Question 1

The City of Spartan's fiscal year ends on December 31. On October 1, 2020, the city issued $1,000,000 of 6%, 10-year term bonds with semiannual interest payments due on April 1 and October 1 each year, beginning on April 1, 2021. What amount of expense should the city recognize in its governmental activities journal for the years 2020 and 2021?
A) $60,000 in 2020; $60,000 in 2021.
B) $30,000 in 2020; $60,000 in 2021.
C) $15,000 in 2020; $60,000 in 2021.
D) $0 in 2020; $60,000 in 2021.

Accepted Answer

The city should recognize $15,000 in 2020 for the interest accrued from October 1 to December 31, 2020, and $60,000 in 2021 for the full year's interest.

Question 2

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 applied against the principal balance by the fiduciary agent.
D) Is recorded in a fiduciary fund since it does not belong to the capital projects fund.

Accepted Answer

When bonds are sold at a premium, the premium amount is typically transferred to the debt service fund. This is because the premium can be used to pay future interest or principal on the bonds, thus reducing the overall cost of borrowing for the entity.

Question 3

Which of the following statements is not True for debt service funds?
A) Special assessment debt for which the government has some obligation is paid through the debt service fund.
B) Interest payable may be reported as a liability of the debt service fund.
C) Bond principal is shown as a liability of the debt service fund only when that principal is due and payable.
D) All tax-supported bond principal is shown as a liability of the debt service fund.

Accepted Answer

Tax-supported bond principal may be paid from other funds, such as the general fund, and therefore may not always be shown as a liability of the debt service fund.

Question 4

The liability for general obligation bonds should be recorded in the:
A) General Fund.
B) Capital projects fund.
C) Governmental activities journal.
D) Debt service fund.

Accepted Answer

General obligation bonds are long-term liabilities and should be recorded in the governmental activities journal, which is part of the government-wide financial statements.

Question 5

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) Appropriations.
D) Interest Expense.

Accepted Answer

On the due date for bond interest, the debt service fund is responsible for making the interest payments on behalf of the government. Therefore, the journal entry will include a debit to Expenditures-Bond Interest to reflect the payment. This entry is similar to the entry made by a for-profit company to record interest expense. The other options listed do not reflect the actual payment of interest and are not relevant to the debt service fund's operations on the interest due date.

Question 6

The City of Spartan's fiscal year ends on December 31. On October 1, 2020, the city issued $1,000,000 of 6%, 10-year term bonds with semiannual interest payments due on April 1 and October 1 each year, beginning on April 1, 2021. What amount of expenditures should the city recognize in its debt service fund for the years 2020 and 2021? 
A) $60,000 in 2020; $60,000 in 2021.
B) $30,000 in 2020; $60,000 in 2021.
C) $15,000 in 2020; $6,000 in 2021.
D) $0 in 2020; $60,000 in 2021.

Accepted Answer

The city should not recognize any expenditures related to the bond issuance in 2020 because the bonds were not outstanding until October 1. Therefore, the city should recognize $60,000 of interest expenditure in the debt service fund for 2021 (two semiannual interest payments of $30,000 each).

Question 7

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 debt of the government.

Accepted Answer

Debt service funds are used to account for the payment of both principal and interest on general long-term debt. They are typically established separately from the general fund and are funded through transfers from the general fund or other revenue sources.

Question 8

The Town of Windsor issued the following during the year: (1) $600,000 in bonds for the installation of street lights, to be assessed against properties benefited, but secondarily backed by the town; (2) $800,000 in bonds for construction of a public golf course to be self-supported from 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) $600,000.
C) $800,000.
D) $1,400,000.

Accepted Answer

Debt service funds are used for the repayment of general long-term debt principal and interest. The $600,000 in bonds for street lights, although initially assessed against properties, are secondarily backed by the town, indicating a general obligation of the town, thus accounted for through debt service funds. The $800,000 in bonds for the golf course are to be self-supported by fees and do not require debt service fund accounting as they are not a general obligation of the town.

Question 9

Which of the following is a True statement regarding in-substance defeasance of bonds?
A) The government must place cash or other assets in an irrevocable trust sufficient to pay all future interest and principal payments for the debt being defeased.
B) The government must agree to maintain sufficient cash and investment balances in its debt service fund to cover all interest and principal payments for the debt being defeased.
C) The government must pledge to transfer amounts to an escrow agent prior to the due date for each interest and principal payment for the debt being defeased.
D) The government must agree to maintain sufficient unrestricted cash and investments in its governmental funds to cover all interest and principal payments for the debt being defeased.

Accepted Answer

In a in-substance defeasance of bonds, the government must place cash or other assets in an irrevocable trust sufficient to pay all future interest and principal payments for the debt being defeased. This is the main requirement for in-substance defeasance. The other options are not accurate requirements for in-substance defeasance.

Question 10

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 fund balances only.
C) Balance sheet and statement of revenues, expenditures, and changes in fund balance only.
D) Balance sheet; statement of revenues, expenditures, and changes in fund balance; and statement of cash flows.

Accepted Answer

Debt Service Funds, as governmental funds, require a balance sheet and a statement of revenues, expenditures, and changes in fund balances to properly report their financial position and the results of their operations.

Question 11

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) Have no record of the transaction.
D) Reflect both principal and interest payments.

Accepted Answer

When the debt service fund makes a payment of principal and interest on an outstanding long-term debt, the governmental activities accounts reflect both the principal and interest payments. This is because the debt service fund is used to make payments on behalf of the governmental activities, and both principal and interest payments are considered part of the debt service cost.

