This problem is based on a recent annual report of the City of Tucson. Dates have been changed.
1. The letter of transmittal from the city's finance director reports that the city's bonds were rated AA by Standard & Poor's. What is the significance of an AA rating? (Standard & Poor's ratings are similar to those of Moody's.)
2. Another city of approximately the same size received a bond rating of AAA, even though its overall financial condition by all reasonable measures was substantially weaker than that of Tucson. What would be the most likely explanation of why the city received a higher rating than Tucson, even though Tucson is more financially sound?
3. A note to the financial statements indicates that the total required general obligation debt service payments over the life of the GO bonds were $ 370 million. Yet the total reported liability for GO bonds was only $209 million.
What is the most likely explanation for the difference? How can you justify reporting the lower amount, when it is the higher amount that will have to be paid?
4. The city's ''combined schedule of bonds payable'' indicates that GO bonds issued in 2008 bore interest at the rate of 6.4 percent, while those issued in the current year carried an interest rate of only 4.95 percent. Why do you suppose the city does not refund (redeem) the 2008 bonds and replace them with lower-interest obligations?
5. The Arizona constitution limits the amount of debt that a city can have outstanding to 6 percent of the assessed value of its property. The assessed valuation of property in Tucson was $1,818,909,000. In as much as only certain types of debt are covered by the limitations, the city's applicable debt was only $70,998,000, not $209,000,000 as indicated in Part 3 of this problem. What was the amount of the city's legal debt margin?
6. In 2008 the assessed value of the property in Tucson was $1,555,216,000, and the city had $110,910,000 in GO debt (and no balances in debt service funds).
By 2015 the assessed value of property had increased to $1,818,909,000, and bonded debt had increased to $209,000,000 (with $4,012,000 in debt service funds).
Taking into account the amount in the debt service funds, would you say that, other factors being equal, the city's debt burden was greater or less in 2015 than it was in 2008? Explain, making relevant computations.
Zeff Township assessed property owners $1,000,000 to construct sidewalks. The assessments were payable over a period of ten years in annual installments of $123,290, an amount that reflects interest at a rate of 4 percent.
To fund the improvements the city issued $1,000,000 of ten-year, 4 percent bonds. The bonds were sold to yield interest of 3.8 percent (1.9 percent per period) and were thereby sold at a premium of $16,510 (i.e., at a total of $1,016,510). The township transferred the premium to an appropriate fund. Interest on the bonds is payable semiannually (i.e., $20,000 each six months).
Inasmuch as the amounts to be received from the property owners are not coincident with the required payments to bondholders, the township will invest all available cash, and any assets that remain after the bonds have been repaid will be transferred to the general fund.
In the same year that the township assessed the property owners and issued the notes, it constructed the side-walks at a cost of $1,000,000. During that year it made one payment of interest on the bonds and collected one installment from the property owners. It invested $119,800 in U.S. Treasury notes-the difference of $103,290 between the assessments received and the interest paid, plus the $16,510 bond premium. It earned $3,000 (cash) interest on these securities.
Assume that the township recognized one full year's interest on the assessments receivable and that it recorded one full year's depreciation (based on a useful life of 20 years) on the sidewalks.
1. Prepare summary journal entries in all appropriate funds.
2. Prepare alternative journal entries to reflect how the transactions would be recorded in the township's government-wide statements.