Deck 8: Long-Term Obligations

Question 1

A government is prohibited from ever recognizing bond anticipation notes (BANs)as long-term obligations.

Answer 1

False

Question 2

When the proceeds of long term debt are reported in governmental fund financial statements

A)They are reported only as an increase in liabilities in the funds.
B)They are reported only as revenues in the funds.
C)They are reported only as an other financing source-debt proceeds.
D)They are reported only as an other financing use-debt proceeds.

Answer 2

C

Question 3

Tax anticipation notes (TANs)must be reported as current liabilities of the governmental funds in which the related revenues will be reported, as well as in the government-wide statements.

Answer 3

True

Question 4

Because they are not obligations of the government at large, revenue bonds are usually not subject to voter approvals or other forms of voter oversight.

Question 5

Governments may enter into operating leases, but may not enter into capital leases.

Question 6

A high bond rating by a recognized agency guarantees the creditworthiness of a government's debt.

Question 7

Unlike individuals and businesses, governments cannot seek protection under the Federal Bankruptcy Code.

Question 8

When the proceeds of general long-term debt are received by a governmental fund, rather than reporting a liability on the balance sheet, the inflow of resources is treated as an other financing source on the operating statement.

Question 9

General long-term debt of a government includes

A)All future financial obligations.
B)All future financial obligations that result from past transactions.
C)All future financial obligations that result from past transactions for which the government has already received a benefit.
D)All future financial obligations that are backed by the government's general credit and revenue raising power and that result from past transactions for which the government has already received a benefit.

Question 10

A government that is unable to satisfy claims against it

A)Is prohibited from filing bankruptcy.
B)May seek protection under the Federal Bankruptcy Code, using the same section that is used by businesses.
C)May seek protection under the Federal Bankruptcy Code, using a special section directed to governments.
D)Is automatically placed under the jurisdiction of a higher level of government.

Question 11

In governmental fund financial statements, the assets acquired under a capital lease would be reported at

A)The total of all payments required under the lease.
B)The present value of the required lease payments.
C)The undiscounted total of required lease payments.
D)They are not reported in the fund financial statements.

Question 12

A government's debt margin is the difference between its authorized debt limit and its outstanding debt.

Question 13

In accounting for operating leases, the rental payments should be recognized as expenditures in a governmental fund and as expenses in the government-wide statement of activities in the periods in which they apply.

Question 14

Overlapping debt refers to the obligations of property owners within a government's boundaries for their proportionate share of the debt of other governments with overlapping geographic boundaries.

Question 15

General obligation debt is the obligation of the government at large and is thereby backed by the government's general credit and revenue-raising powers.

Question 16

Revenue debt is secured only by designated revenue streams.

Question 17

Per GASB Statement No.34, governments generally should report their bonds, notes, and comparable long-term obligations at present value.

Question 18

Financial analysts look at the ratio of assessed value of property to total market value of property as a measure of a government's ability to issue new revenue bonds.

Question 19

To seek protection under the Federal Bankruptcy Code, a government must

A)Be unable to provide the level of services it has provided in the recent past.
B)Be unable to pay its debts in the current year.
C)Have budgeted expenditures in excess of revenues.
D)Both (b)and (c).

Question 20

Although governments may elect to report conduit debt in their government-wide and proprietary fund statements, the GASB has ruled that note disclosure is sufficient.

Question 21

Overlapping debt should be reported in which of the following ways?

A)It should be reported in the schedule of changes in long-term obligations.
B)It should be disclosed as a note to the financial statements.
C)It should be reported in a schedule in the statistical section of the annual report.
D)It should not be reported anywhere in the annual report.

Question 22

Salvador County issued $25 million of 5 percent demand bonds for construction of a county maintenance building.Before year-end the county entered into a two-year noncancellable take-out agreement with a local bank with a 10-year payback period.The county estimates that 20 percent of the bonds would be demanded (called)by the buyers if interest rates increased by at least One percentage point.At year-end, rates on comparable debt were 7 percent.How should these demand bonds be reported in the county's government-wide financial statements at year-end?

