Answer:
Accrued expense means the expense which has been incurred and recorded in the financial statement during the accounting period but payment for the same has not been made.
Stub period means the period in which the interest due on the bonds is not equivalent to interest as per interest cycle
.
Explanation:
Part A)
No interest is matured during 2018 and hence, no expense will be recorded in fund statement of revenue, expenditures, and changes in fund balances for the year 2018.
Compute interest for the year ended on December 31, 2019:
By adding the interest due on $1,000,000 principal at the rate of 4% for six months and interest due on $900,000 principal at the rate of 4% for six months, the total expenditure can be calculated as follows:
Interest expenditure = ($1, 000, 000 x 4% x 0.5) + ($900,000 x 4% x 0.5)
= $20, 000 + $18, 000
= $38, 000
$20,000 represents interest on $1,000,000 for half the year and $18,000 represents interest on amount computed after deducting first maturity of $100,000, computed for half of the year.
Hence, for the year ending December 31, 2019 M will report 1$38,000 as interest expenditure in
Its fund statement of revenues, expenditure and changes in fund balance.
Part B)
Compute interest expenditure that M will report in its government-wide statement of activities for the year ended December 31, 2018 and 2019:
For the year ended December 31, 2018
Interest due on the principal of $1,000,000 at the rate of 4% for three months:
Interest expenditure = [$1,000,000 x 4% x 0.25]
= $10,000
Hence, for the year ending December 31, 2018 M will report 10,000 as interest expenditure in its wide statement of activities.
For the year ended December 31, 2019:
By adding the interest due on $1,000,000 principal at the rate of 4% for three months and interest due on $900,000 principal at the rate of 4% for six months, the total expenditure can be calculated as follows:
Interest expenditure = [($1,000,000 x 4% x 0.25) + ($900,000 x 4% x 0.5) + ($800,000 x 4% x0.25)]
= $10,000 + $18000 + $8,000
= $36,000
$900,000 is computed by reducing the first maturity of $100,000 due on April 1, 2019 and $800,000 is computed by reducing the second maturity of $100,000 due on September 30, 2019.
$10,000 is computed for the period January 1, 2019 to March 30, 2019 and $18,000 is computed for 6 months period from April 1, 2019 to September 30, 2019. $8000 is computed for the period October 01, 2019 to December 31, 2019.
Hence, for the year ending December 31, 2019 M will report 36,000 as interest expenditure in its government-wide statement of activities.
Part C)
Prepare journal entries required to adjust fund financial statements so that government-wide statements:
Date Account Title Debit Credit
Net Position 10000
Accrued interest payable 10000
Accrued interest payable 2000
Interest expense 2000
Accrued interest payable is a liability account having a credit balance, to record increase in interest payable, its account is credited. Interest payable for the period October 31 to December 31, 2018 increases the balance of accrued interest payable balance and hence, its account is credited with $10,000.
Interest expense is an expense account with debit nature balance, to record decrease in expense, its account is credited. Hence, to record the net effect of interest payable computed as the difference between balance of $10,000 outstanding at the end of 2018 and $8,000 outstanding at the end of 2019, the interest expense is credited.
