BANs, TANs, and RANs may sound alike, but they are not necessarily accounted for in a like manner.
In August 2012 voters of Balcones, a medium-sized city approved a $15 million general obligation bond issue to finance the construction of recreational facilities. So as to begin construction immediately, without waiting to complete the lengthy process of issuing long-term bonds, the city issued $4 million in BANs. The notes matured in March 2013, but the city had the right to prepay them at any time prior to maturity.
On February 15, 2013 the city issued $15 million of 6%, 20-year GO bonds. Upon receiving the proceeds, it repaid the BANs, along with $80,000 in interest.
1. Prepare a journal entry to indicate how the city should report the BANs in its December 31, 2012 governmental fund financial statements, assuming that it issued the statements after February 15, 2013.
2. Suppose that the city did not refinance the BANs prior to the date the financial statements were issued. What other evidence must the city present to justify reporting the BANs as long-term obligations? Prepare a journal entry to indicate how the city should report the BANs in its governmental fund financial statements if it is unable to provide this evidence.
3. Assume, also, that the city experienced a cash flow shortage in November2012. Anticipating tax collections in January 2013, it issued $2 million in TANs that are due February 2013. In February 2013, instead of repaying the notes, it ‘‘rolled them over’’ for an additional six months. Should the city report the TAN sin its governmental fund financial statements? Explain.
4. Assume further that, in July 2012, the city was awarded a $1 million reimbursement grant. It expected to receive the grant funds in January 2013. Inasmuch as it expected to incur many of the expenditures covered by the grant in 2012, it issued $1 million in six-month RANs. As of December 31, the city had not repaid the notes but had secured the written agreement of the lender that they could be extended for an additional six months. How should the city report the RANs in its December 31, 2012 governmental fund financial statements? Explain.