Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

CHAPTER 6:

ACCOUNTING FOR GENERAL LONG-TERM LIABILITIES AND DEBT SERVICE

OUTLINE

Number +ue$&io,$: 6-1 6-" 6-$ 6-% 6-) 6-6 6-+ 6-, 6-6-10 C#$e$: 6-1 6-" 6-$ 6-%

Topi

T!pe"T#$%

S&#&u$ 're: ()"e* Same Same Same 'e( Same Same 'e( 6-, revised Same Same Same 'e( Same 6-% revised Same 6-" revised 6-$ revised 6-% revised 6-+ 6-) revised 6-6 Same 6-- revised 'e(

Defining general long-term liabilities; financial reporting Disclosures about long-term liabilities General obligation bonds &eporting special assessment debt Debt limit and debt margin *verlapping debt Long-term debt and net position Distinguish serial bond characteristics; debt service fund accounting differences for serial and term bonds &eporting investments Advance refunding of bonds .olic/ 0ssues1 2ho should pa/ for neighborhood improvements3 .olic/ 0ssues &elating to General Long-term Debt 5he case of the vanishing debt Anal/sis of general obligation debt burden

Define e!plain #!plain #!plain #!plain Calculate #!plain #!plain Describe e!plain Describe #!plain Anal/4e (rite Anal/4e (rite Anal/4e (rite Calculate assess #!amine 8ultiple Choice 9ournal entries 9ournal entries 9ournal entries 6S 6inancial schedules Anal/sis financial statements 9ournal entries 6S 9ournal entries 9ournal entries

E-er i$e$"Prob.em$: 6-1 #!amine the CA6& 6-" 7arious 6-$ Long-term liabilit/ transactions 6-% :udgetar/ transactions 6-) Capital leases 6-6 Legal Debt 8argin Direct and *verlapping Debt 6-+ 5rial balance 6-, 6-6-10 Serial bond debt service fund transactions and statements 5erm bond debt service fund transactions Comprehensive capital assets;serial bond problem

6-1

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

CHAPTER 6:
Ans(ers to <uestions 6-1=

ACCOUNTING FOR GENERAL LONG-TERM LIABILITIES AND DEBT SERVICE

General long-term liabilities arise from activities of the General 6und or some other governmental fund= 5hese liabilities are distinguished from >fund? long-term liabilities that are incurred b/ a proprietar/ or fiduciar/ fund and for (hich debt service (ill be paid from that fund= General long-term liabilities are reported onl/ in the Governmental Activities column of the government-(ide financial statements and not in an/ fund financial statements= As sho(n in 0llustration 6-1 for the Cit/ of 9ac@sonville note disclosures about long-term debt Asuch as bonds notes and capital leasesB and operating long-term liabilities Asuch as claims and Cudgments compensated absences and other accrued liabilitiesB should sho( the beginning balance of each maCor class of long-term liabilit/ as (ell as additions to deletions from and the ending balance of each maCor class= Disclosures should also include the portion of liabilities due (ithin one /ear of the financial statement date= 5hese disclosures should present separate sections for governmental activities and business-t/pe activities= .resenting long-term liabilit/ disclosures for discretel/ presented component units as the Cit/ of 9ac@sonville has done is discretionar/ and is a matter of professional Cudgment per GAS: Codification Section "$00=11)= a= 5he fund receiving the benefit of the bond issue such as a capital proCects fund (ould record a debit to Cash and a credit to *ther 6inancing SourcesD.roceeds of :onds= Since premiums and accrued interest must be used to service the debt the premium on the bond sale (ould be recorded in the debt service fund as a debit to Cash and a credit to *ther 6inancing SourcesD.remium on :onds= At the government-(ide level the debit (ould be to Cash for the total amount Abond pa/able plus premiumB (ith related credits to :onds .a/able and .remium on :onds .a/able= At the fund level the cash (ould be reported on the balance sheet and the accounts *ther 6inancing SourcesD.roceeds of :onds and *ther 6inancing SourcesD .remium on :onds (ould be reported on the statement of revenues e!penditures and changes in fund balances= At the government-(ide level in the Governmental Activities column cash (ould be reported on the statement of net position as (ould the bond pa/able= 5he account :onds .a/able (ould be classified as a long-term liabilit/ Ae!cept for the current portion (hich is due (ithin one /earB and the .remium on :onds .a/able (ould increase Aadd toB the carr/ing value of the :onds .a/able=

6-"=

6-$=

b=

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Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Ans(ers 6-$ AContEdB

c.

GAS: reFuires that the effective interest method be used to amorti4e the .remium on :onds .a/able= As a result the amorti4ation of the premium reduces the carr/ing value of the bond b/ the amount of premium amorti4ed each interest pa/ment period= At the maturit/ of the bond the carr/ing value of the bond (ill be eFual to the face value of the bond= Special assessment debt for (hich a government provides secondar/ bac@ing should be reported as Gspecial assessment debt (ith governmental commitmentG in the government-(ide statement of net position (hile an/ portion of special assessment debt that is the direct responsibilit/ of a government and (ill be repaid from general government resources Athe public benefit portion or the amount assessed against government-o(ned propert/B should be reported li@e other general long-term liabilities= 0f the government is not obligated in an/ manner for special assessment debt the debt should not be reported in the financial statements; ho(ever the notes to the financial statements should disclose the amount of the debt as (ell as the fact that the government is in no (a/ liable for repa/ment but is onl/ acting as agent for the propert/ o(ners in collecting the assessments for(arding the collections to bondholders and initiating foreclosure proceedings if appropriate=

6-%=

AaB

AbB

6-)=

5he debt limit and debt margin for 8ilos Cit/ are1 Debt limit AH10 ,6$ )11 000 I 0=01B Less1 General obligation serial bonds Debt margin H10, 6$) 110 A%$ 000 000B H 6) 6$) 110

A'ote1 Self-supporting debt such as revenue bonds is generall/ not subCect to debt limits= 6or revenue bonds to be included the/ (ould need to be secondaril/ bac@ed b/ the full ta!ing po(er of the cit/= Also capital leases are generall/ not considered a part of general obligation debt unless there is a la( or ordinance to the contrar/= 0n some Curisdictions it ma/ be necessar/ to include authori4ed but unissued debt in the calculation= At a minimum the H10 000 000 should be disclosed=B 6-6= *verlapping debt is (hen a parcel of real estate or obCect of personal propert/ is subCect at an/ given time to assessments for pa/ment of ta!es to retire bonds issued b/ t(o or more governments= Citi4ens care about the e!tent of overlapping debt since it means their propert/ is subCect to assessments from t(o or more governments for the retirement of debt= A government is concerned about the amount of overlapping debt since it can affect the governmentJs abilit/ to issue general obligation debt= 5he greater the assessments on a citi4enJs propert/ the less open the citi4en (ill be to a governmentJs reFuest to issue bonded debt=

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Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Ans(ers AContEdB

6-+=

*n the surface this statement does not sound correct= 5he issuance of long-term debt at par (ill result in a debit to Cash and a credit to :onds .a/able in the government-(ide Cournal= 5he issuance of debt (ould have no effect on net position; ho(ever an/ pa/ment of interest in the /ear of issuance (ould decrease net position= 0n this e!ample an additional note clarified the meaning of the 8DKA statement= 0t seems that the proceeds from the debt (ere spent on road construction that (as then gifted to another government= 5hus the government issuing the debt used the resources for construction in the current /ear Adebiting C20. and crediting cashB; ho(ever the gift removed the capital asset (ith an offsetting decrease to net position= 0t (as the outright gift of the capital asset rather than the debt issuance that caused the decrease in net position= 6or a regular serial bond the total principal is repa/able in a specified number of eFual annual installments over the life of the issue= 0f the first installment of a serial bond issue is dela/ed for a period of more than one /ear after the bond issue date but all future installments fall due on a regular basis the bonds are @no(n as deferred serial bonds= 2ith annuit/ serial bonds the amount of annual principal repa/ments increases each /ear b/ appro!imatel/ the same amount that interest pa/ments decrease so that the total debt service pa/ment remains relativel/ level over the term of the issue= 0rregular serial bonds e!hibit pa/ment patterns that do not fit the other three categories= &egular serial bonds t/picall/ have principal maturities e!tending from one /ear to "0 or more /ears and do not reFuire setting aside resources= 5erm bonds on the other hand have a one-time principal maturit/ that reFuires a lump-sum repa/ment of principal on the due date= Governments generall/ set aside resources over time to prepare for the large lump-sum pa/ment= 5his practice ma/ be reFuired b/ the debt agreement=

6-,=

6--=

GAS: standards reFuire that all long-term investments including investments in debt securities be reported at fair value on the date of the fund and government-(ide financial statements= All changes in fair value during the period both reali4ed and unreali4ed are reported as revenue in the fund and government-(ide operating statements= 0n addition to the recognition of investments at fair value GAS: reFuires several note disclosures related to investments= 'ote disclosures include1 A1B legal and contractual provisions for deposits and investments including t/pes of investments authori4ed to be held and an/ significant violations of legal or contractual provisions and A"B investment policies related to certain @inds of ris@s identified b/ GAS:=

6-10= Advance refunding ma/ be desirable (hen the interest rate on outstanding debt is considerabl/ higher than current interest rates (hen debt service fund assets accumulated for debt repa/ment are not sufficient to repa/ creditors (hen the debt matures or if the covenants of the e!isting bonds are e!cessivel/ burdensome= 0f the old debt issue is Gdefeased G Aeither GlegalG or Gin-substanceGB GAS: standards permit the liabilit/ for the old issue to be removed from the accounts and the reporting of onl/ the liabilit/ for the ne( ArefundingB issue=

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Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Solutions to Cases 6-1= a. 2e recommend that the substance of a studentJs brief be emphasi4ed more than its form= 5he @e/ issues that students should identif/ in this case are1 A1B Should propert/ o(ners have to bear the full cost burden for improvements that have public as (ell as private benefit3 A"B Should the government have the po(er to create a special improvement district (ithout approval of a maCorit/ of affected propert/ o(ners3 As in an/ ambiguous situation involving subCective evaluation students ma/ reach different verdicts= So each studentJs (or@ should be assessed on the content and Fualit/ of anal/sis rather than on the verdict itself= Ver/i &: 0n the verdict on (hich this case is based the court ruled for the plaintiffs on the grounds that the cit/ failed to sho( that propert/ o(ners benefited substantiall/ from the street (idening proCect= 6urther the proCect (as found to have significant public benefit; therefore the Cudge ordered the cit/ to use public ta!es to pa/ a maCorit/ of the cost of the proCect= As a result of this case the cit/ adopted a ne( and man/ (ould argue fairer polic/ for financing future capital proCects that provide both public and private benefit= 6urther the revised cit/ ordinance reFuires a public hearing for all special assessment and other public improvement proCects as (ell as public notification in local ne(spapers= b. 0f as in this case the government provides secondar/ bac@ing for special assessment bonds then accounting and financial reporting are not affected b/ (ho pa/s the debt service on the proCect= 0ssuance of the bonds is recorded as an other financing source in the capital proCects fund and as a general long-term liabilit/ at the government-(ide level regardless of (ho pa/s debt service on the bonds= 8oreover capital proCects fund accounting and reporting for street construction (ould not be affected b/ the verdict= #ven debt service fund accounting is unaffected b/ the verdict since the cit/ had agreed to ma@e the bonds general obligations of the cit/ should propert/ o(ners default on special assessments= 0f ho(ever the special assessment bonds did not have the secondar/ bac@ing of the cit/ and the court did not rule for the plaintiffs then accounting and reporting (ould be ver/ different= 0n the capital proCects fund the change (ould be minorDtitling the other financing source as >Contributions from .ropert/ *(ners? rather than >.roceeds of :onds=? 0n this changed scenario the liabilit/ for the bond issue (ould not be recorded at the government-(ide level as the cit/ has no obligation for the debt= 0n addition all debt service activities (ould be reported in an agenc/ fund Asee Chapter , for more discussion=B All of this is academic ho(ever since the court did rule for the plaintiffs (hich essentiall/ converts the proCect into a normal capital proCect accounted for and reported as described in this chapter=

