CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsHard
A county government issued $20,000,000 in general obligation bonds at a premium of $500,000 to finance the construction of a new courthouse. The bonds have a maturity of 20 years. Under modified accrual accounting, how should the bond premium be recorded by the governmental funds?
- AAs revenue in the Debt Service Fund.
- BAs deferred revenue in the Capital Projects Fund.
- CAs an increase to the bond proceeds in the Capital Projects Fund.
- DAs an other financing source in the Capital Projects Fund.
Show answer & explanationAnswer & explanation
Correct answer: D. As an other financing source in the Capital Projects Fund.
When general obligation bonds are issued at a premium, the entire proceeds, including the premium, are recognized as an 'Other Financing Source' in the fund receiving the proceeds (typically the Capital Projects Fund). The premium is not amortized over the life of the bonds in governmental funds; instead, it is often transferred to the Debt Service Fund to help cover future interest payments.
Why the other options are wrong
- A. The premium is not recorded as revenue in the Debt Service Fund at issuance; it's an 'Other Financing Source' in the issuing fund (Capital Projects) and then often transferred to the Debt Service Fund to reduce future tax levies for debt service.
- B. Deferred revenue is for unearned revenues, not for bond premiums which are considered part of the financing.
- C. While it increases the cash received, the specific classification for both the face value and premium is 'Other Financing Source'.
Bond Premium Recording (Governmental Funds)
In governmental funds using modified accrual accounting, the premium on bonds issued is recorded as an 'Other Financing Source' at the time of issuance, along with the face value of the bonds.
- Applies to governmental funds (e.g., Capital Projects Fund).
- Premium is part of 'Other Financing Sources'.
- No amortization of premium in governmental funds.
- Premium may be transferred to the Debt Service Fund.
Memory trick: Bonds bring cash in, premium just adds to the 'other' sources.