Chapter 8 - Debt Service Funds Solutions Manual

CHAPTER 8DEBT SERVICE FUNDS

ANSWERS TO QUESTIONS

Question 8-1

GAAP identifies the purpose of Debt Service Funds as being “to account for and report financial resources that are restricted, committed, or assigned to expenditure for principal and interest” [on general long-term liabilities]. Only general government long-term liabilities (those being repaid by governmental fund resources) are serviced through Debt Service Funds.

GAAP requires that a Debt Service Fund be used to account for debt service on general long-term liabilities if either of the following is true:

(a) Use of Debt Service Fund is legally or contractually mandated(b) Resources are being accumulated currently to be used for debt service

requirements in the future.

Use of a Debt Service Fund related to general long-term liabilities is never prohibited. A government may want to use a Debt Service Fund for a serial bond issue, even if it is not required to do so, in order to better manage and control its debt service by accounting for all debt service in Debt Service Funds. In this manner all general government debt service would be financed and accounted for through Debt Service Funds, not some through the General Fund or Special Revenue Funds and some through Debt Service Funds. Too, transferring resources from the General Fund or Special Revenue Funds to the Debt Service Funds avoids the possibility of resources needed for debt service being used for other purposes. Finally, many tasks—from reconciling accounts with fiscal agents to auditing debt service transactions—are facilitated by accounting for all general government debt service in Debt Service Funds.

Question 8-2

The main sources of assets for a Debt Service Fund typically are contributions from other funds, taxes, and earnings on invested assets. Refunding bond proceeds usually are the main sources of assets for a refunding Debt Service Fund.

Question 8-3

a. Fixed rate debt issues bear the same interest rate from issuance to maturity, whereas the interest rate of variable rate issues varies in accordance with some agreed index—such as a certain bank's prime rate or a specified federal security interest rate—during the life of the variable rate issue.

b. Conventional serial and term bonds usually are issued to yield approximately their par (face) amount, since interest is paid annually or semiannually, whereas deep discount bonds are issued at substantially less than par (face) because both the principal and much, if not all, of the accumulated compound interest for the life of the issue are paid at its maturity.

Question 8-4© 2011 Pearson Education, Inc. publishing as Prentice Hall

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Governments are permitted (but not required) to accrue unmatured interest (and principal) on general long-term liabilities if two conditions are met. First, the interest payment must be due within one month after the fiscal year-end. Second, the government must have sufficient dedicated resources set aside in a Debt Service Fund to provide for making the payments when they are due.

Question 8-5

Interest payable normally is recorded when due. Interest should not be accrued at the December 31 year end in the case described for Allen City because the payment is not due within a month after year end. The reason is that taxes typically are levied for, or other resources provided to, the Debt Service Fund in the year in which the interest payment comes due. To accrue the interest expenditure and liability at the end of Year 1—when the resources are to be provided to the Debt Service Fund in Year 2—would cause the Debt Service Fund to report an unwarranted deficit. Too, the interest payable would not properly be classified as a fund liability at the end of Year 1, since its payment in Year 2 will not require use of assets existing at the end of Year 1 but will be financed by assets arising in Year 2.

Governments are permitted, but not required, to accrue unmatured principal and interest payments due within the first month of the next fiscal year if dedicated resources are set aside in a Debt Service Fund to provide for the payments when due. Therefore, if Allen City’s debt service payment were due on January 15 of the second year and the city had set dedicated resources aside in the Debt Service Fund by December 31, of the first year, Allen City would be permitted, but not required, to accrue the amount of interest due on January 15.

Question 8-6

a. A Governmental Unit might want to refund an outstanding term bond issue at maturity because it has not accumulated sufficient assets in a Debt Service Fund to retire the term bond issue. Individual maturities of serial bonds would rarely warrant refunding.

b. A Governmental Unit might want to refund either a term bond or serial bond issue prior to maturity because interest rates or other market conditions are more favorable now than (l) when the bonds were issued or (2) they are expected to be in the future, e.g., when bonds might need to be issued to refund a term bond issue at maturity. Such refundings may result in an "economic gain." In addition, bonds outstanding may have highly restrictive (on the government) provisions (covenants) in the bond indentures that would not be required by investors in a new (refunding) bond issue. Thus, the government could relieve itself of such restrictive bond covenant provisions through a refunding bond issue. Finally, a Governmental Unit may refund bond issues prior to maturity to "restructure" or "rearrange" the amounts and timing of future annual debt service requirements.

