Deck 6: Accounting for Capital Projects and Debt Service

Question 1

Governments can account for enterprise-related special assessments in enterprise funds or funds where they account for other special assessments.

Answer 1

False

Question 2

In accounting for costs incurred on a major construction project in a capital projects fund, the construction outlays would be reported in the fund as general capital assets.

Answer 2

False

Question 3

Governments are required to integrate budgetary account information in their debt service and capital projects funds only when control cannot readily be established by means other than a budget.

Answer 3

True

Question 4

In contrast to the accounting for debt service fund expenditures, the interest revenue on bonds held as investments should be accrued in the period the revenue is earned.

Question 5

When bonds are issued at a premium, the capital projects fund should transfer those excess resources to the debt service fund.

Question 6

When bonds are issued at a discount, the debt service fund usually transfers an amount to the capital projects fund to make up for the deficiency.

Question 7

Arbitrage is the process of negotiating resolution of conflicts between the federal government and municipalities over the applicability of federal regulations.

Question 8

The resources to service all general long-term debt of governments are typically accounted for in debt service funds.

Question 9

Special assessment debt to be paid from a water utility fund should be accounted for in that fund along with the related capital improvements.

Question 10

Proceeds of debt issued to finance a capital project should be reported in a capital projects fund as a liability until the project is completed.

Question 11

In which fund type would a government's capital projects fund be found?

A) Governmental fund type.
B) Proprietary fund type.
C) Fiduciary fund type.
D) Governmental activities.

Question 12

When governments establish capital projects funds, they must maintain a separate fund for each major project

Question 13

Special assessments are imposed nonexchange transactions, similar to property tax levies.

Question 14

Capital projects funds do not report long-term obligations in the fund.

Question 15

A government can lock in savings due to a decline in interest rates by using a process called defenestration.

Question 16

The interest paid on debt issued for public purposes by state and local governments is generally subject to federal taxation.

Question 17

Debt service funds are maintained to account for resources accumulated to pay interest and principal on general long-term debt-that is, long-term debt associated primarily with governmental activities.

Question 18

The capital projects fund of a government is accounted for using which of the following bases of accounting?

A) Budgetary basis.
B) Cash basis.
C) Modified accrual basis.
D) Accrual basis.

Question 19

In the statement of revenues, expenditures, and changes in fund balance of a debt service fund, the fund balance amount should be reported as restricted for debt service.

Question 20

Sound fiscal policy dictates that the maturity of debt should be no longer than the life of the assets it is used to finance.

Question 21

Voters in Phillips City approved the construction of a new city hall building and approved a $5 million bond issue with a stated rate of interest of 6 percent to fund the construction. When the bonds were issued, they sold for 101. What are appropriate entries related to the premium?

-In the capital projects fund

A) Debit Cash $50,000; Credit Revenues $50,000; no other entries required.
B) Debit Cash $50,000; Credit Other financing sources-nonreciprocal transfer-in $50,000; no other entries required.
C) Debit Cash $50,000; Credit Revenues; ALSO Debit Other financing uses-nonreciprocal transfer-out $50,000; Credit Cash $50,000.
D) Debit Cash $50,000; Credit Other financing sources-Bond premium $50,000; ALSO Debit Other financing uses-nonreciprocal transfer-out $50,000; Credit Cash
$50,000.

Question 22

Several years ago, the City of Russell issued $7 million of 6 percent serial bonds at 101. Principal payments of $350,000 are due each June 30 for 20 years. Interest on the bonds is payable each December 31 and June 30. As of June 30, 2018, the city has not paid the June 30 principal and interest payment.

-The amount of bonds payable that should be included on the balance sheet for the debt service fund of the City of Russell at June 30, 2018 is

A) $0.
B) $350,000.
C) $700,000.
D) $3,150,000.

Question 23

Avon City issued bonds for the purpose of financing a major capital improvement. Which fund is the most appropriate fund in which to record the receipt of the bond proceeds?

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

Question 24

In the debt service fund

A) Debit Cash $100.000; Credit Revenues $100,000; no other entries required.
B) Debit Cash $100,000; Credit Other financing sources-nonreciprocal transfer-in $100,000; No other entries required.
C) Debit Other financing sources-nonreciprocal transfer-out $100,000; credit Cash $100,000.
D) No entry in the debt service fund.

