Chapter 6 Transactions Affecting General Long-term
Liabilities and Debt Service
The
City of Smithville created a Street Improvement Bond Debt Service Fund to be
used to retire the bonds issued for the purposes described in Chapter 5 of this
cumulative problem, and to pay the interest on the bonds. The $2,000,000 face
value of bonds issued during 2014 are dated January 1, 2014, but were not
issued until May 6, 2014. Because
bondholders will receive six months of interest on July 1, 2014 in the total
amount of $40,000, they were required to pay $28,000 on the date of issue to
pay the city for unearned interest from January 1 to May 6. The bonds bear interest of 4 percent per
annum. The first interest payment of $40,000 is due July 1, 2014. Subsequent semiannual interest payments will
be made January 1 and July 1 of each following year until the maturity of the
bonds. Bonds in the amount of $500,000
are to mature five years after the date of the bonds (January 1, 2019), and
$100,000 are to mature January 1 of each year thereafter until all the bonds
issued in 2014 have been retired. Thus,
these bonds are deferred serial bonds as discussed in Chapter 6 of the
textbook. Make entries as instructed in
the following paragraphs.
Bond
covenants related to this bond issue require the city to levy property taxes
sufficient to make principal and interest payments until the bonds have been
retired. The city council has approved a
resolution to enable the property tax levy, beginning in fiscal year 2015.
a.
Prepare general journal entries, as necessary to record the
transactions described in paragraph b
in the Street Improvement Bond Debt Service Fund general journal and, if
applicable, in the governmental activities general journal. Use account titles
listed under the drop down [Account (# –
Description)] menu. Be sure the year
2014 is selected from the drop-down [Year] menu and the appropriate
paragraph number shown in bold-face font below is in the [Transaction Description] box.
Please remember that before closing the City of Smithville, you must click on [File], and [Save/Save As] to
save your work. Your work is NOT
automatically saved.
b.
Record the transactions below, as necessary.
- [Para. 6-b-1]In early May 2014, an
amendment to the annual budget for 2014 was approved by the city council
for inflows and outflows in the Street Improvement Bond Debt Service Fund
related to the bond issue. The debt
service fund budget amendment provides for estimated other financing sources
of $40,000 for the premium on bonds sold and estimated revenues of $28,000
for accrued interest on bonds sold; and appropriations in the amount of
the one interest payment of $40,000 to be made during 2014. (The payment
that is due on July 1, 2014.) As
the bond issue was not made until May 2014, the city will not levy debt
service property taxes until next year.
Required: Record the budget for the Street Improvement
Bond Debt Service Fund for year 2014.
Budgetary entries have no effect on the government-wide accounting
records.
- [Para. 6-b-2]On April 1, 2014, the
premium and accrued interest on bonds sold were received by the Street
Improvement Bond Debt Service Fund. (See Transaction 5-b-7 in the Street
Improvement Fund.)
Required:Record this transaction in the debt service fund. No entry is required at this time in the
governmental activities general journal since the bond issue, including the
related premium and accrued interest, was recorded in the governmental
activities general journal in transaction 5-b-7.
- [Para. 6-b-3]The July 1, 2014,
interest payment was made in the amount of $40,000. (Note: Since you
credited Expense—Interest on Long-Term Debt for $28,000 in 5-b-7 in the
governmental activities general journal you can record the full July 1,
2014, interest payment as a debit to Interest Expense, less amortization
of the premium.)
Required:Record this transaction in both the debt service fund and
the governmental activities general journals.
For the entry in the governmental activities journal, assume that the appropriate
amount of amortization of the Premium on 4% Deferred Serial Bonds Payable for
the period the bonds have been outstanding (May 6 to July 1) is $339. (Note: Although premiums and discounts on
bonds issued are not amortized in a debt service fund, they should be amortized
at the government-wide level since the accrual basis of accounting is used at
that level.)
