Final Answer:
The correct entry for recording the short-term loan obtained by the capital projects fund is:
Debit: Cash $75,000; Credit: First National Bank Loan $75,000.
Thus the correct option is c.
Step-by-step explanation:
In governmental accounting, capital projects funds are used to account for financial resources dedicated to the acquisition or construction of major capital facilities. When a capital projects fund incurs engineering and design costs before the issuance of a long-term bond, it may need short-term financing to offset these initial expenses. In this case, the fund borrowed $75,000 from First National Bank.
The appropriate journal entry to record this transaction involves debiting the Cash account and crediting the liability account representing the loan. Let's break down the entry:
Debit: Cash $75,000: This reflects the increase in the fund's available cash due to the short-term loan. Cash is a current asset, and an increase in cash is recorded as a debit.
Credit: First National Bank Loan $75,000: This represents the liability created by the short-term loan. The capital projects fund now owes $75,000 to First National Bank, and this obligation is recorded as a credit to the liability account.
Reasoning:
Cash Debit: When a fund receives cash, it's considered an inflow of resources. In governmental accounting, debiting an asset account like Cash acknowledges the increase in available financial resources.
First National Bank Loan Credit: The credit entry recognizes the liability created by the short-term loan. Credits are used to record decreases in assets or increases in liabilities. The loan from First National Bank represents an increase in liabilities for the capital projects fund.
Key Principles:
Matching Principle: This accounting principle states that expenses should be recognized in the same period as the revenues they help to generate. In this case, the short-term loan is taken to offset engineering and design costs, aligning with the matching principle.
Consistency Principle: Once an accounting method is chosen, it should be consistently applied. The chosen entry adheres to the consistent use of debit and credit conventions in accounting.
Full Disclosure: Financial statements should provide all necessary information to understand an entity's financial position. By recording the loan, the fund is transparent about its financial activities, adhering to the full disclosure principle.Thus the correct option is c.