6-)

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions Cases AContJdB

6-"= a. As noted in the chapter the use of long-term debt is a traditional part of the fiscal polic/ of state and local governments particularl/ for financing general capital assets= 6e( governments possess the resources needed to finance capital proCects in the short term as annual ta! revenues are often used for current operating purposes and to meet prior obligations= 5hus long-term debt is freFuentl/ used to fund ne( capital proCects Agovernment buildings schools roads etc=B and capital asset improvements= 0n the shortterm local governments might be able to sustain debt prohibitions; ho(ever in the longer term government buildings schools roads emergenc/ service assets etc= (ould suffer= b. #ach studentJs memo should identif/ and support a position on the amendment= 5his is a case that can generate significant class discussion= 2hile ta!pa/ers often e!press distrust of government and generall/ desire reduced ta! liabilities astute individuals recogni4e that ta!es and ta!-supported debt support general government operations and public services upon (hich the general citi4enr/ relies= 0n "010 residents of the State of Colorado voted on Amendment 61 a measure (hich called for prohibition of ne( debt issuances b/ state or local governments and stringent limits on local government debt= 2hile Amendment 61 did not pass in Colorado it (as hotl/ contested on both sides= 5he five statements (ere adapted from pros and cons published b/ the press in Colorado= Additional information is available at http1;;(((=toda/=colostate=edu;stor/=asp!3idL%)6"; http1;;bellpolic/=org;node;$)01; or http1;;ballotpedia=org;(i@i;inde!=php;ColoradoMStateMandMLocalMDebtMLimitations M AmendmentM61MA"010B= 6-$= a. 0n evaluating each studentJs performance on this case (e recommend placing more (eight on the Fualit/ and depth of anal/sis than on the studentJs final conclusion= 0ndeed there ma/ not be a >right? ans(er given the facts of this case particularl/ since the t(o parties involved in the transaction appear to have reached inconsistent conclusions about ho( the debt service advances should be reported= :ecause the case involves substantial uncertaint/ it affords an e!cellent vehicle for generating classroom discussion= 6rom the perspective of the authorit/ there are both legal and conceptual issues to consider before deciding (hether it acted appropriatel/ in removing the liabilit/ for debt service advances from its accounts= 5he legal issue is (hether the authorit/ can unilaterall/ remove the liabilit/ from its accounts (ithout either being released from the obligation b/ the creditor Athe count/B or b/ appropriate Cudicial action= 5he main conceptual issue is (hether the obligation meets the conceptual definition of a liabilit/=

6-6

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions Case 6-$ AContJdB

0n the authorsJ vie( neither legal nor conceptual anal/ses Custif/ the authorit/Js removal of the liabilit/= 6rom a legal vie(point removal of the liabilit/ appears inappropriate as long as the creditor still insists that it has a valid receivable and no legal release has been obtained= 6rom a conceptual vie(point the GAS: defines liabilities as1
>Npresent obligations to sacrifice resources that the government has little or no discretion to avoid=? OGAS: Concepts Statement 'o= %P

0n most cases of in-substance defeasance the barrier for removing debt from a balance sheet is higher than that for recogni4ing it initiall/ Ai=e= 6AS: ASC %0)="0B= 5hus conceptuall/ it appears that the authorit/ can Custif/ removing the liabilit/ from its accounts onl/ if the possibilit/ of hitting the agreed upon attendance trigger Aannual attendance of $ 000 000B is remote= :ecause a variet/ of sports and entertainment events can be held in the stadium the possibilit/ e!ists that the trigger point could be reached in the future= 5hus as the independent auditor /ou should advise the authorit/ to continue to report the liabilit/ on its statement of net position= b. 8uch of the anal/sis for .art a applies to this part as (ell= 5he un(illingness of the count/ board of commissioners to (rite off the receivable for debt service advances suggests that the/ believe there is a possibilit/ that the attendance sales trigger ma/ be reached in the future= As the independent auditor /ou are not in a position to override the commissionJs opinion particularl/ given the stated facts in this case= Qo(ever /ou should Fuestion (h/ the receivable is being carried at 4ero net reali4able value if there is a positive probabilit/ that some portion of the advances ma/ be repaid in the future= 0f the count/ is un(illing to report a non4ero amount of receivable then /ou should advise them to (rite off the receivable altogether= 0n other (ords the count/ cannot have it both (a/s= 5his in turn (ould provide Custification for the authorit/ to remove its liabilit/= 6-%= a. StudentsJ initial assessments of the cit/Js net general debt burden (ill var/= Qo(ever some students are li@el/ to loo@ at the increasing trend of bonded debt and assess the trend as a potential concern= 5he general trend indicates an increase in the ratio of bonded debt to assessed valuation and the debt per capita= An anal/sis of the trend in assessed valuation sho(s an increase of about ,)R over the past ten /ears= 5his compares to an increase of appro!imatel/ 1$1=,R in net bonded debt= 5hus (hile propert/ values are increasing the increase in value is not @eeping pace (ith the increase in net bonded debt= 5his is reflected in the large increase in the per capita debt Aappro!imatel/ 10$RB= 2hen compared to benchmar@s the cit/ is higher than the %=)6 ratio of net bonded debt to assessed valuation and the H1 $+6 per capita figure= 5hus citi4ens ma/ (ant to be (atchful of the cit/Js debt burden=

