ACC 410 WEEK 4 QUIZ 3

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ACC 410 WEEK 4 QUIZ 3

CHAPTER 6

Accounting for Capital Projects and Debt Service

TRUE/FALSE (CHAPTER 6)

1. The resources to service all general long-term debt of governments are typically accounted for in debt service funds.

2. When governments establish capital projects funds, they may choose to maintain a separate fund for each major project, or they may choose to combine two or more projects in a single fund.

3. Governments are required to integrate budgetary account information in their debt service and capital projects funds only when control cannot readily be established by means other than a budget.

4. Capital projects funds do not report long-term obligations in the fund.

5. When bonds are issued at a premium, the capital projects fund can transfer those excess resources to the debt service fund.

6. When bonds are issued at a discount, the debt service fund usually transfers an amount to the capital projects fund to make up for the deficiency.

7. In accounting for costs incurred on a major construction project in a capital projects fund, the construction outlays would be reported in the fund as general capital assets.

8. Debt service funds are maintained to account for resources accumulated to pay interest and principal on general long-term debt—that is, long-term debt associated primarily with governmental activities.

9. In contrast to the accounting for debt service fund expenditures, the interest revenue on bonds held as investments should be accrued in the period the revenue is earned.

10. Special assessments are imposed nonexchange transactions, similar to property tax levies.

11. The interest paid on debt issued for public purposes by state and local governments is generally subject to federal taxation.

12. Nongovernmental not-for-profits must account for defeasances differently than governments do.

13. In the statement of revenues, expenditures, and changes in fund balance of a debt service fund, the fund balance amount should be reported as restricted for debt service.

14. Governments should account for special assessment debt service transactions in a debt service fund, even if they are not obligated to pay the debt.

15. Arbitrage is the process of negotiating resolution of conflicts between the federal government and municipalities over the applicability of federal regulations.

16. Sound fiscal policy dictates that the maturity of debt should be no longer than the life of the assets it is used to finance.

17. Proceeds of debt issued to finance a capital project should be reported in a capital projects fund as a liability until the project is completed.

18. Special assessment debt to be paid from a water utility fund should be accounted for in that fund along with the related capital improvements.

MULTIPLE CHOICE (CHAPTER 6)

1. The capital projects fund of a government is accounted for using which of the following bases of accounting?
2. Budgetary basis.
3. Cash basis.
4. Modified accrual basis.
5. Accrual basis.

2. In which fund type would a government’s capital projects fund be found?
3. Governmental fund type.
4. Proprietary fund type.
5. Fiduciary fund type.
6. Governmental activities.

3. The debt service fund of a government is accounted for using which of the following bases of accounting?
4. a) Budgetary basis.
5. b) Cash basis.
6. c) Modified accrual basis.
7. d) Accrual basis.

4. In which fund type would a government’s debt service fund be found?
5. a) Governmental fund type.
6. b) Proprietary fund type.
7. c) Fiduciary fund type.
8. d) Governmental activities.

5. With regard to the resources dedicated to the acquisition of capital assets that will be used in general government activities, which of the following is true?
1. Governments must maintain capital projects funds for resources that are legally restricted to the acquisition of capital assets.
2. Governments may maintain capital projects funds for resources that are legally restricted to the acquisition of capital assets.
3. Governments may account for any resources dedicated (whether legally or not) to the acquisition of capital assets in any of the governmental funds.
4. Governments must account for all resources set aside for capital asset acquisition in a capital projects fund.

6. Salt City issued $5 billion of bonds at face value to fund the reconstruction of major interstate highways in and around the city. The bond underwriters withheld $2 million for underwriting fees and remitted the balance to the city.  Assuming the city maintains its books and records in a manner that facilitates the preparation of fund financial statements, how should the underwriting fee be recorded in the capital projects fund?

1. Reduce other financing sources by $2 million.
2. Reduce bonds payable by $2 million.
3. Increase expenditures by $2 million.
4. It would not be accounted for in the capital projects fund.

7. Sugar City issued $2 million of bonds to fund the construction of a new city office building. The bonds have a stated rate of interest of 5 percent and were sold at 101.  Which of the following entries should be made in the capital projects fund to record this event?
8. Debit Cash $2.02 million; Credit Bonds payable $2 million and Premium on bonds payable $0.02 million.
9. Debit Cash $2.02 million; Credit Bonds payable $2 million and Other financing sources $0.02 million.
10. Debit Cash $2.02 million; Credit Other financing sources $2.02 million.
11. Debit Cash $2.02 million; Credit Other financing sources $2 million and Revenue $0.02 million.

