Question

P. 6-6

The debt service phase special assessment bonds are accounted for in a debt service fund.

As stated in the previous problem, a government issued $8.5 million of special assessment bonds to finance a sewer‐extension project. To service the debt, it assessed property owners $8.5 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 $1.57 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 $1.3 million in special assessments and $0.5 million of interest on the unpaid balance of the assessments. In addition, it expected to earn interest of $0.08 million on temporary investments. It would be required to pay interest of $0.68 million and make principal payments of $1.7 million on the outstanding debt. It anticipated transferring $0.5 million from the general fund to cover the revenue shortage.
2. It recorded the $8.5 million of assessments receivable, estimating that $0.2 million would be uncollectible.
3. The special assessments bonds were issued at a premium (net of issue costs) of $0.12 million. The government recognized the anticipated transfer of the premium to the debt service fund.
4. During the year the government collected $2.0 million in assessments and $0.4 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 $0.1 million in assessments and $0.01 million in interest, both of which were due the previous year.
5. It transferred $0.12 million (the premium) from the capital projects fund.
6. It purchased $0.8 million of six‐month treasury bills as a temporary investment.
7. It made its first interest payment of $0.34 million.
8. It sold the investments for $0.85 million, the difference between selling price and cost representing interest earned.
9. It recognized its year‐end obligation for interest of $0.34 million and principal of $1.7 million, but did not actually make the required payments.

10. It prepared year‐end closing entries.

    1. Prepare appropriate journal entries for the debt service fund.

Answer 1

No.	General journal	Debit	Credit
1	Estimated revenues - assessments	1300000
	Estimated revenues - interest on assessments	500000
	Estimated revenues - investment interest	80000
	Estimated other financing sources - Nonreciprocal transfer from general fund	500000
	Appropriations - debt service, principal		1700000
	Appropriations - debt service, interest		680000
2	Assessments receivable	8500000
	Allowance for uncollectable receivables		200000
	Assessment		8300000
3	Due from capital projects fund	120000
	Other financing sources - nonreciprocal transfer from capital projects fund		120000
4	Cash	2400000
	Assessments receivable		2000000
	Interest revenue, assessments		400000
	Assessment	2100000
	Interest receivable on assessments	10000
	Revenue from assessments		2100000
	Interest revenue, assessments		10000
5	Cash	120000
	Due from capital project funds		120000
6	Investments	800000
	Cash		800000
7	Expenditure - debt service, interest	340000
	Cash		340000
8	Cash	850000
	Investments		800000
	Interest revenue, investments		50000
9	Expenditure - debt service, interest	340000
	Expenditure - debt service, principal	1700000
	Mature interest payable		340000
	Matured bonds payable		1700000
	Closing entries
10	Revenue from assessments	2100000
	Interest revenue, assessments	410000
	Interest revenue, investments	50000
	Other financing sources - nonreciprocal transfer from capital projects fund	120000
	Estimated revenues - assessments		1300000
	Estimated revenues - interest on assessments		500000
	Estimated revenues - investment interest		80000
	Estimated other financing sources - nonreciprocal transfer from general fund		500000
	Fund Balance		300000
	Appropriations - debt service, principal	1700000
	Appropriations - debt service, interest	680000
	Expenditure - debt service, principal		1700000
	Expenditure - debt service, interest		680000