Deck 6: Accounting for General Long-Term Liabilities and Debt Service

Question 1

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.

Answer 1

False
Explanation: 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.

Question 2

Debt service funds for term bonds would generally include sinking fund investments.

Answer 2

True
Explanation: 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.

Question 3

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.

Answer 3

False
Explanation: Debt service funds are created to account for interest expenditures and revenues raised, as well as for principal repayment.

Question 4

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.

Question 5

Since the debt of a government is subject to a legal debt limit,there cannot be any legal overlapping debt.

Question 6

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.

Question 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.

Question 8

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.

Question 9

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.

Question 10

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.

Question 11

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.

Question 12

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.

Question 13

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.

Question 14

Taxes for debt service are always levied by the General Fund and transferred to a debt service fund.

Question 15

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.

Question 16

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.

Question 17

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.

Question 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.

Question 19

General long-term liabilities are those that arise from the activities of a government.

Question 20

Debt margin is the difference between the debt limit and the amount of outstanding debt subject to the debt limitation.

Question 21

Pollution remediation obligations should be recognized if which of the following obligating events has occurred?

A) A violation of a pollution prevention permit has occurred.
B) The government is named or will be named as the responsible or potentially responsible party to a remediation.
C) The government is compelled to take remediation action due to imminent endangerment to the public health.
D) All of the above items are obligating events that would require recognition of a pollution remediation obligation.

Question 22

Special assessment debt that carries governmental backing should be reported as "special assessment debt with governmental commitment".

Question 23

Special assessment debt is not recorded in a government's accounts.

Question 24

The issuance of general long-term bonds requires recognition by the fund receiving the proceeds and by the business-type activities.

Question 25

Which of the following statements is true?

A) Debt limit represents the total amount of indebtedness of specified kinds that is allowed by law to be outstanding at any one time.
B) Overlapping debt is a calculation of the difference between the amount of debt limit calculated as prescribed by law and the net amount of outstanding indebtedness subject to limitation.
C) Debt margin is reported in the governmental activities column of the government-wide statements.
D) All of the above statements are true.

Question 26

On the due date for bond interest,the debt service fund journal entry (or entries)will include

A) A debit to Bonds Payable.
B) A debit to Interfund Transfers Out.
C) A debit to Expenditures-Bond Interest.
D) A debit to Interest Expense.

Question 27

Expenditures for capital lease payments consist of two elements: payment of interest on the lease obligation,and payment on the obligation itself.

Question 28

Term bond issues mature in their entirety on a given date,in contrast to serial bonds,which mature in installments.

Question 29

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.

Question 30

Which of the following budgetary accounts is typically used by a debt service fund?

A) Encumbrances.
B) Appropriations.
C) Estimated Uncollectible Accounts.
D) Encumbrances Outstanding.

Question 31

A debt service fund is a

A) Nonexpendable fund.
B) Governmental fund.
C) Fiduciary fund.
D) Proprietary fund.

Question 32

Which of the following resource inflows would be recorded as a revenue of a debt service fund?

A) Property taxes levied by the debt service fund for debt service purposes.
B) Receipt of the premium on a new bond issue.
C) Taxes collected by the General Fund and transferred to the debt service fund.
D) Transfer of the residual equity of a capital project from a capital projects fund to the debt service fund.

Question 33

The purpose of a sinking fund is to set aside resources for a substantial debt payment due at maturity.

Question 34

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

A) Enterprise fund.
B) Governmental activities.
C) Both the enterprise fund and the governmental activities accounts.
D) Enterprise fund and a disclosure is added to the financial statement notes explaining the contingent liability of the general government if enterprise funds are insufficient to pay principal and interest.

Question 35

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.

Question 36

Which of the following statements is always true concerning the reporting of debt service funds?

A) Debt service funds are reported in a separate column in the governmental fund financial statements.
B) Debt service funds are reported in a separate column in the government-wide financial statements.
C) Debt service funds are reported in the Other Governmental Funds column in the governmental fund financial statements.
D) Debt service funds are reported in the Governmental Activities column in the government-wide financial statements.

Question 37

Which of the following is not properly recorded in the governmental activities accounts?

A) Tax-supported general obligation bonds.
B) Obligations under capital leases used to finance general capital assets.
C) The long-term portion of judgments and claims.
D) Revenue bonds issued by an enterprise fund.

