Question: Financial Statement Impact of Incurring General Long-term Debt on Behalf of Other Governments. Facts: The Bates County government issued $2.5 million of tax-supported bonds to
Required
a. Write a brief memo to the county commission explaining how the $2.5 million bond issue for the addition to the Bates County Hospital resulted in the large and apparently unexpected deficit in unrestricted net assets.
b. In your memo, explain what actions can be taken, if any, to eliminate the deficit in governmental activities unrestricted net assets, or at least make it less objectionable.
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a Analysis Usually when a government issues bonds for a capital purpose and the assets have been acquired or constructed the bond liability is subtracted from the amount recorded for the capital assets thereby reducing the balance of Net AssetsInvested in Capital Assets Net of Related Debt This case is different however as the bonds were issued for the benefit of a legally separate entity the Bates County Hospital As a result the county as a primary government does not own the capital assets that were financed by the bonds nor does the hospital have an obligation for the bonds Thus the county must report a decrease in unrestricted net assets for the bond issuance in the Governmental Activities column of its governmentwide statement of net assets while the hospital will report an equal increase in net assets invested in capital assets net of related debt The effects on net assets just described can perhaps be understood more easily by examining the journal entries ignoring related General Fund entries that would be made to record issuance of the bonds by the county transfer of cash to the hospital and subsequent use of the cash for construction by the hospital Bates County Governmental Activities Debits Credits Cash 2500000 Bonds Payable 2500000 Transfer to Component Unit 2500000 Cash 2500000 Closing entry Net AssetsUnrestricted 2500000 Transfer to Component Unit 2500000 Bates County Hospital Cash 2500000 Transfer from Bates County 2500000 Debits Credits Buildings 2500000 Cash 2500000 Closing entry Transfer from Bates County 2500000 Net AssetsInvested in Capital Assets Net of Related Debt 2500000 Note This last entry reflects the ultimate effect even if the hospital routinely closes all of its temporary accounts to Net AssetsUnrestricted If so it would then reclassify the 2500000 amount to Net AssetsInvested in Capital Assets Net of Related Debt As the two closing entries show Bates County will report a decrease in its unrestricted net assets of 2500000 while the hospital will report an increase of 2500000 in its net assets invested in capital assets net of related debt Each students memo should identify the central point that the county has to report debt in the Governmental Activities column of its governmentwide statement of net assets without any assets to show for it while the hospital has received a free addition to its facility without incurring any debt Though the County Commissioners may not like how this situation affects the countys unrestricted net assets the reporting accurately reflects the economic substance of the transaction b You can expect students to be quite imaginative in trying to devise ways of mitigating the countys deficit in unrestricted net assets which is the whole purpose of this requirement Though we wouldnt expect any student to be aware of this nonauthoritative option GASBs Comprehensive Implementation Guide suggests a permissible reporting option that could put the deficit in better perspective Specifically the county could add a Reporting Entity total column to the right of the Discretely Presented Component Units column see Illustration A11 In the context of the reporting entity as a whole the bonds can be considered as capital debt and can be deducted from the capital assets Looking at it from this broader perspective there is no effect on either net assets class since the reporting entitys capital asset ... View full answer
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