Chapter 6

DEBT SERVICE FUND: Term Bond Example

Background: The Town of Susanville voters approved a measure to add an extension to the local fire station expected to cost $1,500,000 (as discussed in Chapter 5). As partial financing of the project, the town issued term bonds maturing in 5 years. The total face value of the bond was $100,000 bearing interest of 6%, payable semiannually on January 1 and July 1, and sinking fund investments are estimated to earn 7% per year. The bonds were dated and sold on January 1, 2022. The financing of the bond will come from transfers from the General Fund semi-annually for interest (one day prior to the due date) and annually for sinking fund investments (on December 31st) according to the schedule below.

Sinking Fund Amortization Table

Required Estimated Estimated Estimated

Year Additions Earnings Increase Fund Balance

2022 $17,389 $ - 0 - $17,389 $ 17,389

2023 $17,389 1,217 $18,606 $ 35,995

2024 $17,389 2,520 $19,909 $ 55,904

2025 $17,389 3,913 $21,302 $ 77,206

2026 $17,389 5,404 $22,794 $100,000

Required: Book journal entries for the following transactions:

1. Record the operating budget for the year ending December 31, 2022:

Debt Service Fund:

Governmental Activities: 2. Cash was received from the General Fund on June 30, 2022 for the interest payment.

Debt Service Fund:

Governmental Activities:

3. Checks were written and mailed for the July 1, 2022 interest payment.

Debt Service Fund:

Governmental Activities:

4. Cash was received from the General Fund on December 31, 2022 for the upcoming sinking fund payment and interest payment :

Debt Service Fund:

Governmental Activities:

5. The sinking fund investment is made on December 31, 2022:

Debt Service Fund:

Governmental Activities:

6. As of December 31, 2022, all budgetary and operating statement accounts are closed to Fund Balance-Restricted.

Debt Service Fund:

Governmental Activities:

7. BUDGET YEAR 2: Record the operating budget for the year ending December 31, 2023:

Debt Service Fund:

Governmental Activities:

8. Checks were written and mailed for the January 1, 2023 interest payment.

Debt Service Fund:

Governmental Activities:

9. Cash was received from the General Fund on June 30, 2023 for the interest payment.

Debt Service Fund:

Governmental Activities:

10. Checks were written and mailed for the July 1, 2023 interest payment.

Debt Service Fund:

Governmental Activities:

11. Cash was received from the General Fund on December 31, 2023 for the upcoming sinking fund payment and interest payment :

Debt Service Fund:

Governmental Activities:

12. The sinking fund investment is made on December 31, 2023:

Debt Service Fund:

Governmental Activities: 13. Investment earnings in 2023 were $1,517 compared with the budgeted amount of $1,217, or $300 more than expected.

Debt Service Fund:

Governmental Activities:

14. As of December 31, 2023, all budgetary and operating statement accounts are closed to Fund Balance-Restricted.

Debt Service Fund:

Governmental Activities: