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: 18/e)
Questions:
6-1
The need for long-term liabilities
Explain
New
6-2
Defining general long-term liabilities;
financial reporting
Define, explain
6-1
6-3
Disclosures about long-term liabilities
Explain
6-2
6-4
Reporting special assessment debt
Explain
Same
6-5
Term and serial bonds
Describe, explain
6-8
6-6
Overlapping debt
Explain
Same
6-7
Debt limit and debt margin
Explain
Same
6-8
Bond anticipation notes
Explain
5-9
6-9
Debt issuance costs
Describe
Same
6-10
Advance refunding of bonds
Explain
Same
Cases:
6-11
Evaluating financing options
Analyze, write
Revised
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
Same
6-16
Direct and Overlapping Debt and the Legal
Debt Margin
Analyze
New
Exercises/Problems:
6-17
Examine the CAFR
Examine
6-16 Updated
6-18
Various
Multiple Choice
Item 5
revised. Items
8, 11 and 13-
,15 are new
6-20
Budgeted and actual debt service transactions
Journal entries
Revised
6-21
Lease agreement
Journal entries, FS
Revised
6-22
Legal debt margin, direct and overlapping
debt
Financial schedules
Same
6-23
Trial balance
Analysis, financial
statements
Same
6-24
Serial bond debt service fund transactions and
statements
Journal entries, FS
Revised
6-25
Term bond debt service fund transactions
Journal entries
Revised
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6-2
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6-3
CHAPTER 6: ACCOUNTING FOR GENERAL LONG-TERM
LIABILITIES AND DEBT SERVICE
Answers to Questions
6-1. 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 term, as
annual tax revenues are often used for current operating purposes and to meet prior
obligations. Thus, long-term debt is frequently used to fund new capital projects (e.g.,
General Problem Information: The need for long-term liabilities
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. 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
that are incurred by a proprietary or fiduciary fund and for which debt service will be
paid from that fund. General long-term liabilities are reported only in the Governmental
Activities column of the government-wide financial statements and not in any fund
financial statements. In comparison, other long-term liabilities are reported in the fund
financial statements of the appropriate proprietary or fiduciary fund, in addition to being
reported in the business-type activities column of the government-wide financial
statements.
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6-3. 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
claims and judgments, compensated absences, and other accrued liabilities) should show
the beginning balance of each major class of long-term liability, as well as additions to,
General Problem Information: Disclosures about long-term liabilities
Learning Objective: 6-2
Topic: General Long-Term Liabilities
Bloom’s Taxonomy: Remember
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
government-wide statement of net position, while any portion of special assessment
debt that is the direct responsibility of a government and will be repaid from general
government resources (the public benefit portion or the amount assessed against
government-owned property) should be reported like other general long-term
liabilities.
General Problem Information: Reporting special assessment debt
Learning Objective: 6-2
Learning Objective: 6-5
Topic: Debt Service Accounting for Special Assessment Debt
6-5
6-5. 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
fund for serial bonds requires entries related primarily to the current repayment
obligation. Term bonds require entries related to the accumulation and investment of
funds needed to retire the debt in its entirety on the maturity date, as well as any currently
required interest payments. Therefore, a debt service fund for term bonds will show
increasing amounts of cash and investments throughout the life of the bonds, while a debt
service fund for serial bonds will not.
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
6-6. 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
more governments. Citizens care about the extent of overlapping debt since it means their
property is subject to assessments from two or more governments for the retirement of
debt. A government is concerned about the amount of overlapping debt since it can affect
the government’s ability to issue general obligation debt. The greater the assessments on
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
measure of property value within the government’s jurisdiction. A debt limit is designed
to help protect the taxpayers and citizens of the government from an excessive tax burden
and potential downgrade of the credit rating of the government. Debt margin is the
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
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
6-8. Bond anticipation notes (BAN) may be classified as current or long-term depending upon
the intent of the government regarding the financing agreement. A BAN is classified as
short-term, unless all legal steps have been taken to refinance the BAN and the intent to
refinance the notes is supported by an ability to secure refinancing of the notes on a long-
term basis. If those two criteria are present, the BAN is, in essence, a long-term liability.
