Project Eight - Recording Other Long-term Debt Transactions Learning Objectives: In this project, you will: record the sale of refunding bonds record the legal defeasance of outstanding general obligation bonds record payment of general obligation debt principal and interest record payment of capital lease principal and interest make adjustments to recognize these transactions in the government-wide financial statements Introduction Just as the accounting entries for transactions involving long-lived assets differ depending on whether the transaction is associated with a governmental fund activity or a proprietary fund activity, accounting entries for transactions involving long-term debt also differ depending on whether the debt is associated with general government activities (“general” debt) or with proprietary fund activities (“specific” debt). The transactions in this Project look at the differences in the accounting entries and how the differences are eliminated for the government-wide statements. Preparing the Transaction Data The following events occurred in March, 2004 and need to be entered into the accounting records. For each event, analyze the transaction to determine the appropriate debit/credit amounts and account names. Use your Chart of Accounts to look up the appropriate account codes to record the entry. After analyzing the transaction, record the complete transaction data in the space provided and then enter the transaction in FundBalance General Ledger. Each event should be recorded on a separate Journal Entry form. Event 1: Record Sale of Refunding Bonds As interest rates had declined significantly over the past several years, the issuance of $3,000,000 of refunding bonds was authorized in order to retire outstanding bonds carrying higher interest rates. The bonds were sold on March 24, 2004 for $3,041,250 (credit Proceeds from Refunding Bonds, an Other Financing Source). Fees and commissions related to the bond issuance totaled $26,650.00. The bond proceeds and related expenses are appropriately accounted for in the General Obligation Debt Service Fund. Entry: window, then enter recordtransaction and then click Save: information in the heading of the Journal Create a Journal Entry to Entry your this transaction. Enter the following Entry/Posting Date: 3/24/2004 Journal Type: GJ Description Line 1: Record sale of refunding bonds Description Line 2: Source Document: P8-01 Source Description: Project 8, #1 Debit/credit total to reconcile to: $3,041,250.00 8-1 Event 2: Record Payments on Long-Term Obligations Three items of long-term debt came due and were paid on March 26, 2004: Principal of $100,000.00 and interest of $22,450.87 on bonds associated with the H.U.D. loan fund (Fund 321) came due and were paid with resources accumulated in the fund. No accrual of these payments had been made. Payments on capital leases appropriately accounted for in the Convention Center Enterprise Fund came due. The payment of $5,000.00 included $306.25 of interest expense which had been previously accrued and $4,693.75 of matured principal. The General Obligation Debt Service Fund paid the currently due installment of a capital lease for assets used by City Clerk’s Office. The total payment amount was $15,972.92, of which $1,972.92 was for interest (not previously accrued) and $14,000 was applied to the principal of the lease. Entry: window, then enter recordtransaction and then click Save: information in the heading of the Journal Create a Journal Entry to Entry your this transaction. Enter the following Entry/Posting Date: 3/26/2004 Journal Type: GJ Description Line 1: Record payments on capital leases Description Line 2: and general long-term debt Source Document: P8-02 Source Description: Project 8, #2 Debit/credit total to reconcile to: $143,423.79 Event 3: Transfer Cash to Escrow Agent to Defease Outstanding Bonds On March 28, 2004, the City transferred $2,875,125.00 from the General Obligation Debt Service Fund to an escrow agent to be used to defease $2,500,000 (book and par value) general obligation bonds that mature in 5 years. The City has determined that this amount, plus the revenue that it generates, is sufficient to cover the remaining interest payments on the debt and the ultimate repayment of the principal amount. Use the “Payment to Escrow Agent” account to record the debit portion of the transaction. Entry: 8-2 window, then enter recordtransaction and then click Save: information in the heading of the Journal Create a Journal Entry to Entry your this transaction. Enter the following Entry/Posting Date: 3/28/2004 Journal Type: GJ Transfer cash to refund $2.5M bond Description Line 1: issue Description Line 2: Source Document: P8-03 Source Description: Project 8, #3 Debit/credit total to reconcile to: $2,875,125.00 Event 4: Receipt of Resources Designated for Debt Service The City received the following payments on March 29, 2004. Both transactions