Chapter five

DEBT SERVICE FUND

General Long-term Liabilities
Debt and other long-term liabilities that arise from the activities of governmental
funds.
It excludes long-term liabilities result from proprietary & fiduciary fund.
Accounting for General Long-term Liabilities
All general long-term liabilities are reported in the governmental activities
column of the government-wide Statement of Net Assets.
Not reported as liabilities of governmental funds.
A debt service fund (a governmental fund), may be established to accounting for
the principal and interest payments on general long-term liabilities
• Example: Tax-supported serial bonds in the amount of $100,000 are issued for a capital
project. The principal is repayable in 10 annual instalments beginning one year after
issue. Proceeds are deposited into the capital projects fund.
Governmental Activities: (GLLA) Dr. Cr.
amount provided to DSF 100,000
Serial Bonds Payable 100,000
Capital Projects Fund:
Cash 100,000
Other Financing Sources-Proceeds of Bonds 100,000
Characteristics of Debt Service Funds
 Accounts for financial resources set aside for principal and/or interest on general long-
term liabilities only
 Debt Service Fund is useful for management of resources being accumulated for Debt
Service.
 DSF are governmental funds and therefore they are expendable. Although, like a CPF,
they have focus more than a year.
 As expendable funds, DSF use the modified accrual basis of accounting
Types of governmental bond
Bond
 It is a written promises to pay a specified principal sum at a specified future date with interest.
 They are typically issued in 1000 and 5000 denominations.
 All long term debts of governmental units consists of one of the following two basic types of
bonds.
1. Term Bonds
 Term bonds are bonds whose principal is repaid in lump-sum at their maturity date.
Such lump-sum payment is usually made possible through accumulation of money in the DSF
on an actuarial basis over the life of the bond issue in a sinking fund.
2. Serial Bonds
These are bonds, which have periodic maturities.
The principal of a serial bond so repaid at various ore determined dates over the life of the issue.
There are four types of serial bonds;
a. Regular Serial Bonds-
The total Principal amount of an issue is repayable in a specified number of equal annual instalments over the life of
the issue.
b. Differed Serial Bond-
The total principal amount of the issue is repaid in equal annual instalments, but the first instalment is delayed for a
period more than one year.
c. Annuity Serial Bond-
If the amount of annual principal repayment is scheduled to increase each year by approximately the same amount
that interest payments
d. Irregular Serial Bonds-
These types of serial bonds may have pattern of repayment that does not fit the other three categories.
•

3. Revenue Bonds-
 They are issued to finance the establishment or expansion of activities accounted for in Enterprise Funds (EF).
 Because their repayment and servicing can only come from money generated from the operations of those funds.
Sources of finances (resources) for debt service fund
 Special Taxes-
• Special Taxes are not unusual when levied for servicing general long-term debts.
• Sometimes a special tax is authorized with the issuance of bond -this is more common with City Governments.
 Investments-
for a term bond issue the assets that accumulate in the DSF will be invested in income producing securities.
• The investment income is to be accounted in the DSF as Revenue.
 Refinancing
It may be possible to use the proceeds of the Sinking Fund. (A means for accumulating resources for a payment of a
long Term Debt usually with Term Bonds) to periodically purchase some of the outstanding bonds.
The process of issuing new bonds to pay of the old ones is called Refinancing.
 Bond Premium and Accrued Interest on Bonds Sold-
 Residual Equity Transfers-
Accounting for Debt Service funds
Illustration
The town of X uses a Serial Bond Debt Service Fund to pay off matured bonds and Interest payable amounts. Information about the Bond issue is
as follows;
- Principal Amount ----------------- 1,000,000
- Interest Rate ---------------------- 10%
- Bonds Dated ---------------------- January 1, 20x6
- Interest Payable--------------------- January 1 and July 1, beginning July 1, and 20x6
- Bonds mature serially at the amount of 100,000 a year starting January 1, 20x7.
- The Fiscal Period runs from July 1, 20x7 - June 30, 20x8.
1. The Revenue Budget for Serial Bond Debt Service Funds for 20x8 consists of estimated Revenues of 330,000 to be raised from Debt Service
Tax Levy and Estimated Revenues of 50,000 from earnings on investments.
•

=> Appropriation Budget includes matured interest payable and matured bonds
Payable i.e ;
Interest for July 1 January 1 = 900,000 x 5% x 2 = 90,000 (for two periods )
Bonds payable mature January 1 = 100,000
Estimated Tax Revenue 330,000
Estimated Investment Revenue 50,000
Appropriations 190,000
Budgetary Fund Balance 190,000
2. Taxes receivable in the amount of 340,000 and estimated uncollectable taxes in
the Amount of 10,000 are recorded.
Taxes Receivable- current 340,000
Allowance for uncollectable current taxes 10,000
Revenues 330,000
3. Half of the gross levy of taxes is collected in cash.
Cash 170,000
Tax Receivable-current 170,000
4. Interest payable on July 1, 20x7 is recorded as a liability.
Expenditure 45,000
Matured Interest Payable 45,000
( 900,000x10%x1/2)

5. Checks are written and mailed to the paying agent for the interest payment due on
July 1.
Cash with Fiscal Agent 45,000
Cash 45,000
( 900,000x10%x1/2)

6. Interest is paid by the Fiscal Agent and the Fiscal Agent fee of 500 is paid.
Mature Interest Payable 45,000
Expenditure 500
Cash with Fiscal agent 45,000
Cash 500
7. Taxes in the amount of 160,000 are collected.
•

Cash 160,000
Tax Receivable- Current 160,000
Cash of 100,000 is invested in a short term note which bear interest of 10%
Short Term Investment- Note 100,000
Cash 100,000
9. Interest on investment is received for the four months.
100,000 x 10% x 4/12 = 3333.33
Cash 3333.33
Revenue 3333.33
10. Checks are written and mailed to the Fiscal Agent for the matured bonds and
interests due on January 1.
Cash with Fiscal Agent 145,000
Cash 145,000
11. On January 1, 20x8 matured bonds and interests of 145,000 and the Fiscal Agents fee of 1,000 is charged as an Expenditure.
Expenditure 146,000
Matured Bonds Payable 100,000
Matured Interest Payable 45,000
F.Agent fee payable 1,000
12. Matured Bonds and interests is paid by the Fiscal Agent and the Fiscal Agent Fee
is paid.
Matured Bond Payable 100,000
Matured Interest Payable 45,000
Fiscal Agent Fee Payable 1,000
Cash With Fiscal Agent 145,000
Cash 1,000
13. Interest on Investment is received for three months.
100,000 x 10% x 3/12 = 2,500
Cash 2,500
Revenue 2,500
14. June 30, 20x8- Interest on investment are accrued for two months.
100,000 x 10% x 2/12 = 1666.67
Interest Receivable 1666.67
Revenue 1666.67
Closing Entries
Appropriations 190,000
Budgetary fund Balance 190,000
Estimated Tax Revenue 330,000
Estimated Investment Revenue 50,000

Tax Revenue 330,000

Investment Revenue 7,500
Expenditure 191,500
Unreserved and Undesignated Fund Balance 146,000