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CHAPTER 7

The document discusses the accounting for general long-term liabilities in governmental funds, emphasizing the establishment of a debt service fund for managing principal and interest payments. It outlines the characteristics and types of debt service funds, including term and serial bonds, and provides procedures for recording transactions related to these funds. Additionally, it includes illustrative transactions to demonstrate the budgeting and accounting processes involved.

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3 views

CHAPTER 7

The document discusses the accounting for general long-term liabilities in governmental funds, emphasizing the establishment of a debt service fund for managing principal and interest payments. It outlines the characteristics and types of debt service funds, including term and serial bonds, and provides procedures for recording transactions related to these funds. Additionally, it includes illustrative transactions to demonstrate the budgeting and accounting processes involved.

Uploaded by

belay wube
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© © All Rights Reserved
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You are on page 1/ 13

Chapter SEVEN

Accounting for Debt


Service
What Are General Long-term Liabilities?

Answer: Debt and other long-term


liabilities that arise from the activities of
governmental funds that are not accounted
for as liabilities of a proprietary or
fiduciary fund.
All general long-term liabilities are reported
in the Governmental Activities column of
the government-wide statement of net assets.
…..Cont’d

 A debt service fund (a governmental


fund) should be established to account for
the principal and interest payments on
general long-term liabilities.
General long-term liabilities are not
reported as liabilities of governmental
funds.
Characteristics of Debt Service Fund

Resources may come from


 Taxes levied by DSF
 Taxes levied by the GF and
transferred to DSF
Special assessments and the like
…..Cont’d

 Debt service fund use modified accrual


basis.
 Budgetary accounting typically is used—
except there is no need for encumbrance
accounting since the debt service fund does
not order goods or enter into contracts for
services.
Types of debt service fund
 Bond is a written promise to pay a specified principal sum
at a specified future date with interest.
 Most long term debt of governmental units consists of one
of the following two basic types of bonds:
 Term bonds: Principal matures in one lump-sum amount at
the end of the bond term.
 Not used as frequently for municipal financing as serial
bonds
 Disadvantages of term bonds: Usually requires a sinking
fund, and therefore investment management; accounting is
more complex for serial bonds.
…Cont’d

2.Serial bonds:
Principal matures in annual installments
For regular serial bonds, the resources raised each
year approximate debt service requirements, thus
investments will be minimal. However, any idle
cash balances should be invested.
For deferred serial bonds, some resources are
likely to be raised and invested during the years
before the first principal payment becomes due
Advantage of serial bonds: Self-amortizing; no
sinking fund needed
Procedures for Debt Service Funds
If taxes are levied by the debt service fund,
record Estimated Revenues in the budget entry
and use the same property tax accounting as for
the General Fund
If taxes are levied by the General Fund and
transferred to the debt service fund, record
Estimated Other Financing Sources in the budget
entry and Inter-fund Transfers In(an Other
Financing Sources account) for the transfer
Illustrative Transactions-DSF
 The budget approved for FY 2011 requires the General Fund
to transfer $11,000 to the DSF for debt service which includes
principal repayment of $5,000 and two interest payments
totaling $6,000
 Debt Service Fund:
Estimated Other Financing Sources ………11,000
Appropriations………………………………11,000
Due from General Fund…………………11,000
OFS—Inter-fund Transfers In…………………11,000
 Governmental Activities:
No entry needed
….Cont’d

 To generate asset, in addition to those


contributed by the tax payers and the General
fund, the tax receipts are invested in
marketable securities. If Br. 500,000 is invested,
the entry would be:
Investment……………………… 500,000
Cash……………………………………………. 500,000
….Cont’d
 Assume that Burkitu town administration issued Br 5,000,000
serial bonds on Jan 1,2007 for the construction of recreational
park. The bond bear annual interest rate of 5% to be paid on
Jan 1 and the face value of the bond is to be retired over 10
years by making equal installment payments on Jan 1 of each
year.
 Further, burden of servicing the debt on the tax payers were
distributed evenly throughout the life of bond. Accordingly, it
is determined that tax payers should provide Br 625,000 as
revenue in 2007. It is also agreed that the General fund will
transfer Br 125,000 to the debt service funds on July, 2007.
 Appropriations for the year incurred only one semi-annual
interest payment to be made on August, 2007.
…Cont’d

 The entry to record the legally adopted budget is as


follows:

Estimated revenue………………… 625,000


Estimated other financing source……125,000
Appropriations (5%X5000, 000)…………….250, 000
Fund Balance ………………...500,000
………

THE END
THANK YOU !!

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