Question 1

All long-term debt,including bonds,notes or warrants,and various other long-term obligations,intended to be repaid from tax levies or special assessments are accounted for in debt service funds.

Accepted Answer

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.

Question 2

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

Accepted Answer

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.

Question 3

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.

Accepted Answer

Debt service funds are created to account for interest expenditures and revenues raised, as well as for principal repayment.

Question 4

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.

Accepted Answer

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.

Question 5

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

Accepted Answer

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.

Question 6

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.

Accepted Answer

GASB requires general capital assets and the related long-term liabilities to be reported in the government-wide statements, not in governmental funds.

Question 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.

Accepted Answer

This paraphrases the definition given in Chapter 6.

Question 8

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.

Accepted Answer

This provision of GASB standards is described in Chapter 6.

Question 9

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.

Accepted Answer

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.

Question 10

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

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.

Question 11

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.

Accepted Answer

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.

Question 12

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.

Accepted Answer

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.

Question 13

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.

Accepted Answer

Creditors, potential creditors, and other users of financial reports are presumed to find this information helpful.

Question 14

Taxes for debt service are always levied by the General Fund and transferred to a debt service fund.

Accepted Answer

Taxes may be levied for a debt service fund directly, or debt service activity may be recorded in the General Fund.

Question 15

Installments of special assessments to be collected within one year are recorded as Assessments Receivable-Current; installments due in periods after one year are recorded as Assessments Receivable-Deferred.

Accepted Answer

This describes the proper accounting for assessment receivables as illustrated in Chapter 6.

Question 16

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.

Accepted Answer

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.

Question 17

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

The tax-exempt feature of governmental debt enables governments to raise large amounts of capital at relatively low cost.

Question 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.

Accepted Answer

This is illustrated in Chapter 6.

Question 19

General long-term liabilities are those that arise from the activities of a government.

Accepted Answer

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.

Question 20

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 also called "borrowing power."

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