© 2011 Pearson Education, Inc. publishing as Prentice Hall

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Question 8-7

a. The appreciation in value of sinking fund securities should be recorded in the DSF accounts if the investments are subject to the fair value accounting requirements of GASB Statement No. 31, discussed in Chapter 5.

b. The answer is the same for securities that have declined in value.

Question 8-8

Formal budgetary control of Debt Service Funds is not ordinarily needed, unless required by law, because:

1. the expenditures that must be financed are known precisely in advance in the case of fixed rate serial debt;

2. the financing requirements of sinking funds for fixed rate term debt are likewise known in advance; and

3. the revenue sources typically are few, such as property taxes and interest, with the additional amounts needed coming from interfund transfers, which are subject to budgetary control in the transferor (payer) funds.

Thus, DSF budgetary control accounts are not essential, unless required by law, except where they serve useful management control purposes.

Question 8-9

"Defeasance" means that a debt is legally satisfied, and any related liens and indenture provisions are released, without the debt having actually been retired.

Legal defeasance is accomplished by fulfilling the "defeasance" provisions of the bond indenture. The specific in substance defeasance requirements of the related GASB standard must be met in an in-substance defeasance. These requirements include

1. The debtor must irrevocably place sufficient cash or other assets with an escrow agent in a trust in an amount that, along with interest earned, will provide for all future debt service payments on the debt.

2. The sole use of the trust must be to satisfy scheduled principal and interest payments on the debt.

3. The noncash assets are limited to monetary assets that are risk-free as to the amount, timing, and collection of interest and principal and denominated in the same currency as the debt.

4. The maturities of the noncash monetary assets must match the scheduled maturities of principal and interest on the debt.


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Question 8-10

A refunding transaction occurs when new debt is issued, and the proceeds of the "new" debt issue are used to repay previously outstanding ("old") debt. If the "old" debt is being repaid at its maturity, the refunding transaction is referred to as a current refunding. If the "old" debt is not due currently, in which case the old bonds are called or the proceeds of the new debt typically are placed in escrow with a trustee or agent (that meet the GASB in substance defeasance requirements) and used to make principal and interest payments in the future, the refunding transaction is referred to as an advance refunding.

Question 8-11

Both bond principal and interest to be paid within the first month of the next year may be accrued as expenditures and current liabilities of a Debt Service Fund if they are to be paid from assets currently in the Debt Service Fund that are dedicated for that purpose. They should not be accrued if they are not to be paid from dedicated assets in the fund at year end. Likewise, bond principal and interest on general long-term liabilities that is due more than one month after year end should not be accrued.

Question 8-12

The town of Sinking Creek has the option of accruing the interest and the principal due on January 3, 20X5, if it wishes to do so. The town is not required to make the accrual. The town meets the two conditions required in order to be permitted to accrue the debt service payment—i.e., dedicated resources have been accumulated in the DSF by the end of the fiscal year and the payment is due within the first month of the next fiscal year. If the town opts to accrue the debt service, it must accrue the full amount of the payment due on January 3, 20X5, and should accrue the payment in subsequent years as well.

Question 8-13

Deep discount debt is primarily bonds and notes with a stated (face) interest rate equal to less than 75% of the effective rate of interest. Zero coupon bonds are one of the better known examples. Debt service expenditures on deep discount debt should be recognized in the period that the payments mature (i.e., "when due"). Accrual is permitted only if the payment is due in the first month of the next fiscal year and the payment is to be made from resources dedicated for that purpose and set aside in a Debt Service Fund.

Question 8-14

The balance remaining in a Debt Service Fund after the bonds mature and are paid would be disposed of in accordance with legal and contractual requirements. If permitted by the law and bond indenture, the balance would ordinarily be transferred to another Debt Service Fund—though sometimes the balance may be transferred to the General Fund.


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Question 8-15

The face value and any premium of a refunding bond issue are reported as other financing sources in the statement of revenues, expenditures, and changes in fund balance. A discount, if any, should be reported as an other financing use, and expenditures reported for any bond issue costs on the refunding issue. The account title used for the source or use should indicate that the bonds are refunding bonds (e.g., refunding bond and premium on refunding bonds). The payment to retire or defease old debt should be reported as an other financing use to the extent that it is financed from the net refunding bond proceeds. Payments in excess of the net refunding bond proceeds are reported as expenditures.

SOLUTIONS TO EXERCISES

Exercise 8-1

1. e2. a3. c4. c5. f6. d7. a8. d

Exercise 8-2

Debt Service Funds normally are used for Items 1, 3.

Items 2, 4, and 6 typically would be accounted for in the General Fund. Item 5 would be accounted for in an Agency Fund as the government is acting solely as an intermediary between the taxpayers and the bondholders. Item 7 should be accounted for in the Enterprise Fund, and Item 8 should be accounted for in a Capital Projects Fund.