General Problem Information: Bond Anticipation Notes
Learning Objective: 6-5
6-9. Debt issuance costs include insurance, financing charges from rating agencies, and
printing, legal, administrative, and trustee fees. According to GASB Codification Section
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
6-7
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
for debt repayment are not sufficient to repay creditors when the debt matures, or if the
covenants of the existing bonds are excessively burdensome. If the old debt issue is
“defeased,” (either “legal” or “in-substance”), GASB standards permit the liability for the
old issue to be removed from the accounts and the reporting of only the liability for the
new (refunding) issue.
General Problem Information: Advance refunding of bonds
Learning Objective: 6-5
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6-8
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 often dislike tax increases
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
development fee to new homeowners and businesses, property values may be increased
by enhanced infrastructure (e.g., improved streets and highways, adequate storm
drainage, and so forth). As a result, taxpayers may recoup a portion of the development
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
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6-9
6-12. 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
recognize that taxes and tax-supported debt support general government operations
and public services upon which the general citizenry relies.
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: Hard
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.
Indeed, there may not be a “right” answer given the facts of this case, particularly
since the two parties involved in the transaction appear to have reached inconsistent
conclusions about how the debt service advances should be reported. Because the
case involves substantial uncertainty, it affords an excellent vehicle for generating
classroom discussion.
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
Ch. 6, Solutions, 6-13 a. (Cont’d)
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
inappropriate as long as the creditor still insists that it has a valid receivable, and no
legal release has been obtained. From a conceptual viewpoint, the GASB defines
liabilities as:
“…present obligations to sacrifice resources that the government has little or no discretion to
avoid.” [GASB Concepts Statement No. 4]
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
be reached in the future. As the independent auditor, you are not in a position to
override the commission’s opinion, particularly given the stated facts in this case.
However, you should question why the receivable is being carried at zero net
realizable value if there is a positive probability that some portion of the advances
may be repaid in the future. If the county is unwilling to report a nonzero amount of
receivable, then you should advise them to write off the receivable altogether. In
other words, the county cannot have it both ways. This, in turn, would provide
justification for the authority to remove its liability.
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6–11
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.
Extraneous factors can also impact consideration of whether the debt burden is excessive.
There may be environmental factors that impact increases in debt, such as floods or wind
destruction. Additionally, the nature of the government issuing the debt may be a factor;
for example, some cities are responsible for school construction, while in other cities,
school districts separately issue debt (impacting the amount of overlapping debt). Finally,
if the debt is part of a capital improvement plan, the level of debt may be considered
more acceptable since there are plans in place to obtain needed capital assets while
managing the level of debt.
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
2014 90,599 $ 1,792,747 $ 192,151 $ 99,545 $ 92,606 5.17% $ 1,022
2015 92,061 1,939,316 206,856 100,690 106,166 5.47% 1,153
2019 97,610 2,585,416 291,736 120,326 171,410 6.63% 1,756
2020 99,208 2,843,133 280,654 106,551 174,103 6.12% 1,755
2021 100,477 3,080,629 278,042 105,945 172,097 5.59% 1,713
2022 102,404 3,201,498 271,425 86,976 184,449 5.76% 1,801
2023 103,428 3,325,203 309,788 95,158 214,630 6.45% 2,075
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6–12
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.
At current levels, the City of Dreams has 41.68% of its debt limit available, while the
City of Hopes has 66.36% available. Current population is not given, but based upon
2018 levels, that equates to $1,983.56 per capita for Dreams and $4,295.40 for Hopes.
Other calculations of trend data are as follows:
Dreams
Year
Legal Debt Margin
Legal Debt Margin per capita
2021
80,698,755
2,032.82
2020
90,463,527
2,156.00
2019
89,755,124
45,679
1,964.91
2018
101,461,856
48,932
2,073.53
2017
107,625,842
51,627
2,084.68
Hopes
Year
Legal Debt Margin
Legal Debt Margin per capita
2021
70,912,815
3,868.25
2020
60,618,712
17,845
3,396.96
2019
61,598,612
16,795
3,667.68
2018
58,584,765
3,603.22
2017
59,602,548
4,772.79
What does this all mean for a new resident? The City of Hopes is growing in population
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6–13
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
6-16. The following answers apply to the City of San Francisco’s 2019 Comprehensive Annual
Financial Report. They were found in the statistical section.
