Debt is not restricted to individuals or private companies. Government entities are also allowed to accumulate a specific amount of debt, as determined by the ruling legislative body. This allowed amount is known as a debt limit. The difference between an entity's actual debt and the allowed amount is known as the debt margin, which is calculated by subtracting the net debt from the debt limit.
1. Write down the entity's property value according to government assessments. For example, a particular entity might have $20 million in assessed property value.
2. Determine the monetary value of the debt limit. Multiply the percentage of debt allowed, according to the debt limit, times the property value. In this example, assume that the legislative authority allows 10 percent debt. Multiply the percentage in decimal form (0.10) times $20 million get a debt limit of $2 million.
3. Calculate net debt by adding outstanding debts and subtract the assets. Assets could include items such as authorized and unissued bonds. Continuing with the example in the previous steps, assume that this entity has $10 million in debt total and $1 million in assets. Subtract $10 million from $1 million to get $9 million in net debt.
4. Subtract the net debt from the debt limit to determine the legal debt margin. In this example, you would subtract $9 million from $2 million to get a legal debt margin of $7 million.
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