Chapter 8: Debt Service Funds

The typical classifications of fund balance used in a Debt Service Fund are A.) nonspendable, restricted, or committed. B.) restricted, committed, or assigned. C.) restricted, committed, or unassigned. D.) nonspendable, restricted, or unassigned.

C.) restricted, committed, or unassigned.

What are the characteristics of a term bond? A.) Term bonds may not exceed 15 years. B.) Principal and interest on the entire principal are paid throughout the life of the issue. C.) No interest is paid during the life of the issue. D.) Principal is paid at the end of the bond issue term.

D.) Principal is paid at the end of the bond issue term.

Questions 2 through 5 are based on the following scenario: A governmental entity levied $1,000,000 in special assessments. The assessments are due and payable in equal installments in the middle of each fiscal year for the next 5 years. Assume that all installments are collected in the year they are due. As of the end of the fiscal year in which the levy was made, the Special Assessment Debt Service Fund would report deferred inflows of resources in the amount of A.) $1,000,000. B.) $800,000. C.) $200,000. D.) $0.

A.) $1,000,000.

Questions 7 through 9 are based on the following scenario: A government is making debt service payments of $200,000 every 6 months, beginning in fiscal year 20Y1, and continuing for 5 years. The government's General Fund transfers $200,000 in fiscal year 20Y0 to the Debt Service Fund. The transfer is made 10 days before the end of the fiscal year. However, the debt service payments that the transfer was made to finance are not due until 15 days into the new fiscal year (20Y1). The General Fund transferred $700,000 to a Debt Service Fund. The Debt Service Fund would report this transaction as A.) an other financing source. B.) a revenue. C.) a deferred inflow of resources. D.) contributed capital.

A.) an other financing source.

The General Fund transferred $700,000 to a Debt Service Fund. The Debt Service Fund would report this transaction as A.) an other financing source. B.) a revenue. C.) a deferred inflow of resources. D.) contributed capital.

A.) an other financing source.

Nondefeasance, in a refunding transaction, would result in A.) both the old debt and the new debt being recorded as liabilities by the issuing government, even if resources to service the old debt have been placed in an irrevocable trust. B.) both the old debt and the new debt being recorded as liabilities by the issuing government, but only if resources to service the old debt have not been placed in an irrevocable trust. C.) the reporting of only the old debt liability. The new debt liability would not be reported until the old debt is extinguished. D.) a budgetary compliance violation in the Debt Service Fund.

A.) both the old debt and the new debt being recorded as liabilities by the issuing government, even if resources to service the old debt have been placed in an irrevocable trust.

As a general rule, debt service expenditures in a Debt Service Fund are recognized A.) when the debt service payment is due. B.) when resources to be used for the repayment are made available to a Debt Service Fund. C.) when due for principal repayments but on an accrual basis for interest. D.) in accordance with the requirements of the original bond order that specifies the basis of expenditure recognition.

A.) when the debt service payment is due.

A county had borrowed $18,000,000 to finance construction of a general government capital project. The debt will be serviced from collections of a special assessment levy made for the project. The county levied the special assessments in 20X8. Ten percent of the assessments are due in 20X8. The 20X8 and early 20X9 collections on the assessments total $1,500,000. The amount of special assessments revenue that should be recognized in the county's Special Assessments DSF for 20X8 is A.) $0. Special assessments are reported as other financing sources. B.) $1,500,000. C.) $1,800,000. D.) $18,000,000.

B.) $1,500,000.

Questions 1 through 3 are based on the following scenario: The City of Lora issued $5,000,000 of general government, general obligation, 8%, 20-year bonds at 103 on April 1, 20X7, to finance a major general government capital project. Interest is payable semiannually on each October 1 and April 1 during the term of the bonds. In addition, $250,000 of principal matures each April 1. Assume the same information as in item 1, except that Lora has not made the October 1, 20X7, interest payment as of the fiscal year end. What amount of debt service expenditures should be reported for this DSF for the 20X7 fiscal year? A.) $0 B.) $200,000 C.) $300,000 D.) $400,000

B.) $200,000

Questions 1 through 3 are based on the following scenario: The City of Lora issued $5,000,000 of general government, general obligation, 8%, 20-year bonds at 103 on April 1, 20X7, to finance a major general government capital project. Interest is payable semiannually on each October 1 and April 1 during the term of the bonds. In addition, $250,000 of principal matures each April 1. If Lora's fiscal year end is December 31, what amount of debt service expenditures should be reported for this DSF for the 20X7 fiscal year? A.) $0 B.) $200,000 C.) $300,000 D.) $400,000

B.) $200,000

Questions 7 through 9 are based on the following scenario: A government is making debt service payments of $200,000 every 6 months, beginning in fiscal year 20Y1, and continuing for 5 years. The government's General Fund transfers $200,000 in fiscal year 20Y0 to the Debt Service Fund. The transfer is made 10 days before the end of the fiscal year. However, the debt service payments that the transfer was made to finance are not due until 15 days into the new fiscal year (20Y1). The government could opt to report debt service expenditures for 20Y0 of A.) $183,333. B.) $200,000. C.) $400,000. D.) $2,000,000.

