Chapter 6 Transactions Affecting General Long-Term Liabilities and Debt Service

During fiscal year 2022, the voters of the City of Bingham approved the issuance of 2 percent tax-supported serial bonds in the face amount of $2,500,000 to construct a cafe in city hall. The bonds are to mature in blocks of $125,000 every six months over a 10-year period commencing in 2024.

The City of Bingham created a Bond Debt Service Fund to be used to retire the bonds issued for the purposes described in Chapter 5 of this cumulative problem, and to pay the interest on the bonds. The $2,500,000 face value of bonds were issued on January 3, 2023 for $2,516,742. The effective interest rate on the bonds is 1.875% percent per annum. The first interest payment of $25,000 is due July 1, 2023. Subsequent semiannual interest payments will be made January 1 and July 1 of each following year until the maturity of the bond. Make entries as instructed in the following paragraphs.

Bond covenants related to this bond issue require the city to levy property taxes sufficient to make principal and interest payments until the bonds have been retired. The city council has approved a resolution to enable the property tax levy, beginning in fiscal year 2024. Until then transfers will be made from Binghams General Fund.

a. Prepare general journal entries, as necessary to record the following transactions in the debt service fund general journal and, if applicable, in the governmental activities general journal. Use account titles listed under the drop down [Account] menu. Be sure the year 2023 is selected from the drop-down [Year] menu and the appropriate paragraph number shown in bold-face font below is in the [Add description] box.

1. [Para. 6a-1] From the data given about the City Hall Annex Construction Fund bond issue projected to be sold on January 3 at a premium of $16,742, city officials adopted a legal budget for the fiscal year ended December 31, 2023.

Required: Record the budget for the Bingham Debt Service Fund for year 2023. Budgetary entries have no effect on the government-wide accounting records. The budget provides for estimated other financing sources for premiums on bonds of $16,742 and interfund transfers in from the General Fund of $20,000. Appropriations associated with the 2% bond provide for the bond interest payment on July 1 [0.02 x 6/12 x $2,500,000 = $25,000].

2. [Para. 6a-2] Cash in the amount of the $16,742 premium on the bonds sold on January 3, 2023 was received and recorded in the debt service fund.

Required: Record this transaction in the debt service fund. No entry is required at this time in the governmental activities general journal since the bond issue, including the related premium and accrued interest, was recorded in the governmental activities general journal in transaction 5a-1.

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3. [Para. 6a-3] On July 1, the debt service fund received $20,000 from the General Fund for interest payment on the 2% serial bonds.

   Required: Record the transfer in the debt service fund. The general fund transfer was already recorded in Chapter 4, Para 4a-14.

4. [Para. 6a-4] Checks totaling $25,000 were written and mailed to bondholders for the interest payment due July 1, 2023.

   Record the interest payment in both the debt service fund and governmental activities journals. At the government-wide level, reduce the premium on bonds payable by $1,406, the difference between the stated interest rate (0.02 X 6/12 X $2,500,000) and the effective interest rate (0.01875 X 6/12 X $2,516,742).

5. [Para. 6a-5] At December 31, 2023, accrued interest expense on the 2% bond issue was recorded in the governmental activities general journal. Amortization of the premium on the 2% bonds sold was also recorded in the amount of $1,419.

   Required: Record the accrual in the governmental activities journal.

6. [Para. 6a-6] Provide the journal entries to reclassify the current portion of long- term debt related to the serial bonds payable. Remember, there are two principal payments due in 2024.