Use the following information to answer questions 8 and 9

Voters in Lincoln School District approved the construction of a new high school and approved an $8 million bond issue with a stated rate of interest of 6 percent to fund the construction.   Bids were received and the low bid was $8 million.  When the bonds were issued, they sold for face value less bond underwriting fees of $0.5 million.   The school board voted to fund the balance of the construction by a transfer from the general fund.

8. The entry in the capital projects fund to record the receipt of the bond proceeds should be
9. Debit Cash $7.5 million; Credit Bonds payable $7.5.
10. Debit Cash $7.5 million; Credit Other financing sources $7.5.
11. Debit Cash $7.5 million and Expenditures $0.5 million; Credit Bonds payable $8 million.
12. Debit Cash $7.5 million and Expenditures $0.5 million; Credit Other financing sources $8 million.

9. The entry in the capital projects fund to record the additional funding for the construction should be
10. Debit Due from general fund $0.5 million; Credit Other financing sources—nonreciprocal transfer-in $0.5 million.
11. Debit Due from general fund $0.5 million; Credit Revenue $0.5 million.
12. Debit Cash $0.5 million; Credit Due to general fund $0.5 million.
13. Debit Other financing sources $0.5 million; Credit Due to general fund $0.5 million.

USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 10 AND 11

Voters in Phillips City approved the construction of a new city hall building and approved a $5 million bond issue with a stated rate of interest of 6 percent to fund the construction.  When the bonds were issued, they sold for 101.  What are appropriate entries related to the premium?

10. In the capital projects fund
1. Debit Cash $50,000; Credit Revenues $50,000; no other entries required.
2. Debit Cash $50,000; Credit Other financing sources—nonreciprocal transfer-in $50,000; no other entries required.
3. Debit Cash $50,000; Credit Revenues; ALSO

Debit Other financing uses—nonreciprocal transfer-out $50,000; Credit Cash $50,000.

1. Debit Cash $50,000; Credit Other financing sources—Bond premium $50,000; ALSO

Debit Other financing uses—nonreciprocal transfer-out $50,000; Credit Cash $50,000.

11. In the debt service fund
1. Debit Cash $50,000; Credit Revenues $50,000; no other entries required.
2. Debit Cash $50,000; Credit Other financing sources—nonreciprocal transfer-in $50,000; no other entries required.
3. c) Debit Other financing sources—nonreciprocal transfer-out $50,000; credit Cash $50,000.
4. d) No entry in the debt service fund.

Use the following information to answer question 12 and 13.

The voters in Ohio City approved the construction of a new city hall building and approved a $10 million bond issue with a stated rate of interest of 6 percent to fund the construction.  When the bonds were issued, they sold for 99.  Assuming that the city has agreed to transfer money from its general fund to make up the difference, what are appropriate entries related to the discount?

12. In the capital projects fund
1. Debit Due from general fund $100,000; Credit Revenues $100,000.
2. Debit Due from general fund $100,000; Credit Other financing sources—nonreciprocal transfer-in $100,000; no other entries required.
3. Debit Other financing uses—nonreciprocal transfer-out $100,000; Credit Cash $100,000.
4. d) No entry in the capital projects fund.

13. In the debt service fund
100. Debit Cash $100.000; Credit Revenues $100,000; no other entries required.
101. Debit Cash $100,000; Credit Other financing sources—nonreciprocal transfer-in $100,000; No other entries required.
102. c) Debit Other financing sources—nonreciprocal transfer-out $100,000; credit Cash $100,000.
103. d) No entry in the debt service fund.

14. Sister City was notified by the state that it has been awarded a $5 million grant to aid in the construction of a senior citizens center. At the time of the notification what is the appropriate entry in the capital projects fund? Assume that the city has met all eligibility requirements and maintains its books and records in a manner to facilitate the preparation of fund financial statements.
1. No entry at the time of the notification.
2. Debit Grants receivable $5 million; Credit Revenue $5 million.
3. Debit Grants receivable $5 million; Credit Deferred inflow of resources $5 million.
4. Debit Grants receivable $5 million; credit Other financing sources—nonreciprocal transfer-in $5 million.

15. Previously Rose City issued bonds with a face value of $10 million to construct a new city maintenance facility. Assume that the city maintains its books and records in a manner that facilitates the preparation of fund financial statements. What is the appropriate entry when the city receives a progress billing from the contractor?
1. Debit Building; Credit Cash.
2. Debit Building; Credit Accounts payable.
3. Debit Expenditures; Credit Accounts payable.
4. No entry is required.

16. Previously Atomic City had issued bonds with a face value of $10 million to construct a new city Because the money will not be needed for several months, the city invested the bond proceeds in U.S. Government securities.  Assume that the city maintains its books and records in a manner that facilitates the preparation of fund financial statements.  What is the appropriate entry when the city receives interest on the investments?
1. Debit Cash; Credit Revenue.
2. Debit Cash; Credit Other financing sources.
3. Debit Cash; Credit Deferred inflow of resources.
4. No entry required.

