Long Term Liabilities- NFP Chapter 6

FALSE General long-term liabilities are those that arise from activities of governmental funds and that are not reported as fund liabilities of a proprietary or fiduciary fund.

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

FALSE Debt service funds should be used to account for revenues or other financing sources used to provide debt service and the related expenditures of these resources for the debt service. However, the long-term debt itself should be accounted for in the governmental activities accounts.

14. All long-term debt, including bonds, notes or warrants, and various other long-term obligations, intended to be repaid from tax levies or special assessments are accounted for in debt service funds.

FALSE Taxes may be levied for a debt service fund directly, or debt service activity may be recorded in the General Fund.

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

TRUE GASB Codification, Section 1500, Paragraphs 111 and 112 provide for an exception to the recognition of governmental fund liabilities and expenditures for debt service on general long-term debt in the reporting period that debt payments are due.

17. While governmental fund liabilities and expenditures for debt service on general long-term debt are generally recognized in the reporting period that debt payments are due to correspond with appropriations, if a government has deposited or transferred financial resources dedicated for payment of debt service to the debt service fund and payment of principal and interest is due early in the following year, then the expenditure and related liability may be recognized in the debt service fund prior to year end.

TRUE This is illustrated in Chapter 6.

18. At year-end, budgetary and operating statement accounts of a debt service fund are closed in the same manner as are those of a General Fund or special revenue funds.

TRUE This describes the proper accounting for assessment receivables as illustrated in Chapter 6.

19. Installments of special assessments to be collected within one year are recorded as Assessments Receivable—Current; installments due in periods after one year are recorded as Assessments Receivable—Deferred.

TRUE The tax-exempt feature of governmental debt enables governments to raise large amounts of capital at relatively low cost.

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 Bond indentures for term bonds generally require assets be set aside as sinking fund investments for ultimate retirement of the debt. In contrast, no sinking fund is necessary for regular serial bonds since revenues are usually raised each year in the amount of interest and principal falling due in that year; indeed one rationale for the use of regular serial bonds is to avoid the need for a sinking fund.

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

TRUE These definitions are consistent with Chapter 6 text.

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

C. The governmental activities accounts.

27. The liability for special assessment bonds that carry a secondary pledge of a city's general credit, if reported in conformity with GAAP, should be reported in the balance sheet(s) of A. A debt service fund. B. An agency fund. C. The governmental activities accounts. D. An agency fund and disclosed in the notes to the financial statements.

A. Debt limit represents the total amount of indebtedness of specified kinds that is allowed by law to be outstanding at any one time.

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

FALSE GASB requires general capital assets and the related long-term liabilities to be reported in the government-wide statements, not in governmental funds.

3. Both general capital assets acquired or constructed from the proceeds of special assessment debt and the related long-term liability are recorded in the governmental fund.

D. All of the above items are obligating events that would require recognition of a pollution remediation obligation.

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

B. Governmental fund.

32 A debt service fund is a A. Nonexpendable fund. B. Governmental fund. C. Fiduciary fund. D. Proprietary fund.

C. Choice C

33. Special assessments levied for debt service of bonds issued for a special assessment capital project will be accounted for by a debt service fund under which of the following situations? A. Choice A B. Choice B C. Choice C D. Choice D

A. Property taxes levied by the debt service fund for debt service purposes.

37. Which of the following resource inflows would be recorded as a revenue of a debt service fund? A. Property taxes levied by the debt service fund for debt service purposes. B. Receipt of the premium on a new bond issue. C. Taxes collected by the General Fund and transferred to the debt service fund. D. Transfer of the residual equity of a capital project from a capital projects fund to the debt service fund.

C. A debit to Expenditures—Bond Interest.

38. On the due date for bond interest, the debt service fund journal entry (or entries) will include A. A debit to Bonds Payable. B. A debit to Interfund Transfers Out. C. A debit to Expenditures—Bond Interest. D. A debit to Interest Expense.

B. Appropriations.

40. Which of the following budgetary accounts is typically used by a debt service fund? A. Encumbrances. B. Appropriations. C. Estimated Uncollectible Accounts. D. Encumbrances Outstanding.

D. When the interest is legally payable.

41. Interest expenditures on bonds payable should be recorded in a debt service fund A. At the end of the fiscal period if the interest due date does not coincide with the end of the fiscal period. B. When bonds are issued. C. When the interest is paid. D. When the interest is legally payable.

A. Expenditures—Bond Interest.

42. 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.

B. Is transferred to the debt service fund.

43. When bonds are sold at a premium for a capital project, the premium amount generally A. Increases the cash available to the capital projects fund. B. Is transferred to the debt service fund. C. Is transferred to the General Fund. D. Is ignored by both the capital projects fund and any other fund.

