Question

The City of Gurnee is preparing its Government-Wide financial statements for the year. Its accountant must prepare a number of journal entries to recognize assets and liabilities previously omitted from the Fund financial statements and to recognize revenues and expenses for the year under accrual accounting that were not recognized under the current financial resources measurement focus and the modified accrual basis of accounting used to prepare the Statement of Revenues, Expenditures, and Changes in Fund Balances for its Funds. The accountant identifies the following journal entries that must be made:

Recognize Capital Assets of $120,440 as of the beginning of the year.

Record Depreciation Expense of $6,850 for the year and reverse Expenditures of $7,360 for Capital Outlays during the year.

Recognize $21,000 of Bonds Payable as of the beginning of the year.

Reverse Other Financing Sources of $8,000 and Expenditures – Debt Payments of $3,100 relating to increases and decreases in the bond liability during the year.

Reverse Deferred Revenue of $10,340 as of the beginning of the year.

Reverse $1,430 of Deferred Revenue recognized during the year.

Recognize Compensated Absences of $1,980 as of the beginning of the year and an increase in that liability of $230 during the year.

Recognize $140 of Accrued Interest Payable as of the beginning of the year and an increase in that liability of $260 during the year.

Recognize a liability of $4,210 relating to the City’s landfill as of the beginning of the year. The estimate for this liability did not change during the year.

Required: Prepare journal entries for each of the items above.

Answer 1

Journal entry for recording unrecognised capital assets
Capital Assets A/C    Dr.   $ 120,440
To Reserves A/C $ 120,440
(Being unrealised asset recorded)
Explanation- We will debit capital asset as asset is real account and golden rule of real account is Debit what comes in & credit what goes out" Recognising an unrealised capital asset is our income that we did not recognize in past. Hence Reserves have been credited.
Journal entry for recording unrecognised capital assets
Depreciation A/C    Dr.   $ 6,580
To Capital Asset A/C $ 6,580
(Being depreciation charged)
Explanation- We will debit depreciation expense as it is nominal account and golden rule of nominal account is "Debit all expenses and losses & credit all incomes & gains" Recognising depreciation will reduce the carrying amount of asset. Hence capital asset is credited.
Journal entry for recording unrecognised capital assets
Capital Assets A/C    Dr.   $ 7,360
To Misc Income/ Reserves A/C $ 7,360
(Being expense for capital outlays reversed)
Explanation- We will debit capital asset as asset is real account and golden rule of real account is Debit what comes in & credit what goes out" Reversing capital outlays will indirectly increase our asset value and such reversal of previous expense should be credited to the account debited earlier or else Misc Income or else directly to reserves.
Journal entry for recording bonds
Asset A/C    Dr.   $ 21,000
To Bonds A/C $ 21,000
(Being bonds recognised)
Explanation- We will credit bonds as it is a liablility and debit the asset that we will receive against the issue of bonds.
Journal entry for reversing other financing sources
Other Financing Sources A/C $ 8,000
To Asset/ Reserves A/C $ 8,000
(Being other financing sources- a liability now reversed)
Explanation- We will debit the liablility and credit the asset that we will receive give against the wave off of liability. If no aset is given, it will be entirely our income and hence a gain will be booked in the books.
Journal entry for reversing other financing sources
Bonds A/C $ 3,100
To Debt Expense A/C $ 3,100
(Being debt expense now reversed)
Explanation- We will debit the liablility as reversal of expense will cause the earlier inflated liability to set off
Journal entry for reversal of deferred revenue
Deferred Revenue A/C $ 10,340
To Income A/C $ 10,340
(Being deferred revenue now reversed)
Explanation- We will credit the entire income now as nothing is to be deferred now. The liability of income to be deferred will be eventually eliminated and hence it is debited.