A)$25 million in the long-term liabilities section of the governmental activities column.
B)$5 million in the current liabilities section of the governmental activities column AND $20 million in the long-term liabilities section of the governmental activities column.
C)$5 million in the governmental activities column AND $20 million would be reported in the schedule of changes in long-term obligations.
D)$25 million in the current liabilities section of the governmental activities column.

Question 23

Governments enter into capital leases rather than conventional buy and borrow arrangements for which of the following reasons? Capital leases

A)May be an effective means of circumventing debt limitations.
B)Are less expensive overall than buy and borrow arrangements.
C)Reduce the cash outflows related to the asset acquisition.
D)Have less effect on governmental fund balances than buy and borrow arrangements.

Question 24

Dumas County has a December 31 fiscal year-end.In November, the county borrowed $8 million from a local bank, due in six months at 6 percent interest, to finance general government operations.The county pledges property tax revenues to secure the loan.At year-end, how should the county display the bank note in the governmental fund financial statements?

A)Nothing in the General Fund; Nothing in the schedule of changes in long-term obligations.
B)General fund--$8 million in other financing sources; Nothing in the schedule of changes in long-term obligations.
C)General fund--$8 million in other financing sources; $8 million in the schedule of changes in long-term obligations.
D)General fund--$8 million in notes payable; Nothing in the schedule of changes in long-term obligations.

Question 25

A state created a housing authority to provide financing for low-income housing.The authority issues bonds and uses the proceeds for that purpose.Currently the authority has outstanding $200 million in bonds backed by the state's promise to cover debt service shortages should they arise.The state constitution specifically limits the state to no more than $2 million in general obligation debt.How can the state officials defend the $200 million in debt outstanding?

A)The debt is not general obligation debt.
B)The state is only morally obligated for the debt.
C)The debt is the debt of the authority, not the state.
D)All of the above.

Question 26

Voters of Valdez School District, a public school district, approved construction of a new high school at a cost not to exceed $20 million.The district will finance the construction by issuing $20 million of 6 percent term bonds payable in 20 years.Because the site had already been prepared, the school district began construction immediately but the bonds would not be issued for nearly a year.Shortly before the fiscal year-end, the school district borrowed $5 million from a local bank due in one year with interest at 6.2 percent.The note will be repaid from bond proceeds.The school district secured a financing agreement with the bank to convert the debt to a 10-year debt if the school district is unable to sell the bonds by the due date.At year-end, how should the $5 million note be displayed in the governmental fund financial statements?

A)Capital projects fund-Notes payable $5 million; Nothing in the schedule of changes in long-term obligations.
B)Capital projects fund-Notes payable $5 million; $15 million in the schedule of changes in long-term obligations.
C)Capital projects fund-Encumbrances of $5 million; $15 million in the schedule of changes in long-term obligations.
D)Nothing in the capital projects fund AND $5 million notes payable in the schedule of Changes in long-term obligations.

Question 27

Easterly City has $47 million of debt recorded in its schedule of changes in long-term obligations, made up of $30 million of general obligation debt, $1 million of compensated absences payable, $4 million of claims and judgments, and $12 million of obligations under capital leases.The state limits the amount of general obligation debt that can be issued by a city to 20 percent of the assessed value of its taxable property.The assessed value of property in Easterly City is $250 million.The city's legal debt margin is

A)$ 3 million.
B)$ 20 million.
C)$ 30 million.
D)$50 million.

Question 28

Pacheco City issued $20 million of bonds at par.The city loaned the proceeds to Sharpe Cheese Processors to expand the size of its facility, which would allow Sharpe to hire additional workers.The loan payments from Sharpe to the city are established to match the principal and interest payments on the bond issue.The bonds are payable exclusively from the loan repayments by Sharpe.The bonds are secured by the additional plant facilities built by Sharpe.Where should the city report the bonds in its annual financial report?

A)In the government-wide financial statements.
B)In the notes to the financial statements.
C)In the proprietary fund financial statements.
D)In any of the above ways.

