jacqueline l. reck accounting for suzanne l. lowensohn...

6-1

Accounting for Governmental & Nonprofit Entities

JACQUELINE L. RECK SUZANNE L. LOWENSOHN

17/e

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6-2

Accounting for General Long-term Liabilities and Debt

Service

C H A P T E R 6

6-3

Learning Objectives

6-1 Explain what types of liabilities are classified as general long-term liabilities.

6-2 Make journal entries in the governmental activities general journal to record the issuance and repayment of general long-term debt.

6-3 Prepare note disclosures for general long-term debt.

6-4

Learning Objectives

6-4 Describe the reasons for statutory debt limits and explain the terms debt margin and overlapping debt. 6-5 Explain the purpose and types of debt service funds. 6-6 Make appropriate journal entries to account for activities of debt service funds.

6-5

Governments and Long-term Debt

Long-term debt is a traditional part of

governmental fiscal policy

Interest on government debt is

generally tax-exempt

The tax-exempt feature allows

governments to issue debt at low rates

Most states have statutory limits on the amount of debt state

and local governments can issue

6-6

General Long-term Liabilities

• 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.

• General long-term liabilities are reported as liabilities in the Governmental Activities column of the government-wide statement of net position but are not reported as liabilities of governmental funds.

6-7

Long-term Liability Sources

Financing activities

• Bonds • Notes • Capital leases

Operating activities

• Claims and judgments

• Pensions • Environmental

issues

6-8

Accounting for Long-term Liabilities

• Long-term liabilities are recognized in the governmental activities records at the government-wide level, even though the proceeds may be recorded in a governmental fund.

• Long-term liabilities are also recognized in proprietary funds and private purpose trust funds when the long-term debt will be serviced by those funds

6-9

Long-term Liability Disclosures

• Changes in long-term debt, such as authorization or issuance of new debt or retirement of existing debt, should be presented in a detailed schedule of changes in the notes to the financial statements.

• An additional schedule of when payments of principal and interest will be made in future years provides useful information to the users of the financial statements.

• If the debt recognized by a proprietary fund or private purpose trust fund is also backed by the full faith and credit of the government, the contingent liability of the government should be disclosed in the notes to the financial statements.

6-10

Debt Limit and Debt Margin

Debt Limit The total

amount of indebtedness of specified kinds that is

allowed by law to be

outstanding at any one time.

Debt Margin The difference

between the amount of debt limit

calculated as prescribed by law

and the net amount of outstanding

indebtedness subject to limitation.

6-11

Overlapping Debt

6-12

Debt Service Funds

• General long-term liabilities are accounted for in a debt service fund.

• One debt service fund can account for multiple issues of long-term debt, using subsidiary records to track the individual issues.

6-13

Debt Service Funds

• Although some debt issues may require lump-sum payments, good financial management suggests that the financial obligation should be spread over time.

• The debt service fund is both a budgeting and accounting entity, which allows for planning and management of the repayment of long-term debt.

• Interest payable is not accrued in the debt-service fund; rather it is recorded at the government-wide level.

6-14

Bonds

Serial Bonds • Regular Serial Bonds • Deferred Serial Bonds • Annuity Serial Bonds • Irregular Serial Bonds

Term Bonds

6-15

Accounting for Regular Serial Bonds Year One

Debits Credits Serial Bond Debt Service Fund: 1. Estimated Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 Estimated Other Financing Sources . . . . . . . . . . . . . . 6,000 Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000 Serial Bond Debt Service Fund: 2a. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,200 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,200 Governmental Activities: 2b. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,200 General Revenues—Sales Taxes— Restricted for Debt Service . . . . . . . . . . . . . . . . . 31,200

6-16

Accounting for Regular Serial Bonds Year One

Debits Credits Serial Bond Debt Service Fund: 3. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 Other Financing Sources—Interfund Transfers In 6,000 Serial Bond Debt Service Fund: 4a. Expenditures—Bond Interest . . . . . . . . . . . . . . . . . . 36,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000 Governmental Activities: 4b. Expenses—Interest on Long-term Debt . . . . . . . . . . 36,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000 Governmental Activities: 5. Expenses—Interest on Long-term Debt . . . . . . . . . . . 3,000 Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000

