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d. transfer an amount equal to the discounts from a debt service fund to the capital projects fund but make no transfer of an amount equal capital projects fund to the debt service fund 6-1 to the premiums from the Select the best answer. 1. A government opts to set aside $10 million of general fund resources to finance a new hall. Construction is expected several years, when the city has set aside an additional $90 million. city begin in 4. A city holds U.S. Treasury notes as an invest ment in a capital projects fund. During the year, the market value of the notes increases by $50,000. Of this amount, $14,000 can be attributed to a decline in prevailing interest rates and $36,000 to interest that has been earned but not yet received. As ot year-end, the city should recognize to a. The government mut account for the $10 million in a government-wide statements it must report the $10 million as "restricted." capital projects fund, and in its as revenue b. The government may account for the S10 million in a capital projects fund, and in its government-wide statements it may report the $10 million as "restricted." c. The government may not account for the $10 million ina capital projects fund, and in its government-wide statements it mnay not report the $10 million as "unrestricted." d. The government may account for the $10 million in a capital projects fund, but in its government-wide statements it may not re- port the $10 million as "restricted." a. $0 b. $14,000 c. $36,000 d. $50,000 5. Which of the following accounts is least likelv to be shown on the balance sheet of a del service fund? a. bonds payable b. investments (at market value) 2. If a government can distinguish underwriting and other issue costs from bond premiums and discounts, it should c. cash d. special assessments receivable 6. Special assessment debt need not be reported on the balance sheet of a city if the debt is to be paid from assessments on property owners and a. report them as expenditures b. add them to the face value of the bond c. report them in a separate account and am- ortize them over the life of the bond d. deduct them from the bond premiums or add them to the bond discount a. the city has not guaranteed payment of the debt b. the city has guaranteed payment of the debt, but the probability of the city having make good on the guarantee is remote c. the city serves only as a collection agent, with no substantive responsibility other than to transfer the funds collected to a bond trustee to 3. When a government issues bonds at premiums or discounts and records the proceeds in a capital projects fund, it should a. transfer an amount equal to the premiums from the capital projects fund to a debt service fund and an amount equal to the discounts from a debt service fund to the capital projects fund b. transfer an amount equal to the premiums from the capital projects fund to a debt service fund but make no transfer of an amount equal debt service fund to the capital projects fund c make no transfers between the capital proj- ects fund and a debt service fund d. none of the above 7, In its fund statements a government should recognize revenue from special assessments a. entirely in the year in which the assessment is imposed b in the years in which the assessments are paid C. in the years in which the assessments are to the discounts from a due d. in the years in which the assessments be- come available for expenditure b. net assets, restricted c. net assets, unrestricted d. capital assets S. In the year it imposes a special assessment, a government should recognize in its government- wide statements 3. The repayment of bond principal should be reported in the fund statements of a service fund as debt a. the full amount of the assessment as both a. an expenditure b. an "other financing use" revenue and an asset b. the present value of the assessment as both revenue and an asset c. only the amount of the assessment that is due in the current year as revenue, but the full amount of the assessment as an asset c a reduction of bonds payable d. a direct charge to fund balance 4. A state issues bonds, at a premium, to finance road construction projects. The premium affects d. only the amount of the assessment that is due in the current year as both revenue and a. interest expenditure, as reported in the state's debt service fund an asset 9. Under existing federal statutes, arbitrage applies to state and local governments as it b. nonreciprocal transfers-out, as reported in the state's general fund c. capital assets, as reported in the state's government-wide statement of net assets a. is illegal b. is illegal unless the government can dem- onstrate a "just cause" for engaging in it c. is legal in some circumstances, but the government may be required to remit arbi- trage earnings to the federal government d. is illegal unless there is no more than a 2% difference between interest earned and in- d. net assets invested in capital assets, net of related debt in the state's government-wide statement of net assets 5. In the period that a government issues bonds at a discount, either all or a count should be reported as portion of the dis- terest paid a. a reduction of fund balance in the balance sheet of a capital projects fund b. an expenditure in the statement of revenues, expenditures, and changes in fund balance of a capital projects fund c. an expense in the government-wide state- ment of activities 10. Bond refundings economic gain when are most likely to result in an a. the bonds are subject to arbitrage b. there is an inverted yield curve c. the bonds were initially issued at a premium d. the bonds are subject to a call provision d. an asset in the government-wide statement 6-2 of net assets Select the best answer. 