ACC 410 Week 7 Quiz – Strayer
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Quiz 5 Chapter 8 and 9
Governmental Activities -
Long-Term Obligations
TRUE/FALSE
(CHAPTER 8)
1. Unlike individuals and businesses,
governments cannot seek protection under the Federal Bankruptcy Code.
2. General obligation debt is the obligation
of the government at large and is thereby backed by the government’s general
credit and revenue-raising powers.
3. Revenue debt is secured only by designated
revenue streams.
4. When the proceeds of general long-term debt
are received by a governmental fund, rather than reporting a liability on the
balance sheet, the inflow of resources is treated as another financing source
on the operating statement.
5. Per GASB Statement No. 34, governments
generally should report their bonds, notes, and comparable long-term obligations
at present value.
6. A government is prohibited from ever
recognizing bond anticipation notes (BANs) as long-term obligations.
7. Tax anticipation notes (TANs) must be
reported as current liabilities of the governmental funds in which the related
revenues will be reported, as well as in the government-wide statements.
8. Governments may enter into operating leases,
but may not enter into capital leases.
9. In accounting for operating leases, the
rental payments should be recognized in a governmental fund and as expenses in
the government-wide statement of activities in the periods in which they apply.
10. Because they are not obligations of the
government at large, revenue bonds are usually not subject to voter approvals
or other forms of voter oversight.
11. Although governments may elect to report
conduit obligations in their government-wide and proprietary fund statements,
the GASB has ruled that note disclosure is sufficient.
MULTIPLE CHOICE (CHAPTER 8)
1. A governmental entity that is unable to
satisfy claims against it
a)
Is prohibited from filing bankruptcy.
b)
May not seek protection under the Federal Bankruptcy Code.
c)
May seek protection under the Federal Bankruptcy Code, using a special section
directed to governments.
d)
Is automatically placed under the jurisdiction of a higher level of
government.
2. To seek protection under the Federal
Bankruptcy Code, a governmental entity must
a)
Be unable to provide the level of services it has provided in the recent
past.
b)
Be unable to pay its debt in its current year.
c)
Have budgeted expenditures in excess of revenues.
d)
Both (b) and (c).
3. General long-term debt of a governmental
entity includes
a)
All future financial obligations.
b)
All future financial obligations that result from past transactions.
c)
All future financial obligations that result from past transactions for
which the government has already received a benefit.
d)
All future financial obligations that are backed by the government’s
general credit and revenue raising power and that result from past transactions
for which the government has already received a benefit.
4. In governmental fund-type financial statements, the assets acquired
under a capital lease would be reported at
a)
They are not reported in the fund financial statements.
b)
The present value of the required lease payments.
c)
The undiscounted total of required lease payments.
d)
The total of all payments required under the lease.
5. In the government-wide financial
statements, the assets acquired under a capital lease would be reported at
a)
They are not reported in the fund financial statements.
b)
The present value of the required lease payments.
c)
The undiscounted total of required lease payments.
d)
The total of all payments required under the lease.
6. In the government-wide financial statements,
long-term liabilities of governmental entities are generally reported at
a)
Face value.
b)
Face value plus (minus) unamortized premium (discount).
c)
Present value.
d)
Market value of the obligation.
7. Pulling County has a December 31 fiscal
year-end. In November, the County
borrowed $8 million from a local bank, due in six months at 6% interest, to
finance general government operations.
The county pledges property tax revenues to secure the loan. At year-end, how should the bank note be
displayed in the fund financial statements?
a)
Nothing in the General Fund; Nothing in a Schedule of Changes in
Long-Term Obligations.
b)
General Fund--$8 million in Other Financing Sources; Nothing in a
Schedule of Changes in Long-Term Obligations.
c)
General Fund--$8 million in Other Financing Sources; $8 million in a
Schedule of Changes in Long-Term Obligations.
d)
General Fund--$8 million in Notes
Payable; Nothing in a Schedule of Changes in Long-Term Obligations.
