chap 006

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

CHAPTER 6: ACCOUNTING FOR GENERAL LONG-TERM LIABILITIES AND DEBT SERVICE

OUTLINE

Number Topic Type/Task Status(re: 15/e)

Questions:6-1 Defining general long-term liabilities;

financial reportingDefine, explain Same

6-2 Disclosures about long-term liabilities Explain Same6-3 General obligation bonds Explain Same6-4 Reporting special assessment debt Explain New6-5 Debt limit and debt margin Calculate Same6-6 Overlapping debt Explain Same 6-7 Long-term debt and net position Explain New6-8 Distinguish serial bond characteristics; debt

service fund accounting differences for serial and term bonds

Describe, explain 6-8 revised

6-9 Reporting investments Describe Same6-10 Advance refunding of bonds Explain Same

Cases:6-1 Policy Issues: Who should pay for

neighborhood improvements?Analyze, write Same

6-2 Policy Issues Relating to General Long-term Debt

Analyze, write New

6-3 The case of the vanishing debt Analyze, write Same6-4 Analysis of general obligation debt burden Calculate, assess 6-4 revised

Exercises/Problems:6-1 Examine the CAFR Examine Same6-2 Various Multiple Choice 6-2 revised6-3 Long-term liability transactions Journal entries 6-3 revised

6-4 Budgetary transactions Journal entries 6-4 revised6-5 Capital leases Journal entries, FS 6-76-6 Legal Debt Margin, Direct and Overlapping

DebtFinancial schedules 6-5 revised

6-7 Trial balance Analysis, financial statements

6-6

6-8 Serial bond debt service fund transactions and statements

Journal entries, FS Same

6-9 Term bond debt service fund transactions Journal entries 6-9 revised6-10 Comprehensive capital assets/serial bond

problemJournal entries New

6-1


CHAPTER 6: ACCOUNTING FOR GENERAL LONG-TERM LIABILITIES AND DEBT SERVICE

Answers to Questions

6-1. General long-term liabilities arise from activities of the General Fund or some other governmental fund. These liabilities are distinguished from “fund” long-term liabilities that are incurred by a proprietary or fiduciary fund and for which debt service will be paid from that fund. General long-term liabilities are reported only in the Governmental Activities column of the government-wide financial statements and not in any fund financial statements.

6-2. As shown in Illustration 6-1 for the City of Jacksonville, note disclosures about long-term debt (such as bonds, notes, and capital leases) and operating long-term liabilities (such as claims and judgments, compensated absences, and other accrued liabilities) should show the beginning balance of each major class of long-term liability, as well as additions to, deletions from, and the ending balance of each major class. Disclosures should also include the portion of liabilities due within one year of the financial statement date. These disclosures should present separate sections for governmental activities and business-type activities. Presenting long-term liability disclosures for discretely presented component units, as the City of Jacksonville has done, is discretionary and is a matter of professional judgment, per GASB Codification Section 2300.115.

6-3. a. The fund receiving the benefit of the bond issue, such as a capital projects fund, would record a debit to Cash and a credit to Other Financing Sources—Proceeds of Bonds. Since premiums and accrued interest must be used to service the debt, the premium on the bond sale would be recorded in the debt service fund as a debit to Cash and a credit to Other Financing Sources—Premium on Bonds. At the government-wide level the debit would be to Cash for the total amount (bond payable plus premium) with related credits to Bonds Payable and Premium on Bonds Payable.

b. At the fund level the cash would be reported on the balance sheet and the accounts, Other Financing Sources—Proceeds of Bonds and Other Financing Sources—Premium on Bonds, would be reported on the statement of revenues, expenditures and changes in fund balances. At the government-wide level in the Governmental Activities column cash would be reported on the statement of net position as would the bond payable. The account Bonds Payable would be classified as a long-term liability (except for the current portion, which is due within one year) and the Premium on Bonds Payable would increase (add to) the carrying value of the Bonds Payable.

6-2


Ch. 6, Answers, 6-3 (Cont'd)

c. GASB requires that the effective interest method be used to amortize the Premium on Bonds Payable. As a result, the amortization of the premium reduces the carrying value of the bond by the amount of premium amortized each interest payment period. At the maturity of the bond the carrying value of the bond will be equal to the face value of the bond.

6-4. (a) Special assessment debt for which a government provides secondary backing should be reported as "special assessment debt with governmental commitment" in the government-wide statement of net position, while any portion of special assessment debt that is the direct responsibility of a government and will be repaid from general government resources (the public benefit portion or the amount assessed against government-owned property) should be reported like other general long-term liabilities.