Question 25

Several years ago, the City of Russell issued $7 million of 6 percent serial bonds at 101. Principal payments of $350,000 are due each June 30 for 20 years. Interest on the bonds is payable each December 31 and June 30. As of June 30, 2018, the city has not paid the June 30 principal and interest payment.

-Sue City has outstanding $5 million in general obligation term bonds used to finance the construction of the new City Library. Sue City has a June 30 fiscal year-end. Interest at 6 percent is payable each January 1 and July 1. The principal of the bonds is due 10 years in the future. The city budgeted the July 1, 2018 interest payment in the budget for the fiscal year ended June 30, 2018. On June 30, cash was transferred from the general fund to the debt service fund to make the required payment. The maximum amount of interest payable that may be included on the balance sheet of the debt service fund of Sue City at June 30 is

A) $ -0-
B) $150,000.
C) $300,000.
D) $3,000,000.

Question 26

In which fund type would a government's debt service fund be found?

A) Governmental fund type.
B) Proprietary fund type.
C) Fiduciary fund type.
D) Governmental activities.

Question 27

The debt service fund of a government is accounted for using which of the following bases of accounting?

A) Budgetary basis.
B) Cash basis.
C) Modified accrual basis.
D) Accrual basis.

Question 28

Six years ago Hill City issued $10 million of 6 percent term bonds, due 30 years from the date of issue. Interest on the bonds is payable semi-annually on January 1 and July 1. Hill City has a September 30 fiscal year-end. The amount of interest payable that should be included on the balance sheet for the debt service fund of Hill City at September 30 is

A) $ -0-.
B) $150,000.
C) $300,000.
D) $600,000.

Question 29

Sugar City issued $2 million of bonds to fund the construction of a new city office building. The bonds have a stated rate of interest of 5 percent and were sold at 101. Which of the following entries should be made in the capital projects fund to record this event?

A) Debit Cash $2.02 million; Credit Bonds payable $2 million and Premium on bonds payable $0.02 million.
B) Debit Cash $2.02 million; Credit Bonds payable $2 million and Other financing sources $0.02 million.
C) Debit Cash $2.02 million; Credit Other financing sources $2.02 million.
D) Debit Cash $2.02 million; Credit Other financing sources $2 million and Revenue $0.02 million.

Question 30

In the capital projects fund

A) Debit Due from general fund $100,000; Credit Revenues $100,000.
B) Debit Due from general fund $100,000; Credit Other financing sources-nonreciprocal transfer-in $100,000; no other entries required.
C) Debit Other financing uses-nonreciprocal transfer-out $100,000; Credit Cash $100,000.
D) No entry in the capital projects fund.

Question 31

Several years ago, the City of Russell issued $7 million of 6 percent serial bonds at 101. Principal payments of $350,000 are due each June 30 for 20 years. Interest on the bonds is payable each December 31 and June 30. As of June 30, 2018, the city has not paid the June 30 principal and interest payment.

-The amount of interest payable (assuming an outstanding balance of $4,000,000 of bonds) that should be included on the balance sheet for the debt service fund of the City of Russell at June 30, 2018 is

A) $ -0-.
B) $168,000.
C) $210,000.
D) $420,000.

Question 32

Voters in Phillips City approved the construction of a new city hall building and approved a $5 million bond issue with a stated rate of interest of 6 percent to fund the construction. When the bonds were issued, they sold for 101. What are appropriate entries related to the premium?

-In the debt service fund

A) Debit Cash $50,000; Credit Revenues $50,000; no other entries required.
B) Debit Cash $50,000; Credit Other financing sources-nonreciprocal transfer-in $50,000; no other entries required.
C) Debit Other financing sources-nonreciprocal transfer-out $50,000; credit Cash $50,000.
D) No entry in the debt service fund.

Question 33

Previously Rose City issued bonds with a face value of $10 million to construct a new city maintenance facility. Assume that the city maintains its books and records in a manner that facilitates the preparation of fund financial statements. What is the appropriate entry when the city receives a progress billing from the contractor?

A) Debit Building; Credit Cash.
B) Debit Building; Credit Accounts payable.
C) Debit Expenditures; Credit Accounts payable.
D) No entry is required.