Question 12

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? $$\begin{array} { | c | c | c } 
\hline & \text { Goverument is secondarily obligated } & \text { Goverument is not secondarily obligated } \
\text { for the debt } & \text { far the debt } \
\hline \mathrm { A } & \text { Yes } & \text { Yes } \
\hline \mathrm { B } & \text { Yes } & \text { No } \
\hline \mathrm { C } & \mathrm { No } & \text { Yes } \
\hline \mathrm { D } & \mathrm { No } & \mathrm { No } \
\hline
\end{array}$$
A) A.
B) B.
C) C.
D) D.

Accepted Answer

Special assessments levied for debt service of bonds issued for a special assessment capital project are accounted for in a debt service fund when the government is secondarily obligated for the debt. If the government is not secondarily obligated, the debt service is not accounted for in a debt service fund by the government.

Question 13

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) Revenues.
D) Expenditures-Bond Interest.

Accepted Answer

Fund Balance is not closed at the end of each fiscal year in a debt service fund. It is a balance sheet account that carries forward into the next fiscal year, reflecting the net assets available in the fund. Other accounts like Estimated Revenues, Revenues, and Expenditures are typically closed to reflect accurately the financial activities for the year.

Question 14

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.

Accepted Answer

The term bond debt service fund would normally have the largest balance in its Fund Balance account because term bonds have a longer maturity period than other types of bonds, resulting in a longer amortization period for debt service payments. This allows for a larger accumulation of resources in the fund for the payment of principal and interest on the term bonds.

Question 15

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 governmental fund balances.
C) Statement of revenues, expenses, and changes in proprietary net position.
D) No basic financial statement contains a column for the total of all debt service funds.

Accepted Answer

The answer of Which of the following basic financial statements...

Question 16

If a city has an unpaid 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 Lease Obligations Payable.
B) A credit to Expenditures-Principal of Lease Obligation.
C) A debit to Expenditures-Principal of Lease Obligation.
D) A debit to Interest Expense on Leases.

Accepted Answer

The journal entry to record the lease payment would include a debit to the Expenditures-Principal of Lease Obligation account to reduce the outstanding lease obligation. This is because the lease payment is reducing the principal amount owed on the lease.

Question 17

Which of the following assets would not be found in the balance sheet of a debt service fund?
A) Cash with fiscal agent.
B) Investments.
C) Equipment.
D) Interest Receivable.

Accepted Answer

Equipment would not be found in the balance sheet of a debt service fund as it is not directly related to the fund's purpose of servicing debt. The other options, cash with fiscal agent, investments, and interest receivable are all items that would typically be included in the balance sheet of a debt service fund.

Question 18

The City of New Haven issued $20 million of tax-supported bonds at 102 to finance a new jail. Upon issuance, how will the premium be recorded? 
A) A $400,000 revenue to the capital projects fund and a $400,000 revenue in governmental activities.
B) A $400,000 revenue to the debt service fund and a $400,000 premium on bonds payable in governmental activities.
C) A $400,000 expenditure in the debt service fund and a $400,000 expense in governmental activities.
D) A $400,000 other financing source to the debt service fund and a $400,000 premium on bonds payable in governmental activities.

Accepted Answer

The premium received from the issuance of bonds is considered an "other financing source" and is recorded in the debt service fund. Therefore, the premium will be recorded as a $400,000 other financing source in the debt service fund. In the governmental activities, the premium will be recorded as a "premium on bonds payable" and will increase the carrying amount of the bond liability by $400,000, resulting in a net bond liability of $20.4 million.

Question 19

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.

Accepted Answer

General obligation bonds are typically issued to finance capital projects such as building roads, schools, or other infrastructure projects. Therefore, the proceeds from these bonds are recorded in the Capital Projects Fund, which is used to account for financial resources to be used for the acquisition or construction of major capital facilities.

Question 20

On June 1, Brooktown levied special assessments in the amount of $500,000, payable in 10 equal annual installments beginning on June 30. 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 would include:
A) A debit to Assessments Receivable-Current for $500,000.
B) A debit to Assessments Receivable-Current for $50,000.
C) A credit to Revenues for $500,000.
D) No journal entry is made in the debt service fund because special assessments are used.

Accepted Answer

DThe correct answers are B and D. For B, since the special assessments are payable in 10 equal annual installments, only the installment due within the year ($50,000) is recognized as current receivable. For D, no journal entry is made in the debt service fund on June 1 for the levy of special assessments because the initial recognition of the levy and the receivable would typically be recorded in the government-wide statements or a special assessment fund if one is used, not in the debt service fund. The debt service fund records transactions related to the payment of interest and principal on long-term debt, not the levy of assessments.

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

When bonds are sold at a premium for a capital project, the premium amount generally:

Which of the following statements is not True for debt service funds?

The liability for general obligation bonds should be recorded in the:

On the due date for bond interest, the debt service fund journal entry (or entries) will include a debit to:

Debt service funds are used to account for which of the following?

Which of the following is a True statement regarding in-substance defeasance of bonds?

Which of the following financial statements are required for a Debt Service Fund?

When the debt service fund makes a payment of principal and interest on an outstanding long-term debt, the governmental activities accounts:

Which of the following debt service fund accounts would not be closed at the end of each fiscal year?

Which of the following debt service funds would normally have the largest balance in its Fund Balance account?

Which of the following basic financial statements contains a column for the total of all debt service funds?

If a city has an unpaid 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:

Which of the following assets would not be found in the balance sheet of a debt service fund?

The City of New Haven issued $20 million of tax-supported bonds at 102 to finance a new jail. Upon issuance, how will the premium be recorded?

Typically, proceeds from general obligation bonds will be recorded in the: