The city of Superior's fiscal year ends on December 31.On July 1,2011 Superior issues $1,000,000 of 8%,10-year term bonds with semi-annual interest payments due on July 1 and January 1 each year.The General Fund transferred $100,000 to the debt service fund on July 1,2011 to pay for interest to bondholders for the year.The debt service fund invests the money at an annual rate of 10%.What is the amount of total assets in the debt service fund at the end of 2011?

Question

Quizplus · Accepted Answer

The debt service fund initially receives $100,000. The interest payment due on July 1 is $40,000 (8% of $1,000,000 for half a year), leaving $60,000. This $60,000 is invested at 10% annually, earning $3,000 by the end of the year. Therefore, the total assets in the debt service fund at the end of 2011 are $60,000 + $3,000 = $63,000. However, since the question asks for the total assets, including the initial transfer, the correct total is $100,000 + $3,000 = $105,000.

The City of Superior's Fiscal Year Ends on December 31