Governmental and Nonprofit Accounting: Theory and Practice, 10e (Freeman)Problems – Chapter 8

Problem 1 – General Government Refunding Transactions

The City of Dandridge has $8,000 par value of general government, general obligation bonds payable outstanding. The bonds have a call option at 102. The city has decided to call the bonds at their call date. The city uses a Debt Service Fund for all refunding transactions. All amounts are in thousands of dollars.

Transactions:

SITUATION A

1. The city issued $8,160 refunding bonds at par.2. The city paid $8,160 to bondholders to retire the bonds at the call date.

SITUATION B

1. The city issued $4,000 of refunding bonds at par.2. The city transferred $4,160 from the General Fund to the Debt Service Fund to provide

the additional resources needed to call the bonds.3. The city paid $8,160 to bondholders to retire the bonds at the call date.

Requirements:

1. Prepare the journal entries required in a Debt Service Fund to record these transactions, assuming the bond anticipation notes do not qualify for long-term debt treatment. If no entry is required, state “No entry required” and explain why.

2. Indicate the effects of each transaction on the accounting equation of the Debt Service Fund and on the General Capital Assets and General Long-Term Liabilities accounts. If an element is not affected, put “NE” in the appropriate box.

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Answers:

Requirement #1

# Accounts Debit CreditSituation A

1 Cash 8,160OFS – Refunding Bonds 8,160

2 OFU – Bond Principal Retirement 8,160Cash 8,160

Situation B

1 Cash 4,000OFS – Refunding Bonds 4,000

2 Cash 4,160OFS – Transfer from GF 4,160

3 OFU – Bond Principal Retirement 4,000Expenditures – Debt Service – Principal 4,160

Cash 8,160

Requirement #2

Situation A

Trans# Assets Liabilities

Fund Balance GCA GLTL

Net Position

1 8,160 NE 8,160 NE 8,160 (8,160)2 (8,160) NE (8,160) NE (8,160) 8,160

Situation B

Trans# Assets Liabilities

Fund Balance GCA GLTL

Net Position

1 4,000 NE 4,000 NE 4,000 4,0002 4,160 NE 4,160 NE NE NE3 (8,160) NE (8,160) NE (8,160) (8,160)

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Problem 2 – Advance Refunding

The City of Armona has decided to refinance $8,000 par value of general government, general obligation bonds outstanding. The bonds had a related unamortized bond premium of $200. The city issues $6,000 of refunding bonds and transfers $2,700 from the General Fund to the Debt Service Fund. The city paid $8,700 from the Debt Service Fund into an irrevocable trust to cover future payments on the original bonds. All amounts are in thousands of dollars.

Requirements:

1. Record the above transactions in the Debt Service Fund assuming the refinancing meets the conditions for treatment as a defeasance in substance.

2. Record the above transactions in the Debt Service Fund assuming the refinancing does not meet the conditions for treatment as a defeasance in substance.

3. For both requirements (1) and (2), indicate the effects of each transaction on the accounting equation of the Debt Service Fund and on the General Capital Assets and General Long-Term Liabilities accounts. If an element is not affected, put “NE” in the appropriate box.

Answers:

# Accounts Debit CreditRequirement 1

1 Cash 6,000OFS – Refunding Bond Principal 6,000

2 Cash 2,700OFS – Transfer from GF 2,700

3 OFU – Payment to Refunding Bond Escrow Agent 6,000Expenditures – Debt Service – Payment to Refunding

Bond Escrow Agent 2,700Cash 8,700

Requirement 21 Cash 6,000

OFS – Refunding Bond Principal 6,000

2 Cash 2,700OFS – Transfer from GF 2,700

3 Investments 8,700Cash 8,700

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Requirement 3

Refunding

Trans# Assets Liabilities

Fund Balance GCA GLTL

Net Position

1 6,000 NE 6,000 NE 6,000 (6,000)2 2,700 NE 2,700 NE NE NE3 (8,700) NE (8,700) NE (8,200) 8,200

Investment (non-Refunding)

Trans# Assets Liabilities

Fund Balance GCA GLTL

Net Position

1 6,000 NE 6,000 NE 6,000 (6,000)2 2,700 NE 2,700 NE NE NE3 NE NE NE NE NE NE

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Problem 3 – Debt Service Fund Transactions

Listed below are selected transactions from a Loudon County Debt Service Fund (all amounts are in thousands of dollars).

1. The remaining funds of a Capital Projects Fund, $1,500, were transferred to the Debt Service Fund to be used in the repayment of debt and interest on that debt that was issued to finance and expansion of the county courthouse.

