Accounting for General Long-term Liabilities and Debt Service

Accounting for General Long-term Liabilities and Debt Service

 

Question 1

General long-term liabilities are typically reported in:
A) Governmental funds.
B) Proprietary funds.
C) Fiduciary funds.
D) Government-wide financial statements.

 

Question 2

Which basis of accounting is used to report general long-term liabilities?
A) Cash basis.
B) Accrual basis.
C) Modified accrual basis.
D) Obligatory basis.

 

Question 3

Proceeds from the issuance of long-term debt are recorded in a governmental fund as:
A) Revenue.
B) Other financing source.
C) Liability.
D) Deferred inflow of resources.

 

Question 4

Debt service payments for principal and interest are typically reported in which fund?
A) General Fund.
B) Debt Service Fund.
C) Capital Projects Fund.
D) Special Revenue Fund.

 

Question 5

Premiums received on bond issuance are usually:
A) Recorded as revenue.
B) Transferred to the Debt Service Fund.
C) Added to the bond liability.
D) Amortized over the life of the bond in the government-wide financial statements.

 

Question 6

The primary purpose of the Debt Service Fund is to:
A) Record all long-term liabilities of a government.
B) Account for resources accumulated to pay principal and interest.
C) Track general revenues used for capital projects.
D) Report all expenditures related to bond issuance.

 

Question 7

When a government issues general obligation bonds, the liability is reported:
A) In the General Fund.
B) In the Debt Service Fund.
C) In the government-wide financial statements.
D) As a fiduciary activity.

 

Question 8

Which of the following is an example of general long-term liabilities?
A) Revenue anticipation notes.
B) Pension obligations.
C) Customer deposits.
D) Accounts payable.

 

Question 9

Debt service expenditures are recognized in governmental funds:
A) When the debt is incurred.
B) When the payment is due.
C) When cash is available.
D) At the time of issuance.

 

Question 10

A government issues refunding bonds to:
A) Increase its debt capacity.
B) Finance new projects.
C) Retire existing bonds with lower-interest debt.
D) Meet short-term cash flow needs.

 

Question 11

What is the purpose of a legal debt margin?
A) To limit the amount of taxes a government can levy.
B) To restrict borrowing to a safe level.
C) To record payments on long-term obligations.
D) To ensure compliance with fund accounting principles.

 

Question 12

Under GASB standards, capital leases are reported as:
A) Operating expenses.
B) General long-term liabilities.
C) Fund liabilities in the General Fund.
D) Deferred inflows of resources.

 

Question 13

Special assessments for debt service are recognized in the Debt Service Fund as:
A) Intergovernmental revenue.
B) Charges for services.
C) Other financing sources.
D) Deferred inflows of resources.

 

Question 14

Bond anticipation notes (BANs) are classified as long-term liabilities if:
A) They are repaid within 12 months.
B) The government has the intent and ability to refinance.
C) They are issued for operating purposes.
D) The notes are secured by property taxes.

 

Question 15

How are arbitrage rebates on tax-exempt bonds accounted for?

A) As an operating expense in governmental funds.
B) As a reduction of bond proceeds.
C) As a liability in the government-wide statements.
D) As deferred outflows of resources.

 

Question 16

What is the primary difference between general obligation bonds and revenue bonds?

A) General obligation bonds are repaid from user fees.
B) Revenue bonds are backed by specific revenue sources.
C) Revenue bonds are considered risk-free.
D) General obligation bonds are restricted to enterprise funds.

 

Question 17

How is interest on long-term debt reported in government-wide financial statements?

A) As an expense in the Debt Service Fund.
B) As a reduction in net position.
C) As an operating expense.
D) As an expense in the Statement of Activities.

 

Question 18

Amortization of bond premiums in government-wide statements:

A) Increases the bond liability.
B) Decreases annual interest expense.
C) Is recorded as a deferred inflow.
D) Has no impact on the fund statements.

 

Question 19

A sinking fund for debt service is classified as:

A) A fiduciary fund.
B) An enterprise fund.
C) A restricted asset in the Debt Service Fund.
D) A capital projects fund.

 

Question 20

Which of the following is NOT included in the government-wide financial statements?

A) General long-term liabilities.
B) Current maturities of long-term debt.
C) Compensated absences.
D) Interfund transfers.

 

Question 21

How are issuance costs for bonds reported under GASB standards?

