JACQUELINE L.

RECK
SUZANNE L. LOWENSOHN
Accounting for
Governmental
& Nonprofit
Entities 17/e

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education. 6-1
 C
H
A
Accounting for P
General Long-term
T
Liabilities and Debt
Service E
R

6
6-2
 Learning Objectives

6-1 Explain what types of liabilities are

classified as general long-term liabilities.
6-2 Make journal entries in the governmental
activities general journal to record the
issuance and repayment of general long-term
debt.
6-3 Prepare note disclosures for general long-
term debt.

6-3
 Learning Objectives

6-4Describe the reasons for statutory debt limits

and explain the terms debt margin and
overlapping debt.
6-5Explain the purpose and types of debt service
funds.
6-6Make appropriate journal entries to account
for activities of debt service funds.

6-4
Governments and Long-term Debt

Long-term debt is a
Interest on government
traditional part of
debt is generally tax-
governmental fiscal
exempt
policy

Most states have

The tax-exempt feature statutory limits on the
allows governments to amount of debt state and
issue debt at low rates local governments can
issue
6-5
 General Long-term Liabilities

• General long-term liabilities are those that arise

from activities of governmental funds and that are
not reported as fund liabilities of a proprietary or
fiduciary fund.
• General long-term liabilities are reported as
liabilities in the Governmental Activities column
of the government-wide statement of net position
but are not reported as liabilities of
governmental funds.

6-6
Long-term Liability Sources

Financing Operating
activities activities
● Bonds ● Claims and
● Notes judgments
● Capital leases ● Pensions
● Environmental
issues

6-7
Accounting for Long-term Liabilities

• Long-term liabilities are recognized in the

governmental activities records at the
government-wide level, even though the
proceeds may be recorded in a governmental
fund.
• Long-term liabilities are also recognized in
proprietary funds and private purpose trust
funds when the long-term debt will be serviced
by those funds

6-8
 Long-term Liability Disclosures

• Changes in long-term debt, such as authorization or issuance

of new debt or retirement of existing debt, should be presented
in a detailed schedule of changes in the notes to the financial
statements.
• An additional schedule of when payments of principal and
interest will be made in future years provides useful information
to the users of the financial statements.
• If the debt recognized by a proprietary fund or private
purpose trust fund is also backed by the full faith and credit
of the government, the contingent liability of the government
should be disclosed in the notes to the financial statements.

6-9
 Debt Limit and Debt Margin

Debt Limit Debt Margin

The total amount The difference
of indebtedness between the amount of
of specified debt limit calculated as
kinds that is prescribed by law and
allowed by law the net amount of
to be outstanding outstanding
at any one time. indebtedness subject to
limitation.

6-10
 Overlapping Debt

County
government
debt

City Township
government government
debt debt

6-11
 Debt Service Funds

• General long-term liabilities are accounted for in

a debt service fund.
• One debt service fund can account for multiple
issues of long-term debt, using subsidiary records
to track the individual issues.

6-12
 Debt Service Funds

• Although some debt issues may require lump-

sum payments, good financial management
suggests that the financial obligation should be
spread over time.
• The debt service fund is both a budgeting and
accounting entity, which allows for planning and
management of the repayment of long-term debt.
• Interest payable is not accrued in the debt-
service fund; rather it is recorded at the
government-wide level.
6-13
 Bonds

Serial Bonds
● Regular Serial Bonds
● Deferred Serial Bonds Term Bonds
● Annuity Serial Bonds
● Irregular Serial Bonds

6-14
Accounting for Regular Serial Bonds
Year One
Debits Credits
Serial Bond Debt Service Fund:
1. Estimated Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Estimated Other Financing Sources . . . . . . . . . . . . . . 6,000
Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000

Serial Bond Debt Service Fund:

2a. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,200
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,200

Governmental Activities:
2b. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,200
General Revenues—Sales Taxes—
Restricted for Debt Service . . . . . . . . . . . . . . . . . 31,200