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

6-5. The debt limit and debt margin for Milos City are:

Debt limit ($10,863,511,000 X 0.01) $108,635,110 Less: General obligation serial bonds (43,000,000)Debt margin $ 65,635,110

(Note: Self-supporting debt, such as revenue bonds, is generally not subject to debt limits. For revenue bonds to be included they would need to be secondarily backed by the full taxing power of the city. Also, capital leases are generally not considered a part of general obligation debt, unless there is a law or ordinance to the contrary. In some jurisdictions it may be necessary to include authorized but unissued debt in the calculation. At a minimum, the $10,000,000 should be disclosed.)

6-6. Overlapping debt is when a parcel of real estate or object of personal property is subject at any given time to assessments for payment of taxes to retire bonds issued by two or more governments. Citizens care about the extent of overlapping debt since it means their property is subject to assessments from two or more governments for the retirement of debt. A government is concerned about the amount of overlapping debt since it can affect the government’s ability to issue general obligation debt. The greater the assessments on a citizen’s property the less open the citizen will be to a government’s request to issue bonded debt.

6-3


Ch. 6, Answers (Cont'd)

6-7. On the surface, this statement does not sound correct. The issuance of long-term debt at par will result in a debit to Cash and a credit to Bonds Payable in the government-wide journal. The issuance of debt would have no effect on net position; however, any payment of interest in the year of issuance would decrease net position. In this example, an additional note clarified the meaning of the MD&A statement. It seems that the proceeds from the debt were spent on road construction that was then gifted to another government. Thus the government issuing the debt used the resources for construction in the current year (debiting CWIP and crediting cash); however, the gift removed the capital asset with an offsetting decrease to net position. It was the outright gift of the capital asset, rather than the debt issuance that caused the decrease in net position.

6-8. For a regular serial bond, the total principal is repayable in a specified number of equal annual installments over the life of the issue. If the first installment of a serial bond issue is delayed for a period of more than one year after the bond issue date, but all future installments fall due on a regular basis, the bonds are known as deferred serial bonds. With annuity serial bonds, the amount of annual principal repayments increases each year by approximately the same amount that interest payments decrease so that the total debt service payment remains relatively level over the term of the issue. Irregular serial bonds exhibit payment patterns that do not fit the other three categories.

Regular serial bonds typically have principal maturities extending from one year to 20 or more years and do not require setting aside resources. Term bonds, on the other hand, have a one-time principal maturity that requires a lump-sum repayment of principal on the due date. Governments generally set aside resources over time to prepare for the large lump-sum payment. This practice may be required by the debt agreement.

6-9. GASB standards require that all long-term investments, including investments in debt securities, be reported at fair value on the date of the fund and government-wide financial statements. All changes in fair value during the period, both realized and unrealized, are reported as revenue in the fund and government-wide operating statements. In addition to the recognition of investments at fair value, GASB requires several note disclosures related to investments. Note disclosures include: (1) legal and contractual provisions for deposits and investments, including types of investments authorized to be held and any significant violations of legal or contractual provisions, and (2) investment policies related to certain kinds of risks identified by GASB.

6-10. Advance refunding may be desirable when the interest rate on outstanding debt is considerably higher than current interest rates, when debt service fund assets accumulated for debt repayment are not sufficient to repay creditors when the debt matures, or if the covenants of the existing bonds are excessively burdensome. If the old debt issue is "defeased," (either "legal" or "in-substance"), GASB standards permit the liability for the old issue to be removed from the accounts and the reporting of only the liability for the new (refunding) issue.

6-4


Solutions to Cases

6-1. a. We recommend that the substance of a student’s brief be emphasized more than its form. The key issues that students should identify in this case are: (1) Should property owners have to bear the full cost burden for improvements that have public as well as private benefit? (2) Should the government have the power to create a special improvement district without approval of a majority of affected property owners? As in any ambiguous situation involving subjective evaluation, students may reach different verdicts. So, each student’s work should be assessed on the content and quality of analysis, rather than on the verdict itself.

Verdict: In the verdict on which this case is based, the court ruled for the plaintiffs on the grounds that the city failed to show that property owners benefited substantially from the street widening project. Further, the project was found to have significant public benefit; therefore, the judge ordered the city to use public taxes to pay a majority of the cost of the project.

As a result of this case, the city adopted a new and, many would argue, fairer policy for financing future capital projects that provide both public and private benefit. Further, the revised city ordinance requires a public hearing for all special assessment and other public improvement projects, as well as public notification in local newspapers.

b. If, as in this case, the government provides secondary backing for special assessment bonds, then accounting and financial reporting are not affected by who pays the debt service on the project. Issuance of the bonds is recorded as an other financing source in the capital projects fund and as a general long-term liability at the government-wide level, regardless of who pays debt service on the bonds. Moreover, capital projects fund accounting and reporting for street construction would not be affected by the verdict.