A) Capitalized and amortized.
B) Reported as a reduction of bond proceeds.
C) Recorded as an expense when incurred.
D) Deferred as outflows of resources.

 

Question 22

General obligation bonds typically require voter approval because:

A) They are secured by a specific revenue stream.
B) They obligate taxpayers for repayment.
C) They are issued without a statutory limit.
D) They do not require repayment with interest.

 

Question 23

The difference between the reacquisition price and the net carrying amount of refunded debt is classified as:

A) A deferred inflow of resources.
B) A gain or loss.
C) An amortized expense.
D) A deferred outflow of resources.

 

Question 24

Under modified accrual accounting, debt service expenditures are recognized:

A) When funds are legally obligated.
B) When due and payable.
C) When accrued.
D) When appropriations are approved.

 

Question 25

A government’s bond ratings are critical because they affect:

A) Tax revenue collection.
B) User fees charged to residents.
C) The interest rates on issued debt.
D) Intergovernmental grant eligibility.

 

Question 26

What is the appropriate method for accounting for the early redemption of bonds?
A) As a gain or loss in the current period.
B) As an expense in the Debt Service Fund.
C) As a reduction in the bond liability.
D) As a deferred inflow of resources.

 

Question 27

In the government-wide financial statements, bond issuance costs are:
A) Capitalized and amortized over the life of the bond.
B) Reported as deferred inflows of resources.
C) Recognized as an expense in the period incurred.
D) Ignored since they are insignificant.

 

Question 28

What type of fund is used to account for the repayment of general long-term liabilities?
A) Enterprise Fund.
B) Special Revenue Fund.
C) Debt Service Fund.
D) Capital Projects Fund.

 

Question 29

The accounting for long-term liabilities in governmental funds differs from that in the government-wide statements because:
A) Governmental funds report long-term liabilities as expenditures.
B) Governmental funds report long-term liabilities as liabilities but do not record them as expenditures.
C) Governmental funds do not recognize long-term liabilities.
D) Governmental funds report long-term liabilities as assets.

 

Question 30

A government issues bonds with a callable feature, allowing them to be repurchased at a premium. How is this reported when bonds are called before maturity?
A) The difference is reported as an expense in the government-wide financial statements.
B) The repurchase premium is amortized over the life of the bond.
C) The premium is reported as a deferred inflow of resources.
D) The call premium is recorded as a loss in the period incurred.

 

Question 31

What is the effect of issuing bonds at a discount on the government’s financial statements?
A) It increases the reported revenue.
B) It decreases the cash received and increases the interest expense.
C) It increases the initial bond liability without affecting interest expense.
D) It has no effect on the financial statements.

 

Question 32

Which financial statement shows the amount of principal and interest due in the next fiscal year?
A) Statement of Net Position.
B) Statement of Activities.
C) Debt Service Fund Budget.
D) Debt Service Fund Balance Sheet.

 

Question 33

When bonds are refunded, the difference between the old debt’s carrying value and the new debt’s issuance price is reported as:
A) A gain or loss on refunding.
B) A deferred inflow or outflow.
C) An expense in the current period.
D) An adjustment to net position.

 

Question 34

A government that issues a bond that is backed by specific revenues (such as a utility fee) must report it as:
A) A general obligation bond.
B) A revenue bond.
C) A general long-term liability with a guarantee.
D) A debt service fund liability.

 

Question 35

Which of the following is not reported in the government-wide financial statements?
A) General obligation bonds.
B) Capital lease obligations.
C) Accounts payable for the current year.
D) Pension obligations.

Answer: C) Accounts payable for the current year.

Question 36

The deferred inflow or outflow from the difference in the reacquisition price and the carrying amount of refunded debt is amortized over:
A) The life of the new debt issued.
B) The original term of the refunded debt.
C) The remaining life of the old debt.
D) The first 12 months following the refunding.

 

Question 37

How should a government report the current portion of long-term debt in its governmental fund financial statements?
A) As an expenditure.
B) As a current liability.
C) As a deferred inflow.
D) As an asset.

 

Question 38

If a government issues bonds with a significant premium, how should this premium be reported in the financial statements?
A) As a reduction of the bond liability.
B) As a deferred inflow of resources.
C) As revenue in the period received.
D) As an increase in capital assets.

