Preston Village engaged in the following transactions: •It issued $20 million in
ID: 2458965 • Letter: P
Question
Preston Village engaged in the following transactions: •It issued $20 million in bonds to purchase a new municipal office building. The proceeds were recorded in a capital projects fund.
•It acquired the building for $20 million. •It recognized, as appropriate, $300,000 of depreciation on municipal vehicles
. •It transferred $2,060,000 from the general fund to a debt service fund. •It paid $60,000 in interest on long-term debt and repaid $2 million of principal on the same long-term debt
. •It sold for $5 million village land that had been acquired for $4 million. The proceeds were recorded in the general fund.
Instructions: Answer the following question based on the transactions outlined above.
1.For each of the transactions, prepare journal entries to record them in appropriate governmental funds (which are accounted for on a modified accrual basis).
2.Prepare journal entries to reflect how the transactions would be reflected in government-wide statements (which are prepared on a full accrual basis).
3.How can governments justify preparing two sets of financial statements, each on a different basis?
Explanation / Answer
1. Journal entries to record them in appropriate governmental funds (which are accounted for on a modified accrual basis):
i) cash $20,000,000
proceed from borrowing $20,000,000
ii) Expenditure to building $20,000,000
cash $20,000,000
iii) No entry required. Depreciation are not recognised in fund statament on modified accrual basis.
iv) Operating transfer-out to debt serving fund $2060000
Cash $2060000
cash $2060000
Operating transfer in from the general fund $2060000
v) Expenditure - Debt Principal $2,000,000
Expenditure - Debt interest $60,000
Cash $2,060,000
vi) Cash $5,000,000
Proceed from the sale of land $5,000,000
2. Journal entries to reflect how the transactions would be reflected in government-wide statements (which are prepared on a full accrual basis):
a) Cash $20,000,000
Bond Payable $20,000,000
b) Building $20,000,000
Cash $20,000,000
c) Depreciation Expenses $300,000
Accumulated Depreciation- Vehicles $300,000
d) No entry is required for a transfer from on fund to another in as much as government wide statements are consolidated statements and hence effect of interfund transactions are eliminated.
e) Debt Interest expense $60,000
Long term Debt $2,000,000
Cash $2,060,000
f) Cash $5,000,000
Land $4,000,000
Gain on sale of land $1,000,000
3. The fund statements show the government as a collection of seperate funds. The government wide statements, which are on full accrual basis, better measure the extent to which governemnt achieved the interperiod equity. The fund statements by contrast (which may be on modified accrual basis or full accrual basis depending on whether they are of a governmental, proprietory or fiduciary type) are more closely tied to the objective of the reporting on budgetary compliance.
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