Financial Accounting Journal Entries For Debt Service Fund Homework Help
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Government issued $25.5 million of special assessment bonds to ﬁnance a power-line extension project. To service the debt, it assessed property owners $25.5 million. Their obligations are payable over a period of ﬁve years, with annual installments due on March 31 of each year. Interest at an annual rate of 8 percent is to be paid on the total balance outstanding as of that date. The bonds require an annual principal payment of $4.5 million each year for ﬁve years, due on December 31.
In addition, interest on the unpaid balance is payable twice each year, on June 30 and December 31 at an annual rate of 8 percent. The government agreed to make up from its general fund the difference between required debt service payments and revenues. At the start of the year, the government established a debt service fund. During the year it engaged in the following transactions, all of which would affect that fund.
1. It prepared, and recorded in its accounts, its annual budget. It estimated that it would collect from property owners $3.9 million in special assessments and $1.5 million of interest on the unpaid balance of the assessments. In addition, it expected to earn interest of $0.24 million on temporary investments. It would be required to pay interest of $2.04 million and make principal payments of $5.1 million on the outstanding debt. It anticipated transferring $1.5 million from the general fund to cover the revenue shortage.
2. It recorded the $25.5 million of assessments receivable, estimating that $0..6million would be uncollectible.
3. The special assessments bonds were issued at a premium (net of issue costs) of $0..36 million. The government recognized the anticipated transfer of the premium to the debt service fund.
4. During the year the government collected $6.0 million in assessments and $1.2 million in interest (with a few property owners paying their entire assessment in the ﬁrst year).During the ﬁrst 60 days of the following year it collected an additional $0.3 million in assessments and $0.03 million in interest, both of which were due the previous year.
5. It transferred $0.36 million (the premium) from the capital projects fund.
6. It purchased $2.4 million of six-month treasury bills as a temporary investment.
7. It made its ﬁrst interest payment of $1.02 million.
8. It sold the investments for $2.55 million, the difference between selling price and cost representing interest earned.
9. It recognized its year-end obligation for interest of $1.02 million and principal of $5.1 million, but did not actually make the required payments.
10. It prepared year-end closing entries.
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a. Prepare appropriate journal entries for the debt service fund.
b. Prepare a statement of revenues, expenditures, and changes in fund balance in which you compare actual and budgeted amounts for the year ending December 31.
c. Prepare a year-end balance sheet.
d. Does your balance sheet report the balance of the bonds payable? If not, where might it be recorded?
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