How do you solve problem number 78?

Chapter 06 Accounting for General Long-term Liabilities and Debt Service True / False Questions 1. General long-term liabilities are those that arise from the activities of a government. 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. 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. True False 4. 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 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. 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 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) until the final maturity of debt outstanding on the balance sheet date. True False 13. 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 False 14. All long-term debt, including bonds, notes or warrants, and various other longterm obligations, intended to be repaid from tax levies or special assessments are accounted for in debt service funds. True False 15. 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. True False 16. Taxes for debt service are always levied by the General Fund and transferred to a debt service fund. True False 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 False 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 False 19. Installments of special assessments to be collected within one year are recorded as Assessments ReceivableCurrent; installments due in periods after one year are recorded as Assessments ReceivableDeferred. True False 20. Debt service funds for term bonds would generally include sinking fund investments. True False 21. Term bond issues mature in their entirety on a given date, in contrast to serial bonds, which mature in installments. True False 22. 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). True False 23. 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. True False 24. Expenditures for capital lease payments consist of two elements: payment of interest on the lease obligation, and payment on the obligation itself. True False 25. 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 26. The issuance of general long-term bonds requires recognition by the fund receiving the proceeds and by the business-type activities. True False 27. Special assessment debt that carries governmental backing should be reported as "special assessment debt with governmental commitment". True False 28. Special assessment debt is not recorded in a government's accounts. True False 29. The purpose of a sinking fund is to set aside resources for a substantial debt payment due at maturity. True False Multiple Choice Questions 30. 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 gener capital assets. C. The long-term portion of judgments and claims. D. Revenue bonds issued by an enterprise fund. 31. 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 finan statements. 32. Which of the following statements is true? A. Debt limit repre indebtedness o allowed by law one time. B. Overlapping debt is a calculation of the difference betw limit calculated as prescribed by law and the net amou indebtedness subject to limitation. C. Debt margin is reported in the governmental activities government-wide statements. D. All of the above statements are true. 33. 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. Enterpri se fund. B. Governmental activities. C. Both the enterprise fund and the governmental activitie accounts. D. Enterprise fund and a disclosure is added to the financ explaining the contingent liability of the general govern are insufficient to pay principal and interest. 34. 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 th of $10,500. B. A debit to Capital Lease Obligation Payable in the amo $20,000. C. A debit to Cash in the amount of $20,000. D. A debit to Capital Lease Obligation Payable in the amo $12,500. 35. 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 res responsible party to a remediation. C. The government is compelled to take remediation actio endangerment to the public health. D. All of the above items are obligating events that would pollution remediation obligation. 36. A debt service fund is a A. Nonexpen dable fund. B. Governmental fund. C. Fiduciary fund. D. Proprietary fund. 37. Which of the following resource inflows would be recorded as a revenue of a debt service fund? A. Property taxes levied b service fund for debt se purposes. B. Receipt of the premium on a new bond issue. C. Taxes collected by the General Fund and transferred t service fund. D. Transfer of the residual equity of a capital project from the debt service fund. 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 ExpendituresBond Interest. D. A debit to Interest Expense. 39. Which of the following statements is always true concerning the reporting of debt service funds? A. Debt service fun separate colum fund financial st B. Debt service funds are reported in a separate column financial statements. C. Debt service funds are reported in the Other Governm the governmental fund financial statements. D. Debt service funds are reported in the Governmental A government-wide financial statements. 40. Which of the following budgetary accounts is typically used by a debt service fund? A. Encumb rances. B. Appropriation s. C. Estimated Uncollectible Accounts. D. Encumbrances Outstanding. 