amount of the City of Wyomin
> Officials of Danville, determining that the city needed additional administrative space, decided to acquire an available office building. Aware that city voters were unlikely to approve a bond issue to finance the purchase of the building, they decided i
> For each of the following items relating to the debt of Marfa City, indicate whether and how the debt would be reported on a balance sheet of one of the city’s governmental funds. If it would not be reported on a balance sheet of one of the city’s govern
> In August 2017, voters of Balcones, a medium-sized city, approved a $15 million general obligation bond issue to finance the construction of recreational facilities. In order to begin construction immediately, without waiting to complete the lengthy proc
> 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 semiannual payments of interest, were issued for $6,627,909—a price that provides an annual yield of 5 percent
> The East Eanes School District engaged in or was affected by the following events and transactions during its fiscal year ending June 30, 2018. 1. Teachers and other personnel earned $350,000 in vacations and other compensated absences that they did not
> What are the measurement focus and basis of accounting of governmental funds? What is the traditional rationale for this basis of accounting (used in governmental fund statements)—as opposed to, for example, either a full accrual basis or a budgetary bas
> In addition to bonds payable, what other kinds of long-term debt for governmental activities did the city report in its statement of net position?
> What are the differences between recording a hospital’s expenses by natural classification than by function?
> What is a single audit? What deficiencies in previous practice was the Single Audit Act intended to correct?
> Per the city’s schedule of long-term obligations, what is the total long-term obligation for both governmental and business-type activities? Does this amount reconcile with the long-term liabilities as reported on the government wide statement of net pos
> A state incurs interest on funds used while a highway was under construction. How will this interest be accounted for on the state’s (a) capital project’s fund statements and (b) government-wide statements?
> Why are general capital assets not recorded in governmental funds?
> Should parks be classified as ordinary capital assets or as infrastructure? Should the various elements that make up a park be classified separately? Parks include lighting, restrooms, sports fields, hiking and horse trails, roads, sewage systems, playgr
> A city included the schedule above in its financial statements. 1. Prepare entries to reflect the activity relating to improvements and equipment in both the general-fund and the government-wide statements, assuming, as appropriate, that all transactions
> Do you think that capital projects funds should be limited to accounting for resources that are externally restricted? What about debt service funds?
> The accompanying statements of the parks, recreations, and municipal capital improvement bond fund (a capital projects fund) were drawn from an annual report of Parkville. According to a note in the report (the only one pertaining to the fund), the fund
> Why is a choice of basis of accounting unavoidably linked to measurement focus?
> Pacific Independent School District issued $100 million of general obligation bonds to finance the construction of new schools. The bonds were issued at a premium of $0.6 million. 1. Prepare the capital projects fund journal entries to record the issue o
> The Wickliffe City Council authorizes the restoration of the city library. The project is to be funded by the issuance of bonds, a reimbursement grant from the state, and property taxes. 1. Prepare journal entries in the capital projects fund to reflect
> Select the best answer. 1. A term endowment is a gift a. The principal of which must be returned to the donor after a specified period of time b. The principal of which is available for expenditure after a specified period of time c. The income from whi
> Visit GuideStar at www.guidestar.org. Select two not-for-profit health and welfare organizations that have a similar mission and are of relatively similar size (e.g., the Parkinson’s Disease Foundation and the American Parkinson Disease Association). Sup
> Why is the “fund-raising ratio” of key concern to both donors and financial analysts?
> What special abuse does the AICPA address in its statement of position on the allocation of fund-raising costs? What general criteria does it establish as to when common costs of materials and activities that include a fund-raising appeal can be allocate
> In what significant ways do the FASB standards differ from those of the GASB with respect to the statement of cash flows?
> On July 1, a city issued, at par, $100 million in 6 percent, 20‐year general obligation bonds. It established a debt service fund to account for resources set aside to pay interest and principal on the obligations. In the year that it issued the debt, th
> What is meant by “variance power”? Suppose that a charitable foundation receives a gift that the donor specifies must be used to support the college education of a particular individual. What is the relevance of “variance power” in how the foundation acc
> How do not-for-profits differ from governments in the way they account for business-type activities, such as dining halls, gift shops, and admission fees?