B.) $200,000.

Questions 7 through 9 are based on the following scenario: A government is making debt service payments of $200,000 every 6 months, beginning in fiscal year 20Y1, and continuing for 5 years. The government's General Fund transfers $200,000 in fiscal year 20Y0 to the Debt Service Fund. The transfer is made 10 days before the end of the fiscal year. However, the debt service payments that the transfer was made to finance are not due until 15 days into the new fiscal year (20Y1). The minimum amount of debt service expenditures for 20Y0 that may be reported in the Debt Service Fund is A.) $0. B.) $200,000. C.) $400,000. D.) $2,000,000.

B.) $200,000.

Which of the following is not a common type of general government long-term liability? A.) Bonds. B.) Contracts payable. C.) Capital leases. D.) Notes.

B.) Contracts payable.

Questions 2 through 5 are based on the following scenario: A governmental entity levied $1,000,000 in special assessments. The assessments are due and payable in equal installments in the middle of each fiscal year for the next 5 years. Assume that all installments are collected in the year they are due. As of the end of the fiscal year in which the first installment is due and collected, the Special Assessment Debt Service Fund would report revenue in the amount of A.) $1,000,000. B.) $800,000. C.) $200,000. D.) $0.

C.) $200,000.

Which of the following financial statements are required for a Debt Service Fund? A.) Balance Sheet only. B.) Statement of Revenues, Expenditures, and Changes in Fund Balance 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.

C.) Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balance.

A government paid $3,500,000 to its fiscal agent on June 30, 20X6, to provide for principal ($2,000,000) and interest payments due on July 1, 20X6. The fiscal agent will make payments to bondholders on July 1. The payment to the fiscal agent does not constitute legal or in-substance defeasance of the principal and interest payments. If the government uses the option of accruing its principal and interest expenditures due early in the next year, which of the following assets and liabilities should be reported in the government's DSF balance sheet at June 30, 20X6? A.) No assets or liabilities from the preceding information would be reported because the government has paid the fiscal agent. B.) Cash with fiscal agent, $3,500,000. C.) Cash with fiscal agent, $3,500,000. Matured bonds payable, $2,000,000. Matured interest payable, $1,500,000. D.) Cash with fiscal agent, $3,500,000. Accrued interest payable, $1,500,000.

C.) Cash with fiscal agent, $3,500,000. Matured bonds payable, $2,000,000. Matured interest payable, $1,500,000.

Which of the following statements about Special Assessment Debt Service Funds is false? A.) Most of the receivables in a typical Special Assessment Debt Service Fund are noncurrent. B.) Revenue accounting for special assessments follows the same principles as that for property taxes. C.) Debt Service Funds must be used to service all debt issued for special assessment capital projects even if the government is not obligated in any manner for the debt. D.) It is common for deferred revenues to be reported in a Special Assessment Debt Service Fund.

C.) Debt Service Funds must be used to service all debt issued for special assessment capital projects even if the government is not obligated in any manner for the debt.

Taxes levied in the Debt Service Fund and due in the current fiscal year include $125,000 that is not expected to be collected within the first 60 days of the new fiscal year. As of the end of the current fiscal year, this amount would be reported as A.) revenue. B.) a liability. C.) a deferred inflow of resources. D.) an other financing source.

C.) a deferred inflow of resources.

If a Debt Service Fund issues bonds at a premium, the premium is reported on the operating statement as A.) a revenue. B.) a nonoperating revenue. C.) an other financing source. D.) an other financing use.

C.) an other financing source.

Questions 2 through 5 are based on the following scenario: A governmental entity levied $1,000,000 in special assessments. The assessments are due and payable in equal installments in the middle of each fiscal year for the next 5 years. Assume that all installments are collected in the year they are due. As of the end of the fiscal year in which the first installment is due, the Special Assessment Debt Service Fund would report $800,000 as A.) revenues. B.) liabilities. C.) deferred inflows of resources. D.) deferred outflows of resources.

C.) deferred inflows of resources.

Assume for Questions 5 through 9 that the state of Exuberance issued $10,000,000 of 5%, 20-year refunding bonds in 20X5 at par. If the state of Exuberance defeased its $9,000,000 debt in substance as in item 8 except that no advance refunding debt was issued, the state should report A.) expenditures of $9,000,000 and other financing uses of $3,000,000. B.) expenditures of $2,000,000 and other financing uses of $10,000,000. C.) expenditures of $12,000,000. D.) other financing uses of $12,000,000.

C.) expenditures of $12,000,000.

