Prepare appropriate journal entries for the debtservice fund

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Reference no: EM13842086

Problem 1

As statedinthepreviousproblem, a governmentissued$25.5 million of special assessment bonds to ?nance a power-line extension project. To service the debt, it assessed propertyowners $25.5 million. Their obligations are payable over aperiod of ?ve years, with annual installments due on March31 of each year. Interest at an annual rate of 8 percent is tobe paid on the total balance outstanding as of that date.The bonds require an annual principal payment of$4.5 million each year for ?ve years, due on December 31.

In addition, interest on the unpaid balance is payable twiceeach year, on June 30 and December 31 at an annual rateof 8 percent.The government agreed to make up from its generalfundthedifferencebetweenrequireddebtservicepaymentsand revenues.At the start of the year, the government establisheda debt service fund. During the year it engaged in thefollowing transactions, all of which would affect that fund.

1. It prepared, and recorded in its accounts, its annualbudget. It estimated that it would collect from property owners $3.9 million in special assessments and$1.5 million of interest on the unpaid balance of theassessments. In addition, it expected to earn interestof $0.24 million on temporary investments. It wouldbe required to pay interest of $2.04 million and makeprincipal payments of $5.1 million on the outstandingdebt. It anticipated transferring $1.5 million from thegeneral fund to cover the revenue shortage.

2. It recorded the $25.5 million of assessments receivable,estimating that $0..6million would be uncollectible.

3. The special assessments bonds were issued at a premium (net of issue costs) of $0..36 million. The government recognized the anticipated transfer of thepremium to the debt service fund.

4. Duringtheyearthegovernmentcollected$6.0millionin assessments and $1.2 million in interest (with a fewproperty owners paying their entire assessment in the?rstyear).Duringthe?rst60daysofthefollowingyearit collected an additional $0.3 million in assessmentsand $0.03 million in interest, both of which were duethe previous year.

5. It transferred $0.36 million (the premium) from thecapital projects fund.

6. It purchased $2.4 million of six-month treasury bills asa temporary investment.

7. It made its ?rst interest payment of $1.02 million.

8. Itsoldtheinvestmentsfor$2.55 million, thedifferencebetween selling price and cost representing interestearned.

9. It recognized its year-end obligation for interest of$1.02 million and principal of $5.1 million, but did notactually make the required payments.

10. It prepared year-end closing entries.

Required

a. Prepare appropriate journal entries for the debtservice fund.

b. Prepare a statement of revenues, expenditures, andchanges in fund balance in which you compareactual and budgeted amounts for the year endingDecember 31.

c. Prepare a year-end balance sheet.

d. Does your balance sheet report the balance of thebonds payable? If not, where might it be recorded?

Problem 2

In the year a road maintenance district was established, it engaged in the transactions that follow involving capital assets (all dollar amounts in thousands). The district maintains only a single governmental fund(a general fund).

1. Received authority over roads previously ‘‘owned'' bythe county. The estimated replacement cost of the roads was $240,000. On average they have a remaining useful life of 40 years.

2. Acquired machinery and equipment for $2,800, with general fund resources. They have a useful life of 10 years.

3. Incurred costs of $12,000 to construct a building. The construction was ?nanced with general obligation bonds. The building has a useful life of 30 years.

4. Acquired equipment having a fair market value of $240 in exchange for $80 cash (from general-fund resources) plus used equipment for which the district had paid $200. The used equipment had a fair market value at the time of the trade of $160; depreciation of $100 had previously been recognized.

5. Sold land for $280 that had been acquired for $360.

6. Received a donation of land from one of the towns within the district. The land had cost the town $480, but at the time of the contribution had a fair market value of $2,000.

7. Incurred $4,800 in road resurfacing costs. The district estimates that its roads must be resurfaced every four years if they are to be preserved in the condition they were in when they were acquired.

8. Recognized depreciation of $400 on its building, $280 on its machinery and equipment, and $6,000 on its roads, in addition to any depreciation relating to the resurfacing costs.

a. Prepare entries to record the transactions so that they could be re?ected in the district's government-wide statements. The district has opted to depreciate its infrastructure assets.

b. Suppose instead that the district has elected not to depreciate its roads but to record as an expense only the costs necessary to preserve the roads in the condition they were in when acquired. How would your entries differ?

c. If, in fact, the roads have a useful life of 40 years, do you think it is sound accounting not to depreciate the roads? Explain.

d. If, in fact, the preservation costs are suf?cient to preserve the roads in the condition they were in when the district acquired them, do you think it is sound accounting to depreciate the roads? Explain.

Problem 3

A school district constructs a new combined High school and Middle school at a cost of $96 million. It ?nances the project by issuing
30-yeargeneralobligationserialbonds,payableevenlyoverthe outstanding term ($3,200,000 per year). District of?cialsestimate that the school will have a useful life of 30 years(with no residual value).

1. Prepare summary entries, in a capital projects fund, torecord the issuance of the bonds and construction of theschool.

2. Assume that the district repays the bonds out of currentrevenues. Prepare the entry that it would make eachyear in its general fund to record the bond principalpayments.

3. Assume that the school district must balance its budget; all general-fund expenditures must be covered bygeneral-fund tax and other revenues. A member of thedistrict's board of trustees pointed out that, owing toan unanticipated increase in property values, the districtenjoyed a budget surplus in the previous two years andconsequently had accumulated $16 million in ‘‘savings.''its government-wide statements. Suppose that the districtwere required to balance its budget; expenditures could notexceed revenues. With respect to expenditures relating tothenew building,woulditmatterwhethertheexpenditureswere measured on a full or a modi?ed accrual basis? Wouldyour response be the same if the repayment schedule onthe bonds differed from the pattern of depreciation (e.g.,the bonds were repaid over only ten years or depreciationwere charged on an accelerated basis)?

Reference no: EM13842086

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