8.
Governmental entities enter into capital leases, rather than
conventional buy and borrow arrangements for which of the following
reasons? Capital leases
a)
May be an effective means of circumventing debt limitations.
b)
Are less expensive overall than buy and borrow arrangements.
c)
Reduce the cash outflows related to the asset acquisition.
d)
Have less impact on fund balance than buy and borrow arrangements.
9. New City
entered into a lease agreement for several new dump trucks to be used in
general government activities. Assuming
the City maintains its books and records in a manner that facilitates the
preparation of the fund financial statements, acquisition of these dump trucks
would require entries in which of the following funds and/or schedules?
a)
General Fund only.
b)
General Fund AND Schedule of Changes in Long-Term Debt Obligations.
c)
General Fund AND Schedule of General Fixed Assets.
d) General Fund, Schedule of General Fixed
Assets AND Schedule of General Long-Term Debt Obligations.
10. Southwest
City enters into a lease agreement that contains a nonappropriation
clause. The clause
a)
Has been held by courts in 26 states to effectively cancel the lease.
b)
Stipulates that the yearly lease payment must be appropriated by the
City Council each year.
c) Prohibits the city from
replacing leased property with similar property.
d)
Permits the city to lease at lower rates than would be possible without
the presence of the clause.
11. Why would a
government issue revenue bonds (which generally are issued at a higher rate of
interest than general obligation bonds) even though the government knows that
if revenues from the project are not sufficient to cover principal and interest
payments, the government will use resources from general government activities
to fund the principal and interest payments?
a)
Revenue bonds may not require approval of the voters.
b)
Revenue bonds may not be considered in legal debt limitations.
c)
Revenue bonds may permit the interest costs to be passed on to the
users.
d)
All of the above.
12. Which of the following funds is most likely
to receive the proceeds of revenue bonds?
a)
General Fund.
b)
Capital Project Fund.
c)
City Utility Enterprise Fund.
d)
Highway Department Special Revenue Fund.
13. Sun City is
located in Hailey County. Sun Valley
School District encompasses all of Sun City and some of Hailey County. Property in Sun City is assessed at $400
million; property in Hailey County is assessed at $800 million; property in Sun
Valley School District is assessed at $600 million. The total debt outstanding for Sun City is
$30 million; Hailey County is $50 million; Sun Valley School District is $45
million. Compute the amount of direct and
overlapping debt for Sun City.
a)
$ 30 million.
b)
$ 75 million.
c)
$ 85 million.
d)
$125 million.
14. Obligations of property owners within a
particular government for their proportionate share of debts of other
governments with whom they share boundaries is
a)
Overlapping debt.
b)
Conduit debt.
c)
Committed debt.
d)
Moral obligation debt.
15. Overlapping debt should be reported in which
of the following ways?
a)
It should be reported in the Schedule of
Changes in Long-Term Obligations.
b)
It should be disclosed as a note to the financial statements.
c)
It should be reported in a schedule in the statistical section of the
annual report.
d)
It should not be reported in the financial statements of the reporting
entity.
16. An
obligation issued in the name of a government on behalf of a nongovernmental
entity is called
a)
Overlapping debt.
b)
Conduit debt.
c)
Committed debt.
d)
Moral obligation debt.
17. The City of
Pocahontas issued $20 million in general obligation bonds at par. The City loaned the proceeds to Domsee Fish
Processors to expand the size of their facility, which would allow Domsee to
hire additional workers. The loan
payments from Domsee to the City are established to match the principal and
interest payments on the bond issue. The
bonds are payable exclusively from the loan repayments by Domsee. The bonds are secured by the additional plant
facilities built by Domsee. Where should
the City report the bonds on the annual financial report?
a)
In the government-wide financial statements.
b)
In the notes to the financial statements.
c)
In the proprietary fund financial statements.
d)
In any of the above ways.
