COMPANY ABC engaged in the following transactions: It issued $20 million in bond

Question

COMPANY ABC 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.

REQUIRED:

Answer the following question based on the transactions outlined:

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

Part 1)

The journal entries are prepared as below:

_____

Part 2)

The journal entries are given as follows:

_____

Part 3)

The government wide statements are prepared to indicate the functioning of government as a whole. Interperiod equity is more appropriately measured with the use of government wide statements prepared on full accrual basis. On the other hand, the fund statements use different forms/types of funds to record the activities of the government, thereby, treating the government as a collection of different funds. Such statements may be prepared either on modified or on full accural basis with the objective of providing information on various budgetary requirements/compliances.

Event Account Titles Debit Credit Capital Projects Fund 1) Cash $20,000,000 Proceeds from Borrowing $20,000,000 Capital Projects Fund 2) Expenditure (Building) $20,000,000 Cash $20,000,000 General Fund 3) No Entry Required General Fund 4) Operating Transfer-Out to Debt Service Fund $2,060,000 Cash $2,060,000 Debt Service Fund Cash $2,060,000 Operating Transfer-In from General Fund $2,060,000 Debt Service Fund 5) Expenditure - Principal $2,000,000 Expenditure - Interest $60,000 Cash $2,060,000 General Fund 6) Cash $5,000,000 Proceeds from Sale of Land $5,000,000

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