41. Interest expenditures on bonds payable should be recorded in a debt service fund A. B. When bonds are issued. C. When the interest is At the end of th interest due dat the end of the fi paid. D. When the interest is legally payable. 42. 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. Choi ce A B. Choice B C. Choice C D. Choice D 43. 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. Revenue s. D. ExpendituresBond Interest. 44. 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. $600,00 0. C. $800,00 0. D. $1,400,00 0. 45. The liability for general obligation bonds should be recorded in the A. Genera l Fund. B. Capital projects fund. C. Governmental activities journal. D. Debt service fund. 46. 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. Appropriation s. D. Interest Expense. 47. 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 ot fund. 48. 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 reve projects fund an governmental a B. A $400,000 revenue to the debt service fund and a $4 bonds payable in governmental activities. C. A $400,000 expenditure in the debt service fund and a governmental activities. D. A $400,000 other financing source to the debt service premium on bonds payable in governmental activities. 49. 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. 50. 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 financial report (CAFR) when more than one debt serv C. Encumbrance accounting is often used. D. GAAP requires that a separate debt service fund be e bond issue. 51. Which of the following statements is not true for debt service funds? A. Special assessm government has through the deb B. Interest payable is reported as a liability of the debt service fund. C. Bond principal is shown as a liability of the debt servic principal is due and payable. D. All tax-supported bond principal is shown as a liability service fund. 52. 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 debts of the government. 53. Premiums received on tax-supported bonds are generally transferred to what fund? A. Capital projects. B. Debt service. C. Genera l. D. Special revenue. 54. Which of the following assets would not be found in the balance sheet of a debt service fund? A. Cash with fiscal agent. B. Investment s. C. Equipmen t. D. Interest Receivable. 55. 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. 56. 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. 57. 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 ExpendituresPrincipal of Capital Lease Obligation. C. A debit to ExpendituresPrincipal of Capital Lease Obligation. D. A debit to Interest Expense on Capital Leases. 58. 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 ReceivableCurrent for $500,000. B. A debit to Assessments ReceivableCurrent for $50,000. C. A credit to Revenues for $500,000. D. No journal entry is made in the debt service fund beca assessments are used. 59. Which of the following is a true statement regarding in-substance defeasance of bonds? A. The governmen other assets in sufficient to pay principal payme defeased. B. The government must agree to maintain sufficient cas balances in its debt service fund to cover all interest an the debt being defeased. C. The government must pledge to transfer amounts to a the due date for each interest and principal payment fo defeased. D. The government must agree to maintain sufficient unre investments in its governmental funds to cover all inte payments for the debt being defeased. 60. 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. 61. 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. Has no record of the transaction. D. Reflects both principal and interest payments. 62. 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 balances. C. Statement of revenues, expenses, and changes in pro position. D. No basic financial statement contains a column for the service funds. 63. 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 balances only. C. Balance sheet and statement of revenues, expenditure fund balance. D. Balance sheet, statement of revenues, expenditures, a balance, and statement of cash flows. 64. 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. 65. Which of the following is not true? A. The debt servic government ma for within the Ge mandates the u B. Debt service funds, unlike the General Fund and spec use budgetary accounting procedures. C. Expenditures for interest on tax supported long-term d even though debt service funds are accounted for on t basis. D. At year-end, budgetary and operating statement accou fund are closed in the same manner as is true for a Ge revenue funds. 66. 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 a accounts. C. A credit to Other Financing Sources - Interfund Transf fund only. D. A credit to Other Financing Sources - Interfund Transf service fund and governmental activities accounts. 67. 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 Intere service fund. C. A debit to Interest Expenditures in the General Fund. D. A debit to Interest Expenditures in the governmental a accounts. Short Answer Questions 68. The following key terms from Chapter 6 relate to accounting for general long-term liabilities and debt service: A. Legal defeasance B. Regular serial bonds C. In-substance defeasance D. Irregular serial bonds E. Debt limit F. Annuity serial bonds G. 