6-15
Accounting for Regular Serial Bonds
Year One
Debits Credits
Serial Bond Debt Service Fund:
3. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Other Financing Sources—Interfund Transfers In 6,000
Serial Bond Debt Service Fund:
4a. Expenditures—Bond Interest . . . . . . . . . . . . . . . . . . 36,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000
Governmental Activities:
4b. Expenses—Interest on Long-term Debt . . . . . . . . . . 36,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000
Governmental Activities:
5. Expenses—Interest on Long-term Debt . . . . . . . . . . . 3,000
Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000

6-16
Accounting for Regular Serial Bonds
Year One

Debits Credits
Serial Bond Debt Service Fund:
6a. Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000
Estimated Revenues . . . . . . . . . . . . . . . . . . . . . . 30,000
Estimated Other Financing Sources . . . . . . . . . . 6,000

6b. Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,200

Other Financing Sources—Interfund Transfers In . . 6,000
Expenditures—Bond Interest . . . . . . . . . . . . . . . 36,000
Fund Balance—Restricted—Debt Service . . . . . 1,200

6-17
Accounting for Regular Serial Bonds
Year Two
Debits Credits
Serial Bond Debt Service Fund:
7. Estimated Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 135,000
Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,200
Budgetary Fund Balance . . . . . . . . . . . . . . . . . . . . 4,800

Serial Bond Debt Service Fund:

8a. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,100
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,100
Governmental Activities:
8b. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,100
General Revenues—Sales Taxes—
Restricted for Debt Service . . . . . . . . . . . . . . . . . . . 134,100

6-18
Accounting for Regular Serial Bonds
Year Two
Debits Credits
Serial Bond Debt Service Fund:
9a. Expenditures—Bond Principal . . . . . . . . . . . . . . . . . 60,000
Expenditures—Bond Interest . . . . . . . . . . . . . . . . . . 36,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,000
Governmental Activities:
9b. Bonds Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Expenses—Interest on Long-term Debt . . . . . . . . . . 33,000
Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,000

6-19
Accounting for Regular Serial Bonds
Year Two
Debits Credits
Serial Bond Debt Service Fund:
10a. Expenditures—Bond Interest . . . . . . . . . . . . . . . . . 34,200
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,200
Governmental Activities:
10b. Expenses—Interest on Long-term Debt . . . . . . . . . 34,200
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,200
Governmental Activities:
11. Expenses—Interest on Long-term Debt . . . . . . . . . . 2,850
Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . 2,850

6-20
Accounting for Regular Serial Bonds
Year Two
Debits Credits
Serial Bond Debt Service Fund:
12a. Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,200
Budgetary Fund Balance . . . . . . . . . . . . . . . . . . . . . 4,800
Estimated Revenues . . . . . . . . . . . . . . . . . . . . 135,000
12b. Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,100
Fund Balance—Restricted—Debt Service . . . . 3,900
Expenditures—Bond Interest . . . . . . . . . . . . . . 70,200
Expenditures—Bond Principal . . . . . . . . . . . . . 60,000

6-21
 Accounting for Term Bonds
Actuarial Basis
Debits Credits
Term Bond Debt Service Fund:
1. Estimated Revenues . . . . . . . . . . . . . . . . . . . . . . . 117,843.33
Budgetary Fund Balance . . . . . . . . . . . . . . . . . 42,843.33
Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . 75,000.00
Term Bond Debt Service Fund:
2a. Taxes Receivable—Current . . . . . . . . . . . . . . . . . 120,000.00
Estimated Uncollectible Current Taxes . . . . . . 3,000.00
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,000.00
Governmental Activities:
2b. Taxes Receivable—Current . . . . . . . . . . . . . . . . . 120,000.00
Estimated Uncollectible Current Taxes . . . . . . . 3,000.00
General Revenues—Property Taxes—Restricted
for Debt Service . . . . . . . . . . . . . . . . . . . . . . . 117,000.00

6-22
 Accounting for Term Bonds
Actuarial Basis
Debits Credits
Term Bond Debt Service Fund:
3a. Expenditures—Bond Interest . . . . . . . . . . . . . . . . . 37,500.00
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500.00
Governmental Activities:
3b. Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500.00
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500.00
Term Bond Debt Service Fund and Governmental Activities:
4. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,400.00
Taxes Receivable—Current . . . . . . . . . . . . . . . . 57,400.00
5. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,893.57
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,893.57

