Chapter 6 Book

How does the financial reporting of general long-term liabilities differ from the financial reporting of other long-term liabilities?

General long-term liabilities are reported only in the Governmental Activities column of the government-wide financial statements and not in any fund financial statements. In comparison, other long-term liabilities are reported in the fund financial statements of the appropriate proprietary or fiduciary fund in addition to being reported in the business-type activities column of the government-wide financial statements.

How are general long-term liabilities distinguished from other long-term liabilities of the government?

General long-term liabilities arise from activities of the General Fund or some other governmental fund. These liabilities are distinguished from "fund" long-term liabilities that are incurred by a proprietary or fiduciary fund and for which debt service will be paid from that fund.

Governments are prevented from borrowing unlimited funds though the enforcement of deb limits. Explain the concept of a debt limit.

A debt limit is the maximum amount of long-term debt that a government may legally have outstanding at any point in time, expressed as a proportion or percentage of some measure of property value within the government's jurisdiction. A debt limit is designed to help protect the taxpayers and citizens of the government from an excessive tax burden and potential downgrade of the credit rating of the government.

What is the purpose of a debt service fund?

A debt service fund exists to record and manage not only payments of principal and interest related to general long-term liabilities, but also to record and manage revenues restricted for debt repayment and other funds, such as interfund transfers, that will be used for those payments.

Why would a government care about the amount of overlapping debt reported?

A government is concerned about the amount of overlapping debt since it can affect the government's ability to issue general obligation debt. The greater the assessments on a citizen's property the less open the citizen will be to a government's request to issue bonded debt.

Under what circumstances might a government consider an advance refunding of general obligation bonds outstanding?

Advance refunding may be desirable when the interest rate on outstanding debt is considerably higher than current interest rates, when debt service fund assets accumulated for debt repayment are not sufficient to repay creditors when the debt matures, or if the covenants of the existing bonds are excessively burdensome. If the old debt issue is "defeased," (either "legal" or "in-substance"), GASB standards permit the liability for the old issue to be removed from the accounts and the reporting of only the liability for the new (refunding) issue.

Does a debt service fund require budgeting? Why or why not?

Budgets are needed to help manage the repayment of the debt, and help ensure that funds are available for payments required in the current period, as well as over the life of the debt. Since certain items, such as premiums on long-term debt, may have legal limitations related to how they are used, budgeting also helps managers remain compliant with any legal restrictions.

Why would a citizen care about the amount of overlapping debt reported?

Citizens care about the extent of overlapping debt since it means their property is subject to assessments from two or more governments for the retirement of debt.

How are debt issuance costs accounted for at the fund and government-wide levels?

Debt issuance costs include insurance, financing charges from rating agencies, and printing, legal, administrative, and trustee fees. According to GASB Codification Section I30.115, debt issuance costs are recognized as expenditures at the governmental fund level. At the government-wide level, prepaid insurance costs should be reported as an asset and recognized as an expense over the life of the bond. All other bond issuance costs are expensed at the time of the bond issuance.

How is the concept of borrowing power or debt margin connected to debt limits?

Debt margin is the difference between the debt limit and net amount of existing governmental debt subject to limitation. It is a measure of the government's remaining borrowing power.

Which type of bonds have governments been more likely to issue in recent years? Why do you think this trend has occurred.

Governments have been more likely to issue serial bonds with recurring principal repayments. This preference is primarily reflective of the potential negative effects of term bond balloon payment requirements that lead to financial difficulties when resources were not sufficiently accumulated over the life of a bond issuance.

Explain the financial reporting for special assessment bonds when the government assumes no responsibility whatsoever.

If the government is not obligated in any manner for special assessment debt, the debt should not be reported in the financial statements; however, the notes to the financial statements should disclose the amount of the debt, as well as the fact that the government is in no way liable for repayment but is only acting as an agent for the property owners in collecting the assessments, forwarding the collections to bondholders, and initiating foreclosure proceedings, if appropriate.

What disclosures about long-term liabilities are required in the notes to the financial statements?

Note disclosures for long-term debt (such as bonds, notes, and leases) and operating long-term liabilities (such as claims and judgments, compensated absences, and other accrued liabilities) should show the beginning balance of each major class of long-term liability, as well as additions to, deletions from, and the ending balance of each major class. Disclosures should also include the portion of liabilities due within one year of the financial statement date. These disclosures should present separate sections for governmental activities and business-type activities. Presenting long-term liability disclosures for discretely presented component units, as the City and County of Denver has done, is discretionary and is a matter of professional judgment, according to GASB Codification Section 2300.121.

What is overlapping debt?

Overlapping debt is when a parcel of real estate or object of personal property is subject at any given time to assessments for payment of taxes to retire bonds issued by two or more governments.

Although the most common type of general long-term liabilities are those arising from financing activities (e.g., bond, notes, and lease agreements), general long-term liabilities also can be created through operating activities. Provide examples of long-term liabilities other than those related to financing.

Several different long-term liabilities may arise as a result of government operating activities. Two examples are the result of providing long-term benefits to employees. The first is compensation paid for employee absences, such as sick leave and vacation or holidays (i. e., compensated absences). The second is postretirement benefits, such as pensions or postretirement medical benefits. Government operating activities may also result in judgments or claims against the government. Finally, issues related to the environment, such as landfill obligations or pollution remediation may also result in long-term liabilities.

