Question

The City of Holbrook transferred $100,000 from the General Fund to the Debt Service Fund for payment of interest. The appropriate entry in the General Fund to record this transfer would be

		Debit Expenditures $100,000; Credit Cash $100,000.
		Debit Other Financing Uses Transfer Out $100,000; Credit Cash $100,000.
		Debit Fund Balance Transfer Out $100,000; Credit Cash $100,000.
		Debit Other Financing Sources Transfer In $100,000; Credit Cash $100,000.

Answer 1

Solution :

As per the information given in the question

An amount of $ 100,000 was transferred from General fund to Debt Service Fund for Payment of Interest

Payment of Interest entails outflow of cash i.e.,

Cash being a real account, the following principle for real accounts shall apply to it

Debit what comes in ; Credit What goes out.

Since there is an outflow of cash i.e., Cash is going out we shall credit the cash account with $ 100,000

Interest is paid for the use of Financial resources. Thus the account that it will be affected will be the “ Other Financing Sources “

Payment of Interest is an expense and comes under the category of Nominal accounts

The following principle for Nominal accounts shall apply to it         

Debit all expenses and Losses ; Credit all incomes and gains

Since Payment of Interest is an expense, we will Debit the same.

Thus the correct accounting Entry shall be

Debit Other Financing Sources Transfer In $100,000; Credit Cash $100,000.

The solution is Option 4 :

The other options are incorrect due to the following reasons :

a.Debit Expenditures $100,000; Credit Cash $100,000.

The accounting being debited in the above entry is the Expenditures account which is a General account. Whereas the Interest Payment is a specific expense associated with the cost of availing Finance from various Financing sources. Thus the correct account that should be debited is the Other Financing Sources Transfer a/c.

b.Debit Other Financing Uses Transfer Out $100,000; Credit Cash $100,000

The accounting being debited in the above entry is the Financing uses transfer. Whereas the Interest Payment is a specific expense associated with associated with the cost of availing Finance from various Financing sources. Interest payment is not a use of Finance. It is cost of availing a source of finance. Thus the correct account that should be debited is the Other Financing Sources Transfer a/c.

c.Debit Fund Balance Transfer Out $100,000; Credit Cash $100,000.

Payment of Interest is specific expense and not a Fund balance transfer. Thus it should be recorded by debiting the Other Financing Uses Transfer Out.