On January 1, 2012, the City of Cape May authorized and issued $200,000 of 5%, three-year term bonds. Interest is payable annually on December 31. A debt service fund is established to accumulate the necessary resources to pay the annual interest on the bonds and to redeem the bonds when they mature. The required annual addition for principal and interest will be transferred annually to the debt service fund from the general fund. It is assumed that amounts received by the debt service fund for the payment of principal can be invested at an annual return of 8%.

Required:

A. Prepare a schedule to calculate the annual required additions and annual required earnings to repay the principal on the bonds assuming that the first installment for principal and interest is transferred to the debt service fund from the general fund on December 30, 2012.

B. Prepare the entries to be recorded by the debt service fund as follows:

(1) The 2013 budget entry.

(2) The entry to record the annual transfer from the general fund.

(3) The entry to record the annual payment of interest.

(4) The entry to record $4,929 in interest income for 2013.

(5) The entry(s) to close the accounts at the end of 2013.