Deck 8: Governmental Activities - Long-Term Obligations

Question 1

Unlike individuals and businesses, governments cannot seek protection under the Federal Bankruptcy Code.

Answer 1

False

Question 2

In accounting for operating leases, the rental payments should be recognized in a governmental fund and as expenses in the government-wide statement of activities in the periods in which they apply.

Answer 2

True

Question 3

Because they are not obligations of the government at large, revenue bonds are usually not subject to voter approvals or other forms of voter oversight.

Answer 3

True

Question 4

A governmental entity that is unable to satisfy claims against it

A)Is prohibited from filing bankruptcy.
B)May not seek protection under the Federal Bankruptcy Code.
C)May seek protection under the Federal Bankruptcy Code, using a special section directed to governments.
D)Is automatically placed under the jurisdiction of a higher level of government.

Question 5

Governmental entities enter into capital leases, rather than conventional buy and borrow arrangements for which of the following reasons? Capital leases

A)May be an effective means of circumventing debt limitations.
B)Are less expensive overall than buy and borrow arrangements.
C)Reduce the cash outflows related to the asset acquisition.
D)Have less impact on fund balance than buy and borrow arrangements.

Question 6

Revenue debt is secured only by designated revenue streams.

Question 7

Pulling County has a December 31 fiscal year-end.In November, the County borrowed $8 million from a local bank, due in six months at 6% interest, to finance general government operations.The county pledges property tax revenues to secure the loan.At year-end, how should the bank note be displayed in the fund financial statements?

A)Nothing in the General Fund; Nothing in a Schedule of Changes in Long-Term Obligations.
B)General Fund--$8 million in Other Financing Sources; Nothing in a Schedule of Changes in Long-Term Obligations.
C)General Fund--$8 million in Other Financing Sources; $8 million in a Schedule of Changes in Long-Term Obligations.
D)General Fund--$8 million in Notes Payable; Nothing in a Schedule of Changes in Long-Term Obligations.

Question 8

Governments may enter into operating leases, but may not enter into capital leases.

Question 9

Per GASB Statement No.34, governments generally should report their bonds, notes, and comparable long-term obligations at present value.

Question 10

General obligation debt is the obligation of the government at large and is thereby backed by the government's general credit and revenue-raising powers.

Question 11

A government is prohibited from ever recognizing bond anticipation notes (BANs)as long-term obligations.

Question 12

New City entered into a lease agreement for several new dump trucks to be used in general government activities.Assuming the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, acquisition of these dump trucks would require entries in which of the following funds and/or schedules?

A)General Fund only.
B)General Fund AND Schedule of Changes in Long-Term Debt Obligations.
C)General Fund AND Schedule of General Fixed Assets.
D)General Fund, Schedule of General Fixed Assets AND Schedule of General Long-Term Debt Obligations.

Question 13

General long-term debt of a governmental entity includes

A)All future financial obligations.
B)All future financial obligations that result from past transactions.
C)All future financial obligations that result from past transactions for which the government has already received a benefit.
D)All future financial obligations that are backed by the government's general credit and revenue raising power and that result from past transactions for which the government has already received a benefit.

Question 14

In governmental fund-type financial statements, the assets acquired under a capital lease would be reported at

A)They are not reported in the fund financial statements.
B)The present value of the required lease payments.
C)The undiscounted total of required lease payments.
D)The total of all payments required under the lease.

Question 15

In the government-wide financial statements, the assets acquired under a capital lease would be reported at

A)They are not reported in the fund financial statements.
B)The present value of the required lease payments.
C)The undiscounted total of required lease payments.
D)The total of all payments required under the lease.

Question 16

In the government-wide financial statements, long-term liabilities of governmental entities are generally reported at

A)Face value.
B)Face value plus (minus)unamortized premium (discount).
C)Present value.
D)Market value of the obligation.

Question 17

Tax anticipation notes (TANs)must be reported as current liabilities of the governmental funds in which the related revenues will be reported, as well as in the government-wide statements.

Question 18

To seek protection under the Federal Bankruptcy Code, a governmental entity must

A)Be unable to provide the level of services it has provided in the recent past.
B)Be unable to pay its debt in its current year.
C)Have budgeted expenditures in excess of revenues.
D)Both (b)and (c).

Question 19

When the proceeds of general long-term debt are received by a governmental fund, rather than reporting a liability on the balance sheet, the inflow of resources is treated as another financing source on the operating statement.

Question 20

Although governments may elect to report conduit obligations in their government-wide and proprietary fund statements, the GASB has ruled that note disclosure is sufficient.

Question 21

Southwest City enters into a lease agreement that contains a nonappropriation clause.The clause

A)Has been held by courts in 26 states to effectively cancel the lease.
B)Stipulates that the yearly lease payment must be appropriated by the City Council each year.
C)Prohibits the city from replacing leased property with similar property.
D)Permits the city to lease at lower rates than would be possible without the presence of the clause.