Even debt service fund accounting is unaffected by the verdict since the city had agreed to make the bonds general obligations of the city should property owners default on special assessments. If, however, the special assessment bonds did not have the secondary backing of the city and the court did not rule for the plaintiffs, then accounting and reporting would be very different. In the capital projects fund, the change would be minor—titling the other financing source as “Contributions from Property Owners” rather than “Proceeds of Bonds.” In this changed scenario, the liability for the bond issue would not be recorded at the government-wide level as the city has no obligation for the debt. In addition, all debt service activities would be reported in an agency fund (see Chapter 8 for more discussion.) All of this is academic, however, since the court did rule for the plaintiffs, which essentially converts the project into a normal capital project, accounted for and reported as described in this chapter.

6-5


Ch. 6, Solutions, Cases (Cont’d)

6-2. a. As noted in the chapter, the use of long-term debt is a traditional part of the fiscal policy of state and local governments, particularly for financing general capital assets. Few governments possess the resources needed to finance capital projects in the short term, as annual tax revenues are often used for current operating purposes and to meet prior obligations. Thus, long-term debt is frequently used to fund new capital projects (government buildings, schools, roads, etc.) and capital asset improvements. In the short-term local governments might be able to sustain debt prohibitions; however, in the longer term government buildings, schools, roads, emergency service assets, etc. would suffer.

b. Each student’s memo should identify and support a position on the amendment. This is a case that can generate significant class discussion. While taxpayers often express distrust of government and generally desire reduced tax liabilities, astute individuals recognize that taxes and tax-supported debt support general government operations and public services upon which the general citizenry relies.

In 2010 residents of the State of Colorado voted on Amendment 61, a measure which called for prohibition of new debt issuances by state or local governments and stringent limits on local government debt. While Amendment 61 did not pass in Colorado, it was hotly contested on both sides. The five statements were adapted from pros and cons published by the press in Colorado. Additional information is available at http://www.today.colostate.edu/story.aspx?id=4562; http://bellpolicy.org/node/3501; or

http://ballotpedia.org/wiki/index.php/Colorado_State_and_Local_Debt_Limitations,_ Amendment_61_(2010).

6-3. a. In evaluating each student’s performance on this case, we recommend placing more weight on the quality and depth of analysis than on the student’s final conclusion. Indeed, there may not be a “right” answer given the facts of this case, particularly since the two parties involved in the transaction appear to have reached inconsistent conclusions about how the debt service advances should be reported. Because the case involves substantial uncertainty, it affords an excellent vehicle for generating classroom discussion.

From the perspective of the authority, there are both legal and conceptual issues to consider before deciding whether it acted appropriately in removing the liability for debt service advances from its accounts. The legal issue is whether the authority can unilaterally remove the liability from its accounts without either being released from the obligation by the creditor (the county) or by appropriate judicial action. The main conceptual issue is whether the obligation meets the conceptual definition of a liability.

6-6

http://ballotpedia.org/wiki/index.php/Colorado_State_and_Local_Debt_Limitations,_%20Amendment_61_(2010)

http://ballotpedia.org/wiki/index.php/Colorado_State_and_Local_Debt_Limitations,_%20Amendment_61_(2010)

http://bellpolicy.org/node/3501

http://www.today.colostate.edu/story.aspx?id=4562


Ch. 6, Solutions, Case 6-3 (Cont’d)

In the authors’ view, neither legal nor conceptual analyses justify the authority’s removal of the liability. From a legal viewpoint, removal of the liability appears inappropriate as long as the creditor still insists that it has a valid receivable and no legal release has been obtained. From a conceptual viewpoint, the GASB defines liabilities as:

“…present obligations to sacrifice resources that the government has little or no discretion to avoid.” [GASB Concepts Statement No. 4]

In most cases of in-substance defeasance, the barrier for removing debt from a balance sheet is higher than that for recognizing it initially (i.e., FASB ASC 405.20). Thus, conceptually, it appears that the authority can justify removing the liability from its accounts only if the possibility of hitting the agreed upon attendance trigger (annual attendance of 3,000,000) is remote. Because a variety of sports and entertainment events can be held in the stadium, the possibility exists that the trigger point could be reached in the future. Thus, as the independent auditor, you should advise the authority to continue to report the liability on its statement of net position.

b. Much of the analysis for Part a applies to this part as well. The unwillingness of the county board of commissioners to write off the receivable for debt service advances suggests that they believe there is a possibility that the attendance sales trigger may be reached in the future. As the independent auditor, you are not in a position to override the commission’s opinion, particularly given the stated facts in this case. However, you should question why the receivable is being carried at zero net realizable value if there is a positive probability that some portion of the advances may be repaid in the future. If the county is unwilling to report a nonzero amount of receivable, then you should advise them to write off the receivable altogether. In other words, the county cannot have it both ways. This, in turn, would provide justification for the authority to remove its liability.