Question 34

Salt City issued $5 billion of bonds at face value to fund the reconstruction of major interstate highways in and around the city. The bond underwriters withheld $2 million for underwriting fees and remitted the balance to the city. Assuming the city maintains its books and records in a manner that facilitates the preparation of fund financial statements, how should the underwriting fee be recorded in the capital projects fund?

A) Reduce other financing sources by $2 million.
B) Reduce bonds payable by $2 million.
C) Increase expenditures by $2 million.
D) It would not be accounted for in the capital projects fund.

Question 35

Previously Atomic City had issued bonds with a face value of $10 million to construct a new city hall. Because the money will not be needed for several months, the city invested the bond proceeds in U.S. Government securities. Assume that the city maintains its books and records in a manner that facilitates the preparation of fund financial statements. What is the appropriate entry when the city receives interest on the investments? i. Debit Cash; Credit Revenue.
Ii) Debit Cash; Credit Other financing sources.
Iii) Debit Cash; Credit Deferred inflow of resources.
Iv) No entry required.

Question 36

With regard to the resources dedicated to the acquisition of capital assets that will be used in general government activities, which of the following is true?

A) Governments must maintain capital projects funds for resources that are legally restricted to the acquisition of capital assets.
B) Governments may only purchase capital assets out of the capital projects fund
C) Governments may account for any resources dedicated (whether legally or not) to the acquisition of capital assets in any of the governmental funds.
D) Governments must account for all resources set aside for capital asset acquisition in a capital projects fund.

Question 37

Sister City was notified by the state that it has been awarded a $5 million grant to aid in the construction of a senior citizens center. At the time of the notification what is the appropriate entry in the capital projects fund? Assume that the city has met all eligibility requirements and maintains its books and records in a manner to facilitate the preparation of fund financial statements.

A) No entry at the time of the notification.
B) Debit Grants receivable $5 million; Credit Revenue $5 million.
C) Debit Grants receivable $5 million; Credit Deferred inflow of resources $5 million.
D) Debit Grants receivable $5 million; credit Other financing sources-nonreciprocal transfer-in $5 million.

Question 38

Voters in Lincoln School District approved the construction of a new high school and approved an $8 million bond issue with a stated rate of interest of 6 percent to fund the construction. Bids were received, and the low bid was $8 million. When the bonds were issued, they sold for face value less bond underwriting fees of $0.5 million. The school board voted to fund the balance of the construction by a transfer from the general fund.

-The entry in the capital projects fund to record the additional funding for the construction should be

A) Debit Due from general fund $0.5 million; Credit Other financing sources-nonreciprocal transfer-in $0.5 million.
B) Debit Due from general fund $0.5 million; Credit Revenue $0.5 million.
C) Debit Cash $0.5 million; Credit Due to general fund $0.5 million.
D) Debit Other financing sources $0.5 million; Credit Due to general fund $0.5 million.

Question 39

Voters in Lincoln School District approved the construction of a new high school and approved an $8 million bond issue with a stated rate of interest of 6 percent to fund the construction. Bids were received, and the low bid was $8 million. When the bonds were issued, they sold for face value less bond underwriting fees of $0.5 million. The school board voted to fund the balance of the construction by a transfer from the general fund.

-The entry in the capital projects fund to record the receipt of the bond proceeds should be

A) Debit Cash $7.5 million; Credit Bonds payable $7.5.
B) Debit Cash $7.5 million; Credit Other financing sources $7.5.
C) Debit Cash $7.5 million and Expenditures $0.5 million; Credit Bonds payable $8 million.
D) Debit Cash $7.5 million and Expenditures $0.5 million; Credit Other financing sources $8 million.

Question 40

Use of a debt service fund is required.

A) When financial resources are being accumulated for the purpose of paying for capital asset acquisition.
B) When financial resources are being accumulated for the purpose of paying principal and interest when it matures.
C) For all bonded debt service payments.
D) For all debt service payments.