18. Industrial development bonds are issued in
the name of a government with the proceeds used to attract private businesses
to a community. Which of the following is a true statement about industrial
development bonds?
a)
The proceeds are used by the private corporations and principal and
interest payments are made by the private corporation. The government backs the bonds in the event
of default by the private corporation.
b)
The proceeds are used by the private corporations and principal and
interest payments are made by the private corporation. The government does not back the bonds in the
event of default by the private corporation.
c)
The proceeds are used by the government to build infrastructure to
service private corporations with principal and interest payments made by the
government out of the additional tax revenues received from the private
corporation.
d)
The proceeds are used by the government to build infrastructure to
service private corporations with principal and interest payments made by the
private corporation in lieu of property taxes.
19. The Southside City has $95 million of debt
recorded in its Schedule of Changes in Long-Term Obligations, made up of $60
million of general obligation debt, $2 million of compensated absences payable,
$8 million claims and judgments, and $25 million of obligations under capital
leases. The State limits the amount of
general obligation debt that can be issued by a City to 20% of the assessed
value of taxable property. The assessed
value of property in Southside City is $500 million. The amount of legal debt margin for Southside
City is
a)
$ 5 million.
b)
$ 40 million.
c)
$ 60 million.
d)
$100 million.
20. A state created a Housing Authority to
provide financing for low-income housing.
The Authority issues bonds and uses the proceeds for that purpose. Currently the Authority has outstanding $200
million in bonds backed by the State’s promise to cover debt service shortages
should they arise. The State
Constitution specifically limits the State to no more than $2 million in
general obligation debt. How can the
state officials defend the $200 million in debt outstanding?
a)
The debt is not general obligation debt.
b)
The State is only morally obligated on the debt.
c)
The debt is the debt of the Authority not the State.
d)
All of the above.
21. Debt that is issued by one entity but backed
by the promise of another entity to make up any debt service deficiency is
a)
Committed debt.
b)
Overlapping debt.
c)
Conduit debt.
d)
Moral obligation debt.
22. A City entered into a long-term capital lease
for some office equipment. Assuming the
city maintains its books and records in a manner to facilitate preparation of
fund financial statements, what entry would be made in the General Fund to
record this event?
a)
Debit Expenditures; Credit Other Financing Sources—Leases.
b)
Debit Equipment; Credit Other Financing Sources—Leases.
c)
Debit Equipment; Credit Leases Payable.
d)
No entry since it this event had
no impact on financial resources.
23. Which of the following is likely to be used
by a bond-rating agency to rate the general obligation bonds of a governmental entity?
a)
A review of the Basic Financial Statements.
b)
Consideration of economic statistics such as unemployment rates.
c)
Consideration of legal debt margin.
d)
All of the above.
PROBLEMS (CHAPTER 8)
1. During the fiscal year ended 6/30/02 the
City of Hartsville engaged in the following transactions. Assuming the city maintains its books and
records in a manner that facilitates the preparation of its fund financial
statement, prepare all necessary journal entries that the City should make for
each transaction. Clearly indicate in
which fund the entry is being made. If
no entry is required, write ‘No Entry Required’.
a) In July 2001, the City issued $20 million in
6% general obligation term bonds to finance construction of a new building to
house City offices. The bonds were
issued at a premium of $200,000.
b)
In September, 2001 the City transferred $1 million from the General Fund
to cover the $.6 million principal and $.4 million interest payments due that
month on debt issued in previous years.
c)
In September, 2001 the City paid the principal and interest due from
(b).
d)
In June 2002, the City transferred $2 million from the General Fund to
cover the $1.2 million interest payment and the $.8 million principal payment
due in July on the bonds issued in July 2001.
2. A city enters into the following
transactions during the current year.
Assuming that the City maintains its books and records in a manner that
facilitates the preparation of its fund financial statements, prepare entries
to record the following transactions.
Indicate the fund in which the entry is being made.
a)
The City issues $5 million of tax anticipation notes, backed by property
taxes that will be recorded in the General Fund.
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