Homework Lance
Accounting for General Long-term Liabilities and Debt Service
What are general long-term liabilities?
Answer:
General long-term liabilities are obligations that are not due within the current fiscal year and are not directly related to proprietary or fiduciary funds. These include bonds, leases, pensions, and other long-term obligations incurred by governmental entities.
How are general long-term liabilities recorded?
Answer:
General long-term liabilities are not reported in governmental fund financial statements. Instead, they are recorded in the government-wide financial statements under the Statement of Net Position.
What is a debt service fund?
Answer:
A debt service fund is a governmental fund used to account for resources that are restricted, committed, or assigned to the payment of principal and interest on general long-term liabilities.
What are some examples of general long-term liabilities?
Answer:
- General obligation bonds
- Revenue bonds
- Capital leases
- Compensated absences
- Pension obligations
- Notes payable
How is debt service expenditure reported in governmental funds?
Answer:
Debt service expenditures, such as bond principal and interest payments, are recognized in the debt service fund when they become due and payable, following the modified accrual basis of accounting.
What is the role of the government-wide financial statements in reporting long-term liabilities?
Answer:
The government-wide financial statements report all long-term liabilities, including their full balances and any changes during the reporting period, on an accrual basis of accounting.
What is a bond refunding, and why is it done?
Answer:
Bond refunding occurs when a government issues new bonds to retire existing bonds. It is done to take advantage of lower interest rates, reduce debt service costs, or restructure debt.
How are premiums and discounts on bonds accounted for?
Answer:
- Premiums: Recorded as a liability and amortized over the life of the bond.
- Discounts: Recorded as a contra-liability and amortized similarly.
In the government-wide financial statements, amortization is recognized as an adjustment to interest expense.
What are arbitrage regulations, and how do they affect debt service?
Answer:
Arbitrage regulations prevent governments from profiting by investing tax-exempt bond proceeds in higher-yielding taxable securities. Violations can lead to penalties or loss of tax-exempt status.
What is the difference between general obligation bonds and revenue bonds?
Answer:
- General Obligation Bonds: Secured by the full faith and credit of the government, backed by tax revenues.
- Revenue Bonds: Secured by specific revenue sources, such as fees from a utility or toll road.
How are lease obligations reported in government accounting?
Answer:
Under GASB Statement 87, lease obligations are reported as a lease liability and a corresponding right-of-use asset in the government-wide financial statements.
What is a sinking fund, and how is it used in debt service?
Answer:
A sinking fund is a reserve fund set aside to repay debt or redeem bonds at maturity. It is accounted for within the debt service fund.
How does GASB 34 impact reporting of long-term liabilities?
Answer:
GASB 34 requires that general long-term liabilities be reported in the government-wide financial statements and disclosed in the notes, providing a more comprehensive view of the government’s financial position.
What are compensated absences, and how are they accounted for?
Answer:
Compensated absences are employee benefits, such as vacation and sick leave, that are earned but not yet paid. The liability for these is reported in the government-wide financial statements.
What disclosures are required for long-term liabilities?
Answer:
Disclosures include the nature of the liability, maturity dates, interest rates, repayment terms, and any restrictions or commitments associated with the liability.
What is overlapping debt, and how is it calculated?
Answer:
Overlapping debt refers to the proportionate share of debt issued by other governments that overlaps the government’s jurisdiction. It is calculated based on the percentage of the overlapping area served by the government.
True / False Questions
| 1. | General long-term liabilities are those that arise from the activities of a government.
True False |
| 2. | Although some governments have issued taxable debt, the interest earned on most debt issued by state and local governments is exempt from federal taxation and, in some states, from state taxation.
True False |
| 3. | Both general capital assets acquired or constructed from the proceeds of special assessment debt and the related long-term liability are recorded in the governmental fund.
True False |
| 4. | Debt backed by both special assessments and the full faith and credit of a government should be reported in the government-wide statement of net position in the Business-type Activities column.
True False |
| 5. | When a capital lease payment is legally due, an entry is made in the debt service (or appropriate governmental) fund to record an expenditure, and an entry is made in the governmental activities accounts to reduce Capital Lease Obligations Payable.
True False |
| 6. | Issuance of tax-supported debt having a maturity of more than one year from date of issue results in a journal entry in only the governmental activities general journal.
True False |
| 7. | Debt limit is a term used to denote the total amount of indebtedness of specified kinds that is allowed by law to be outstanding at any one time.
True False |
| 8. | Debt margin is the difference between the debt limit and the amount of outstanding debt subject to the debt limitation.
True False |
| 9. | Debt margin is a term used to denote the total amount of indebtedness of specified kinds that is allowed by law to be outstanding at any one time, while debt limit is the difference between the debt margin and the amount of outstanding debt subject to the debt limitation.
True False |
| 10. | Since the debt of a government is subject to a legal debt limit, there cannot be any legal overlapping debt.
True False |
| 11. | Disclosures about long-term liabilities should be included in the notes to the financial statements to provide users with information about authorization of new debt issues, sale of previously authorized issues, and retirement and refunding of debt during the year.
