153 Chapter 6 - Chapter 6 Accounting for Capital Projects and Debt Service Questions for Review and Discussion 1 Budgets and hence budget

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Chapter 6 Accounting for Capital Projects and Debt Service Questions for Review and Discussion 1. Budgets, and hence budget comparisons, are not as essential for capital projects and debt service funds because they are often on a project, rather than an annual, basis and spending is typically authorized on that basis. 2. When bonds are issued for more than their par value, the premium can be interpreted as an adjustment of the interest rate and transferred to the debt service fund — the fund in which resources for the payment of debt will be accumulated. Although the same interpretation can be placed upon bond discounts, there may be no funds available in the debt service fund (or any other fund) for transfer to the capital projects fund. Therefore, the project must be scaled back or additional means of financing secured. 3. Interest (on investments) is generally recognized as revenue is earned, i.e., on a full accrual basis. Interest expenditure, by contrast, should not be accrued; it should be reported as an expenditure only as due. The rationale for recognizing the expenditure only as the interest is due is that most jurisdictions will not appropriate the resources to pay the interest, or transfer them to the debt service fund, until then. “To accrue the debt service fund expenditure and liability in one period but record the transfer of financial resources for debt service purposes in a later period would be confusing and would result in overstatement of debt service fund expenditures and liabilities and understatement of the fund balance,” according to GASB standards. However, if the resources have been transferred in to the debt service fund, then interest may (it does not have to) be accrued. 4. Today, governments account for special assessments the same as they do other projects. Thus, the resources earmarked for construction are accounted for in a capital projects fund; those dedicated for the repayment of debt are accounted for in a debt service fund. The long-term debt and the construction in process are not given fund balance sheet recognition. They are reported only in government-wide statements and in schedules of long-term debt and capital assets. Assessments receivable are reported in the debt service fund. 5. Even though the government may not, in economic substance (and sometimes even in legal form), be responsible for special assessment debt, it is generally linked to the debt in some manner (e.g., it will probably not allow the issue to default). Therefore, per current standards, it should report the debt as its own unless: it is prohibited (by constitution, charter, contract, or statute) from assuming the debt in the event of property owner default, or 6-1
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it is not legally liable for assuming the debt and makes no statement, or gives no indication that it will, or may, honor the debt in the event of default. 6.
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This note was uploaded on 02/04/2011 for the course ACCT 153 taught by Professor Na during the Spring '11 term at Cornell University (Engineering School).

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153 Chapter 6 - Chapter 6 Accounting for Capital Projects and Debt Service Questions for Review and Discussion 1 Budgets and hence budget

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