301268 Flashcards
Where should receipts from a special tax levy to retire and pay interest on general obligation bonds be recorded?
General fund
Permanent fund
Capital projects fund
Debt service fund
Debt service fund
Debt service funds are used to account for payments of the maturing principal and related interest of general government long-term debt and the accumulation of financial resources for these payments. The resources for these payments may be accumulated from tax levies specifically designated for debt service and/or by transfers from other funds.
Debt Service Funds
Debt service funds are governmental funds used to account for the accumulation of resources for and the payment of principal and interest associated with general long-term debt as they come due (mature). Unmatured amounts are not accrued. Debt service funds are accounted for on the modified accrual basis. (GASB 1300.107 and 1600.120)
Note: The collection of resources and periodic payments for finance lease obligations may be recorded in a debt service fund but may also be accounted for in the general fund. Finance leases for a proprietary fund would be accounted for in that fund. (GASB L20.118, .120)
Transfer
In governmental accounting, some interfund transactions are termed “transfers.” These transactions represent a payment or receipt of resources by one fund from another without requirement for repayment or other reciprocation. These are internal transactions within a government. Many interfund transactions are between governmental funds and thus are not represented on the government-wide financial statements because they occur completely within governmental activities. Interfund transfers between governmental funds and enterprise funds may be reflected as movement of resources between business-like and governmental activities and do appear as transfers on the government-wide financial statements.
2131.10
In governmental accounting, the measurement focus and basis of accounting used depend on the nature of the fund.
a. The flow of economic resources measurement focus and the accrual basis are used in proprietary funds (Enterprise and Internal Service Funds)—where revenues and expenses are recorded.
b. The flow of current financial resources measurement focus and the modified accrual basis are used in the governmental funds (General, Special Revenue, Capital Projects, Debt Service, and Permanent Funds)—where revenues and expenditures are recorded.
c. Changes in net position of fiduciary funds are reported as additions and deductions, using the flow of economic resources measurement focus and the accrual basis of accounting.
The GASB Codification provides the following modified accrual basis guidelines:
a. Revenues should be recognized in the period that they become susceptible to accrual—both measurable and available to finance that period’s expenditures.
Available to finance the period’s expenditures means the resources are:
(1) legally available for use during the period and
(2) collected within the period or early enough in the next period to be used to pay the liabilities of the period. (“Early enough in the next period” cannot exceed 60 days for property taxes; therefore, most governments apply the same limits to other revenue sources.)
If revenue-related assets (i.e., taxes receivable) are not available, Deferred Revenues (a liability similar to Unearned Revenues) should be credited initially. When the assets are available, Deferred Revenues is debited and Revenues is credited to recognize the revenues.
2131.10
b. Expenditures should be recorded as fund liabilities are incurred or assets are expended, except:
(1) inventory items may be recorded as expenditures either:
(a) at the time of purchase (purchase method) or
(b) when the items are used (consumption or use method).
(2) expenditures for prepayments (e.g., a two-year insurance policy) may be recorded using either the purchase method or the consumption method.
(3) payments made for interest and retirement of principal on general long-term liabilities, which usually are accounted for in Debt Service Funds, normally should be recorded as expenditures on their due date (when due) rather than being accrued prior to the due date.
(4) unmatured noncurrent liabilities for vacation, sick leave, claims and judgments, landfill closure and postclosure costs, pollution remediation, and postretirement benefits such as pensions and health care are recorded as general long-term liabilities rather than as governmental fund expenditures and liabilities, and are recognized as fund expenditures in the year that the liabilities mature (become due).
In summary, expenditures are recognized at one of three points:
(1) When goods/services are acquired—Capital assets, salaries, contracted services, materials and supplies (purchases method), prepaid items (purchases method), etc. Indeed, this is the point at which a fund liability is incurred unless there is an expenditure recognition modification.
(2) When goods/services are used or consumed—Known as the consumption method, recognition at this point is permitted for materials and supplies and prepaid items such as insurance, but is never required in governmental funds.
(3) When payment for goods/services is due—Debt service on general long-term debt and the types of expenditures referred to in item b.(4) above—compensated absences, claims and judgments, special termination benefits, pensions, other postemployment benefits, pollution remediation, and so on.
2132.06
Debt Service Funds
Debt service funds are used to account for and report payments of the (1) maturing principal of general government long-term debt and (2) related interest and fiscal agent charges. These liabilities are recorded in the General Capital Assets and General Long-Term Liabilities accounts that are reported only in the government-wide financial statements.
Use of debt service funds is required if:
amounts are being accumulated for future general government debt service or
their use is required by law, bond indenture covenant, or other contractual agreement.
Otherwise, their use is optional.
Most bond issues require use of debt service funds (and their use typically has been presumed in CPA Examination questions and problems), but leases and similar debt that do not require use of debt service funds may be serviced through the General Fund and/or special revenue funds.
All resources of a debt service fund are either restricted, committed, or assigned, but a restricted or committed revenue source is not required to establish a debt service fund.
GASB 1300.107
