Recording Capital Asset Transactions
Street Improvement Capital Projects Fund and Governmental Activities at the Government-wide Level
During late 2013, the voters of the City of Smithville authorized tax-supported bond issues totaling $10,000,000 as partial financing for a series of projects to construct streets, curbs, culverts, and storm sewers in various parts of the city. The estimated total cost of the series of projects, which are expected to extend over the next three years, was $11,200,000. In addition to the bond financing, voters also approved a special ½ cent sales tax to assist in financing the projects. The sales tax begins January 1, 2014 and will continue for two years. The sales tax is projected to generate $400,000 each year.
Required
a. Open a general journal for the Street Improvement Fund by recording the transactions listed under paragraph b below, as necessary. Use account titles listed under the drop-down [Account (# - Description)] menu. Select 2014 for each transaction in the [Year] box of the [Journal] view. Enter the paragraph reference, i.e. 5-b-[1, 2, 3, etc], in the [Transaction Description] box. Among other accounts, the following account titles should appear in the [Accounts] view:
Cash
Taxes Receivable-Sales
Vouchers Payable
Contracts Payable
Contracts Payable-Retained Percentage
Fund Balance-Restricted
Encumbrances Outstanding-Elm Street Project
Revenues
Other Financing Sources-Proceeds of Bonds
Construction Expenditures-Elm Street Project
Encumbrances-Elm Street Project
Please remember that before closing the City of Smithville, you must click on [File], and [Save/Save As] to save your work. Your work is NOT automatically saved.
b. Record journal entries in the general journal of the Street Improvement Fund, as appropriate, for each of the following transactions. Remember to enter the correct year and paragraph numbers. Do not record entries at this time in other affected funds; those entries will be made in the later chapters of this cumulative problem that cover the affected funds. You should, however, make all required entries in the governmental activities general journal at the government-wide level.
1. [Para. 5-b-1] In early 2014, design plans and specifications for the first project, the "Elm Street Project," were submitted by a construction engineering firm. The firm billed the Street Improvement Fund for $40,000.
Required: Record this billing and the related Vouchers Payable liability in the Street Improvement Fund and governmental activities journals. (Note: this transaction was not encumbered.)
2. [Para. 5-b-2] On April 15, 2014, construction bids were opened and analyzed. A bid of $2,000,000 was accepted, and the contract was awarded for the Elm Street Project. The contract provided for a retained percentage of 4 percent from each progress payment, and from the final payment, until final inspection and acceptance by the city's public works inspectors.
Required: Record the signing of the contract in the Street Improvement Fund general journal. This transaction has no effect at the government-wide level.
3. [Para. 5-b-3] Vouchers payable (see Transaction 1) were paid on April 20, 2014.
Required: Record this transaction in both the Street Improvement Fund and governmental activities general journals.
4. [Para. 5-b-4] On May 6, 2014, 4% deferred serial bonds with a face value of $2,000,000 were sold for a total amount of $2,068,000, of which $28,000 was for accrued interest from the January 1, 2014, date of the bonds and $40,000 was a premium on the bonds sold. Cash in the amount of the accrued interest and premium was deposited directly in the Street Improvement Bond Debt Service Fund. Cash in the amount of $2,000,000 was deposited and recorded in the Street Improvement Fund.
Required: Record these transactions in the Street Improvement Fund and governmental activities journals. (Hint: In addition to recording the liability for bonds payable in the governmental activities journal, you should record the premium on the bonds payable [credit Premium on 4% Deferred Serial Bonds] and accrued interest on bonds sold [we recommend that you credit Expense-Interest on Long-term Debt] in the governmental activities general journal for the $28,000 of accrued interest.) For now you should ignore the entries in the Street Improvement Bond Debt Service Fund to record the accrued interest and premium. Those entries will be made in Chapter 6 of this cumulative problem.
5. [Para. 5-b-5] In July 2014, the contractor for the Elm Street Project reported that the project was one-half completed and requested a progress payment of $1,000,000.
Required: Record the liability for the progress billing.