True False |
| 12. | Notes to the financial statements of a state or local government should include a schedule, or summary, of debt service requirements (principal and interest payments) until the final maturity of debt outstanding on the balance sheet date.
True False |
| 13. | Debt service funds exist to accumulate resources to pay tax-supported bond issues at maturity. Interest on such bonds is paid from General Fund appropriations rather than from debt service fund appropriations.
True False |
| 14. | All long-term debt, including bonds, notes or warrants, and various other long-term obligations, intended to be repaid from tax levies or special assessments are accounted for in debt service funds.
True False |
| 15. | The debt service activity of a government may be properly accounted for within the General Fund unless law mandates the use of a debt service fund.
True False |
| 16. | Taxes for debt service are always levied by the General Fund and transferred to a debt service fund.
True False |
| 17. | While governmental fund liabilities and expenditures for debt service on general long-term debt are generally recognized in the reporting period that debt payments are due to correspond with appropriations, if a government has deposited or transferred financial resources dedicated for payment of debt service to the debt service fund and payment of principal and interest is due early in the following year, then the expenditure and related liability may be recognized in the debt service fund prior to year end.
True False |
| 18. | At year-end, budgetary and operating statement accounts of a debt service fund are closed in the same manner as are those of a General Fund or special revenue funds.
True False |
| 19. | Installments of special assessments to be collected within one year are recorded as Assessments Receivable—Current; installments due in periods after one year are recorded as Assessments Receivable—Deferred.
True False |
| 20. | Debt service funds for term bonds would generally include sinking fund investments.
True False |
| 21. | Term bond issues mature in their entirety on a given date, in contrast to serial bonds, which mature in installments.
True False |
| 22. | The premium or discount on bonds purchased as investments is accounted for in the same manner as a premium or discount on bonds sold (i.e., bond payable).
True False |
| 23. | If a debt service fund is used, capital lease payments for general capital assets should be recorded by a debt service fund rather than the fund using the leased asset.
True False |
| 24. | Expenditures for capital lease payments consist of two elements: payment of interest on the lease obligation, and payment on the obligation itself.
True False |
| 25. | Under a bond refunding, the proceeds of a new bond issuance are either deposited in escrow to pay the debt service on the outstanding bonds when due or used to promptly retire previously issued bonds.
True False |
| 26. | The issuance of general long-term bonds requires recognition by the fund receiving the proceeds and by the business-type activities.
True False |
| 27. | Special assessment debt that carries governmental backing should be reported as “special assessment debt with governmental commitment”.
True False |
| 28. | Special assessment debt is not recorded in a government’s accounts.
True False |
| 29. | The purpose of a sinking fund is to set aside resources for a substantial debt payment due at maturity.
True False |
Multiple Choice Questions
| 30. | Which of the following is not properly recorded in the governmental activities accounts?
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| 31. | The liability for special assessment bonds that carry a secondary pledge of a city’s general credit, if reported in conformity with GAAP, should be reported in the balance sheet(s) of
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| 32. | Which of the following statements is true?
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| 33. | General obligation bonds issued for the benefit of enterprise funds, with the intent of paying bond principal and interest from revenues of the enterprise fund, should be reported as a liability in the balance sheet of the
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| 34. | Immediately after making its annual $20,000 lease payment on June 30, 2014, the last day of its fiscal year, Capitol City had an unpaid capital lease obligation of $95,000. The interest rate applicable to the lease is 10 percent. When the $20,000 lease payment due on June 30, 2015 is made, the journal entry for the governmental activities accounts will include
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| 35. | Pollution remediation obligations should be recognized if which of the following obligating events has occurred?
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| 36. | A debt service fund is a
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| 37. | Which of the following resource inflows would be recorded as a revenue of a debt service fund?
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| 38. | On the due date for bond interest, the debt service fund journal entry (or entries) will include
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| 39. | Which of the following statements is always true concerning the reporting of debt service funds?
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| 40. | Which of the following budgetary accounts is typically used by a debt service fund?
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| 41. | Interest expenditures on bonds payable should be recorded in a debt service fund
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| 42. | Special assessments levied for debt service of bonds issued for a special assessment capital project will be accounted for by a debt service fund under which of the following situations?
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| 43. | Which of the following debt service fund accounts would not be closed at the end of each fiscal year?
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| 44. | The town of Terra Cotta issued the following during the year ended June 30, 2014: (1) $600,000 in bonds for the installation of street lights, to be assessed against properties benefited, but secondarily backed by the village; (2) $800,000 in bonds for construction of a Parks and Recreation Department public golf course to be paid from pledged fees collected from golf course users. How much should be accounted for through debt service funds for payments of principal over the life of the bonds?
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| 45. | The liability for general obligation bonds should be recorded in the
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| 46. | On the due date for bond interest, the debt service fund journal entry (or entries) will include a debit to
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| 47. | When bonds are sold at a premium for a capital project, the premium amount generally
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| 48. | The city of New Haven issued $20 million of tax-supported bonds at 102 to finance a new prison. Upon issuance, how will the premium be recorded?
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| 49. | Typically, proceeds from general obligation bonds will be recorded in the
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| 50. | Which of the following is true for debt service funds?
