CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsMedium
A municipal government issued general obligation bonds totaling $20,000,000 to finance the construction of a new city hall. The bonds have a 20-year term with interest paid annually. Which governmental fund would typically account for the accumulation of resources for the future principal and interest payments on these bonds?
- AGeneral Fund
- BCapital Projects Fund
- CPermanent Fund
- DDebt Service Fund
Show answer & explanationAnswer & explanation
Correct answer: D. Debt Service Fund
Debt Service Funds are established to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest. This matches the scenario of accumulating resources for bond payments.
Why the other options are wrong
- A. The General Fund accounts for general operations, not specific debt servicing.
- B. Capital Projects Funds are for the construction itself, not the repayment of the associated debt.
- C. Permanent Funds are for resources legally restricted so that only earnings, not principal, may be used for specific purposes benefiting the government or its citizenry.
Debt Service Fund
A governmental fund established to account for the accumulation of resources for, and the payment of, general long-term debt principal and interest.
- Governmental fund (uses modified accrual).
- Used for general long-term debt, not enterprise fund debt.
- Resources often come from tax levies or transfers from other funds.
Memory trick: Debt Service: Saving up for the big loan payment.