6. A city issued bonds on July 1. Interest of $600,000 is payable the following January 1 On December 31 the city transfers the re- quired $600,000 from its general fund to its debt service fund. On its December 31 debt service fund statement of revenues, expendi- tures, and changes in fund balance, the city 1. Which of the following items is least likely to appear on the balance sheet of a capital proj- ects fund? a. cash b. investments c. construction in process d. reserve for encumbrances must report interest expenditure of S0 b. must report interest expenditure of $600,000 . must report interest expenditure of $500,000 d may report interest expenditure of either S0 or S600,000 2. The fund balance of a debt service fund is most likely to be incorporated into the reporting entity's government-wide statement of net assets as 7. A city issues $10 million of debt that it uses to acquire an office building. In the year that it a. net assets invested in capital assets, net of related debt retire them. It would acquire the necemany funds by issuing new 10-year, 5% bonds The transaction would most likely result in accounting lon issues the debt and acquires the building, the city neither charges depreciation building nor repays any of the debt principal. Assume that the city accounts for all capital acquisitions in a capital projects fund and all payments of interest in a debt service fund. The transaction on the a. an economic gain, but an b. an economic loss, but an accounting gain c an economic gain and an accounting gin d. neither an economic gain or loss, but an accounting loss a. increases expenditures of the capital proj- ects fund b. increases other financing sources of the debt service fund 6-3 Capital projectsr funds account for construction expendi res, not for the anets that are being constructod The Wickliffe City Council approves a budge of $9,027,000 to restore the city library. The proj- ect is to be funded by the issuance of S6 million of general obligation bonds, a S2.5 million state grant, and $527,000 from general fund property taxes The city estimates that construction costs will be $8,907,000 and bond issue costs $120,000. 1. Prepare journal entries in the capital projects fund to reflect the following events and c. increases fund balance of the capital projects fund d. increases expenditures of the debt service fund 8. A city assesses property owners S50 million to extend sewer lines to their neighborhood. By year-end, however, it has not yet begun con- struction of the new lines and has not yet collected any of the assessments. It accounts for its waste-water services in an enterprise fund. In its year-end enterprise fund financial statements, the government should transactions. a. The city issues 9 % , 15-year bonds that have a face value of $6,000,000. The bonds are sold for $6,120,000, an amount reflecting price of $102. The city incurs $115,000 in issue costs; hence, the net proceeds $6,005,000. b. The city transfers the net premium of $5,000 to its debt service fund. a. recognize the assessments as assessments receivable and deferred revenue a b. recognize the assessments as assessments receivable and revenue are c. recognize the assessments as assessments receivable and a liability for future con- struction costs d. should not recognize the assessments until they c. It receives the anticipated S2,500,000 from the state, and it transfers in $527,000 from the general fund d. It signs an agreement with a contractor for $8,890,000. e. It pays the contractor S8,890,000 upon completion of the project. E It transfers the remaining cash to the debt service fund. are available for expenditure 9. A county engages in an in-substance defeasance of its bonds. The transaction results in an eco- nomic gain, but an accounting loss. In its govern- ment-wide statements, the county should a recognize the loss entirely defeasance in the year of the b. amortize the loss over either the remaining life of the existing debt or the new debt c. report the loss as a direct charge to net 2. Prepare appropriate closing entries 6-4 assets d. not recognize the loss, but instead continue to report the defeased bonds (as well as the new bonds) as liabilities The accounting for bond pre not the mir image of that for bond discounts Pacific Independent School District issued s100 million of general obligation bonds to finanee the construction of new schools. The bonds were issued at a premium of S600,000, 1. Prepare the capital projects fund journal entries to record the issue of the bonds and the transfer of the premium to an appropriate 10. A government issued, at par, $10 million of 20-year, 6 % bonds. The bonds do not contain a call provision. Ten years later,, prevailing interest rates have fallen to 5%, The govern- ment is considering whether to purchase the outstanding bonds at their market price and fund

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