 

Question 39

In which financial statement would you find the amortization of bond issuance costs?
A) Government-wide Statement of Net Position.
B) Debt Service Fund Balance Sheet.
C) Statement of Activities.
D) Governmental Fund Balance Sheet.

 

Question 40

The use of a sinking fund in debt service accounting is primarily for:
A) Managing cash flow for day-to-day operations.
B) Making early principal payments on bonds.
C) Collecting revenues for future debt service payments.
D) Paying off interest on short-term loans.

 

Question 41

The recognition of debt service expenditures in governmental funds occurs:
A) When the debt is issued.
B) When the payment is made.
C) When the payment is due and payable.
D) At the end of the fiscal year.

 

Question 42

When debt service expenditures are recorded in the Debt Service Fund, they are reported as:
A) An increase in fund balance.
B) A decrease in net position.
C) An expenditure.
D) A deferred outflow.

 

Question 43

What is the main characteristic of a general obligation bond?
A) It is repaid from revenue generated by the project it finances.
B) It is backed by the full faith and credit of the government.
C) It does not require voter approval.
D) It is typically secured by specific revenue sources.

 

Question 44

Which of the following is a required disclosure for long-term liabilities in the government-wide financial statements?
A) Total accrued interest.
B) Schedule of future debt service payments.
C) List of revenue sources securing bonds.
D) Current tax revenue impact.

 

Question 45

The principal amount of bonds payable is reported as:
A) A current liability only.
B) A noncurrent liability only.
C) A combination of current and noncurrent liabilities.
D) An asset.

 

Question 46

What is the primary accounting treatment for bonds payable in governmental funds?

A) Reported as an expenditure when the bonds are issued.
B) Reported as a liability and recorded as a transfer to the Debt Service Fund.
C) Recognized as a liability in the fund statements but not as an expenditure.
D) Deferred as a liability in the government-wide financial statements only.

 

Question 47

Which of the following is true about debt service funds?

A) They are used to account for debt incurred by proprietary funds.
B) They are primarily used to track revenues and expenditures related to debt payments.
C) They report both current and noncurrent liabilities.
D) They account for long-term assets used in debt service.

 

Question 48

When a government issues bonds at a discount, how is the discount treated in the financial statements?

A) It is recorded as an asset.
B) It is amortized as interest expense over the life of the bond.
C) It is reported as a revenue source.
D) It is deferred until the maturity of the bond.

 

Question 49

The term “defeasance” in bond accounting refers to:

A) Issuing new bonds to replace old bonds at a higher interest rate.
B) Creating a trust that will pay off the old bonds and removing them from the government’s balance sheet.
C) Recording an interest expense on bonds that are no longer outstanding.
D) Increasing the bond issue price to cover anticipated costs.

 

Question 50

How should bond issuance costs be treated in the government-wide financial statements?

A) As a liability to be paid off in future years.
B) As a reduction of the bond proceeds, amortized over the life of the bond.
C) Expensed in the period incurred.
D) Deferred as an asset until the bonds mature.

 

Question 51

In a government’s financial statements, where is the current portion of long-term debt presented?

A) As a noncurrent liability.
B) As a current liability.
C) As an expense in the government-wide Statement of Activities.
D) As part of fund balance in the governmental fund.

 

Question 52

When a bond is refunded, the resulting savings are recognized as:

A) A direct gain in the period the refunding occurs.
B) A deferred outflow of resources if there is an economic gain.
C) Revenue in the Debt Service Fund.
D) A reduction in future debt service expenditures.

 

Question 53

The primary focus of the GASB Statement No. 34 in relation to long-term liabilities is:

A) To ensure the proper recording of capital assets.
B) To require full accrual accounting for long-term debt.
C) To simplify debt management for small governments.
D) To eliminate all long-term liability reporting.

 

Question 54

What is an advantage of issuing bonds with a call feature?

A) The bonds can be exchanged for other investments.
B) The issuer can repurchase the bonds at a specified price before maturity.
C) The bonds will have a lower coupon rate.
D) The bonds will automatically mature early without any action.

 

Question 55

Interest on general long-term debt is recorded in which financial statement under full accrual accounting?

A) Governmental fund balance sheet.
B) Statement of Activities.
C) Government-wide Statement of Net Position.
D) Debt Service Fund statement.

 

Question 56

What financial statement is used to show the details of long-term debt obligations at the end of a fiscal year?