D. All tax-supported bond principal is shown as a liability of the debt service fund.

47. Which of the following statements is not true for debt service funds? A. Special assessment debt for which the government has some obligation is paid through the debt service fund. B. Interest payable is reported as a liability of the debt service fund. C. Bond principal is shown as a liability of the debt service fund only when that principal is due and payable. D. All tax-supported bond principal is shown as a liability of the debt service fund.

B. Debt service.

49. Premiums received on tax-supported bonds are generally transferred to what fund? A. Capital projects. B. Debt service. C. General. D. Special revenue.

C. Equipment.

50. 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.

D. $0 in 2014; $60,000 in 2015.

51. The city of Spartan's fiscal year ends on December 31. On September 1, 2014, the city issued $1,000,000 of 6%, 10-year term bonds with semi-annual interest payments due on March 1 and September 1 each year, beginning on March 1, 2015. What amount of expenditures should the city recognize in its debt service fund for the years 2014 and 2015? A. $30,000 in 2014; $60,000 in 2015. B. $60,000 in 2014; $60,000 in 2015. C. $3,000 in 2014; $6,000 in 2015. D. $0 in 2014; $60,000 in 2015.

C. A debit to Expenditures—Principal of Capital Lease Obligation.

53. If a city has an unpaid capital lease obligation at the beginning of its fiscal year, the journal entry in the debt service fund to record the lease payment during that fiscal year will include A. A debit to Capital Lease Obligations Payable. B. A credit to Expenditures—Principal of Capital Lease Obligation. C. A debit to Expenditures—Principal of Capital Lease Obligation. D. A debit to Interest Expense on Capital Leases.

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 deceased.

55. 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 deceased. 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.

A. Both principal and interest payments of debt issues.

56. Debt service funds are used to record A. Both principal and interest payments of debt issues. B. Only interest payments on debt issues. C. Only principal payments of debt issues. D. Neither principal nor interest payments of debt issues.

D. Reflects both principal and interest payments.

57. When the debt service fund makes a payment of principal and interest on an outstanding long-term debt, the governmental activities account A. Reflect the principal payment only. B. Reflect the interest payment only. C. Has no record of the transaction. D. Reflects both principal and interest payments.

B. Debt service funds, unlike the General Fund and special revenue funds, do not use budgetary accounting procedures.

61. Which of the following is not true? A. The debt service activity of a government may be properly accounted for within the General Fund unless law mandates the use of a debt service fund. B. Debt service funds, unlike the General Fund and special revenue funds, do not use budgetary accounting procedures. C. Expenditures for interest on tax supported long-term debt are not accrued, even though debt service funds are accounted for on the modified accrual basis. D. At year-end, budgetary and operating statement accounts of a debt service fund are closed in the same manner as is true for a General Fund or special revenue funds.

TRUE Debt margin is also called "borrowing power".

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

FALSE GASB standards require that the obligation for special assessment debt be recorded in the governmental activities accounts if the government is obligated in any manner for the debt, even though primary responsibility for the debt rests with taxpayers in the special benefit district.

Debt backed by both special assessments and the full faith and credit of a government should be reported in the government-wide statement of net position in the Business-type Activities column.

TRUE This paraphrases the definition given in Chapter 6.

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.

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

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.

C. Payment of principal and interest on general long-term debt.

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.

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

Debt service funds exist to accumulate resources to pay tax-supported bond issues at maturity. Interest on such bonds is paid from General Fund appropriations rather than from debt service fund appropriations.

TRUE Creditors, potential creditors, and other users of financial reports are presumed to find this information helpful.

Disclosures about long-term liabilities should be included in the notes to the financial statements to provide users with information about authorization of new debt issues, sale of previously authorized issues, and retirement and refunding of debt during the year.

TRUE Chapter 6 presents an example illustrating how the two elements are calculated and recorded in the debt service fund.

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

D. Enterprise fund and a disclosure is added to the financial statement notes explaining the contingent liability of the general government if enterprise funds are insufficient to pay principal and interest.

General obligation bonds issued for the benefit of enterprise funds, with the intent of paying bond principal and interest from revenues of the enterprise fund, should be reported as a liability in the balance sheet of the A. Enterprise fund. B. Governmental activities. C. Both the enterprise fund and the governmental activities accounts. D. Enterprise fund and a disclosure is added to the financial statement notes explaining the contingent liability of the general government if enterprise funds are insufficient to pay principal and interest.

TRUE Payments required by capital leases are merely installment payments of general long-term debt and interest on the unpaid debt; it is logical to record such payments in a debt service fund rather than in the fund using the leased assets.

If a debt service fund is used, capital lease payments for general capital assets should be recorded by a debt service fund rather than the fund using the leased asset.