17. Avon City issued bonds for the purpose of financing a major capital improvement. Which fund is the most appropriate fund in which to record the receipt of the bond proceeds?
1. General fund.
2. Special revenue fund.
3. Capital projects fund.
4. Debt service fund.

18. Use of a debt service fund is required.
1. When financial resources are being accumulated for the purpose of paying for capital asset acquisition.
2. When financial resources are being accumulated for the purpose of paying principal and interest when it matures.
3. For all bonded debt service payments.
4. For all debt service payments.

19. Six years ago Hill City issued $10 million of 6 percent term bonds, due 30 years from the date of issue. Interest on the bonds is payable semi-annually on January 1 and July 1.  Hill City has a September 30 fiscal year-end.  The amount of interest payable that should be included on the balance sheet for the debt service fund of Hill City at September 30 is

1. $ -0-.
2. $150,000.
3. $300,000.
4. $600,000.

Use the following information to answer questions 20 and 21.

Several years ago, the City of Russell issued $7 million of 6 percent serial bonds at 101.  Principal payments of $350,000 are due each June 30 for 20 years.  Interest on the bonds is payable each December 31 and June 30.  As of June 30, 2015, the city has not paid the June 30 principal and interest payment.

20. The amount of interest payable (assuming an outstanding balance of $4,000,000 of bonds) that should be included on the balance sheet for the debt service fund of the City of Russell at June 30, 2015 is
21. $ -0-.
22. $168,000.
23. $210,000.
24. $420,000.

21. The amount of bonds payable that should be included on the balance sheet for the debt service fund of the City of Russell at June 30, 2015 is
22. a) $0.
23. b) $350,000.
24. c) $700,000.
25. d) $3,150,000.

22. Sue City has outstanding $5 million in general obligation term bonds used to finance the construction of the new City Library. Sue City has a June 30 fiscal year-end.  Interest at 6 percent is payable each January 1 and July 1.  The principal of the bonds is due 10 years in the future.  The city budgeted the July 1, 2015 interest payment in the budget for the fiscal year ended June 30, 2015.  On June 30, cash was transferred from the general fund to the debt service fund to make the required payment.  The maximum amount of interest payable that may be included on the balance sheet of the debt service fund of Sue City at June 30 is
23. $ -0-
24. $150,000.
25. $300,000.
26. $3,000,000.

USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 23 AND +24

Lewis County uses a fiscal agent to distribute payments of interest to bondholders.  Interest payments are due on July 1 of each year.  The fiscal agent requires the county to transfer by June 20 the cash necessary to make the July 1 payments.

23. How should Lewis County account for the amount transferred on June 20 if the county maintains its books and records in a manner that facilitates the preparation of fund financial statements?
24. Debit Cash with fiscal agent and expenditures; Credit Cash and interest payable.
25. Debit Cash with fiscal agent and interest expense; Credit Cash and interest payable.
26. Debit Expenditures; Credit Cash.
27. Debit Cash with fiscal agent; Credit Cash.

24. What entry should be made on July 1 related to the interest payment?
25. Debit Interest payable; Credit Cash.
26. Debit Interest payable; Credit Cash with fiscal agent.
27. Debit Expenditure; Credit Cash with fiscal agent.
28. No entry required.

25. Cascade County issued $1 million of 6 percent term bonds at 101. These bonds will be used to finance the construction of highways.  The entry in the debt service fund to record the receipt of cash should be
26. Debit Cash $10,000; Credit Revenue, $10,000.
27. Debit Cash $10,000; Credit Other financing sources—nonreciprocal transfer-in, $10,000.
28. Debit Cash $1,010,000; Credit Bonds payable $1,000,000 and premium on bonds $10,000.
29. Debit Cash $1,010,000; Credit Other financing sources—nonreciprocal transfer-in $1,010,000.

USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 26 AND 27

Calhoun County makes annual transfers from the general fund to the debt service fund to pay principal and interest on long-term debt.

26. When the county makes the transfer the entry in the debt service fund should be
27. Debit Cash; Credit Revenue.
28. Debit Cash; Credit Other financing sources—nonreciprocal transfer-in.
29. Debit Cash; Credit Interest payable.
30. Debit Cash with fiscal agent; Credit Other financing sources—nonreciprocal transfer-in.

27. In the debt service fund, what is the appropriate entry when the principal payment is made?
1. Debit Bonds payable; Credit Cash.
2. Debit Expenditures; Credit Cash.
3. Debit Other financing uses—nonreciprocal transfer-out; Credit Cash.
4. No entry is required.

Use the following information to answer questions 28 – 29. 

