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Accounting > Chapter 6 > Flashcards

Chapter 6 Flashcards

0
Q

debt service funds

A

resources to service debts

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1
Q

capital projects funds

A

are used to account for financial resources that are legally restricted and contractually required for the aquisition of capital assets.

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2
Q

Basis of accounting used in Capital Projects funds

A

Modified accrual basis

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3
Q

Capital Projects budgeted on what basis?

A

Projects not period (might not have an annual budget)

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4
Q

Unique feature of capital projects funds is

A

financial statements prepared at the end of the fiscal year may be considered interim financial statements (project fund only exist for the term of project under construction)

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5
Q

bonds

A

formal certificates of indebtedness, most frequently issued by governments for the long term

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6
Q

How to account for proceeds of bonds or other long-term obligations received

A

“other financing sources” as they do not report long-term obligations in government funds

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7
Q

Issue costs

A

Bond underwriters charge for their services and will withold a portion of the gross proceeds as fees

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8
Q

premiums and discounts

A

bond coupon rate is rarely exactly equal to the market rate at time of sale.

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9
Q

coupon rate

A

stated interest rate

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10
Q

bond sold to yield an interest rate greater than the coupon rate is sold at a ?

A

discount

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11
Q

bond sold to yield n interest rate less than the coupon rate will be sold at a

A

premium

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12
Q

Governments report the underwriting and other issue costs as

A

expenditure

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13
Q

If the issue costs are not set out separately from premiums and discounts

A

then the government should estimate them

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14
Q

debt service funds are maintained to account for and report on

A

financial resources that are restricted, committed, or assigned to expenditure for principal and interest on all general long-term debt itself

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15
Q

debt service funds do not account

A

for the long-term debt itself

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16
Q

only time principal of debt is reported as an obligation

A

is when it has matured but actual payment has been delayed

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17
Q

GAAP direct that debt service funds be established when?

A
  • Legally required

* Financial resources are being accumulated for principal and interest payments maturing in future years

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18
Q

debt service funds receive resources

A
  • Transfers from the general fund
  • Special taxes restricted to the payment of debt
  • Special assessments
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19
Q

debt service funds are on accounted for on the basis of

A

modified accrual basis

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20
Q

Construction phase of special assessments

A

accounted for in the capital projects fund

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21
Q

Debt service phase of special assessments are accounted

A

accounted for in a debt service fund

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22
Q

If government is not obligated for the debt (special assessment) just collects the money then it should?

A
  • report the debt service transactions in an agency fund
  • report construction activities, like other capital improvements, in a capital projects fund
  • Report the capital assets in the schedule of capital assets and the government-wide statements
  • Disclose in notes to the financial statements the amount of debt and the governments role. do not report debt on schedules
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23
Q

arbitrage

A

issuance of debt at relatively low, tax-exempt rates of interest and the investment of the proceeds in taxable securities yielding a higher return,

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24
Q

arbitrage restrictions

A

issuers are permitted to invest both construction funds and reserve funds for a limited period of time (i.e. must be spent withing x# of years.)

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25
Q

arbitrage rebates

A

regulations require that all arbitrage earnings, again with some exceptions be remitted to the federal government

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26
Q

bond refundings

A

early retirement of existing debt so that it can be replaced with new debt

27
Q

Refinance

A

governments refund their debt to take advantage of more favorable (lower) interest rates, to shorten or lengthen the debt payout period, or to rid themselves of restrictive bond covenants.

28
Q

economic cost

A

present value of all future payments

29
Q

call prices

A

predetermined price at which the issuer of bonds may redeem the bonds irrespective of the current market price.

30
Q

in-substance defeasance

A

advance refunding in which the government places sufficient resources in a trust account to cover all required principal and interest payments on the defeased debt.

34
Q

Capital Assets are maintained in a

A

schedule of capital assets

35
Q

CPF basis of accounting on the Government statements

A

full accrual basis

36
Q

CPF Capital outlays include

A

acquisition or construction of capital facilities

37
Q

Types of capitla projects

A

*General (public benefit)

38
Q

General capital projects

A

Public buildings, roads, highways and bridges, park improvements, sewer systems, plant and equipment

39
Q

Special assessment projects

A

Benefits citizens in a specified benefit district (street improvements, curbs, sidewalks, street lighting, and sewage)

40
Q

Construction Cylce

A

Phase 1 Preconstruction Phase (Project & Financing authorization)
Phase 2 Construction Phase
Phase 3 Debt Servicing Phase

41
Q

Types of lont-term financing

A

*Tax supported Debt
General obligation bonds or special taxes restricted to payment of debt
*Grants
*Other forms of financing-Special assessments

42
Q

Tax Supported Debt

A

*Voter approval required
*Memo entry for bond/tax authorization
*Proceeds accoounted for as “other financing sources.”
Difference between face value of bonds and cash recieved is either issue costs and or premiums and discounts

43
Q

Special Assessments are?

