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Accounting For Debt Service Fund
Accounting For Debt Service Fund
Long-Term debt incurred to provide money to pay for the construction or acquisition of
fixed assets, or for any other purposes, can be paid only from revenue raised in
subsequent years to pay (service) the fund. Debt service fund includes both the
payment of interest and the repayment of principal when due.
As discussed earlier, debt service funds serve to record monies accumulated in order to
pay long-term liabilities and interest as they come due. However, this fund type does
not account for a governmental long-term debt; rather debt service funds maintain a
record of the monetary resources available to satisfy long-term liabilities as well as
eventual payments.
With respect to accounting for debt service fund, the following points will be discussed
Separately. These are type of debt service fund, transactions and entries for debt
service fund
The customary types of general obligation bonds whose servicing is recorded in debit
service are the following:
1. Serial-bonds are with principal payable in annual installments over the term of
the bond issue.
2. Term-bonds are with principal payable in total on a fixed maturity date,
generally from proceeds of an accumulated sink fund.
Generally, legal requirements govern the establishment of debt service funds in the
absence of legal requirements for a formal plan of accumulation of a sinking fund for
repayment of general obligations term bond, there may be no needs to establish a debt
service fund.
In this example we will discus methods for journalizing transaction for debt service fund.
The aim is to show you how transactions are recorded in the debt service fund.
Assume that the bonds issued by the City council of ABC as partial financing for the
project was police station project fund, discussed in accounting for capital project fund
of this module, are regular serial bonds maturing in equal annual amounts over 20 years
and are registered as to interest and principal. The total face value of the issue was Birr
1,200,000 All bonds in the issue bear interest of 6% per annum and payable semiannually
on June 15 and Dec. 15 The bonds were dated June 15, year 1, and sold on that date at
face value. During year 1, the only expenditure the debt service fund will be required to
make will be the interest payment due Dec. 15 year 1 (only 6 months interest), in the
amount of Birr 36,000 that will be calculated as (1,200,000x6/100x6/12).
1. Assuming revenue to pay the first installment of bonds on June 15, year 2, and both
interest payment due in year 2, will be raised year 2. The budget for year1, need
only. Provide revenue in the amount of the year 1, expenditure, Thus, the entry to
record the badger in year 1, would be:
2. If revenue in the amount of Birr 30,000 were collected in cash from various sources
available for debt service fund, the entry would be:
3. Assume, the Birr 6,000 residual equity of the fire station capital project fund was
transferred to the debt service fund. The entry required in the latter fund would be:
4. The Equity transferred must be reported in the changes in fund balance section of the
operating statement. Accordingly, it is closed in the following manner.
5. On Dec.15,year 1, when the first interest payment is legally due, the debt service fund
records the expenditure of the appropriations as:-
6. Check totaling Birr 36,000 are written to the registered owner of this bond.
Title Dr. Cr.
Interest payable 36,000
Cash 36,000
7. Assume as of Dec. 31, year 1, the debt service fund has no assets and no liabilities,
there fore no need to prepare a balance sheet. But the budgetary and operating
statement accounts have balances, which are closed by the following entry.
Dear student
Let us have one more illustration regarding accounting for debt service fund and you may
have a brief understanding about the method for recording it.
Assume that Birr 1,200,000 bonds were prepared and issued on Jan 1, year 1. Interest
rate on bonds was 6% per annum Bonds were issued at par and dated Jan. a year 1.
Interest is paid annually on Dec. 31, terms of the bond 20 years to be paid in 4 equal
installments.
Required. Show the entry to record the above transaction in debt service fund.
Solution: First you are required to determine interest on bond for the first year.
Thus,
4. When cash in the amount of 72,000 is paid to the owner of the note:-
Dear student, now take fifteen minutes and answer the following question by you. If you
think that a question is difficult, read the relevant section again until you get the answer
right.
Journalize the following transaction into debt service fund account.
Assume Birr 1,000,000 bonds were prepared on Jan 1, year1. Interest rates on bonds was
10% per annum Bonds were issued at par and dated Jan 1 year1. Interest is paid annually
on Dec 31, terms of the bond 10 years to be paid 2.
Feedback: As it is discussed above first calculate the amount of interest that is to be paid
in the first year. Then use interest expenditure and interest payable accounts to debit and
credit respectively in the debt service fund account.
Prior to 1987, these activities were accounted for within a separate governmental fund
type, the special Assessment Fund. However, the GASB now requires, in most cases,
that these construction costs be recorded in the Capital projects Fund with the debt shown
in the General Lo0ng-Term Debt account group. The assessment of the owner is entered
as a receivable within the Debt Service Funds.
Now consider the following illustration and understand the meaning of accounting for
special assessment fund.
To reduce levy for construction work done in connection with a sidewalk with costs to be
paid by owners being benefited. As collections are made, deferred revenues will be
reclassified as revenues.
The asset is included at cost within the General Fixed Asset Account Group
although no government funds were actually required. However, as an
infrastructure item, this recording iis optional.
Summary
Dear students, we have completed unit one of the module two and the following
summary points are taken from this unit. Accounting procedures utilized by state and
local governments vary in many significant respects from the reporting process employed
by profit-oriented business.
This information is communicated to the users through the financial report namely
balance sheet and statement of revenue, expenditure and change in fund balance. One of
the most unique aspects of government financial reporting is the use of fund accounting.
Each of the distinct functions of a state or locality is recoded in an individual, self-
balancing reporting system referred to as a fund. Because of the broad range of possible
activities, specific accounting procedures have been designed for the various funds. For a
state or local government, three fund types are identified (1) governmental fund (2)
Proprietary Fund and (3) Fiduciary Funds In addition two account groups are utilized in
connection with the governmental funds General Assets Account Group and General
Long-Term Debt Account Group.
