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: 17/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
Same
6-4
Reporting special assessment debt
Explain
Same
6-5
Other long-term liabilities
Explain
Same
6-6
Overlapping debt
Explain
Same
6-7
Debt limit and debt margin
Explain
Revised
6-8
Term and serial bonds
Describe, explain
Revised
6-9
Debt issuance costs
Describe
New
6-10
Advance refunding of bonds
Explain
Same
Cases:
6-11
Evaluating financing options
Analyze, write
Same
6-12
Policy issues relating to general long-term debt
Analyze, write
Revised
6-13
The case of the vanishing debt
Analyze, write
Same
6-14
Analysis of general obligation debt burden
Calculate, assess
Same
6-15
Comparing debt burdens
Calculate, assess
New
Exercises/Problems:
6-16
Examine the CAFR
Examine
Updated
6-17
Various
Multiple Choice
Items 10-15
are new
6-18
Long-term liability transactions
Journal entries
Revised
6-19
Budgeted and actual debt service transactions
Journal entries
Same
6-20
Lease agreement
Journal entries, FS
Revised
6-21
Legal debt margin, direct and overlapping
debt
Financial schedules
Same
6-22
Trial balance
Analysis, financial
statements
Same
6-23
Serial bond debt service fund transactions and
statements
Journal entries, FS
Revised
6-24
Term bond debt service fund transactions
Journal entries
New
6-25
Comprehensive capital assets/serial bond
problem
Journal entries
Same
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 leases) and operating long-term liabilities (such as
General Problem Information: Disclosures about long-term liabilities
Learning Objective: 6-2
Topic: General 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
6-3
Ch. 6, Answers (Cont’d)
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
General Problem Information: Debt service funds
Learning Objective: 6-3
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
(b) If the government is not obligated in any manner for special assessment debt, the
debt should not be reported in the financial statements; however, the notes to the
General Problem Information: Reporting special assessment debt
Learning Objective: 6-2, 6–5
Topic: Debt Service Accounting for Special Assessment 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
6-4
Ch. 6, Answers (Cont’d)
6-5. Several different long-term liabilities may arise as a result of government operating
activities. Two examples are the result of providing long-term benefits to employees. The
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
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: 6-2
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
Chapter 06 – Accounting for General Long-term Liabilities and Debt Service
6-5
Ch. 6, Answers, Question 6-7 (Cont’d)
General Problem Information: Debt limit and debt margin
Learning Objective: 6-2
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
General Problem Information: Term and serial bonds
Learning Objective: 6-4
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. Debt issuance costs include insurance, financing charges from rating agencies, and
General Problem Information: Debt issuance costs
Learning Objective: 6-5
Topic: Accounting for Bond Premiums, Accrued Interest, and Bond Issue Costs
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
Ch. 6, Answers (Cont’d)
6-10. Advance refunding may be desirable when the interest rate on outstanding debt is
General Problem Information: Advance refunding of bonds
Learning Objective: 6-5
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
6-7
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
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; however, if not
Chapter 06 – Accounting for General Long-term Liabilities and Debt Service
6-8
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.
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
6-9
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
removal of the liability. From a legal viewpoint, removal of the liability appears
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
Chapter 06 – Accounting for General Long-term Liabilities and Debt Service
6-10
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.
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
2011 $ 90,599 $ 1,792,747 $ 192,151 $ 99,545 $ 92,606 5.17% $ 1,022
2012 92,061 1,939,316 206,856 100,690 106,166 5.47% 1,153
Chapter 06 – Accounting for General Long-term Liabilities and Debt Service
Ch. 6, Solutions, Case 6-14 (Cont’d)
General Problem Information: Analysis of general obligation debt burden
Learning Objective: 6-1, 6–3
Topic: General Long-Term Liabilities
Bloom’s Taxonomy: Apply
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
6-15. The instructions for this case were intentionally vague in hopes that the students would
use the data provided to examine debt margin trends in total and per capita over the five–
year period. Some instructors may wish to instruct the students to calculate legal debt
margin per capita or to evaluate trends.
While the legal debt margins for the City of Dreams and the City of Hopes are equal in
Chapter 06 – Accounting for General Long-term Liabilities and Debt Service
6-12
Ch. 6, Solutions, Case 6-15 (Cont’d)
General Problem Information: Examine the CAFR
Learning Objective: 6-2
Topic: Debt limit and debt margin
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Easy
Solutions to Exercises and Problems
General Problem Information: Examine the CAFR
Learning Objective: 6-1, 6–2
Topic: Various chapter topics
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
6-17. 1. b. 6. a. 11. c.
General Problem Information: Various
Learning Objective: 6-1, 6–2, 6-3
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
6-13
Ch. 6, Solutions (Cont’d)
6-18. VILLAGE OF CENTERVILLE
Debits Credits
1. General Fund:
CASH 750,000
REVENUES 750,000
OTHER FINANCING USES—INTERFUND
Chapter 06 – Accounting for General Long-term Liabilities and Debt Service
6-14
Ch. 6, Solutions, Exercise 6-18 (Cont’d)
Debits Credits
2. Capital Projects Fund:
CASH 5,000,000
OTHER FINANCING SOURCES—
PROCEEDS OF BONDS 5,000,000
3. Special Revenue Fund:
CASH 110,000
Chapter 06 – Accounting for General Long-term Liabilities and Debt Service
6-15
Ch. 6, Solutions, Exercise 6-18 (Cont’d)
Debits Credits
4. Debt Service Fund:
CASH 3,500,000
Chapter 06 – Accounting for General Long-term Liabilities and Debt Service
6-16
Ch. 6, Solutions, Exercise 6-18 (Cont’d)
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
6-17
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Ch. 6, Solutions, Exercise 6-18, part 5 (Cont’d)
Debits Credits
EXPENSES—INTEREST ON SPECIAL
ASSESSMENT DEBT (500,000 × 0.06 × 4/12) 10,000
INTEREST PAYABLE 10,000
6. Capital Projects Fund:
CASH 5,000,000
OTHER FINANCING SOURCES—
PROCEEDS OF BONDS 5,000,000
6-19. Debits Credits
a. Debt Service Fund: