CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsMedium
A county government issued $20,000,000 in general obligation bonds at a premium of $500,000 to finance a new courthouse. The bonds have a 20-year term. Under governmental fund accounting, how should the bond premium be recorded in the year of issuance?
- AAs an increase in fund balance in the General Fund.
- BAs revenue in the Debt Service Fund.
- CAs a deferred inflow of resources in the Capital Projects Fund.
- DAs other financing sources in the Capital Projects Fund.
Show answer & explanationAnswer & explanation
Correct answer: D. As other financing sources in the Capital Projects Fund.
When general obligation bonds are issued at a premium in governmental funds, the entire proceeds, including the premium, are recorded as "Other Financing Sources" in the fund receiving the proceeds, typically the Capital Projects Fund if the bonds are for capital assets. The premium is not amortized or treated as a deferred inflow of resources in governmental funds.
Why the other options are wrong
- A. Incorrect. The General Fund is not typically the recipient of bond proceeds for major capital projects.
- B. Incorrect. While the premium may eventually be used for debt service, it's initially recorded in the fund receiving the bond proceeds as an 'Other Financing Source'.
- C. Incorrect. Bond premiums are not deferred inflows in governmental funds; they are recognized immediately.
Bond Premium Recording (Governmental Funds)
In governmental funds, bond premiums are recorded as 'Other Financing Sources' in the fund receiving the bond proceeds (e.g., Capital Projects Fund) in the year of issuance. They are not amortized.
- Recorded as 'Other Financing Sources'
- Applies to governmental funds (modified accrual)
- Recognized in the year of issuance
- Not amortized over the life of the bond
Memory trick: OFS for Bonds = Other Financing Sources for Bonds