Question

The following transactions relate to the City of Middleton, which has a fiscal year end of December 31. The city adopts budgets for the General Fund and the debt service fund. NOTE: for simplicity, and contrary to GASB standards, assume straight-line amortization for this problem.

1. The City of Middleton sells a $2,000,000, 3%, 16-year general obligation bond issue on January 2 at par. The bond pays interest semi-annually on July 1 and January 2, with the first principal payment scheduled for next year on January 2. A city hall annex must be constructed with the bond proceeds. The bond premium must be used to pay interest on the debt.
2. Budgets are adjusted to account for the sale of the bond. The debt service fund budget should be adjusted to accommodate the new debt issue. If the debt service fund does not have sufficient resources to pay expenditures, the needed funds will be provided by the General Fund.
3. On February 1, $1,000,000 of the cash from the sale of the bonds is invested for one year at a rate of 1.26%. Earnings on the investment are available for construction of the city hall annex.
4. July 1 the first interest payment is due.
5. December 31 adjusting entries are prepared.

Required:
For the five related transactions provided, prepare journal entries for the affected funds and at the govemmental activities level.

Answer 1

See explaination

Step-by-step explanation:

1.

--Capital projects fund journal

Dr. Cash $2,000,000

Cr. Other Financing Source—Proceeds of Bonds $2,000,000

--Governmental activities journal

Dr. Cash $2,000,000

Cr. Bonds Payable $2,000,000

2.

--Debt service fund journal

Dr. Estimated Other Financing Sources—Inter fund Transfers In $ 30,000

Cr. Appropriations $ 30,000

--General Fund journal

Dr. Budgetary Fund Balance $ 30,000

Cr. Estimated Other Financing Uses—Inter fund Transfers Out $ 30,000

3.

--Capital projects fund journal

Dr. Investments $1,000,000

Cr. Cash $1,000,000

--Governmental activities journal

Dr. Investments $1,000,000

Cr. Cash $1,000,000

4.

4.

--General Fund journal

Dr. Other Financing Uses—Inter fund Transfer out $ 30,000

Cr. Cash $ 30,000

--Debt service fund journal

a) Dr. Cash $ 30,000

Cr. Other Financing Sources—Inter fund Transfer In $ 30,000

b) Dr. Expenditures—Interest $ 30,000

Cr. Cash $ 30,000

--Governmental activities journal

Dr. Expenses—Interest on Long-term Debt $ 30,000

Cr. Cash $ 30,000

5.

--Capital projects fund

Dr. Interest Receivable $ 11,555

Cr. Revenues—(optional to put source, Interest) $ 11,555

--Governmental activities journal

a) Dr. Interest Receivable $ 11,555

Cr. General Revenues—Investment Earnings—(optional to indicate restriction, Restricted for Capital Projects) $ 11,555

b) Expenses—Interest on Long-term Debt $ 30,000

Interest Payable $ 30,000

Debt service fund

Note that there is no accrual of interest expenditure since the expenditure is not legally due until after the first of the year.