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| 51. | Which of the following statements is not true for debt service funds?
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| 52. | Debt service funds are used to account for which of the following?
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| 53. | Premiums received on tax-supported bonds are generally transferred to what fund?
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| 54. | Which of the following assets would not be found in the balance sheet of a debt service fund?
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| 55. | The city of Spartan’s fiscal year ends on December 31. On September 1, 2014, the city issued $1,000,000 of 6%, 10-year term bonds with semi-annual interest payments due on March 1 and September 1 each year, beginning on March 1, 2015. What amount of expenditures should the city recognize in its debt service fund for the years 2014 and 2015?
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| 56. | Which of the following debt service funds would normally have the largest balance in its Fund Balance account?
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| 57. | If a city has an unpaid capital lease obligation at the beginning of its fiscal year, the journal entry in the debt service fund to record the lease payment during that fiscal year will include
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| 58. | On June 1, 2015, Brooktown levied special assessments in the amount of $500,000, payable in 10 equal annual installments beginning on June 30, 2015. The assessment installments are intended to pay principal and interest on special assessment bonds for which the town has pledged its full faith and credit should assessments be insufficient. Assuming no allowance for uncollectible receivables, the journal entry in the debt service fund on June 1, 2015 would include:
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| 59. | Which of the following is a true statement regarding in-substance defeasance of bonds?
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| 60. | Debt service funds are used to record
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| 61. | When the debt service fund makes a payment of principal and interest on an outstanding long-term debt, the governmental activities accounts
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| 62. | Which of the following basic financial statements contains a column for the total of all debt service funds?
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| 63. | Which of the following financial statements are required for a Debt Service Fund?
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| 64. | The sale of revenue bonds by a water utility fund would be recorded
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| 65. | Which of the following is not true?
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| 66. | The General Fund of the city of Castle Rock transfers $115,000 to the debt service fund for a $100,000 principal and $15,000 interest payment. The recording of this transaction would include
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| 67. | The General Fund of the city of Castle Rock transfers $115,000 to the debt service fund for a $100,000 bond principal and $15,000 interest payment. Subsequent payment of the principal and interest would include
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Short Answer Questions
| 68. | The following key terms from Chapter 6 relate to accounting for general long-term liabilities and debt service: A. Legal defeasance B. Regular serial bonds C. In-substance defeasance D. Irregular serial bonds E. Debt limit F. Annuity serial bonds G. Debt margin For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.
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Essay Questions
| 69. | “Bonds to be retired by a debt service fund are recorded in that fund throughout their life.” Do you agree or disagree? Why or why not?
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| 70. | How are general long-term liabilities distinguished from other long-term liabilities of the government? How does the financial reporting of general long-term liabilities differ from the financial reporting of other long-term liabilities?
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| 71. | Explain the essential differences between regular serial bonds and term bonds and how debt service fund accounting differs for the two types of bonds.
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| 72. | Bonds and other debt of enterprise funds may legally, at least contingently, have the status of tax-supported debt. In the event that enterprise fund resources are insufficient for debt service on such debt, why might the government as a whole find it necessary or desirable to assume responsibility for debt service? How would assumption of responsibility for such debt by the government as a whole be accounted for in the governmental activities accounts in the enterprise fund?
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| 73. | In many jurisdictions, the statutory debt limit is relatively low, but overlapping debt is not prohibited. From the standpoint of the property owner and taxpayer, how does that situation compare with a relatively high total statutory debt limit?
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| 74. | “The entire debt arising from the acquisition of general capital assets under a capital lease agreement should be reported as debt of the fund that accounts for the activities of the department or function using the leased asset. Only debt arising from the lease of equipment used by a number of departments should be reported in the governmental activities accounts, rather than a fund.” Do you agree? Why or why not?
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| 75. | Explain the financial reporting for special assessment bonds when (a) a government assumes responsibility for debt service should special assessment collections be insufficient, and when (b) the government assumes no responsibility whatsoever.
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| 76. | If general capital assets are being acquired by a government under a capital lease agreement, describe the entries that should be recorded in a governmental fund (logically, a debt service fund) for each lease payment.
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| 77. | “All taxes raised for payment of interest and principal on general long-term debt are recognized as other financing sources of the debt service fund.” Do you agree? Why or why not?
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| 78. | In the current fiscal year, Casper County issued $10,000,000 in general obligation term bonds at 102 for construction of a new county complex. The county is required to use any accrued interest or premiums for servicing the debt issue. a. Prepare journal entries to record the bond issuance at the fund and government-wide levels? b. How would the bond issue be reported in the fund financial statements and the government-wide financial statements? c. What effect, if any, do interest payments have on the carrying value of the bond issue as reported in the financial statements?
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| 79. | Compute the legal debt margin for Mountain City given the following information regarding its bonded debt. 1) The legal debt limit is 10 percent of total assessed valuation. 2) Bonds outstanding and bonds authorized are: Note: The city has no general obligation liability for the revenue bonds or the industrial development bonds.