A) Governmental fund balance sheet.
B) Statement of Net Position.
C) Statement of Revenues, Expenditures, and Changes in Fund Balances.
D) Statement of Changes in Financial Position.

 

Question 57

When bonds are issued to finance a capital project, the debt should be reported in:

A) The Capital Projects Fund.
B) The Debt Service Fund.
C) The Governmental Activities in the government-wide financial statements.
D) The Special Revenue Fund.

Question 58

What is a major reason for a government to issue bonds at a premium?

A) To generate revenue for the General Fund.
B) To cover issuance costs.
C) To lower the overall effective interest rate.
D) To meet liquidity requirements.

 

Question 59

What is an example of an item that would be classified as a long-term liability?
A) Deferred revenue from a property tax levy.
B) A note payable due in 30 days.
C) Compensated absences expected to be paid in future years.
D) Short-term loans.

 

Question 60

The amortization of bond discounts affects which part of the financial statements?

A) The Debt Service Fund statement as an expenditure.
B) The Statement of Activities as an increase in interest expense.
C) The Statement of Net Position as a reduction in the bond liability.
D) The Governmental Fund balance sheet as a reduction in assets.

 

Question 61

A government that issues bonds with an embedded option to convert them to equity must:

A) Record the option as an asset in the financial statements.
B) Recognize the embedded option as a liability.
C) Disclose the option in the notes to the financial statements.
D) Ignore the option in financial reporting until it is exercised.

 

Question 62

The amortization period for a deferred charge on refunding is:

A) The term of the refunded debt.
B) The term of the new debt issued.
C) One year.
D) The life of the underlying asset.

 

Question 63

When bonds are issued for a project that benefits future periods, how is the debt typically recorded in the financial statements?

A) As an expenditure in the current fiscal year.
B) As a liability, and the capital project is recorded as an asset.
C) As a deferred inflow of resources.
D) As revenue in the capital project fund.

 

Question 64

What is the main purpose of a debt service fund?

A) To record expenditures for operational costs.
B) To account for transactions related to the payment of principal and interest on long-term debt.
C) To track assets held for future capital projects.
D) To manage revenues from bond issuance.

 

Question 65

Which of the following statements is true regarding the use of a sinking fund for debt service?

A) A sinking fund is used to accumulate money for paying off debt at maturity.
B) A sinking fund reports the amount of debt service expenditures made during the year.
C) A sinking fund is used to account for debt service expenditures as they are incurred.
D) A sinking fund requires a separate special revenue account.

 

Question 66

How is the interest paid on long-term bonds reported in governmental fund financial statements?

A) As a capital outlay.
B) As an expenditure.
C) As a liability.
D) As a revenue source.

 

Question 67

What accounting treatment is used for the issuance of bonds in a government’s proprietary fund?

A) Bonds are reported as an increase in capital assets.
B) Bonds are reported as a long-term liability on the statement of net position.
C) Bonds are treated as current liabilities.
D) Bonds are ignored in proprietary fund statements.

 

Question 68

If a government issues bonds to finance a capital project, the proceeds should be recorded in:

A) The Debt Service Fund.
B) The Capital Projects Fund.
C) The General Fund.
D) The Enterprise Fund.

 

Question 69

How is the premium from a bond issuance recorded in the government-wide financial statements?

A) As an asset to be amortized.
B) As a deferred inflow of resources.
C) As a direct increase in net position.
D) As revenue in the current period.

 

Question 70

What is the purpose of a debt service reserve fund?

A) To maintain an emergency fund for government operations.
B) To ensure funds are available to make debt service payments as they come due.
C) To fund future capital expenditures.
D) To account for funds received from taxes.

 

Question 71

What type of bond is backed by the full faith and credit of the issuing government and typically requires voter approval?

A) Revenue bond.
B) General obligation bond.
C) Special assessment bond.
D) Tax increment bond.

 

Question 72

If bonds are refunded and the proceeds are placed in an escrow account, how should this be reported?

A) As a new liability in the fund financial statements.
B) As a deferred outflow of resources in the government-wide financial statements.
C) As an asset in the escrow account.
D) As revenue from bond issuance.

 

Question 73

In what situation would a government report bonds payable as a short-term liability?

A) When the bonds are due in less than 12 months.
B) When the bonds are issued for a non-revenue-generating project.
C) When the bonds have an embedded option for early repayment.
D) When the bonds are considered tax-exempt.

