Question

The city of Sparr's fiscal year ends on December 31. On July 1, 2011, the city issued $1,000,000 of 6%, 10-year term bonds with semi-annual interest payments due on July 1 and January 1 each year, beginning on January 1, 2012. What amount of expenditures should the city recognize in its debt service fund for the years 2011 and 2012?

1) $30,000 in 2011; $60,000 in 2012.
2) $60,000 in 2011; $60,000 in 2012.
3) $3,000 in 2011; $6,000 in 2012.
4) $0 in 2011; $60,000 in 2012.

Answer 1

The city of Sparr should recognize $60,000 in expenditures in its debt service fund for the years 2011 and 2012.

Step-by-step explanation:

The city of Sparr should recognize $60,000 in expenditures in its debt service fund for the years 2011 and 2012.

When the city issued the $1,000,000 bond on July 1, 2011, it means that they borrowed $1,000,000. The 6% interest rate represents the annual interest that the city will pay on the bond. Since the bond has a 10-year term with semi-annual interest payments, the city will make interest payments twice a year.

Therefore, in 2011, the city will make one interest payment on January 1, 2012. The interest payment would be $1,000,000 x 6% / 2 = $30,000. In 2012, the city will make two interest payments, one on January 1 and another on July 1. Each interest payment would be $1,000,000 x 6% / 2 = $30,000. Thus, the city should recognize $60,000 in expenditures in its debt service fund for the years 2011 and 2012.