6-+

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions Case 6-% AContJdB

#!traneous factors can also impact consideration of (hether the debt burden is e!cessive= 5here ma/ be environmental factors that impact increases in debt such as floods or (ind destruction= Additionall/ the nature of the government issuing the debt ma/ be a factor; for e!ample some cities are responsible for school construction (hile in other cities school districts separatel/ issue debt Aimpacting the amount of overlapping debtB= 6inall/ if the debt is part of a capital improvement plan the level of debt ma/ be considered more acceptable since there are plans in place to obtain needed capital assets (hile managing the level of debt= R#&io o0 Ne& Ge,er#. Bo,/e/ Deb& &o A &u#. V#.ue o0 T#-#b.e Proper&! #,/ Ne& Ge,er#. Bo,/e/ Deb& per C#pi&# 'L#$& Te, Fi$ #. 1e#r$ 2 3444$ omi&&e/*
Fiscal Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Estimated Assessed Population Valuation $ 90,599 $ 1,792,747 92,061 1,939,316 93,524 2,057,130 94,986 2,197,710 96,647 2,386,169 97,610 2,585,416 99,208 2,843,133 100,477 3,080,629 102,404 3,201,498 103,428 3,325,203 Gross Bonded Debt $ 192,151 206,856 212,323 221,287 261,519 291,736 280,654 278,042 271,425 309,788 Less: Amount Net in Debt Bonded Service Fund Debt $ 99,545 $ 92,606 100,690 106,166 106,655 105,668 102,518 118,769 117,212 144,307 120,326 171,410 106,551 174,103 105,945 172,097 86,976 184,449 95,158 214,630 Net General Bonded Debt to Assessed Value 5.17% 5.47% 5.14% 5.40% 6.05% 6.63% 6.12% 5.59% 5.76% 6.45% Net General Bonded Debt per Capita $ 1,022 1,153 1,130 1,250 1,493 1,756 1,755 1,713 1,801 2,075

6-,

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Solutions to #!ercises and .roblems 6-1= #ach student (ill have a different annual report; therefore there is no single set of ans(ers to each Fuestion as@ed= As@ing students to compare their ans(ers to various Fuestions is an effective active learning in-class techniFue= 1= "= $= %= )= b= a= a= c= a. 6= += ,= -= 10= c. b= d= d. c=

6-"=

6--

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions AContEdB

!"# (# General Fund: CAS) 'EVEN.ES

V$LLAGE %F CEN&E'V$LLE Debits *+,-,,, *+,-,,, Credits

%&)E' F$NANC$NG .SES/$N&E'F.ND &'ANSFE'S %.& CAS) Debt Service Fund: CAS) %&)E' F$NANC$NG S%.'CES/$N&E'F.ND &'ANSFE' $N E0PEND$&.'ES/P'$NC$PAL E0PEND$&.'ES/$N&E'ES& CAS) Governmental Activities: CAS) GENE'AL 'EVEN.ES/&A0ES E0PENSES/$N&E'ES& %N L%NG!&E'1 DEB& B%NDS PAYABLE CAS) (+,-,,, ,,-,,, *+,-,,, *+,-,,, *+,-,,, ,,-,,, (+,-,,, *+,-,,, *+,-,,, *+,-,,, *+,-,,, *+,-,,,

6-10

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions 6-$ AContEdB

Debits 2# Capital Projects Fund: CAS) %&)E' F$NANC$NG S%.'CES/ P'%CEEDS %F B%NDS Debt Service Fund: CAS) %&)E' F$NANC$NG S%.'CES/ P'E1$.1 %N B%NDS PAYABLE 'EVEN.ES Governmental Activities: CAS) SE'$AL B%NDS PAYABLE $N&E'ES& PAYABLE P'E1$.1 %N B%NDS PAYABLE "# Special Revenue Fund: CAS) 'EVEN.ES %&)E' F$NANC$NG .SES/$N&E'F.ND &'ANSFE'S %.& CAS) ((,-,,, ((,-,,, +-(+,-,,, (+,-,,, +-,,,-,,,

Credits

+-,,,-,,,

(,,-,,, +,-,,,

+-,,,-,,, +,-,,, (,,-,,,

((,-,,,

((,-,,,

6-11

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions 6-$ AContEdB

Debits Debt Service Fund: CAS) %&)E' F$NANC$NG S%.'CES/ $N&E'F.ND &'ANSFE'S $N E0PEND$&.'ES/$N&E'ES& E0PEND$&.'ES/P'$NC$PAL CAS) Governmental Activities: CAS) P'%G'A1 'EVEN.ES/GENE'AL G%VE'N1EN&/CAP$&AL G'AN&S 6 C%N&'$B.&$%NS E0PENSES/$N&E'ES& %N CAP$&AL LEASE CAP$&AL LEASE %BL$GA&$%N CAS) 5# Debt Service Fund: CAS) %&)E' F$NANC$NG S%.'CES/ P'%CEEDS %F 'EF.ND$NG B%NDS 2-3,,-,,, (+-3,4 45-(4( ((,-,,, (+-3,4 45-(4( ((,-,,,

Credits

((,-,,,

((,-,,,

((,-,,,

((,-,,,

2-3,,-,,,

%&)E' F$NANC$NG .SES/'EF.NDED B%NDS E0PEND$&.'ES/P'$NC$PAL CAS)

2-3,,-,,, *,,-,,, "-+,,-,,,

6-1"

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions 6-$ AContEdB

Debits Governmental Activities: CAS) SE'$AL B%NDS PAYABLE &E'1 B%NDS PAYABLE CAS) +# Debt Service Fund: CAS) %&)E' F$NANC$NG S%.'CES/ P'%CEEDS %F SPEC$AL ASSESS1EN& B%NDS ASSESS1EN&S 'ECE$VABLE/C.''EN& ASSESS1EN&S 'ECE$VABLE/DEFE''ED 'EVEN.ES DEFE''ED 'EVEN.ES Governmental Activities: CAS) SPEC$AL ASSESS1EN& DEB& 7$&) G%VE'N1EN&AL C%11$&1EN& ASSESS1EN&S 'ECE$VABLE/C.''EN& ASSESS1EN&S 'ECE$VABLE/DEFE''ED P'%G'A1 'EVEN.ES/GENE'AL G%V&/ CAP$&AL G'AN&S AND C%N&'$B.&$%NS DEFE''ED 'EVEN.ES E0PENSES/$N&E'ES& %N SPEC$AL ASSESS1EN& DEB& 8+,,-,,, 0 ,#, 0 59(2: $N&E'ES& PAYABLE
6-1$