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Exercise 8-3

A. Other Financing Use.................................................................. $13,000,000

B. Other Financing Use.................................................................. 18,000,000Expenditure......................................................................... 2,000,000

C. Other Financing Use............................................................ 16,000,000Expenditure......................................................................... 2,000,000

D. Other Financing Use............................................................ 20,000,000

E. Other Financing Use............................................................ 5,000,000Expenditure......................................................................... 10,000,000

F. Other Financing Use............................................................ 8,000,000Expenditure......................................................................... 4,000,000

Exercise 8-4

1. Cash .....................................................................................50,000,000Other Financing Sources—Refunding Bonds....................... 50,000,000

To record issuance of refunding bonds.

2. Cash .....................................................................................5,000,000Other Financing Sources—Transfers In............................... 5,000,000

To record transfer from General Fund.

3. Other Financing Uses—Payment to Refunded Bond Escrow Agent.............................................................. 50,000,000Expenditures—Payment to Refunded Bond

Escrow Agent................................................................. 5,000,000Cash..................................................................................... 55,000,000

To record payment to escrow agent to defease bonds in substance.


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Exercise 8-5

1. Cash ...............................................................7,420,000Expenditures—Bond Issue Costs........................................ 60,000

Other Financing Sources—Refunding Bonds................ 7,300,000Other Financing Sources—Refunding Bond Premium.................................................................. 180,000

To record issuance of refunding bonds.

2. Expenditures—Interest*..................................................... 420,000Other Financing Uses—Bond Principal

Retirement............................................................... 7,000,000Cash.............................................................................. 7,420,000

To record retirement of refunding bonds.

Note that other financing uses are not reported for interest due that is financed with borrowed resources. This creates new debt rather than substituting new debt for old debt.

Exercise 8-6

1. Cash.............................................................................. $15,000,000Revenues—Property Taxes.................................... $15,000,000

To record levy and collection of property taxes.

2. Investments................................................................... 14,500,000Cash....................................................................... 14,500,000

To record purchase of investments.

3. Cash.............................................................................. 7,000,000Investments............................................................ 7,000,000

To record maturity of investments.

4. Expenditures—Debt Service—Principal....................... 4,900,000Expenditures—Debt Service—Interest.......................... 2,400,000

Cash....................................................................... 7,300,000To record payment of long-term debt principal and interest.

5. Cash.............................................................................. 600,000Revenues—Investment Income.............................. 600,000

To record collection of interest.

6. Cash.............................................................................. 7,000,000Investments............................................................ 7,000,000

To record maturity of investments.


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Exercise 8-6 (Continued)

7. Expenditures—Debt Service—Principal....................... 4,900,000Expenditures—Debt Service—Interest.......................... 2,160,000

Cash....................................................................... 7,060,000To record payment of long-term debt principal and interest.

Note that the payment due date is more than a month into the next fiscal year, therefore, the government does not have the option of accruing that payment at year end.

8. Revenues—Investment Income—Decrease in Fair Value 175,000Investments............................................................ 175,000

To record decline in fair value of investments.

Exercise 8-7

St. Louey Independent School DistrictDebt Service Fund

Statement of Revenues, Expenditures, and Changes in Fund BalanceFor the Year Ended December 31, 20X1

RevenuesProperty Taxes $14,981,675 County Appropriation 266,084 State Appropriation 1,478,157 Investment Income 582,300 $17,308,216

Expenditures—Debt Service Principal 19,040,000 Interest 14,120,000 33,160,000

Excess of Revenues over (under) Expenditures (15,851,784)Other Financing Source—Transfer from General

Fund 500,000 Change in Fund Balance (15,351,784)Fund Balance, January 1, 20X1 61,763,591 Fund Balance, December 31, 20X1 $46,411,807


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SOLUTIONS TO PROBLEMS

Problem 8-1

1. b2. d3. b4. b5. d6. d7. e8. c9. d10. c

Problem 8-2

No. Date Accounts Dr. Cr.

1. 6/28/X0 Cash ................................................................... 52,000Revenues—Taxes ............................................... 52,000

To record receipt of taxes. (Note a)

2. 6/29/X0 Cash ................................................................... 38,000Transfer from Special Revenue Fund .................. 38,000

To record transfer received. (Note a)

3. 7/2/X0 Expenditures—Interest on Bonds......................... 20,000Cash ................................................................... 20,000

To record semiannual interest payment.Calculation: (1/2)(.08)($500,000) = $20,000

4. 7/3/X0 Investments ........................................................ 70,000Cash ................................................................... 70,000

To record investing available cash.

