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

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

Financial statement note disclosures on long-term liabilities should include information on authorization of new debt issues, sale of previously authorized issues, and retirement and refunding of debt during the year.

Answer 3

True

Question 4

All special assessment debt should be reported in the government-wide statement of net position in the Business-type Activities column.

Question 5

General long-term liabilities are those that arise from activities of governmental funds as well as those reported as fund liabilities of a proprietary or fiduciary fund.

Question 6

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) of debt outstanding on the balance sheet date.

Question 7

When a lease payment is made, 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 Lease Obligations Payable.

Question 8

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.

Question 9

Debt service fund activities are reported as part of governmental activities at the government-wide level.

Question 10

Resources to pay interest on tax-supported bond issues are generally accumulated in special revenue funds.

Question 11

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

Question 12

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 13

The use of long-term debt is a traditional part of the fiscal policy of state and local governments.

Question 14

The debt service activity of a government may be accounted for within the General Fund unless law mandates the use of a debt service fund.

Question 15

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 16

A given parcel of real estate may be subject at a given time to assessments for the payment of taxes to retire bonds issued by two or more governments.

Question 17

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

Question 18

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 19

Long-term debt intended to be repaid from tax levies or special assessments is recorded in debt service funds.

Question 20

The use of encumbrance accounting is required for debt service funds.

Question 21

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 22

Which of the following statements is True?

A) Debt margin is reported in the governmental activities column of the government-wide statements.
B) Debt limit represents the total amount of indebtedness of specified kinds that is allowed by law to be outstanding at any one time.
C) 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.
D) All of the given statements are True.

Question 23

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

Question 24

A debt service fund is a:

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

Question 25

Compensated absences, pollution remediation obligations, and claims and judgments are examples of long-term liabilities that can arise from operating activities.

Question 26

Which of the following statements regarding debt service funds is True?

A) Given the size and relevance of general long-term liabilities, debt service funds are always reported as major funds.
B) GASB standards require a separate debt service fund to be established for each issuance of tax-supported or special assessment debt.
C) A debt service fund is used only for debt service activities related to general long-term liabilities.
D) By law debt service funds are required to use encumbrance accounting.

Question 27

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

Question 28

Pollution remediation obligations arise from responsibilities related to the cleanup of hazardous wastes or hazardous substances resulting from existing pollution.

Question 29

Compensated absences may be reported in governmental funds.

Question 30

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 given items are obligating events that would require recognition of a pollution remediation obligation.

Question 31

The liability for special assessment bonds that carry a secondary pledge of a city's general credit should be reported in the balance sheet(s) of:

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

Question 32

On the due date for a bond interest and principal payment, 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 33

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 34

The issuance of general long-term bonds is reported in the fund receiving the proceeds and in the business-type activities column of the government-wide statements.

Question 35

When Sunny City makes its annual lease payment on an unpaid lease obligation, the journal entry for the governmental activities accounts will include:

A) A debit to Lease Obligation Payable.
B) A credit to Lease Obligation Payable.
C) A debit to Lease Expense.
D) A debit to Expenditures-Principal of Lease Obligation.

Question 36

Term bond issues mature in installments.

Question 37

Governments should report an estimated loss from a claim or judgment as an expense and as a liability in the government-wide financial statements if a claim appears reasonable.

Question 38

When Sunny City makes its annual lease payment on an unpaid lease obligation, the journal entry for the debt service fund accounts will include:

A) A debit to Lease Obligation Payable.
B) A credit to Lease Obligation Payable.
C) A debit to Lease Expense.
D) A debit to Expenditures-Principal of Lease Obligation.

Question 39

Compensated absences are leaves of absence for which employees earn the right to be paid, but likely will not be paid due to insufficient government funds.

Question 40

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

A) Tax-supported general obligation bonds.
B) Obligations under 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 41

The City of Spartan's fiscal year ends on December 31. On October 1, 2020, the city issued $1,000,000 of 6%, 10-year term bonds with semiannual interest payments due on April 1 and October 1 each year, beginning on April 1, 2021. What amount of expense should the city recognize in its governmental activities journal for the years 2020 and 2021?

A) $60,000 in 2020; $60,000 in 2021.
B) $30,000 in 2020; $60,000 in 2021.
C) $15,000 in 2020; $60,000 in 2021.
D) $0 in 2020; $60,000 in 2021.

Question 42

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 applied against the principal balance by the fiduciary agent.
D) Is recorded in a fiduciary fund since it does not belong to the capital projects fund.

Question 43

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 may be 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 44

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 45

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 46

The City of Spartan's fiscal year ends on December 31. On October 1, 2020, the city issued $1,000,000 of 6%, 10-year term bonds with semiannual interest payments due on April 1 and October 1 each year, beginning on April 1, 2021. What amount of expenditures should the city recognize in its debt service fund for the years 2020 and 2021? 

A) $60,000 in 2020; $60,000 in 2021.
B) $30,000 in 2020; $60,000 in 2021.
C) $15,000 in 2020; $6,000 in 2021.
D) $0 in 2020; $60,000 in 2021.

Question 47

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 debt of the government.

Question 48

The Town of Windsor issued the following during the year: (1) $600,000 in bonds for the installation of street lights, to be assessed against properties benefited, but secondarily backed by the town; (2) $800,000 in bonds for construction of a public golf course to be self-supported from 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 49

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 50

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 only.
D) Balance sheet; statement of revenues, expenditures, and changes in fund balance; and statement of cash flows.

