Problem # 1

Upon annexing a recently developed subdivision, agovernment undertakes to extend power-line lines to the area.

The estimated cost is $30.0 million. The project is to befunded 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

Generalfund.Propertyownersaretobeassessedanamountsuf?cient 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 acapital projects fund.

1. Itrecordedthecapitalprojectsfundbudget.Itestimatedthat it would earn $0.60 million in interest on thetemporary investment of bond proceeds, an amountthat will reduce the required transfer from the generalfund. It estimated that bond issue costs would be $0.54 million.

2. It issued $25.5 million in bonds at a premium of $0.90million and incurred $0.54 million in issue costs. Thepremium, net of issue costs, is to be transferred to anewly 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 $3.0million in construction costs.

4. It invested $22.86 million in short-term (less than oneyear) 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 interestearned. By year-end the investments still on hand hadincreased in value by $0.18 million, an amount alsoattributable to interest earned.

7. It received invoices totaling $17.1 million. As permittedby 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 becausethe project is not completed and its budget is for theentire project, not for a single period.

Required

a. Prepare appropriate journal entries for the capitalprojects fund.

b. Prepare a statement of revenues, expenditures, andchanges in fund balance in which you compare actualand budgeted amounts.

c. Prepare a year-end (December 31) balance sheet.

d. Does your balance sheet report the construction inprocess? If not, where might the construction inprocess be recorded?

 

 

Problem # 2

As statedinthepreviousproblem, a governmentissued$25.5 million of special assessment bonds to ?nance a power-line extension project. To service the debt, it assessed propertyowners $25.5 million. Their obligations are payable over aperiod of ?ve years, with annual installments due on March31 of each year. Interest at an annual rate of 8 percent is tobe paid on the total balance outstanding as of that date.The bonds require an annual principal payment of$4.5 million each year for ?ve years, due on December 31.

In addition, interest on the unpaid balance is payable twiceeach year, on June 30 and December 31 at an annual rateof 8 percent.The government agreed to make up from its generalfundthedifferencebetweenrequireddebtservicepaymentsand revenues.At the start of the year, the government establisheda debt service fund. During the year it engaged in thefollowing transactions, all of which would affect that fund.

1. It prepared, and recorded in its accounts, its annualbudget. 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 theassessments. In addition, it expected to earn interestof $0.24 million on temporary investments. It wouldbe required to pay interest of $2.04 million and makeprincipal payments of $5.1 million on the outstandingdebt. It anticipated transferring $1.5 million from thegeneral 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 thepremium to the debt service fund.

4. Duringtheyearthegovernmentcollected$6.0millionin assessments and $1.2 million in interest (with a fewproperty owners paying their entire assessment in the?rstyear).Duringthe?rst60daysofthefollowingyearit collected an additional $0.3 million in assessmentsand $0.03 million in interest, both of which were duethe previous year.

5. It transferred $0.36 million (the premium) from thecapital projects fund.

6. It purchased $2.4 million of six-month treasury bills asa temporary investment.

7. It made its ?rst interest payment of $1.02 million.

8. Itsoldtheinvestmentsfor$2.55 million, thedifferencebetween selling price and cost representing interestearned.

9. It recognized its year-end obligation for interest of$1.02 million and principal of $5.1 million, but did notactually make the required payments.

10. It prepared year-end closing entries.

Required

a. Prepare appropriate journal entries for the debtservice fund.

b. Prepare a statement of revenues, expenditures, andchanges in fund balance in which you compareactual and budgeted amounts for the year endingDecember 31.

c. Prepare a year-end balance sheet.

d. Does your balance sheet report the balance of thebonds payable? If not, where might it be recorded?