Question 41

Cascade County issued $1 million of 6 percent term bonds at 101. These bonds will be used to finance the construction of highways. The entry in the debt service fund to record the receipt of cash should be

A) Debit Cash $10,000; Credit Revenue, $10,000.
B) Debit Cash $10,000; Credit Other financing sources-nonreciprocal transfer-in, $10,000.
C) Debit Cash $1,010,000; Credit Bonds payable $1,000,000 and premium on bonds $10,000.
D) Debit Cash $1,010,000; Credit Other financing sources-nonreciprocal transfer-in $1,010,000.

Question 42

Calhoun County makes annual transfers from the general fund to the debt service fund to pay principal and interest on long-term debt.

-In the debt service fund, what is the appropriate entry when the principal payment is made?

A) Debit Bonds payable; Credit Cash.
B) Debit Expenditures; Credit Cash.
C) Debit Other financing uses-nonreciprocal transfer-out; Credit Cash.
D) No entry is required.

Question 43

Which bonds should be reported on the government-wide statement of net position?

A) Neither the 6.5 percent nor the 5 percent bonds.
B) Both the 6.5 percent bonds and the 5 percent bonds.
C) Only the 6.5 percent bonds.
D) Only the 5 percent bonds.

Question 44

What entry should be made on July 1 related to the interest payment?

A) No entry required.

B) Debit Interest payable; Credit Cash.
C) Debit Interest payable; Credit Cash with fiscal agent.
D) Debit Expenditure; Credit Cash with fiscal agent.

Question 45

The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks. The citizens agreed to a special assessment on their property for 20 years in an amount sufficient to pay principal and interest on the bonds. The city will oversee the construction of the sidewalks and act as agent for servicing the debt. If the special assessment is not sufficient to make the principal and interest payments, the city will assume the obligations.

-When the city collects the special assessment, it should be accounted for in which fund of the City of Arlington?

A) Agency fund.
B) Special assessment fund.
C) Capital projects fund.
D) Debt service fund.

Question 46

Harbor City issued 6 percent tax-exempt bonds and used the proceeds to acquire federal government securities yielding 7 percent. After paying the interest on the tax-exempt bonds, the city cleared 1 percent. This is an example of

A) An illegal act.
B) Poor fiscal management.
C) Arbitrage.
D) Debt refunding.

Question 47

What amount of gain or loss should be recognized on this transaction?

A) None.
B) The difference between the total principal and interest payments on the old debt and the total principal and interest payments on the new debt.
C) The difference between the present value of the principal and interest payments on the old debt and the present value of the principal and interest payments on the new debt.
D) The difference between the economic cost and the call price.

Question 48

The City of Twin Falls issued $5 million in special assessment bonds to finance major reconstruction of the turbines and facilities used in generating electricity that is sold to the citizens in the surrounding area. The electric power distribution activities are accounted for in an enterprise fund, which service the debt. If the city is NOT legally obligated for the debt, the appropriate entry in the city's Electric Enterprise Fund to record this event is

A) Debit Plant assets; Credit Bonds payable.
B) Debit Plant assets; Credit Capital contributions.
C) Debit Plant assets; Credit Retained earnings.
D) No entry should be made in the Electric Enterprise Fund.

Question 49

When the City of Arlington levies the special assessment tax, the best entry would be

A) Debit Special assessments receivable; Credit Revenues.
B) Debit Special assessments receivable; Credit Deferred inflow of resources.
C) Debit Special assessments receivable; Credit Liability.
D) Debit Special assessments receivable; Credit Fund balance.

Question 50

The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks. The citizens agreed to a special assessment on their property for 20 years in an amount sufficient to pay principal and interest on the bonds. The city will oversee the construction of the sidewalks and act as agent for servicing the debt. If the special assessment is not sufficient to make the principal and interest payments, the city will assume the obligations.

-The proceeds of the bond issue should be recorded in which fund of the City of Arlington?

A) Agency fund.
B) Special assessment fund.
C) Capital projects fund.
D) Debt service fund.

Question 51

Adams County has outstanding $10 million in bonds issued to construct a sewer system in a specific area of the county. The taxpayers in that area voted for the construction and the bonds and agreed to assess themselves to pay the principal and interest on the bonds. The county contracted for the construction and issued the bonds but assumed no legal or moral obligation for the bonds. If the special assessment payments are not sufficient to make the required principal and interest payments, the county will not make up the difference. The liability for the $10 million of bonds should appear in which fund financial statements?

