A county government issued $10,000,000 in general obligation bonds at a premium of $200,000 to finance the construction of a new public safety building. The bonds have a 20-year term. Under modified accrual accounting in the Capital Projects Fund, how should the bond premium be recorded upon receipt?
- AAs 'Bond Premium Payable' in the Capital Projects Fund.
- BAs an 'Other Financing Source' transferred to the Debt Service Fund.
- CAs an 'Other Financing Source' in the Capital Projects Fund.
- DAs 'Revenue' in the Capital Projects Fund.
Show answer & explanationAnswer & explanation
Correct answer: B. As an 'Other Financing Source' transferred to the Debt Service Fund.
When general obligation bonds are issued at a premium, the premium typically provides additional resources. GASB guidance usually requires that the premium on general long-term debt be recorded as an 'Other Financing Source' in the fund receiving the proceeds (Capital Projects Fund), but then immediately transferred to the Debt Service Fund to be used for future debt service payments. This transfer ensures the premium is used to reduce the effective interest cost over the life of the bonds.
Why the other options are wrong
- A. Bond premium is a financing source, not a payable in this context, although it does relate to the bonds payable.
- C. While initially an 'Other Financing Source' in the Capital Projects Fund, the premium on general long-term debt is usually transferred to the Debt Service Fund.
- D. Bond premiums are not considered revenue in governmental funds.
Bond Premium Accounting (Governmental Funds)
For general obligation bonds issued at a premium in governmental funds, the premium is typically recorded as an 'Other Financing Source' in the fund receiving the proceeds (e.g., Capital Projects Fund) and then transferred to the Debt Service Fund to amortize over the life of the debt, reducing future interest payments.
- Applies to general long-term debt (e.g., general obligation bonds).
- Recorded as an 'Other Financing Source'.
- Generally transferred to the Debt Service Fund.
- Reduces the effective interest cost over the bond's life.
Memory trick: Bond 'Premium' is extra cash, so 'Pass' it to the Debt Service Fund to pay off the 'Principal' eventually.