Chapter 8, Problem 1Q

a.

To determine

Explain the purpose of debt service funds.

Explanation of Solution

GAAP illustrates the purpose of debt service funds as to account for and report the financial resources which are restricted, committed or assigned to expenditure for principal or interest on long term liabilities. Only the general government long term liabilities those which are repaid by the governmental fund resources are serviced through debt service funds.

b.

To determine

Explain the situation that GAAP requires for the use of a debt service fund.

Explanation of Solution

GAAP needs that a debt service funds as to be used to account for debt service on general long-term liabilities if the following conditions are true.

• Debt service fund use is legally or contractually mandated or,
• For the usage in future resources are being currently accumulated.

c.

To determine

Explain the reason for use of debt service fund by government even if it is not required to do so.

Explanation of Solution

Use of debt service fund related to general long-term liabilities and are generally not prohibited. A government usually want to use a debt service fund for a serial bond issue even when there is no requirement for doing so and in order to better manage and control its debt service accounting for all debt service in debt service funds. In this point of view, all general government debt service will be accounted and financed through debt service funds, not some through special revenue funds or general funds and some through debt service funds. Also in the process of transferring resources from the general fund or special revenue funds to debt service funds will avoid the possibility of resources required for debt service being used for the other needs. Finally, many task including reconciling accounts with fiscal agent to auditing debt service transactions are being facilitated by accounting for all general government debt service in debt service funds.