Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6-1
CHAPTER 6: ACCOUNTING FOR GENERAL LONG-TERM
LIABILITIES AND DEBT SERVICE
OUTLINE
Number
Topic
Type/Task
Status
(re: 16/e)
Questions:
6-1
Defining general long-term liabilities;
financial reporting
Define, explain
Same
6-2
Disclosures about long-term liabilities
Explain
Same
6-3
Debt service funds
Explain
New
6-4
Reporting special assessment debt
Explain
Same
6-5
Other long-term liabilities
Explain
New
6-6
Overlapping debt
Explain
Same
6-7
Debt limit and debt margin
Explain
New
6-8
Term and serial bonds
Describe, explain
New
6-9
Debt service fund investments
Describe
Same
6-10
Advance refunding of bonds
Explain
Same
Cases:
6-11
Evaluating financing options
Analyze, write
New
6-12
Policy issues relating to general long-term debt
Analyze, write
6-2 revised
6-13
The case of the vanishing debt
Analyze, write
6-3
6-14
Analysis of general obligation debt burden
Calculate, assess
6-4
Exercises/Problems:
6-15
Examine the CAFR
Examine
6-1 revised
6-16
Various
Multiple Choice
Items 4, 5, 6,
and 10 are
new; 1 and 2
are revised
6-17
Long-term liability transactions
Journal entries
6-3
6-18
Budgeted and actual debt service transactions
Journal entries
New
6-19
Capital leases
Journal entries, FS
New
6-20
Legal debt margin, direct and overlapping
debt
Financial schedules
6-6
6-21
Trial balance
Analysis, financial
statements
6-7 revised
6-22
Serial bond debt service fund transactions and
statements
Journal entries, FS
6-8
6-23
Term bond debt service fund transactions
Journal entries
6-9
6-24
Comprehensive capital assets/serial bond
problem
Journal entries
6-10
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6-2
CHAPTER 6: ACCOUNTING FOR GENERAL LONG-TERM
LIABILITIES AND DEBT SERVICE
Answers to Questions
6-1. General long-term liabilities arise from activities of the General Fund or some other
governmental fund. These liabilities are distinguished from “fund” long-term liabilities
General Problem Information: Defining general long-term liabilities; financial
reporting
Learning Objective: 6-1
Topic: General Long-Term Liabilities
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
6-2. As shown in Illustration 6-1 for the City and County of Denver, note disclosures for long-
term debt (such as bonds, notes, and capital leases) and operating long-term liabilities
(such as claims and judgments, compensated absences, and other accrued liabilities)
General Problem Information: Disclosures about long-term liabilities
Learning Objective: 6-3
Topic: General Long-Term Liabilities
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
6-3. A debt service fund exists to record and manage not only payments of principal and
interest related to general long-term liabilities, but also to record and manage revenues
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6-3
Ch. 6, Answers, Question 6-3 (Cont’d)
General Problem Information: Debt service funds
Learning Objective: 6-5
Topic: Debt Service Funds
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
6-4. (a) Special assessment debt for which a government provides secondary backing should
be reported as “special assessment debt with governmental commitment” in the
General Problem Information: Reporting special assessment debt
Learning Objective: 6-2
Learning Objective: 6-3
Topic: Debt Service Accounting for Special Assessment Debt
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy Medium Hard
6-5. Several different long-term liabilities may arise as a result of governmental operating
activities. Two examples are the result of providing long-term benefits to employees.
General Problem Information: Other long-term liabilities
Learning Objective: 6-1
Topic: Other Long-Term Liabilities
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6-4
Ch. 6, Answers (Cont’d)
6-6. Overlapping debt is when a parcel of real estate or object of personal property is subject
at any given time to assessments for payment of taxes to retire bonds issued by two or
General Problem Information: Overlapping debt
Learning Objective: 6-4
Topic: Overlapping Debt
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
6-7. A debt limit is the maximum amount of long-term debt that a government may legally
have outstanding at any point in time, expressed as a proportion or percentage of some
General Problem Information: Debt limit and debt margin
Learning Objective: 6-4
Topic: Debt Limit and Debt Margin
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
6-8. Term bonds require repayment of long-term debt in a lump sum on a specified date.
Serial bonds are repaid in a series of installments over the life of the debt. A debt service
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6-5
Ch. 6, Answers, Question 6-8 (Cont’d)
General Problem Information: Term and serial bonds
Learning Objective: 6-1
Learning Objective: 6-6
Topic: Types of Serial Bonds; Debt Service Accounting for Term Bonds
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
6-9. GASB standards require that all long-term investments, including investments in debt
securities, be reported at fair value on the date of the fund and government-wide financial
General Problem Information: Debt service fund investments
Learning Objective: 6-1
Topic: Valuation of Debt Service Fund Investments
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
6-10. Advance refunding may be desirable when the interest rate on outstanding debt is
considerably higher than current interest rates, when debt service fund assets accumulated
General Problem Information: Advance refunding of bonds
Learning Objective: 6-6
Topic: Advance Refunding of Debt
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6-6
Solutions to Cases
6-11. The following suggested solution is not all-inclusive; we recommend that the
substance of a student’s analysis be emphasized more than its form. A city council
member may argue that option (1), the sales tax approach, offers the advantage of
spreading the burden for infrastructure improvements across a larger number of
taxpayers, including many non-residents who visit or shop in Surf City. Since taxpayers
Option (2), the development fee approach, has the advantage of being relatively
“invisible” to the public and efficient to administer since the number of developers will
be relatively small. Although real estate developers can be expected to pass the
Option (3), the term bond issue, may be appealing to city council, as well as current
homeowners and business owners; however, if not handled responsibly (i.e., funded
gradually over 20 years), it could place undue burden on future homeowners and business
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6-7
Ch. 6, Solutions, Case 6-11 (Cont’d)
General Problem Information: Evaluating financing options
Learning Objective: 6-1
Topic: Various chapter topics
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making
Level of Difficulty: Medium
6-12. a. As noted in the chapter, the use of long-term debt is a traditional part of the fiscal
policy of state and local governments, particularly for financing general capital assets.