6-4. a. Students’ initial assessments of the city’s net general debt burden will vary. However, some students are likely to look at the increasing trend of bonded debt and assess the trend as a potential concern.

The general trend indicates an increase in the ratio of bonded debt to assessed valuation and the debt per capita. An analysis of the trend in assessed valuation shows an increase of about 85% over the past ten years. This compares to an increase of approximately 131.8% in net bonded debt. Thus, while property values are increasing, the increase in value is not keeping pace with the increase in net bonded debt. This is reflected in the large increase in the per capita debt (approximately 103%). When compared to benchmarks, the city is higher than the 4.56 ratio of net bonded debt to assessed valuation and the $1,376 per capita figure. Thus, citizens may want to be watchful of the city’s debt burden.

6-7


Ch. 6, Solutions, Case 6-4 (Cont’d)

Extraneous factors can also impact consideration of whether the debt burden is excessive. There may be environmental factors that impact increases in debt, such as floods or wind destruction. Additionally, the nature of the government issuing the debt may be a factor; for example, some cities are responsible for school construction, while in other cities school districts separately issue debt (impacting the amount of overlapping debt). Finally, if the debt is part of a capital improvement plan the level of debt may be considered more acceptable since there are plans in place to obtain needed capital assets while managing the level of debt.

Ratio of Net General Bonded Debt to Actual Value of Taxable Property and Net General Bonded Debt per Capita

(Last Ten Fiscal Years – $000s omitted)Net General Net General

Gross Less: Amount Net Bonded BondedFiscal Estimated Assessed Bonded in Debt Bonded Debt to Debt perYear Population Valuation Debt Service Fund Debt Assessed Value Capita 2005 $ 90,599 $ 1,792,747 $ 192,151 $ 99,545 $ 92,606 5.17% $ 1,0222006 92,061 1,939,316 206,856 100,690 106,166 5.47% 1,1532007 93,524 2,057,130 212,323 106,655 105,668 5.14% 1,1302008 94,986 2,197,710 221,287 102,518 118,769 5.40% 1,2502009 96,647 2,386,169 261,519 117,212 144,307 6.05% 1,4932010 97,610 2,585,416 291,736 120,326 171,410 6.63% 1,7562011 99,208 2,843,133 280,654 106,551 174,103 6.12% 1,7552012 100,477 3,080,629 278,042 105,945 172,097 5.59% 1,7132013 102,404 3,201,498 271,425 86,976 184,449 5.76% 1,8012014 103,428 3,325,203 309,788 95,158 214,630 6.45% 2,075

6-8


Solutions to Exercises and Problems

6-1. Each student will have a different annual report; therefore, there is no single set of answers to each question asked. Asking students to compare their answers to various questions is an effective active learning in-class technique.

6-2. 1. b. 6. c.2. a. 7. b.3. a. 8. d.4. c. 9. d.5. a. 10. c.

6-9


Ch. 6, Solutions (Cont'd)

6-3. VILLAGE OF CENTERVILLE

Debits Credits

1. General Fund:

CASH 750,000

REVENUES 750,000

OTHER FINANCING USES—INTERFUND

TRANSFERS OUT 750,000

CASH 750,000

Debt Service Fund:

CASH 750,000

OTHER FINANCING SOURCES—INTERFUND

TRANSFER IN 750,000

EXPENDITURES—PRINCIPAL 600,000

EXPENDITURES—INTEREST 150,000

CASH 750,000

Governmental Activities:

CASH 750,000

GENERAL REVENUES—TAXES 750,000

EXPENSES—INTEREST ON LONG-TERM DEBT 150,000

BONDS PAYABLE 600,000

CASH 750,000

6-10


Ch. 6, Solutions, 6-3 (Cont'd)Debits Credits

2. Capital Projects Fund:

CASH 5,000,000

OTHER FINANCING SOURCES—

PROCEEDS OF BONDS 5,000,000

Debt Service Fund:

CASH 150,000


PREMIUM ON BONDS PAYABLE 100,000

REVENUES 50,000


CASH 5,150,000

SERIAL BONDS PAYABLE 5,000,000

INTEREST PAYABLE 50,000

PREMIUM ON BONDS PAYABLE 100,000

3. Special Revenue Fund:

CASH 110,000

REVENUES 110,000

OTHER FINANCING USES—INTERFUND

TRANSFERS OUT 110,000

CASH 110,000

6-11



Debt Service Fund:

