Midway City Engaged in Two Types of Debt Transactions in Its

question 6

Essay

Midway City engaged in two types of debt transactions in its fiscal year ending December 31, 2017. The city issued its financial statements for 2017 on May 15, 2018.
A. In November 2017, the city issued $4 million in bond anticipation notes (BANs) to finance construction of a new maintenance facility. The proceeds were placed in a capital projects fund and the city began construction immediately. Although the city intended to refinance the BANs with long-term bonds, interest rates were higher than anticipated and as of May 15, 2018 the city had neither issued the bonds nor entered into an agreement to do so. How, if at all, should the debt be reported in the capital projects fund and the government-wide statements? Be specific.
1. Capital projects fund
2. Government-wide statements
B. In October 2017, the city issued $1 million of industrial development bonds to finance the construction of a new fast-food restaurant. The city will construct the facility and lease it to a restaurant chain. The lease satisfies the criteria for a capital lease. The lease payments will be exactly equal to the debt service on the bonds. The bonds are payable exclusively from the lease payments. In the event the restaurant chain defaults on its lease payments, the bondholders have a claim only against the restaurant chain and the leased property, not against the city. In its December 31, 2017 government-wide statement of net position, the city did not report the debt as a liability. Assuming that the amount involved is material, would you as an auditor issue an unqualified opinion on the financial statements? Explain and justify your response.

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Definitions:

Sales Call

A prearranged meeting or phone conversation with a potential client to discuss a product or service with the intention of making a sale.

Purchasing Manager

An individual responsible for sourcing goods and services for a company, negotiating contracts, and managing supplier relationships.

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A sales technique that focuses on understanding the Situation, Problem, Implication, and Need-payoff to effectively sell a product or service.

Customer Benefit Approach

A sales strategy that focuses on emphasizing the advantages and positive outcomes a customer will gain from a product or service.