A government's MD&A states that government-wide net position decreased as a result of the issuance of a long-term liability during the current reporting period. Does this sound correct? How does the issuance of long-term debt typically affect net position in the year of issuance?
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On the surface, this statement does not sound correct. The issuance of long-term debt at par will result in a debit to Cash and a credit to Bonds Payable in the government-wide journal. The issuance of debt would have no effect on net position; however, any payment of interest in the year of issuance would decrease net position. It is possible for this circumstance to occur if the proceeds from the debt were spent on a capital asset (such as road construction) that was then gifted to another government. Thus the government issuing the debt used the resources for construction in the current year (debiting CWIP and crediting cash); however, the gift removed the capital asset with an offsetting decrease to net position. It was the outright gift of the capital asset, rather than the debt issuance that caused the decrease in net position.
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