The Following Activities and Transactions Are Typical of Those Which

question 27

Essay

The following activities and transactions are typical of those which may affect the various funds used by a municipal government.
Required:
Prepare journal entries to record each transaction and identify the fund in which each entry is recorded.
1. The Sparta City Council passed a resolution approving a general operating budget of $6,800,000 for the fiscal year. Total revenues are estimated at $5,800,000.
2. The Sparta City Council passed an ordinance providing a property tax levy of $3.50 per $100 of assessed valuation for the fiscal year. Total property valuation in Sparta City is $320,000,000. Property is assessed at 30% of current property valuation. Property tax bills are mailed to property owners. An estimated 5% will be uncollectible.
3. Sparta City sold a general obligation term bond issue for $1,000,000 at 104 to a major brokerage firm. The stated interest rate is 10%. Construction of a new Municipal Courts Building will be financed by the bond issue proceeds.
4. The premium on bond sale in (3) above is transferred to the Debt Service Fund.
5. At the end of fiscal year, the Sparta City Council approves the write-off of $55,000 of uncollected taxes because of inability to locate the property owners.
6. The Sparta City Municipal Courts Building (3 above) is completed. Contracts and expenses total $1,190,000, and all have been paid and recorded in the Capital Projects Fund. Prepare entries to close this project and record the completion of the project in all other funds and/or account groups affected. Any balance in the Capital Projects Fund is to be applied to payment of interest and principal of the bond issue.
7. On March 1, Sparta City issued 10% serial bonds at par to finance streetlights in an area recently incorporated in the city limits. The face amount of the bonds is $900,000; interest is payable annually, and bonds are to be retired in equal amounts over 6 years from collections from assessments against property affected. In case of default by the property owners, the bond principal will be paid by the city.
a. Record the issuance of the bonds on March 1 of the current year.
b. Record the payment to bondholders on March 1 of the next year.
8. The street lighting project in (7) above was completed on September 30 at a total cost of $840,000. Record summary entries for expenditure transactions from March 1 - September 30, and on completion of the project.

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Definitions:

Bond Indentures

A legal and binding agreement that outlines the specific promises made to bondholders, including the terms of the bond, such as its maturity date, timing of interest payments, and method of interest calculation.

Senior Creditors

Creditors who have priority over other creditors for the repayment of debts, typically in the event of a bankruptcy or liquidation.

Yield To Maturity

The total return anticipated on a bond if the bond is held until it matures, considering all interest payments and the principal repayment.

Coupon Rate

The interest rate on a bond, which is calculated as a percentage of the face value, and paid to the bondholders periodically until maturity.