 

Question 74

Which of the following is an example of a long-term liability that would be reported on the government-wide financial statements?

A) Accrued wages payable.
B) Deferred revenue.
C) Bonds payable due in 20 years.
D) Accounts payable for the current year.

 

Question 75

How should the gain or loss from the early extinguishment of debt be recorded?

A) As a deferred outflow or inflow.
B) As a direct adjustment to the government’s net position.
C) As an expenditure in the current period.
D) As an increase or decrease in fund balance.

 

Question 76

What is the main purpose of reporting the debt service fund in government financial reporting?

A) To show the assets held for future investment.
B) To provide details of how debt service payments are funded and made.
C) To record general operating expenditures.
D) To include future expected revenues from taxes.

 

Question 77

How is the repayment of a bond principal shown in the debt service fund?

A) As an increase in the fund’s balance.
B) As an expenditure.
C) As a transfer to the general fund.
D) As revenue.

 

Question 78

What is the treatment for accrued interest payable on bonds in the government-wide financial statements?

A) It is recorded as a noncurrent liability.
B) It is included as an expense when paid.
C) It is reported as a current liability.
D) It is reported as deferred revenue.

 

Question 79

How should a government report the issuance of bonds at par value in the financial statements?

A) The entire proceeds are reported as revenue.
B) The proceeds are recorded as a liability with an offsetting asset.
C) The proceeds are recorded as a direct reduction in net position.
D) The bonds are reported as deferred inflows.

 

Question 80

What is the impact on a government’s financial statements when bonds are refunded at a lower interest rate?

A) It reduces the net position in the current period.
B) It results in an immediate gain recorded as revenue.
C) It lowers future debt service payments and may generate a deferred inflow or outflow.
D) It has no impact on the financial statements.

 

Another Updated Set

How are general long-term liabilities reported in the government-wide financial statements?

A) As expenditures in the year they are paid.
B) As liabilities in the statement of net position.
C) As deferred outflows of resources.
D) They are not reported in the government-wide financial statements.

 

What is the appropriate fund to account for the payment of principal and interest on general long-term liabilities?

A) General Fund.
B) Debt Service Fund.
C) Capital Projects Fund.
D) Enterprise Fund.

 

Which of the following is a characteristic of general obligation bonds?

A) They are backed by the revenues of a specific project.
B) They are typically secured by the issuing government’s taxing power.
C) They are always issued without voter approval.
D) They are not subject to any statutory debt limits.

 

Under GASB standards, how should compensated absences be reported?

A) As expenditures in the period they are paid.
B) As liabilities only in fund financial statements.
C) As liabilities in both government-wide and fund financial statements.
D) As liabilities in government-wide financial statements only.

 

What type of liability would be classified as a general long-term liability?

A) Current accounts payable.
B) Bonds issued for a general government purpose.
C) Utility fund debt.
D) Liabilities for restricted grants.

Answer: B) Bonds issued for a general government purpose.

 

Which statement about the Debt Service Fund is correct?

A) It records all liabilities of the government.
B) It accounts for the accumulation of resources for and the payment of principal and interest.
C) It is used to account for the acquisition or construction of capital assets.
D) It only accounts for short-term liabilities.

 

How are premiums received from bond issuances typically accounted for in governmental funds?

A) As revenue in the year of issuance.
B) As other financing sources in the year of issuance.
C) As a liability to be amortized over the life of the bonds.
D) As a deferred inflow of resources.

 

When a government refinances its bonds, any savings resulting from lower interest payments are recorded as:

A) Revenue in the current period.
B) A reduction in liabilities.
C) A deferred inflow of resources.
D) An increase in fund balance.

 

Which of the following is true about capital leases under GASB standards?

A) They are reported only as expenses in the Debt Service Fund.
B) They are recognized as both an asset and a liability in government-wide financial statements.
C) They are treated as short-term liabilities.
D) They are not recorded in government-wide statements.

 

In what circumstances is a sinking fund used in government accounting?

A) To accumulate money for future debt issuance.
B) To ensure funds are available to retire debt at maturity.
C) To pay for operational expenditures.
D) To track interfund transfers.

 

How are early extinguishments of debt typically treated in government-wide financial statements?

A) As expenditures in the year of extinguishment.
B) As a gain or loss on the statement of activities.
C) As an increase in fund balance.
D) They are not reported.