a. Three. The San Francisco Unified School District, the San Francisco Community
College District, the Bay Area Rapid Transit District.
c. $7,756,615,000; $5,267,628,000.
d. 32.09%.
e. The City of San Francisco’s general obligation bonds amounting to $2,488,987,000
are subject to the legal debt limit. This represents just over 64%
($2,488,987/3,884,194) of the city’s direct debt. The debt subject to limitation differs
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
Solutions to Exercises and Problems
6-17. Each student will have a different annual report; therefore, there is no single set of
answers to each question asked. Asking students to compare their answers to various
questions is an effective active learning in-class technique.
General Problem Information: Examine the CAFR
Learning Objective: 6-1
Learning Objective: 6-2
Topic: Various chapter topics
2. a. 7. c. 12. a.
4. c. 9. d. 14. c.
5. d. 10. d. 15. c.
General Problem Information: Various
Learning Objective: 6-1
Learning Objective: 6-2
Learning Objective: 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
6–15
6-19. VILLAGE OF CENTERVILLE
Debits Credits
1. General Fund:
OTHER FINANCING USES—INTERFUND
TRANSFERS OUT 750,000
CASH 750,000
Debt Service Fund:
EXPENDITURES—BOND PRINCIPAL 600,000
EXPENDITURES—BOND INTEREST 150,000
CASH 750,000
Governmental Activities:
CASH 750,000
GENERAL REVENUES—TAXES 750,000
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6–16
Ch. 6, Solutions, Exercise 6-19 (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
Governmental Activities:
CASH 5,150,000
BONDS PAYABLE 5,000,000
INTEREST PAYABLE* 50,000
PREMIUM ON BONDS PAYABLE 100,000
* As noted in the textbook, this accrued interest could also have been recorded as a credit
to interest expense at the government-wide level.
3. Special Revenue Fund:
CASH 110,000
REVENUES 110,000
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6–17
Ch. 6, Solutions, Exercise 6-19, part 3 (Cont’d)
Debits Credits
Debt Service Fund:
CASH 110,000
OTHER FINANCING SOURCES—
INTERFUND TRANSFERS IN 110,000
Governmental Activities:
CASH 110,000
PROGRAM REVENUES—GENERAL
GOVERNMENT—CAPITAL GRANTS &
CONTRIBUTIONS 110,000
4. Debt Service Fund:
CASH 3,500,000
OTHER FINANCING SOURCES—
PROCEEDS OF REFUNDING BONDS 3,500,000
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
6–18
Ch. 6, Solutions, Exercise 6-19, part 4 (Cont’d)
Debits Credits
Governmental Activities:
CASH 3,500,000
BONDS PAYABLE (SERIAL) 3,500,000
5. Debt Service Fund:
CASH 500,000
OTHER FINANCING SOURCES—
PROCEEDS OF SPECIAL ASSESSMENT BONDS 500,000
ASSESSMENTS RECEIVABLE—CURRENT 25,000
Governmental Activities:
CASH 500,000
SPECIAL ASSESSMENT DEBT WITH
GOVERNMENTAL COMMITMENT 500,000
ASSESSMENTS RECEIVABLE—CURRENT 25,000
ASSESSMENTS RECEIVABLE—UNAVAILABLE 475,000
Chapter 06 – Accounting for General Long–term Liabilities and Debt Service
Ch. 6, Solutions, Exercise 6-19, part 5 (Cont’d)
Debits Credits
EXPENSES—INTEREST ON SPECIAL
ASSESSMENT DEBT (500,000 × 0.03 × 4/12) 5,000
INTEREST PAYABLE 5,000
6. Capital Projects Fund:
CASH 5,000,000
Governmental Activities:
CASH 5,000,000
BONDS PAYABLE 5,000,000
7. Capital Projects Fund:
CASH 2,450,000
OTHER FINANCING USES—
DISCOUNT ON BONDS 50,000
Governmental Activities:
CASH 2,450,000
DISCOUNT ON BONDS PAYABLE 50,000
BONDS PAYABLE 2,500,000