CASH 110,000


INTERFUND TRANSFERS IN 110,000



CASH 110,000


CASH 110,000

PROGRAM REVENUES—GENERAL

GOVERNMENT—CAPITAL GRANTS &

CONTRIBUTIONS 110,000

EXPENSES—INTEREST ON CAPITAL LEASE 15,809

CAPITAL LEASE OBLIGATION 94,191

CASH 110,000

4. Debt Service Fund:

CASH 2,800,000


PROCEEDS OF REFUNDING BONDS 2,800,000

OTHER FINANCING USES—REFUNDED BONDS 2,800,000


CASH 3,500,000

6-12




CASH 2,800,000

SERIAL BONDS PAYABLE 2,800,000

TERM BONDS PAYABLE 3,500,000

CASH 3,500,000


CASH 500,000


PROCEEDS OF SPECIAL ASSESSMENT BONDS 500,000

ASSESSMENTS RECEIVABLE—CURRENT 25,000

ASSESSMENTS RECEIVABLE—DEFERRED 475,000

REVENUES 25,000

DEFERRED REVENUES 475,000


CASH 500,000

SPECIAL ASSESSMENT DEBT WITH

GOVERNMENTAL COMMITMENT 500,000

ASSESSMENTS RECEIVABLE—CURRENT 25,000

ASSESSMENTS RECEIVABLE—DEFERRED 475,000

PROGRAM REVENUES—GENERAL GOVT—

CAPITAL GRANTS AND CONTRIBUTIONS 25,000

DEFERRED REVENUES 475,000

EXPENSES—INTEREST ON SPECIAL ASSESSMENT

DEBT (500,000 X 0.06 X 4/12) 10,000

6-13





INVESTMENTS 10,000

REVENUES—CHANGE IN FAIR VALUE

OF INVESTMENTS 10,000


INVESTMENTS 10,000

GENERAL REVENUES—INVESTMENT EARNINGS 10,000

6-4. Debt Service Fund:

ESTIMATED REVENUE (5,500,000 X 0.03 X 1/12) 13,750

ESTIMATED OTHER FINANCING SOURCES—

BOND PREMIUM (5,500,000 X .01) 55,000

ESTIMATED OTHER FINANCING SOURCES—

INTERFUND TRANSFER IN 13,750

APPROPRIATIONS (5,500,000 X 0.03 X ½) 82,500

Calculation of Interfund Transfer In:

Amount of appropriation required for the interest

payment due on July 1 $ 82,500

Less: Premium (55,000)

Accrued interest on bonds (Jan 1-Feb1) (13,750)

$ 13,750

The General Fund would need to adjust its budget to account for the

Interfund Transfer. A debit to Budgetary Fund Balance and a credit to

Estimated Other Financing Uses for $13,750 would need to be made.

6-14


Ch. 6, Solutions (Cont’d)

6-5. CITY OF JAMESTOWN

Debits Credits

a. Capital Projects Fund:

EXPENDITURES 724,689

OTHER FINANCING SOURCES

CAPITAL LEASE AGREEMENTS 724,689

Calculations: The present value of an ordinary annuity of $1 for 9 years at 8

percent per year is 6.24689. Therefore, the present value of the 9 annual

payments of $100,000 each is $624,689. The present value of the capital

lease obligation is $724,689 ($624,689 + $100,000 paid at the inception of

the lease).

Note: When the initial payment of $100,000 is made by the debt service

fund, it would debit Expenditures—Principal for $100,000 and credit Cash

for the same amount.

b. Governmental Activities:EQUIPMENT 724,689

CAPITAL LEASE OBLIGATIONS PAYABLE 624,689

CASH 100,000

Note: The asset is recorded at the lesser of the present value of the capital

lease obligation or the fair value of the fire truck, $750,000.

c. Debt Service Fund:EXPENDITURESINTEREST 49,975

EXPENDITURESPRINCIPAL 50,025

CASH 100,000

6-15


Ch. 6, Solutions, 6-5 (Cont'd)

Debits Credits

Governmental Activities:EXPENSES—INTEREST ON CAPITAL LEASES 49,975

CAPITAL LEASE OBLIGATIONS PAYABLE 50,025

CASH 100,000

Calculation: Interest Payment Unpaid Payment Amount of on Unpaid on Lease Number Payment Balance at 8% Principal Obligation

