Exam 6: Accounting for Capital Projects and Debt Service

Debt service funds are maintained to account for resources accumulated to pay interest and principal on general long-term debt-that is, long-term debt associated primarily with governmental activities.

In early 2017, Jackson City issued $10 million of 6 percent term bonds to finance a highway construction project. Because of problems related to the Endangered Species Act, the city deferred highway construction that year. In early 2018, the city entered into contracts for construction that will begin in summer 2018 and be completed by summer 2019. When the city realized they would not need the bond proceeds in 2018, they invested the proceeds in risk-free federal government securities bought to yield 7 percent. What potential arbitrage liability, if any, should the city recognize as a result of the year 2018 transactions?

The City of Williamsburg decided to defease old 6 percent bonds carried in its Electric Enterprise Fund with new 4.5 percent bonds. As a result of the defeasance, the city incurred an accounting loss. The loss should be recognized

The repayment of bond principal should be reported in the fund statements of a debt service fund as a/an

Raygun County had outstanding $35 million in Series 1998 general obligation bonds on June 30, 2018. The bonds were issued at an interest rate of 10 percent with interest payable on June 30 and December 31. In July 2018, interest rates declined substantially, and the county issued refunding bonds in the amount of $35 million at 5 percent. The proceeds of the refunding bonds were placed in escrow along with $2,800,000 held in the county's debt service fund as a sinking fund for the 1998 debt. The proceeds of the refunding bonds and the sinking fund amount would be used in December 2018 (the call date) to purchase the 1998 debt at a 3 percent call premium, totaling $1,050,000, plus accrued interest of $1,750,000. The County had $250,000 of unamortized debt issue costs on the 1998 bonds, which it reported in its government-wide financial statements. This amount combined with the call premium resulted in a $3,050,000 "loss" on the refunding. REQUIRED: (a) What journal entries should the county make in July 2018 to record the in-substance defeasance of the 1998 debt in its debt service fund? (b) What debt should be reported in the county's government-wide financial statements at July 2018? (c) What journal entry should be made in the county's debt service fund in December 2018 to record the purchase of the old debt at the call date? (d) How should the "loss" on the refunding be recognized in the government-wide financial statements? Why did the GASB choose this method of recognition?

Use of a debt service fund is required.

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 bonds payable that should be included on the balance sheet for the debt service fund of the City of Russell at June 30, 2018 is

Assuming that the government is not obligated in any manner, the debt service transactions of a special assessment bond issue should be reported in a(n)

Six years ago Hill City issued $10 million of 6 percent term bonds, due 30 years from the date of issue. Interest on the bonds is payable semi-annually on January 1 and July 1. Hill City has a September 30 fiscal year-end. The amount of interest payable that should be included on the balance sheet for the debt service fund of Hill City at September 30 is

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 receipt of the bond proceeds should be

The City of Twin Falls issued $5 million in special assessment bonds to finance major reconstruction of the turbines and facilities used in generating electricity that is sold to the citizens in the surrounding area. The electric power distribution activities are accounted for in an enterprise fund, which service the debt. If the city is NOT legally obligated for the debt, the appropriate entry in the city's Electric Enterprise Fund to record this event is

Governments are required to integrate budgetary account information in their debt service and capital projects funds only when control cannot readily be established by means other than a budget.

When the city collects the special assessment, it should be accounted for in which fund of the City of Arlington?

Salt City issued $5 billion of bonds at face value to fund the reconstruction of major interstate highways in and around the city. The bond underwriters withheld $2 million for underwriting fees and remitted the balance to the city. Assuming the city maintains its books and records in a manner that facilitates the preparation of fund financial statements, how should the underwriting fee be recorded in the capital projects fund?

The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks. The citizens agreed to a special assessment on their property for 20 years in an amount sufficient to pay principal and interest on the bonds. The city will oversee the construction of the sidewalks and act as agent for servicing the debt. If the special assessment is not sufficient to make the principal and interest payments, the city will assume the obligations. -When the city collects the special assessment, it should be accounted for in which fund of the City of Arlington?

When the City of Arlington levies the special assessment tax, the best entry would be

The City of St. Joe had outstanding $5 million of 6 percent bonds with a call provision. Due to changes in the prevailing interest rates, the city issued new bonds at 4.5 percent and used the proceeds to call the 6 percent bonds. This is an example of

A government can lock in savings due to a decline in interest rates by using a process called defenestration.

When bonds are issued at a premium, the capital projects fund should transfer those excess resources to the debt service fund.

What amount of gain or loss should be recognized on this transaction?