Homework answers / question archive / Chapter 06 Accounting for General Long-Term Liabilities and Debt Service     True / False Questions The use of long-term debt is a traditional part of the fiscal policy of state and local governments

Chapter 06 Accounting for General Long-Term Liabilities and Debt Service     True / False Questions The use of long-term debt is a traditional part of the fiscal policy of state and local governments

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Chapter 06

Accounting for General Long-Term Liabilities and Debt Service

 

 

True / False Questions

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

 

True    False

 

2. Although some governments have issued taxable debt, the interest earned on most debt issued by state and local governments is exempt from federal taxation and, in some states, from state taxation.  

 

True    False

 

3. 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.

 

True    False

 

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

 

True    False

 

5. When a capital lease payment is legally due, an entry is made in the debt service (or appropriate governmental) fund to record an expenditure, and an entry is made in the governmental activities accounts to reduce Capital Lease Obligations Payable.  

 

True    False

 

6. Issuance of tax-supported debt having a maturity of more than one year from date of issue results in a journal entry in only the governmental activities general journal.  

 

True    False

 

7. Debt limit is a term used to denote the total amount of indebtedness of specified kinds that is allowed by law to be outstanding at any one time.  

 

True    False

 

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

 

True    False

 

9. Debt margin is a term used to denote the total amount of indebtedness of specified kinds that is allowed by law to be outstanding at any one time, while debt limit is the difference between the debt margin and the amount of outstanding debt subject to the debt limitation.  

 

True    False

 

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

 

True    False

 

11. 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.  

 

True    False

 

12. Notes to the financial statements of a state or local government should include a schedule, or summary, of debt service requirements (principal and interest payments) of debt outstanding on the balance sheet date.  

 

True    False

 

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

 

True    False

 

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

 

True    False

 

15. 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.  

 

True    False

 

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. 

 

True    False

 

17. 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. 

 

True    False

 

18. If a government has deposited or transferred financial resources dedicated for payment of debt service to the debt service fund and payment of principal and interest is due early in the following year, then the expenditure and related liability may be recognized in the debt service fund prior to year end.  

 

 True    False

 

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

 

True    False

 

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

 

True    False

 

21. Term bond issues mature in installments.  

 

True    False

 

22. Under a bond refunding, the proceeds of a new bond issuance are either deposited in escrow to pay the debt service on the outstanding bonds when due or used to promptly retire previously issued bonds.  

 

True    False

 

23. 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.  

 

True    False

 

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

 

True    False

 

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

 

True    False

 

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

 

True    False

 

 

27. 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. 

 

True    False

 

 

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

 

True    False

 

 

29. 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. 

 

True    False

 

 

30. Compensated absences may be reported in governmental funds. 

 

True    False

 

 

 

 

Multiple Choice Questions

 

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

 

1. 1. Tax-supported general obligation bonds. 
   2. Obligations under capital leases used to finance general capital assets. 
   3. The long-term portion of judgments and claims. 
   4. Revenue bonds issued by an enterprise fund. 

 

 

        

32. Which of the following statements regarding debt service funds is true?

 

1. 1. Given the size and relevance of general long-term liabilities, debt service funds are always reported as major funds.
   2. GASB standards require a separate debt service fund to be established for each issuance of tax-supported or special assessment debt.
   3. A debt service fund is used only for debt service activities related to general long-term liabilities.
   4. Annual budgets must be prepared for debt service funds and reported in the statement of revenues, expenditures, and changes in fund balances—budget and actual.

 

 

33. 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: 

 

1. 1. A debt service fund. 
   2. An agency fund. 
   3. The governmental activities accounts. 
   4. An agency fund and disclosed in the notes to the financial statements. 

 

 

34. Which of the following statements is true?  

 

1. 1. Debt margin is reported in the governmental activities column of the government-wide statements. 
   2. Debt limit represents the total amount of indebtedness of specified kinds that is allowed by law to be outstanding at any one time. 
   3. 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. 
   4. All of the above statements are true. 

 

 

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

 

1. 1. A debit to Capital Lease Obligation Payable. 
   2. A credit to Capital Lease Obligation Payable. 
   3. A debit to Capital Lease Expense. 
   4. A debit to Expenditures-Principal of Capital Lease Obligation. 

 

  

        

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

 

1. 1. A debit to Capital Lease Obligation Payable. 
   2. A credit to Capital Lease Obligation Payable. 
   3. A debit to Capital Lease Expense. 
   4. A debit to Expenditures—Principal of Capital Lease Obligation.

 

 

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

  

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

 

 

38. A debt service fund is a:   

 

1. 1. Nonexpendable fund. 
   2. Governmental fund. 
   3. Fiduciary fund. 
   4. Proprietary fund. 

 

 

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

 

1. 1. A debit to Bonds Payable. 
   2. A debit to Interfund Transfers Out. 
   3. A debit to Expenditures—Bond Interest. 
   4. A debit to Interest Expense. 

