Chapter 6 Transactions Affecting General Long-term Liabilities and Debt Service
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 bonds. 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 issued in 2020 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.
a. Prepare general journal entries, as necessary to record the transactions described below in the Street Improvement Bond 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 2020 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.
- [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, estimated other financing sources of $17,500 for a transfer from the General Fund that will be used to help pay interest due on January 1, 2021, 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.)
Required: Record the budget for the Street Improvement Bond Debt Service Fund for year 2020. Budgetary entries have no effect on the government-wide accounting records.