Government Funds

Property taxes are not necessarily recognized as revenue in the year collected.

The fiscal year of Duchess County ends on December 31. Property taxes are due March 31 of the year in which they are levied.

Prepare journal entries (excluding budgetary and closing entries) to record the following property tax-related transactions in which the county engaged in 2014 and 2015.

a. On January 15, 2014, the county council levied property taxes of $170 million for the year ending December 31, 2014. Officials estimated that 1percent would be uncollectible.

b. During 2014 it collected $120 million.

c. In January and February 2015, prior to preparing its 2014 financial statements, it collected an additional $45 million in 2014 taxes. It reclassified as delinquent the $5 million of 2014 taxes not yet collected.

d. In January 2015, the county levied property taxes of $190 million, of which officials estimated 1.1 percent would be uncollectible.

e. During the remainder of 2015 the county collected $2.5 million more in taxes relating to 2014, $160 million relating to 2015, and $1.9 million (in advance) applicable to 2016. f. In December 2015 it wrote off $1 million of 2014 taxes that it determined would be uncollectible.

2. Suppose the county were to prepare government-wide statements and account for property taxes on a full accrual basis of accounting rather than the modified accrual basis. How would your entries differ? Explain.

Irrespective of how capital assets are acquired, they are recorded differently in governmental funds than in businesses.

In a recent year Ives Township acquired six police cars at a total cost of $200,000. The vehicles are expected to have a useful life of four years.

1. Prepare the journal entries that the township would make in its general fund in the year of acquisition for each of the following assumptions:

a. It paid for the cars in cash at the time of acquisition.

b. It leased the cars and agreed to make, starting in the year of acquisition, four equal payments of $63,095, an amount that represents the annuity required to liquidate a loan of $200,000 at 10 percent interest. The lease would satisfy the criteria necessary to be accounted for as a capital lease.

c. It issued $200,000 in installment notes to the car dealer, agreeing to repay them in four annual payments of $63,095, starting in the year of acquisition.

2. Comment on how any ‘‘off the balance sheet’’ assets or obligations would be reported in supplementary schedules and the government-wide statements.

Capital projects funds account for construction expenditures, not for the assets that are being constructed.

The Wickliffe City Council authorizes the restoration of the city library. The project is to be funded by the issuance of bonds, a reimbursement grant from the state, and property taxes.

1. Prepare journal entries in the capital projects fund to reflect the following events and transactions:

a. The city approves (and gives accounting recognition to) the project’s budget of $9,027,000, of which $6,000,000 is to be funded by general obligation bonds, $2,500,000 from the state, and the remaining $527,000 from the general fund. The city estimates that construction costs will be $8,907,000 and bond issue costs $120,000.

b. The city issues 9 percent, 15-year bonds that have a face value of $6,000,000. The bonds are sold for $6,120,000, an amount reflecting a price of $102. The city incurs $115,000 in issue costs; hence, the net proceeds are $6,005,000.

c. The city transfers the net premium of $5,000 to its debt service fund

d. It receives the anticipated $2,500,000 from the state and transfers $527,000 from the general fund.

e. It signs an agreement with a contractor for $8,890,000.

f. It pays the contractor $8,890,000 upon completion of the project.

g. It transfers the remaining cash to the debt service fund.

2. Prepare appropriate closing entries.

Debt service funds account for resources accumulated to service debt, not the debt itself.

On July 1, a city issued, at par, $100 million in 6 percent, 20-year general obligation bonds. It established a debt service fund to account for resources set aside to pay interest and principal on the obligations. In the year that it issued the debt, the city engaged in the following transactions involving the debt service fund:

1. It estimated that it would make interest payments of $3 million and have interest earnings of $30,000 from investments. It would transfer from the general fund to the debt service fund $2.97 million to pay interest and $500,000 to provide for the payment of principal when the bonds mature. Further, as required by the bond indentures, it would transfer $1 million of the bond proceeds from the capital projects fund to the debt service fund to be held in reserve until the debt matures.

2. Upon issuing the bonds, the city transferred $1 million of the bond proceeds from the capital projects fund. It invested $977,254 of the funds in 20-year, 6 percent Treasury bonds that had a face value of $1 million.

The bond discount of $22,746 reflected an effective yield rate of 6.2 percent.

3. On December 31, the city received $30,000 interest on the Treasury bonds. This payment represented interest for six months. Correspondingly, the market value of the bonds increased by $294, reflecting the amortization of the discount.

4. On the same day the city transferred $2.97 million from the general fund to pay interest on the bonds that it had issued. It also transferred $500,000 for the eventual repayment of principal.

5. Also on December 31, it made its first interest payment of $3 million to bondholders.

a. Prepare appropriate journal entries in the debt service fund, including budgetary and closing entries.

b. The bonds issued by the city pay interest at the rate of 6 percent. The bonds in which the city invested its reserve have an effective yield of 6.2 percent. Why might the difference in rates create a potential liability for the city?