On July 1, a city issued, at par, $100 million in 6 percent, 20-year general obligation bonds. It established a debt service fund to account for resources set aside to pay interest and principal on the obligations. In the year that it issued the debt, the city engaged in the following transactions involving the debt service fund:

debit service funds account for resources accumulated to service debt not the debt itself.

1. It estimated that it would make interest payments of $3 million and have interest earnings of $30,000 from investments. It would transfer from the general fund to the debt service fund $2.97 million to pay interest and $500,000 to provide for the payment of principal when the bonds mature. Further, as required by the bond indentures, it would transfer $1 million of the bond proceeds from the capital projects fund to the debt service fund to be held in reserve until the debt matures.

2. Upon issuing the bonds, the city transferred $1 million of the bond proceeds from the capital projects fund. It invested $977,254 of the funds in 20-year, 6 percent Treasury bonds that had a face value of $1 million. The bond discount of $22,746 reflected an effective yield rate of 6.2 percent.

3. On December 31, the city received $30,000 interest on the Treasury bonds. This payment represented interest for six months. Correspondingly, the market value of the bonds increased by $294, reecting the amortization of the discount.

4. On the same day the city transferred $2.97 million from the general fund to pay interest on the bonds that it had issued. It also transferred $500,000 for the eventual repayment of principal.

5. Also on December 31, it made its first interest payment of $ 3 million to bondholders.

a. Please prepare the Statement of Revenues, Expenditures and Changes in Fund Balance, and the Fund Balance Sheet for the

Debt Service Fund.

Journal Entries Provided below.

Estimated revenuesinterest $ 30,000

Estimated transfer-incapital projects fund 1,000,000

Estimated transfer-in for interestgeneral fund 2,970,000

Estimated transfer-in for principalgeneral fund 500,000

Appropriationsinterest $3,000,000

Fund balance 1,500,000

To record the budget

(2)

Cash $1,000,000

Other financing sourcenonreciprocal transfer from the capital projects fund $1,000,000

To record the transfer-in from the capital projects fund to establish the required reserve

Investment in bonds $977,254

Cash $977,254

To record purchase of bonds as an investment

(3)

Cash $30,000

Investment in bonds 294

Interest revenue $30,294

To record revenue equal to the first periods interest and change in carrying value (3.1 percent of $977,254)

(4)

Cash $3,470,000

Other financing sourcenonreciprocal transfer from the general fundinterest $2,970,000

Other financing sourcenonreciprocal transfer from the general fundprincipal 500,000

To record the transfers from the general fund

(5)

Expenditureinterest $3,000,000

Cash $3,000,000

To record the first payment of interest

(Closing entry)

Appropriationsinterest $3,000,000

Interest revenue 30,294

Other financing sourcenonreciprocal transfer from the capital projects fund 1,000,000

Other financing sourcenonreciprocal transfer from the general fundinterest 2,970,000

Other financing sourcenonreciprocal transfer from the general fundprincipal 500,000

Estimated revenuesinterest $ 30,000

Estimated transfer-incapital projects fund 1,000,000

Estimated transfer-in for interestgeneral fund 2,970,000

Estimated transfer-in for principalgeneral fund 500,000

Expenditureinterest 3,000,000

Fund balance 294

To close the accounts