5. 12/30/X0 Cash ................................................................... 73,000Investments ........................................................ 70,000Revenues—Interest on Investments .................... 3,000

To record maturity of investments and interest received.


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Problem 8-2 (continued)

No. Date Accounts Dr. Cr.6. 1/2/X1 Expenditures—Bond Principal ........................... 50,000

Expenditures—Interest on Bonds ........................................ 20,000Cash ................................................................... 70,000

To record debt service expenditure.

Calculation:Bond principal ............................................. $50,000Interest (1/2)(.08)($500,000) ....................... 20,000

$70,000

7a. 1/2/Y0 Cash ................................................................... 30,000Investments ........................................................ 30,000

To liquidate investments.

7b. Expenditures—Bond Principal ............................................ 50,000Expenditures—Interest on Bonds ........................................ 2,000

Cash ................................................................... 52,000To record final bond principal and interest payment.

Calculation:Bond principal ............................................. $50,000Interest (1/2)(.08)($50,000) ......................... 2,000

$52,000

8a. Transfer to Special Revenue Fund ...................................... 3,000Cash ................................................................... 3,000

To transfer remaining assets to Special Revenue Fund.(Note b)

8b. 1/3/Y0 Transfer from Special Revenue Fund................... 30,000Revenues—Taxes ............................................................... 25,000

Transfer to Special Revenue Fund ...................... 3,000Expenditures—Bond Principal ........................... 50,000Expenditures—Interest on Bonds ........................ 2,000

To close the operating accounts.

Notes:a. Alternatively, a correct solution to entries 1 and 2 might first present (or assume) an entry

accruing the taxes receivable and transfer, then record the collection of the receivable.

b. Net assets at 1/2/Y0 ($30,000 + $25,000 = $55,000) less payment on 1/3/Y0 ($52,000) = Remaining assets for transfer upon termination of fund ($3,000)


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Problem 8-3 (a)Hatcher Village

5-Year Note Debt Service FundGeneral Journal

No. Accounts Dr. Cr.

l. Budgetary EntryEstimated General Fund Transfer ............................................. 10,000Estimated Tax Revenues ........................................................... 18,000

Appropriations .................................................................... 27,600Unreserved Fund Balance ................................................... 400

To record budget.

Calculations:Appropriations:Principal, 7/5/X4 and 1/5/X5 ..................................$20,000Interest, 7/5/X4

(1/2)(.08)($l00,000) .................................. 4,000Interest, l/5/X5,

(1/2)(.08)($90,000) .................................... 3,600$27,600

2. Cash .......................................................................................... 20,000Revenues—Taxes ............................................................... 20,000

To record receipt of taxes. (Note 1)

Assumption: All taxes levied were collected.

3. Expenditures—Note Principal .................................................. 10,000Expenditures—Interest on Note ................................................ 4,000

Cash ............................................................................ 14,000To record payment of matured note principal and interest payable.

4. Cash .......................................................................................... 10,000Transfer from General Fund ............................................... 10,000

To record transfer from General Fund.

5. Cash .....................................................................................6,000Transfer from Capital Projects Fund ................................... 6,000

To record transfer from discontinued Capital Projects Fund.


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Problem 8-3 (a) (continued)

No. Accounts Dr. Cr.6. Expenditures—Note Principal .................................................. 10,000

Expenditures—Interest on Note ................................................ 3,600Matured Note Principal Payable .......................................... 10,000Matured Interest Payable .................................................... 3,600

To accrue note principal and interest due 1/5/20X5.

7a. Transfer from General Fund ..................................................... 10,000Transfer from Capital Projects Fund ......................................... 6,000Revenues—Taxes ..................................................................... 20,000

Unreserved Fund Balance ................................................... 8,000Estimated General Fund Transfer ........................................ 10,000Estimated Tax Revenues ..................................................... 18,000

To close revenue- and transfer-related accounts. (Note 2)

7b. Appropriations .......................................................................... 27,600Expenditures—Note Principal ............................................. 20,000Expenditures—Interest on Note .......................................... 7,600

To close expenditure-related accounts.

