• Document: Debt Service Funds. Chapter 8
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Debt Service Funds Chapter 8 Learning Objectives for DSFs  Understand basic purpose and  Record transactions and nature of DSFs and liabilities prepare financial statements serviced by them  Understand accounting and  Understand when DSFs are reporting for special required and when other funds assessment DSFs may be used  Understand requirements for  Understand when GLTL term bonds and deep expenditures on GLTL are discount debt recognized  Understand, record, & report  Understand when refundings of GLTL governments may accrue principal and interest expenditures before maturity Purpose of DSFs  To account for the accumulation of resources for, and the payment of, general long-term debt principal and interest  Required only if  Legally mandated, or  Financial resources are being accumulated for principal and interest payments in future years Debt Terminology  General obligation indicates “full faith and credit” of the governmental unit pledged to repay the debt  Revenue debt indicates specific revenue source dedicated to repay the debt  Double barrel is revenue debt with repayment guaranteed by full faith and credit of governmental unit Types of Long-Term Liabilities  Bonds  Notes  Time Warrants  Capital Leases (including leases, lease- purchase agreements, certificates of participation, and installment purchase contracts) Bonds  Usually issued in $1,000 or $5,000 denominations  Maturity runs from 15 to 25 years  Interest paid annually or semi-annually  Types  Serial – the most widely used, principal comes due in installments  Term – principal comes due at a single point in time Notes  Typically less formal than bonds  May be  Short-term – 30 to 90 days – reported as fund liabilities  Long-term – 3 to 5 years – reported in GLTL  Single note used for entire transaction rather than multiple bonds Warrants  Notes – multiple year warrants that are the same as notes payable  Checks  Check warrant  Promises to pay  Money must be in bank on date it comes due  Reported in GLTL if maturity date is more than 1 year in future  “Normal check”  Order to pay  Money must be in bank on date written Capital Leases, et. al.  Instruments have widespread use in public sector  Certificates of participation (CoPs) divide leases into shares that are sold to investors  Some leases made with deep discounts – little or no interest paid during term Other Bond Terms  Interest rates  Fixed – most common – aids in planning for expenditures  Variable – more flexibility  Debt service payments – try to minimize fluctuations  Fiscal agents – process interest and principal payments Other Bond Terms (continued)  Funded reserves  Highestyear’s principal and interest  Give bondholders additional assurance of prompt payments  Bond ratings – aid in determining interest rates and reserves  Bond insurance – helps lower interest rates and reserves; may assist is issuance of bonds Other Bond Terms (continued)  Sources of financing to repay bonds – property taxes, sales taxes, or first revenues accruing to treasury  Investments – excess funds invested until needed; must keep arbitrage in mind  Expenditure recognition – usual classifications  Interest  Principal  Fiscal agent fees Typical Debt Service Transactions  Budgetary entry  Receipt of financing  Investments  Debt service expenditures #1 Budgetary entry [Page 308] Estimated Revenues – Property Taxes 162,000 Estimated Revenues – Investment Income 6,000 Estimated Transfer from GF 80,000 Appropriations – Bond Principal Retirement 100,000 Appropriations – Interest on Bonds 50,000 Appropriations – Fiscal Agent Fees 10,000 Unreserved Fund Balance 88,000 #2 Financing operations [Page 308] Cash 80,000 OFS – Transfer from GF 80,000 #3 Make investments to establish funded reserves [Page 308] Investments 80,000 Unreserved Fund Balance 80,000 Cash 80,000 Reserve for Fiscal Exigencies 80,000 #4 Record taxes [Page 308] Taxes Receivable – Current 165,000 Allowance for Uncollectible Current Taxes 3,000 Revenues – Property Taxes 162,000 #5 Collect taxes [Page 308] Cash 158,000 Taxes Rec

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