68) In the current fiscal year, St. George County issued $3,000,000 in general obligation term
bonds for 102. The county is required to use any accrued interest or premiums for servicing the
debt issue.
a. How would the bond issue be recorded at the fund and government-wide levels?
b. How would the bond issue be reported in the fund financial statements and the government-wide
financial statements?
c. What effect, if any, do interest payments have on the carrying value of the bond issue as reported
in the financial statements?
69) A government’s MD&A states that government-wide net position decreased as a result of the
issuance of a long-term liability during the current reporting period. Does this sound correct? How
does the issuance of long-term debt typically affect net position in the year of issuance?
70) How are general long-term liabilities distinguished from other long-term liabilities of the
government? How does the financial reporting of general long-term liabilities differ from the
financial reporting of other long-term liabilities?
71) Explain the essential differences between regular serial bonds, deferred serial bonds, annuity
serial bonds, and irregular serial bonds. How do regular serial bonds differ from term bonds?
72) “The entire debt arising from the acquisition of general capital assets under a lease agreement
should be reported as debt of the fund that accounts for the activities of the department or function
using the leased asset. Only debt arising from the lease of equipment used by a number of
departments should be reported in the governmental activities accounts, rather than a fund.” Do
you agree? Why or why not?
73) Explain the financial reporting for special assessment bonds when a government assumes
responsibility for debt service should special assessment collections be insufficient, and when the
government assumes no responsibility whatsoever.
74) The City of Jamestown has agreed to acquire a new city maintenance building under a lease
agreement. At the inception of the lease, a payment of $100,000 is to be made; nine annual lease
payments, each in the amount of $100,000, are to be made at the end of each year after the
inception of the lease. The total amount to be paid under this lease, therefore, is $1,000,000.
The town could borrow this amount for nine years at the annual rate of 8 percent; therefore, the
present value of the lease at inception, including the initial payment, is $724,689. Assume that the
fair value of the building at the inception of the lease is $750,000.
a. Prepare the entry that should be made in a capital projects fund at the inception of the lease. (If
no entry is required for a transaction/event, select “No Journal Entry Required” in the first
account field.)
b. Prepare the entry that should be made at the inception of the lease in the governmental activities
journal. (If no entry is required for a transaction/event, select “No Journal Entry Required”
in the first account field.)
c. Prepare the entry that should be made in the debt service fund and governmental activities
journal to record the second lease payment. (If no entry is required for a transaction/event,
select “No Journal Entry Required” in the first account field.)
33
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c.
Debt Service Fund:
EXPENDITURES–INTEREST
49,975
EXPENDITURES–PRINCIPAL
50,025
CASH
100,000
Governmental Activities:
EXPENSES–INTEREST ON LEASES
49,975
LEASE OBLIGATIONS PAYABLE
50,025
CASH
100,000
Payment
Number
Amount of
Payment
Interest on Unpaid
Balance at 8%
Payment on
Principal
Unpaid Lease
Obligation
$724,689
1
$100,000
$ 0
$100,000
624,689
2
100,000
49,975
50,025
574,664
Difficulty: 3 Hard
Topic: Use of Debt Service Funds to Record Lease Payments
Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including
schedules of statutory debt limits, debt margin, and overlapping debt.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Reporting
75) As of December 31, 2019, Westport had $9,500,000 in 4.5 percent serial bonds outstanding.
The serial bonds pay interest semiannually on July 1 and December 31, with $500,000 in bonds
being retired on each interest payment date. Resources for payment of principal and interest are
transferred from the General Fund. Prepare debt service fund and government-wide entries in
general journal form to reflect, as necessary, the following information and transactions for FY
2020.
(1) The operating budget for FY 2020 consists of other financing sources (transfers from the
General Fund) equal to estimated principal and interest payments. Appropriations also must be
provided for interest payments and bond redemptions on July 1 and December 31. (If no entry is
required for a transaction/event, select “No Journal Entry Required” in the first account
field.)
(2) Cash was received from the General Fund and checks were written and mailed for the July 1
principal and interest payments.