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. Essay Questions 69. "Bonds to be retired by a debt service fund are recorded in that fund throughout their life." Do you agree or disagree? Why or why not? 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 and term bonds and how debt service fund accounting differs for the two types of bonds. 72. Bonds and other debt of enterprise funds may legally, at least contingently, have the status of tax-supported debt. In the event that enterprise fund resources are insufficient for debt service on such debt, why might the government as a whole find it necessary or desirable to assume responsibility for debt service? How would assumption of responsibility for such debt by the government as a whole be accounted for in the governmental activities accounts in the enterprise fund? 73. In many jurisdictions, the statutory debt limit is relatively low, but overlapping debt is not prohibited. From the standpoint of the property owner and taxpayer, how does that situation compare with a relatively high total statutory debt limit? 74. "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? 75. 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. 76. If general capital assets are being acquired by a government under a capital lease agreement, describe the entries that should be recorded in a governmental fund (logically, a debt service fund) for each lease payment. 77. "All taxes raised for payment of interest and principal on general long-term debt are recognized as other financing sources of the debt service fund." Do you agree? Why or why not? 78. In the current fiscal year, Casper County issued $10,000,000 in general obligation term bonds at 102 for construction of a new county complex. The county is required to use any accrued interest or premiums for servicing the debt issue. a. Prepare journal entries to record the bond issuance at the fund and government-wide levels? b. How would the bond issue be reported in the fund financial statements and the government-wide financial statements? c. What effect, if any, do interest payments have on the carrying value of the bond issue as reported in the financial statements? 79. Compute the legal debt margin for Mountain City given the following information regarding its bonded debt. 1) The legal debt limit is 10 percent of total assessed valuation. 2) Bonds outstanding and bonds authorized are: Note: The city has no general obligation liability for the revenue bonds or the industrial development bonds. 3) Total assessed valuation of property within Mountain City is $200,000,000. 80. As of the fiscal year ending September 30, 2013, Crystal Beach had $10,000,000 in 5 percent serial bonds outstanding. The serial bonds pay interest semiannually on March 1 and September 1, with $500,000 in bonds being retired on each interest payment date. Resources for payment of principal are transferred from the General Fund, and the debt service fund levies property taxes annually to cover interest payments. Any excess is reserved for future debt service payments. Prepare debt service fund and government-wide entries in general journal form to reflect, as necessary, the following information and transactions for FY 2014. (1) The operating budget for FY 2014 consists of estimated revenues of $500,000 and estimated other financing sources equal to the amount of principal to be paid in FY 2014. Appropriations must be provided for interest payments and bond redemptions on March 1 and September 1. (2) Property taxes in the amount of $500,000 were levied (no estimate for uncollectible accounts has been made). (3) Property taxes in the amount of $500,000 were collected. (4) Cash was received from the General Fund and checks were written and mailed for the March 1 principal and interest payments. (5) Cash was received from the General Fund and checks were written and mailed for the September1 principal and interest payments. (6) At the fund level, entries were made to close budgetary and operating statement accounts. (Ignore closing entries in the government activities journal.) 81. From records available in various offices of Baraga County, you find the following information about changes in long-term liabilities of the county during the year ended June, 2012: 1) At the end of the 2011 fiscal year, $500,000 was still outstanding on an issue of a 3 percent serial bond that matures at the rate of $250,000 per year. The payment during fiscal year 2012 has been made by the debt service fund. 2) Baraga County council decided to fund a General Fund deficit with an issue of four-year notes totaling $480,000. The notes were issued on July 1, 2011, and were to be retired at the rate of $120,000 per year; the first payment was to be made on July 1, 2012 by the debt service fund. 3) At the end of the 2011 fiscal year, $100,000 par value general obligation serial bonds were outstanding, from an original amount of $400,000. Annual maturities of $25,000 have been paid on December 31 of each year. 4) In FY 2011 an issue of 7 percent serial bonds was sold in the amount of $6,000,000. The issue matures at the rate of $300,000 per year. The first payment was made in FY 2012. 