Notes:

1. Alternatively, the tax levy might be recorded at $20,000 or another assumed amount, followed by a collection entry.

2. Entry(ies) 7 may be compounded, or any reasonable combination of closing entries may be made.


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Problem 8- 3 (a) (continued)

(Not Required)

CashTransfer from

Capital Projects Fund Unreserved Fund Balance(2) 20,000 l4,000 (3) (7a) 10,000 10,000 (4) 400 (1)(4) 10,000 16,000 16,000 8,000 (7a)(5) 6,000 22,000 (/) 8,400

36,000 36,000 Other Financing Sources— Transfer from

Capital Projects Fund(7a) 6,000 6,000 (5)

(/) 22,000 16,000 16,000

Estimated General Fund Transfer Estimated Tax Revenues Appropriations(1) 10,000 10,000 (7a) (1) 18,000 18,000 (7a) (7b) 27,600 27,600 (1)

Revenues—Taxes Expenditures—Note Principal(7a) 20,000 20,000 (2) (3) 10,000

(6) 10,00020,000 20,000 (7b)

Expenditures—Interest on Note Matured Note Principal Payable Matured Interest Payable(3) 4,000 10,000 (6) 3,600 (6)(6) 3,600

7,600 7,600 (7b)


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Problem 8-3 (b)

Hatcher VillageDebt Service Fund

Balance SheetDecember 31, 20X4

Assets

Cash ............................................................................................... $22,000

Liabilities and Fund Balance

Liabilities:Matured note principal payable ................................................. $10,000Matured interest payable ........................................................... 3,600 $13,600

Fund Balance (Assigned)................................................................. 8,400$22,000

Hatcher VillageDebt Service Fund

Statement of Revenues Expenditures, and Changes in Fund BalanceFor the Year Ended December 31, 20X4

Revenues:Taxes ........................................................................................ $20,000

Expenditures:Note principal ........................................................................... $20,000Interest on note ......................................................................... 7,600 27,600

Excess of Revenues Over (Under) Expenditures.............................. (7,600)

Other Financing Sources:Transfer from General Fund ..................................................... 10,000Transfer from Capital Projects Fund ......................................... 6,000 16,000

Net Change in Fund Balance .......................................................... 8,400

Fund Balance—January 1, 20X4 .................................................... —

Fund Balance—December 31, 20X4 .............................................. $ 8,400


196

Problem 8-4

State of ArtexvaAdvance Refunding Debt Service Fund

General Journal EntriesDuring 20Y6

1. Cash .....................................................................................8,800,000Expenditures—Bond Issue Costs............................................... 290,000

Other Financing Sources—Refunding Bonds ...................... 9,000,000Other Financing Sources—Refunding Bond Premium......... 90,000

To record issuance of $9,000,000 par 20Y6 6% refunding serial bonds at 101 less $290,000 issuance costs.

2. Other Financing Uses—Payment to Refunded Bond Escrow Agent .............................................................. 8,800,000

Cash .................................................................................... 8,800,000To record payment of net proceeds of 20Y6 refunding bond issue to escrow agent to legally defease $8,000,000 par of 20X2 10% serial bonds.

3. Other Financing Sources—Refunding Bonds ............................ 9,000,000Other Financing Sources—Refunding Bond Premium............... 90,000

Other Financing Uses—Payments to Refunded Bond Escrow Agent ..................................................... 8,800,000

Expenditures—Bond Issue Costs......................................... 290,000To record closing the 20Y6 accounts and terminating this Debt Service Fund.

4. Expenditures—Payment to Refunded Bond Escrow Agent .............................................................. 1,000,000

Other Financing Uses—Payment to Refunded Bond Escrow Agent ..................................................... 7,800,000

Cash ............................................................................ 8,800,000To record payment of net proceeds of 20Y6 refunding bondissue and of General Fund transfer to escrow agent to legally defease $8,000,000 par of 20X2 10% serial bonds.

5. Expenditures—Interest on Bonds .............................................. 800,000Expenditures—Bond Principal Retirement ............................... 200,000Other Financing Uses—Retirement of

Refunded Bonds ............................................................. 7,800,000Cash .................................................................................... 8,800,000

To record final payment of interest on, and retirement of 20X2 10% serial bonds.


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Problem 8-5 (a)

Leslie Independent School DistrictDebt Service Fund

General Journal

No. Date Accounts Dr. Cr.(1) 01/02 Estimated Revenues ............................................ 302,000

Estimated General Fund Transfer ................................. 118,000Appropriations .................................................... 398,981Unreserved Fund Balance ................................... 21,019

To record the approved budget.