 

 

        

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

 

1. 1. Debt service funds are reported in a separate column in the governmental fund financial statements. 
   2. Debt service funds are reported in a separate column in the government-wide financial statements. 
   3. Debt service funds are reported in the Other Governmental Funds column in the governmental fund financial statements. 
   4. Debt service funds are reported in the Governmental Activities column in the government-wide financial statements. 

 

 

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

 

1. 1. Estimated Revenues. 
   2. Fund Balance. 
   3. Revenues. 
   4. Expenditures—Bond Interest. 

 

 

42. 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 paid 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?  

 

1. 1. $0. 
   2. $600,000. 
   3. $800,000. 
   4. $1,400,000. 

 

 

43. 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? 

 

  Government is secondarily Government is not secondarily               obligated for the debt       obligated for the debt

1. 1. Yes                                      Yes 
   2. Yes                                      No 
   3. No                                        Yes 
   4. No                                        No 

 

        

 

44. The liability for general obligation bonds should be recorded in the:  

 

1. 1. General Fund. 
   2. Capital projects fund. 
   3. Governmental activities journal. 
   4. Debt service fund. 

 

 

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

 

1. 1. Expenditures—Bond Interest.
   2. Interfund Transfers In.
   3. Appropriations.
   4. Interest Expense.

 

 

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

 

1. 1. Increases the cash available to the capital projects fund.
   2. Is transferred to the debt service fund.
   3. Is applied against the principal balance by the fiduciary agent.
   4. Is recorded in a fiduciary fund since it does not belong to the capital projects fund.

 

 

47. 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?  

 

1. 1. A $400,000 revenue to the capital projects fund and a $400,000 revenue in governmental activities. 
   2. A $400,000 revenue to the debt service fund and a $400,000 premium on bonds payable in governmental activities. 
   3. A $400,000 expenditure in the debt service fund and a $400,000 expense in governmental activities. 
   4. A $400,000 other financing source to the debt service fund and a $400,000 premium on bonds payable in governmental activities. 

 

 

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

 

1. 1. Debt service fund.
   2. General obligation bond fund.
   3. Permanent fund.
   4. Capital projects fund.

 

 

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

 

1. 1. Special assessment debt for which the government has some obligation is paid through the debt service fund. 
   2. Interest payable may be reported as a liability of the debt service fund. 
   3. Bond principal is shown as a liability of the debt service fund only when that principal is due and payable. 
   4. All tax-supported bond principal is shown as a liability of the debt service fund. 

 

 

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

 

1. 1. Payment of only interest on general long-term debt. 
   2. Payment of only principal on general long-term debt. 
   3. Payment of principal and interest on general long-term debt. 
   4. Payment of principal and interest on all debt of the government. 

 

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

 

1. 1. Cash with fiscal agent.
   2. Investments.
   3. Equipment.
   4. Interest Receivable.

 

 

52. The City of Spartan's fiscal year ends on December 31. On October 1, 2017, the city issued $1,000,000 of 6%, 10-year term bonds with semi-annual interest payments due on March 1 and October 1 each year, beginning on April 1, 2018.  What amount of expenditures should the city recognize in its debt service fund for the years 2017 and 2018?  

 

1. 1. $60,000 in 2017; $60,000 in 2018. 
   2. $30,000 in 2017; $60,000 in 2018. 
   3. $15,000 in 2017; $6,000 in 2018. 
   4. $0 in 2017; $60,000 in 2018. 

 

 

53. The City of Spartan's fiscal year ends on December 31. On October 1, 2017, the city issued $1,000,000 of 6%, 10-year term bonds with semi-annual interest payments due on March 1 and October 1 each year, beginning on April 1, 2018. What amount of expense should the city recognize in its governmental activities journal for the years 2017 and 2018?  

 

53. 1. $60,000 in 2017; $60,000 in 2018. 
    2. $30,000 in 2017; $60,000 in 2018. 
    3. $15,000 in 2017; $60,000 in 2018. 
    4. $0 in 2017; $60,000 in 2018.  
54. Which of the following debt service funds would normally have the largest balance in its Fund Balance account?  

 

1. 1. Serial bond debt service fund. 
   2. Deferred serial bond debt service fund. 
   3. Irregular serial bond debt service fund. 
   4. Term bond debt service fund. 

 

 

55. 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:  

 

1. 1. A debit to Capital Lease Obligations Payable. 
   2. A credit to Expenditures—Principal of Capital Lease Obligation. 
   3. A debit to Expenditures—Principal of Capital Lease Obligation. 
   4. A debit to Interest Expense on Capital Leases. 

 

 

56. On June 1, 2018, Brooktown levied special assessments in the amount of $500,000, payable in 10 equal annual installments beginning on June 30, 2018. 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, 2018 would include:  

 

1. 1. A debit to Assessments Receivable—Current for $500,000. 
   2. A debit to Assessments Receivable—Current for $50,000. 
   3. A credit to Revenues for $500,000. 
   4. No journal entry is made in the debt service fund because special assessments are used. 