6-17

Accounting for Regular Serial Bonds Year One

Debits Credits Serial Bond Debt Service Fund: 6a. Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000 Estimated Revenues . . . . . . . . . . . . . . . . . . . . . . 30,000 Estimated Other Financing Sources . . . . . . . . . . 6,000 6b. Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,200 Other Financing Sources—Interfund Transfers In . . 6,000 Expenditures—Bond Interest . . . . . . . . . . . . . . . 36,000 Fund Balance—Restricted—Debt Service . . . . . 1,200

6-18

Accounting for Regular Serial Bonds Year Two

Debits Credits Serial Bond Debt Service Fund: 7. Estimated Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 135,000 Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,200 Budgetary Fund Balance . . . . . . . . . . . . . . . . . . . . 4,800 Serial Bond Debt Service Fund: 8a. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,100 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,100 Governmental Activities: 8b. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,100 General Revenues—Sales Taxes— Restricted for Debt Service . . . . . . . . . . . . . . . . . . . 134,100

6-19

Accounting for Regular Serial Bonds Year Two

Debits Credits Serial Bond Debt Service Fund: 9a. Expenditures—Bond Principal . . . . . . . . . . . . . . . . . 60,000 Expenditures—Bond Interest . . . . . . . . . . . . . . . . . . 36,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,000 Governmental Activities: 9b. Bonds Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 Expenses—Interest on Long-term Debt . . . . . . . . . . 33,000 Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,000

6-20

Accounting for Regular Serial Bonds Year Two

Debits Credits Serial Bond Debt Service Fund: 10a. Expenditures—Bond Interest . . . . . . . . . . . . . . . . . 34,200 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,200 Governmental Activities: 10b. Expenses—Interest on Long-term Debt . . . . . . . . . 34,200 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,200 Governmental Activities: 11. Expenses—Interest on Long-term Debt . . . . . . . . . . 2,850 Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . 2,850

6-21

Accounting for Regular Serial Bonds Year Two

Debits Credits Serial Bond Debt Service Fund: 12a. Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,200 Budgetary Fund Balance . . . . . . . . . . . . . . . . . . . . . 4,800 Estimated Revenues . . . . . . . . . . . . . . . . . . . . 135,000 12b. Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,100 Fund Balance—Restricted—Debt Service . . . . 3,900 Expenditures—Bond Interest . . . . . . . . . . . . . . 70,200 Expenditures—Bond Principal . . . . . . . . . . . . . 60,000

6-22

Accounting for Term Bonds Actuarial Basis

Debits Credits Term Bond Debt Service Fund: 1. Estimated Revenues . . . . . . . . . . . . . . . . . . . . . . . 117,843.33 Budgetary Fund Balance . . . . . . . . . . . . . . . . . 42,843.33 Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . 75,000.00 Term Bond Debt Service Fund: 2a. Taxes Receivable—Current . . . . . . . . . . . . . . . . . 120,000.00 Estimated Uncollectible Current Taxes . . . . . . 3,000.00 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,000.00 Governmental Activities: 2b. Taxes Receivable—Current . . . . . . . . . . . . . . . . . 120,000.00 Estimated Uncollectible Current Taxes . . . . . . . 3,000.00 General Revenues—Property Taxes—Restricted for Debt Service . . . . . . . . . . . . . . . . . . . . . . . 117,000.00

6-23

Accounting for Term Bonds Actuarial Basis

Debits Credits Term Bond Debt Service Fund: 3a. Expenditures—Bond Interest . . . . . . . . . . . . . . . . . 37,500.00 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500.00 Governmental Activities: 3b. Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500.00 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500.00 Term Bond Debt Service Fund and Governmental Activities: 4. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,400.00 Taxes Receivable—Current . . . . . . . . . . . . . . . . 57,400.00 5. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,893.57 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,893.57

