Question

Voters of Valdez School District, a public school district, approved construction of a new high school at a cost not to exceed $20 million. The district will finance the construction by issuing $20 million of 6 percent term bonds payable in 20 years. Because the site had already been prepared, the school district began construction immediately but the bonds would not be issued for nearly a year. Shortly before the fiscal year end, the school district borrowed $5 million from a local bank due in one year with interest at 6.2 percent. The note will be repaid from bond proceeds. The school district secured a financing agreement with the bank to convert the debt to a 10-year debt if the school district is unable to sell the bonds by the due date. At year-end, how should the $5 million note be displayed in the government-wide financial statements ?

a. Notes payable-long term $5 million
b. Notes payable-short term $5 million
c. Nothing
d. None of above

Answer 1

The correct answer is B.The $5 million note should be displayed as Notes payable-short term $5 million in the government-wide financial statements.

Step-by-step explanation:

The $5 million note should be displayed as Notes payable-short term $5 million in the government-wide financial statements.

In this scenario, the school district borrowed $5 million from a local bank as a short-term loan to finance the construction of the new high school. The note is due in one year with an interest rate of 6.2 percent. It will be repaid from the proceeds of the bond issuance. The school district also has a financing agreement with the bank to convert the debt to a 10-year debt if the bonds cannot be sold by the due date.

Since the note is due within one year and it is explicitly mentioned that it should be displayed in the government-wide financial statements, it should be classified as a short-term liability with the designation of Notes payable-short term $5 million.