Chapter 6, Problem 25EP

To determine

Record the journal entries in the debt service fund, capital projects fund and governmental activities at the government wide level of Town MV.

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.

Serial bond: Serial bonds are a debt security in which a portion of bonds matures at regular intervals until all of the bonds are matured.

Encumbrances: Encumbrances are charges made against appropriation for an estimated amount when the goods are being ordered. Encumbrances is a control account that controls appropriation of fund, controlling of appropriation will neither increase nor decrease of balances in the general fund during the fiscal year.

Capital project funds (CPFs): CPFs are used to report financial resources that are restricted, committed, or have been assigned to expenditure for capital spending inclusive of constructing and acquiring of capital facilities other than capital assets.

Record the journal entries in the debt service fund of Town MV:

Date	Account title and explanation	Amount
		Debit	Credit
(a)	Estimated Revenues	$350,000
	Appropriations (1)		$62,500
	Budgetary Fund  Balance		$287,500
	(To record the revenues)
(b)	No entry
(c)	No entry
(d)	No entry
(e)	Cash	$50,000
	Other financing sources—Premium on Bonds (2)		$50,000
	(To record the premium received on bonds)
	Estimated Other financing sources—Premium on Bonds (2)	$50,000
	Budgetary Fund Balance		$50,000
	(To record the premium received on bonds)
(f)	No entry
(g)	Expenditures—  Interest (1)	$62,500
	Cash		$62,500
	(To record the interest expenditures)
(h)	Cash	$350,000
	Revenues		$350,000
	(To record the revenues)
(i)	No entry
(j)	No entry
(k)	No entry
(l)	Appropriations (1)	$62,500
	Budgetary Fund	$337,500
	Estimated Revenues		$350,000
	Estimated Other financing sources - Premium on Bonds (2)		$50,000
	(To record the revenues)
	Revenues	$350,000
	Other financing sources—Premium on Bonds	$50,000
	Expenditures - Interest		$62,500
	Fund Balance -Restricted		$337,500
	(To record the revenues and the expenditures)
(m)	Estimated Revenues	$300,000
	Budgetary Fund Balance	$68,750
	Appropriations (4)		$368,750
	(To record the revenues)
(n)	Cash	$250,000
	Revenues		$250,000
	(To record the revenues)
(o)	No entry
(p)	No entry
(q)	No entry
(r)	Expenditures -  Interest	$62,500
	Expenditures - Principal	$250,000
	Cash		$312,500
	(To record the expenditures)
(s)	Cash	$120,000
	Other financing sources - Inter fund Transfers In		$120,000
	(To record the cash collections from inter fund transfers)
	Estimated Other financing sources - Inter fund Transfers In	$120,000
	Budgetary Fund Balance		$120,000
	(To record the budgetary balance)

Table (1)

Record the journal entries in the capital projects fund of Town MV:

Date	Account title and explanation	Amount
		Debit	Credit
(a)	No Entry
(b)	Cash	$1,000,000
	Other financing sources – Inter fund Transfers In		$1,000,000
	(To record the cash received from inter fund transfers)
(c)	Construction Expenditures	$200,000
	Cash		$200,000
	(To record the construction expenditure)
(d)	Encumbrances	$4,500,000
	Encumbrances Outstanding		$4,500,000
	(To record the outstanding contract)
(e)	Cash	$2,500,000
	Other financing sources—Proceeds of Bonds		$2,500,000
	(To record the bonds payable )
(f)	Construction Expenditures	$50,000
	Cash		$50,000
	(To record the construction expenditure)
(g)	No Entry
(h)	No Entry
(i)	Encumbrances Outstanding	$2,500,000
	Construction Expenditures	$2,500,000
	Encumbrances		$2,500,000
	Contracts Payable		$2,500,000
	(To record the construction expenditure and the outstanding contract)
(j)	Contracts Payable	$2,500,000
	Contracts payable - Retained $\left(\$2,500,000\times 5\%\right)$		$125,000
	Cash		$2,375,000
	(To record the payables)
(k)	Cash	$1,500,000
	Revenues		$1,500,000
	(To record the cash received from revenues)
(l)	Revenues	$1,500,000
	Other financing sources - Inter fund Transfers In	$1,000,000
	Other financing sources - Proceeds of Bonds	$2,500,000
	Construction Expenditures		$2,750,000
	Fund Balance - Restricted		$1,250,000
	Fund Balance - Assigned		$1,000,000
	(To record the revenues and expenditures)
(m)	No Entry
(n)	No Entry
(o)	Encumbrances Outstanding	$2,000,000
	Construction Expenditures	$2,000,000
	Encumbrances		$2,000,000
	Contracts Payable		$2,000,000
	(To record the construction expenditure and the outstanding contract)
(p)	Construction Expenditures	$130,000
	Cash		$130,000
	(To record the investment)
(q)	Contacts Payable	$2,000,000
	Contracts payable—Retained	$125,000
	Cash		$2,125,000
	(To record the payables)
(r)	No Entry
(s)	Fund Balance - Restricted	$1,250,000
	Fund Balance - Assigned	$880,000
	Construction Expenditures		$2,130,000
	(To record the fund balance)
	Other financing uses—Inter fund Transfers Out	$120,000
	Cash		$120,000
	(To record the inter fund transfers-out)
	Fund Balance—  Assigned	$120,000
	Other financing uses—Inter fund Transfers Out		$120,000
	(To record the fund balance)