Revenues Ledger (Estimated Revenues):Property Taxes ............................................................. 250,000Interest on Investments ................................................ 52,000

302,000Expenditures Ledger (Appropriations):Serial Bond Principal ................................................... 100,000Capital Lease Principal

[$38,986 - (.07)($400,000) ................................. 10,986Interest on Indebtedness

($198,000 + $60,000 + $28,000) ........................ 286,000Fiscal Agent Fees ......................................................... 1,995

398,981

(2) 01/02 Revenues ............................................................ 10,000Accrued Interest Receivable ............................... 10,000

To reverse the 12/31/X4 accrual of interest receivable. (Note 1)

Revenues Ledger (Revenues):Interest on Investments ................................................ 10,000

(3) 01/02 Matured Interest Payable .................................... 101,500Matured Serial Bonds Payable ............................................ 50,000Accrued Fiscal Agent Fees Payable .................................... 1,005

Expenditures ....................................................... 152,505To reverse the 12/31/X4 accrual of bondprincipal and interest payable. (Note 2)

Expenditures Ledger (Expenditures):Interest on Indebtedness ...................................................... 101,500Serial Bond Principal .......................................................... 50,000Fiscal Agent Fees ................................................................ 1,005

152,505


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No. Date Accounts Dr. Cr.(4) 01/05 Expenditures ....................................................... 152,505

Cash ................................................................... 152,505To record semiannual payment of serial bond debt service. (Note 2)

Expenditures Ledger (Expenditures):Interest on Indebtedness....................................................... 101,500Serial Bond Principal .......................................................... 50,000Fiscal Agent Fees ................................................................ 1,005

152,505

(5) 02/12 Cash ................................................................... 118,000Transfer from General Fund ............................... 118,000

To record receipt of transfer.

(6) 02/12 Investments ........................................................ 118,000Cash ................................................................... 118,000

To record investment of cash transferred in.

(7) 02/12 Restricted fund balance will be increased by the $21,019 required increase to the Sinking Fund Reserve, which may or may not be maintained in the accounts.

(8) 03/24 Expenditures ....................................................... 38,986Cash ................................................................... 38,986

To record annual payment on capital lease.

Expenditures Ledger (Expenditures):Capital Lease Principal ....................................................... 10,986Interest on Indebtedness....................................................... 28,000[Interest calculation: (.07)($400,000)] ................................ 38,986


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No. Date Accounts Dr. Cr.(9) 04/15 Cash ................................................................... 7,000

Investments ........................................................ 7,000To record liquidating investments.

Calculation:Cash required for term bond interest

payment ........................................... $30,000Minimum cash balance permitted ..................... 5,000Total cash required............................................ $35,000Cash on hand before investment

liquidation ........................................ 28,509Additional cash required ................................... $ 6,491Investment liquidation (in $000s) ..................... $ 7,000


To record semiannual payment of interest on term bonds.

Expenditures Ledger (Expenditures):Interest on Indebtedness ...................................................... 30,000

(11) 05/08 Cash ................................................................... 256,000Revenues. ........................................................... 256,000

To record receipt of 20X5 property taxes.

Revenues Ledger (Revenues):Property Taxes .................................................................... 256,000


To record semiannual serial bond debt service payment.

Expenditures Ledger (Expenditures):Serial Bond Principal .......................................................... 50,000Interest on Indebtedness ...................................................... 100,000Fiscal Agent Fees ................................................................ 1,000

151,000


200


No. Date Accounts Dr. Cr.(13) 10/15 Expenditures ....................................................... 30,000

Cash ................................................................... 30,000To record semi-annual payment of interest on term bonds.

Expenditures Ledger (Expenditures):Interest on Indebtedness ...................................................... 30,000

(14) 12/31 Cash ................................................................... 49,000Accrued Interest Receivable ................................................ 15,000

Revenues ............................................................ 64,000To record investment earnings for the year. (Note 1)

Revenues Ledger (Revenues):Interest on Investments ....................................................... 64,000

Calculation:Interest revenue recorded 12/31.................. $64,000Less: Interest revenue reversing entry 1/2 . 10,000Interest revenue for 20X5 (given)............... $54,000

(15) 12/31 Investments ........................................................ 116,000 Cash ................................................................... 116,000

To record investments of cash.

Calculation:Cash on hand before investment—12/31........... $129,509Ending cash balance 12/31/X5 (given) ............. 13,509Additional investments made............................ $116,000


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No. Date Accounts Dr. Cr.

(16) 12/31 Expenditures ....................................................... 148,995Matured Interest Payable .................................... 98,000Matured Serial Bonds Payable ............................ 50,000Accrued Fiscal Agent Fees Payable .................... 995

To record accrual of semi-annual serial bond debt service payment due 1/5/X6 to be paid from existing fund financial resources.