6. [Para. 5-b-6] The billing for the partially completed Elm Street Project (see Transaction 5) was paid in late July, less the contractual retention of 4 percent.
Required: Record this transaction in both the Street Improvement Fund and governmental activities general journals.
7. [Para. 5-b-7] In late November 2014 the Elm Street Project was completed and the contractor for the project requested a final payment of $980,000. This amount was recorded as a liability.
Required: Record the liability for the final billing in both the Street Improvement Fund and governmental activities journals.
8. [Para. 5-b-8] Payment was made for the final billing on the Elm Street Project, less the retained percentage, on December 1, 2014.
Required: Record this transaction in both the Street Improvement Fund and governmental activities journals.
9. [Para. 5-b-9] Upon final inspection of the Elm Street Project, the city inspector determined that all work conformed to specifications. Retained percentages (Transactions 6 and 8) were paid to the contractor.
Required: Record this transaction in both the Street Improvement Fund and governmental activities journals. Total construction expenditures for the Elm Street Project should be capitalized in the Infrastructure account in governmental activities.
10. [Para. 5-b-10] During the year sales taxes were collected in the amount of $410,000.
Required: Make the summary journal entries in both the Street Improvement Fund and governmental activities journals to record the collection of sales taxes.
11. Verify the accuracy of all your preceding entries in the Street Improvement Fund and governmental activities general journals, then click [Post Entries] of each entity to post the entries to the respective general ledgers. For the Street Improvement Fund only, prepare year-end closing entries for 2014 and post them to the fund's general ledger. (Note: You must click on the box for [Closing Entry] to check mark it; "Closing Entry" will appear in the [Transaction Description] box for the account being closed. Be sure the check mark is present for each account being closed.) Click [Post Entries] to post the closing entry. Cash remaining in the Street Improvement Fund at year-end is not transferred to the debt service fund since other street improvement projects will be undertaken during the next two years. Closing entries will be made in the governmental activities general journal in Chapter 9 of this cumulative problem. Ignore those entries for now.
c. Export the post-closing trial balance for year 2014 to an Excel worksheet and use Excel to prepare a balance sheet for the Street Improvement Fund as of December 31, 2014. (See Illustration 4-3 in the textbook for an example of an appropriate format of a governmental fund balance sheet.) In addition, save and print the post-closing trial balance from the [Reports] drop-down menu.
d. Export the pre-closing trial balance for year 2014 to an Excel worksheet and use Excel to prepare a statement of revenues, expenditures, and changes in fund balance for the Street Improvement Fund for the year ended December 31, 2014. (See Illustration 5-3 in textbook for an example of the format of a capital projects fund statement of revenues, expenditures and changes in fund balance.) Save and print the pre-closing trial balance from the [Reports] drop-down menu.
[Note: Retain all required printouts and your financial statements in your cumulative folder until directed by your instructor to submit them, unless your instructor prefers to have computer files submitted via e-mail.]
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 2014 are dated January 1, 2014, but were not issued until May 6, 2014. Because bondholders will receive six months of interest on July 1, 2014 in the total amount of $40,000, they were required to pay $28,000 on the date of issue to pay the city for unearned interest from January 1 to May 6. The bonds bear interest of 4 percent per annum. The first interest payment of $40,000 is due July 1, 2014. 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, 2019), and $100,000 are 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 2015. Property tax revenue is not needed in 2014 as the accrued interest and premium received on the bond issue will be sufficient to make the single interest payment due in 2014.
a. Prepare general journal entries, as necessary to record the transactions described in paragraph b 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 (# - Description)] menu. Be sure the year 2014 is selected from the drop-down [Year] menu and the appropriate paragraph number shown in bold-face font below is in the [Transaction Description] box.
Please remember that before closing the City of Smithville, you must click on [File], and [Save/Save As] to save your work. Your work is NOT automatically saved.
b. Record the transactions below, as necessary.
