Governments issue bonds to finance large capital projects such as the construction of schools or roads. A bond issue incurs administrative expenses, such as underwriter fees and other issuance costs, in addition to the discounted selling price for the bonds. When accountants record the sale of the bonds, the Governmental Accounting Standards Board (GASB) requires separate recording of certain details, using different government funds and segmented data for more readable and transparent analysis.
1. Record the entries pertaining to the issuance of bonds in the specific fund set up to track the capital project. Current generally accepted accounting principles (GAAP) allow government accountants to record the proceeds of a bond issue, net of underwriting and other fees, in a capital projects fund as an "Other Financing Source," or OFS. They can do so with no detail to describe the fees paid out of the proceeds. Under GASB Statement 34, the full face amount of the issued bond debt should be recorded in the capital project fund as an OFS.
2. Record the entries for expenditures and the discount related to the bond issue. Under GASB 34, the bond discount amount should be labeled "Other Financing Use", or OFU. The costs to issue the debt should be labeled as expenditures. The accountant should debit the capital project fund for the net cash proceeds, the expenditures, and the bond discount. The offsetting entries in the capital project fund consist of separate debit entries for the entire face value of the bond issue, and the interest payment due to the organization's debt service fund.
3. Record an accrual for the bond interest payable in the organization's debt service fund. This is the coupon payment made to bondholders. This entry should consist of a debit to record the amount due from the capital projects fund, and an offsetting credit to accrued interest payable for the bonds.
4. Record the bond sale information and bonds payable amount in the self-balancing accounts for general long-term liabilities. The full face value of the bond issue is recorded as a credit in the general long-term liabilities account as the amount to be provided for payment of bonds. The offsetting entry, which is a debit for the full face value of the bond issue, is recorded along with a note from the accountant. The note specifies the sale terms of the specific bond issue -- this includes the name or purpose of the bond issue, the issue discount and interest payment terms.
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