 

Which financial statement provides details of a government’s general long-term liabilities?

A) Statement of Revenues, Expenditures, and Changes in Fund Balance.
B) Statement of Net Position.
C) Balance Sheet for the General Fund.
D) Budgetary Comparison Statement.

 

What is the purpose of a bond covenant in governmental accounting?

A) To restrict the use of general fund revenues.
B) To provide assurance to bondholders about the repayment terms.
C) To ensure compliance with federal tax regulations.
D) To authorize additional bond issuance.

 

Which of the following is an example of a revenue source used to fund debt service payments?

A) Income taxes.
B) Special assessments.
C) Interfund loans.
D) Investment earnings.

 

What is the significance of a legal defeasance in debt refunding?

A) It eliminates the government’s liability for the old debt.
B) It creates a new liability for the refunded bonds.
C) It requires the immediate recognition of a loss.
D) It allows unrestricted use of bond proceeds.

 

What is the accounting treatment for arbitrage earnings on tax-exempt bonds?

A) Recognized as revenue in the general fund.
B) Recorded as a liability to the federal government.
C) Included as deferred inflows in the government-wide financial statements.
D) Amortized over the life of the bonds.

 

When should long-term liabilities be reported as short-term in governmental financial statements?

A) If they are to be liquidated with expendable available resources.
B) When payment is due within the next fiscal year.
C) When bond proceeds are used for a specific project.
D) When voter approval is pending.

 

What distinguishes revenue bonds from general obligation bonds?

A) Revenue bonds are secured by the government’s taxing power.
B) Revenue bonds are backed by the revenues generated from specific projects.
C) Revenue bonds require voter approval.
D) Revenue bonds are issued for operational purposes only.

 

How are long-term debt proceeds typically classified in governmental fund financial statements?

A) As revenue.
B) As other financing sources.
C) As deferred inflows of resources.
D) As liabilities.

 

What is the role of the Capital Projects Fund in relation to general long-term liabilities?

A) To record liabilities directly.
B) To track the expenditures for major capital projects.
C) To pay interest on long-term debt.
D) To account for lease obligations.

 

Questions and Answers for Learning

 

Explain how governmental funds handle the reporting of general long-term liabilities, and contrast this with the government-wide financial statements.

Answer:

In governmental fund financial statements, general long-term liabilities are not reported directly. Instead, expenditures are recognized in the period when payments (principal and interest) are due. Long-term liabilities, such as bonds payable, are only disclosed in the notes to the financial statements and are not presented on the balance sheet.

In contrast, government-wide financial statements use the accrual basis of accounting. Here, long-term liabilities are reported as part of the statement of net position. Both current and noncurrent portions of the debt are included, and interest expense is accrued and reported in the statement of activities.

 

What is the purpose of advance refunding of bonds, and how is it accounted for in governmental financial statements?

Answer:

Advance refunding occurs when a government issues new bonds and places the proceeds in escrow to retire old bonds at a later date. This allows the government to take advantage of lower interest rates or restructure its debt.

In governmental financial statements:

• The refunded bonds remain on the financial statements until they are legally defeased.
• Any difference between the reacquisition price and the carrying amount of the refunded bonds is reported as a deferred outflow (loss) or inflow (gain). This amount is amortized over the shorter of the life of the new or old bonds.

 

Describe the accounting treatment for capital leases in the government-wide financial statements versus fund financial statements.

Answer:

In government-wide financial statements:

• Capital leases are recognized as a liability at the present value of future lease payments.
• The leased asset is recorded as a capital asset and depreciated over its useful life.
• Lease payments are split into interest expense and a reduction of the lease liability.

In fund financial statements:

• Lease payments are recorded as expenditures in the period they are due.
• No long-term liability or asset is recognized because governmental funds focus on current financial resources.

 

What is the GASB requirement for recognizing compensated absences as liabilities, and how does this impact financial reporting?

Answer:

GASB standards require governments to recognize compensated absences (e.g., unused vacation and sick leave) as liabilities if they are earned by employees and are expected to be paid.

In financial reporting:

• In government-wide financial statements, both the current and noncurrent portions of compensated absences are reported as liabilities.
• In fund financial statements, compensated absences are recognized as expenditures only when they are due and payable, as the focus is on current resources.

This dual treatment ensures that long-term obligations are disclosed in full while maintaining the current resource focus of fund statements.

