Accounting for Governmental and Nonprofit Entities, 18e (Reck)
1) The use of long-term debt is a traditional part of the fiscal policy of state and local governments.
2) Although some governments have issued taxable debt, the interest earned on most debt issued
by state and local governments is exempt from federal taxation and, in some states, from state
taxation.
3) General long-term liabilities are those that arise from activities of governmental funds as well as
those reported as fund liabilities of a proprietary or fiduciary fund.
4) All special assessment debt should be reported in the government-wide statement of net position
in the Business-type Activities column.
5) When a lease payment is made, an entry is made in the debt service (or appropriate
governmental) fund to record an expenditure, and an entry is made in the governmental activities
accounts to reduce Lease Obligations Payable.
6) The use of encumbrance accounting is required for debt service funds.
7) Debt limit is a term used to denote the total amount of indebtedness of specified kinds that is
allowed by law to be outstanding at any one time.
8) Debt margin is the difference between the debt limit and the amount of outstanding debt subject
to the debt limitation.
9) Debt margin is a term used to denote the total amount of indebtedness of specified kinds that is
allowed by law to be outstanding at any one time, while debt limit is the difference between the
debt margin and the amount of outstanding debt subject to the debt limitation.
10) Since the debt of a government is subject to a legal debt limit, there cannot be any legal
overlapping debt.
11) Financial statement note disclosures on long-term liabilities should include information on
authorization of new debt issues, sale of previously authorized issues, and retirement and
refunding of debt during the year.
12) Notes to the financial statements of a state or local government should include a schedule, or
summary, of debt service requirements (principal and interest payments) of debt outstanding on
the balance sheet date.
13) Resources to pay interest on tax-supported bond issues are generally accumulated in special
revenue funds.
14) Long-term debt intended to be repaid from tax levies or special assessments is recorded in debt
service funds.
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15) The debt service activity of a government may be accounted for within the General Fund
unless law mandates the use of a debt service fund.
16) A given parcel of real estate may be subject at a given time to assessments for the payment of
taxes to retire bonds issued by two or more governments.
17) Governmental fund liabilities and expenditures for debt service on general long-term debt are
generally recognized in the reporting period that debt payments are due.
18) If a government has deposited or transferred financial resources dedicated for payment of debt
service to the debt service fund and payment of principal and interest is due early in the following
year, then the expenditure and related liability may be recognized in the debt service fund prior to
year end.
19) Debt service fund activities are reported as part of governmental activities at the
government-wide level.
20) Debt service funds for term bonds would generally include sinking fund investments.
21) Term bond issues mature in installments.
22) Under a bond refunding, the proceeds of a new bond issuance are either deposited in escrow to
pay the debt service on the outstanding bonds when due or used to promptly retire previously
issued bonds.
23) The issuance of general long-term bonds is reported in the fund receiving the proceeds and in
the business-type activities column of the government-wide statements.
24) Special assessment debt that carries government backing should be reported as “special
assessment debt with governmental commitment.”
25) The purpose of a sinking fund is to set aside resources for a substantial debt payment due at
maturity.
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26) Compensated absences, pollution remediation obligations, and claims and judgments are
examples of long-term liabilities that can arise from operating activities.
27) Compensated absences are leaves of absence for which employees earn the right to be paid, but
likely will not be paid due to insufficient government funds.
28) Pollution remediation obligations arise from responsibilities related to the cleanup of
hazardous wastes or hazardous substances resulting from existing pollution.
29) Governments should report an estimated loss from a claim or judgment as an expense and as a
liability in the government-wide financial statements if a claim appears reasonable.
30) Compensated absences may be reported in governmental funds.
31) Which of the following is not properly recorded in the governmental activities accounts?
A) Tax-supported general obligation bonds.
B) Obligations under leases used to finance general capital assets.
C) The long-term portion of judgments and claims.
D) Revenue bonds issued by an enterprise fund.
32) Which of the following statements regarding debt service funds is true?
A) Given the size and relevance of general long-term liabilities, debt service funds are always
reported as major funds.
B) GASB standards require a separate debt service fund to be established for each issuance of
tax-supported or special assessment debt.
C) A debt service fund is used only for debt service activities related to general long-term
liabilities.
D) By law debt service funds are required to use encumbrance accounting.
33) The liability for special assessment bonds that carry a secondary pledge of a city’s general
credit should be reported in the balance sheet(s) of:
A) A debt service fund.
B) A custodial fund.
C) The governmental activities accounts.
D) A custodial fund and disclosed in the notes to the financial statements.