Chapter 8 Objectives: What information concerning long term debt is important to users Define the different types of bonds Learn how to account for a capital lease Learn how to account for debt

Definitions Revenue Bonds Zero Coupon Bonds Bond Anticipation Notes Tax Anticipation Notes Revenue Anticipation Notes Conduit Debt Overlapping Debt Ratings

Why information is needed Interperiod equity Determine financial position Forecast trend in taxes Assess debt limits Possibility of bankruptcy

What’s Recorded Bonds Payable Notes Payable Vested vacation pay Vested sick pay Unfunded pensions and PRB Capital Leases

Types of Liabilities Demand Bond – holder can demand payment at any time. These are treated as long term if there is a take-out agreement Agreement does not expire within one year Can not be cancelled Lender is financial capable of performing In general fund: Cash OFS – Proceeds from bonds Keep track of debt in schedule of long term debt

Accounting for Zeros At time of Sale: ($1 million, 5%, 20 yrs. Cash $37,890 OFS – Bonds$37,890 Amortize deep discount, first period Add to bonds payable $1,894.50

Bond Anticipation Notes Can be temporary short term borrowing, less than one year and not be rolled over into long term. Then record in general fund as a payable. Cash Bond Anticipation Notes Payable When paid off: BANS payable Expenditure interest Cash

Long Term BANS Short term notes but they will be rolled over into long term bonds payable. General Fund: Cash OFS –BANS Keep track on schedule of L/T debt Interest can be capitalized if for capital project.

TANS and RANS Not listed on schedule of L/T debt because these are short term and are in anticipation of revenue rather than for long term financing Cash TANS (RANS) payable Interest Expenditure Cash

Leases Operating – expenditure as payments are made Disclosures like FASB rules Capital Leases Same criteria Expenditure, and OFS Debt expenditures as make lease payments, both principal and interest

Revenue Bonds Usually issued by a proprietary fund Obligation falls on the proprietary fund not the general government Shifts risk to proprietary fund Frees up the ability to issue more debt for the general government

Overlapping Debt Debt of more than one governmental entity Disclosed in supplemental information May be allocated by proportion of assessed value of property

Conduit Debt Debt issued by governmental unit on behalf of non-governmental entity Industrial revenue bonds May be on schedule of L/T debt or just disclosed Amounts restricted by federal government

Debt Margin The amount of debt that a city or state still can issue Usually determined debt capacity as a percentage of property value Then GO debt is subtracted from capacity to determine margin

Financial Analysis Trend Liquidity Solvency Funding What does each category measure? ** Remember you always need to compare

Solvency Measures the ability to pay long term obligations Debt Service Expenditures GF + DS Expenditures Guideline – 20 % + is high

Funding Measures different aspects of the funding of the entity Debt Margin Debt per capita Debt as a % of assessed value of property

Ratios Debt Margin 6% of assessed value of property Used for general obligation debt Ratios Total L/T Debt Population Total L/T Debt Assessed Value of property

Government-Wide Full accrual, reported on balance sheet Reported as amortized cost of the debt Amortize discounts and premiums No expenditure for re-payment of principal