Question

COMPANY ABC engaged in the following transactions:

It issued $20 million in bonds to purchase a new municipal office building. The proceeds were recorded in a capital projects fund.

It acquired the building for $20 million.

It recognized, as appropriate, $300,000 of depreciation on municipal vehicles.

It transferred $2,060,000 from the general fund to a debt service fund.

It paid $60,000 in interest on long-term debt and repaid $2 million of principal on the same long-term debt.

It sold for $5 million village land that had been acquired for $4 million. The proceeds were recorded in the general fund.

REQUIRED:

Answer the following question based on the transactions outlined:

1. For each of the transactions, prepare journal entries to record them in appropriate governmental funds (which are accounted for on a modified accrual basis).

2. Prepare journal entries to reflect how the transactions would be reflected in government-wide statements (which are prepared on a full accrual basis).

3. How can governments justify preparing two sets of financial statements, each on a different basis?

Answer 1

Part 1)

The journal entries are prepared as below:

Event	Account Titles	Debit	Credit
	Capital Projects Fund
1)	Cash	$20,000,000
	Proceeds from Borrowing		$20,000,000
	Capital Projects Fund
2)	Expenditure (Building)	$20,000,000
	Cash		$20,000,000
	General Fund
3)	No Entry Required
	General Fund
4)	Operating Transfer-Out to Debt Service Fund	$2,060,000
	Cash		$2,060,000
	Debt Service Fund
	Cash	$2,060,000
	Operating Transfer-In from General Fund		$2,060,000
	Debt Service Fund
5)	Expenditure - Principal	$2,000,000
	Expenditure - Interest	$60,000
	Cash		$2,060,000
	General Fund
6)	Cash	$5,000,000
	Proceeds from Sale of Land		$5,000,000

_____

Part 2)

The journal entries are given as follows:

Event	Account Titles	Debit	Credit
1)	Cash	$20,000,000
	Bonds Payable		$20,000,000
2)	Building	$20,000,000
	Cash		$20,000,000
3)	Depreciation Expense	$300,000
	Accumulated Depreciation - Vehicles		$300,000
4)	No Entry Required
5)	Bonds Payable	$2,000,000
	Bond Interest Expense	$60,000
	Cash		$2,060,000
6)	Cash	$5,000,000
	Land		$4,000,000
	Gain on Sale of Land (5,000,000 - 4,000,000)		$1,000,000

_____

Part 3)

The government wide statements are prepared to indicate the functioning of government as a whole. Interperiod equity is more appropriately measured with the use of government wide statements prepared on full accrual basis. On the other hand, the fund statements use different forms/types of funds to record the activities of the government, thereby, treating the government as a collection of different funds. Such statements may be prepared either on modified or on full accural basis with the objective of providing information on various budgetary requirements/compliances.