Exam 6: Accounting for Capital Projects and Debt Service

In 2017 the voters of Solis City authorized the construction of a new swimming pool for a total cost of no more that $4 million. The voters also approved the issuance of $4 million of 20-year, 5% general obligation serial bonds to be repaid by a special property tax. Interest on these bonds is payable annually on June 30. On June 30, 2017, the city sold the bonds at 101 and signed contracts for the construction of the swimming pool. Principal payments of $200,000 are due each June 30, beginning in 2018. If the property tax revenue is not sufficient to make the necessary principal and interest payments, the city is obligated to transfer the necessary monies from the general fund to the debt service fund. The city does not formally incorporate budgetary entries in the debt service fund but it does use encumbrance accounting for control purposes. The city has a June 30 fiscal year-end. REQUIRED: Assume that the city maintains its books and records in a manner that facilitates the preparation of the fund financial statements. Prepare journal entries in the debt service fund for the following transactions. (a) The city immediately transferred the premium to the debt service fund. The debt service fund may not use the premium to pay principal or interest until the year 2032. (b) On June 30, the city invested the premium in a 10-year 5% certificate of deposit (CD) at a local financial institution. The CD pays interest annually on June 30. Interest is automatically reinvested in the CD. (c) Property taxes in the amount of $250,000 were collected by June 30, 2018. The city expects to collect another $50,000 by August 31. (d) The city transferred to the debt service fund the cash necessary to make the June 30, 2018 principal and interest payments. The checks will be mailed on July 1. (e) The city recognized interest earned on the CD. (f) The city recognized the appropriate liabilities in the debt service fund.

When governments establish capital projects funds, they must maintain a separate fund for each major project

Arbitrage is the process of negotiating resolution of conflicts between the federal government and municipalities over the applicability of federal regulations.

Calhoun County makes annual transfers from the general fund to the debt service fund to pay principal and interest on long-term debt. -When the county makes the transfer the entry in the debt service fund should be

Voters in Phillips City approved the construction of a new city hall building and approved a $5 million bond issue with a stated rate of interest of 6 percent to fund the construction. When the bonds were issued, they sold for 101. What are appropriate entries related to the premium? -In the capital projects fund

In accounting for costs incurred on a major construction project in a capital projects fund, the construction outlays would be reported in the fund as general capital assets.

When bonds are issued at a discount, the debt service fund usually transfers an amount to the capital projects fund to make up for the deficiency.

In the capital projects fund

When a government issues bonds at a discount, where should it report the discount on its (a) fund statements and (b) government-wide statements?

Capital projects funds do not report long-term obligations in the fund.

Previously Rose City issued bonds with a face value of $10 million to construct a new city maintenance facility. Assume that the city maintains its books and records in a manner that facilitates the preparation of fund financial statements. What is the appropriate entry when the city receives a progress billing from the contractor?

In the statement of revenues, expenditures, and changes in fund balance of a debt service fund, the fund balance amount should be reported as restricted for debt service.

A government has elected to issue new debt and use the proceeds to redeem existing debt because there is an economic gain in doing so. There is, however, an "accounting loss" associated with these events. The accounting loss is defined as

Several years ago, the City of Russell issued $7 million of 6 percent serial bonds at 101. Principal payments of $350,000 are due each June 30 for 20 years. Interest on the bonds is payable each December 31 and June 30. As of June 30, 2018, the city has not paid the June 30 principal and interest payment. -The amount of interest payable (assuming an outstanding balance of $4,000,000 of bonds) that should be included on the balance sheet for the debt service fund of the City of Russell at June 30, 2018 is

Governments often receive interest on the temporary investment of capital debt proceeds. Some believe that governments are inconsistent in the way they report interest and other earnings on investments compared to interest on their debt. Explain this comment. Do you believe the reporting is inconsistent?

Special assessment debt to be paid from a water utility fund should be accounted for in that fund along with the related capital improvements.

Voters in Lincoln School District approved the construction of a new high school and approved an $8 million bond issue with a stated rate of interest of 6 percent to fund the construction. Bids were received, and the low bid was $8 million. When the bonds were issued, they sold for face value less bond underwriting fees of $0.5 million. The school board voted to fund the balance of the construction by a transfer from the general fund. -The entry in the capital projects fund to record the additional funding for the construction should be

When bonds are issued for capital projects, premiums are generally not accounted for as the mirror image of discounts. Why not?

Several years ago, the City of Russell issued $7 million of 6 percent serial bonds at 101. Principal payments of $350,000 are due each June 30 for 20 years. Interest on the bonds is payable each December 31 and June 30. As of June 30, 2018, the city has not paid the June 30 principal and interest payment. -Sue City has outstanding $5 million in general obligation term bonds used to finance the construction of the new City Library. Sue City has a June 30 fiscal year-end. Interest at 6 percent is payable each January 1 and July 1. The principal of the bonds is due 10 years in the future. The city budgeted the July 1, 2018 interest payment in the budget for the fiscal year ended June 30, 2018. On June 30, cash was transferred from the general fund to the debt service fund to make the required payment. The maximum amount of interest payable that may be included on the balance sheet of the debt service fund of Sue City at June 30 is

Under existing federal statutes, arbitrage, as it applies to state and local governments is