Explain the financial reporting for special assessment bonds when a government assumes responsibility for debt service should special assessment collections be insufficient.

Special assessment debt for which a government provides secondary backing should be reported as "special assessment debt with governmental commitment" in the government-wide statement of net position, while any portion of special assessment debt that is the direct responsibility of a government and will be repaid from general government resources (the public benefit portion or the amount assessed against government-owned property) should be reported like other general long-term liabilities.

How do term bonds differ from serial bonds?

Term bonds require repayment of long-term debt in a lump sum on a specified date. Serial bonds are repaid in a series of installments over the life of the debt. A debt service fund for serial bonds requires entries related primarily to the current repayment obligation. Term bonds require entries related to the accumulation and investment of funds needed to retire the debt in its entirety on the maturity date, as well as any currently required interest payments. Therefore, a debt service fund for term bonds will show increasing amounts of cash and investments throughout the life of the bonds, while a debt service fund for serial bonds will not.

Debt issuance costs a. Include legal and administrative fees associated with bond issuance. b. Are recognized as an expense at the government fund level. c. Are capitalized and amortized over the life of the bond.. d. Are reported as deferred outflows of resources at the government-wide level.

a

On March 2, 2020, 20-year, 6 percent, general obligation serial bonds were issued by Mossy County at the face amount of $3,000,000. Interest of 6 percent per year is due semiannually on March 1 and September 1. The first principal payment of $150,000 is due on March 1, 2021. The county's fiscal year-end is December 31. What amounts are reported as interest expense in the government-wide financial statements and interest expenditure in the debt service fund for 2020? Interest expense; Interest expenditure a. 150,000; 90,000 b. 90,000; 150,000 c. 150,000; 150,000 d. 150,000; 180,000

a

Proceeds from bonds issued to construct a new county jail would most likely be recorded in the journal of the a. Capital projects fund. b. Debt service fund. c. General fund. d. Enterprise fund.

a

The liability for long-term debt issued to finance a capital project will appear in which financial statement? a. Government-wide statement of net position. b. Capital projects fund balance sheet. c. Debt service fund balance sheet. d. General fund balance sheet.

a

Which of the following would not be considered a general long-term liability? a. The estimated liability to clean up the hazardous waste storage sites of the city's public works department. b. Capitalized equipment leases of the water utility fund. c. Compensated absences for the city's police department. d. Five-year notes payable used to acquire computer equipment for the city's administrative offices.

b

Annual lease payments a. Are required to be paid from a debt service fund. b. Require payment of interest from a debt service fund and principal from governmental activities. c. Are recorded at both the fund and government-wide levels. d. Are reported in the notes to the financial statements but not within the financial statements themselves.

c

Debt service funds may be used to account for all of the following except a. Repayment of debt principal. b. Lease payments. c. Amortization of premiums on bonds payable. d. The proceeds of refunding bond issues.

c

Payment of general obligation bond interest would be recorded as a. An expenditure in the governmental activities general journal. b. An other financing use in the governmental activities general journal. c. An expenditure in the debt service fund general journal. d. An other financing use in the debt service fund general journal.

c

Which one of the following statements regarding debt margin is correct? a. Debt margin is the total amount of indebtedness of specified types of debt that is allowed by law to be outstanding at any one time. b. Debt margin is calculated without regard to debt that is authorized but not yet issued. c. Debt margin is the difference between the legal debt limit and the amount of net indebtedness subject to limitation. d. All of the above statements regarding debt margin are correct.

c

Budgeting entries for a debt service fund would a. Not include an entry for estimated revenues because taxes are always recorded directly into the general fund. b. Include an estimated adjustment to bonds payable equal to the amount of principal payments that will become legally due during the fiscal year. c. Include estimated other financing uses equal to the amount of interest payments that will become legally due during the fiscal year. d. Include appropriations for principal payments that will become legally due during the fiscal year.

d

If bonds are sold at a premium a. The premium is typically recorded in the debt service fund at the fund level. b. The premium is amortized at the government-wide level. c. The premium is recorded as a component of the bond liability at the government-wide level. d. All of the above statements are true.

d

Long-term liabilities of a government a. Include compensated absences, claims and judgments, and pollution remediation obligations. b. Are only reported at the fund level within the financial statements. c. Are only reported at the government-wide level within the financial statements. d. Both a and c are true.

d

The liability for special assessment bonds for which the city is not obligated in any manner should be recorded in a a. Debt service fund general journal. b. Custodial fund general journal. c. Governmental activities general journal. d. None of the fund or governmental activities general journals but should be disclosed in the notes to the financial statements.

d

Total general long-term indebtedness subject to debt margin calculations typically does not include a. Debt authorized but not issued as of year-end. b. Special assessment debt for which a government might be liable if collections are insufficient. c. General obligation debt. d. Lease obligations.

d

Which of the following items would be reported in the Governmental Activities column of the government-wide financial statements? Premium on bonds payable; Noncurrent portion of general long-term liabilities payable a. Yes; No b. No; No c. No; Yes d. Yes; Yes

d