A) Capital projects fund.
B) Special assessment fund.
C) Debt service fund.
D) The bond liability should not appear in the fund financial statements of Adams County.

Question 52

The City of Twin Falls issued $5 million in special assessment bonds to finance major reconstruction of the turbines and facilities used in generating electricity that is sold to the citizens in the surrounding area. The electric power distribution activities are accounted for in an enterprise fund, which will service the debt. If the city is legally obligated for the debt, the appropriate entry in the city's Electric Enterprise Fund to record this event is

A) Debit Plant assets; Credit Bonds payable.
B) Debit Plant assets; Credit Contributed capital.
C) Debit Plant assets; Credit Contributed revenue.
D) No entry should be made in the Electric Enterprise Fund.

Question 53

Calhoun County makes annual transfers from the general fund to the debt service fund to pay principal and interest on long-term debt.

-When the county makes the transfer the entry in the debt service fund should be

A) Debit Cash; Credit Revenue.
B) Debit Cash; Credit Other financing sources-nonreciprocal transfer-in.
C) Debit Cash; Credit Interest payable.
D) Debit Cash with fiscal agent; Credit Other financing sources-nonreciprocal transfer-in.

Question 54

In early 2017, Jackson City issued $10 million of 6 percent term bonds to finance a highway construction project. Because of problems related to the Endangered Species Act, the city deferred highway construction that year. In early 2018, the city entered into contracts for construction that will begin in summer 2018 and be completed by summer 2019. When the city realized they would not need the bond proceeds in 2018, they invested the proceeds in risk-free federal government securities bought to yield 7 percent. What potential arbitrage liability, if any, should the city recognize as a result of the year 2018 transactions?

A) None.
B) The amount of the earnings from the federal government securities.
C) The amount of the interest paid on the term bonds.
D) The difference between the earnings from the federal government securities and the interest paid on the bonds.

Question 55

The City of St. Joe had outstanding $5 million of 6 percent bonds with a call provision. Due to changes in the prevailing interest rates, the city issued new bonds at 4.5 percent and used the proceeds to call the 6 percent bonds. This is an example of

A) Debt retirement.
B) Debt refunding.
C) In-substance defeasance.
D) Financial mismanagement.

Question 56

The proceeds of the bond issue should be recorded in which fund of the City of Arlington?

A) Agency fund.
B) Special assessment fund.
C) Capital projects fund.
D) Debt service fund.

Question 57

A government has elected to issue new debt and use the proceeds to redeem existing debt because there is an economic gain in doing so. There is, however, an "accounting loss" associated with these events. The accounting loss is defined as

A) The present value of the principal and interest payments on the new debt less the present value of the principal and interest payments on the old debt.
B) The present value of the principal and interest payments on the old debt less the present value of the principal and interest payments on the new debt.
C) The cash paid to redeem the old debt less the book value of the old debt.
D) The face value of the new debt less the cash paid to redeem the old debt.

Question 58

The City of Williamsburg decided to defease old 6 percent bonds carried in its Electric Enterprise Fund with new 4.5 percent bonds. As a result of the defeasance, the city incurred an accounting loss. The loss should be recognized

A) As an adjustment to retained earnings since it is applicable to prior periods.
B) In the year of the defeasance.
C) Over the remaining life of the old bonds or the new bonds, whichever is shorter.
D) It should not be recognized.

Question 59

How should Lewis County account for the amount transferred on June 20 if the county maintains its books and records in a manner that facilitates the preparation of fund financial statements?

A) Debit Cash with fiscal agent and expenditures; Credit Cash and interest payable.
B) Debit Cash with fiscal agent and interest expense; Credit Cash and interest payable.
C) Debit Expenditures; Credit Cash.
D) Debit Cash with fiscal agent; Credit Cash.

Question 60

When the city collects the special assessment, it should be accounted for in which fund of the City of Arlington?

A) Agency fund.
B) Special assessment fund.
C) Capital projects fund.
D) Debt service fund.

