Long-Term Debt

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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Types of Debt Covered

• Long-Term Obligations• Zero-Interest-Rate Bonds• Debt Refunding / Defeasance• Capital Leases

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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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Basis of Accounting and Measurement Focus

Fund TypeBasis of

AccountingMeasurement

FocusGovernmental Funds Modified Accrual Basis Current Financial

Resources

Proprietary Funds Accrual Basis Economic Resources

Fiduciary Funds Accrual Basis Economic Resources

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Differences Between the Two Methods

Modified Accrual Accrual

Revenues & Receivables

Recorded When Earned & Realized Within a Specified Number of Days

Recorded When Earned

Expenditures & Liabilities

Recorded When Incurred and Payable with Current Resources

Recorded When Incurred

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Differences Between the Two Methods

Modified Accrual Accrual

Long-Term Debts Not Recorded in the Balance Sheet

Recorded In the Balance Sheet When Incurred

Capital Assets Not Recorded in the Balance Sheet

Recorded In the Balance Sheet Net of Accumulated Depreciation

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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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Long-Term Obligations

Governmental Funds Proprietary FundsDebit – Cash (Asset) Debit – Cash

Debit – Bond Issuance Cost (Expenditure)

Debit – Unamortized Bond Issuance Cost (Deferred Charge)

Credit – Accrued Interest Payable (Liability)

Credit – Accrued Interest Payable (Liability)

Credit – Proceeds From Issuance of Bonds (Other Financing Source)

Credit – Bonds Payable (Long-Term Liability)

Credit – Proceeds From Premium on Issuance of Bonds (Other Financing Source)

Credit – Unamortized Bond Premiums (Long-Term Liability)

Entry to record issuance of long-term debt.9

Long-Term Obligations

Governmental Funds Proprietary FundsDebit – Debt Service - Principal (Expenditure)

Debit – Bonds Payable (Long-Term Liability)

Debit – Debt Service - Interest (Expenditure)

Debit – Debt Service - Interest (Expense)

Credit – Cash (Asset) Credit – Cash (Asset)

Entry to record bond principal and interest payments.

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Long-Term Obligations

Governmental Funds Proprietary FundsDebit – 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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Example Sources and Uses of Funds

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Journal Entry – Example Question #1

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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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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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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Treatment of Refundings in Governmental Funds

Item Current Refundings

Advance Refunding

Legal or In-substance

Defeasance

No Defeasance

Issuance of Refunding Bonds

Other Financing Source

Other Financing Source

Other Financing Source

Redemption / Payment to Escrow from Bond Proceeds

Expenditure Other Financing Use Cash With Fiscal Agent

Redemption / Payment to Escrow from Other Sources

Expenditure Expenditure Cash With Fiscal Agent

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Debt Refunding / Defeasance

Governmental Funds Proprietary FundsDebit – Bond Issuance Cost (Expenditure)

Debit – Unamortized Bond Issuance Cost (Deferred Charge)

Debit – Payment to Refunded Debt Escrow Agent (Other Financing Use)

Debit / Credit – Bonds Payable (Long-Term Liability)

Credit – Proceeds From Issuance of Refunding Bonds (Other Financing Source)

Credit / Debit – (Gain) Loss on Refunding (Long-Term Liability)

Credit – Proceeds From Premium on Issuance of Bonds (Other Financing Source)

Credit – Unamortized Bond Premiums (Long-Term Liability)

To record issuance of long-term bonds and payment to the escrow agent for debt defeasance.

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Debt Refunding / Defeasance

Governmental Funds Proprietary FundsDebit – 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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How to Calculate Deferred Gain (Loss)

Book Value of Retired Debt:Maturity Value of DebtAdd Unamortized PremiumDeduct Unamortized DiscountDeduct Unamortized Bond Issuance CostsEquals Book Value of Retired Debt

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How to Calculate Deferred Gain (Loss)

Gain (Loss) on Refunding:Book Value of Retired DebtDeduct Reacquisition Price

Equals Gain (Loss) on Refunding

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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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Example Sources and Uses of Funds

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Refunded Bonds

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Journal Entry – Example Question #2

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G.A.S.B. #34 Entry – Example Question #2

Capital Leases

Governmental Funds Proprietary FundsDebit – Capital Outlay (Expenditure)

Debit - Equipment Under Capital Lease (Capital Asset)

Credit – Proceeds From Capital Lease (Other Financing Source)

Credit – Capital Leases Payable (Long-Term Liability)

Entry to record capital lease

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Capital Leases

Governmental Funds Proprietary FundsDebit – Capital Lease Principal (Expenditure)

Debit - Capital Leases Payable (Long-Term Liability)

Debit – Capital Lease Interest (Expenditure)

Credit – Cash (Asset)

Credit – Cash (Asset)

Entry to record capital lease payments made during the year

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Questions

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