are appropriately accounted for in the General Obligation Debt Service Fund. $45,000 from the Watershed Management Commission which was designated to assist in the debt service related to several storm drain improvement projects undertaken by the City. Credit the Intergovernmental Revenues account for this payment. $1,352,492.89 in property taxes specifically designated for servicing general obligation debt. Of the payment received, $1,247,532.56 was related to current property taxes and $104,960.33 was related to delinquent property taxes. Credit the appropriate receivables accounts for the receipt of these payments. Entry: window, then enter recordtransaction and then click Save: information in the heading of the Journal Create a Journal Entry to Entry your this transaction. Enter the following Entry/Posting Date: 03/29/2004 Journal Type: GJ Description Line 1: Receipt of resources designated for Description Line 2: debt service Source Document: P8-04 Source Description: Project 8, #4 Debit/credit total to reconcile to: $1,397,492.89 8-3 Event 5: Transfer Excess Cash to Investment Account Even after payment of currently due interest and principal, the cash balance in the General Obligation Debt Service was significantly greater than the level deemed necessary by the City to cover expenses. Consequently, on March 29, 2004 the City moved $1,000,000 from the Fund’s Cash and Working Capital account to the Fund’s Investment account. Entry: window, then enter recordtransaction and then click Save: information in the heading of the Journal Create a Journal Entry to Entry your this transaction. Enter the following Entry/Posting Date; 03/29/2004 Journal Type: GJ Description Line 1: Move excess cash to investments Description Line 2: Source Document: P8-05 Source Description: Project 8, #5 Debit/credit total to reconcile to: $1,000,000.00 This is the last transaction you need to enter for Project 8. Posting the Transactions Follow your usual procedures to post the transactions: Print theSubheading. Carefully reviewYourLname-Projectensure that entered as is Optional Journal Entries report with each transaction to 8 Trans. your data the correctly entered. If you did not need to make any journal entries other than those included in the Project 8 transactions, the grand total on your Journal Entries report should be $8,457,291.68. Backup your files, taking care to note the time and date of the backup on this handout and in your log. System date: __________________ System time: __________________ Append the transactions to the Master Journal Entry File. If you did not need to make any journal entries other than those included in the Project 8 transactions, your Append Report should show 5 journal entries appended. Select previously appended transaction for posting. Choose Process from the Main Menu and then choose Correct Master JEs. Change the entry and posting dates to 03/01/2004 for the following journal entry: JE # Source Journal Entry description 15 P8-6 Adjust budgets Be sure to click Save before closing the window! 8-4 the Audit From PostingYourLname-Project 8 Trans. entered as Posting Date set to Print Subheading, the Report with Date set to 03/01/2004 and the Through the Optional 03/31/2004. Verify that only the journal entry numbers listed above and the journal entry numbers listed on your Journal Entries report are included in the Audit Report. If you do not have any transactions other than those included in this assignment, the Grand Total on your Audit Report should be $19,457,291.68. the transactions with YourLname-Project 8 Trans. entered as the Optionalthe Post Subheading and the Posting Date set to 03/31/2004. Reconcile the grand total on posting report to the grand total listed on the Audit Report. Circle and check the grand totals to indicate that they are reconciled. Reviewing the Fund and Government-wide Financial Statements We’re now ready to see how these transactions appear in the Fund financial statements, make the requisite adjustments to convert the modified accrual basis transactions to full accrual basis and then review the Government-Wide financial statements as well. Before we can do this, the data from FundBalance General Ledger must be imported to GASB 34 Reporter. To do this: start GASB 34 Reporter and choose Select General Ledger Data from the Navigation Tree when the Import Data page appears, click FundBalance General Ledger as your import source when the Import Wizard dialog window appears, click Next to begin the import process in the next window, choose 101 General Fund from the drop-down list and click Next to continue. in the next window, leave Re-import selected and click Next to begin the import process click Finish to complete the import process. Several processing windows appear as the data is being imported. Click OK when the import process is completed. start by reviewing the Fundthe Balance Sheet Setup Window appears, enter