 

How should a government report conduit debt obligations, and what disclosures are required?

Answer:

Conduit debt obligations are bonds or similar debt instruments issued by a government on behalf of a third party, such as a nonprofit organization, with the third party being responsible for repayment.

Governments typically do not report conduit debt as a liability in their financial statements unless they have a moral or legal obligation to support the debt.

Disclosures required include:

• A description of the conduit debt arrangements.
• The total amount of outstanding conduit debt at the reporting date.

Any commitments or contingencies related to the conduit debt.

 

What are the key steps for calculating and reporting the net pension liability for a government under GASB standards?

Answer:

To calculate and report the net pension liability (NPL):

1. Determine the Total Pension Liability (TPL): Estimate the present value of projected benefit payments based on actuarial assumptions.
2. Calculate Fiduciary Net Position (FNP): Measure the assets set aside to pay pension benefits.
3. Compute the NPL: Subtract the FNP from the TPL.

In financial reporting:

• The NPL is reported in the government-wide statement of net position.
• Annual changes in the NPL, such as service cost, interest on the liability, and differences between expected and actual investment returns, are reported in the statement of activities.

 

How are arbitrage rebate liabilities related to tax-exempt bonds calculated and reported by a government?

Answer:

Arbitrage rebate liabilities occur when governments earn interest on bond proceeds that exceed the bond yield and must rebate the excess earnings to the federal government.

Calculation:

• Compute the difference between the investment earnings on the bond proceeds and the bond yield over a five-year period.

Reporting:

• In government-wide financial statements, the liability is accrued as an expense and reported as a payable.
• In fund financial statements, the liability is recognized as an expenditure only when the payment is due.

 

What considerations should a government take into account when deciding between issuing general obligation bonds versus revenue bonds?

Answer:

Key considerations include:

1. Revenue Source: General obligation bonds are backed by the government’s taxing authority, while revenue bonds are supported by specific project revenues (e.g., tolls or utility fees).
2. Voter Approval: General obligation bonds often require voter approval, whereas revenue bonds typically do not.
3. Risk and Interest Rates: Revenue bonds may carry higher interest rates due to the increased risk of default, as repayment depends on the success of the project.
4. Legal Constraints: Some jurisdictions impose limits on the amount of general obligation debt a government can issue.

Flexibility: Revenue bonds provide more flexibility in funding specific projects without increasing tax burdens.

 

Explain the impact of GASB Statement No. 87 on lease accounting for governmental entities.
Answer:

GASB Statement No. 87 significantly changes lease accounting by requiring governments to recognize most leases as financing arrangements.

Impact:

1. Lessee Accounting:
   • A lease liability and an intangible right-to-use asset are recorded in the government-wide financial statements.
   • Payments are split into principal and interest.
2. Lessor Accounting:
   • The lessor recognizes a lease receivable and a deferred inflow of resources.
   • Lease revenue is recognized over the lease term.
3. Fund Financial Statements:
   • Lease payments are recognized as expenditures in the governmental funds.

This standard improves transparency by providing a clearer picture of a government’s financial obligations related to leases.

 

Discuss the challenges governments face in managing long-term liabilities and strategies for mitigating these challenges.

Answer:

Challenges:

• Rising Debt Levels: Excessive borrowing can lead to unsustainable debt service costs.
• Revenue Fluctuations: Economic downturns reduce revenues, making it harder to meet debt obligations.
• Pension Liabilities: Unfunded pension obligations can significantly strain government finances.
• Arbitrage Rules: Compliance with federal arbitrage regulations adds complexity.

Strategies:

1. Debt Management Policies: Establishing limits on debt levels and clear guidelines for issuance.
2. Revenue Diversification: Developing stable, diverse revenue streams to support debt payments.
3. Refinancing Debt: Taking advantage of lower interest rates to reduce debt service costs.
4. Long-Term Planning: Using multi-year financial forecasting to align resources with liabilities.
5. Pension Reforms: Adjusting benefits, contributions, or investment strategies to address unfunded liabilities.

 

Discuss the differences in accounting treatment for general long-term liabilities between governmental fund financial statements and government-wide financial statements. How do these differences reflect the measurement focus and basis of accounting used in each?

 

Answer:

Governmental fund financial statements and government-wide financial statements treat general long-term liabilities differently due to their distinct measurement focuses and accounting bases.

