Auxiliary Standard Operating Procedures


SUBJECT:

Accrued Interest Expense on Long-term Debt

SOURCE:

Auxiliary Accounting, Financial Management Services

DATE ISSUED:

April 2005

DATE OF LAST REVISION:

May 2009

ASOP NO:

33.0

RATIONALE:

To account for accrued interest in accordance with Generally Accepted Accounting Principles (GAAP). Accrued interest is an expense resulting from interest owed on debt. To account for it in the correct accounting period, an accrual entry should be recorded. This entry is recorded to recognize the expense in the month it is incurred rather than the month it is paid. The entry should be recorded so that the income statement and balance sheet are fairly stated, satisfying the matching principle1.

ASOP:

On occasion, it is necessary for the University to issue debt in order to raise money for construction or renovation of parking garages, academic facilities, student housing, or other capital projects. This is done largely through the issuance of public bonds.

 

The Office of the Treasurer creates quarterly accruals for Auxiliary and Service Center accounts holding this type of debt to properly reflect interest expense in the accounting period it is incurred. The amount of the accrual is determined by the amortization schedule, which can be obtained from the University Office of the Treasurer. Indianapolis Housing is an example of an auxiliary unit that undergoes this activity.

 

Fixed rate interest payments are generally paid semi-annually.  For example, actual interest payments may be made by the Office of the Treasurer in May and November; therefore, accrual entries will be recorded by the Office of the Treasurer for each quarter. These accruals should reverse either at the end of each quarter or in the month the actual interest expense is paid, whichever occurs first.   The auxiliary unit is still responsible for verifying the accuracy of the accruals.

 

Each auxiliary unit also has the option to accrue interest expense monthly.  If the auxiliary unit prefers to complete monthly accruals, quarterly accruals will still be completed by the Office of the Treasurer and any monthly accruals must be reversed by the beginning of the last month of each quarter to ensure no duplication of accruals occur at the end of each quarter.

To determine the appropriate amount of the accrual for fixed rate interest, divide the amount of the next interest payment per the amortization schedule by the number of months in the payment period (For example, divide by six months if the payments are made semi-annually).

 

Variable rate interest payments reflect the current interest rates based upon outstanding principle amounts.  These payments are generally made monthly on the last day of the month and do not require an accrual entry. These payment amounts will follow the amortization schedule as provided by the Office of the Treasurer.

 

The following is an example of an accrual entry (AVAE) as it should be recorded in the appropriate account each quarter by the Office of the Treasurer.

 

Account Object Code Object Code Name Debit

Credit

60-xxx-xx

4400

Interest Exp

$50,000

 

60-xxx-xx

9004

Accrued Interest

 

$50,000

 

Note that the reversal date on the AVAE should be changed to reflect the month in which the interest will be paid by Treasury or at the beginning of the last month in the quarter.  

 

This transaction ensures that the appropriate amount of expense and the corresponding liability is recorded in the correct fiscal period.

 

The Office of the Treasurer is also responsible for preparing and recording the actual debt payment for both principal and interest from the appropriate 91-xxx-xx account. The 91-xxx-xx account will then reflect the 4400 interest expense and the reduction in cash.

 

The Office of the Treasurer records the following entries to record the debt service payment:

  1. Transfer of Funds to move cash from the 60 account to the 91 account (See 91 account definition below). Cash is the offset on a Transfer of Funds document.
  2. Non-Check Disbursement to Wire Funds. Cash is the offset on a Non-Check Disbursement document. Cash will automatically be credited in the 91 account.
  3. Internal Billing to record the principal and interest portion of the debt

 

DEFINITIONS:

Account – Identifying number for a pool of funds assigned to a specific university organization, for a specific function.

 

Auxiliary Account – An account (typically in the 60-xxx-xx or 61-xxx-xx range) that furnishes goods or services to any non-Indiana University department and charges a fee directly related to, although not necessarily equal to, the cost of the goods or services. This includes sales to students, faculty and staff for non-IU business, or the general public. An auxiliary activity is an entity that is regularly carried on and is managed with the intent to be self-supporting.

 

Service Center Account – An account (typically in the 63-xxx-xx or 66-xxx-xx range) that furnishes goods or services to another Indiana University department and charges a fee directly related to, and equal to, the cost of the goods or services. Service center rates cannot exceed the rate charged to an external customer. Fundamentally, a service center unit is managed as a self-supporting activity that is to operate at breakeven.

 

Retirement of Indebtedness Account – An account (typically in the 91-xxx-xx range) that is used to account for the accumulation of resources for and the payment of principal and interest on notes and bonds payable related to plant fund indebtedness. These accounts are maintained by the University Treasurer’s Office.

CROSS

REFERENCE:

 

Office of the Treasurer

RESPONSIBLE

ORGANIZATION:

 

Office of the Treasurer and Reporting Auxiliaries and Service Centers

 

1"The matching principle means that revenues generated and expenses incurred in generating those revenues should be reported in the same income statement. Revenues for an accounting period are recognized in accordance with the realization principle. Then the expenses incurred in generating those revenues are determined in accordance with the matching principle. Thus, expenses are reported in the income statement for the accounting period in which the related revenues are recognized." (Intermediate Accounting, by Chasteen, Flaherty, and O'Conner; 1992; McGraw-Hill, Inc.; p.60).