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| 80. | As of the fiscal year ending September 30, 2013, Crystal Beach had $10,000,000 in 5 percent serial bonds outstanding. The serial bonds pay interest semiannually on March 1 and September 1, with $500,000 in bonds being retired on each interest payment date. Resources for payment of principal are transferred from the General Fund, and the debt service fund levies property taxes annually to cover interest payments. Any excess is reserved for future debt service payments.
Prepare debt service fund and government-wide entries in general journal form to reflect, as necessary, the following information and transactions for FY 2014. |
| 81. | From records available in various offices of Baraga County, you find the following information about changes in long-term liabilities of the county during the year ended June, 2012: 1) At the end of the 2011 fiscal year, $500,000 was still outstanding on an issue of a 3 percent serial bond that matures at the rate of $250,000 per year. The payment during fiscal year 2012 has been made by the debt service fund. 2) Baraga County council decided to fund a General Fund deficit with an issue of four-year notes totaling $480,000. The notes were issued on July 1, 2011, and were to be retired at the rate of $120,000 per year; the first payment was to be made on July 1, 2012 by the debt service fund. 3) At the end of the 2011 fiscal year, $100,000 par value general obligation serial bonds were outstanding, from an original amount of $400,000. Annual maturities of $25,000 have been paid on December 31 of each year. 4) In FY 2011 an issue of 7 percent serial bonds was sold in the amount of $6,000,000. The issue matures at the rate of $300,000 per year. The first payment was made in FY 2012. 5) On June 30, 2011 the county had outstanding $200,000 of 4 percent serial bonds that had been issued to finance a revenue-producing recreation facility. On June 1, 2012 bonds in the amount of $50,000 were paid. The bonds are being paid from enterprise revenues; they carry a covenant that obligates the county to levy taxes to service the debt if enterprise revenues are insufficient. It is expected that enterprise revenues will be sufficient to retire the bonds on schedule. 6) During FY 2012 a $300,000 issue of 6 percent term bonds matured, with little provision having been made for their payment. The bonds were closely held, and arrangements were made with holders of all but $25,000 to accept 8 percent refunding serial bonds. Cash was paid to creditors who declined to accept refunding bonds. Required: Prepare a schedule disclosing the changes in long-term liabilities for Baraga County for the year ended June 30, 2012.
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Chapter 06 Accounting for General Long-term Liabilities and Debt Service Answer Key
True / False Questions
| 1. | General long-term liabilities are those that arise from the activities of a government.
FALSE General long-term liabilities are those that arise from activities of governmental funds and that are not reported as fund liabilities of a proprietary or fiduciary fund. |
| Difficulty: Easy Difficulty: Medium Question Type: Content |
| 2. | Although some governments have issued taxable debt, the interest earned on most debt issued by state and local governments is exempt from federal taxation and, in some states, from state taxation.
TRUE The tax-exempt feature of governmental debt enables governments to raise large amounts of capital at relatively low cost. |
| Difficulty: Easy Difficulty: Medium Question Type: Content |
| 3. | Both general capital assets acquired or constructed from the proceeds of special assessment debt and the related long-term liability are recorded in the governmental fund.
FALSE GASB requires general capital assets and the related long-term liabilities to be reported in the government-wide statements, not in governmental funds. |
| Difficulty: Medium Question Type: Content |
| 4. | Debt backed by both special assessments and the full faith and credit of a government should be reported in the government-wide statement of net position in the Business-type Activities column.
FALSE GASB standards require that the obligation for special assessment debt be recorded in the governmental activities accounts if the government is obligated in any manner for the debt, even though primary responsibility for the debt rests with taxpayers in the special benefit district. |
| Difficulty: Medium Question Type: Concept |
| 5. | When a capital lease payment is legally due, an entry is made in the debt service (or appropriate governmental) fund to record an expenditure, and an entry is made in the governmental activities accounts to reduce Capital Lease Obligations Payable.
TRUE A capital lease payment necessitates reduction of Capital Lease Obligations Payable in the governmental activities accounts for the portion of the payment that is a payment on principal (not interest) of the lease obligation and recognition of an expenditure in the debt service or appropriate governmental fund. |
| Difficulty: Medium Question Type: Concept |
| 6. | Issuance of tax-supported debt having a maturity of more than one year from date of issue results in a journal entry in only the governmental activities general journal.
FALSE The fund or funds that received the proceeds of the debt must also record the issuance; however, it will be recorded as an other financing source, rather than a long-term liability, in a governmental fund. |
| Difficulty: Medium Question Type: Concept |
| 7. | Debt limit is a term used to denote the total amount of indebtedness of specified kinds that is allowed by law to be outstanding at any one time.
TRUE This paraphrases the definition given in Chapter 6. |
| Difficulty: Easy Question Type: Concept |
| 8. | Debt margin is the difference between the debt limit and the amount of outstanding debt subject to the debt limitation.
TRUE Debt margin is also called “borrowing power.” |
| Difficulty: Medium Question Type: Concept |
| 9. | Debt margin is a term used to denote the total amount of indebtedness of specified kinds that is allowed by law to be outstanding at any one time, while debt limit is the difference between the debt margin and the amount of outstanding debt subject to the debt limitation.