5) On June 30, 2011 the county had outstanding $200,000 of 4 percent serial bonds that had been issued to finance a revenue-producing recreation facility. On June 1, 2012 bonds in the amount of $50,000 were paid. The bonds are being paid from enterprise revenues; they carry a covenant that obligates the county to levy taxes to service the debt if enterprise revenues are insufficient. It is expected that enterprise revenues will be sufficient to retire the bonds on schedule. 6) During FY 2012 a $300,000 issue of 6 percent term bonds matured, with little provision having been made for their payment. The bonds were closely held, and arrangements were made with holders of all but $25,000 to accept 8 percent refunding serial bonds. Cash was paid to creditors who declined to accept refunding bonds. Required: Prepare a schedule disclosing the changes in long-term liabilities for Baraga County for the year ended June 30, 2012. Chapter 06 Accounting for General Long-term Liabilities and Debt Service Answer Key True / False Questions 1. General long-term liabilities are those that arise from the activities of a government. 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. Difficulty: Easy Difficulty: Medium Question Type: Content 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 The tax-exempt feature of governmental debt enables governments to raise large amounts of capital at relatively low cost. Difficulty: Easy Difficulty: Medium Question Type: Content 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. FALSE GASB requires general capital assets and the related long-term liabilities to be reported in the government-wide statements, not in governmental funds. Difficulty: Medium Question Type: Content 4. 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. 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. Difficulty: Medium Question Type: Concept 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 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. Difficulty: Medium Question Type: Concept 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. 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. Difficulty: Medium Question Type: Concept 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 This paraphrases the definition given in Chapter 6. Difficulty: Easy Question Type: Concept 8. Debt margin is the difference between the debt limit and the amount of outstanding debt subject to the debt limitation. TRUE Debt margin is also called "borrowing power." Difficulty: Medium Question Type: Concept 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 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. Difficulty: Medium Question Type: Concept 10. Since the debt of a government is subject to a legal debt limit, there cannot be any legal overlapping debt. 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. Difficulty: Easy Question Type: Concept 11. 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 Creditors, potential creditors, and other users of financial reports are presumed to find this information helpful. Difficulty: Medium Question Type: Concept 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) until the final maturity of debt outstanding on the balance sheet date. TRUE This provision of GASB standards is described in Chapter 6. Difficulty: Easy Question Type: Concept 13. 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. FALSE Debt service funds are created to account for interest expenditures and revenues raised, as well as for principal repayment. Difficulty: Medium Question Type: Concept 14. All long-term debt, including bonds, notes or warrants, and various other longterm obligations, intended to be repaid from tax levies or special assessments are accounted for in debt service funds. 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. Difficulty: Medium Question Type: Concept 15. 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. 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. Difficulty: Easy Question Type: Concept 16. Taxes for debt service are always levied by the General Fund and transferred to a debt service fund. FALSE Taxes may be levied for a debt service fund directly, or debt service activity may be recorded in the General Fund. Difficulty: Medium Question Type: Concept 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 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. Difficulty: Medium Question Type: Concept 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 is illustrated in Chapter 6. Difficulty: Easy Question Type: Concept 19. Installments of special assessments to be collected within one year are recorded as Assessments ReceivableCurrent; installments due in periods after one year are recorded as Assessments ReceivableDeferred. TRUE This describes the proper accounting for assessment receivables as illustrated in Chapter 6. Difficulty: Medium Question Type: Concept 20. Debt service funds for term bonds would generally include sinking fund investments. 