Chapter 6, Problem 22EP

a.

To determine

Prepare debt service fund and government wide entries in general journal form to record the transactions.

Explanation of Solution

Government wide financial statements:  This statement provides an aggregated overview of the government net position and their changes in the net position. This statement reports on the government as a whole and assess whether the government has used the resources efficiently and effectively (operational accountability) to meet the operating objectives.

Prepare debt service fund and government wide entries in general journal form to record the transactions:

Date	Account Title and Explanation	PostRef.	Debit ($)	Credit ($)
1.	Serial bond debt service fund:
	Estimated other financing sources (1)		$416,250
	Estimated revenue		$1,020,000
	Appropriations (2)			$1,416,250
	Budgetary fund balance			$20,000
	(To record the appropriations for interest payments and bond redemptions)
	Governmental activities:
	No entry.
2.	Serial bond debt service fund:
	Cash		$213,750
	Other financing sources –inter fund transfers in			$213,750
	(To record the receipt of cash from general fund)
	Expenditures –Bond interest		$213,750
	Expenditures –Bond principal		$500,000
	Cash			$713,750
	(To record the payment of interest expense and principal amount)
	Governmental activities:
	Interest Payable		$213,750
	Bonds  Payable		$500,000
	Cash			$713,750
	(To record the payment of interest expense and principal amount)
3.	Serial bond debt service fund:
	Taxes receivable-current		$1,020,000
	Revenues			$1,020,000
	(To record the property taxes levied)
	Governmental activities:
	Taxes receivable-current		$1,020,000
	General Revenues- Property taxes			$1,020,000
	(To record the property taxes levied)
4.	Serial bond debt service fund:
	Cash		$1,019,000
	Taxes receivable-current			$1,019,000
	(To record the property taxes levied)
	Governmental activities:
	Cash		$1,019,000
	Taxes receivable-current			$1,019,000
	(To record the property taxes levied)
5.	Serial bond debt service fund:
	Cash		$202,500
	Other financing sources –inter fund transfers in			$202,500
	(To record the receipt of cash from general fund)
	Expenditures –Bond interest		$202,500
	Expenditures –Bond principal		$500,000
	Cash			$702,500
	(To record the payment of interest expense and principal amount)
	Governmental activities:
	Interest on long term debt		$202,500
	Bonds  Payable		$500,000
	Cash			$702,500
	(To record the payment of interest expense and principal amount)
6.	Serial bond debt service fund:
	Budgetary fund balance		$20,000
	Appropriations		$1,416,250
	Estimated other financing sources			$416,250
	Estimated revenue			$1,020,000
	(To record the closing entry)
	Other financing sources-inter fund transfers in		$416,250
	Revenues		$1,020,000
	Expenditures—bond interest			$416,250
	Expenditures—bond principal			$1,000,000
	Fund balance—restricted			$20,000
	(To record the closing entry)
	Taxes receivable—delinquent (3)		$1,000
	Taxes receivable—current			$1,000
	(To record adjustment for uncollected taxes)
	Governmental activities:
	Expenses—interest on long–term debt		$191,250
	Interest payable			$191,250
	(To record the interest expense)

Table (1)

Working note 1: Compute inter-fund transfers in for interest:

• Compute interest payment on January 1:

It can be computed by multiplying bond value with the rate of interest. Then, the attained value is converted for the six months because the period is from January 1 to June 30. The bond value is $9,500,000 and rate of interest is 4.5%.

$\begin{array}{c}\text{Interest payment for January 1}=\text{Bond value}\times \text{Rate of interest}\times \frac{6\text{ months}}{\text{12 months}}\\ =\$9,500,000\times 4.5\%\times 0.5\\ =\$427,500\times 0.5\\ =\$213,750\end{array}$

Hence, the interest payment for January 1 amount is $213,750.

• Compute interest payment on July 1:

It is computed by multiplying bond value with the rate of interest. Then, the attained value is converted for the six months because the period is from July 1 to December 31. The bond value is $9,000,000$\left(\$9,500,000-\$500,000\right)$ this is because $500,000 amount would be retired on bond with each interest payment. Thus, the rate of interest is 4.5%.

