Question

salmon county issued $20 million of 5% demand bonds for construction of a county maintenance building. before year-end the county entered into a two-year noncancellable take-out agreement with a local bank with a 10-year payback period. the county estimates that 25% of the bonds would be demanded (called) by the buyers if interest rates increased at least 1%. at year-end rates on comparable debt were 7%. how should these demand bonds be reported in the county s government-wide financial statements at year-end? $20 million in the long-term liability section of the governmental activities column. $5 million in the current liabilities section of the governmental activities column and $15 million in the long-term liabilities section of the governmental activities column. $5 million in the governmental activities column and $15 million would be reported in the schedule of changes in long-term debt obligations. $20 million in the current liabilities section of the governmental activities column.

Answer 1

Salmon County should report the 5% demand bonds as $5 million in current liabilities and $15 million in long-term liabilities in the governmental activities column. This split reflects the portion that could be called within one year due to increased interest rates.

Step-by-step explanation:

When evaluating how Salmon County should report its 5% demand bonds in the government-wide financial statements at year-end, we should look at the nature of demand bonds and the specific circumstances provided. Demand bonds are a type of bond for which payment of the principal can be demanded by bondholders at any time upon an agreed-upon notice. In this scenario, the county has entered into a two-year noncancellable take-out agreement with a local bank, which will pay back over 10 years.

Given that interest rates have increased to 7%, beyond the 1% increase threshold, the county estimates that 25% of the bonds would be demanded by bondholders. Thus, the appropriate reporting would split between current and long-term liabilities. This means $5 million should be classified as a current liability, as it represents the portion of the bonds that could be called within one year, and the remaining $15 million would be reported as a long-term liability.

Therefore, the correct answer to how these demand bonds should be reported is: '$5 million in the current liabilities section of the governmental activities column and $15 million in the long-term liabilities section of the governmental activities column.'