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. Difficulty: Medium Question Type: Concept 21. Term bond issues mature in their entirety on a given date, in contrast to serial bonds, which mature in installments. TRUE These definitions are consistent with Chapter 6 text. Difficulty: Medium Question Type: Concept 22. 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). 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. Difficulty: Medium Question Type: Concept 23. 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. 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. Difficulty: Medium Question Type: Concept 24. Expenditures for capital lease payments consist of two elements: payment of interest on the lease obligation, and payment on the obligation itself. TRUE Chapter 6 presents an example illustrating how the two elements are calculated and recorded in the debt service fund. Difficulty: Easy Question Type: Concept 25. 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 This description of a bond refunding is consistent with the Chapter 6 discussion. Difficulty: Easy Question Type: Concept 26. The issuance of general long-term bonds requires recognition by the fund receiving the proceeds and by the business-type activities. FALSE Governmental funds do not record long-term debt; it is recorded in the governmental (not business-type) activities accounts at the government-wide level. However, the proceeds of the bond are recorded in a governmental fund, typically the capital projects fund. Difficulty: Easy Question Type: Concept 27. Special assessment debt that carries governmental backing should be reported as "special assessment debt with governmental commitment". TRUE The portion of special assessment debt that will be repaid from property owner assessments should be reported as "special assessment debt with governmental commitment" to recognize governmental backing of the debt, while the portion of special assessment debt that will be repaid from general resources of the government (the public benefit portion or the amount assessed against government-owned property) should be reported like other general long-term liabilities. Difficulty: Easy Question Type: Concept 28. Special assessment debt is not recorded in a government's accounts. FALSE If a government provides backing for special assessment, the portion of special assessment debt that will be repaid from property owner assessments should be reported as "special assessment debt with governmental commitment" to recognize governmental backing of the debt, while the portion of special assessment debt that will be repaid from general resources of the government (the public benefit portion or the amount assessed against government-owned property) should be reported like other general long-term liabilities. Difficulty: Easy Question Type: Concept 29. The purpose of a sinking fund is to set aside resources for a substantial debt payment due at maturity. TRUE This definition is consistent with discussion in Chapter 6. Difficulty: Easy Question Type: Concept Multiple Choice Questions 30. 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 gene capital assets. C. The long-term portion of judgments and claims. D. Revenue bonds issued by an enterprise fund. Difficulty: Easy Question Type: Concept 31. 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 finan statements. Difficulty: Medium Question Type: Concept 32. Which of the following statements is true? A. Debt limit represe of indebtedness is allowed by law any one time. B. Overlapping debt is a calculation of the difference betw debt limit calculated as prescribed by law and the net indebtedness subject to limitation. C. Debt margin is reported in the governmental activities government-wide statements. D. All of the above statements are true. Difficulty: Medium Question Type: Concept 33. 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. Enterpri se fund. B. Governmental activities. C. Both the enterprise fund and the governmental activiti accounts. D. Enterprise fund and a disclosure is added to the financ explaining the contingent liability of the general govern funds are insufficient to pay principal and interest. Difficulty: Medium Question Type: Concept 34. 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 th of $10,500. B. A debit to Capital Lease Obligation Payable in the amo $20,000. C. A debit to Cash in the amount of $20,000. D. A debit to Capital Lease Obligation Payable in the amo $12,500. Difficulty: Medium Question Type: Journal Entry 35. 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 res responsible party to a remediation. C. The government is compelled to take remediation acti endangerment to the public health. D. All of the above items are obligating events that would a pollution remediation obligation. Difficulty: Medium Question Type: Concept 36. A debt service fund is a A. Nonexpen dable fund. B. Governmental fund. C. Fiduciary fund. D. Proprietary fund. Difficulty: Easy Question Type: Concept 37. Which of the following resource inflows would be recorded as a revenue of a debt service fund? A. Property taxes levied b service fund for debt se purposes. B. Receipt of the premium on a new bond issue. C. Taxes collected by the General Fund and transferred t service fund. D. Transfer of the residual equity of a