The purpose of Debt Service Funds is “to account for and report resources that are restricted, committed, or assigned to expenditure for principal and interest on general long-term liabilities”. Only general government long-term liabilities that are recorded in the General Long-Term Liabilities are serviced through Debt Service Funds.
GAAP requires that a Debt Service Fund be used to account for debt service on general long-term liabilities only if (1)Use of Debt Service Fund is legally mandated (2)Financial resources are being accumulated for principle and interest payments maturing in future years
Capital lease liabilities and serial bond debt might properly be services directly from General Fund or special Revenue fund. Indeed, many governments prefer to account for all general long-term debt service through one or more Debt service Funds (1) so that all general long-term liabilities are serviced through the same fund type, and (2) to enhance control over and accountability for debt service resources.
The typical source is property taxes. A special tax rate may be assessed for a single bond issue, or a total annual rate may be used, with the proceeds prorated to several debt issues.
Some SLGs levy a sales tax in addition to or instead of property of tax to service some of their general long term debt.
Another method of providing for debt service is required by indentures or other contracts that the debt shall be repaid out of the first revenues accruing to the treasury. Such agreements require that the government to contribute the necessary amounts to the Debt Service Fund from the General Fund.
The income from the investment of the assets of the funds is another form of Debt Service Fund revenue.
Finally, the new bond issue constitutes the financing sources in refunding transactions.
(1) Dedicated resources to pay the interest have been received in a Debt service Fund by year-end. (2) The debt service payment...
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