The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks.  The citizens agreed to assess themselves for 20 years in an amount sufficient to pay principal and interest on the bonds.  The city will oversee the construction of the sidewalks and act as agent for servicing the debt.  The city does not guarantee the debt nor does it assume any legal or moral obligation for the bonds.

28. The proceeds of the bond issue should be recorded in which fund of the City of Arlington?

1. Agency fund.
2. Special assessment fund.
3. Capital projects fund.
4. Debt service fund.

29. When the city collects the special assessment, it should be accounted for in which fund of the City of Arlington?
30. Agency fund.
31. Special assessment fund.
32. Capital projects fund.
33. Debt service fund.

Use the following information to answer questions #30 – #32.

The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks.  The citizens agreed to a special assessment on their property for 20 years in an amount sufficient to pay principal and interest on the bonds.  The city will oversee the construction of the sidewalks and act as agent for servicing the debt.  If the special assessment is not sufficient to make the principal and interest payments, the city will assume the obligations.

30. The proceeds of the bond issue should be recorded in which fund of the City of Arlington?
31. Agency fund.
32. Special assessment fund.
33. Capital projects fund.
34. Debt service fund.

31. When the city collects the special assessment, it should be accounted for in which fund of the City of Arlington?
32. Agency fund.
33. Special assessment fund.
34. Capital projects fund.
35. Debt service fund.

32. When the City of Arlington levies the special assessment tax, the best entry would be
33. Debit Special assessments receivable; Credit Revenues.
34. Debit Special assessments receivable; Credit Deferred inflow of resources.
35. Debit Special assessments receivable; Credit Liability.
36. Debit Special assessments receivable; Credit Fund balance.

33. Adams County has outstanding $10 million in bonds issued to construct a sewer system in a specific area of the county. The taxpayers in that area voted for the construction and the bonds and agreed to assess themselves to pay the principal and interest on the bonds.  The county contracted for the construction and issued the bonds but assumed no legal or moral obligation for the bonds.  If the special assessment payments are not sufficient to make the required principal and interest payments, the county will not make up the difference.  The liability for the $10 million of bonds should appear in which fund financial statements?
34. Capital projects fund.
35. Special assessment fund.
36. Debt service fund.
37. The bond liability should not appear in the fund financial statements of Adams County.

34. The City of Twin Falls issued $5 million in special assessment bonds to finance major reconstruction of the turbines and facilities used in generating electricity that is sold to the citizens in the surrounding area. The electric power distribution activities are accounted for in an enterprise fund, which will service the debt.  If the city is legally obligated for the debt, the appropriate entry in the city’s Electric Enterprise Fund to record this event is
35. Debit Plant assets; Credit Bonds payable.
36. Debit Plant assets; Credit Contributed capital.
37. Debit Plant assets; Credit Contributed revenue.
38. No entry should be made in the Electric Enterprise Fund.

35. The City of Twin Falls issued $5 million in special assessment bonds to finance major reconstruction of the turbines and facilities used in generating electricity that is sold to the citizens in the surrounding area. The electric power distribution activities are accounted for in an enterprise fund, which service the debt.  If the city is NOT legally obligated for the debt, the appropriate entry in the city’s Electric Enterprise Fund to record this event is
36. a) Debit Plant assets; Credit Bonds payable.
37. b) Debit Plant assets; Credit Capital contributions.
38. c) Debit Plant assets; Credit Retained earnings.
39. d) No entry should be made in the Electric Enterprise Fund.

36. In early 2014, Jackson City issued $10 million of 6 percent term bonds to finance a highway construction project. Because of problems related to the Endangered Species Act, the city deferred highway construction that year.  In early 2015, the city entered into contracts for construction that will begin in summer 2015 and be completed by summer 2016.  When the city realized they would not need the bond proceeds in 2015, they invested the proceeds in risk-free federal government securities bought to yield 7 percent.  What potential arbitrage liability, if any, should the city recognize as a result of the year 2015 transactions?
37.  
38. The amount of the earnings from the federal government securities.
39. The amount of the interest paid on the term bonds.
40. The difference between the earnings from the federal government securities and the interest paid on the bonds.

37. Harbor City issued 6 percent tax-exempt bonds and used the proceeds to acquire federal government securities yielding 7 percent. After paying the interest on the tax-exempt bonds, the city cleared 1 percent.  This is an example of
38. An illegal act.
39. Poor fiscal management.
40.  
41. Debt refunding.

38. The City of St. Joe had outstanding $5 million of 6 percent bonds with a call provision. Due to changes in the prevailing interest rates, the city issued new bonds at 4.5 percent and used the proceeds to call the 6 percent bonds.  This is an example of
39. Debt retirement.
40. Debt refunding.
41. In-substance defeasance.
42. Economic defeasance.