Assume for Questions 5 through 9 that the state of Exuberance issued $10,000,000 of 5%, 20-year refunding bonds in 20X5 at par. If the state placed $12,000,000 (the $10,000,000 from the advance refunding plus $2,000,000 from previously accumulated DSF resources) in the irrevocable trust in item 6 and the debt was deemed defeased in substance, the state should report A.) expenditures of $9,000,000 and other financing uses of $3,000,000. B.) expenditures of $3,000,000 and other financing uses of $9,000,000. C.) expenditures of $2,000,000 and other financing uses of $10,000,000. D.) other financing uses of $12,000,000.

C.) expenditures of $2,000,000 and other financing uses of $10,000,000.

Questions 2 through 5 are based on the following scenario: A governmental entity levied $1,000,000 in special assessments. The assessments are due and payable in equal installments in the middle of each fiscal year for the next 5 years. Assume that all installments are collected in the year they are due. At the time of the levy (which is 10 months before the first installment comes due in the middle of the next fiscal year), the Special Assessment Debt Service Fund would report revenue in the amount of A.) $1,000,000. B.) $800,000. C.) $200,000. D.) $0.

D.) $0.

Questions 1 through 3 are based on the following scenario: The City of Lora issued $5,000,000 of general government, general obligation, 8%, 20-year bonds at 103 on April 1, 20X7, to finance a major general government capital project. Interest is payable semiannually on each October 1 and April 1 during the term of the bonds. In addition, $250,000 of principal matures each April 1. If Lora's fiscal year end is March 31 and Lora accumulates dedicated resources in the DSF by fiscal year end sufficient to pay the principal and interest due on April 1 of the subsequent fiscal year, what amount of debt service expenditures should Lora report for the fiscal year ended March 31, 20X8? A.) $200,000 B.) $400,000 C.) $650,000 D.) $200,000 or $650,000, depending on whether the city opts to accrue the debt service

D.) $200,000 or $650,000, depending on whether the city opts to accrue the debt service

Which of the following statements concerning debt refundings is false? A.) Advance refundings do not result in immediate, direct retirement of existing long-term debt. B.) Often, resources of an irrevocable trust are used to service old long-term debt, even though the liability has been removed from the financial statements of the issuing government. C.) Both legal defeasance and in-substance defeasance may result in the removal of the old debt from the original issuer's balance sheet. D.) Expenditures are reported in a legal defeasance and other financing uses are reported in an in-substance defeasance.

D.) Expenditures are reported in a legal defeasance and other financing uses are reported in an in-substance defeasance.

In the year that any advance refunding occurs, which of the following disclosures is not required by GAAP? A.) Difference in debt service requirements of the old defeased issue and new issue, adjusted for any additional cash paid or received. B.) Difference between the present value of the new issue's debt service requirements and the old defeased issue's debt service requirements. C.) Any clarification necessary concerning whether the defeasance was a legal defeasance or an in-substance defeasance. D.) Identity of the escrow agent managing the irrevocable trust established to service the old defeased issue's debt service requirements.

D.) Identity of the escrow agent managing the irrevocable trust established to service the old defeased issue's debt service requirements.

Assume for Questions 5 through 9 that the state of Exuberance issued $10,000,000 of 5%, 20-year refunding bonds in 20X5 at par. If the state placed the $10,000,000 in an irrevocable trust as in item 6 but the transaction did not meet the defeasance in substance criteria, the state should report A.) expenditures of $10,000,000. B.) expenditures of $1,000,000 and other financing uses of $9,000,000. C.) other financing uses of $10,000,000. D.) no expenditures or other financing uses.

D.) no expenditures or other financing uses.

Assume for Questions 5 through 9 that the state of Exuberance issued $10,000,000 of 5%, 20-year refunding bonds in 20X5 at par. If the state used the proceeds to retire $10,000,000 of general long-term debt upon its maturity, the state should report A.) revenues of $10,000,000 and expenditures of $10,000,000. B.) other financing sources of $10,000,000 and expenditures of $10,000,000. C.) revenues of $10,000,000 and other financing uses of $10,000,000. D.) other financing sources of $10,000,000 and other financing uses of $10,000,000.

D.) other financing sources of $10,000,000 and other financing uses of $10,000,000.

Assume for Questions 5 through 9 that the state of Exuberance issued $10,000,000 of 5%, 20-year refunding bonds in 20X5 at par. If the state placed the $10,000,000 in an irrevocable trust that is to be used to service an outstanding $9,000,000 general obligation bond issue and those bonds are deemed defeased in substance, the state should report A.) expenditures of $9,000,000 and other financing uses of $1,000,000. B.) expenditures of $10,000,000. C.) expenditures of $1,000,000 and other financing uses of $9,000,000. D.) other financing uses of $10,000,000.

D.) other financing uses of $10,000,000.