 

1. Governmental Fund Financial Statements:
   • Measurement Focus: Current financial resources.
   • Basis of Accounting: Modified accrual basis.
   • Long-term liabilities are not reported as liabilities in these statements because the focus is on resources available for current-period spending.
   • Payments on long-term liabilities, such as debt service (principal and interest), are recognized as expenditures when they are due and payable.
   • Any outstanding balances of long-term liabilities are disclosed only in the notes to the financial statements, not on the balance sheet.
2. Government-wide Financial Statements:
   • Measurement Focus: Economic resources.
   • Basis of Accounting: Full accrual basis.
   • General long-term liabilities are reported as liabilities on the statement of net position, including both the current and noncurrent portions.
   • Interest expense is accrued and recognized in the period it is incurred, rather than when it is paid.
   • This approach provides a more comprehensive view of the government’s overall financial position.

Reflection of Accounting Differences:

The differences reflect the purpose of each type of statement. Governmental fund financial statements are designed to show the financial resources available for current operations and compliance with budgetary constraints. Conversely, government-wide statements provide a broader, long-term perspective, illustrating the overall financial health of the government, including its ability to meet future obligations.

 

Explain the concept of advance refunding of debt. Why do governments engage in this practice, and what are the accounting and reporting implications for both governmental funds and government-wide financial statements?

 

Answer:

Advance refunding of debt occurs when a government issues new bonds to retire existing bonds before their scheduled maturity date, placing the proceeds in escrow until the old bonds can be legally defeased.

Reasons for Advance Refunding:

1. Interest Rate Savings: Governments take advantage of lower interest rates to reduce debt service costs.
2. Debt Restructuring: Governments can adjust repayment schedules to better align with current or anticipated financial resources.
3. Compliance with Debt Limits: Advance refunding may be used to manage legal or statutory debt ceilings.

Accounting and Reporting Implications:

1. Governmental Fund Financial Statements:
   • The proceeds from the new bonds are recorded as other financing sources in the fund receiving the proceeds.
   • Payments to the escrow agent are reported as expenditures.
   • The refunded bonds remain on the books until they are legally defeased.
2. Government-wide Financial Statements:
   • The old debt is removed from the statement of net position once it is defeased in substance.
   • Any difference between the reacquisition price of the old debt and its net carrying amount is reported as a deferred inflow or outflow of resources. This amount is amortized over the shorter of the life of the refunded debt or the new debt.
   • The government records the new debt as a liability.

Advance refunding enhances a government’s financial flexibility but must be managed carefully to ensure cost-effectiveness and compliance with accounting standards.

 

What are the primary considerations for a government when deciding whether to issue general obligation bonds or revenue bonds? Include the advantages and disadvantages of each type of bond.

 

Answer:

When deciding between general obligation (GO) bonds and revenue bonds, governments must evaluate various financial, legal, and operational factors.

General Obligation Bonds:

1. Definition:
   • Backed by the full faith and credit of the issuing government, including its taxing power.
2. Advantages:
   • Lower interest rates due to reduced risk for investors.
   • Greater flexibility in usage, as the funds are not tied to a specific revenue-generating project.
3. Disadvantages:
   • Often require voter approval, which can delay issuance.
   • Contribute to the government’s overall debt limit, potentially reducing borrowing capacity for future needs.
4. Use Cases:
   • Typically used for projects that benefit the entire community, such as schools, parks, and infrastructure.

Revenue Bonds:

1. Definition:
   • Secured by the revenues generated from a specific project (e.g., toll roads, utilities).
2. Advantages:
   • Do not require voter approval in many jurisdictions.
   • Do not count against the government’s general debt limits.
3. Disadvantages:
   • Higher interest rates due to the project-specific revenue risk.
   • Limited to projects that can generate sufficient revenue to cover debt service.
4. Use Cases:
   • Suitable for self-sustaining projects like airports, water utilities, or parking facilities.

Primary Considerations:

• Revenue Stability: Governments must assess the reliability of the revenue stream supporting revenue bonds.
• Debt Capacity: If the government is close to its legal debt limit, revenue bonds may be preferable.
• Community Impact: For projects with broad public benefits, GO bonds are more appropriate.
• Market Conditions: Interest rates and investor appetite may influence the choice.

The decision ultimately depends on balancing financial risks, legal constraints, and the intended use of funds to achieve fiscal responsibility and project success.

 

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