- [Para. 6-b-4] Make the required journal entry in the
governmental activities general journal to accrue six months of interest
payable on the 4% Deferred Serial Bonds Payable from the July 1 interest
payment until the end of the fiscal year, December 31, 2014. For this entry, assume that the
appropriate amount of amortization of the Premium on 4% Deferred Serial
Bonds Payable is $1,017. (Recall
that interest is not accrued for the period July 1 to December 31, 2014,
in the debt service fund as no appropriation exists for this expenditure
and the interest is not due this fiscal year.)
- [Para. 6-b-5]To permit payment of
the $40,000 interest payment due on January 1, 2015, the Street
Improvement Bond Debt Service Fund borrowed $20,000 from the General
Fund. That amount together with
available cash balance in the debt service fund will be sufficient to
cover the January 1, 2015, interest payment.
Required:Record the interfund loan in
the debt service fund journal only. This
transaction was previously recorded in the General Fund in Chapter 4 of this
problem. The transaction has no effect
at the government-wide level since it occurs between two governmental funds.
- Verify the accuracy of
journal entries, including dates and paragraph numbers, and, if you have
not already done so, post all entries to the general ledger of both the
Street Improvement Bond Debt Service Fund and governmental activities by
clicking on [Post Entries]. Make the entries needed to close the
budgetary and operating statement accounts at the end of fiscal year
2014. Make this entry only in the
Street Improvement Bond Debt Service Fund journal. Be sure that for each account being
closed that the check mark for [Closing
Entry] is on and that “Closing Entry” appears in the [Transaction Description]
box. (Note: Closing entries for
governmental activities at the government-wide level will be made in
Chapter 9 of this cumulative problem.)
c.
Go to [Reports] and print
the pre-closing and post-closing trial balances for the Street Improvement Bond
Debt Service Fund as of December 31, 2014.
Retain in your cumulative folder until directed by your instructor to
submit them, unless your instructor specifies submission of computer files via
e-mail, in which case you will need to save a .pdf version of your trial
balance.
d.
As given later in Chapter 8
of this project, the assessed valuation of property within the City of
Smithville is $303,035,714. Assuming the
legal general obligation debt limit is 8 percent of assessed valuation, prepare
in good form a schedule showing the legal debt limit, debt outstanding subject
to the limit, and the legal debt margin of the city as of December 31, 2014,
rounding the debt limit to the nearest whole dollar. (Notes: The $28,000
balance in the Fund Balance—Restricted account is intended for payment of
interest rather than principal repayment and, therefore, should be excluded
from your schedule. In addition, the bonds authorized but unissued, as
described in the introductory paragraph of Chapter 5 of the City of Smithville
cumulative problem, should be disclosed at the bottom of your schedule to
inform the reader that additional debt issuances are pending.)
Fiscal year 2015 Transactions:
e.
On January 2, 2015, the City
of Smithville approved the issuance of additional street improvement bonds in
the total amount of $3,000,000. The new
bonds will be serial bonds and will bear interest at the nominal annual rate of
5 percent. These bonds are dated January 1, 2015, and will be issued during the
next few months when the city’s bond underwriters believe market conditions are
most favorable.
The first interest payment on the new bonds will be
due on July 1, 2015; interest will be payable January 1 and July 1 of each
following year until maturity. Bonds in the amount of $250,000 will mature on January 1, 2016, and
in the same amount each year thereafter until all bonds of the 2015 issue have
been retired. To give you some
additional practice on accounting for a debt service fund, record the following
events and transactions that are presumed to occur in fiscal year 2015 in the Street Improvement Bond Debt Service
Fund only. You should
ignore entries that would be required in the General Fund and in the
governmental activities general journal related to these transactions for
fiscal year 2015.Keep in mind that these transactions will not affect the 2014
financial statements that will be prepared in Chapter 9.Be sure to select 2015
in the Year menu.