Question 29

Salvador County issued $25 million of 5 percent demand bonds for construction of a county maintenance building.The county has no take-out agreement related to the bonds.It estimates that 20 percent of the bonds would be demanded (called)by the buyers if interest rates increased by at least one percentage point.At year-end, rates on comparable debt were 7 percent.How should these demand bonds be reported in the government-wide financial statements at year-end?

A)$25 million in the long-term liabilities section of the governmental activities column.
B)$5 million in the current liabilities section of the governmental activities column AND $20 million in the long-term liabilities section of the governmental activities column.
C)$5 million in the governmental activities column AND $20 million would be reported in the schedule of changes in long-term obligations.
D)$25 million in the current liabilities section of the governmental activities column.

Question 30

In the government-wide financial statements, the assets acquired under a capital lease would be reported at

A)The total of all payments required under the lease.
B)The present value of the required lease payments.
C)The undiscounted total of required lease payments.
D)They are not reported in the government-wide financial statements.

Question 31

Industrial development bonds are issued in the name of a government with the proceeds used to attract private businesses to a community.Which of the following is a true statement about industrial development bonds?

A)The proceeds are used by the private corporations and principal and interest payments are made by the private corporation.The government backs the bonds in the event of default by the private corporation.
B)The proceeds are used by the private corporations and principal and interest payments are made by the private corporation.The government does not back the bonds in the event of default by the private corporation.
C)The proceeds are used by the government to build infrastructure to service private corporations, with principal and interest payments made by the government out of the additional tax revenues received from the private corporation.
D)The proceeds are used by the government to build infrastructure to service private corporations, with principal and interest payments made by the private corporation in lieu of property taxes.

Question 32

North City enters into a lease agreement that contains a nonappropriation clause.The clause

A)Has been held by courts in 26 states to effectively cancel the lease.
B)Stipulates that the yearly lease payment must be appropriated by the city council each year.
C)Prohibits the city from replacing leased property with similar property.
D)Permits the city to lease at lower rates than would be possible without the presence of the clause.

Question 33

Debt that is issued by one entity but backed by the promise of another entity to make up any debt service deficiency is

A)Committed debt.
B)Overlapping debt.
C)Conduit debt.
D)Moral obligation debt.

Question 34

Which of the following funds is most likely to receive the proceeds of revenue bonds?

A)General fund.
B)Capital projects fund.
C)City utility enterprise fund.
D)Highway department special revenue fund.

Question 35

Salvador County issued $25 million of 5 percent demand bonds for construction of a county maintenance building.The county has no take-out agreement related to the debt.It estimates that 20 percent of the bonds would be demanded (called)by the buyers if interest rates increased by at least one percentage point.At year-end, rates on comparable debt were 7 percent.How should these demand bonds be reported in the governmental fund financial statements at year-end?

A)$25 million in the capital projects fund.
B)$5 million in the capital projects fund AND $20 million would be reported in the schedule of changes in long-term obligations.
C)$20 million in the capital projects fund AND $5 million would be reported in the schedule of changes in long-term obligations.
D)$25 million in the schedule of changes in long-term obligations.

Question 36

Beaver city entered into a long-term capital lease for some office equipment.The city maintains its books and records in a manner to facilitate preparation of fund financial statements.What entry should be made in its general fund to record this event?

A)Debit Expenditures; Credit Other financing sources-leases.
B)Debit Equipment; Credit Other financing sources-leases.
C)Debit Equipment; Credit Leases payable.
D)No entry, because this event had no effect on financial resources.

Question 37

Why would a government issue revenue bonds (which generally are issued at a higher rate of interest than general obligation bonds)even though the government knows that if revenues from the project are not sufficient to cover principal and interest payments, the government will use resources from general government activities to fund the principal and interest payments?

A)Revenue bonds may not require approval of the voters.
B)Revenue bonds may not be considered in legal debt limitations.
C)Revenue bonds may permit the interest costs to be passed on to the users of the services financed.
D)All of the above.

Question 38

Obligations issued in the name of a government on behalf of a nongovernmental entity are called

A)Overlapping debt.
B)Conduit debt.
C)Committed debt.
D)Moral obligation debt.

