Debt Service Fund

Debt service funds exists to account for the gathering of resources for and the payment of, long term interest and debt principal other than that which it is issued for and serviced primarily by an enterprise or similar trust fund. A debt service fund is necessary only if it is legally required or if resources are being accumulated for future payment. Although governments may incur a wide variety of debt, the more common types are described below.

Term (or sinking bond) bonds are being replaced by serial bonds as the predominant form of state and local government debt.  For term bonds, debt service consists of annual additions of resources being made to a cumulative “investment fund”, are computed on an actuarial basis, which includes assumptions that certain rates of interest will be earned from investing the resources accumulating in the investment fund. If the actual earnings are less than the planned earnings, subsequent additions are increased; if the earnings are greater than planned, the excess is earned forward until the time  of the final additional of the fund. Because term bond principal is due at the end of the bond’s term, the expenditure for repayment of principal is recognized at that time.

Debt service on serial binds, however, generally consists of pre-established principal payments that are due on annual basis and interest payments based on either fixed or variable rates that are due on a semiannual basis. No sinking fund is involved in the repayment of the serial bonds.  The revenue for a debt service fund come from one or more sources with property taxes being the predominant source. Taxes that are specified for debt service appear as revenue of the debt service fund.  Taxes for general purposes (i.e., not specified but nevertheless used for debt service) are considered to be an operating transfer to the debt service fund from the fund in which the revenue is recorded, oftentimes the general fund.

Questionnaire:

• What is debt service fund?
• Explain Debt service fund?