Accounting Non for Profit

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Accounting for Capital Projects and Debt Service ------------------------------------------------- Questions for Review and Discussion 1. Budgets, and hence budget comparisons, are not as essential for capital projects and debt service funds because they are often on a project, rather than an annual, basis and spending is typically authorized on that basis. 2. When bonds are issued for more than their par value, the premium can be interpreted as an adjustment of the interest rate and transferred to the debt service fund — the fund in which resources for the payment of debt will be accumulated. Although the same interpretation can be placed upon bond discounts, there may be no funds available in the debt service…show more content…
The Internal Revenue Service imposes strict limitations on the amount of arbitrage that governments can earn so as to avoid undermining the “subsidy” given to state and local governments in the form of the tax-exempt status. If governments could engage in unlimited arbitrage, they would have virtually unlimited sources of revenue (at least until an equilibrium in the interest rate structure between tax-exempt and taxable bonds was reached). 9. As a general rule, a government can benefit from a decline in interest rates only if its outstanding debt can be redeemed at less than current market value — i.e., if a call provision is attached to the debt and thereby imposes a ceiling on the market value of the debt. 10. An in-substance defeasance is a process by which a debtor refunds its debt in economic substance but not legal form. The debtor retires the debt in economic substance by setting aside (with an independent trustee) sufficient funds to make all required payments of both interest and principal up to the date at which the debtor may first exercise its call provision. The debtor borrows the required funds by issuing new debt at prevailing interest rates, which are lower than those that it is paying on the existing outstanding debt. In that way it is able to “lock in” the lower rates and save on interest costs from the date of the defeasance until the call date. GASB standards require a government to recognize
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