Dunn-Whitaker Construction has agreed to construct a plant in a new industrial park. To finance the construction, the county government issued $4,000,000 of 10-year, 5.25 percent revenue bonds for $4,100,000 on December 31, 2011. Dunn-Whitaker will pay the interest and principal on the bonds.
When the bonds are repaid, Dunn-Whitaker will receive title to the plant. In the interim, Dunn-Whitaker will pay property taxes as if it owned the plant. This financing arrangement is attractive to Dunn-Whitaker, as state and local government bonds are exempt from federal income taxation and thus carry a lower interest rate. The bonds are attractive to investors, as both Dunn-Whitaker and the county are issuers. The bonds pay interest semiannually on June 30 and December 31.

1. Prepare an amortization table through December 31, 2013, for these revenue bonds assuming straight-line amortization.
2. Discuss whether or not Dunn-Whitaker should record the plant as an asset after it is constructed.
3. Discuss whether or not Dunn-Whitaker should record the liability for these revenue bonds.

  • CreatedSeptember 22, 2015
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