Chapter 6 Transactions Affecting General Long-term Liabilities and Debt Services

The City of Smithville created a Street Improvement 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 $2,000,000 face value of bonds issued during 2020 are dated January 1, 2020, but were not issued until April 1, 2020.Because bondholders will receive six months of interest on July 1, 2020 in the total amount of $25,000, they were required to pay $12,500 on the date of issue to pay the city for unearned interest from January 1 to April 1.The bonds bear interest of 2.5 percent per annum. The first interest payment of $25,000 is due July 1, 2020.Subsequent semiannual interest payments will be made January 1 and July 1 of each following year until the maturity of the bond.Bonds in the amount of $500,000 are to mature five years after the date of the bonds (January 1, 2025), and $100,000 is to mature January 1 of each year thereafter until all the bonds have been retired.Thus, these bonds are deferred serial bonds as discussed in Chapter 6 of the textbook.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 2021.As the bond issue did not occur until April 2020, the city will not levy debt service property taxes until next year.

[Para. 6-a-1] In early April 2020, an amendment to the annual budget for 2020 was approved by the city council for inflows and outflows in the Street Improvement Bond Debt Service Fund related to the bond issue.The debt service fund budget amendment provides for estimated other financing sources of $20,000 for the premium on bonds sold and estimated revenues of $12,500 for accrued interest on bonds sold; and appropriations in the amount of the one interest payment of $25,000 to be made during 2020. (The payment that is due on July 1, 2020.)

[Para. 6-a-2] On April 1, 2020, the premium and accrued interest on bonds sold were received by the Street Improvement Bond Debt Service Fund. (See Transaction 5-a-3 in the Street Improvement Fund.)

[Para. 6-a-3] The July 1, 2020 interest payment was made in the amount of $25,000. (Note: Since you credited ExpenseInterest on Long-Term Debt for $12,500 in 5-a-3 in the governmental activities general journal you can record the full July 1, 2020, interest payment as a debit to Interest Expense, less amortization of the premium.)

[Para. 6-a-4] Make the required journal entry in the governmental activities general journal to accrue six months of interest payable on the 2.5% deferred serial bonds from the July 1 interest payment until the end of the fiscal year, December 31, 2020.For this entry, assume that the appropriate amount of amortization of the Premium on Deferred Serial Bonds Payable is $875.(Recall that interest is not accrued for the period July 1 to December 31, 2020 in the debt service fund as no appropriation exists for this expenditure and the interest is not due this fiscal year.)