Question 51

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) Have no record of the transaction.
D) Reflect both principal and interest payments.

Question 52

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? $$\begin{array} { | c | c | c } \hline & \text { Goverument is secondarily obligated } & \text { Goverument is not secondarily obligated } \\\text { for the debt } & \text { far the debt } \\\hline \mathrm { A } & \text { Yes } & \text { Yes } \\\hline \mathrm { B } & \text { Yes } & \text { No } \\\hline \mathrm { C } & \mathrm { No } & \text { Yes } \\\hline \mathrm { D } & \mathrm { No } & \mathrm { No } \\\hline\end{array}$$

A) A.
B) B.
C) C.
D) D.

Question 53

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 54

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 55

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 56

If a city has an unpaid 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 Lease Obligations Payable.
B) A credit to Expenditures-Principal of Lease Obligation.
C) A debit to Expenditures-Principal of Lease Obligation.
D) A debit to Interest Expense on Leases.

Question 57

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 58

The City of New Haven issued $20 million of tax-supported bonds at 102 to finance a new jail. 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 59

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 60

On June 1, Brooktown levied special assessments in the amount of $500,000, payable in 10 equal annual installments beginning on June 30. 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 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 61

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 62

Explain the essential differences between regular serial bonds, deferred serial bonds, annuity serial bonds, and irregular serial bonds. How do regular serial bonds differ from term bonds?

Question 63

The City of Jamestown has agreed to acquire a new city maintenance building under a lease agreement. At the inception of the lease, a payment of $100,000 is to be made; nine annual lease payments, each in the amount of $100,000, are to be made at the end of each year after the inception of the lease. The total amount to be paid under this lease, therefore, is $1,000,000.
The town could borrow this amount for nine years at the annual rate of 8 percent; therefore, the present value of the lease at inception, including the initial payment, is $724,689. Assume that the fair value of the building at the inception of the lease is $750,000.
a. Prepare the entry that should be made in a capital projects fund at the inception of the lease. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
b. Prepare the entry that should be made at the inception of the lease in the governmental activities journal. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
c. Prepare the entry that should be made in the debt service fund and governmental activities journal to record the second lease payment. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Question 64

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 Expenditures - Bond Interest in the General Fund.
D) A debit to Interest Expenditures in the governmental activities accounts.

Question 65

As of December 31, 2019, Westport had $9,500,000 in 4.5 percent serial bonds outstanding. The serial bonds pay interest semiannually on July 1 and December 31, with $500,000 in bonds being retired on each interest payment date. Resources for payment of principal and interest are transferred from the General Fund. Prepare debt service fund and government-wide entries in general journal form to reflect, as necessary, the following information and transactions for FY 2020. 
(1) The operating budget for FY 2020 consists of other financing sources (transfers from the General Fund) equal to estimated principal and interest payments. Appropriations also must be provided for interest payments and bond redemptions on July 1 and December 31. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
(2) Cash was received from the General Fund and checks were written and mailed for the July 1 principal and interest payments.

Question 66

On March 2, 2019, 20-year, 6 percent, general obligation serial bonds were issued at the face amount of $3,000,000. Interest of 6 percent per annum is due semiannually on March 1 and September 1. The first payment of $150,000 for redemption of principal is due on March 1, 2020. Fiscal year-end occurs on December 31. What is the interest expense for the fiscal year ending December 31, 2019?

A) $90,000.
B) $135,000.
C) $150,000.
D) None of the options are correct.

Question 67

The debt limit for general obligation debt for Milos City is 1 percent of the assessed property valuation for the city.

Calculate the city's debt limit and debt margin.

Question 68

In the current fiscal year, St. George County issued $3,000,000 in general obligation term bonds for 102. The county is required to use any accrued interest or premiums for servicing the debt issue.
a. How would the bond issue be recorded 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 69

On March 2, 2019, 20-year, 6 percent, general obligation serial bonds were issued at the face amount of $3,000,000. Interest of 6 percent per annum is due semiannually on March 1 and September 1. The first payment of $150,000 for redemption of principal is due on March 1, 2020. Fiscal year-end occurs on December 31. What is the interest expenditure for the fiscal year ending December 31, 2019?

A) $90,000.
B) $135,000.
C) $150,000.
D) None of the options are correct.

Question 70

Select the key term that relate to accounting for general long-term liabilities and debt service from the list that best matches with the following definition.
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
________ 1. A transaction in which cash or other assets are placed into an irrevocable trust for the benefit of debt holders
________ 2. Bonds for which the amount of annual principal repayments is scheduled to increase each year by approximately the same amount that interest payments decrease
________ 3. Bonds payable in which the total principal is repayable in a specified number of equal annual installments
________ 4. The maximum amount of gross or net debt that is legally permitted
________ 5. A transaction in which debt is legally satisfied based on certain provisions in the debt instrument even though the debt has not been repaid

Question 71

Explain the financial reporting for special assessment bonds when a government assumes responsibility for debt service should special assessment collections be insufficient, and when the government assumes no responsibility whatsoever.

Question 72

"The entire debt arising from the acquisition of general capital assets under a 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 73

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

A) In the governmental activities column 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 74

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 75

A government's MD&A states that government-wide net position decreased as a result of the issuance of a long-term liability during the current reporting period. Does this sound correct? How does the issuance of long-term debt typically affect net position in the year of issuance?