GASB requires that educational institutions who engage in business-type activities and issue debt account for the debt by:
A) Recording the debt service as an expenditure as it becomes due.
B) Recording the interest as an expense when it is due and payable.
C) Recording the principal net of any premium or discount when the debt is issued and expense the interest as it is paid.
D) Recording the interest expense on the accrual basis, including amortizing the premium or discount, if applicable.

Question

Quizplus · Accepted Answer

GASB requires that educational institutions follow accrual accounting for business-type activities and debt accounting. Therefore, the interest expense should be recorded on the accrual basis, including amortizing any premium or discount, if applicable. The principal should be recorded net of any premium or discount when the debt is issued. Option A is incorrect because recording only the debt service as an expenditure would result in understated interest expense. Option B is incorrect because it only records interest when it is due and payable, which does not provide an accurate picture of the institution's liabilities. Option C is incorrect because it does not amortize the premium or discount, resulting in an overstatement or understatement of interest expense over the life of the debt.

GASB Requires That Educational Institutions Who Engage in Business-Type Activities