Question 38

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

A) A debit to Capital Lease Obligation Payable in the amount of $10,500.
B) A debit to Capital Lease Obligation Payable in the amount of $20,000.
C) A debit to Cash in the amount of $20,000.
D) A debit to Capital Lease Obligation Payable in the amount of $12,500.

Question 39

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

A) A debt service fund.
B) An agency fund.
C) The governmental activities accounts.
D) An agency fund and disclosed in the notes to the financial statements.

Question 40

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).

Question 41

Which of the following debt service fund accounts would not be closed at the end of each fiscal year?

A) Estimated Revenues.
B) Fund Balance.
C) Revenues.
D) Expenditures-Bond Interest.

Question 42

Premiums received on tax-supported bonds are generally transferred to what fund?

A) Capital projects.
B) Debt service.
C) General.
D) Special revenue.

Question 43

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?

A) $0.
B) $600,000.
C) $800,000.
D) $1,400,000.

Question 44

Debt service funds are used to account for which of the following?

A) Payment of only interest on general long-term debt.
B) Payment of only principal on general long-term debt.
C) Payment of principal and interest on general long-term debt.
D) Payment of principal and interest on all debts of the government.

Question 45

Which of the following assets would not be found in the balance sheet of a debt service fund?

A) Cash with fiscal agent.
B) Investments.
C) Equipment.
D) Interest Receivable.

Question 46

The liability for general obligation bonds should be recorded in the

A) General Fund.
B) Capital projects fund.
C) Governmental activities journal.
D) Debt service fund.

Question 47

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?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 48

Which of the following statements is not true for debt service funds?

A) Special assessment debt for which the government has some obligation is paid through the debt service fund.
B) Interest payable is reported as a liability of the debt service fund.
C) Bond principal is shown as a liability of the debt service fund only when that principal is due and payable.
D) All tax-supported bond principal is shown as a liability of the debt service fund.

Question 49

Interest expenditures on bonds payable should be recorded in a debt service fund

A) At the end of the fiscal period if the interest due date does not coincide with the end of the fiscal period.
B) When bonds are issued.
C) When the interest is paid.
D) When the interest is legally payable.

Question 50

On the due date for bond interest,the debt service fund journal entry (or entries)will include a debit to

A) Expenditures-Bond Interest.
B) Interfund Transfers In.
C) Appropriations.
D) Interest Expense.

Question 51

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

A) A debit to Capital Lease Obligations Payable.
B) A credit to Expenditures-Principal of Capital Lease Obligation.
C) A debit to Expenditures-Principal of Capital Lease Obligation.
D) A debit to Interest Expense on Capital Leases.

Question 52

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?

A) A $400,000 revenue to the capital projects fund and a $400,000 revenue in governmental activities.
B) A $400,000 revenue to the debt service fund and a $400,000 premium on bonds payable in governmental activities.
C) A $400,000 expenditure in the debt service fund and a $400,000 expense in governmental activities.
D) A $400,000 other financing source to the debt service fund and a $400,000 premium on bonds payable in governmental activities.

Question 53

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?

A) $30,000 in 2014; $60,000 in 2015.
B) $60,000 in 2014; $60,000 in 2015.
C) $3,000 in 2014; $6,000 in 2015.
D) $0 in 2014; $60,000 in 2015.

Question 54

When bonds are sold at a premium for a capital project,the premium amount generally

A) Increases the cash available to the capital projects fund.
B) Is transferred to the debt service fund.
C) Is transferred to the General Fund.
D) Is ignored by both the capital projects fund and any other fund.

Question 55

Which of the following debt service funds would normally have the largest balance in its Fund Balance account?

A) Serial bond debt service fund.
B) Deferred serial bond debt service fund.
C) Irregular serial bond debt service fund.
D) Term bond debt service fund.

Question 56

Which of the following is true for debt service funds?

A) A legally required budget should be recorded in the accounts.
B) A combining balance sheet may not be prepared for a comprehensive annual financial report (CAFR)when more than one debt service fund exists.
C) Encumbrance accounting is often used.
D) GAAP requires that a separate debt service fund be established for each bond issue.

Question 57

Debt service funds are used to record

A) Both principal and interest payments of debt issues.
B) Only interest payments on debt issues.
C) Only principal payments of debt issues.
D) Neither principal nor interest payments of debt issues.