Question 22

Obligations of property owners within a particular government for their proportionate share of debts of other governments with whom they share boundaries is

A)Overlapping debt.
B)Conduit debt.
C)Committed debt.
D)Moral obligation debt.

Question 23

A state created a Housing Authority to provide financing for low-income housing.The Authority issues bonds and uses the proceeds for that purpose.Currently the Authority has outstanding $200 million in bonds backed by the State's promise to cover debt service shortages should they arise.The State Constitution specifically limits the State to no more than $2 million in general obligation debt.How can the state officials defend the $200 million in debt outstanding?

A)The debt is not general obligation debt.
B)The State is only morally obligated on the debt.
C)The debt is the debt of the Authority not the State.
D)All of the above.

Question 24

Overlapping debt should be reported in which of the following ways?

A)It should be reported in the Schedule of Changes in Long-Term Obligations.
B)It should be disclosed as a note to the financial statements.
C)It should be reported in a schedule in the statistical section of the annual report.
D)It should not be reported in the financial statements of the reporting entity.

Question 25

Industrial development bonds are issued in the name of a government with the proceeds used to attract private businesses to a community.Which of the following is a true statement about industrial development bonds?

A)The proceeds are used by the private corporations and principal and interest payments are made by the private corporation.The government backs the bonds in the event of default by the private corporation.
B)The proceeds are used by the private corporations and principal and interest payments are made by the private corporation.The government does not back the bonds in the event of default by the private corporation.
C)The proceeds are used by the government to build infrastructure to service private corporations with principal and interest payments made by the government out of the additional tax revenues received from the private corporation.
D)The proceeds are used by the government to build infrastructure to service private corporations with principal and interest payments made by the private corporation in lieu of property taxes.

Question 26

Debt that is issued by one entity but backed by the promise of another entity to make up any debt service deficiency is

A)Committed debt.
B)Overlapping debt.
C)Conduit debt.
D)Moral obligation debt.

Question 27

A City entered into a long-term capital lease for some office equipment.Assuming the city maintains its books and records in a manner to facilitate preparation of fund financial statements, what entry would be made in the General Fund to record this event?

A)Debit Expenditures; Credit Other Financing Sources-Leases.
B)Debit Equipment; Credit Other Financing Sources-Leases.
C)Debit Equipment; Credit Leases Payable.
D)No entry since it this event had no impact on financial resources.

Question 28

Sun City is located in Hailey County.Sun Valley School District encompasses all of Sun City and some of Hailey County.Property in Sun City is assessed at $400 million; property in Hailey County is assessed at $800 million; property in Sun Valley School District is assessed at $600 million.The total debt outstanding for Sun City is $30 million; Hailey County is $50 million; Sun Valley School District is $45 million.Compute the amount of direct and overlapping debt for Sun City.

A)$ 30 million.
B)$ 75 million.
C)$ 85 million.
D)$125 million.

Question 29

Why would a government issue revenue bonds (which generally are issued at a higher rate of interest than general obligation bonds)even though the government knows that if revenues from the project are not sufficient to cover principal and interest payments, the government will use resources from general government activities to fund the principal and interest payments?

A)Revenue bonds may not require approval of the voters.
B)Revenue bonds may not be considered in legal debt limitations.
C)Revenue bonds may permit the interest costs to be passed on to the users.
D)All of the above.

Question 30

The Southside City has $95 million of debt recorded in its Schedule of Changes in Long-Term Obligations, made up of $60 million of general obligation debt, $2 million of compensated absences payable, $8 million claims and judgments, and $25 million of obligations under capital leases.The State limits the amount of general obligation debt that can be issued by a City to 20% of the assessed value of taxable property.The assessed value of property in Southside City is $500 million.The amount of legal debt margin for Southside City is

A)$ 5 million.
B)$ 40 million.
C)$ 60 million.
D)$100 million.

Question 31

An obligation issued in the name of a government on behalf of a nongovernmental entity is called

A)Overlapping debt.
B)Conduit debt.
C)Committed debt.
D)Moral obligation debt.

Question 32

Which of the following funds is most likely to receive the proceeds of revenue bonds?

A)General Fund.
B)Capital Project Fund.
C)City Utility Enterprise Fund.
D)Highway Department Special Revenue Fund.

Question 33

The City of Pocahontas issued $20 million in general obligation bonds at par.The City loaned the proceeds to Domsee Fish Processors to expand the size of their facility, which would allow Domsee to hire additional workers.The loan payments from Domsee to the City are established to match the principal and interest payments on the bond issue.The bonds are payable exclusively from the loan repayments by Domsee.The bonds are secured by the additional plant facilities built by Domsee.Where should the City report the bonds on the annual financial report?

A)In the government-wide financial statements.
B)In the notes to the financial statements.
C)In the proprietary fund financial statements.
D)In any of the above ways.