Question

The City of Spartan's fiscal year ends on December 31. On October 1, 2020, the city issued $1,000,000 of 6%, 10-year term bonds with semiannual interest payments due on April 1 and October 1 each year, beginning on April 1, 2021. What amount of expenditures should the city recognize in its debt service fund for the years 2020 and 2021?

Answer 1

Available options are:

A) $60,000 in 2020; $60,000 in 2021.

B) $30,000 in 2020; $60,000 in 2021.

C) $15,000 in 2020; $60,000 in 2021.

D) $0 in 2020; $60,000 in 2021.

Answer:

Option C. $15,000 in 2020; $60,000 in 2021.

Step-by-step explanation:

In the first year 2020, the total months for which the $1,000,000 of loan which has 6% was used in the business hence the interest cost for the 3 months is calculated as under:

Interest for 12 months = Loan amount * Interest Rate

Interest for 12 months = $1,000,000 * 6% = $60,000

Interest for 3 months = $60,000 * 3 / 12 = $15,000 for the first year

For the year 2021, the total interest expense must be recognized in its debt service which is $60,000, calculated above.