Hi senior auditor, I am currently downtown, at the San Diego County accounting o

Question

Hi senior auditor,

I am currently downtown, at the San Diego County accounting office, conducting fieldwork for the government’s annual audit. While reviewing the Government-Wide 6/30/2015 Statement of Net Position, I noticed the government’s Net Position decreased drastically during the current year. Unable to pinpoint the direct source of this unexpected decline, I asked the County Administrator for an explanation. The County Administrator said “the decrease was caused by the long-term liability issued during the current year”. I believe the County Administrator’s explanation may be inaccurate….

When long-term debt is issued, what is the appropriate journal entry?

When long-term debt is issued, how does this affect the Statement of Net Position?

The County Administrator provided the Bond Indenture and all corresponding Bond Issuance documentation. The documentation clearly supports the existence of a new long-term liability. The Bond was issued at the beginning of the current year, on July 1, 2014. Could this new debt be triggering other new transactions?

Assuming there are other new transactions, what are the corresponding journal entries?

How do these corresponding journal entries affect the Statement of Net Position?

Do you think the new debt and other new transactions is the primary source of the decline? Why or why not?

Explanation / Answer

When long-term debt is issued, the appropriate journal entry would be:-

Bank/Cash A/c Dr.

To Long-term Debt

X

X

When long-term debt is issued, the Statement of Net Position will be affected in following manner:-

Long-term liability would increase. Debt- equity ratio increased.

The Bond was issued at the beginning of the current year, on July 1, 2014. Yes, this new debt could be triggering other new transactions.

Journal entry for issue of Bond:-   Bank / Cash A/c Dr.

To Bond A/c.

The issue of bond will increase long-term liability. Interest expenses would increase. There would be high debt- equity ratio, high debt to total assets ratio and high financial leverage too.

This new debt is one of primary source of decline for the government. Although the impact of other business factors can not be avoided.

Bank/Cash A/c Dr.

To Long-term Debt

X

X

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