Question

A hospital issues $1,000,000 of 4% tax-exempt bonds at par for the following purposes:

$750,000 for construction

$250,000 for refunding purposes

The bonds pay interest semiannually.

In addition, the hospital must maintain cash of 1% of the outstanding bond principal at all times.

Prepare the entries for the bond issuance and for the first interest payment made on the bonds.

Then, identify at least 2 things that the hospital must do to remain compliant with tax-exempt bond issuances.

Answer 1

Date	Particulars	Debit Amount($)	Credit Amount($)
	Cash    Bonds Payable (Bonds issued by a hospital)	1000000	1000000
	Bond interest cash (by formula 1000000*4%*6/12)	20000	20000
	Construction Refunding Purposes Bonds cash (Bonds for refunding and construction)	750000 250000	1000000
	Maintain cash reserve Cash Payable Cash (1% of principal is maintained)	10000 990000	1000000

Construction Refunding Purposes Bonds (Bonds for refunding and construction)

750000 250000

1000000

Complaints and problems with issuing tax-exempt bonds

1. Taxable and non taxable bonds should be issued together to take advantage of government schemes. issued together can minimise the burden of taxation at smaller extent. Only issuing tax-exempt bonds becomes cause of decrease in government revenue.

2. Bonds can aslo be issued again in case of tax-exempt bonds.