> A museum received gifts of two valuable paintings. It recorded the value of one as an asset and recognized the corresponding revenue. It gave no accounting recognition to the other. What might be a legitimate explanation for such an apparent inconsistenc
> In a recent month a CPA provided 10 hours of volunteer time to the Society for the Visually Impaired. He devoted 7 hours to maintaining the organization’s financial records and 3 to recording tapes of newspapers and magazine articles. If volunteers had n
> In what significant way do not-for-profits account for investments differently from businesses?
> It is sometimes said that performance audits are not “true” audits in that they are conceptually different from traditional financial audits. In what way are they conceptually different?
> Members of the National Accounting Association, a not-for-profit organization, are charged annual dues of $150. Of this amount, $50 is restricted, per association policy, for covering the cost of the association’s journal, which every member receives. In
> Please go to the Internet and obtain the financial report for the most recent year available of the following two (a public and a private) universities. 1. University of North Carolina at Chapel Hill 2. Duke University Analyze the financial reporting dif
> Mr. Griffin Smith donated $3,500,000 to the University of Baton Rouge (a government university) with the stipulation that earnings of the first 10 years be used to provide scholarship for social entrepreneurship program in the university’s College of Soc
> Bronxville College maintains a loan fund of approximately $1 million (including receivables). The funds are invested in stocks and bonds, and all investment income must be added to the balance in the fund. The fund, however, is unrestricted inasmuch as i
> What are the major categories of revenues and expenses for a health care organization?
> Although universities may be characterized by transactions not typically engaged in by other types of entities, most can be accounted for within the framework applicable to not-for-profit organizations in general. Windom College, a not-for-profit institu
> Select the best answer. 1. In June 2017, a public university bills and collects $30 million in tuition for the summer semester that runs from June 1 through July 15. In addition, in May and June it bills $200 million for the fall semester that runs from
> Select the best answer. 1. For purposes of external reporting, private colleges and universities a. Must adhere to all applicable FASB pronouncements b. Must adhere to all applicable GASB pronouncements c. Can opt to follow either all applicable FASB or
> Review the financial statements of the University of Virginia in Table 13-1 of the text. 1. For purposes of internal accounting, the university maintains several funds. Why must the university maintain so many funds? Provide examples of the funds most li
> Near the end of its fiscal year, a not-for-profit university was awarded a $2 million National Science Foundation grant to conduct biological research. Yet, consistent with GAAP, the college made no accounting entries with respect to the grant until the
> A not-for-profit technical college trains computer specialists, most of whom have, in the past, received offers for high-paying jobs in Silicon Valley. What special concerns might you have as to the ability of the college to repay its long-term debts?
> What types of matters do “specific” requirements address?
> How are investments, investment income, and gains and losses on these investments accounted for? Is there a difference in treatment for public as opposed to private colleges and universities?
> What are the three types of endowments? How are they presented on the financial statements of a public and a private college and university? Why are board-designated (or quasi) endowments always classified as unrestricted?
> What are auxiliary enterprises? How are they accounted for?
> A government has outstanding $100 million of 20‐year, 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 p
> Why are revenues presented on the financial statements net of scholarships and discounts?
> Please go to www.Guidestar.org, and download the Form 990 of three health care organizations for the most recent year available. Note that you will need to create a free account to access the forms: 1. Harris Country Healthcare Alliance 2. Southern Illin
> At the end of the year O’Toole General Hospital, which carries no medical malpractice insurance had the following list of malpractice claims: 1. Mr. Seymour Green, a heart patient, filed a claim for $600,000. Based on Mr. Green’s medical records, the hos
> On June 30, 2018, a county (government) hospital bought 3,000 shares of stock for $94,000 intending to hold the investment for its proposed expansion of its trauma center. The market value of the stock on August 31, 2015, the hospital’s fiscal year-end,
> Prepare journal entries for the following transactions. 1. Mt. Helen Hospital billed the state Medicaid program $365,000 for services provided at its standard billing rate. The prospective payment system gives Medicaid a 38 percent discount from these ra
> A not-for-profit residential assisted living center engaged in the following transactions during the year. Prepare appropriate journal entries. 1. It billed residents for $6,200,000. Of this amount it estimates that $3,000,000 will be paid by third-party
> In a particular month Northwest Medical Clinic reported the following: 1. It provided direct care services to patients, billing them $400,000. Of this amount it received $120,000 in cash, but as a consequence of bad debts it expects to collect a total of