YourLname-Project 8 Trans Let’s - Governmental Funds. When statements. Click Reports in the Navigation Tree and choose Balance Sheet BEFORE in the Report Title, set the Date Heading to 03/31/2004, set the Major Fund order so that the fund numbers are in ascending order and click Print. a Statementinformation andExpenditures and Changes in Fund Balances - Governmental Funds using Print the same heading of Revenues, fund order you used to print the Balance Sheet. Take a minute to review the Balance Sheet (Figure 8-1). In particular, note the column dedicated to the General Obligation Debt Service Fund. Circle this column. Several of the accounts listed for this fund were affected by entries in this Project, most notably the Cash, Investments and Property Taxes accounts. Circle these accounts and list the transactions that affected their balances. Note also that, although we used the resources of this fund to pay bond principal and interest, there is no long-term debt listed in the fund. 8-5 Figure 8-1: Balance Sheet - Governmental Funds - transaction effects noted Cash receipts, disbursements & transfers Transfer-in Taxes collected No long-term liabilities Now take a look at the Statement of Revenues, Expenditures and Changes in Fund Balances (see Figure 8-2). This statement shows the effects of many of the transactions that you entered in this Project. Circle the amounts on the statement that contain the effects of the following transactions . Label the amounts to indicate the transaction that affected that account (note: the first one is shown for you in Figure 8-2). Selling price of the refunding bonds (Event 1) Fees and commissions associated with the issuance of the refunding bonds (Event 1) Payment of principal and payment of interest for the capital lease serviced by the General Obligation Debt Service Fund (Event 2) Payment made to the escrow agent to defease the $2.5 M of general obligation bonds (Event 3) Receipt of intergovernmental revenues from the Watershed Management Commission (Event 4) 8-6 Figure 8-1: Statement of Revenues, Expenditures & Changes - transaction effects noted Identify the accounts in the General Obligation Debt Service Fund affected by the transactions noted above Sale of refunding bonds The transactions of the governmental funds are reported in the Fund statements using modified accrual basis accounting, just as they are recorded in the funds. In order to produce the government-wide statements, the transactions entered under modified accrual basis must be converted to full accrual basis. The reconciliations presented with the two Fund statements show the cumulative effect of the adjustments necessary to convert the governmental fund statements from modified accrual basis to full accrual basis. you and a the adjustments related to use entries you just made, print a government-wideTrans of Before Net Assets enter Statement of Activity to the for comparison. Enter YourLname-Project 8 Statement BEFORE as the Optional Subheading for both reports and set the report date to 03/31/2004. 8-7 Entering the Adjustments to Convert Modified Accrual Basis to Full Accrual Basis Since adjustments are usually necessary for transactions involving long-term debt, most of the governmental fund entries in this project will require an adjustment to convert them to full accrual basis. Event 1: Sale of Refunding Bonds In modified accrual basis accounting, when bonds are sold the bond proceeds are recognized as a resource and the bond liability is not recognized at all. Additionally, any premium associated with the bonds is treated as a current period resource and any issue costs are treated as current period expenditures. Full accrual basis accounting requires that we recognize the bond liability and amortize the bond premium and issue costs over the outstanding life of the bonds. The entry to convert the transaction to full accrual basis must therefore: 1) reverse the effects of the modified accrual basis entries and 2) record the effects of full accrual basis recognition. To accomplish this, click Adjustment Interviewer in the Navigation Tree and then click the Start Interviewer button. To make an adjustment for the issuance of refunding bonds, choose Adjustment H. To reverse the effects of the modified accrual basis entry: reverse the entry to Other Financing Sources-Proceeds from Refunding Bonds for $3,041,250.00 reverse the entry to Fees and Commissions expenditures for $26,650.00 To record the effects of the full accrual basis recognition: record the issue costs of $26,650.00 as Deferred Costs and Expenses record the face value of the bonds ($3,000,000.00) and premium on the bonds ($41,250.00) as General Obligation Debt, net (note: for reporting purposes, the face and the premium are netted together to give the carrying amount of the bonds; the premium, however, will be amortized over the life of the bonds) Figure 8-3 summarizes the entries for this adjustment. 