These funds utilize many of the unusual accounting procedures traditionally associated
with governmental reporting. For example, budgetary entries are required in the General
Fund, Special Revenue Funds, and Expandable Trust funds while being optional in the
Debt Service Funds and Capital Projects funds. Annual financial budgets are adopted
for each fund (to promote financial planning and control) and are entered directly into the
accounting records by means of a journal entry. Comparisons can then be drawn at any
time during the period between actual and budgeted figures. At years end, both amounts
are reported in the Statement of Revenues, Expenditures, and Changes in Fund Balance
Budgeted and Actual.
Assume that the beginning balance sheet for general fund of XYZ. Town is given as
follows:
Q.1 The town of XYZ in June, year 5 adopted the following condensed annual
budget for its general fund for the fiscal year ending June 30, year 6.
XYZ-Town
Balance sheet
June 30, year 5
Asset
Cash ………………………………………….. 160,000.00
Inventory of supplies …………………………. 40,000.00
Total Assets …………………………………… 200,000.00
Liabilities balance
Voucher payable ………………………………. 80,000.00
Fund balance
Reserve for inventory of supplies………………. 40,000.00
Undesignated and Unreserved …………………. 80,000.00
Total fund equity ………………………………. 120,000.00
Total Liabilities and fund equity ………………. 200,000.00
Estimated Revenue
General property taxes …………………………. 700,000.00
Other ……………………………………………. 140,000.00
Total estimated Revenue ………………….. 840,000.00
Add: Estimated other financing source
(Transfer from enterprise fund)……………. 10,000.000
Sub total ………………………………...... 850,000.00
Less: Appropriation
General government ………………………470,000.00
Other ……………………………………. 340,000.00
Total Appropriations ………………………810,000.00
3. Property taxes collected in cash totaled Birr 650,000: Revenue from license and
permit fees collected totaled Birr 102,000.
5. Purchase orders for non recurring expenditures were issued to outside suppliers in the
amount of Birr 360,000.
6. Expenditures for the year totaled Birr 760,000 of which Birr 90,000 applied to
additions to inventory of supplies, and Birr 350,000 applied to Birr 355,000 of the
purchase orders in the amount of Birr 360,000 issued during the year.
7. Billing for service and supplies received from the enterprise fund and the internal
service fund totaled Birr 30,000 and Birr 20,000, respectively.
8. Cash payment on vouchers payable totaled Birr 770,000. Cash payment to the
enterprise fund and the internal service fund were Birr 25,000 and Birr 14,000,
respectively.
9. Transfers of cash to the debt service fund for maturing principal and interest on
general obligation serial bonds totaled Birr 11,000
10. a payment of Birr 40,000 in lieu of property taxes and subsidy of Birr 10,000 was
received from the enterprise fund.
11. Supplies with a cost of Birr 80,000 were used during the year.
12. All uncollected property taxes on June 30, year 6 were delinquent.
13. The town council designated Birr 25,000 of the unreserved and undesignated fund
balance for the replacement of equipment during the year ending June 30, year
Required:
1. Show the necessary entries to record the above transaction.
2. Prepare a pre-closing trial balance.
3. Prepare closing entries.
4. Prepare General fund balance sheet.
Instruction: See solutions for self assessment question 1 at the end of the module
Q2. Journalizing transactions
Assume that the ABC town’s financial transactions occurring during the 1998 fiscal year
are as follows. Prepare journal entries for these events indicating the appropriate fund(s)
or group of accounts. In each case closing entries are not required.
The town council adopts a budget estimating general revenues of Birr 740,000 and
establishing approved expenditures of Birr 610,000 and operating transfers out of Birr
100,000. A surphs of Birr 30,000 is projected. The council also agrees that an additional
Birr 8,000 in anticipated parking meter receipts is to be used to send needy children to a
summer comp.
1. Property taxes of Birr 700,000 are levied for 1998. Based on past
experience,2 percent are estimated as un-collectible.
2. Three new police cars are ordered at an approximate cost of Birr 96,000.
3. A transfer of Birr 50,000 is made from the general fund to a debt service
fund, is used to pay a Birr 70,000 bond payable that comes due plus occurred
interest.
4. The town council approves construction of a Birr 850,000 town hall of this
amount Birr 700,000 will be raised by a bond issue with the remainder,
coming from a state grant that has already been approved (although not yet
received) and must be spent for this building and its furnishings.
5. The town sells the bonds mentioned in (5) for Birr 700,000
6. Parking meter revenues of Birr 6,600 are collected and immediately used to
send deserving children to camp.
8. A contract to build the new town hall at a cost of Birr 828,000 is signed and
the commitment is recorded.
9. The town agrees to put curbing on several local streets at a cost of Birr
80,000. Ten percent of this money will come from the general fund with the
remainder to be charged to the property owners being benefited. The town
will be secondarily liable for the entire amount.
10. The three new police cars arrive at an actual cost of Birr 95,000.
11. An invoice for the work to date of Birr 120,000 is received from the
contractor in connection with the new town hall. Five percent is retained to
ensure completion to the contract with the remained to be paid by the town in
60 days.
12. Bonds of Birr 72,000 are sold to finance the curbing project.
13. The town collects license and fees of Birr 18,000. No previous recording had
been made.
14. The state pays the Birr 150,000 grant described in (5) in connection with the
town hall of this total. Birr 20,000 is spent immediately to acquire furniture
for the facility.
15. The town issues on Birr 80,000 two-year bond to finance on going operating
activities.