Problem
At the start of the current year, a city enters into an agreement with a privately owned corporation. In exchange for an upfront payment of $800 million and a long-term receivable of $100 million, the city transfers a newly constructed toll road to the corporation. The road was reported on the books of the city at its construction cost of $300 million. The corporation receives the right to operate the road and collect tolls for a period of 30 years. The toll rates are set forth in the agreement and adjust for inflation. Any changes in the rates other than those for inflation must be approved by the city. The expected useful life of the road is 50 years. The receivable of $100 million is to be repaid over 30 years in equal amounts with interest at 4 percent. Thus, annual payments would be $5.78 million.
Task
The City enters into a PPP agreement with a privately owned corporation.
i. What PPP stands for?
ii. List two factors motivating the City enter into the PPP agreement with a privately owned corporation
iii. How much revenue should the city report at its Year 1 Financial statement?
iv. List detail items with dollar amount and show your step-by-step calculations.
v. How much assets should the city report at its Year 1 Financial statement?
vi. List detail items with dollar amount and show your step-by step calculations.
vii. List the financial statements the city need to prepare for year 1