6-24

Accounting for Term Bonds Actuarial Basis

Debits Credits Term Bond Debt Service Fund: 6a. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,261.99 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,261.99 Governmental Activities: 6b. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,261.99 General Revenues—Investment Earnings—Restricted for Debt Service . . . . . . . . . . . . . . . . . . . . . . . . 1,261.99 Term Bond Debt Service Fund: 7a. Expenditures—Bond Interest . . . . . . . . . . . . . . . . 37,500.00 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500.00 Governmental Activities: 7b. Expenses—Interest on Long-term Debt . . . . . . . . 37,500.00 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500.00

6-25

Accounting for Term Bonds Actuarial Basis

Debits Credits Term Bond Debt Service Fund and Governmental Activities: 8. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,000.00 Taxes Receivable—Current . . . . . . . . . . . . . . . . 58,000.00 9. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,893.57 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,893.57 Governmental Activities: 10. Expenses—Interest on Long-term Debt . . . . . . . . . . 37,500.00 Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500.00

6-26

Accounting for Term Bonds Actuarial Basis

Debits Credits Term Bond Debt Service Fund: 11a. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,883.10 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,883.10 Governmental Activities: 11b. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,883.10 General Revenues—Investment Earnings— Restricted for Debt Service . . . . . . . . . . . . . 1,883.10 Term Bond Debt Service Fund and Governmental Activities: 12. Taxes Receivable—Delinquent . . . . . . . . . . . . . . . . 4,600.00 Estimated Uncollectible Current Taxes . . . . . . . . . . 3,000.00 Taxes Receivable—Current . . . . . . . . . . . . . . 4,600.00 Estimated Uncollectible Delinquent Taxes . . . 3,000.00

6-27

Accounting for Term Bonds Actuarial Basis

Debits Credits Term Bond Debt Service Fund 13a. Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000.00 Budgetary Fund Balance . . . . . . . . . . . . . . . . . . 42,843.33 Estimated Revenues . . . . . . . . . . . . . . . . . . 117,843.33 13b. Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,000.00 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,145.09 Expenditures—Bond Interest . . . . . . . . . . . . 75,000.00 Fund Balance—Restricted—Debt Service . . 45,145.09

6-28

Financial Reporting for Debt Service Funds

Part of governmental activities at the government-wide level

Separate column if major fund

Otherwise included with all other nonmajor governmental funds

6-29

Debt Service Fund Investments

• Resources held in debt service funds to be used for repayment of debt are generally invested in low-risk securities.

• Investments are marked to market at the end of the accounting period.

• Any unrealized gains or losses are reported in the statement of revenues, expenditures and changes in fund balance at the fund level and also in the statement of activities at the government-wide level.

6-30

Deposit and Investment Risks

Risks related to deposits and

investments held at

financial institutions

Interest rate risk

Custodial credit risk Credit risk

Concentration risk

6-31

Deposit and Investment Disclosures

• The government should describe in its financial statement notes (1) legal and contractual provisions for deposits and investments, including types of investments authorized to be held and any significant violations of legal or contractual provisions and (2) investment policies related to the kinds of risks described in the previous slide.

• Investment disclosures should be organized by type of investment.

• Additionally, the government should provide disclosures about the specific risks discussed in the previous slide.

6-32

Capital Lease Payments

• Governments may use a General Fund, a special revenue fund, or a debt service fund to record capital lease payments since the annual lease payments are merely installment payments of general long-term debt.

• At the inception of the lease an obligation is recognized at the government-wide level in an amount equal to the present value of the stream of annual payments.

6-33

Debt Refunding

New bonds are issued to retire previously issued bonds. This may be done when: • Debt service funds to retire bonds won’t be sufficient

when bonds mature • Interest rate on new debt is lower than on existing debt • Covenants on existing debt are excessively burdensome

Advance refunding of debt

• Legal defeasance • In-substance defeasance

6-34

Looking Forward

This chapter described the types of debt and other long-term liabilities that are called general long-term liabilities. It also presented examples of accounting entries related to long-term debt, as well as financial statement reporting and required disclosures. Chapter 7 presents accounting for business-type activities of state and local governments.