FALSE Debt limit is a term used to denote the total amount of indebtedness of specified kinds that is allowed by law to be outstanding at any one time. Debt margin is the difference between the debt limit and the amount of outstanding debt subject to the debt limitation. |
| Difficulty: Medium Question Type: Concept |
| 10. | Since the debt of a government is subject to a legal debt limit, there cannot be any legal overlapping debt.
FALSE Property ordinarily lies in many different taxing jurisdictions simultaneously. Although each jurisdiction may be subject to a legal debt limit, the property is taxed to service the debt of all jurisdictions within which the property is located. |
| Difficulty: Easy Question Type: Concept |
| 11. | Disclosures about long-term liabilities should be included in the notes to the financial statements to provide users with information about authorization of new debt issues, sale of previously authorized issues, and retirement and refunding of debt during the year.
TRUE Creditors, potential creditors, and other users of financial reports are presumed to find this information helpful. |
| Difficulty: Medium Question Type: Concept |
| 12. | Notes to the financial statements of a state or local government should include a schedule, or summary, of debt service requirements (principal and interest payments) until the final maturity of debt outstanding on the balance sheet date.
TRUE This provision of GASB standards is described in Chapter 6. |
| Difficulty: Easy Question Type: Concept |
| 13. | Debt service funds exist to accumulate resources to pay tax-supported bond issues at maturity. Interest on such bonds is paid from General Fund appropriations rather than from debt service fund appropriations.
FALSE Debt service funds are created to account for interest expenditures and revenues raised, as well as for principal repayment. |
| Difficulty: Medium Question Type: Concept |
| 14. | All long-term debt, including bonds, notes or warrants, and various other long-term obligations, intended to be repaid from tax levies or special assessments are accounted for in debt service funds.
FALSE Debt service funds should be used to account for revenues or other financing sources used to provide debt service and the related expenditures of these resources for the debt service. However, the long-term debt itself should be accounted for in the governmental activities accounts. |
| Difficulty: Medium Question Type: Concept |
| 15. | The debt service activity of a government may be properly accounted for within the General Fund unless law mandates the use of a debt service fund.
TRUE Only those funds required by law or by sound financial management are needed. Bond covenants or ordinances are usually interpreted, however, as requiring the use of a debt service fund, and it generally is good financial management to report assets held for debt service separately from assets available for salaries, etc. |
| Difficulty: Easy Question Type: Concept |
| 16. | Taxes for debt service are always levied by the General Fund and transferred to a debt service fund.
FALSE Taxes may be levied for a debt service fund directly, or debt service activity may be recorded in the General Fund. |
| Difficulty: Medium Question Type: Concept |
| 17. | While governmental fund liabilities and expenditures for debt service on general long-term debt are generally recognized in the reporting period that debt payments are due to correspond with appropriations, if a government has deposited or transferred financial resources dedicated for payment of debt service to the debt service fund and payment of principal and interest is due early in the following year, then the expenditure and related liability may be recognized in the debt service fund prior to year end.
TRUE GASB Codification, Section 1500, Paragraphs 111 and 112 provide for an exception to the recognition of governmental fund liabilities and expenditures for debt service on general long-term debt in the reporting period that debt payments are due. |
| Difficulty: Medium Question Type: Concept |
| 18. | At year-end, budgetary and operating statement accounts of a debt service fund are closed in the same manner as are those of a General Fund or special revenue funds.
TRUE This is illustrated in Chapter 6. |
| Difficulty: Easy Question Type: Concept |
| 19. | Installments of special assessments to be collected within one year are recorded as Assessments Receivable—Current; installments due in periods after one year are recorded as Assessments Receivable—Deferred.
TRUE This describes the proper accounting for assessment receivables as illustrated in Chapter 6. |
| Difficulty: Medium Question Type: Concept |
| 20. | Debt service funds for term bonds would generally include sinking fund investments.
TRUE Bond indentures for term bonds generally require assets be set aside as sinking fund investments for ultimate retirement of the debt. In contrast, no sinking fund is necessary for regular serial bonds since revenues are usually raised each year in the amount of interest and principal falling due in that year; indeed one rationale for the use of regular serial bonds is to avoid the need for a sinking fund. |
| Difficulty: Medium Question Type: Concept |
| 21. | Term bond issues mature in their entirety on a given date, in contrast to serial bonds, which mature in installments.
TRUE These definitions are consistent with Chapter 6 text. |
| Difficulty: Medium Question Type: Concept |
| 22. | The premium or discount on bonds purchased as investments is accounted for in the same manner as a premium or discount on bonds sold (i.e., bond payable).
FALSE Investments generally would not be adjusted for amortization of any premiums or discounts because GASB standards require fair value accounting. Premiums and discounts on bonds payable are amortized in the governmental activities accounts at the government-wide level. |
| Difficulty: Medium Question Type: Concept |
| 23. | If a debt service fund is used, capital lease payments for general capital assets should be recorded by a debt service fund rather than the fund using the leased asset.
TRUE Payments required by capital leases are merely installment payments of general long-term debt and interest on the unpaid debt; it is logical to record such payments in a debt service fund rather than in the fund using the leased assets. |
| Difficulty: Medium Question Type: Concept |
| 24. | Expenditures for capital lease payments consist of two elements: payment of interest on the lease obligation, and payment on the obligation itself.
