Question

Marilyn County operates on a calendar-year basis. It uses a Capital Projects Fund to account for major capital projects and a Debt Service Fund to accumulate resources to pay principal and interest on general obligation debt. It does not use encumbrance accounting in the Capital Projects Fund. The following transactions occur:

1. On January 1, 2019, Marilyn County issues general obligation bonds in the amount of $1,000,000 to build a community center. The debt will be paid off in 20 equal semiannual installments of $50,000 over a 10-year period commencing October 1, 2019, with interest of 4 percent per annum paid on the outstanding debt.
2. The county realizes that the community center will cost more than it originally anticipated. On May 1, the county transfers $20,000 from its General Fund to its Capital Projects Fund to help meet project costs.
3. Construction is completed on July 1, 2019, and the community center is ready for occupancy. The county pays the contractor a total of $1,020,000 on July 1. The county anticipates that the community center will have a useful life of 20 years.
4. On September 30, 2019, the General Fund transfers an amount to the Debt Service Fund that is sufficient to pay the first debt service installment, which is due October 1.
5. The county pays the debt service due on October 1.
Required:
Prepare the journal entries to record these transactions in the Capital Projects Funds, the General Funds and the Debit Service Fund.

Answer 1

The Capital Fund Entries include;

Jan 1, 2019

DR Cash $1,000,000

CR Other Financing Source - long term debt $1,000,000

May 1

DR Cash $20,000

CR Transfer in from General Fund $20,000

July 1

DR Expenditures - Capital Outlay $1,020,000

CR Construction contracts payable $1,020,000

DR Construction contracts payable $1,020,000

CR Cash $1,020,000

The General Fund Entries are;

May 1,

DR Transfer to Capital Projects Fund $20,000

CR Cash $20,000

September 30

DR Transfer to Debt Service Fund $80,000

CR Cash $80,000

Entries to the Debt Service Fund

September 30

DR Cash $80,000

CR Transfer in from General Fund $80,000

October 1,

DR Expenditure - Bond Principal $50,000

Expenditure - Interest $30,000

CR Matured Bond Principal Payable $50,000

Matured Bond Interest Payable $30,000

October 1

DR Matured Bond Principal Payable $50,000

Matured Bond Interest Payable $30,000

CR Cash $80,000

Interest on debt = 4% * 1,000,000 = $40,000 semi annual

= 40,000 * 2 = $80,000

Principal = $50,000 so Interest = $30,000