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:

Specific Gravity

The proportion between the density of a material and the density of a reference material, usually water, given a certain temperature.

Specific Gravity

The ratio of the density of a substance to the density of a reference substance, typically water for liquids and solids, or air for gases.

Rock

A naturally occurring solid aggregate of minerals or mineraloid matter.

Effervescence

The release of gas bubbles in a liquid, often seen when acids react with carbonates producing carbon dioxide bubbles.