Question 39

Olden City entered into a capital lease agreement for several new dump trucks to be used in general government activities.The city maintains its books and records in a manner that facilitates the preparation of the fund financial statements.Acquisition of these dump trucks would require entries in which of the following funds and/or schedules?

A)General fund only.
B)General fund AND schedule of changes in long-term obligations.
C)General fund AND schedule of changes in capital assets.
D)General fund, schedule of Changes in Capital assets AND schedule of changes in long-term obligations.

Question 40

Obligations of property owners within a particular government for their proportionate share of debts of other governments with whom their government shares boundaries are called

A)Overlapping debt.
B)Conduit debt.
C)Committed debt.
D)Moral obligation debt.

Question 41

Generally accepted accounting principles require governments to report many assets to be reported at market value.However, few liabilities are reported at market value.Present arguments for and against reporting liabilities at market value.

Question 42

On December 31, 2014 Morse City issued $50 million of 8 percent, 20-year, demand bonds that give bondholders the opportunity to "put" (i.e.sell)the securities back to the issuer at face value, beginning on January 1, 2018.On December 31, 2017, prevailing interest rates on comparable bonds were 6.7 percent.Should the city report the bonds as a liability on its December 31, 2017 governmental fund financial statements? Explain, indicating any additional information you would need to make a determination.

Question 43

Identify and define "conduit debt." What are the current reporting standards for conduit debt issued by governments? Do you agree or disagree with the use of conduit debt by governments? Justify your answer.Do you agree or disagree with the current reporting standards related to conduit debt? Why?

Question 44

In November 2014, the Frost City issued $3 million in 6 percent TANs, payable in April 2015.In what fund or fund type should the city report the TANs on its December 31, 2014 financial statements? Explain, indicating any additional information you would need.

Question 45

The work of bond rating agencies is important because

A)They ensure that all principal and interest payments on bonds issued will be made.
B)The rating they assign proves the quality of a particular debt instrument.
C)They affect the debt's marketability and hence its interest rate.
D)Bonds cannot be issued without them.

Question 46

Flora City financed the construction of sidewalks in a newly annexed subdivision by issuing $50 million in special assessment debt.The debt is to be serviced entirely by assessments against the subdivision's property owners.The government does not have any obligation for the debt and has not guaranteed it.Nevertheless, when the property owners in a nearby subdivision were unable to pay their required assessments, the city, fearful of damaging its own credit rating, serviced the debt using its own resources.Should the city report the $50 million in special assessment debt in its government-wide statement of net position? Explain, citing specific GASB provisions.

Question 47

A city's electric utility enterprise fund made its annual interest payment on its outstanding $20 million of 6 percent bonds, which were originally issued at a premium.The city maintains its books and records in a manner that facilitates preparation of fund financial statements.The entry to record the interest payment would include a credit to cash for the amount of the interest checks written and debit(s)to

A)Interest expenditure AND bond premium.
B)Interest expense AND bond premium.
C)Interest expenditure only.
D)Interest expense only.

Question 48

Which of the following is likely to be used by a bond rating agency to rate a government's general obligation bonds?

A)A review of the basic financial statements.
B)Consideration of economic statistics such as unemployment rates.
C)Consideration of legal debt margin.
D)All of the above.

Question 49

Bond insurance issued by credit enhancement agencies

A)Assures the holder of the debt that all interest and principal payments will be made.
B)Ensures that the bonds receive the highest possible rating.
C)May seem cost prohibitive to many governments.
D)All of the above.

Question 50

What is "overlapping debt" and why is it important to financial analysts and others who use government financial statements?

Question 51

In a bond covenant, a city agreed to create and maintain a $2 million reserve.These funds can be used

A)Only to make the final year's interest and principal payments on the bonds.
B)Only to make the interest and principal payments on the bonds in a year in which the city is unable to make them from other resources.
C)To make either the final year's interest and principal payments on the bonds or to make the payments in any year that the city is unable to make them from other resources.
D)By the city as it chooses since the funds legally belong to the city.

Question 52

What is the distinction between general obligation debt and revenue bond debt? Why might a government issue revenue bond debt instead of general obligation debt?

Question 53

Why is information about long-term debt important to financial statement users?