$724,6891 $100,000 $ -0- $100,000 624,6892 100,000 49,975 50,025 574,664

6-6. CITY OF APPLETONSTATEMENT OF LEGAL DEBT MARGIN

DECEMBER 31, 2013

ASSESSED VALUE OF PROPERTY $240,000,000

RATE OF DEBT LIMITATION 6%

AMOUNT OF DEBT LIMITATION 14,400,000

OUTSTANDING LONG–TERM INDEBTEDNESS

SUBJECT TO DEBT LIMIT:

CONVENTION CENTER BONDS $ 3,600,000

GENERAL OBLIGATION SERIAL BONDS 3,100,000

TAX INCREMENT BONDS 2,500,000

TOTAL LONG–TERM DEBT 9,200,000

LESS DEDUCTIONS:

AMOUNT ACCUMULATED FOR DEBT

RETIREMENT 1,800,000

NET DEBT SUBJECT TO LIMITATION 7,400,000

LEGAL DEBT MARGIN: AMOUNT AVAILABLE

FOR FUTURE INDEBTEDNESS $ 7,000,000

6-16



CITY OF APPLETONSCHEDULE OF DIRECT AND OVERLAPPING DEBT

DECEMBER 31, 2013

Governmental Unit

GeneralObligation

Bonds

EstimatedPercentage Applicable

Estimated Share of

Overlapping Debt

Clyde County School District $ 15,000,000 25% $ 3,750,000Clyde County Health Services 8,000,000 25% 2,000,000Regional Library 2,400,000 33.33% 800,000 Subtotal, Overlapping Debt 6,550,000

City Direct Debt $ 9,200,000 100% $ 9,200,000

Total Direct and Overlapping Debt $ 15,750,000

Note: The city also has $6,600,000 ($2,700,000 + $1,900,000 + $2,000,000) of self-

supporting revenue bonds outstanding, which are backed by the full faith and

credit of the city, should enterprise revenues be insufficient to make debt service

payments.

6-17



6-7. KLAUS COUNTY

Debits Credits

a. Debt Service Fund:

ESTIMATED OTHER FINANCING SOURCES 5,825,000

ESTIMATED REVENUES 1,006,500

ESTIMATED OTHER FINANCING USES 5,000,000

APPROPRIATIONS 1,825,000

BUDGETARY FUND BALANCE 6,500

b. $6,500

c. No. The only interest and principal expenditures recorded relate to

bonds. If capital lease payments had been made interest and principal

expenditures would be recorded related to the lease.

d. Yes. Other Financing Sources—Proceeds of Refunding and Other

Financing Uses—Payment to Escrow Agent indicate that a bond

refunding has occurred.

6-18



e.

KLAUS COUNTYDEBT SERVICE FUND

STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES

FOR THE YEAR ENDED JUNE 30, 2014

REVENUES:

SALES TAXES $1,001,400

INVESTMENT EARNINGS 5,400

TOTAL REVENUES 1,006,800

EXPENDITURES:

BOND INTEREST $ 825,000

BOND PRINCIPAL 1,000,000

TOTAL EXPENDITURES 1,825,000

EXCESS OF REVENUES UNDER EXPENDITURES 818,200

OTHER FINANCING SOURCES (USES):


PROCEEDS OF REFUNDING BONDS 5,000,000

PAYMENT TO ESCROW AGENT (5,000,000)

TOTAL OTHER FINANCING SOURCES (USES): 825,000

INCREASE IN FUND BALANCES 6,800

FUND BALANCES, JULY 1, 2013 125,200

FUND BALANCES, JUNE 30, 2014 $ 132,000

6-19



6-8. a. SANDY BEACH

Debits Credits

1. Serial Bond Debt Service Fund:

ESTIMATED OTHER FINANCING SOURCES 416,250

ESTIMATED REVENUE 1,020,000



BUDGET FOR FY2014: INTERFUND TRANSFERS IN FOR INTEREST = $9,500,000 X

0.045 X ½ FOR JANUARY 1 PAYMENT AND $9,000,000 x 0.045 X ½ FOR JULY 1

PAYMENT = $416,250.


No entries required


CASH 213,750


TRANSFERS IN 213,750

EXPENDITURES—BOND INTEREST 213,750

EXPENDITURES—BOND PRINCIPAL 500,000

CASH 713,750




CASH 713,750

6-20


Ch. 6, Solutions, 6-8 (Cont’d)

Debits Credits


TAXES RECEIVABLE—CURRENT 1,020,000

REVENUES 1,020,000



GENERAL REVENUES—PROPERTY TAXES 1,020,000

4. Serial Bond Debt Service Fund & Governmental Activities:

CASH 1,019,000



CASH 202,500




EXPENDITURES—BOND PRINCIPAL 500,000

CASH 702,500


EXPENSES—INTEREST ON LONG–TERM DEBT 202,500


CASH 702,500

6-21



Debits Credits





ESTIMATED REVENUE 1,020,000



REVENUES 1,020,000


EXPENDITURES—BOND PRINCIPAL 1,000,000

FUND BALANCE—RESTRICTED 20,000

TAXES RECEIVABLE—DELINQUENT 1,000

TAXES RECEIVABLE—CURRENT 1,000


EXPENSES—INTEREST ON LONG–TERM DEBT 191,250


($8,500,000 X 0.045 X ½)

6-22



b.