6-23
 Accounting for Term Bonds
Actuarial Basis
Debits Credits
Term Bond Debt Service Fund:
6a. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,261.99
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,261.99
Governmental Activities:
6b. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,261.99
General Revenues—Investment Earnings—Restricted
for Debt Service . . . . . . . . . . . . . . . . . . . . . . . . 1,261.99
Term Bond Debt Service Fund:
7a. Expenditures—Bond Interest . . . . . . . . . . . . . . . . 37,500.00
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500.00
Governmental Activities:
7b. Expenses—Interest on Long-term Debt . . . . . . . . 37,500.00
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500.00
6-24
 Accounting for Term Bonds
Actuarial Basis
Debits Credits
Term Bond Debt Service Fund and Governmental Activities:
8. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,000.00
Taxes Receivable—Current . . . . . . . . . . . . . . . . 58,000.00
9. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,893.57
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,893.57
Governmental Activities:
10. Expenses—Interest on Long-term Debt . . . . . . . . . . 37,500.00
Interest Payable . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500.00

6-25
 Accounting for Term Bonds
Actuarial Basis
Debits Credits
Term Bond Debt Service Fund:
11a. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,883.10
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,883.10
Governmental Activities:
11b. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,883.10
General Revenues—Investment Earnings—
Restricted for Debt Service . . . . . . . . . . . . . 1,883.10
Term Bond Debt Service Fund and Governmental Activities:
12. Taxes Receivable—Delinquent . . . . . . . . . . . . . . . . 4,600.00
Estimated Uncollectible Current Taxes . . . . . . . . . . 3,000.00
Taxes Receivable—Current . . . . . . . . . . . . . . 4,600.00
Estimated Uncollectible Delinquent Taxes . . . 3,000.00

6-26
 Accounting for Term Bonds
Actuarial Basis
Debits Credits
Term Bond Debt Service Fund
13a. Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000.00
Budgetary Fund Balance . . . . . . . . . . . . . . . . . . 42,843.33
Estimated Revenues . . . . . . . . . . . . . . . . . . 117,843.33
13b. Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,000.00
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,145.09
Expenditures—Bond Interest . . . . . . . . . . . . 75,000.00
Fund Balance—Restricted—Debt Service . . 45,145.09

6-27
Financial Reporting for Debt Service
Funds

Part of governmental activities at the

government-wide level

Separate column if major fund

Otherwise included with all other nonmajor

governmental funds

6-28
 Debt Service Fund Investments

• Resources held in debt service funds to be used

for repayment of debt are generally invested in
low-risk securities.
• Investments are marked to market at the end of
the accounting period.
• Any unrealized gains or losses are reported in the
statement of revenues, expenditures and changes
in fund balance at the fund level and also in the
statement of activities at the government-wide
level.
6-29
 Deposit and Investment Risks

Custodial Credit risk

credit risk

Interest rate Concentration

risk Risks related to risk
deposits and
investments held
at financial
institutions

6-30
 Deposit and Investment Disclosures

• The government should describe in its financial

statement notes (1) legal and contractual provisions for
deposits and investments, including types of investments
authorized to be held and any significant violations of
legal or contractual provisions and (2) investment
policies related to the kinds of risks described in the
previous slide.
• Investment disclosures should be organized by type of
investment.
• Additionally, the government should provide disclosures
about the specific risks discussed in the previous slide.
6-31
 Capital Lease Payments

• Governments may use a General Fund, a special

revenue fund, or a debt service fund to record
capital lease payments since the annual lease
payments are merely installment payments of
general long-term debt.
• At the inception of the lease an obligation is
recognized at the government-wide level in an
amount equal to the present value of the stream of
annual payments.

6-32
 Debt Refunding

New bonds are issued to retire previously issued bonds.

This may be done when:
● Debt service funds to retire bonds won’t be sufficient when
bonds mature
● Interest rate on new debt is lower than on existing debt
● Covenants on existing debt are excessively burdensome

Advance refunding of debt

● Legal defeasance
● In-substance defeasance
6-33
 Looking Forward

This chapter described the types of debt and other long-

term liabilities that are called general long-term liabilities.
It also presented examples of accounting entries related to
long-term debt, as well as financial statement reporting
and required disclosures.

Chapter 7 presents accounting for business-type activities

of state and local governments.

6-34