 

 

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

 

1. 1. 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. 
   2. 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. 
   3. 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. 
   4. 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. 

 

 

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

 

1. 1. Reflect the principal payment only.
   2. Reflect the interest payment only.
   3. Have no record of the transaction.
   4. Reflect both principal and interest payments.

 

 

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

 

1. 1. Statement of cash flows. 
   2. Statement of revenues, expenditures, and changes in governmental fund balances. 
   3. Statement of revenues, expenses, and changes in proprietary net position. 
   4. No basic financial statement contains a column for the total of all debt service funds. 

 

 

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

 

1. 1. Statement of net position only. 
   2. Statement of revenues, expenditures, and changes in fund balances only. 
   3. Balance sheet and statement of revenues, expenditures, and changes in fund balance. 
   4. Balance sheet, statement of revenues, expenditures, and changes in fund balance, and statement of cash flows. 

 

 

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

 

1. 1. In the governmental activities column as a liability. B.             In an enterprise fund as "Proceeds of Bonds."

1. 3. In an enterprise fund as a liability.
   4. In an enterprise fund as a revenue.

 

 

 

62. 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:  

 

62. 1. A debit to Interest Expenditures in the General Fund. 
    2. A debit to Interest Expenditures in the governmental activities accounts. 
    3. A credit to Other Financing Sources – Interfund Transfers In in the debt service fund only. 
    4. A credit to Other Financing Sources – Interfund Transfers In in both the debt service fund and governmental activities accounts. 
63. 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: 

 

1. 1. A debit to Expenditures – Bond Interest in the debt service fund. 
   2. A debit to Other Financing Uses – Principal and Interest Payments in the debt service fund. 
   3. A debit to Interest Expenditures in the General Fund. 
   4. A debit to Interest Expenditures in the governmental activities accounts. 

 

 

64. On March 2, 2016, 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, 2017. Fiscal year-end occurs on December 31. What is the interest expense for the fiscal year ending December 31, 2016?

 

1. 1. $90,000.
   2. $135,000.
   3. $150,000.
   4. None of the above.

 

 

65. On March 2, 2016, 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, 2017. Fiscal year-end occurs on December 31.  What is the interest expenditure for the fiscal year ending December 31, 2016?

 

1. 1. $90,000.
   2. $135,000.
   3. $150,000.
   4. None of the above.

 

 

 

 

       

Short Answer Questions

 

66. The following key terms from Chapter 6 relate to accounting for general long-term liabilities and debt service:

 

1. 1. Legal defeasance
   2. Regular serial bonds
   3. In-substance defeasance
   4. Irregular serial bonds
   5. Debt limit
   6. Annuity serial bonds
   7. Debt margin

 

For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.

 

    

 _____ 1. 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

 

 

 

67. 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.
    1. 1. How would the bond issue be recorded at the fund and government-wide levels?
       2. How would the bond issue be reported in the fund financial statements and the     government-wide financial statements?
       3. What effect, if any, do interest payments have on the carrying value of the bond       issue as reported in the financial statements?

 

 

 

        

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

valuation for the city. Using the following information, calculate the city’s debt limit and debt margin.

 

Assessed property valuation	$10,863,511,000
Approved but unissued tax-supported debt	10,000,000
Revenue bonds issued	32,000,000
General obligation serial bonds issued	43,000,000
Capital leases outstanding	5,230,000

 

 

 

 

 

 

Essay Questions

 

69. 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? 

 

 

 

70. How are general long-term liabilities distinguished from other long-term liabilities of the government? How does the financial reporting of general long-term liabilities differ from the financial reporting of other long-term liabilities?  

 

 

 

71. 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? 

 

 

 

 

72. "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?  

 

 

 

 

 

73. 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.  

 

 

 

 

Problems

 

 

 

74. The City of Jamestown has agreed to acquire a new city maintenance building under a capital 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.

 

1. 1. Show the entry that should be made in a capital projects fund at the inception of the lease.
   2. Show the entry that should be made at the inception of the lease in the government activities journal.
   3. Show the entry that should be made in the debt service fund and governmental activities journal to record the second lease payment.

 

75. Prepare debt service fund and government-wide entries in general journal form to reflect, as necessary, the following information and transactions for FY 2017.

 

1. The operating budget for FY 2017 consists of estimated revenues of $1,020,000 and estimated other financing sources equal to the amount of interest to be paid in FY 2017. Appropriations must be provided for interest payments and bond redemptions on January 1 and July 1.
2. Cash was received from the General Fund and checks were written and mailed for the January 1 principal and interest payments.
3. Property taxes in the amount of $1,020,000 were levied (no estimate for uncollectible accounts has been made).
4. Property taxes in the amount of $1,019,000 were collected.
5. Cash was received from the General Fund and checks were written and mailed for the July 1 principal and interest payments.
6. Adjusting entries were made and uncollected taxes receivable were reclassified as delinquent. At the fund level, entries were also made to close budgetary and operating statement accounts. (Ignore closing entries in the government activities journal.)