8-8 Figure 8-3: Adjustment Interviewer Window - Adjustment H - issuance of refunding bonds When the adjustments are complete, this amount should be zero. Other Financing Sources are temporarily reported under the heading “Transfers” in the government-wide Statement of Activities; when all of the adjustments have been made, this total will be zero. 8-9 Event 2: Payments on Long-Term Obligations Both the payment of interest and principal made by the H.U.D. Loan fund and the payment of interest and principal on a capital lease made by the General Obligation Debt fund require adjustments. The payment of interest and principal on a capital lease made by the Convention Center fund does not require adjustment since it was recorded using full accrual basis rules. Under modified accrual basis, the repayment of principal is recognized as an expenditure. To convert this transaction to full accrual basis, we must therefore reverse the expenditure and recognize instead a decrease in long-term debt. To record the adjustment for the H.U.D. loan payment, choose Adjustment D - Debt Principal Reclassification (see Figure 8-4). In this instance, all of the interest expense is for the current period so only the principal payment needs to be adjusted. Figure 8-4: Adjustment Interviewer Window - Adjustment D, repayment of principal on long-term debt 8-10 The entry to record the adjustment for the payment on the capital lease is similar but uses Adjustment E - Debt Principal Reclassification (for capital leases) (see Figure 8-5). Once again, all of the interest expense is for the current period so only the principal payment needs to be adjusted. Figure 8-5: Adjustment Interviewer Window - Adjustment E, repayment of principal on capital lease Event 3: Transfer of Cash to Escrow Agent to Defease Outstanding Bonds Under modified accrual basis accounting, the outflow of resources to legally defease outstanding bonds is recorded as an Other Financing Use. No entry related to the outstanding bonds is required since the defeased bonds are not recorded or reported in the governmental funds. When debt is defeased GASB requires that the defeased debt be removed from the government-wide financial statements and that the difference between the amount required to defease the debt and the carrying value of the debt be amortized over the remaining life of the bonds (either the new bonds or the old bonds, whichever is shorter). 8-11 Click Adjustment H to enter the adjustment (Figure 8-5) On the Assets tab: Recognize the $375,125 book loss on the defeasance ($2,875,125 cash placed with agent less $2,500,000 book value of the defeased bonds). On the Liabilities tab: Recognize the decrease of $2,500,000 in general obligation bonds. On the Revenues tab: Eliminate the Other Financing Use - Payment to Escrow Agent by crediting Transfers in the General Revenue column for $2,875,125.00. Be sure to click Save before leaving Adjustment H (or alternatively, click Save after each entry)! Figure 8-5: Adjustment Interviewer Window - Adjustment H - 8-12 Although Event 4-Receipt of Resources Restricted to Debt Service may ultimately yield some adjustments to recognize revenue for the current period, the revenue entry does not necessarily require adjustment. Likewise, Event 5 - Transfer of Excess Cash to Investment Account does not require adjustment. that the adjustments have been made, print new versions of the four reports: Now Balance Sheet - Governmental Funds Statement of Revenues - Governmental Funds Government-Wide Statement of Net Assets Government-Wide Statement of Activities For each report, be sure to enter YourLname-Project 8 Trans AFTER as the Optional Subheading and set the report date to 03/31/2004. that are Funds because thethere should not be affectdifference in the face ofstatements; however, there To see the effect of your adjustments, place the old and the new report pages side-by-side and circle the items different (note: any the Balance Sheet for Governmental adjustments only the government-wide should be differences in the Reconciliation sections). To Turn in for This Project Journal Entries Report showing the eight transactions Append Report showing the eight entries appended Audit Report with account totals checked to show reconciliation with the Journal Posting Report Journal Posting Report with account totals checked to show reconciliation with the Audit Report Fund Balance Sheet and Reconciliation Schedule (2 copies - before & after - with differences circled on both reports) Fund Statement of Revenues, Expenditures and Changes in Fund Balance and Reconciliation Schedule (2 copies - before & after - with differences circled on both reports) Government-wide Statement of Net Assets (2 copies - before & after - with differences circled on both reports) Government-wide Statement of Activities (2 copies - before & after - with differences circled on both reports) 8-13
"Refund of Taxes on Capital Leases"