A town plans to borrow about 10 million and is

A town plans to borrow about $10 million and is considering three alternatives. A town official
requests your guidance on the economic cost of each of the arrangements and advice as to
how they would affect the town's reported expenditures.1. For each of the town's three
alternatives, determine (1) what the town's economic cost would be of using the funds in the
year ending December 31, 2018, and (2) what amount of interest expenditure the town would
be required to report for the year ending December 31, 2018, in its governmental funds.a. The
town would issue $10 million of 20?year, 6 percent coupon bonds on July 1, 2018. The bonds
would be issued at par. The town would be required to make its first interest payment of
$300,000 on January 1, 2019.b. The town would issue $10 million of 20?year, 6 percent bonds
on June 30, 2018. The bonds would be sold for $9,552,293, a price that reflects an annual yield
(effective interest rate) of 6.4 percent. The town would be required to make its first interest
payment of $300,000 on December 31, 2018.c. The town would issue $32,071,355 of 20?year
zero coupon bonds on July 1, 2018. The bonds would be sold for $10 million, an amount that
reflects an annual yield of 6 percent. The bonds require no payment of principal or interest until
June 30, 2038.2. Suppose that the town elects the first option and issues $10 million of 20?year,
6 percent coupon bonds at par on July 1, 2018. The town establishes a debt service fund to
account for resources that it sets aside to pay principal and interest on the bonds. On December
31, 2018, the town transfers $300,000 from the general fund to the debt service fund to cover
the first interest payment that is due on January 1, 2019.a. How would the transfer be reported
in the general fund?b. How would the transfer be reported in the debt service fund? What
options are available to the town to record 2018 interest in the debt service fund?3. Suppose
that the town borrowed $10 million on July 1, 2015, and temporarily invested the proceeds in
two?year, 6 percent Treasury notes. The first payment of interest, $300,000, is payable on
January 1, 2019.a. What would be the town's economic gain from investing the funds in the year
ending December 31, 2018? Ignore borrowing costs.b. How much investment revenue should
the town report for the year ending December 31, 2018? Assume there was no change in
prevailing interest rates.View Solution: A town plans to borrow about 10 million and is
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