A. A debit to Capital Lease Obligation Payable in the amount of $10,500.

Immediately after making its annual $20,000 lease payment on June 30, 2014, the last day of its fiscal year, Capitol City had an unpaid capital lease obligation of $95,000. The interest rate applicable to the lease is 10 percent. When the $20,000 lease payment due on June 30, 2015 is made, the journal entry for the governmental activities accounts will include A. A debit to Capital Lease Obligation Payable in the amount of $10,500. B. A debit to Capital Lease Obligation Payable in the amount of $20,000. C. A debit to Cash in the amount of $20,000. D. A debit to Capital Lease Obligation Payable in the amount of $12,500.

FALSE The fund or funds that received the proceeds of the debt must also record the issuance; however, it will be recorded as an other financing source, rather than a long-term liability, in a governmental fund.

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 This provision of GASB standards is described in Chapter 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) until the final maturity of debt outstanding on the balance sheet date.

B. A debit to Assessments Receivable—Current for $50,000.

On June 1, 2015, Brooktown levied special assessments in the amount of $500,000, payable in 10 equal annual installments beginning on June 30, 2015. The assessment installments are intended to pay principal and interest on special assessment bonds for which the town has pledged its full faith and credit should assessments be insufficient. Assuming no allowance for uncollectible receivables, the journal entry in the debt service fund on June 1, 2015 would include: A. A debit to Assessments Receivable—Current for $500,000. B. A debit to Assessments Receivable—Current for $50,000. C. A credit to Revenues for $500,000. D. No journal entry is made in the debt service fund because special assessments are used.

FALSE Property ordinarily lies in many different taxing jurisdictions simultaneously. Although each jurisdiction may be subject to a legal debt limit, the property is taxed to service the debt of all jurisdictions within which the property is located.

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

C. A credit to Other Financing Sources - Interfund Transfers In in the debt service fund only.

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.

D. A $400,000 other financing source to the debt service fund and a $400,000 premium on bonds payable in governmental activities.

The city of New Haven issued $20 million of tax-supported bonds at 102 to finance a new prison. Upon issuance, how will the premium be recorded? A. A $400,000 revenue to the capital projects fund and a $400,000 revenue in governmental activities. B. A $400,000 revenue to the debt service fund and a $400,000 premium on bonds payable in governmental activities. C. A $400,000 expenditure in the debt service fund and a $400,000 expense in governmental activities. D. A $400,000 other financing source to the debt service fund and a $400,000 premium on bonds payable in governmental activities.

TRUE Only those funds required by law or by sound financial management are needed. Bond covenants or ordinances are usually interpreted, however, as requiring the use of a debt service fund, and it generally is good financial management to report assets held for debt service separately from assets available for salaries, etc.

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

C. Governmental activities journal.

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.

FALSE Investments generally would not be adjusted for amortization of any premiums or discounts because GASB standards require fair value accounting. Premiums and discounts on bonds payable are amortized in the governmental activities accounts at the government-wide level.

The premium or discount on bonds purchased as investments is accounted for in the same manner as a premium or discount on bonds sold (i.e., bond payable).

C. In an enterprise fund as a liability.

The sale of revenue bonds by a water utility fund would be recorded A. In the governmental activities accounts as a liability. B. In an enterprise fund as "Proceeds of Bonds". C. In an enterprise fund as a liability. D. In an enterprise fund as a revenue.

B. $600,000.

The town of Terra Cotta issued the following during the year ended June 30, 2014: (1) $600,000 in bonds for the installation of street lights, to be assessed against properties benefited, but secondarily backed by the village; (2) $800,000 in bonds for construction of a Parks and Recreation Department public golf course to be paid from pledged fees collected from golf course users. How much should be accounted for through debt service funds for payments of principal over the life of the bonds? A. $0. B. $600,000. C. $800,000. D. $1,400,000.

D. Capital projects fund.

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.

TRUE This description of a bond refunding is consistent with the Chapter 6 discussion.

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 A capital lease payment necessitates reduction of Capital Lease Obligations Payable in the governmental activities accounts for the portion of the payment that is a payment on principal (not interest) of the lease obligation and recognition of an expenditure in the debt service or appropriate governmental fund.

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.

D. No basic financial statement contains a column for the total of all debt service funds.

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.

B. Fund Balance.

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.

D. Term bond debt service fund.

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.

C. Balance sheet and statement of revenues, expenditures, and changes in fund balance.

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. Which of the following financial statements are required for a Debt Service Fund? A. Statement of net position only. B. Statement of revenues, expenditures, and changes in fund balances only. C. Balance sheet and statement of revenues, expenditures, and changes in fund balance. D. Balance sheet, statement of revenues, expenditures, and changes in fund balance, and statement of cash flows.

D. Revenue bonds issued by an enterprise fund.

Which of the following is not properly recorded in the governmental activities accounts? A. Tax-supported general obligation bonds. B. Obligations under capital leases used to finance general capital assets. C. The long-term portion of judgments and claims. D. Revenue bonds issued by an enterprise fund.

A. A legally required budget should be recorded in the accounts.

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

D. Debt service funds are reported in the Governmental Activities column in the government-wide financial statements.

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.