Question 58

Typically,proceeds from general obligation bonds will be recorded in the

A) Debt service fund.
B) General obligation bond fund.
C) Permanent fund.
D) Capital projects fund.

Question 59

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:

A) A debit to Assessments Receivable-Current for $500,000.
B) A debit to Assessments Receivable-Current for $50,000.
C) A credit to Revenues for $500,000.
D) No journal entry is made in the debt service fund because special assessments are used.

Question 60

Which of the following is a true statement regarding in-substance defeasance of bonds?

A) The government must place cash or other assets in an irrevocable trust sufficient to pay all future interest and principal payments for the debt being defeased.
B) The government must agree to maintain sufficient cash and investment balances in its debt service fund to cover all interest and principal payments for the debt being defeased.
C) The government must pledge to transfer amounts to an escrow agent prior to the due date for each interest and principal payment for the debt being defeased.
D) The government must agree to maintain sufficient unrestricted cash and investments in its governmental funds to cover all interest and principal payments for the debt being defeased.

Question 61

Which of the following is not true?

A) 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.
B) Debt service funds,unlike the General Fund and special revenue funds,do not use budgetary accounting procedures.
C) Expenditures for interest on tax supported long-term debt are not accrued,even though debt service funds are accounted for on the modified accrual basis.
D) At year-end,budgetary and operating statement accounts of a debt service fund are closed in the same manner as is true for a General Fund or special revenue funds.

Question 62

When the debt service fund makes a payment of principal and interest on an outstanding long-term debt,the governmental activities accounts

A) Reflect the principal payment only.
B) Reflect the interest payment only.
C) Has no record of the transaction.
D) Reflects both principal and interest payments.

Question 63

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?

Question 64

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?

Question 65

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

A) A debit to Expenditures - Bond Interest in the debt service fund.
B) A debit to Other Financing Uses - Principal and Interest Payments in the debt service fund.
C) A debit to Interest Expenditures in the General Fund.
D) A debit to Interest Expenditures in the governmental activities accounts.

Question 66

Which of the following basic financial statements contains a column for the total of all debt service funds?

A) Statement of cash flows.
B) Statement of revenues,expenditures,and changes in governmental fund balances.
C) Statement of revenues,expenses,and changes in proprietary net position.
D) No basic financial statement contains a column for the total of all debt service funds.

Question 67

"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?

Question 68

Which of the following financial statements are required for a Debt Service Fund?

A) Statement of net position only.
B) Statement of revenues,expenditures,and changes in fund balances only.
C) Balance sheet and statement of revenues,expenditures,and changes in fund balance.
D) Balance sheet,statement of revenues,expenditures,and changes in fund balance,and statement of cash flows.

Question 69

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.

Question 70

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?

Question 71

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.
(1)The operating budget for FY 2014 consists of estimated revenues of $500,000 and estimated other financing sources equal to the amount of principal to be paid in FY 2014.Appropriations must be provided for interest payments and bond redemptions on March 1 and September 1.
(2)Property taxes in the amount of $500,000 were levied (no estimate for uncollectible accounts has been made).
(3)Property taxes in the amount of $500,000 were collected.
(4)Cash was received from the General Fund and checks were written and mailed for the March 1 principal and interest payments.
(5)Cash was received from the General Fund and checks were written and mailed for the September1 principal and interest payments.
(6)At the fund level,entries were made to close budgetary and operating statement accounts.(Ignore closing entries in the government activities journal.)

Question 72

"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?

Question 73

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.

Question 74

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?

Question 75

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

A) A debit to Interest Expenditures in the General Fund.
B) A debit to Interest Expenditures in the governmental activities accounts.
C) A credit to Other Financing Sources - Interfund Transfers In in the debt service fund only.
D) A credit to Other Financing Sources - Interfund Transfers In in both the debt service fund and governmental activities accounts.

Question 76

"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?

Question 77

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.
3)Total assessed valuation of property within Mountain City is $200,000,000.

Question 78

The sale of revenue bonds by a water utility fund would be recorded

A) In the governmental activities accounts as a liability.
B) In an enterprise fund as "Proceeds of Bonds."
C) In an enterprise fund as a liability.
D) In an enterprise fund as a revenue.

Question 79

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.

Question 80

Explain the essential differences between regular serial bonds and term bonds and how debt service fund accounting differs for the two types of bonds.