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ay435
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Joined: 01 Jul 2010
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Posts: 14

Posted: 31 Jul 2010 at 20:49 \| IP Logged

Refund Ridge Township issued General Governmental Refunding Bonds for $1,000,000 at 98 during the year ended June 30, 20X6. The Township would report the following balances in the indicated accounts in its Debt Service Fund financial statements at and for the year ended June 30, 20X6:

Bonds Payable /Discount Expenditures /Other Financing Sources

Choice 3

0 / 0 / 980,000

Choice 3 is correct.

Proceeds from refunding debt would be recorded net of any discount as other financing sources in the debt service fund associated with the refunded debt. The transaction associated with the issuance of the debt would appear on the Statement of Revenues, Expenditures and Changes in Fund Balance.

Choice 1 is incorrect. The non current debt, bonds payable, would not be recorded in the governmental fund financial statements, it would only be recorded in the government-wide financial statements under the governmental activities column. Other financing sources would be displayed in the amount of $980,000.

Choice 2 is incorrect. Refund bonds would be recorded in the debt service fund associated with the refunded debt. The net proceeds would be recorded as Other Financing Sources. There would be no "expenditure" recorded as a discount.

Choice 4 is incorrect. The issuance of refunding bonds would be recorded in the debt service fund financial statements as bond proceeds under the category "Other Financing Sources." It would not be either recorded exclusively on the government-wide financial statements or recorded in another fund.

What is a refunding debt ?

accessash
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Joined: 19 Jul 2010
Location: United States
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Posts: 4

Posted: 01 Aug 2010 at 02:48 \| IP Logged

Sometimes, the government recalls old bonds which have
either reached their maturity date or have been called.
Once these bonds are recalled, the government issues new
bonds in lieu. This is primarily done to benefit from the
low interest rate. This is what is known as government bond
refunding.

EAK5455
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Joined: 08 Jan 2010
Location: United States
Online Status: Offline
Posts: 107

Posted: 02 Aug 2010 at 10:35 \| IP Logged

First off, bond refunding is not something exclusive to governmental entities. Bond refunding can be applied to any issuance of bonds by any entity.

Bond refunding is simply a means of issuing new debt or new bonds to payoff or call existing bonds. Why would something do this? The bond refunding is generally issued because
interest rates NOW are much much lower than interest rates
were at the time the bonds were established.

Example:

Ridge township issues $1,000,000 of bonds in the year 2002 at a stated rate of 10% interest that are due in 2012. In 2010, however, the township's bond lawyer advises the township
that they could issue $1,000,000 of bonds at 2% interest.

The township is definitely going to issue the new bonds at 2%. The township takes the $1,000,000 cash proceeds received from the new bond issuance and pays off the old bond
issuance. Why? so they can pay 2% interest and avoid paying
10% interest on those last years of the original bond issuance (2010 through 2012).

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