1. [Para. 6-b-1] In early May 2014, an amendment to the annual budget for 2014 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 $40,000 for the premium on bonds sold and estimated revenues of $28,000 for accrued interest on bonds sold; and appropriations in the amount of the one interest payment of $40,000 to be made during 2014. (The payment that is due on July 1, 2014.)
Required: Record the amended budget for the Street Improvement Bond Debt Service Fund for year 2014. Budgetary entries have no effect on the government-wide accounting records.
2. [Para. 6-b-2] On April 1, 2014, the premium and accrued interest on bonds sold were received by the Street Improvement Bond Debt Service Fund. (See Transaction 5-b-4 in the Street Improvement Fund.)
Required: Record this transaction in the Street Improvement Debt Service Fund. No entry is required at this time in the governmental activities general journal since the bond issue, together with related premium and accrued interest, was recorded in the governmental activities general journal in transaction 5-b-4.
3. [Para. 6-b-3] The July 1, 2014, interest payment was made in the amount of $40,000. (Note: Since you credited Expense-Interest on Long-Term Debt for $28,000 in 5-b-4 in the governmental activities general journal you can record the full July 1, 2014, interest payment as a debit to Interest Expense, less amortization of the premium.)
Required: Record this transaction in both the Street Improvement Debt Service Fund and the governmental activities general journals. For the entry in the governmental activities journal, assume that the appropriate amount of amortization of the Premium on 4% Deferred Serial Bonds Payable for the period the bonds have been outstanding (May 6 to July 1) is $339. (Note: Although premiums and discounts on bonds issued are not amortized in a debt service fund, they should be amortized at the government-wide level since the accrual basis of accounting is used at that level.)
4. [Para. 6-b-4] Make the required journal entry in the governmental activities general journal to accrue six months of interest payable on the 4% Deferred Serial Bonds Payable from the July 1 interest payment until the end of the fiscal year, December 31, 2014. For this entry, assume that the appropriate amount of amortization of the Premium on 4% Deferred Serial Bonds Payable is $1,017. (Recall that interest is not accrued for the period July 1 to December 31, 2014, in the debt service fund as no appropriation exists for this expenditure and the interest is not due this fiscal year.)
5. Verify the accuracy of journal entries, including dates and paragraph numbers, and, if you have not already done so, post all entries to the general ledger of both the Street Improvement Bond Debt Service Fund and governmental activities by clicking on [Post Entries]. Make the entries needed to close the budgetary and operating statement accounts at the end of fiscal year 2014. Make this entry only in the Street Improvement Debt Service Fund journal. Be sure that for each account being closed that the check mark for [Closing Entry] is on and that "Closing Entry" appears in the [Transaction Description] box. (Note: Closing entries for governmental activities at the government-wide level will be made in Chapter 9 of this cumulative problem.)
c. Go to [File/Export] and export Excel files of the pre-closing and post-closing trial balances for the Street Improvement Bond Debt Service Fund as of December 31, 2014, and use them to prepare a balance sheet; statement of revenues, expenditures, and changes in fund balances; schedule of revenues, expenditures, and changes in fund balances-budget and actual for the Street Improvement Bond Debt Service Fund. Print and retain the statements and schedules in your cumulative folder until directed by your instructor to submit them, unless your instructor specifies submission of computer files via e-mail.
d. Assuming that the assessed valuation of property within the City of Smithville is $303,035,714 and the legal general obligation debt limit is 8 percent of assessed valuation, prepare a schedule in good form showing calculation of the legal debt limit, debt subject to the limit, and debt margin at the end of 2014 (see Illustration 6-3 for an example). A note at the bottom of the schedule should disclose that $28,000 of restricted fund balance in the debt service fund is restricted for payment of interest rather than principal repayment. In addition, the note should disclose the bonds authorized but unissued, as described in the introductory paragraph of Chapter 5 of the City of Smithville cumulative problem. This will inform the reader that additional debt issuances are pending.
[Note: Retain a printout of all worksheets and your financial statements in your cumulative file until directed by your instructor to submit them, unless your instructor specifies that you should submit computer files via e-mail.]