capital project from to the debt service fund. Difficulty: Medium Question Type: Concept 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 ExpendituresBond Interest. D. A debit to Interest Expense. Difficulty: Medium Question Type: Journal Entry 39. Which of the following statements is always true concerning the reporting of debt service funds? A. Debt service fund separate column fund financial sta B. Debt service funds are reported in a separate column wide financial statements. C. Debt service funds are reported in the Other Governm the governmental fund financial statements. D. Debt service funds are reported in the Governmental A government-wide financial statements. Difficulty: Medium Question Type: Concept 40. Which of the following budgetary accounts is typically used by a debt service fund? A. Encumb rances. B. Appropriation s. C. Estimated Uncollectible Accounts. D. Encumbrances Outstanding. Difficulty: Easy Question Type: Concept 41. Interest expenditures on bonds payable should be recorded in a debt service fund A. At the end of the interest due date the end of the fis B. When bonds are issued. C. When the interest is paid. D. When the interest is legally payable. Difficulty: Medium Question Type: Concept 42. 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. Choi ce A B. Choice B C. Choice C D. Choice D Difficulty: Medium Question Type: Concept 43. 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. Revenue s. D. ExpendituresBond Interest. Difficulty: Easy Question Type: Journal Entry 44. 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. $600,00 0. C. $800,00 0. D. $1,400,00 0. Difficulty: Medium Question Type: Calculation 45. The liability for general obligation bonds should be recorded in the A. Genera l Fund. B. Capital projects fund. C. Governmental activities journal. D. Debt service fund. Difficulty: Medium Question Type: Concept 46. 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. Appropriation s. D. Interest Expense. Difficulty: Medium Question Type: Concept 47. 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 ot fund. Difficulty: Medium Question Type: Concept 48. 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 reven projects fund and in governmental B. A $400,000 revenue to the debt service fund and a $4 bonds payable in governmental activities. C. A $400,000 expenditure in the debt service fund and a governmental activities. D. A $400,000 other financing source to the debt service premium on bonds payable in governmental activities. Difficulty: Medium Question Type: Concept 49. 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. Difficulty: Medium Question Type: Concept 50. 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 annual financial report (CAFR) when more than one d exists. C. Encumbrance accounting is often used. D. GAAP requires that a separate debt service fund be e bond issue. Difficulty: Medium Question Type: Concept 51. Which of the following statements is not true for debt service funds? A. Special assessm government has paid through the B. Interest payable is reported as a liability of the debt service fund. C. Bond principal is shown as a liability of the debt servic principal is due and payable. D. All tax-supported bond principal is shown as a liability service fund. Difficulty: Medium Question Type: Concept 52. 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 debts of the government. Difficulty: Easy Question Type: Concept 53. Premiums received on tax-supported bonds are generally transferred to what fund? A. Capital projects. B. Debt service. C. Genera l. D. Special revenue. Difficulty: Easy Question Type: Concept 54. Which of the following assets would not be found in the balance sheet of a debt service fund? A. Cash with fiscal agent. B. Investment s. C. Equipmen t. D. Interest Receivable. Difficulty: Medium Question Type: Concept 55. 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. Difficulty: Medium Question Type: Calculation 56. 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. Difficulty: Medium Question Type: Concept 57. 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 ExpendituresPrincipal of Capital Lease Obligation. C. A debit to ExpendituresPrincipal of Capital Lease Obligation. D. A debit to Interest Expense on Capital Leases. Difficulty: Medium Question Type: Journal Entry 58. 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 ReceivableCurrent for $500,000. B. A debit to Assessments ReceivableCurrent for $50,000. C. A credit to Revenues for $500,000. D. No journal entry is made in the debt service fund beca assessments are used. Difficulty: Medium Question Type: Journal Entry 59. Which of the following is a true statement regarding in-substance defeasance of bonds? A. The government other assets in a sufficient to pay a principal paymen defeased. B. The government must agree to maintain sufficient cas balances in its debt service fund to cover all interest a for the debt being defeased. C. The government must pledge to transfer amounts to a to the due date for each interest and principal paymen defeased. D. The government must agree to maintain sufficient unr investments in its governmental funds to cover all inte payments for the debt being defeased. Difficulty: Medium Question Type: Concept 60. 