Credits

2-3,,-,,, 2-3,,-,,, "-+,,-,,, "-+,,-,,,

+,,-,,,

+,,-,,, 2+-,,, 5*+-,,, 2+-,,, 5*+-,,,

+,,-,,, +,,-,,, 2+-,,, 5*+-,,, 2+-,,, 5*+-,,,

(,-,,, (,-,,,

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions 6-$ AContEdB

Debits # Debt Service Fund: $NVES&1EN&S 'EVEN.ES/C)ANGE $N FA$' VAL.E %F $NVES&1EN&S Governmental Activities: $NVES&1EN&S GENE'AL 'EVEN.ES/$NVES&1EN& EA'N$NGS !5# Debt Service Fund: ES&$1A&ED 'EVEN.E 8+-+,,-,,, 0 ,#," 0 (9(2: ES&$1A&ED %&)E' F$NANC$NG S%.'CES/ B%ND P'E1$.1 8+-+,,-,,, 0 #,(: ES&$1A&ED %&)E' F$NANC$NG S%.'CES/ $N&E'F.ND &'ANSFE' $N APP'%P'$A&$%NS 8+-+,,-,,, 0 ,#," 0 ;: Calculation o< $nter<und &rans<er $n: Amount o< appropriation re=uired <or t>e interest pa?ment due on @ul? ( Less: Premium Accrued interest on bonds 8@an (!Feb(: A 32-+,, 8++-,,,: 8("-*+,: A ("-*+, &>e General Fund Bould need to adCust its budDet to account <or t>e ("-*+, ++-,,, ("-*+, (,-,,, (,-,,,

Credits

(,-,,,

(,-,,,

32-+,,

$nter<und &rans<er# A debit to BudDetar? Fund Balance and a credit to Estimated %t>er FinancinD .ses <or A("-*+, Bould need to be made#

6-1%

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions AContJdB

!+# a# Capital Projects Fund: E0PEND$&.'ES

C$&Y %F @A1ES&%7N Debits *25- 34 Credits

%&)E' F$NANC$NG S%.'CES CAP$&AL LEASE AG'EE1EN&S *25- 34

Calculations: &>e present value o< an ordinar? annuit? o< A( <or 4 ?ears at 3 percent per ?ear is #25 34# &>ere<ore- t>e present value o< t>e 4 annual pa?ments o< A(,,-,,, eac> is A 25- 34# &>e present value o< t>e capital lease obliDation is A*25- 34 8A 25- 34 E A(,,-,,, paid at t>e inception o< t>e lease:# Note: 7>en t>e initial pa?ment o< A(,,-,,, is made b? t>e debt service <und- it Bould debit EFpenditures/Principal <or A(,,-,,, and credit Cas> <or t>e same amount# b# Governmental Activities: EG.$P1EN& CAP$&AL LEASE %BL$GA&$%NS PAYABLE CAS)

*25- 34 25- 34 (,,-,,,

Note: &>e asset is recorded at t>e lesser o< t>e present value o< t>e capital lease obliDation or t>e <air value o< t>e <ire trucH- A*+,-,,,# c# Debt Service Fund: E0PEND$&.'ES $N&E'ES& E0PEND$&.'ES P'$NC$PAL CAS)

54-4*+ +,-,2+ (,,-,,,

6-1)

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions 6-) AContEdB

Debits Governmental Activities: E0PENSES/$N&E'ES& %N CAP$&AL LEASES CAP$&AL LEASE %BL$GA&$%NS PAYABLE CAS)
Calculation: Pa?ment Number ( 2 $nterest on .npaid Balance at 3I A !,! 54-4*+ Pa?ment on Principal A(,,-,,, +,-,2+

Credits

54-4*+ +,-,2+ (,,-,,,

.npaid Lease %bliDation A*25- 34 25- 34 +*5- 5

Amount o< Pa?ment A(,,-,,, (,,-,,,

! #

C$&Y %F APPLE&%N S&A&E1EN& %F LEGAL DEB& 1A'G$N DECE1BE' "(- 2,(" A25,-,,,-,,, I (5-5,,-,,,

ASSESSED VAL.E %F P'%PE'&Y 'A&E %F DEB& L$1$&A&$%N A1%.N& %F DEB& L$1$&A&$%N %.&S&AND$NG L%NGJ&E'1 $NDEB&EDNESS S.B@EC& &% DEB& L$1$&: C%NVEN&$%N CEN&E' B%NDS GENE'AL %BL$GA&$%N SE'$AL B%NDS &A0 $NC'E1EN& B%NDS &%&AL L%NGJ&E'1 DEB& LESS DED.C&$%NS: A1%.N& ACC.1.LA&ED F%' DEB& 'E&$'E1EN& NE& DEB& S.B@EC& &% L$1$&A&$%N LEGAL DEB& 1A'G$N: A1%.N& AVA$LABLE F%' F.&.'E $NDEB&EDNESS (-3,,-,,, A "- ,,-,,, "-(,,-,,, 2-+,,-,,, 4-2,,-,,,

*-5,,-,,, A *-,,,-,,,

6-16

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions 6-6 AContEdB

C$&Y %F APPLE&%N SC)ED.LE %F D$'EC& AND %VE'LAPP$NG DEB& DECE1BE' "(- 2,(" General %bliDation Bonds A (+-,,,-,,, 3-,,,-,,, 2-5,,-,,, A 4-2,,-,,, Estimated PercentaDe Applicable 2+I 2+I ""#""I (,,I Estimated S>are o< %verlappinD Debt A "-*+,-,,, 2-,,,-,,, 3,,-,,, -++,-,,, A 4-2,,-,,, A (+-*+,-,,,

Governmental .nit Cl?de Count? Sc>ool District Cl?de Count? )ealt> Services 'eDional Librar? Subtotal- %verlappinD Debt Cit? Direct Debt &otal Direct and %verlappinD Debt

Note: &>e cit? also >as A - ,,-,,, 8A2-*,,-,,, E A(-4,,-,,, E A2-,,,-,,,: o< sel<! supportinD revenue bonds outstandinD- B>ic> are bacHed b? t>e <ull <ait> and credit o< t>e cit?- s>ould enterprise revenues be insu<<icient to maHe debt service pa?ments#

