2. Objectives
• Accounting for debt transactions-
– Governmental Funds
– Proprietary Funds
• Reporting debt transactions-
– Government-Wide Financial Statements
– Fund Financial Statements
• Question and Answers
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3. Types of Debt Covered
• Long-Term Obligations
• Zero-Interest-Rate Bonds
• Debt Refunding / Defeasance
• Capital Leases
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4. Introduction
• Accounting standards used to determine how debt
transactions are recorded depends on whether the
liability is presented in:
– Governmental Funds
– Proprietary or Fiduciary Funds, or
– Government-Wide Financial Statements
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5. Basis of Accounting and Measurement Focus
Basis of Measurement
Fund Type Accounting Focus
Governmental Funds Modified Accrual Basis Current Financial
Resources
Proprietary Funds Accrual Basis Economic Resources
Fiduciary Funds Accrual Basis Economic Resources
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6. Differences Between the Two Methods
Modified
Accrual Accrual
Revenues & Recorded When Recorded When
Receivables Earned & Realized Earned
Within a Specified
Number of Days
Expenditures & Recorded When Recorded When
Liabilities Incurred and Payable Incurred
with Current
Resources
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7. Differences Between the Two Methods
Modified
Accrual Accrual
Long-Term Debts Not Recorded in the Recorded In the
Balance Sheet Balance Sheet When
Incurred
Capital Assets Not Recorded in the Recorded In the
Balance Sheet Balance Sheet Net of
Accumulated
Depreciation
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8. Long-Term Obligations
• Face Amount of the Debt, Any Related Premium or
Discount, and Debt Issuance Costs Should Be Reported
Separately
• When Bonds Issuance Does Not Coincide With an
Interest Payment Date, Proceeds Should Include Accrued
Interest. Accrued Interest Should Be Recorded as a
Liability
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9. Long-Term Obligations
Governmental Funds Proprietary Funds
Debit – Cash (Asset) Debit – Cash
Debit – Bond Issuance Cost Debit – Unamortized Bond Issuance
(Expenditure) Cost (Deferred Charge)
Credit – Accrued Interest Payable Credit – Accrued Interest Payable
(Liability) (Liability)
Credit – Proceeds From Issuance of Credit – Bonds Payable (Long-Term
Bonds (Other Financing Source) Liability)
Credit – Proceeds From Premium on Credit – Unamortized Bond
Issuance of Bonds (Other Financing Premiums (Long-Term Liability)
Source)
Entry to record issuance of long-term debt.
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10. Long-Term Obligations
Governmental Funds Proprietary Funds
Debit – Debt Service - Principal Debit – Bonds Payable (Long-Term
(Expenditure) Liability)
Debit – Debt Service - Interest Debit – Debt Service - Interest
(Expenditure) (Expense)
Credit – Cash (Asset) Credit – Cash (Asset)
Entry to record bond principal and interest payments.
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11. Long-Term Obligations
Governmental Funds Proprietary Funds
Debit – Unamortized Bond
Premiums (Long-Term Liability)
Debit / Credit – Debt Service -
Interest (Expenditure)
Credit – Unamortized Bond Issuance
Cost (Deferred Charge)
Entry to amortize bond premium and bond issuance cost.
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15. Zero-Interest-Rate Bonds
• Issued at a Deep Discount
• Difference Between the Initial Price and Maturity Value
Represents Interest
• Proceeds of Debt (Including Underwriter’s Discount and
Other Issuance Costs) are Reported as Other Financing
Sources in Governmental Funds
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16. Debt Refunding / Defeasance
• Refunding Can Be Accomplished as Either a Current
Refunding or an Advance Refunding
• Current refunding – Old Debt Is Paid Before It’s Maturity
Date (Within 90 Days of Issuance of the Refunding Debt)
and the Retirement is Financed by Issuing New Debt
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17. Debt Refunding / Defeasance
• Advance Refunding – Cash and Other Assets Are Placed
Into an Irrevocable Trust That Is to be Used Exclusively to
Service the Future Debt Requirements of the Old Debt.
– Old Debt is Considered Defeased
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18. Treatment of Refundings in Governmental Funds
Item Current Advance Refunding
Refundings
Legal or In- No Defeasance
substance
Defeasance
Issuance of Other Financing Other Financing Other Financing
Refunding Bonds Source Source Source
Redemption / Expenditure Other Financing Use Cash With Fiscal
Payment to Escrow Agent
from Bond Proceeds
Redemption / Expenditure Expenditure Cash With Fiscal
Payment to Escrow Agent
from Other Sources
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19. Debt Refunding / Defeasance
Governmental Funds Proprietary Funds
Debit – Bond Issuance Cost Debit – Unamortized Bond Issuance Cost
(Expenditure) (Deferred Charge)
Debit – Payment to Refunded Debt Debit / Credit – Bonds Payable (Long-
Escrow Agent (Other Financing Use) Term Liability)
Credit – Proceeds From Issuance of Credit / Debit – (Gain) Loss on
Refunding Bonds (Other Financing Refunding (Long-Term Liability)
Source)
Credit – Proceeds From Premium on Credit – Unamortized Bond Premiums
Issuance of Bonds (Other Financing (Long-Term Liability)
Source)
To record issuance of long-term bonds and payment to the escrow agent for debt
defeasance.
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20. Debt Refunding / Defeasance
Governmental Funds Proprietary Funds
Debit – Interest Expense
Debit – Unamortized Bond
Premiums (Long-Term Liability)
Credit / Debit – (Gain) Loss on
Refunding (Long-Term Liability)
Credit – Unamortized Bond Issuance
Cost (Deferred Charge)
To record amortization of bond issuance cost, bond premium or discount, and net
(gain) loss on refunding.
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21. How to Calculate Deferred Gain (Loss)
Book Value of Retired Debt:
Maturity Value of Debt
Add Unamortized Premium
Deduct Unamortized Discount
Deduct Unamortized Bond Issuance Costs
Equals Book Value of Retired Debt
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22. How to Calculate Deferred Gain (Loss)
Gain (Loss) on Refunding:
Book Value of Retired Debt
Deduct Reacquisition Price
Equals Gain (Loss) on Refunding
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23. Debt Refunding / Defeasance
• Deferred Gain or Loss is Amortized Over the Original
Remaining Life of the Old Debt or the Life of the New
Debt
• Bond Issuance Costs and Premiums or Discounts on
Issuance is Amortized Over the Life of the New Debt
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29. Capital Leases
Governmental Funds Proprietary Funds
Debit – Capital Outlay (Expenditure) Debit - Equipment Under Capital
Lease (Capital Asset)
Credit – Proceeds From Capital Credit – Capital Leases Payable
Lease (Other Financing Source) (Long-Term Liability)
Entry to record capital lease
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30. Capital Leases
Governmental Funds Proprietary Funds
Debit – Capital Lease Principal Debit - Capital Leases Payable
(Expenditure) (Long-Term Liability)
Debit – Capital Lease Interest Credit – Cash (Asset)
(Expenditure)
Credit – Cash (Asset)
Entry to record capital lease payments made during the year
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