TRUE Chapter 6 presents an example illustrating how the two elements are calculated and recorded in the debt service fund. |
| Difficulty: Easy Question Type: Concept |
| 25. | Under a bond refunding, the proceeds of a new bond issuance are either deposited in escrow to pay the debt service on the outstanding bonds when due or used to promptly retire previously issued bonds.
TRUE This description of a bond refunding is consistent with the Chapter 6 discussion. |
| Difficulty: Easy Question Type: Concept |
| 26. | The issuance of general long-term bonds requires recognition by the fund receiving the proceeds and by the business-type activities.
FALSE Governmental funds do not record long-term debt; it is recorded in the governmental (not business-type) activities accounts at the government-wide level. However, the proceeds of the bond are recorded in a governmental fund, typically the capital projects fund. |
| Difficulty: Easy Question Type: Concept |
| 27. | Special assessment debt that carries governmental backing should be reported as “special assessment debt with governmental commitment”.
TRUE The portion of special assessment debt that will be repaid from property owner assessments should be reported as “special assessment debt with governmental commitment” to recognize governmental backing of the debt, while the portion of special assessment debt that will be repaid from general resources of the government (the public benefit portion or the amount assessed against government-owned property) should be reported like other general long-term liabilities. |
| Difficulty: Easy Question Type: Concept |
| 28. | Special assessment debt is not recorded in a government’s accounts.
FALSE If a government provides backing for special assessment, the portion of special assessment debt that will be repaid from property owner assessments should be reported as “special assessment debt with governmental commitment” to recognize governmental backing of the debt, while the portion of special assessment debt that will be repaid from general resources of the government (the public benefit portion or the amount assessed against government-owned property) should be reported like other general long-term liabilities. |
| Difficulty: Easy Question Type: Concept |
| 29. | The purpose of a sinking fund is to set aside resources for a substantial debt payment due at maturity.
TRUE This definition is consistent with discussion in Chapter 6. |
| Difficulty: Easy Question Type: Concept |
Multiple Choice Questions
| 30. | Which of the following is not properly recorded in the governmental activities accounts?
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| Difficulty: Easy Question Type: Concept |
| 31. | The liability for special assessment bonds that carry a secondary pledge of a city’s general credit, if reported in conformity with GAAP, should be reported in the balance sheet(s) of
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| Difficulty: Medium Question Type: Concept |
| 32. | Which of the following statements is true?
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| Difficulty: Medium Question Type: Concept |
| 33. | General obligation bonds issued for the benefit of enterprise funds, with the intent of paying bond principal and interest from revenues of the enterprise fund, should be reported as a liability in the balance sheet of the
|
| Difficulty: Medium Question Type: Concept |
| 34. | Immediately after making its annual $20,000 lease payment on June 30, 2014, the last day of its fiscal year, Capitol City had an unpaid capital lease obligation of $95,000. The interest rate applicable to the lease is 10 percent. When the $20,000 lease payment due on June 30, 2015 is made, the journal entry for the governmental activities accounts will include
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| Difficulty: Medium Question Type: Journal Entry |
| 35. | Pollution remediation obligations should be recognized if which of the following obligating events has occurred?
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| Difficulty: Medium Question Type: Concept |
| 36. | A debt service fund is a
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| Difficulty: Easy Question Type: Concept |
| 37. | Which of the following resource inflows would be recorded as a revenue of a debt service fund?
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| Difficulty: Medium Question Type: Concept |
| 38. | On the due date for bond interest, the debt service fund journal entry (or entries) will include
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| Difficulty: Medium Question Type: Journal Entry |
| 39. | Which of the following statements is always true concerning the reporting of debt service funds?
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| Difficulty: Medium Question Type: Concept |
| 40. | Which of the following budgetary accounts is typically used by a debt service fund?
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| Difficulty: Easy Question Type: Concept |
| 41. | Interest expenditures on bonds payable should be recorded in a debt service fund
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| Difficulty: Medium Question Type: Concept |
| 42. | Special assessments levied for debt service of bonds issued for a special assessment capital project will be accounted for by a debt service fund under which of the following situations?
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| Difficulty: Medium Question Type: Concept |
| 43. | Which of the following debt service fund accounts would not be closed at the end of each fiscal year?
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| Difficulty: Easy Question Type: Journal Entry |
| 44. | The town of Terra Cotta issued the following during the year ended June 30, 2014: (1) $600,000 in bonds for the installation of street lights, to be assessed against properties benefited, but secondarily backed by the village; (2) $800,000 in bonds for construction of a Parks and Recreation Department public golf course to be paid from pledged fees collected from golf course users. How much should be accounted for through debt service funds for payments of principal over the life of the bonds?
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| Difficulty: Medium Question Type: Calculation |
| 45. | The liability for general obligation bonds should be recorded in the
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| Difficulty: Medium Question Type: Concept |
| 46. | On the due date for bond interest, the debt service fund journal entry (or entries) will include a debit to
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| Difficulty: Medium Question Type: Concept |
| 47. | When bonds are sold at a premium for a capital project, the premium amount generally
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| Difficulty: Medium Question Type: Concept |
| 48. | The city of New Haven issued $20 million of tax-supported bonds at 102 to finance a new prison. Upon issuance, how will the premium be recorded?
