Question 1

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

Accepted Answer

Debt service funds are established to ensure the timely payment of principal, interest, and other related costs on bonds. Sinking fund investments are funds set aside over time by the bond issuer to pay off the principal of the bond at maturity. Therefore, sinking fund investments are typically included in debt service funds for term bonds.

Question 2

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.

Accepted Answer

The statement has the definitions of debt limit and debt margin reversed. Debt limit is the maximum amount of outstanding debt allowed by law, while debt margin is the difference between the debt limit and the amount of outstanding debt.

Question 3

Financial statement note disclosures on long-term liabilities should include information on authorization of new debt issues, sale of previously authorized issues, and retirement and refunding of debt during the year.

Accepted Answer

These are the typical disclosures that should be included in the notes to the financial statements regarding long-term liabilities.

Question 4

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

Accepted Answer

Special assessment debt is reported in the government-wide statement of net position only if the government is obligated in some manner for the debt; it is not exclusively reported in the Business-type Activities column but rather based on the nature of the activity it finances, which could be governmental or business-type.

Question 5

General long-term liabilities are those that arise from activities of governmental funds as well as those reported as fund liabilities of a proprietary or fiduciary fund.

Accepted Answer

General long-term liabilities are typically only those that arise from activities of governmental funds and are not reported as fund liabilities of proprietary or fiduciary funds, which have their own separate accounting and reporting mechanisms.

Question 6

Notes to the financial statements of a state or local government should include a schedule, or summary, of debt service requirements (principal and interest payments) of debt outstanding on the balance sheet date.

Accepted Answer

This is true as per Generally Accepted Accounting Principles (GAAP) which require the presentation of a schedule or summary of debt service requirements in the notes to the financial statements of a state or local government.

Question 7

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

Accepted Answer

This is a correct statement. When a lease payment is made, the governmental entity would record the expenditure in the debt service (or appropriate governmental) fund and reduce the Lease Obligations Payable in the governmental activities accounts.

Question 8

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.

Accepted Answer

This statement is true. Governmental fund liabilities and expenditures for debt service on general long-term debt are recognized in the reporting period that debt payments are due. This occurs even if the payment is made from resources that will not be available until a future period.

Question 9

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

Accepted Answer

Debt service funds are used to account for the accumulation of resources and payment of principal and interest on general long-term debt. These activities are considered governmental activities and are reported at the government-wide level.

Question 10

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

Accepted Answer

Resources to pay interest on tax-supported bond issues are typically accumulated in debt service funds, not special revenue funds. Special revenue funds are used to account for specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service.

Question 11

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

Accepted Answer

Debt margin is calculated as the difference between the statutory debt limit set by Congress and the total amount of outstanding debt that is subject to the limit. Therefore, the statement is true.

Question 12

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.

Accepted Answer

If the financial resources have already been deposited or transferred to the debt service fund, then it is appropriate to recognize the expenditure and related liability in the current year even if the payment is due in the following year. This follows the accrual accounting principle of recognizing expenses when they are incurred, not when they are paid.

Question 13

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

Accepted Answer

State and local governments commonly use long-term debt to finance capital projects such as infrastructure improvements or construction of public facilities. This allows them to spread out the cost of these projects over many years rather than paying for them all at once.

Question 14

The debt service activity of a government may be accounted for within the General Fund unless law mandates the use of a debt service fund.

Accepted Answer

Debt service activities are typically accounted for in the General Fund unless there is a legal requirement or specific financial policy that mandates the use of a separate Debt Service Fund.

Question 15

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.

Accepted Answer

This is an accurate definition of the term "debt limit".

Question 16

A given parcel of real estate may be subject at a given time to assessments for the payment of taxes to retire bonds issued by two or more governments.

Accepted Answer

It is possible for a parcel of real estate to be subject to assessments for the payment of taxes to retire bonds issued by multiple governments at the same time. This could happen if the property is located within different taxing districts, each with its own set of bond issues and tax assessments.

Question 17

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

Accepted Answer

Legal overlapping debt occurs when a government exceeds its legal debt limit by borrowing from multiple sources without authorization. It can happen when different parts of a government issue debt independently without coordination or when a government borrows under different legal authorities that have separate debt limits.

Question 18

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.

Accepted Answer

This is correct, as most debt issued by state and local governments is exempt from federal taxation and may also be exempt from state taxation in some cases.

Question 19

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

Accepted Answer

Long-term debt is not recorded in debt service funds; instead, debt service funds are used to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest. Long-term debt itself is recorded in the government-wide financial statements.

Question 20

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

Accepted Answer

Encumbrance accounting is primarily used in governmental accounting for budgetary control purposes, not specifically required for debt service funds, which are used to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest.

Quiz 6: Accounting for General Long-Term Liabilities and Debt Service