Question

The City of Pocahontas issued $20 million in bonds at par. The City loaned the proceeds to Domsee Fish Processors to expand the size of its facility, which would allow Domsee to hire additional workers. The loan payments from Domsee to the City are established to match the principal and interest payments on the bond issue. The bonds are payable exclusively from the loan repayments by Domsee. The bonds are secured by the additional plant facilities built by Domsee. Where should the City report the bonds in its annual financial report?

a. In the government-wide financial statements.
b. In the notes to the financial statements.
c. In the proprietary fund financial statements.
d. In any of the above ways.

Answer 1

The City of Pocahontas should report the bonds in the proprietary fund financial statements because the repayment is linked to a business-type activity, and these funds account for transactions similar to private sector businesses.

Step-by-step explanation:

The City of Pocahontas should report the bonds in the proprietary fund financial statements. The proceeds of the bond issue, which were loaned to Domsee Fish Processors, suggest these are not general governmental activities but rather are intended to be paid back from the earnings of a business-type activity—namely, the loan repayments from Domsee Fish Processors. Since the bonds are payable exclusively from these loan repayments and are secured by the additional plant facilities, the City’s proprietary funds are the most appropriate place for reporting.

Proprietary funds are used to account for activities similar to those found in the private sector, where the payment and use of goods and services are exchanged. Therefore, when a governmental entity extends a loan that is paid back from a business-type activity, the accounting and financial reporting align more with a business approach rather than governmental accounting standards. Details about the nature of the bonds and the loan arrangement would be disclosed in the notes to the financial statements to provide additional contextual information to the users of the financial report.