5–7. The Village of Harris issued $5,000,000 in 6 percent general obligation, taxsupported
bonds on July 1, 2011, at 101. A fiscal agent is not used. Resources
for principal and interest payments are to come from the General Fund. Interest
payment dates are December 31 and June 30. The first of 20 annual principal
payments is to be made June 30, 2012. Harris has a calendar fiscal year.
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1. A capital projects fund transferred the premium ($50,000) to the debt service
2. On December 31, 2011, funds in the amount of $150,000 were received
from the General Fund and the first interest payment was made.
148 Chapter 5
3. The books were closed for 2011.
4. On June 30, 2012, funds in the amount of $350,000 were received from
the General Fund, and the second interest payment ($150,000) was made
along with the first principal payment ($250,000).
5. On December 31, 2012, funds in the amount of $142,500 were received from
the General Fund and the third interest payment was made ($142,500).
6. The books were closed for 2012.
a. Prepare journal entries to record the events above in the debt service
b. Prepare a Statement of Revenues, Expenditures, and Changes in Fund
Balance for the debt service fund for the year ended December 31,
c. Prepare a Statement of Revenues, Expenditures, and Changes in Fund
Balance for the debt service fund for the year ended December 31,
5–10. On July 1, 2011, a five-year agreement is signed between the City of Genoa
and the Computer Leasing Corporation for the use of computer equipment
not associated with proprietary funds activity. The cost of the lease, excluding
executory costs, is $12,000 per year. The first payment is to be made by a
capital projects fund at the inception of the lease. Subsequent payments, beginning
July 1, 2012, are to be made by a debt service fund. The present value
of the lease payments, including the first payment, is $54,552. The interest
rate implicit in the lease is 5 percent.
a. Assuming the agreement meets the criteria for a capital lease under the provisions
of SFAS No. 13, make the entries required in (1) the capital projects
fund and (2) the debt service fund on July 1, 2011, and July 1, 2012.
6–10. The Town of Frostbite self-insures for some of its liability claims and purchases
insurance for others. In an effort to consolidate its risk management
activities, the Town recently decided to establish an internal service fund, the
Risk Management Fund. The Risk Management Fund’s purpose is to obtain
liability coverage for the Town, to pay claims not covered by the insurance,
and to charge individual departments in amounts sufficient to cover currentyear
costs and to establish a reserve for losses.
The Town reports proprietary fund expenses by object classification using
the following accounts: Personnel services (salaries), Contractual services
(for the expired portion of prepaid service contracts), Depreciation, and
Proprietary Funds 183
Insurance Claims. The following transactions relate to the year ended December
31, 2012, the first year of the Risk Management Fund’s operations.
1. The Risk Management Fund is established through a transfer of
$500,000 from the General Fund and a long-term advance from the
water utility enterprise fund of $250,000.
2. The Risk Management Fund purchased (prepaid) insurance coverage
through several commercial insurance companies for $200,000. The policies
purchased require the Town to self-insure for $25,000 per incident.
3. Office Equipment is purchased for $10,000.
4. $450,000 is invested in marketable securities.
5. Actuarial estimates were made in the previous fiscal year to determine
the amount necessary to attain the goal of accumulating sufficient funds
to cover current-year claims and to establish a reserve for losses. It was
determined that the General Fund and water utility be assessed a fee of
6 percent of total wages and salaries (Interfund premium). Wages and
salaries by department are as follows:
Public Safety 5,000,000
General Administrative Operations 1,500,000
Water Utility 2,500,000
6. Cash received in payment of interfund premiums from the General
Fund totaled $275,000 and cash received from the Water Utility totaled
7. Interest and dividends received totaled $27,000.
8. Salaries for the Risk Management Fund amounted to $200,000 (all paid
during the year).
9. Claims paid under self-insurance totaled $150,000 during the year.
10. The office equipment is depreciated on the straight-line basis over 5 years.
11. At year-end, $190,000 of the insurance policies purchased in January
12. The market value of investments at December 31 totaled $456,000 (Hint:
credit Net Increase in Fair Market Value of Investments ).
13. In addition to the claims paid in entry 9 above, estimates for the liability
for the Town’s portion of known claims since the inception of the Town’s
self-insurance program totaled $90,000.
a. Prepare the journal entries (including closing entries) to record the
b. Prepare a Statement of Revenues, Expenses, and Changes in Fund
Net Assets for the year ended December 31, 2012, for the Risk
184 Chapter 6
c. Prepare a Statement of Net Assets as of December 31, 2012, for the
Risk Management Fund.
d. Prepare a Statement of Cash Flows for the year ended December 31,
2012, for the Risk Management Fund. Assume $10,000 of the transfer
from the General Fund was for the purchase of the equipment. Further,
assume the remainder of the transfer from the General Fund and all of
the advance from the enterprise fund are to establish working capital
(noncapital related financing).
e. Comment on whether the interfund premium of 6 percent of wages
and salaries is adequate.
7–6. On July 1, 2011, the City of Belvedere accepted a gift of cash in the amount
of $3,000,000 from a number of individuals and foundations and signed an
agreement to establish a private-purpose trust. The $3,000,000 and any additional
gifts are to be invested and retained as principal. Income from the trust
is to be distributed to community nonprofit groups as directed by a Board
consisting of city officials and other community leaders. The agreement provides
that any increases in the market value of the principal investments are
to be held in trust; if the investments fall below the gift amounts, then earnings
are to be withheld until the principal amount is reestablished.
a. The following events and transactions occurred during the fiscal year ended
June 30, 2012. Record them in the Belvedere Community Trust Fund.
(1) On July 1, the original gift of cash was received.
(2) On July 1, $2,000,000 in XYZ Company bonds were purchased at
par plus accrued interest. The bonds pay an annual rate of 6 percent
interest semiannually on April 1 and October 1.
(3) On July 2, $950,000 in ABC Company common stock was purchased.
ABC normally declares and pays dividends semiannually, on January
31 and July 31.
(4) On October 1, the first semiannual interest payment was received
from XYZ Company. Note that part of this is for accrued interest due
at the time of purchase; the remaining part is an addition that may be
used for distribution.
(5) On January 31, a cash dividend was received from ABC Company in
the amount of $38,000.
(6) On March 1, the ABC stock was sold for $960,000. On the same day,
DEF Company stock was purchased for $965,000.
(7) On April 1, the second semiannual interest payment was received
from XYZ Company
(8) During the month of June, distributions were approved by the Board
and paid in cash in the amount of $104,000.
(9) Administrative expenses were recorded and paid in the amount of
(10) An accrual for interest on the XYZ bonds was made as of June 30,
(11) As of June 30, 2012, the fair value of the XYZ bonds, exclusive of
accrued interest, was determined to be $2,002,000. The fair value of
the DEF stock was determined to be $960,000.
(12) Closing entries were prepared.
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