Expenditures Ledger (Expenditures):Serial Bond Principal .......................................................... 50,000Interest on Indebtedness ...................................................... 98,000Fiscal Agent Fees ................................................................ 995

148,995

(C1) 12/31 Closing Entries—General Ledger

Appropriations .................................................................... 398,981Unreserved Fund Balance ................................................... 21,019

Estimated Revenues ............................................ 302,000Estimated General Fund Transfer ....................... 118,000

To reverse the budgetary entry.

(C2) Revenues ............................................................ 310,000Transfer from General Fund ............................................... 118,000

Expenditures ....................................................... 398,981Unreserved Fund Balance ................................... 29,019

To close the accounts.

Closing Entries—Revenues Ledger

(C) Property Taxes..................................................................... 6,000Interest on Investments........................................................ 2,000

8,000Proof:Revenues $310,000Estimated Revenues ......................................... 302,000Difference ...................................................$ 8,000


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Notes:

1. Alternatively, the interest accrual reversing entry at 1/2 may be omitted and Accrued Interest Receivable increased $5,000 (from $10,000 to $15,000) in the 12/31/X5 interest earnings entry.

2. Alternatively, the debt service payable accrual reversing entry at 1/2 may be omitted and the liability accounts (rather than Expenditures) may be debited in the 1/5 debt service payment entry.

Problem 8-5 (b)


Balance SheetDecember 31, 20X5

AssetsCash ............................................................................................... $ 13,509Investments (net of $25,000 unamortized premiums and

$9,000 unamortized discounts) ................................................. 897,000Accrued interest receivable ............................................................. 15,000

$925,509

Liabilities and Fund BalanceLiabilities:

Matured interest payable ........................................................... $ 98,000Matured serial bonds payable .................................................... 50,000Accrued fiscal agent fees payable ............................................. 995 $148,995

Fund Balance:Restricted for term bond principal ............................................ $336,304Restricted for serial bond service assurance .............................. 350,000

686,304Assigned ................................................................................... 90,210 776,514

$925,509


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Problem 8-5 (b) (continued)


Statement of Revenues, Expenditures, and Changes in Fund BalanceFor Year Ended December 31, 20X5

Revenues:Property taxes .................................................................... $256,000Interest on investments....................................................... 54,000 $310,000

Expenditures:Serial bond principal .......................................................... 100,000Capital lease principal ........................................................ 10,986Interest on indebtedness ..................................................... 286,000Fiscal agent fees ................................................................ 1,995 398,981

Excess of Revenues Over (Under) Expenditures....................... (88,981)

Other Financing Sources:Transfer from General Fund .............................................. 118,000

Net Change in Fund Balance.................................................... 29,019

Fund Balance—January 1 ........................................................ 747,495

Fund Balance—December 31 .................................................. $776,514


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Problem 8-5 (b) (Continued)

Leslie Independent School DistrictDebt Service FundSubsidiary Ledgers

20X5 Fiscal Year

Revenues Ledger:

AccountsEstimated

Dr.Actual

Cr.BalanceCr. (Dr.)

Property Taxes (1) 250,000 (11) 256,000

(C)

250,000 (6,000)

6,000 —

Interest on Investment (1) 50,000 (2)

(14)(10,000)

64,000

52,000 62,000 (2,000)

52,000 54,000 (C) 2,000 —

Expenditures Ledger:

AccountsEstimated

Dr.Actual

Cr.

UnexpendedBalanceCr. (Dr.)

Serial Bond Principal(3)(4)

(12)(16)

(50,000)50,000 50,000 50,000

(1) 100,000 100,000 50,000

100,000 50,000

— 100,000

Capital Lease Principal(8) 10,986

(1) 10,986 10,986 —

Interest on Indebtedness(3)(4)(8)

(10)(12)(13)(16)

(101,500)101,500

28,000 30,000

100,000 30,000 98,000

(1) 286,000 286,000 387,500 286,000 258,000 228,000 128,000

98,000 —

286,000

Fiscal Agent Fees(3)(4)

(12)(16)

(1,005)1,005 1,000

995

(1) 1,995 1,995 3,000 1,995

995 —

1,995


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Problem 8-5 (b) (continued)

Legend:

1. 01/02 budgetary entry.2. 01/02 reversal of 12/31/X4 accrual of interest receivable.3. 01/02 reversal of 12/31/X4 accrual of 1/5/X5 serial bond debt service payment.4. 01/05 payment of serial bond debt service accrued at 12/31/X4.5. 02/12 transfer from General Fund.6. 02/12 investment of cash transferred in.7. 02/12 increase of reserve to its required level.8. 03/24 annual capital lease debt service payment. 9 04/15 investment liquidation.10. 04/15 semiannual payment of interest on term bonds.11. 05/08 receipt of 20X5 property taxes.12. 08/05 semiannual serial bond debt service payment.13. 10/15 semiannual payment of interest on term bonds.14. 12/15 summary investment earnings entry.15. 12/15 additional cash investments.16. 12/15 accrual of 1/5/X6 serial bond debt service payment.C. Closing entries (C1, C2, C)