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. Difficulty: Easy Question Type: Concept 61. 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. Has no record of the transaction. D. Reflects both principal and interest payments. Difficulty: Medium Question Type: Concept 62. 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 balances. C. Statement of revenues, expenses, and changes in pro position. D. No basic financial statement contains a column for the service funds. Difficulty: Hard Question Type: Concept 63. 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 balances only. C. Balance sheet and statement of revenues, expenditur fund balance. D. Balance sheet, statement of revenues, expenditures, a balance, and statement of cash flows. Difficulty: Hard Question Type: Concept 64. 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. Difficulty: Medium Question Type: Concept 65. Which of the following is not true? A. The debt service government may accounted for wit unless law mand service fund. B. Debt service funds, unlike the General Fund and spec not use budgetary accounting procedures. C. Expenditures for interest on tax supported long-term d even though debt service funds are accounted for on t basis. D. At year-end, budgetary and operating statement accou fund are closed in the same manner as is true for a Ge revenue funds. Difficulty: Medium Question Type: Concept 66. 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 a accounts. C. A credit to Other Financing Sources - Interfund Transf service fund only. D. A credit to Other Financing Sources - Interfund Transf service fund and governmental activities accounts. Difficulty: Medium Question Type: Concept 67. 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 Intere debt service fund. C. A debit to Interest Expenditures in the General Fund. D. A debit to Interest Expenditures in the governmental a accounts. Difficulty: Medium Question Type: Concept Short Answer Questions 68. The following key terms from Chapter 6 relate to accounting for general longterm liabilities and debt service: A. Legal defeasance B. Regular serial bonds C. In-substance defeasance D. Irregular serial bonds E. Debt limit F. Annuity serial bonds G. 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. C, 2. F, 3. B, 4. E, 5. A Difficulty: Medium Question Type: Concept Essay Questions 69. "Bonds to be retired by a debt service fund are recorded in that fund throughout their life." Do you agree or disagree? Why or why not? Disagree. Debt service funds account for only those liabilities to be paid under authorization of the funds' current appropriation. Bonds are not payable until their maturity (or until they are called) and are properly accounted for in the governmental activities accounts until that time. Difficulty: Medium Question Type: Concept 70. How are general long-term liabilities distinguished from other long-term liabilities of the government? How does the financial reporting of general longterm liabilities differ from the financial reporting of other long-term liabilities? Difficulty: Medium Question Type: Concept 71. Explain the essential differences between regular serial bonds and term bonds and how debt service fund accounting differs for the two types of bonds. Difficulty: Medium Question Type: Concept 72. Bonds and other debt of enterprise funds may legally, at least contingently, have the status of tax-supported debt. In the event that enterprise fund resources are insufficient for debt service on such debt, why might the government as a whole find it necessary or desirable to assume responsibility for debt service? How would assumption of responsibility for such debt by the government as a whole be accounted for in the governmental activities accounts in the enterprise fund? Difficulty: Medium Question Type: Concept 73. In many jurisdictions, the statutory debt limit is relatively low, but overlapping debt is not prohibited. From the standpoint of the property owner and taxpayer, how does that situation compare with a relatively high total statutory debt limit? A definite answer to this question requires knowledge of the total rate limitation and the rate and number of jurisdictions involved in the overlapping debt situation. A very general answer is that the single rate is easier to comprehend than the overlapping debt situation with its multiple governments, each with its own debt-issuing capacity. The single rate might provide greater protection for the taxpayers; on the other hand, it might not because governments can usually find financing arrangements not specifically prohibited by law. Difficulty: Medium Question Type: Concept 74. "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? Difficulty: Medium Question Type: Concept 75. 