PREPARING AND USING AN AMORTIZATION TABLE (STRAIGHT LINE)
Girves Development Corporation has agreed to construct a plant in a new industrial park. To finance the construction, the county government issued $5,000,000 of 10-year, 4.75 percent revenue bonds for $5,125,000 on December 31, 2008. Girves will pay the inter- est and principal on the bonds. When the bonds are repaid, Girves will receive title to the plant. In the interim, Girves will pay property taxes as if it owned the plant. This financing arrangement is attractive to Girves, as state and local government bonds are exempt from federal income taxation and thus carry a lower interest rate. The bonds are attractive to investors, as both Girves and the county are issuers. The bonds pay interest semiannually on June 30 and December 31.
Required:
1. Prepare an amortization table through December 31, 2010, for these revenue bonds assuming straight-line amortization.
2. Discuss whether or not Girves should record the plant as an asset after it is constructed.
3. Discuss whether or not Girves should record the liability for these revenue bonds.