Problem 8-6

Broadus CountyCourthouse Bonds Debt Service Fund

Statement of Revenues, Expenditures, and Changes in Fund BalanceFor the Year Ended December 31, 20X6

Revenues:Property taxes ............................................................. $3,065,000Investment income ($80,000 - $5,000) ....................... 75,000Total Revenues .......................................................... $3,140,000

Expenditures:Principal retirement............................................................ 5,000,000Interest ...............................................................1,200,000Fiscal agent fees ................................................................ 75,000

Total Expenditures ....................................................... 6,275,000Excess of Revenues Over (Under) Expenditures....................... (3,135,000)Other Financing Sources:

Transfer from General Fund ....................................... 5,250,000Net Change in Fund Balance.................................................... 2,115,000Fund Balance—Beginning of Year .......................................... 1,500,000Fund Balance—End of Year .................................................... $3,615,000


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Problem 8-7

a. A crossover refunding differs from a typical advance refunding in that resources in the related escrow account are dedicated, at least temporarily, to the debt service for both the old debt and the new refunding debt.

b. In a typical refunding, neither the assets placed in escrow nor the old refunded debt is reported on the face of the financial statements. The new refunding debt is reported. However, in a crossover refunding, both the old refunded debt and new refunding debt is reported on the face of the financial statements, as are the assets placed in escrow, until the crossover date.

c. From a budgetary standpoint, while both the refunded debt and refunding debt is reported on the face of the financial statements, debt service for both must be included in the budget.

Problem 8-8

Summary reports on this research and analysis problem should be evaluated in terms of the specific requirements. The depth of analysis and understanding should be apparent—particularly if several reports are evaluated concurrently.


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CASE SOLUTIONS

Case 8-1

City of MilwaukeeDebt Service Fund

Statement of Revenues, Expenditures, and Change in Fund BalanceFor the Year Ended December 31, 20X5

(amounts in thousands)

RevenuesProperty Taxes $ 52,942 Other Taxes 14,695 Investment Income 3,418 Other 8,214 $ 79,269

Expenditures -- Debt Service Principal 81,206 Interest 29,593 Bond Issue Costs 750 111,549

Excess of Revenues over (under) Expenditures

(32,280)

Other Financing Sources (Uses)Refunding Bonds 28,112 Refunding Bonds Premium 12,209 Payment to Refunded Bond Escrow Agent (39,571)Transfers In 31,930 32,680

Change in Fund Balance 400 Fund Balance, January 1, 20X5 43,807 Fund Balance, December 31, 20X5 $ 44,207


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Case 8-2

a.1. Accrued Interest Payable................................................ $332,964

Cash......................................................................... $332,964To record payment of accrued interest.

2. Cash............................................................................... 105,396,619Transfer from General Fund..................................... 105,396,619

To record transfer from the General Fund.

3. Expenditures—Debt Service—Principal........................ 12,878,605Expenditures—Debt Service—Interest........................... 9,776,065

Cash......................................................................... 22,654,670To record payment of principal and interest.

4. Investments.................................................................... 7,300,000Cash......................................................................... 7,300,000

To record purchase of investments.

5. Expenditures—Debt Service—Interest........................... 320,521Accrued Interest Payable.......................................... 320,521

To accrue interest on long-term debt.


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Case 8-2 (b)

County of HawaiiBond Redemption and Interest Debt Service Fund

Statement of Revenues, Expenditures, and Change in Fund BalanceFor the Year Ended June 30, 20X6

Revenues $ - Expenditures—Debt Service

Principal $12,878,605 Interest 10,096,586 22,975,191

Excess of Revenues over (under) Expenditures (22,975,191)Other Financing Sources—Transfer from General

Fund 105,396,619 Change in Fund Balance 82,421,428 Fund Balance, July 1, 20X5 15,041,758 Fund Balance, June 30, 20X6 $ 97,463,186

County of HawaiiBond Redemption and Interest Debt Service Fund

Balance SheetJune 30, 20X6

AssetsCash $90,483,707 Investments 7,300,000

Total Assets $97,783,707

Liabilities and Fund BalanceLiabilities

Accrued Interest Payable $ 320,521 Fund Balance -- Committed 97,463,186

Total Liabilities and Fund Balance $97,783,707


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Chapter 8 - Debt Service Funds Solutions Manual

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