Use the following to answer the next four questions:
On April 1, 2014, the City of Southern Ponds issued $4,000,000 in 4% general obligation, tax supported bonds at 101 for the purpose of constructing a new police station. The premium was transferred to a debt service fund. A total of $3,990,000 was used to construct the police station, which was completed before December 31, 2014, the end of the fiscal year. The remaining funds were transferred to the debt service fund. The bonds were dated April 1, 2014, and paid interest on October 1 and April 1. The first of 20 equal annual principal payments of $200,000 is due April 1, 2015.
-What amount would be reported as debt service expenditures for 2015?

Question

Quizplus · Accepted Answer

The debt service expenditure for 2015 includes the first annual principal payment of $200,000 and six months of interest at 4% on the original $4,000,000 principal amount, or $80,000. Thus, the total debt service expenditure for 2015 is $200,000 + $80,000 = $280,000. However, because the bonds were issued at a premium, the debt service expenditure must be increased by the amount of the premium that is amortized for the year. The premium of $40,000 is amortized over the life of the bonds using the straight-line method. Thus, the annual amortization of the premium is $40,000 / 20 = $2,000. Therefore, the total debt service expenditure for 2015 is $280,000 + $2,000 = $282,000.

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