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. Difficulty: Medium Question Type: Concept 76. If general capital assets are being acquired by a government under a capital lease agreement, describe the entries that should be recorded in a governmental fund (logically, a debt service fund) for each lease payment. The debt service fund will typically budget and record receipt of revenues and/or transfers from the general fund to provide resources for each lease payment, as well as recording an appropriation and expenditures for each lease payment. The latter entry should distinguish between expenditures for interest and expenditures for principal of the lease obligation. Difficulty: Medium Question Type: Concept 77. "All taxes raised for payment of interest and principal on general long-term debt are recognized as other financing sources of the debt service fund." Do you agree? Why or why not? Difficulty: Medium Question Type: Concept 78. In the current fiscal year, Casper County issued $10,000,000 in general obligation term bonds at 102 for construction of a new county complex. The county is required to use any accrued interest or premiums for servicing the debt issue. a. Prepare journal entries to record the bond issuance at the fund and government-wide levels? b. How would the bond issue be reported in the fund financial statements and the government-wide financial statements? c. What effect, if any, do interest payments have on the carrying value of the bond issue as reported in the financial statements? Difficulty: Medium Question Type: Journal Entry 79. Compute the legal debt margin for Mountain City given the following information regarding its bonded debt. 1) The legal debt limit is 10 percent of total assessed valuation. 2) Bonds outstanding and bonds authorized are: Note: The city has no general obligation liability for the revenue bonds or the industrial development bonds. 3) Total assessed valuation of property within Mountain City is $200,000,000. Difficulty: Hard Question Type: Calculation 80. As of the fiscal year ending September 30, 2013, Crystal Beach had $10,000,000 in 5 percent serial bonds outstanding. The serial bonds pay interest semiannually on March 1 and September 1, with $500,000 in bonds being retired on each interest payment date. Resources for payment of principal are transferred from the General Fund, and the debt service fund levies property taxes annually to cover interest payments. Any excess is reserved for future debt service payments. Prepare debt service fund and government-wide entries in general journal form to reflect, as necessary, the following information and transactions for FY 2014. (1) The operating budget for FY 2014 consists of estimated revenues of $500,000 and estimated other financing sources equal to the amount of principal to be paid in FY 2014. Appropriations must be provided for interest payments and bond redemptions on March 1 and September 1. (2) Property taxes in the amount of $500,000 were levied (no estimate for uncollectible accounts has been made). (3) Property taxes in the amount of $500,000 were collected. (4) Cash was received from the General Fund and checks were written and mailed for the March 1 principal and interest payments. (5) Cash was received from the General Fund and checks were written and mailed for the September1 principal and interest payments. (6) At the fund level, entries were made to close budgetary and operating statement accounts. (Ignore closing entries in the government activities journal.) Difficulty: Hard Question Type: Journal Entry 81. From records available in various offices of Baraga County, you find the following information about changes in long-term liabilities of the county during the year ended June, 2012: 1) At the end of the 2011 fiscal year, $500,000 was still outstanding on an issue of a 3 percent serial bond that matures at the rate of $250,000 per year. The payment during fiscal year 2012 has been made by the debt service fund. 2) Baraga County council decided to fund a General Fund deficit with an issue of four-year notes totaling $480,000. The notes were issued on July 1, 2011, and were to be retired at the rate of $120,000 per year; the first payment was to be made on July 1, 2012 by the debt service fund. 3) At the end of the 2011 fiscal year, $100,000 par value general obligation serial bonds were outstanding, from an original amount of $400,000. Annual maturities of $25,000 have been paid on December 31 of each year. 4) In FY 2011 an issue of 7 percent serial bonds was sold in the amount of $6,000,000. The issue matures at the rate of $300,000 per year. The first payment was made in FY 2012. 5) On June 30, 2011 the county had outstanding $200,000 of 4 percent serial bonds that had been issued to finance a revenue-producing recreation facility. On June 1, 2012 bonds in the amount of $50,000 were paid. The bonds are being paid from enterprise revenues; they carry a covenant that obligates the county to levy taxes to service the debt if enterprise revenues are insufficient. It is expected that enterprise revenues will be sufficient to retire the bonds on schedule. 6) During FY 2012 a $300,000 issue of 6 percent term bonds matured, with little provision having been made for their payment. The bonds were closely held, and arrangements were made with holders of all but $25,000 to accept 8 percent refunding serial bonds. Cash was paid to creditors who declined to accept refunding bonds. Required: Prepare a schedule disclosing the changes in long-term liabilities for Baraga County for the year ended June 30, 2012. Difficulty: Medium Question Type: Concept