Question 61

Raygun County had outstanding $35 million in Series 1998 general obligation bonds on June 30, 2018. The bonds were issued at an interest rate of 10 percent with interest payable on June 30 and December 31. In July 2018, interest rates declined substantially, and the county issued refunding bonds in the amount of $35 million at 5 percent. The proceeds of the refunding bonds were placed in escrow along with $2,800,000 held in the county's debt service fund as a sinking fund for the 1998 debt. The proceeds of the refunding bonds and the sinking fund amount would be used in December 2018 (the call date) to purchase the 1998 debt at a 3 percent call premium, totaling $1,050,000, plus accrued interest of $1,750,000. The County had $250,000 of unamortized debt issue costs on the 1998 bonds, which it reported in its government-wide financial statements. This amount combined with the call premium resulted in a $3,050,000 "loss" on the refunding.
REQUIRED:
(a) What journal entries should the county make in July 2018 to record the in-substance defeasance of the 1998 debt in its debt service fund?
(b) What debt should be reported in the county's government-wide financial statements at July 2018?
(c) What journal entry should be made in the county's debt service fund in December 2018 to record the purchase of the old debt at the call date?
(d) How should the "loss" on the refunding be recognized in the government-wide financial statements? Why did the GASB choose this method of recognition?

Question 62

The citizens of a defined geographical area of Eagle City authorized a special assessment to be levied on their properties to finance the reconstruction of the sewer system infrastructure that serves the area. The city will solicit bids, oversee reconstruction, issue the debt in the name of the city, and service the debt. The city is NOT obligated in any manner for the debt but will collect the special assessments and make principal and interest payments to the bondholders. Discuss the appropriate accounting for the construction phase and the debt service phase of this project. Justify the required accounting and financial reporting for these two phases of this project.

Question 63

In 2017 the voters of Solis City authorized the construction of a new swimming pool for a total cost of no more that $4 million. The voters also approved the issuance of $4 million of 20-year, 5% general obligation serial bonds to be repaid by a special property tax. Interest on these bonds is payable annually on June 30. On June 30, 2017, the city sold the bonds at 101 and signed contracts for the construction of the swimming pool. Principal payments of $200,000 are due each June 30, beginning in 2018. If the property tax revenue is not sufficient to make the necessary principal and interest payments, the city is obligated to transfer the necessary monies from the general fund to the debt service fund. The city does not formally incorporate budgetary entries in the debt service fund but it does use encumbrance accounting for control purposes. The city has a June 30 fiscal year-end.
REQUIRED: Assume that the city maintains its books and records in a manner that facilitates the preparation of the fund financial statements. Prepare journal entries in the debt service fund for the following transactions.
(a) The city immediately transferred the premium to the debt service fund. The debt service fund may not use the premium to pay principal or interest until the year 2032.
(b) On June 30, the city invested the premium in a 10-year 5% certificate of deposit (CD) at a local financial institution. The CD pays interest annually on June 30. Interest is automatically reinvested in the CD.
(c) Property taxes in the amount of $250,000 were collected by June 30, 2018. The city expects to collect another $50,000 by August 31.
(d) The city transferred to the debt service fund the cash necessary to make the June 30, 2018 principal and interest payments. The checks will be mailed on July 1.
(e) The city recognized interest earned on the CD.
(f) The city recognized the appropriate liabilities in the debt service fund.

Question 64

On October 1, 2018, the Central School District issued $20 million of 6 percent bonds at par to construct a new junior high school. The first interest payment of $600,000 is due on March 31, 2019. In December 2018 the district transferred $600,000 from its general fund to a debt service fund to cover the March 2019 interest payment. How much interest expense/expenditure should the district recognize for 2018 in its
1. general fund? ____________
2. debt service fund? ____________
3. government-wide statements? _____________

Question 65

Clark City has the following balances in the accounts of its capital projects fund at year-end before closing entries. All accounts have normal balances. All amounts are in millions of dollars.
REQUIRED:
(a) Prepare an operating statement for the capital projects fund.
(b) Prepare a balance sheet for the capital projects fund.

Question 66

The repayment of bond principal should be reported in the fund statements of a debt service fund as a/an

A) Reduction of bonds payable.
B) Expenditure.
C) Other financing use.
D) Direct reduction of fund balance.

Question 67

How should the fund balance of a debt service fund generally be incorporated into the government-wide statement of net position?

