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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 2017 are dated January 1, 2017, but were not issued until May 6, 2017. Because
bondholders will receive six months of interest on July 1, 2017 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, 2017. 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, 2022), and $100,000 is to mature January 1 of each
year thereafter until all the bonds issued in 2017 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
2018. As the bond issue did not occur until May 2017, the city will not levy debt service
property taxes until next year.
a. Prepare general journal entries, as necessary to record the transactions described
below 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 2017 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.
Before closing the City of Smithville, click on [File], and [Save/Save As] to save
your work. If you close the file by clicking on the [X] box you will be asked if you
want to save your changes before closing.
1. [Para. 6-a-1] In early May 2017, an amendment to the annual budget for 2017
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
$42,000 for the premium on bonds sold, estimated other financing sources of
$10,000 for a transfer from the General Fund that will be used to help pay interest
due on January 1, 2018, 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 2017. (The payment that is due on July 1, 2017.)
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Required: Record the budget for the Street Improvement Bond Debt Service
Fund for year 2017. Budgetary entries have no effect on the government-wide
accounting records.
2. [Para. 6-a-2] On May 6, 2017, the premium and accrued interest on bonds sold
were received by the Street Improvement Bond Debt Service Fund. (See
Transaction 5-a-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-a-7.
3. [Para. 6-a-3] The July 1, 2017, 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-a-7 in the governmental activities general journal you can record the
full July 1, 2017, 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 Deferred Serial Bonds Payable for the period the bonds have been
outstanding (May 6 to July 1) is $585. (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.)
4. [Para. 6-a-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 from the July 1 interest payment until the end of the fiscal year, December
31, 2017. For this entry, assume that the appropriate amount of amortization of
the Premium on Deferred Serial Bonds Payable is $1,750. (Recall that interest is
not accrued for the period July 1 to December 31, 2017 in the debt service fund as
no appropriation exists for this expenditure and the interest is not due this fiscal
year.)
5. [Para. 6-a-5] To permit payment of the $40,000 interest payment due on January
1, 2018, the Street Improvement Bond Debt Service Fund received $10,000 from
the General Fund. That amount together with available cash balance in the debt
service fund will be sufficient to cover the January 1, 2018, interest payment.
Required: Record the interfund transfer 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.
whole or part.
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6. 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 2017. Operating statement
accounts should be closed to Fund Balance—Restricted. 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.)
b. Go to [File/Export] and export Excel files of the pre-closing and post-closing trial
balances for the Street Improvement Bond Debt Service Fund as of December 31,
2017, and use them to prepare a balance sheet; statement of revenues, expenditures,
and changes in fund balances; schedule of revenues, expenditures, and changes in
fund balances—budget and actual for the Street Improvement Bond Debt Service
Fund.
[Note: Retain all required printouts in your cumulative folder until directed by
your instructor to submit them, unless your instructor specifies submission of
files electronically, in which case you will need to save a .pdf version of your trial
balance.]
c. As given later in Chapter 8 of this project, the assessed valuation of property within
the City of Smithville is $314,727,270. 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, 2017, rounding the debt limit to the nearest whole dollar (see
Illustration 6-3 for an example). A note at the bottom of the schedule should disclose
that $40,000 of restricted fund balance in the debt service fund is restricted for
payment of interest rather than principal repayment and therefore should be excluded
from your schedule. In addition, the note should disclose the bonds authorized but
unissued, as described in the introductory paragraph of Chapter 5 of the City of
Smithville cumulative problem. This will inform the reader that additional debt
issuances are pending.
Fiscal year 2018 Transactions:
d. On January 2, 2018, 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 3.5 percent. These bonds are
dated January 1, 2018, and will be issued during the next few months when the city’s
bond underwriters believe market conditions are most favorable.
whole or part.
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The first interest payment on the new bonds will be due on July 1, 2018; 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, 2019, and in the same amount at each
interest payment date thereafter until all bonds of the 2018 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 2018 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 2018. Keep in mind that these
transactions will not affect the 2017 financial statements that will be
prepared in Chapter 9. Be sure to select 2018 in the [Year] menu.
1. [Para. 6-d-1] On January 2, 2018, the Street Improvement Bond Debt Service
Fund budget for 2018 is legally adopted. The budget should provide 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, 2022 for the 4% deferred serial bonds. The
budget should include estimated investment earnings of $3,000 during 2018.
Property tax revenues are intended to help pay $80,000 interest due during 2018
on the 4% deferred serial bonds (due January 1 and July 1), as well as the $52,500
interest payment that will be due on the 3.5% serial bonds on July 1, 2018. The
property tax levy will also provide resources to help pay interest of $92,500 due
on January 1, 2019 ($40,000 interest on the 4% deferred serial bonds and $52,500
on the 3.5% serial bonds). No premium or accrued interest on bonds sold is
included in the 2018 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 2018 in the general journals for the Street
Improvement Bond Debt Service Fund. [As a reminder, you should make
journal entries for FY 2018 only in the debt service fund, ignoring any
entries for governmental activities at the government-wide level or any other
funds.]
2. [Para. 6-d-2] Property taxes were levied in the amount of $660,000, of which
$20,000 was estimated to be uncollectible.
3. [Para. 6-d-3] Bond interest due on January 1, 2018 in the amount of $40,000 was
paid for the 4% deferred serial bonds.
4. [Para. 6-d-4] On March 1, 2018, 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 d.), plus $17,500 for two
whole or part.
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months of accrued interest ($47,500 in total). The $47,500 of premium and
accrued interest was invested in temporary investments earning 3 percent per
annum.
Required: Prepare journal entries to record the receipt of $47,500 in cash and the
subsequent investment. Also, prepare a journal entry to amend the FY 2018
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 $1,187. (Note: You should credit Budgetary Fund Balance for the
full $48,687, since the appropriation for the interest payment due on July 1, 2018,
was recorded in Paragraph 6-d-1).