- [Para. 6-e-1]On January 2, 2015,the Street Improvement Bond Debt
Service Fund budget for 2015 was legally adopted. The budget provides for
estimated property tax revenue of $640,000, of which $120,000 will be
invested to accumulate resources over the next four years for the $500,000
principal that will be due for payment on January 1, 2019. The remaining revenues are intended to
pay $80,000 interest due during 2015 on the 4% deferred serial bonds, as
well as the $75,000 interest payment that will be due on the 5% serial
bonds on July 1, 2015. The 2015
property tax levy also provides resources to retire the $250,000 of 5%
serial bonds that mature on January 1, 2016, and interest of $115,000 due
on that date ($40,000 interest on the 4% deferred serial bonds and $75,000
on the 5% serial bonds). The budget
also provides for estimated investment earnings of $3,000 during
2015. No premium or accrued
interest on bonds sold is included in the 2015 estimated other financing
sources or estimated revenues. If
the Street Improvement Debt Service Fund does receive such items, they
will be invested and used for eventual bond redemption or interest
payments, and the budget will be amended accordingly to reflect such
items.
Required:Record the budget for FY
2015 in the general journals for the Street Improvement Bond Debt Service
Fund. [As a reminder, you should make journal entries for FY 2015 only in the
debt service fund, ignoring any entries for governmental activities at the
government-wide level or any other funds.]
- [Para. 6-e-2]Property taxes were
levied in the amount of $660,000, of which $20,000 was estimated to be
uncollectible.
- [Para.
6-e-3]Bond
interest due on January 1, 2015 in the amount of $40,000 was paid for the
4% deferred serial bonds.
- [Para.
6-e-4]On
March 1, 2015, the Street Improvement Debt Service Fund received $30,000
of premium from the sale of the additional $3,000,000 street improvement
bonds (see first paragraph of section e.),
plus $25,000 for two months of accrued interest ($55,000 in total). The $55,000 of premium and accrued
interest was invested in temporary investments earning 3 percent per
annum.
Required:Prepare the journal entry to
record the receipt of $55,000 in cash.
Also, prepare a journal entry to amend the FY 2015 budget to reflect the
amounts of the premium and accrued interest on bonds sold, including an additional
amount for estimated revenues for investment earnings in the amount of $1,375.
(Note: You should credit Budgetary Fund Balance for the full $56,375, since the
appropriation for the interest payment due on July 1, 2015, was recorded in
Paragraph 6-e-1).
- [Para. 6-e-5]By June 30, 2015,
property taxes had been collected in the amount of $325,000; $200,000 was
invested in temporary investments that earn 3 percent per annum.
- [Para. 6-e-6]The debt service fund repaid the $20,000
short-term loan it received from the General Fund in December 2014.
- [Para.
6-e-7]
Bond interest of $40,000 due July 1, 2015 on the 4% street improvement
bonds issued in 2014 and $75,000on the 5% street improvement bonds issued
in 2015 was paid on that date.
8. [Para. 6-e-8]During the
second half of 2014, property taxes were collected in the amount of
$290,000. At year-end, the uncollected
amount of current property taxes receivable and related estimated uncollectible
amount were reclassified as delinquent.
Interest and penalties of $3,600 were also levied, of which $180 was
estimated as uncollectible.
Required:Prepare the journal entries
to record the receipt of current property taxes, to reclassify the uncollected
amount as delinquent, and to accrue the related interest and penalties.
9. [Para. 6-e-9]Investment
earnings received in cash during the year amounted to $4,375.
- After verifying the
accuracy of the preceding entries, post the amounts to the general ledger
accounts by clicking [Post Entries]. Prepare closing entries for the Street
Improvement Bond Debt Service Fund as of December 31, 2015. Be sure that for each account being
closed the [Closing Entry]check
mark is on and that “Closing Entry” appears in the [Transaction Description] box.
Post the closing entries to the general ledger by clicking [Post Entries].
d.
Go to [Reports] and print
the pre-closing and post-closing trial balances for the Street Improvement Bond
Debt Service Fund as of December 31, 2015.
Retain in your cumulative folder until directed by your instructor to
submit them, unless your instructor specifies submission of computer files via
e-mail, in which case you will need to save a .pdf version of your trial
balance.
[Note: Retain a printout of
all worksheets and your financial statements in your cumulative file until
directed by your instructor to submit them, unless your instructor specifies
that you should submit computer files via e-mail.]