Few governments possess the resources needed to finance capital projects in the short
b. Each student’s memo should identify and support a position on the amendment. This
is a case that can generate significant class discussion. While taxpayers often express
distrust of government and generally desire reduced tax liabilities, astute individuals
General Problem Information: Policy Issues Relating to General Long-term Debt
Learning Objective: 6-1
Topic: Various chapter topics
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making
Level of Difficulty: Medium
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6-8
Ch. 6, Solutions (Cont’d)
6-13. a. In evaluating each student’s performance on this case, we recommend placing more
weight on the quality and depth of analysis than on the student’s final conclusion.
From the perspective of the authority, there are both legal and conceptual issues to
consider before deciding whether it acted appropriately in removing the liability for
In the authors’ view, neither legal nor conceptual analyses justify the authority’s
avoid.” [GASB Concepts Statement No. 4]
In most cases of in-substance defeasance, the barrier for removing debt from a
balance sheet is higher than that for recognizing it initially (i.e., FASB ASC 405.20).
b. Much of the analysis for Part a applies to this part as well. The unwillingness of the
county board of commissioners to write off the receivable for debt service advances
suggests that they believe there is a possibility that the attendance sales trigger may
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6-9
Ch. 6, Solutions, Case 6-13 (Cont’d)
General Problem Information: The case of the vanishing debt
Learning Objective: 6-1
Topic: Section from Chapter
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making
Level of Difficulty: Medium
6-14. a. Students’ initial assessments of the city’s net general debt burden will vary. However,
some students are likely to look at the increasing trend of bonded debt and assess the
trend as a potential concern.
The general trend indicates an increase in the ratio of bonded debt to assessed valuation
and the debt per capita. An analysis of the trend in assessed valuation shows an increase
of about 85% over the past ten years. This compares to an increase of approximately
Ratio of Net General Bonded Debt to Actual Value of Taxable Property and Net General
Bonded Debt per Capita
(Last Ten Fiscal Years – $000s omitted)
Net General Net General
Gross Less: Amount Net Bonded Bonded
Fiscal Estimated Assessed Bonded in Debt Bonded Debt to Debt per
Year Population Valuation Debt Service Fund Debt Assessed Value Capita
2008 $ 90,599 $ 1,792,747 $ 192,151 $ 99,545 $ 92,606 5.17% $ 1,022
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6–10
Ch. 6, Solutions, Case 6-14 (Cont’d)
General Problem Information: Analysis of general obligation debt burden
Learning Objective: 6-1
Learning Objective: 6-3
Topic: General Long-Term Liabilities
Bloom’s Taxonomy: Apply
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
Solutions to Exercises and Problems
6-15. Each student will have a different annual report; therefore, there is no single set of
General Problem Information: Examine the CAFR
Learning Objective: 6-1
Topic: Various chapter topics
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
6-16. 1. b. 6. a.
General Problem Information: Various
Learning Objective: 6-1
Learning Objective: 6-4
Learning Objective: 6-5
Learning Objective: 6-6
Topic: Various chapter topics
Bloom’s Taxonomy: Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6–11
Ch. 6, Solutions (Cont’d)
6-17. VILLAGE OF CENTERVILLE
Debits Credits
1. General Fund:
CASH 750,000
REVENUES 750,000
OTHER FINANCING USES—INTERFUND
Debt Service Fund:
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6–12
Ch. 6, Solutions, 6-17 (Cont’d)
Debits Credits
2. Capital Projects Fund:
CASH 5,000,000
OTHER FINANCING SOURCES—
PROCEEDS OF BONDS 5,000,000
Debt Service Fund:
CASH 150,000
3. Special Revenue Fund:
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6–13
Ch. 6, Solutions, 6-17 (Cont’d)
Debits Credits
Debt Service Fund:
CASH 110,000
OTHER FINANCING SOURCES—
INTERFUND TRANSFERS IN 110,000
EXPENDITURES—INTEREST 15,809
EXPENDITURES—PRINCIPAL 94,191
4. Debt Service Fund:
CASH 2,800,000
OTHER FINANCING SOURCES—
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6–14
Ch. 6, Solutions, 6-17 (Cont’d)
Debits Credits
Governmental Activities:
5. Debt Service Fund:
CASH 500,000
OTHER FINANCING SOURCES—
PROCEEDS OF SPECIAL ASSESSMENT BONDS 500,000
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6–15
Ch. 6, Solutions, 6-17 (Cont’d)
Debits Credits
6. Debt Service Fund:
INVESTMENTS 10,000
REVENUES—CHANGE IN FAIR VALUE
General Problem Information: Long-term liability transactions
Learning Objective: 6-2
Learning Objective: 6-6
Topic: Various chapter topics
Bloom’s Taxonomy: Apply
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Hard
6-18. Debits Credits
a. Debt Service Fund:
ESTIMATED OTHER FINANCING SOURCES—
TRANSFER IN 120,000
APPROPRIATIONS ($8,000,000 x .03 x ½) 120,000
b. Debt Service Fund:
CASH 100,000