Question

During 20X8, the following transfers and transactions between funds took place in the City of Matthew.

1.
On March 1, a $12,600 transfer was made from the general fund to establish a building maintenance internal service fund. Matthew uses transfer accounts for this type of transfer.

2.
On April 1, the general fund made an $12,100, six-month loan to the building maintenance service fund.

3. On April 15, $2,480 was transferred from the general fund to the debt service fund to pay interest.
4. On May 5, Matthew’s transportation service fund billed the general fund $900 for April services.
Required:
a.
Prepare journal entries and appropriate closing entries for the general fund involved that should be recorded at the time of each transfer or transaction. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)


b.
Prepare journal entries and appropriate closing entries for the other fund involved that should be recorded at the time of each transfer or transaction. (Select the appropriate fund for each situation. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

An open market purchase by the Fed results in the selling bank's reserves increasing and bonds decreasing by the sale amount. The bank's loans increase by the same amount once the bond sale proceeds are converted into new loans.

Step-by-step explanation:

When the Federal Reserve (Fed) conducts an open market purchase by buying Treasury bonds, this activity affects a bank's balance sheet. For example, if the Fed buys $10 million in Treasury bonds from Acme Bank, the bank's assets and liabilities will experience changes. Assuming Acme Bank converts the bond sale proceeds into new loans, the following adjustments would be observed:

• Reserves will increase by the amount of the bond sale, adding $10 million.
• Bonds will decrease by the amount sold to the Fed, reducing $10 million.
• Loans will increase as the newly acquired funds are converted into loans, adding $10 million.

Therefore, the new balance sheet will reflect an increase in reserves and loans by $10 million, while the bonds account will decrease by $10 million. The deposits and equity would initially remain unchanged.

Answer 2

The balance sheet of Acme Bank will reflect an increase in both reserves and loans by $10 million each, while bonds will decrease by $10 million. The deposits and equity will remain unchanged. These changes occur as Acme Bank receives funds for the bonds sold to the Fed and uses them to issue new loans.

Step-by-step explanation:

A student has asked about the effect of an open market purchase by the Federal Reserve on a bank's balance sheet. Specifically, the Fed has purchased $10 million in Treasury bonds from Acme Bank. We are to sketch out the balance sheet changes as the bank turns the proceeds from the bond sale into new loans.

Initially, Acme Bank has the following balance sheet:

• Assets: reserves $30 million, bonds $50 million, loans $50 million.
• Liabilities: deposits $100 million, equity $30 million.

After the Fed purchases $10 million in bonds, the bank's reserves increase by $10 million, as the Fed pays for the bonds. Then, as the bank converts these additional reserves into new loans, the loans on the asset side of the balance sheet will increase by $10 million. Therefore, the new balance sheet will show increased reserves and loans by $10 million each, while bonds decrease by $10 million. Deposits and equity remain unchanged as this transaction pertains only to asset side changes.

The balance sheet after the Fed's purchase and conversion to loans by Acme Bank would look like this:

• Assets: reserves $40 million (+$10 million), bonds $40 million (-$10 million), loans $60 million (+$10 million).
• Liabilities: deposits $100 million, equity $30 million.

This process of the Fed buying Treasury bonds and banks converting those funds into loans is part of monetary policy mechanisms, influencing the money supply and credit availability in the economy.