5. [Para. 6-d-5] By June 30, 2018, property taxes had been collected in the amount
of $325,000; $200,000 was invested in temporary investments that earn 3 percent
per annum.
6. [Para. 6-d-6] Bond interest of $40,000 due July 1, 2018 on the deferred serial
bonds issued in 2017 and $52,500 on the 3.5% serial bonds issued in 2018 was
paid on that date.
7. [Para. 6-d-7] During the second half of 2018, 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.
8. [Para. 6-d-8] Investment earnings received in cash during the year amounted to
$4,187.
9. 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, 2018. For
each account closed, be sure and click on the check mark for [Closing Entry] and
that “Closing Entry” appears in the [Transaction Description] box. Post the
closing entries to the general ledger by clicking [Post Entries].
e. Export the post-closing trial balance (click on [File]-[Export]) for year 2018 to Excel
to prepare a balance sheet for the Street Improvement Bond Debt Service Fund as of
December 31, 2018.
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f. Export a pre-closing trial balance for year 2018 to Excel to prepare a statement of
revenues, expenditures, and changes in fund balance for the Street Improvement
Bond Debt Service Fund for the year ended December 31, 2018.
g. Use the same trial balance exported in item f above to prepare a schedule of revenues,
expenditures, and changes in fund balance—budget and actual for the Street
Improvement Bond Debt Service Fund for the year ended December 31, 2018.
[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 files electronically, in which case you will
need to save a .pdf version of your trial balance.]
whole or part.
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Chapter 7 Recording Transactions Affecting the Enterprise Fund and
Business-type Activities
The City of Smithville accounts for its solid waste collection and disposal activities in an
enterprise fund. The balance sheet for the Solid Waste Disposal Fund as of December 31,
2016, appears below.
CITY OF SMITHVILLE
Solid Waste Disposal Fund
Post-closing Trial Balance
As of December 31, 2016
Account Title Debits Credits
Cash $ 315,000
Customer Accounts Receivable 117,100
Allowance for Doubtful Accounts $ 6,140
Due from Other Funds 6,400
Inventories 4,060
Land 600,000
Buildings 1,650,000
Accumulated Depreciation—Buildings 791,250
Equipment 1,340,400
Accumulated Depreciation—Equipment 755,640
Vouchers Payable 45,180
Due to Other Funds 12,000
Accrued Payroll and Fringe Benefits 66,720
Net Position—Net Investment in Capital Assets 2,043,510
Net Position—Unrestricted 312,520
Totals $4,032,960 $4,032,960
Required
a. Open a general journal as of December 31, 2016, for the Solid Waste Disposal Fund
by entering each of the accounts and amounts shown in the above post-closing trial
balance. Enter 2016 from the drop-down [Year] menu. Each of the account titles will
be found in the drop down menu [Account (# – Description)] in the [Journal] view
of the program. Be sure to enter 7-a as your paragraph number in the [Transaction
Description] box and enter the appropriate paragraph number for all subsequent
journal entries. Verify the accuracy of your journal entry and post it to the general
ledger by clicking [Post Entries]. Unless your instructor specifies electronic
submission, print a post-closing trial balance as of December 31, 2016, and retain it in
your cumulative file until directed by your instructor to submit it.
Entries in this enterprise fund are not recorded at the government-wide level since
enterprise funds and business-type activities at the government-wide level both use
the same (accrual) basis of accounting and same (economic resources) measurement
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focus. Thus, the same information recorded in the accounts of the enterprise fund can
also, with only slight modification, be reported as business-type activities at the
government-wide level.
Before closing the City of Smithville, click on [File], and [Save/Save As] to save
your work. If you close the file by clicking on the [X] box you will be asked if you
want to save your changes before closing.
b. Record the following events and transactions, which occurred during the year ended
December 31, 2017. Be sure that 2017 appears in the [Year] menu.
1. [Para. 7-b-1] Billings to customers of the Solid Waste Disposal Fund totaled
$2,247,532 for the year, including $18,200 billed to City of Smithville
departments accounted for in the General Fund. For the amount billed to City of
Smithville departments you should debit Due from Other Funds.
2. [Para. 7-b-2] Equipment costing $335,000 was purchased on July 1, 2017. Cash
in the amount of $135,000 was paid at the time of purchase; the vendor accepted
revenue anticipation notes in the amount of $200,000 to finance the remainder of
the equipment. Of this amount, $100,000 of the notes will be payable on July 1,
2018; the other $100,000 will be payable on July 1, 2019. All notes bear interest
at the rate of 4 percent per year. (Record only the purchase and the related
payment of cash and issuance of notes at this time; interest will be recorded in a
later transaction.)
3. [Para. 7-b-3] Vouchers for materials and supplies to be used in the operations of
the fund were issued in the total amount of $773,500 (debit Inventories).
4. [Para. 7-b-4] Collections from customers totaled $2,234,545 during 2017. This
amount included $21,800 collected from the General Fund (see 7-a balance and 7-
b-1 above).
5. [Para. 7-b-5] Payrolls and fringe benefits paid in cash during the year totaled
$1,221,724 including the amount accrued at December 31, 2016.
6. [Para. 7-b-6] Accrued salaries and fringe benefits at year-end amounted to
$66,053. Inventories of materials and supplies used in operations during the year
amounted to $773,480, at cost.
7. [Para. 7-b-7] Vouchers in the amount of $778,600 and the amount Due to Other
Funds were paid during the year.
8. [Para. 7-b-8] The city uses the following annual straight-line depreciation rates:
Buildings, 2.5 percent; Equipment, 10 percent (equipment purchased during the
year need not be depreciated because it was not held for more than 6 months of