6-1+

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions AContEdB

!*#

KLA.S C%.N&Y Debits a. Debt Service Fund: ES&$1A&ED %&)E' F$NANC$NG S%.'CES ES&$1A&ED 'EVEN.ES ES&$1A&ED %&)E' F$NANC$NG .SES APP'%P'$A&$%NS B.DGE&A'Y F.ND BALANCE b. A -+,, c. No# &>e onl? interest and principal eFpenditures recorded relate to bonds# $< capital lease pa?ments >ad been made interest and principal eFpenditures Bould be recorded related to t>e lease# d. Yes# %t>er FinancinD Sources/Proceeds o< 'e<undinD and %t>er FinancinD .ses/Pa?ment to EscroB ADent indicate t>at a bond re<undinD >as occurred# +-32+-,,, (-,, -+,, +-,,,-,,, (-32+-,,, -+,, Credits

6-1,

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions 6-+ AContEdB

e. KLA.S C%.N&Y DEB& SE'V$CE F.ND S&A&E1EN& %F 'EVEN.ES- E0PEND$&.'ES AND C)ANGES $N F.ND BALANCES F%' &)E YEA' ENDED @.NE ",- 2,(5 'EVEN.ES: SALES &A0ES $NVES&1EN& EA'N$NGS &%&AL 'EVEN.ES E0PEND$&.'ES: B%ND $N&E'ES& B%ND P'$NC$PAL &%&AL E0PEND$&.'ES E0CESS %F 'EVEN.ES .NDE' E0PEND$&.'ES %&)E' F$NANC$NG S%.'CES 8.SES:: $N&E'F.ND &'ANSFE'S $N P'%CEEDS %F 'EF.ND$NG B%NDS PAY1EN& &% ESC'%7 AGEN& &%&AL %&)E' F$NANC$NG S%.'CES 8.SES:: $NC'EASE $N F.ND BALANCES F.ND BALANCES- @.LY (- 2,(" F.ND BALANCES- @.NE ",- 2,(5 32+-,,, +-,,,-,,, 8+-,,,-,,,: 32+-,,, -3,, (2+-2,, A ("2-,,, A 32+-,,, (-,,,-,,, (-32+-,,, 3(3-2,, A(-,,(-5,, +-5,, (-,, -3,,

6-1-

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions AContEdB

!3# a# (#

SANDY BEAC) Debits Credits

Serial Bond Debt Service Fund: ES&$1A&ED %&)E' F$NANC$NG S%.'CES ES&$1A&ED 'EVEN.E APP'%P'$A&$%NS B.DGE&A'Y F.ND BALANCE 5( -2+, (-,2,-,,, (-5( -2+, 2,-,,,

B.DGE& F%' FY2,(5: $N&E'F.ND &'ANSFE'S $N F%' $N&E'ES& L A4-+,,-,,, 0 ,#,5+ 0 ; F%' @AN.A'Y ( PAY1EN& AND A4-,,,-,,, F ,#,5+ 0 ; F%' @.LY ( PAY1EN& L A5( -2+,#

Governmental Activities: No entries re=uired 2. Serial Bond Debt Service Fund: CAS) %&)E' F$NANC$NG S%.'CES/$N&E'F.ND &'ANSFE'S $N E0PEND$&.'ES/B%ND $N&E'ES& E0PEND$&.'ES/B%ND P'$NC$PAL CAS) Governmental Activities: $N&E'ES& PAYABLE B%NDS PAYABLE CAS) 2("-*+, +,,-,,, *("-*+, 2("-*+, +,,-,,, *("-*+, 2("-*+, 2("-*+,

6-"0

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions 6-, AContJdB

Debits "# Serial Bond Debt Service Fund: &A0ES 'ECE$VABLE/C.''EN& 'EVEN.ES Governmental Activities: &A0ES 'ECE$VABLE/C.''EN& GENE'AL 'EVEN.ES/P'%PE'&Y &A0ES 5# Serial Bond Debt Service Fund & Governmental Activities: CAS) &A0ES 'ECE$VABLE/C.''EN& +# Serial Bond Debt Service Fund: CAS) %&)E' F$NANC$NG S%.'CES/$N&E'F.ND &'ANSFE'S $N E0PEND$&.'ES/B%ND $N&E'ES& E0PEND$&.'ES/B%ND P'$NC$PAL CAS) Governmental Activities: E0PENSES/$N&E'ES& %N L%NGJ&E'1 DEB& B%NDS PAYABLE CAS) 2,2-+,, +,,-,,, 2,2-+,, +,,-,,, 2,2-+,, (-,(4-,,, (-,2,-,,, (-,2,-,,,

Credits

(-,2,-,,,

(-,2,-,,,

(-,(4-,,,

2,2-+,,

*,2-+,,

*,2-+,,

6-"1

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions 6-, AContJdB

Debits # Serial Bond Debt Service Fund: B.DGE&A'Y F.ND BALANCE APP'%P'$A&$%NS ES&$1A&ED %&)E' F$NANC$NG S%.'CES ES&$1A&ED 'EVEN.E 2,-,,, (-5( -2+,

Credits

5( -2+, (-,2,-,,,

%&)E' F$NANC$NG S%.'CES/$N&E'F.ND &'ANSFE'S $N 'EVEN.ES E0PEND$&.'ES/B%ND $N&E'ES& E0PEND$&.'ES/B%ND P'$NC$PAL F.ND BALANCE/'ES&'$C&ED &A0ES 'ECE$VABLE/DEL$NG.EN& &A0ES 'ECE$VABLE/C.''EN& Governmental Activities: E0PENSES/$N&E'ES& %N L%NGJ&E'1 DEB& $N&E'ES& PAYABLE 8A3-+,,-,,, 0 ,#,5+ 0 ;: (4(-2+, (4(-2+, (-,,, (-,,, 5( -2+, (-,2,-,,, 5( -2+, (-,,,-,,, 2,-,,,

6-""