SANDY BEACHDEBT SERVICE FUND

STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE

FOR THE YEAR ENDED DECEMBER 31, 2014

REVENUES:

PROPERTY TAXES $1,020,000

EXPENDITURES:

BOND INTEREST $ 416,250

BOND PRINCIPAL 1,000,000

TOTAL EXPENDITURES 1,416,250

EXCESS OF REVENUES UNDER EXPENDITURES 396,250

OTHER FINANCING SOURCES (USES):


INCREASE IN FUND BALANCE 20,000

FUND BALANCE, JANUARY 1, 2014 509,000

FUND BALANCE, DECEMBER 31, 2014 $ 529,000

c. SANDY BEACHDEBT SERVICE FUND

BALANCE SHEETDECEMBER 31, 2014

ASSETS:

CASH $ 528,000

TAXES RECEIVABLE—DELINQUENT 1,000

TOTAL ASSETS $ 529,000

FUND BALANCES:

FUND BALANCE—RESTRICTED FOR DEBT SERVICE $ 529,000

6-23



6-9. a. SINKING FUND SCHEDULE FOR THE CITY OF NEVIN

FISCAL REQUIRED* EXPECTED ENDING

YEAR PERIOD ADDITION EARNINGS BALANCE

2014 1 $174,461 $ 0 $ 174,461

2 174,461 5,234 354,156

2015 3 174,461 10,625 539,242

4 174,461 16,177 729,880

2016 5 174,461 21,896 926,237

6 174,461 27,787 1,128,485

2017 7 174,461 33,855 1,336,801

8 174,461 40,104 1,551,366

2018 9 174,461 46,541 1,772,368

10 174,461 53,171 2,000,000

* Required addition = 2,000,000/11.4638793 where 11.4638793 is the futureamount of an annuity of $1 for 10 periods at 3 percent per period.

b. CITY OF NEVIN DEBT SERVICE FUNDDebits Credits

(1) ESTIMATED OTHER FINANCING SOURCES 468,922

ESTIMATED REVENUES 5,234

APPROPRIATIONS 60,000


(Estimated Other Financing Sources consists of two times the sinking fund additions ($174,461) and two interest payments ($120,000), although only one interest payment is authorized in FY2014)

6-24


Ch. 6, Solutions, 6-9 (Cont'd) Debits Credits

(2) CASH 234,461

OTHER FINANCING SOURCES—INTERFUND TRANSFERS IN 234,461

INVESTMENTS 174,461

CASH 174,461

(3) EXPENDITURES—INTEREST 60,000

CASH 60,000

(4) CASH 234,461

OTHER FINANCING SOURCES—INTERFUND TRANSFERS IN 234,461

INVESTMENTS 174,461

CASH 174,461

(5) INVESTMENTS 5,234

REVENUES—INVESTMENT EARNINGS 5,234

(6) APPROPRIATIONS 60,000



ESTIMATED REVENUES 5,234

OTHER FINANCING SOUCES—INTERFUND


REVENUES—INVESTMENT EARNINGS 5,234


FUND BALANCE—RESTRICTED 414,156

6-25


Ch. 6, Solutions (Cont’d)

6-10. JOURNAL ENTRIESDEBT SERVICE FUND CAPITAL PROJECTS FUND GOVERNMENTAL ACTIVITIES

(a) Est. Revenues 350,000 (a) NO ENTRY (a) NO ENTRY Appropriations 62,500 Budgetary Fund Balance

287,500

(b) NO ENTRY (b) Cash 1,000,000 (b) NO ENTRY OFS*—Interfund Transfers In

1,000,000

(c) NO ENTRY (c) Constr. Expenditures 200,000 (c) CWIP** 200,000 Cash 200,000 Cash 200,000

(d) NO ENTRY (d) Encumbrances 4,500,000 (d) NO ENTRY Encumbrances OS+ 4,500,000

(e) Cash 50,000 (e) Cash 2,500,000 (e) Cash 2,550,000 OFS—Premium

on Bonds50,000 OFS—Proceeds

of Bonds2,500,000 Premium on Bonds

Payable 50,000 Bonds Payable 2,500,000

Est. OFS—Premium on Bonds

50,000

Budgetary Fund Balance

50,000

(f) NO ENTRY (f) Constr. Expenditures 50,000 (f) CWIP 50,000 Cash 50,000 Cash 50,000

