Chapter 6 - Test 2

35) When Sunny City makes its annual lease payment on an unpaid lease obligation, the journal entry for the governmental activities accounts will include A) A debit to Lease Obligation Payable. B) A credit to Lease Obligation Payable. C) A debit to Lease Expense. D) A debit to Expenditures—Principal of Lease Obligation.

A

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

A

57) Which of the following is a true statement regarding in-substance defeasance of bonds? A) The government must place cash or other assets in an irrevocable trust sufficient to pay all future interest and principal payments for the debt being defeased. B) The government must agree to maintain sufficient cash and investment balances in its debt service fund to cover all interest and principal payments for the debt being defeased. C) The government must pledge to transfer amounts to an escrow agent prior to the due date for each interest and principal payment for the debt being defeased. D) The government must agree to maintain sufficient unrestricted cash and investments in its governmental funds to cover all interest and principal payments for the debt being defeased.

A

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 A) A debit to Expenditures — Bond Interest in the debt service fund. B) A debit to Other Financing Uses — Principal and Interest Payments in the debt service fund. C) A debit to Expenditures - Bond Interest in the General Fund. D) A debit to Interest Expenditures in the governmental activities accounts.

A

65) On March 2, 2019, 20-year, 6 percent, general obligation serial bonds were issued at the face amount of $3,000,000. Interest of 6 percent per annum is due semiannually on March 1 and September 1. The first payment of $150,000 for redemption of principal is due on March 1, 2020. Fiscal year-end occurs on December 31. What is the interest expenditure for the fiscal year ending December 31, 2019? A) $90,000. B) $135,000. C) $150,000. D) None of the options are correct.

A

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

B

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

B

41) 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.

B

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 self-supported from fees collected from golf course users. How much should be accounted for through debt service funds for payments of principal over the life of the bonds? A) $0. B) $600,000. C) $800,000. D) $1,400,000.

B

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 obligated for the debt Government is not secondarily obligated for the debt A Yes Yes B Yes No C No Yes D No No A) A. B) B. C) C. D) D.

B

46) When bonds are sold at a premium for a capital project, the premium amount generally A) Increases the cash available to the capital projects fund. B) Is transferred to the debt service fund. C) Is applied against the principal balance by the fiduciary agent. D) Is recorded in a fiduciary fund since it does not belong to the capital projects fund.

B

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

B

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

C

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

C

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

C

44) The liability for general obligation bonds should be recorded in the A) General Fund. B) Capital projects fund. C) Governmental activities journal. D) Debt service fund.

C

50) 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.

C

51) 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.

C

53) The City of Spartan's fiscal year ends on December 31. On October 1, 2020, the city issued $1,000,000 of 6%, 10-year term bonds with semiannual interest payments due on April 1 and October 1 each year, beginning on April 1, 2021. What amount of expense should the city recognize in its governmental activities journal for the years 2020 and 2021? A) $60,000 in 2020 $60,000 in 2021. B) $30,000 in 2020 $60,000 in 2021. C) $15,000 in 2020 $60,000 in 2021. D) $0 in 2020 $60,000 in 2021.

C

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

C

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

C

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

C

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 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.

C

64) On March 2, 2019, 20-year, 6 percent, general obligation serial bonds were issued at the face amount of $3,000,000. Interest of 6 percent per annum is due semiannually on March 1 and September 1. The first payment of $150,000 for redemption of principal is due on March 1, 2020. Fiscal year-end occurs on December 31. What is the interest expense for the fiscal year ending December 31, 2019? A) $90,000. B) $135,000. C) $150,000. D) None of the options are correct.

C

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

D

36) When Sunny City makes its annual lease payment on an unpaid lease obligation, the journal entry for the debt service fund accounts will include A) A debit to Lease Obligation Payable. B) A credit to Lease Obligation Payable. C) A debit to Lease Expense. D) A debit to Expenditures—Principal of Lease Obligation.

D

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

D

40) 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.

D

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

D

48) 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.

D

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

D

52) The City of Spartan's fiscal year ends on December 31. On October 1, 2020, the city issued $1,000,000 of 6%, 10-year term bonds with semiannual interest payments due on April 1 and October 1 each year, beginning on April 1, 2021. What amount of expenditures should the city recognize in its debt service fund for the years 2020 and 2021? A) $60,000 in 2020 $60,000 in 2021. B) $30,000 in 2020 $60,000 in 2021. C) $15,000 in 2020 $6,000 in 2021. D) $0 in 2020 $60,000 in 2021.

D

54) Which of the following debt service funds would normally have the largest balance in its Fund Balance account? A) Serial bond debt service fund. B) Deferred serial bond debt service fund. C) Irregular serial bond debt service fund. D) Term bond debt service fund.

D

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

D

59) 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.

D

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

FALSE

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

FALSE

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

FALSE

21) Term bond issues mature in installments.

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.

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.

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.

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.

FALSE

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

FALSE

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

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.

FALSE

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

TRUE

30) Compensated absences may be reported in governmental funds.

TRUE

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

TRUE

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

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

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

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

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

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

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

TRUE

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

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

TRUE

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

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

TRUE

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

TRUE

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

TRUE

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

TRUE

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

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

TRUE