A

taxes levied when taxpayers in areas beyond their jurisdiction want to benefit from certain facilities and services or the improvements will increase the value of taxpayer owned property

44
Q

Budgets help CPF by?

A

control individual project expenditures

45
Q

Gasab requires CPF

A

budgeting over integrated funds when control cannot be established by other means

46
Q

DSF

A

Debt Service Funds

47
Q

DSF does not include

A

debt issued for and serviced by Enterprise or Internal Service Funds and some trust funds

48
Q

DSF basis of accounting

A

modified accrual basis of accounting

49
Q

Interest and pricipal are considered current liabiliteis of DSF when

A

the period in which they must be paid

50
Q

DSF resources may come form

A

Tax supported Debt

Other means of financing

51
Q

GASB requires DSF be estbalished when

A

legally required

Financial resources are being accumulated for principal and interest payments maturing in future years.

52
Q

GASB recommends for DSF

A

A single DSF for all debt serviced by property taxes

Governments hold number of funds to a minimum

53
Q

Tax Supported Debt types

A

Serial Bonds

Term Bonds

54
Q

Serial bonds

A

amount budgeted for revenues or inter-fund transfers in, is usually just what is needed that fiscal year for matured principal and interest (Advantage-Self Amortizing)
Principal matures in annual installments

55
Q

Term bonds

A

Principal matures in one lump-sum amount at end of the bond term
Not used as frequently for municipal financing as serial bonds

56
Q

Disadvantages of Term bonds

A

Usually requires a sinking fund and therefore investment management
Sinking fund investments are reported at fair market value
Changes in FMV are reproted as a component of investment earnings
More complex accounting than for serial bonds

57
Q

DSF Special assessment revenues and receivables are accounted

A

using full accrual basis

58
Q

Government obligated to account for special assessment when

A

Govenrment accounts for dsf on special assessment debt in a dsf when the government is obligated in some manner for the debt
GASB states

59
Q

Gasb States Obligated for Special assessment debt

A

it is responsible for the debt in the event of property owner default
it is legally liable for assuming the debt or gives indication taht it may honor the debt in the event of default

60
Q

Not obligated to account for special assessmetn debt

A

when both the special assessment debt and the debt service are account for in an agency fund
disclose the amount of debt in the notes to the financial statements

61
Q

When Special Assessments Debt is paid from a proprietary fund

A

All transactions are reported in the proprietary fund

improvemnets financed with assessment should be capitalized

62
Q

arbitrage

A
  • results from investment of idle cash
  • issuance of debt at low tax-exempt interest rates and investment of proceeds in taxable securities yielding higher return.
  • Interest received is exempt from federal taxes
63
Q

Provisions to prevent arbitrage abuse

A

*Arbitrage restrictions: State and local governments must observe arbitrage regulations
*Rebate on arbitrage: Arbitrage rules and regulations are complex and contain several exemptions and exceptions.
Investment revenues should be redued and rebate liabilities established

64
Q

In-substance defeasance

A
  • provision for the government to lock the savings that would result from a decline in the interest rates
  • Advance refunding in which the borrower economically satisfies its existing obligations
  • Journal entries are similar to those for regualt refundings
65
Q

In-substance defeasance should satisy the following conditions

A
  • debtor must place cash/assets with an escrow agent to be solely used for servicing/retiring the debt
  • Possibility of debtor having to make future payments on the debt must be remote
  • Assets in escrow fund must be investments considered “risk-free” like US Treasury Bonds
  • Amortize loss (or gain) over future years using the shorter of the original term or the term of the new debt
66
Q

Debt refunding

A
  • bond refunding is the early retirement of existing debt with so that it can be replaced with new debt
  • Existing debt may have a “call feature” that lets the government repay face value early
  • Bonds without a call feature that are not actively traded are more challenging-this is the situation that leads to use of “in-substance defeasance”
93
Q

Primary purpose of Capital Projects Funds

A

To ensure and demonstrate the expenditure of the dedicated financial resource is both legally and contractually compliant.

94
Q

Capital Projects Funds

A

CPF

95
Q

CPF does not account for…

A

Capital assets themselves.

Accounting (14 decks)

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