Table (2)

Record the journal entries in the governmental activities at the government wide level of Town MV:

Date	Account title and explanation	Amount
		Debit	Credit
(a)	No Entry
(b)	No Entry
(c)	Construction Work in process	$200,000
	Cash		$200,000
	(To record the expenditures)
(d)	No Entry
(e)	Cash	$2,550,000
	Premium on Bonds Payable		$50,000
	Bonds Payable		$2,500,000
	(To record the payables)
(f)	Construction Work in process	$50,000
	Cash		$50,000
	(To record the expenditures)
(g)	Premium on Bonds   Payable $\left(\$50,000/40\text{ interest periods}\right)$	$1,250
	Expenses—Interest	$61,250
	Cash		$62,500
	(To record the payable and expense)
(h)	Cash	$350,000
	General Revenue - Taxes		$350,000
	(To record the revenues)
(i)	Construction Work in process	$2,500,000
	Contracts Payable		$2,500,000
	(To record the payables)
(j)	Contracts Payable	$2,500,000
	Contracts payable—Retained $\left(\$2,500,000\times 5\%\right)$		$125,000
	Cash		$2,375,000
	(To record the payables)
(k)	Cash	$1,500,000
	General government revenue-capital granted and contributed		$1,500,000
	(To record the revenues)
(l)	No entry
(m)	No entry
(n)	Cash	$250,000
	General Revenue - Taxes		$250,000
	(To record the tax revenues)
(o)	Construction Work in process	$2,000,000
	Contracts Payable		$2,000,000
	(To record the payables)
(p)	Construction Work in process	$130,000
	Cash		$130,000
	(To record the expenditures)
(q)	Contacts Payable	$2,000,000
	Contracts payable—Retained $\left(\$2,500,000\times 5\%\right)$	$125,000
	Cash		$2,125,000
	(To record the payables)
(r)	Premium on Bonds Payable	$1,250
	Expenses—Interest	$61,250
	Bonds Payable	$250,000
	Cash		$312,500
	(To record the payables)
(s)	Buildings	$4,750,000
	Improvements Other than Buildings	$130,000
	Construction Work in process		$4,880,000

Table (3)

Working note 1: Compute the appropriation for first semi-annual interest payment:

The bond value is $2,500,000 and rate of interest is 5% and it is paid semi-annually.

$\begin{array}{c}\text{Appropriations}=\text{Bond value}\times \text{Rate of interest}\times \frac{1}{2}\\ =\$2,500,000\times 5\%\times 0.5\\ =\$125,000\times 0.5\\ =\$62,500\end{array}$

Working note 2: Compute premium on bonds:

The premium is 2%$\left(102\%-100\%\right)$ and the bond was sold at 102%. The bond value is given as $2,500,000.

$\begin{array}{c}\text{Premium on bond}=\text{Bond value}\times \text{Premium}\\ =\$2,500,000\times 2\%\\ =\$50,000\end{array}$

Working note 3: Compute second semi-annual interest payment:

The bond value is $2,250,000$\left(\$2,500,000\text{ bond value}-\$250,000\text{ principal payment}\right)$. The rate of interest is 5% and principal amount is $250,000, which is given.

$\begin{array}{c}\text{Second semi-annual interest payment}=\text{Bond value}\times \text{Rate of interest}\times \frac{1}{2}\\ =\$2,250,000\times 5\%\times 0.5\\ =\$112,500\times 0.5\\ =\$56,250\end{array}$

Working note 4: Compute appropriations:

It is given that appropriation amount includes principal payment on April 1 of $250,000 and two interest payment of serial bond. The principal amount and two-interest payment amount must be added together to ascertain the amount of appropriation. The first semi-annual interest payment amount is $62,500 (1) and second is $56,250 (3). Thus, the appropriation is calculated as follows:

$\begin{array}{c}\text{Appropriations}=\left(\text{Principal payment}+\left(\begin{array}{l}\text{First semi-annual interest payment}+\\ \text{Second semi-annual interest payment}\end{array}\right)\right)\\ =\$250,000+\left(\$62,500+\$56,250\right)\\ =\$250,000+\$118,750\\ =\$368,750\end{array}$