YOSEF KIBREABChapter_06powerpointCOMPILED THIS.pdf

No one can interfere this material normal for all

1. this document was brought to u by
YOSEF KIBREAB 6-1
Accounting for
Governmental
& Nonprofit
Entities
JACQUELINE L. RECK
SUZANNE L. LOWENSOHN
17/e
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.

2. this document was brought to u by
YOSEF KIBREAB 6-2
Accounting for
General Long-term
Liabilities and Debt
Service
C
H
A
P
T
E
R

6

3. this document was brought to u by
YOSEF KIBREAB 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.

4. this document was brought to u by
YOSEF KIBREAB 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.

5. this document was brought to u by
YOSEF KIBREAB 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. this document was brought to u by
YOSEF KIBREAB 6-6
General Long-term Liabilities
•General long- te rm 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- t
erm 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.

7. this document was brought to u by
YOSEF KIBREAB 6-7
Long-term Liability Sources
Financing
activities
•Bonds
•Notes
•Capital leases
Operating
activities
•Claims and
judgments
•Pensions
•Environmental
issues

8. this document was brought to u by
YOSEF KIBREAB 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- t

proprietary funds and private purpose trust funds
when the long- term debt will be serviced by those
funds

9. this document was brought to u by
YOSEF KIBREAB 6-9
Long-term Liability Disclosures
•Changes in long- t erm 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
i
nterest will be made in future years provides useful information
to the users of the financial statements.
•If t
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.

10. this document was brought to u by
YOSEF KIBREAB 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.

11. this document was brought to u by
YOSEF KIBREAB 6-11
Overlapping Debt

12. this document was brought to u by
YOSEF KIBREAB 6-12
Debt Service Funds
•General long- t erm liabilities are accounted for in a
debt service fund.
•One debt s
ervice fund can account for multiple
issues of long- term debt, using subsidiary records
to track the individual issues.

13. this document was brought to u by
YOSEF KIBREAB 6-13
Debt Service Funds
•Although some debt issues may require lump- s um
payments, good financial management suggests
that the financial obligation should be spread over
time.
•The debt service fund is both a budgeting and
ac
counting entity, which allows for planning and
management of the repayment of long- term debt.
•Interest payable is not accrued in the debt-se
rvice
fund; rather it is recorded at the government-wide
level.

14. this document was brought to u by
YOSEF KIBREAB 6-14
Bonds
Serial Bonds
•Regular Serial Bonds
•Deferred Serial Bonds
•Annuity Serial Bonds
•Irregular Serial Bonds
Term Bonds

15. this document was brought to u by
YOSEF KIBREAB 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

16. this document was brought to u by
YOSEF KIBREAB 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

17. this document was brought to u by
YOSEF KIBREAB 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

18. this document was brought to u by
YOSEF KIBREAB 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

19. this document was brought to u by
YOSEF KIBREAB 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

20. this document was brought to u by
YOSEF KIBREAB 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

21. this document was brought to u by
YOSEF KIBREAB 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

22. this document was brought to u by
YOSEF KIBREAB 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

23. this document was brought to u by
YOSEF KIBREAB 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

24. this document was brought to u by
YOSEF KIBREAB 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

25. this document was brought to u by
YOSEF KIBREAB 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

26. this document was brought to u by
YOSEF KIBREAB 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

27. this document was brought to u by
YOSEF KIBREAB 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

28. this document was brought to u by
YOSEF KIBREAB 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

29. this document was brought to u by
YOSEF KIBREAB 6-29
Debt Service Fund Investments
•Resources held in debt service funds to be used
f
or repayment of debt are generally invested in
low-risk securities.
•Investments are marked to market at the end of
t
he 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.

30. this document was brought to u by
YOSEF KIBREAB 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

31. this document was brought to u by
YOSEF KIBREAB 6-31
Deposit and Investment Disclosures
•The gov
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
i
nvestment.
•Additionally, the gov
ernment should provide disclosures
about the specific risks discussed in the previous slide.

32. this document was brought to u by
YOSEF KIBREAB 6-32
Capital Lease Payments
•Governments may use a General Fund, a special
r
evenue 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 t

recognized at the government-wide level in an
amount equal to the present value of the stream of
annual payments.

33. this document was brought to u by
YOSEF KIBREAB 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

34. this document was brought to u by
YOSEF KIBREAB 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.