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| Difficulty: Medium Question Type: Concept |
| 49. | Typically, proceeds from general obligation bonds will be recorded in the
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| Difficulty: Medium Question Type: Concept |
| 50. | Which of the following is true for debt service funds?
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| Difficulty: Medium Question Type: Concept |
| 51. | Which of the following statements is not true for debt service funds?
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| Difficulty: Medium Question Type: Concept |
| 52. | Debt service funds are used to account for which of the following?
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| Difficulty: Easy Question Type: Concept |
| 53. | Premiums received on tax-supported bonds are generally transferred to what fund?
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| Difficulty: Easy Question Type: Concept |
| 54. | Which of the following assets would not be found in the balance sheet of a debt service fund?
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| Difficulty: Medium Question Type: Concept |
| 55. | The city of Spartan’s fiscal year ends on December 31. On September 1, 2014, the city issued $1,000,000 of 6%, 10-year term bonds with semi-annual interest payments due on March 1 and September 1 each year, beginning on March 1, 2015. What amount of expenditures should the city recognize in its debt service fund for the years 2014 and 2015?
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| Difficulty: Medium Question Type: Calculation |
| 56. | Which of the following debt service funds would normally have the largest balance in its Fund Balance account?
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| Difficulty: Medium Question Type: Concept |
| 57. | If a city has an unpaid capital lease obligation at the beginning of its fiscal year, the journal entry in the debt service fund to record the lease payment during that fiscal year will include
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| Difficulty: Medium Question Type: Journal Entry |
| 58. | On June 1, 2015, Brooktown levied special assessments in the amount of $500,000, payable in 10 equal annual installments beginning on June 30, 2015. The assessment installments are intended to pay principal and interest on special assessment bonds for which the town has pledged its full faith and credit should assessments be insufficient. Assuming no allowance for uncollectible receivables, the journal entry in the debt service fund on June 1, 2015 would include:
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| Difficulty: Medium Question Type: Journal Entry |
| 59. | Which of the following is a true statement regarding in-substance defeasance of bonds?
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| Difficulty: Medium Question Type: Concept |
| 60. | Debt service funds are used to record
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| Difficulty: Easy Question Type: Concept |
| 61. | When the debt service fund makes a payment of principal and interest on an outstanding long-term debt, the governmental activities accounts
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| Difficulty: Medium Question Type: Concept |
| 62. | Which of the following basic financial statements contains a column for the total of all debt service funds?
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| Difficulty: Hard Question Type: Concept |
| 63. | Which of the following financial statements are required for a Debt Service Fund?
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| Difficulty: Hard Question Type: Concept |
| 64. | The sale of revenue bonds by a water utility fund would be recorded
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| Difficulty: Medium Question Type: Concept |
| 65. | Which of the following is not true?
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| Difficulty: Medium Question Type: Concept |
| 66. | The General Fund of the city of Castle Rock transfers $115,000 to the debt service fund for a $100,000 principal and $15,000 interest payment. The recording of this transaction would include
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| Difficulty: Medium Question Type: Concept |
| 67. | The General Fund of the city of Castle Rock transfers $115,000 to the debt service fund for a $100,000 bond principal and $15,000 interest payment. Subsequent payment of the principal and interest would include
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| Difficulty: Medium Question Type: Concept |
Short Answer Questions
| 68. | The following key terms from Chapter 6 relate to accounting for general long-term liabilities and debt service: A. Legal defeasance B. Regular serial bonds C. In-substance defeasance D. Irregular serial bonds E. Debt limit F. Annuity serial bonds G. Debt margin For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition. 1. C, 2. F, 3. B, 4. E, 5. A |
| Difficulty: Medium Question Type: Concept |
Essay Questions
| 69. | “Bonds to be retired by a debt service fund are recorded in that fund throughout their life.” Do you agree or disagree? Why or why not?
Disagree. Debt service funds account for only those liabilities to be paid under authorization of the funds’ current appropriation. Bonds are not payable until their maturity (or until they are called) and are properly accounted for in the governmental activities accounts until that time. |
| Difficulty: Medium Question Type: Concept |
| 70. | How are general long-term liabilities distinguished from other long-term liabilities of the government? How does the financial reporting of general long-term liabilities differ from the financial reporting of other long-term liabilities? |
| Difficulty: Medium Question Type: Concept |
| 71. | Explain the essential differences between regular serial bonds and term bonds and how debt service fund accounting differs for the two types of bonds. |
| Difficulty: Medium Question Type: Concept |
| 72. | Bonds and other debt of enterprise funds may legally, at least contingently, have the status of tax-supported debt. In the event that enterprise fund resources are insufficient for debt service on such debt, why might the government as a whole find it necessary or desirable to assume responsibility for debt service? How would assumption of responsibility for such debt by the government as a whole be accounted for in the governmental activities accounts in the enterprise fund? |
| Difficulty: Medium Question Type: Concept |
| 73. | In many jurisdictions, the statutory debt limit is relatively low, but overlapping debt is not prohibited. From the standpoint of the property owner and taxpayer, how does that situation compare with a relatively high total statutory debt limit?
