On April 1, 2009, a local government issued bonds in the amount of $2,000,000. The bonds were issued at par and carried an interest rate of 6%, payable October 1 and April 1. When moving from the change in fund balances in the governmental funds Statement of Revenues, Expenditures and Changes in Fund Balances to the change in net Assets in the governmental funds column of the Statement of Activities, both for the fiscal year ended June 30, 2009, the effect for the interest accrual only would be:

Question

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The interest expense to be recognized for the fiscal year ended June 30, 2009, would be calculated as follows:
($2,000,000 x 6%)/12 months = $100,000 semi-annual interest
Since the bonds were issued on April 1, 2009, the government would need to accrue 3 months' worth of interest (April 1 to June 30, 2009) at year-end. That would be $100,000 x 3/6 = $50,000.

When moving from the change in fund balances to the change in net assets, the interest accrual would be added back to the change in fund balances since it represents an expense that has been recognized but not yet paid in cash. Therefore, the effect on the change in net assets would be an increase of $50,000.

Since the bonds were issued at par, there would be no gain or loss on issuance to be recognized in the governmental funds statement of revenues, expenditures, and changes in fund balances. Therefore, the effect on the change in net assets would be solely due to the interest accrual, resulting in a decrease of $30,000 (since interest expense reduces net assets).

On April 1, 2009, a Local Government Issued Bonds in the Amount