$\begin{array}{c}\text{Interest payment for July 1}=\text{Bond value}\times \text{Rate of interest}\times \frac{6\text{ months}}{\text{12 months}}\\ =\$9,000,000\times 4.5\%\times 0.5\\ =\$405,000\times 0.5\\ =\$202,500\end{array}$

Hence, the interest payment for January 1 amount is $202,500.

The inter-fund transfers in for interest payment is computed by adding interest payment for January 1 and July 1. Hence, the inter-fund transfers in for interest payment amount is $416,250$\left(\$213,750+\$202,500\right)$.

Working note 2: Compute appropriations:

It is computed by adding the total interest payment and the principal payment made by Hotel S. The total interest payment is determined by adding interest payment of $213,750 (January 1) and $202,500 (July 1). The total interest payment amount is $416,250$\left(\$213,750+\$202,500\right)$.

The total principal amount is $1,000,000$\left(\$500,000+\$500,000\right)$. This is determined by adding two-interest period retired bond value and the retired value is $500,000 each.

$\begin{array}{c}\text{Appropriations amount}=\text{Total interest payment}+\text{Total principal payment}\\ =\$416,250+\$1,000,000\\ =\$1,416,250\end{array}$

Hence, the appropriation amount is $1,416,250.

Working note 3: Compute delinquent tax receivables:

It is computed by deducting property tax collected amount $1,020,000 from the property tax levied amount $1,019,000.

$\begin{array}{c}\text{Delinquent tax receivables}=\text{Property tax collected amount}-\text{Property tax levied amount}\\ =\$1,020,000-\$1,019,000\\ =\$1,000\end{array}$

Hence, the delinquent tax receivable amount is $1,000.

Working note 4: Compute interest payable:

It can be determined by multiplying the closing bond value with the rate of interest. Then, the resulting value is converted into semiannual interest. The closing bond value is $8,500,000$\left(\$9,500,000-\$1,000,000\right)$ which has been determined by deducting the principal amount from the bond value. The rate of interest is 4.5%.

$\begin{array}{c}\text{Interest payable}=\text{Closing bond value}\times \text{Rate of interest}\times \frac{1}{2}\\ =\$8,500,000\times 4.5\%\times 0.5\\ =\$382,500\times 0.5\\ =\$191,250\end{array}$

Hence, the closing interest payable amount is $191,250.

b.

To determine

Prepare a statement of revenues, expenditures and changes in fund balances for the debt service fund for the year ended December 31, 2017.

Explanation of Solution

Debt service fund: The debt service fund is a fund that provides government to account for transactions related with the payment of principle and interest on its liabilities or debt.

Prepare a statement of revenues, expenditures and changes in fund balances for the debt service fund for the year ended December 31, 2017:

Company SB
Debt service fund
Statement of revenues, expenditures and Changes in fund balances
For the year ended December 31, 2017
Particulars	Amount	Amount
Revenues:
Property taxes		$1,020,000
Expenditures:
Bond interest	$416,250
Bond principal	$1,000,000
Less: Total expenditures		($1,416,250)
Excess of expenditures under revenues		$396,250
Other financing sources (uses):
Inter fund transfers in		($416,250)
Increase in fund balances		$20,000
Fund balances, July 1, 2017		$509,000
Fund balances, December 31, 2017		$529,000

Table (2)

c.

To determine

Prepare a balance sheet for the debt service fund for the year ended December 31, 2017.

Explanation of Solution

Balance sheet: Balance Sheet is one of the financial statements that summarize the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare a balance sheet for the debt service fund for the year ended December 31, 2017:

Company SB
Debt service fund
Balance sheet
As on December 31, 2017
Particulars	Amount	Amount
Assets:
Cash		$528,000
Taxes receivable -delinquent		$1,000
Total assets		$529,000
Deferred inflows of resources:
Unavailable revenues		$1,000
Fund balances:
Fund balance- restricted for debt service		$528,000
Total deferred inflows of resources and fund balance		$529,000

Table (3)