A definite answer to this question requires knowledge of the total rate limitation and the rate and number of jurisdictions involved in the overlapping debt situation. A very general answer is that the single rate is easier to comprehend than the overlapping debt situation with its multiple governments, each with its own debt-issuing capacity. The single rate might provide greater protection for the taxpayers; on the other hand, it might not because governments can usually find financing arrangements not specifically prohibited by law. |
| Difficulty: Medium Question Type: Concept |
| 74. | “The entire debt arising from the acquisition of general capital assets under a capital lease agreement should be reported as debt of the fund that accounts for the activities of the department or function using the leased asset. Only debt arising from the lease of equipment used by a number of departments should be reported in the governmental activities accounts, rather than a fund.” Do you agree? Why or why not? |
| Difficulty: Medium Question Type: Concept |
| 75. | Explain the financial reporting for special assessment bonds when (a) a government assumes responsibility for debt service should special assessment collections be insufficient, and when (b) the government assumes no responsibility whatsoever. |
| Difficulty: Medium Question Type: Concept |
| 76. | If general capital assets are being acquired by a government under a capital lease agreement, describe the entries that should be recorded in a governmental fund (logically, a debt service fund) for each lease payment.
The debt service fund will typically budget and record receipt of revenues and/or transfers from the general fund to provide resources for each lease payment, as well as recording an appropriation and expenditures for each lease payment. The latter entry should distinguish between expenditures for interest and expenditures for principal of the lease obligation. |
| Difficulty: Medium Question Type: Concept |
| 77. | “All taxes raised for payment of interest and principal on general long-term debt are recognized as other financing sources of the debt service fund.” Do you agree? Why or why not? |
| Difficulty: Medium Question Type: Concept |
| 78. | In the current fiscal year, Casper County issued $10,000,000 in general obligation term bonds at 102 for construction of a new county complex. The county is required to use any accrued interest or premiums for servicing the debt issue. a. Prepare journal entries to record the bond issuance at the fund and government-wide levels? b. How would the bond issue be reported in the fund financial statements and the government-wide financial statements? c. What effect, if any, do interest payments have on the carrying value of the bond issue as reported in the financial statements? |
| Difficulty: Medium Question Type: Journal Entry |
| 79. | Compute the legal debt margin for Mountain City given the following information regarding its bonded debt. 1) The legal debt limit is 10 percent of total assessed valuation. 2) Bonds outstanding and bonds authorized are: Note: The city has no general obligation liability for the revenue bonds or the industrial development bonds. |
| Difficulty: Hard Question Type: Calculation |
| 80. | As of the fiscal year ending September 30, 2013, Crystal Beach had $10,000,000 in 5 percent serial bonds outstanding. The serial bonds pay interest semiannually on March 1 and September 1, with $500,000 in bonds being retired on each interest payment date. Resources for payment of principal are transferred from the General Fund, and the debt service fund levies property taxes annually to cover interest payments. Any excess is reserved for future debt service payments.
Prepare debt service fund and government-wide entries in general journal form to reflect, as necessary, the following information and transactions for FY 2014. |
| Difficulty: Hard Question Type: Journal Entry |
| 81. | From records available in various offices of Baraga County, you find the following information about changes in long-term liabilities of the county during the year ended June, 2012: 1) At the end of the 2011 fiscal year, $500,000 was still outstanding on an issue of a 3 percent serial bond that matures at the rate of $250,000 per year. The payment during fiscal year 2012 has been made by the debt service fund. 2) Baraga County council decided to fund a General Fund deficit with an issue of four-year notes totaling $480,000. The notes were issued on July 1, 2011, and were to be retired at the rate of $120,000 per year; the first payment was to be made on July 1, 2012 by the debt service fund. 3) At the end of the 2011 fiscal year, $100,000 par value general obligation serial bonds were outstanding, from an original amount of $400,000. Annual maturities of $25,000 have been paid on December 31 of each year. 4) In FY 2011 an issue of 7 percent serial bonds was sold in the amount of $6,000,000. The issue matures at the rate of $300,000 per year. The first payment was made in FY 2012. 5) On June 30, 2011 the county had outstanding $200,000 of 4 percent serial bonds that had been issued to finance a revenue-producing recreation facility. On June 1, 2012 bonds in the amount of $50,000 were paid. The bonds are being paid from enterprise revenues; they carry a covenant that obligates the county to levy taxes to service the debt if enterprise revenues are insufficient. It is expected that enterprise revenues will be sufficient to retire the bonds on schedule. 6) During FY 2012 a $300,000 issue of 6 percent term bonds matured, with little provision having been made for their payment. The bonds were closely held, and arrangements were made with holders of all but $25,000 to accept 8 percent refunding serial bonds. Cash was paid to creditors who declined to accept refunding bonds. Required: Prepare a schedule disclosing the changes in long-term liabilities for Baraga County for the year ended June 30, 2012. |
| Difficulty: Medium Question Type: Concept |
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