Problem # 1
Upon
annexing a recently developed subdivision, a government undertakes to extend power-line
lines to the area.
The
estimated cost is $30.0 million. The project is to be funded with $25.5 million
in special assessment bonds and a $3.0 million reimbursement grant from the
state. The balance is to be paid by the government out of its
General
fund. Property owners are to be assessed an amount sufficient to pay both
principal and interest on the debt. During the year, the government engaged in
the following transactions, all of which would be recorded in a capital
projects fund.
1.
It recorded the capital projects fund budget .It estimated that it would earn
$0.60 million in interest on the temporary investment of bond proceeds, an
amount that will reduce the required transfer from the general fund. It
estimated that bond issue costs would be $0.54 million.
2.
It issued $25.5 million in bonds at a premium of $0.90 million and incurred $0.54
million in issue costs. The premium, net of issue costs, is to be transferred
to a newly established debt service fund.
3.
It received the $3.0 million grant from the state, recognizing it as a liability
until it incurred at least $3.0 million in construction costs.
4.
It invested $22.86 million in short-term (less than one year) securities.
5.
It issued purchase orders and signed construction contracts for $27.6 million.
6.
It sold $15.0 million of its investments for $15.42 million, the excess of
selling price over cost representing interest earned. By year-end the
investments still on hand had increased in value by $0.18 million, an amount
also attributable to interest earned.
7.
It received invoices totaling $17.1 million. As permitted by its agreement with
its prime contractor, it retained (and recorded as a payable) $1.2 million
pending satisfactory completion of the project. It paid the balance of $15.9
million.
8.
It transferred $0.36 million to the debt service fund.
9.
It updated its accounts, but did not close them because the project is not
completed and its budget is for the entire project, not for a single period.
Required
a. Prepare appropriate journal entries
for the capital projects fund.
b. Prepare a statement of revenues,
expenditures, and changes in fund balance in which you compare actual and budgeted
amounts.
c. Prepare a year-end (December 31)
balance sheet.
d. Does your balance sheet report the
construction in process? If not, where might the construction in process be
recorded?
Problem # 2
As
stated in the previous problem, a government issued $25.5 million of special
assessment bonds to finance a power-line extension project. To service the debt,
it assessed property owners $25.5 million. Their obligations are payable over a
period of five years, with annual installments due on March 31 of each year.
Interest at an annual rate of 8 percent is to be paid on the total balance
outstanding as of that date. The bonds require an annual principal payment of $4.5
million each year for five years, due on December 31.
In
addition, interest on the unpaid balance is payable twice each year, on June 30
and December 31 at an annual rate of 8 percent. The government agreed to make
up from its general fund the difference between required debt service payments and
revenues. At the start of the year, the government established a debt service
fund. During the year it engaged in the following transactions, all of which
would affect that fund.
1. It prepared, and recorded in its accounts, its
annual budget. It estimated that it would collect from property owners $3.9
million in special assessments and $1.5 million of interest on the unpaid
balance of the assessments. In addition, it expected to earn interest of $0.24
million on temporary investments. It would be required to pay interest of $2.04
million and make principal payments of $5.1 million on the outstanding debt. It
anticipated transferring $1.5 million from the general fund to cover the
revenue shortage.
2. It recorded the $25.5 million of assessments
receivable, estimating that $0..6million would be uncollectible.
3. The special assessments bonds were issued at
a premium (net of issue costs) of $0..36 million. The government recognized the
anticipated transfer of the premium to the debt service fund.
4. During the year the government collected $6.0
million in assessments and $1.2 million in interest (with a few property owners
paying their entire assessment in the first year).During the first 60 days of the
following year it collected an additional $0.3 million in assessments and $0.03
million in interest, both of which were due the previous year.
5. It transferred $0.36 million (the premium)
from the capital projects fund.
6. It purchased $2.4 million of six-month
treasury bills as a temporary investment.
7. It made its first interest payment of $1.02
million.
8. It sold the investments for $2.55 million,
the difference between selling price and cost representing interest earned.
9. It recognized its year-end obligation for
interest of $1.02 million and principal of $5.1 million, but did not actually
make the required payments.
10.
It prepared year-end closing entries.
Required
a. Prepare appropriate journal entries
for the debt service fund.
b. Prepare a statement of revenues,
expenditures, and changes in fund balance in which you compare actual and
budgeted amounts for the year ending December 31.
c. Prepare a year-end balance sheet.
d. Does your balance sheet report the
balance of the bonds payable? If not, where might it be recorded?