2. The county General Fund transferred $8,600 to the Debt Service Fund to provide financing for principal, interest, and fiscal agent fees for debt service transactions during the year. $6,000 of the transfer from the General Fund and all of the transfer from the CPF was invested.

3. The semi-annual payment of interest on bonds issued several years ago by a Capital Projects Fund came due and was paid. The outstanding principal of these 20-year, 4% face rate, term bonds is $3,000. The unamortized discount on these bonds is $100. The bonds were issued 15 years ago on this date. The payment includes fiscal agent fees of $10.

4. The county has agreed to set up a small water treatment facility for the remote District 7, now that the local water supply has been polluted by a hog farm upstream. The cost of the facility, $2,500, is to be financed over 5 years by special assessments on the homeowners in that district, although the debt is guaranteed by the county. The assessment principal is paid annually, although the interest (4%) is paid semi-annually. The first interest payment is due in 6 months, with the first principal payment due in one year (60 days after year-end).

5. The annual payment of serial bonds issued 10 years ago by the county came due. The amount owed is $1,250 in principal, $20 interest, and $5 in fiscal agent fees. The amount due was paid.

6. The county received interest on its investments, $85. In addition, investments that originally cost $4,000 were sold for $3,975. (See entry #2)

7. Another term bond issued 20 years ago by the county came due and was paid. The face amount and rate was $3,200 and 3%, respectively, and pays interest semi-annually. The fiscal agent fees were $60.

8. The semi-annual payment for interest on the outstanding special assessment bonds was paid when due. Also, $300 has been collected for the principal payment due next year.

9. The regular semi-annual interest payment on the term bonds came due and was paid. (See entry #3)

10. A serial bond issued in the current year has its first annual payment of principal and interest due on the third day of the next fiscal year. As is required by the debt covenant and following the general procedures for all debt issues of the county, $1,200 ($1,000 for principal, $180 for interest, and $20 for fiscal agent fees) has been transferred from the General Fund to the Debt Service Fund to make this payment.

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Requirements:

1. Record the above transactions in the Debt Service Fund.2. Indicate the effects of each transaction on the accounting equation of the Debt Service

Fund and on the General Capital Assets and General Long-Term Liabilities accounts. If an element is not affected, put “NE” in the appropriate box.

Answers:

Requirement #1

# Accounts Debit Credit1 Cash 1,500

OFS – Transfer from CPF 1,500

2a Cash 8,600OFS – Transfer from GF 8,600

2b Investments 7,500Cash 7,500

3 Expenditures – Debt Service – Interest (3,000 x .04 / 2) 60Expenditures – Debt Service – Fiscal Agent Fees 10

Cash 70

4 Assessments Receivable – Current 500Assessments Receivable – Deferred 2,000

Revenues – Special Assessments 500Deferred Revenues 2,000

5 Expenditures – Debt Service – Principal 1,250Expenditures – Debt Service – Interest 20Expenditures – Debt Service – Fiscal Agent Fees 5

Cash 1,300

6a Cash 85Revenues – Investments Income 85

6b Cash 3,975Revenues – Investment Income 25

Investments 4,000

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# Accounts Debit Credit7 Expenditures – Debt Service – Principal 3,200

Expenditures – Debt Service – Interest (3,000 x .03 / 2) 45Expenditures – Debt Service – Fiscal Agent Fees 60

Cash 3,305

8a Expenditures – Debt Service – Interest (2,500 x .04 / 2) 50Cash 50

8b Cash 300Assessments Receivable -- Current 300

9 Expenditures – Debt Service – Interest (3,000 x .04 / 2) 60Expenditures – Debt Service – Fiscal Agent Fees 10

Cash 70

10 Cash 1,200 OFS – Transfer from GF 1,200

Requirement #2

Trans# Assets Liabilities

Deferred Inflows

Fund Balance GCA GLTL

Net Position

1 1,500 NE NE 1,500 NE NE NE2a 8,600 NE NE 8,600 NE NE NE2b NE NE NE NE NE NE NE3 (70) NE NE (70 NE NE NE4 2,500 NE 2,000 500 NE NE NE5 1,300 NE NE 1,300 NE (1,250) 1,250

6a 85 NE NE 85 NE NE NE6b (25) NE NE (25) NE NE NE7 3,305 NE NE 3,305 NE (3,200) 3,200

8a (50) NE NE (50) NE NE NE8b NE NE NE NE NE NE NE9 (70) NE NE (70) NE NE NE

10 1,200 NE NE NE1,200 NE NE NE

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