(g) Expenditures— Interest 62,500

(g) NO ENTRY (g) Premium on Bonds Payable (50,000/40) 1,250

Cash 62,500 Expenses—Interest 61,250 Cash 62,500

Note: *OFS = Other Financing Sources. ** CWIP = Construction Work in Progress. + OS = Outstanding

6-26



DEBT SERVICE FUND CAPITAL PROJECTS FUND GOVERNMENTAL ACTIVITIES(h) Cash 350,000 (h) NO ENTRY (h) Cash 350,000

Revenues 350,000 Gen. Rev.— Taxes 350,000

(i) NO ENTRY (i) Encumbrances OS 2,500,000 (i) CWIP 2,500,000Constr. Expenditures 2,500,000 Contracts Payable 2,500,000 Encumbrances 2,500,000 Contracts Payable 2,500,000

(j) NO ENTRY (j) Contracts Payable 2,500,000 (j) Contracts Payable 2,500,000 CP—Retained %# 125,000 CP—Retained % 125,000 Cash 2,375,000 Cash 2,375,000

(k) NO ENTRY (k) Cash 1,500,000 (k) Cash 1,500,000 Revenues 1,500,000 Prog Rev—Gen.

Govt.—Cap. Grant/Contrib.

1,500,000

(l) Appropriations 62,500 (l) Revenues1,500,000

(l) NOT REQUIREDFOR PROBLEM

Budgetary Fund Balance 337,500

OFS—Interfund Transfers In 1,000,000

Est. Revenues 350,000 OFS—Proceeds of Bonds 2,500,000

Est. OFS— Premium on Bonds 50,000

Constr. Expenditures

2,750,000

Fund Balance— Restricted

1,250,000

Revenues 350,000 Fund Balance— Assigned

1,000,000

OFS—Premium on Bonds 50,000 Expenditures— Interest 62,500 Fund Balance— Restricted 337,500

# CP—Retained % = Contracts Payable—Retained Percentage


6-27


DEBT SERVICE FUND CAPITAL PROJECTS FUND GOVERNMENTAL ACTIVITIES(m) Est. Revenues 300,000 (m) NO ENTRY (m) NO ENTRY


68,750

Appropriations& 368,750

(n) Cash 250,000 (n) NO ENTRY (n) Cash 250,000 Revenues 250,000 Gen. Rev.— Taxes 250,000

(o) NO ENTRY (o) Encumbrances OS 2,000,000 (o) CWIP 2,000,000Constr. Expenditures 2,000,000 Contracts Payable 2,000,000 Encumbrances 2,000,000 Contracts Payable 2,000,000

(p) NO ENTRY (p) Constr. Expenditures 130,000 (p) CWIP*** 130,000 Cash 130,000 Cash 130,000

(q) NO ENTRY (q) Contacts Payable 2,000,000 (q) Contacts Payable 2,000,000CP—Retained % 125,000 CP—Retained % 125,000 Cash 2,125,000 Cash 2,125,000

(r) Expenditures— Interest 62,500

(r) NO ENTRY (r) Premium on Bonds Payable

1,250

Expenditures— Principal 250,000

Expenses—Interest 61,250

Cash 312,500 Bonds Payable 250,000 Cash 312,500

&The appropriation includes a principal payment of $250,000, a semi-annual interest payment of $62,500 ($5,000,000*.05*1/2) and a semi-annual interest payment of $56,250 ([$5,000,000-250,000]*.05*1/2).

6-28



DEBT SERVICE FUND CAPITAL PROJECTS FUND GOVERNMENTAL ACTIVITIES(s)

Cash 120,000(s) Fund Balance—

Restricted1,250,000 (s) Buildings 4,750,000

OFS—Interfund Transfers In 120,000

Fund Balance— Assigned

880,000 Improvements Other than Buildings

130,000

Construction Expenditures 2,130,000

CWIP 4,880,000

Est. OFS—Interfund Transfers In

120,000


120,000 OFU—Interfund Transfers Out 120,000 Cash 120,000

Fund Balance— Assigned

120,000

OFU—Interfund Transfers Out 120,000

Note: The resources provided to the Capital Projects Fund include restricted and assigned amounts. The bond proceeds and grant funds are restricted, while the interfund transfer was assigned for the historical renovation. It is assumed restricted funds are spent first, when available, explaining why restricted fund balance was used first.

6-29

chap 006

Documents

fund longterm liabilities

general fund

general longterm debtanalyze

debt service chapter

debt service answers

debt limit

debt margincalculatesame

governmental fund