Question

The Village of Rodale keeps its governmental fund accounting records on a modified accrual basis. At the end of the fiscal year the village accountant must covert the modified accrual information to accrual information to allow for preparation of the government-wide financial statements. Following are several transactions identified by the accountant that will require recognition and/or conversion for accrual accounting. The village has a fiscal year end of December 31.

1. On December 15 the village took out a long-term note payable in the amount of $30,000.

Answer 1

Accrual system of accounting suggests that, income and expenditure shall be recognised in the period in which they are due and not in the period when they are actually paid or received.

Here the village has taken the long term note payable for $30000 on December 15, so the concept of accrual will come in picture on December 31 i.e. day of closure of books of accounts.

On 31st December The village of Rodale will have to accrue interest payable for 16 days in it's books of accounts. Accounting treament for the same shall flow as follows:

When Loan is taken:

December 15, Bank A/c______________Dr. 30000 -

To Long Term Loan Payable - 30000

December 31, Interest expenses A/c_________Dr. 157.81

To Interest Payable - 157.81

( Here, I have assumed 12% rate of interest p.a. as the rate is not specified in the given question. Interest has been accrued for 16 days at this rate).