A) Net position-investment in capital assets, net of related debt
B) Net position-unassigned
C) Net position-unrestricted
D) Net position-restricted

Question 68

Augur City received voter approval to issue $12 million of 5% bonds to construct a city office building. The estimated total cost of construction is $18 million. The city hopes to raise the balance needed through private donations. The city has a June 30 fiscal year-end.
REQUIRED: Assume that the city maintains its books and records in a manner that facilitates the preparation of the fund financial statements. Prepare journal entries to record the following transactions. Indicate in which fund the entry should be made.
(a) On July 1 the city issued $12 million of 5% serial bonds at face to fund construction of the new office building. The bonds pay interest on January 1 and July 1. The first principal payments are due five years hence.
(b) On July 15 the city signed a $18 million contract with a local construction company for construction of the buildings.
(c) On September 1 a local benefactor donated $6 million cash for the office building.
(d) On October 1, the contractor requested a progress payment of $3 million for the earthwork and foundation work on the new building. The city paid the contractor.
(e) On January 1, the city transferred from the general fund the amount necessary to make the first interest payment. The city made the first interest payment on the bonds.
(f) On June 1 the contractor requested and received a progress payment of $12 million.

Question 69

The voters of Salinas City authorized the construction of a new north-south expressway for a total cost of no more that $90 million. The voters also approved the issuance of $60 million of 5 percent general obligation bonds. The balance of the necessary funds will come from the following sources: $20 million from a federal grant and $10 million from a state grant. The city controls expenditures in capital project funds through project management. The city does not formally incorporate budgetary entries in the capital projects fund but it does use encumbrance accounting for control purposes.
REQUIRED: Assume that the city maintains its books and records in a manner that facilitates the preparation of the fund financial statements. Prepare journal entries in the capital projects fund, for the following transactions. The city
(a) Issues $60 million of 5 percent general obligation bonds at 101.
(b) Transfers the premium to the appropriate fund.
(c) Incurs bid-related expenditures of $1,000.
(d) Signs a contract with the lowest competent bidder for $58 million.
(e) Receives notice from the state that the grant has been approved and the proceeds will be forwarded to the city in the state's current fiscal year.
(f) Receives the federal grant in full.
(g) Pays a progress billing from the contractor for $12 million.

Question 70

When a government issues bonds at a discount, where should it report the discount on its (a) fund statements and (b) government-wide statements?

Question 71

When bonds are issued for capital projects, premiums are generally not accounted for as the mirror image of discounts. Why not?

Question 72

What is arbitrage? What are its potential uses and/or abuses? How are potential abuses regulated?

Question 73

A government held the following equity securities in its debt service fund as of January 1, 2018. During 2018 it engaged in the following transactions as indicated. A. Ignoring dividends, what would be the effect of the transactions on 2018 debt service fund revenues or expenditures?
B. What would be the effect of the transactions on 2018 government-wide revenues or expenses?

Question 74

Assuming that the government is not obligated in any manner, the debt service transactions of a special assessment bond issue should be reported in a(n)

A) Debt service fund
B) Enterprise fund
C) Special revenue fund
D) Agency fund

Question 75

Governments often receive interest on the temporary investment of capital debt proceeds. Some believe that governments are inconsistent in the way they report interest and other earnings on investments compared to interest on their debt. Explain this comment. Do you believe the reporting is inconsistent?

Question 76

Which of the following is not characteristics of a capital projects?

A) Involves long-lived assets
B) Usually requires long-range planning and extensive financing
C) Usually has a year-to-year focus
D) None of the above

Question 77

How should governments report their capital projects and debt service activities in their government-wide financial statements?

Question 78

In its governmental fund financial statements, a government should recognize revenue from special assessments

A) In the year it imposes a special assessment.
B) In the year an assessment is due.
C) In the year an assessment is paid.
D) In the year an assessment becomes available for expenditure.

Question 79

Under existing federal statutes, arbitrage, as it applies to state and local governments is

A) Illegal.
B) Illegal unless the government can demonstrate a "just cause" for engaging in it.
C) Legal in some circumstances, but the government may be required to remit arbitrage earnings to the federal government.
D) Illegal unless there is no more than a 2 percent difference between interest earned and interest paid.
ANSWERS TO MULTIPLE CHOICE (CHAPTER 6)