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions 6-, AContEdB

b. SANDY BEAC) DEB& SE'V$CE F.ND S&A&E1EN& %F 'EVEN.ES- E0PEND$&.'ES AND C)ANGES $N F.ND BALANCE F%' &)E YEA' ENDED DECE1BE' "(- 2,(5 'EVEN.ES: P'%PE'&Y &A0ES E0PEND$&.'ES: B%ND $N&E'ES& B%ND P'$NC$PAL &%&AL E0PEND$&.'ES E0CESS %F 'EVEN.ES .NDE' E0PEND$&.'ES %&)E' F$NANC$NG S%.'CES 8.SES:: $N&E'F.ND &'ANSFE'S $N $NC'EASE $N F.ND BALANCE F.ND BALANCE- @AN.A'Y (- 2,(5 F.ND BALANCE- DECE1BE' "(- 2,(5 c. SANDY BEAC) DEB& SE'V$CE F.ND BALANCE S)EE& DECE1BE' "(- 2,(5 ASSE&S: CAS) &A0ES 'ECE$VABLE/DEL$NG.EN& &%&AL ASSE&S F.ND BALANCES: F.ND BALANCE/'ES&'$C&ED F%' DEB& SE'V$CE A +24-,,, A +23-,,, (-,,, A +24-,,, 5( -2+, 2,-,,, +,4-,,, A +24-,,, A 5( -2+, (-,,,-,,, (-5( -2+, "4 -2+, A(-,2,-,,,

6-"$

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions AContEdB

!4# a# S$NK$NG F.ND SC)ED.LE F%' &)E C$&Y %F NEV$N F$SCAL YEA' 2,(5 2,(+ 2,( 2,(* 2,(3 PE'$%D ( 2 " 5 + * 3 4 (,
M

'EG.$'EDM ADD$&$%N A(*5-5 ( (*5-5 ( (*5-5 ( (*5-5 ( (*5-5 ( (*5-5 ( (*5-5 ( (*5-5 ( (*5-5 ( (*5-5 (

E0PEC&ED EA'N$NGS A , +-2"5 (,- 2+ ( -(** 2(-34 2*-*3* ""-3++ 5,-(,5 5 -+5( +"-(*(

END$NG BALANCE A (*5-5 ( "+5-(+ +"4-252 *24-33, 42 -2"* (-(23-53+ (-"" -3,( (-++(-" (-**2-" 3 2-,,,-,,,

'e=uired addition L 2-,,,-,,,9((#5 "3*4" B>ere ((#5 "3*4" is t>e <uture amount o< an annuit? o< A( <or (, periods at " percent per period#

b. 8(:

C$&Y %F NEV$N DEB& SE'V$CE F.ND Debits ES&$1A&ED %&)E' F$NANC$NG S%.'CES ES&$1A&ED 'EVEN.ES APP'%P'$A&$%NS B.DGE&A'Y F.ND BALANCE 5 3-422 +-2"5 ,-,,, 5(5-(+ Credits

8Estimated %t>er FinancinD Sources consists o< tBo times t>e sinHinD <und additions 8A(*5-5 (: and tBo interest pa?ments 8A(2,-,,,:- alt>ouD> onl? one interest pa?ment is aut>oriNed in FY2,(5:

6-"%

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

Ch= 6 Solutions 6-- AContEdB

Debits 2"5-5 (

Credits

82:

CAS) %&)E' F$NANC$NG S%.'CES/$N&E'F.ND &'ANSFE'S $N $NVES&1EN&S CAS)

2"5-5 ( (*5-5 ( (*5-5 ( ,-,,, ,-,,, 2"5-5 ( 2"5-5 ( (*5-5 ( (*5-5 ( +-2"5 +-2"5 ,-,,, 5(5-(+ 5 3-422 +-2"5

8":

E0PEND$&.'ES/$N&E'ES& CAS)

85:

CAS) %&)E' F$NANC$NG S%.'CES/$N&E'F.ND &'ANSFE'S $N $NVES&1EN&S CAS)

8+:

$NVES&1EN&S 'EVEN.ES/$NVES&1EN& EA'N$NGS

8 :

APP'%P'$A&$%NS B.DGE&A'Y F.ND BALANCE ES&$1A&ED %&)E' F$NANC$NG S%.'CES ES&$1A&ED 'EVEN.ES %&)E' F$NANC$NG S%.CES/$N&E'F.ND &'ANSFE'S $N 'EVEN.ES/$NVES&1EN& EA'N$NGS E0PEND$&.'ES/$N&E'ES& F.ND BALANCE/'ES&'$C&ED

5 3-422 +-2"5 ,-,,, 5(5-(+

6-")

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions AContJdB

!(,#
DEB& SE'V$CE F.ND
(a) Est. Revenues A !" !#at#"ns $u%&eta!' (un% $a)an*e NO ENTRY 350,000 62,500 287,500 (+) (a)

@%.'NAL EN&'$ES CAP$&AL P'%@EC&S F.ND

NO ENTRY (a)

G%VE'N1EN&AL AC&$V$&$ES
NO ENTRY

(+)

,asO(./01nte!2un% T!ans2e!s 1n

1,000,000 1,000,000

(+)

NO ENTRY

(*)

NO ENTRY

(*)

,"nst!. E3 en%#tu!es ,asEn*u6+!an*es En*u6+!an*es O.7 ,asO(.05!"*ee%s "2 $"n%s

200,000 200,000 4,500,000 4,500,000 2,500,000 2,500,000

(*)

,415// ,asNO ENTRY ,as5!e6#u6 "n $"n%s 5a'a+)e $"n%s 5a'a+)e

200,000 200,000

(%) (e)

NO ENTRY ,asO(.05!e6#u6 "n $"n%s Est. O(.05!e6#u6 "n $"n%s $u%&eta!' (un% $a)an*e 50,000 50,000 50,000 50,000

(%) (e)

(%) (e)

2,550,000 50,000 2,500,000

(2) (&)

NO ENTRY E3 en%#tu!es0 1nte!est ,as-

(2) (&) 62,500 62,500

,"nst!. E3 en%#tu!es ,asNO ENTRY

50,000 50,000

(2) (&)

,415 ,as5!e6#u6 "n $"n%s 5a'a+)e (50,000840) E3 enses01nte!est ,as-

50,000 50,000 1,250 61,250 62,500

N"te9 /O(. : Ot-e! (#nan*#n& ."u!*es. // ,415 : ,"nst!u*t#"n 4"!; #n 5!"&!ess.

