SU 7: Debt Service Funds

Question 1

Debt service funds

Answer 1

Account for financial resources restricted, committed, or assigned for expenditures on long-term debt (principle and interest).

NOT used for debt for/serviced by proprietary funds and some trust funds

Question 2

Types of debt repaid by debt service funds

Answer 2

Tax supported bonds

other financing (special assessments)

Question 3

When does GASB require debt service funds

Answer 3

1) when legally required
2) when financial resources are being accumulated for principal and interest payments maturing in futures

Question 4

number of DSFs

Answer 4

GASB reccomends both a single, separate DSF for all debt served by property taxes
AND
to try to keep number of DSFs to a minimum

Controlled by: culture of agency and the law

Question 5

Are budgets used in DSFs

Answer 5

not typically
- contract for debt dictates spending
- money received from other funds (general, special revenue) already has a budget attached

Question 6

Sources of funding for debt service funds

Answer 6

• Transfers from a general fund or CPF
• investment revenue
• tax revenue
• special assessments (imposed non-exchange transactions)

Question 7

Serial bonds

Answer 7

• principal matures in annual installments
• budgeted revenues or transfers in are the amounts needed to cover principal and interest for the current year

Question 8

Term bonds

Answer 8

Principal matures in one amount at the end of the bond term

some disadvantages:
- requires sinking fund & investment management
- sinking fund investments reported at FMV
- makes changes in FMV a component of investment earnings
- creates more complex bookkeeping

Question 9

Bond Journal entries

Answer 9

Discount and premium amortization happen ONLY in the government-wide entries. fund entries just show interest and principal expenditure

Question 10

What fund holds special assessment debt

Answer 10

most often a CPF + DSF

but also could be: general fund, special revenue fund, enterprise fund

Question 11

When government is obligated to account for special assessment debt

Answer 11

1. GOV is responsible if property owner defaults
2. GOV legally liable for assuming the debt
3. GOV gives indication it may honor the debt in default
4. DEFAULT: Obligated, unless prohibited or clear lack of liability

Question 12

accounting if government is not obligated to account for special assessment debt

Answer 12

Use an agency fund + disclose amount holding in notes

Question 13

way for governments to refinance debt

Answer 13

1) bond refunding
2) in-substance defeasance

Question 14

In- substance defeasance

Answer 14

A provision in a loan removing it from a balance sheet if cash or a portfolio is set aside for debt service. Usually, defeasance occurs when a borrower owns a portfolio of Treasury securities whose coupons are used to service a debt. When the borrower has set aside sufficient assets to cover the debt, the debt does not need to be recorded on a balance sheet.1

Question 15

Continues for in-substance defeasance

Answer 15

1) must place cash/assets with escrow agent to require old debt
2) secure arrangement that makes need for future payments small
3) assets in escrow must be “risk-free” (treasury bonds)

Question 16

bond refunding

Answer 16

early retirement of bonds and replacement with lower-interest debt

may be facilitated by callable bonds

sometimes it’s st imply not affordable to buy back old bonds

Question 17

Process of in-substance defeasance

Answer 17

If conditions are met
1) gov locks in savings from a decline in interest rates
2) original bonds put in trust for guaranteed repayment
3) new bonds issued to fund old bonds placed in trust
4) advance refunding satisfies obligations
4) government can eliminate old bonds from schedule of LT obligations and add new bonds
5) gain or loss calculated by cash to redeem old debt - book value of old debt
6) gain or loss amortized in government-wide or proprietary fund using the shorter of original term or term of new debt

Question 18

Amortization period for in substance defeasance gain or loss

Answer 18

shorter of
- original term
or
- term of new debt

Question 19

Gain or loss on in-substance defeasance

Answer 19

= cash to redeem old debt - Book value of old debt

Question 20

Bond defeasance DSF JE

Answer 20

DR Cash
CR other financing source - new bond proceeds

DR Other financing use - payment to trustee
CR cash

(issuing new bonds and transferring payment of old bonds to trustee)

Question 21

Bond defeasance government-wide JE

Answer 21

DR Cash
DR Bond Discount or CR Bond Premium
CR Bond Payable
(issuing new bonds)

DR Bonds payable
Dr interest expense
DR deferred loss on defeseance or CR deferred gain
DR bond premium amoritzation
CR cash
(paying off old bonds)

Question 22

JE for amortization of loss or gain on bond defeasance

Answer 22

No entry in DSF

Government wide
Dr Loss on Defeasance
Cr Deferred Loss on Defesance
(loss)

Dr Deferred Gain on Defeasance
CR Gain on defeasance
(gain )