O. : Outstan%#n&

6-"6

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions 6-10 AContJdB DEB& SE'V$CE F.ND
(-) (#) ,asRevenues NO ENTRY 350,000 350,000 (#) En*u6+!an*es O. ,"nst!. E3 en%#tu!es En*u6+!an*es ,"nt!a*ts 5a'a+)e ,"nt!a*ts 5a'a+)e ,50Reta#ne% %> ,as,asRevenues 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000 125,000 2,375,000 1,500,000 1,500,000 (;) (=) ,"nt!a*ts 5a'a+)e ,50Reta#ne% % ,as,as5!"& Rev0<en. <"vt.0,a . <!ant8,"nt!#+. NOT RE?@1REA (OR 5RO$BEC 2,500,000 125,000 2,375,000 1,500,000 1,500,000 (#) (-)

CAP$&AL P'%@EC&S F.ND

NO ENTRY (-)

G%VE'N1EN&AL AC&$V$&$ES
,as<en. Rev.0 Ta3es ,415 ,"nt!a*ts 5a'a+)e 350,000 350,000 2,500,000 2,500,000

(=)

NO ENTRY

(=)

(;)

NO ENTRY

(;)

())

!" !#at#"ns

62,500 337,500 350,000

())

Revenues 1,500,000 O(.01nte!2un% T!ans2e!s 1n O(.05!"*ee%s "2 $"n%s ,"nst!. E3 en%#tu!es (un% $a)an*e0 Rest!#*te% (un% $a)an*e0 Ass#&ne% 1,000,000 2,500,000 2,750,000 1,250,000 1,000,000

())

$u%&eta!' (un% $a)an*e Est. Revenues Est. O(.0 5!e6#u6 "n $"n%s Revenues

50,000 350,000

O(.05!e6#u6 "n $"n%s 50,000 E3 en%#tu!es0 1nte!est 62,500 (un% $a)an*e0 Rest!#*te% 337,500 > ,50Reta#ne% % : ,"nt!a*ts 5a'a+)e0Reta#ne% 5e!*enta&e

Ch= 6 Solutions 6-10 AContJdB

6-"+

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service

DEB& SE'V$CE F.ND

(6) Est. Revenues $u%&eta!' (un% $a)an*e A !" !#at#"nsD ,asRevenues NO ENTRY 300,000 68,750 368,750 250,000 250,000 (") (n) (6)

CAP$&AL P'%@EC&S F.ND

NO ENTRY (6)

G%VE'N1EN&AL AC&$V$&$ES
NO ENTRY

(n)

NO ENTRY

(n)

,as<en. Rev.0 Ta3es ,415 ,"nt!a*ts 5a'a+)e

250,000 250,000 2,000,000 2,000,000

(")

En*u6+!an*es O. ,"nst!. E3 en%#tu!es En*u6+!an*es ,"nt!a*ts 5a'a+)e ,"nst!. E3 en%#tu!es ,as,"nta*ts 5a'a+)e ,50Reta#ne% % ,asNO ENTRY

2,000,000 2,000,000 2,000,000 2,000,000 130,000 130,000 2,000,000 125,000 2,125,000

(")

( ) (E)

NO ENTRY NO ENTRY

( ) (E)

( ) (E)

,415/// ,as,"nta*ts 5a'a+)e ,50Reta#ne% % ,as5!e6#u6 "n $"n%s 5a'a+)e E3 enses01nte!est $"n%s 5a'a+)e ,as-

130,000 130,000 2,000,000 125,000 2,125,000 1,250 61,250 250,000 312,500

(!)

E3 en%#tu!es0 1nte!est E3 en%#tu!es0 5!#n*# a) ,as-

(!) 62,500 250,000 312,500

(!)

T-e a !" !#at#"n #n*)u%es a !#n*# a) a'6ent "2 $250,000, a se6#Fannua) #nte!est a'6ent "2 $56,250 (G$5,000,000F250,000H/.05/182).

a'6ent "2 $62,500 ($5,000,000/.05/182) an% a se6#Fannua) #nte!est

6-",

Chapter 06 - Accounting for General Long-term Liabilities and Debt Service Ch= 6 Solutions 6-10 AContJdB DEB& SE'V$CE F.ND
(s) ,asO(.01nte!2un% T!ans2e!s 1n Est. O(.01nte!2un% T!ans2e!s 1n $u%&eta!' (un% $a)an*e 120,000 120,000 120,000 120,000 O(@01nte!2un% T!ans2e!s Out ,as(un% $a)an*e0 Ass#&ne% O(@01nte!2un% T!ans2e!s Out 120,000 120,000 120,000 120,000 (s)

CAP$&AL P'%@EC&S F.ND

(un% $a)an*e0 Rest!#*te% (un% $a)an*e0 Ass#&ne% ,"nst!u*t#"n E3 en%#tu!es 1,250,000 880,000 2,130,000 (s)

G%VE'N1EN&AL AC&$V$&$ES
$u#)%#n&s 16 !"ve6ents Ot-e! t-an $u#)%#n&s ,415 4,750,000 130,000 4,880,000

Note9 T-e !es"u!*es !"v#%e% t" t-e ,a #ta) 5!"=e*ts (un% #n*)u%e !est!#*te% an% ass#&ne% a6"unts. T-e +"n% !"*ee%s an% &!ant 2un%s a!e !est!#*te%, I-#)e t-e #nte!2un% t!ans2e! Ias ass#&ne% 2"! t-e -#st"!#*a) !en"vat#"n. 1t #s assu6e% !est!#*te% 2un%s a!e s ent 2#!st, I-en ava#)a+)e, e3 )a#n#n& I-' !est!#*te% 2un% +a)an*e Ias use% 2#!st.

6-"-