[jessanqi]

Hi, my question is, when paid the interest, shouldn’t decrease the debt service fund instead of the general fund?
Can someone please help!!!

Thank you in advance!!!

A state had general obligation bonds outstanding that required payment of interest on July 1 and January 1 of each year. State law allowed for the general fund to make debt payments without the use of a fiscal agent. The fiscal year ended June 30. Which of the following accounts would have decreased when the state paid the interest due on July 1?

A. Interest expenditures.
B. Interest payable.
C. Interest expense.
D. Fund balance.

Explanation
The correct answer is D. The government paid interest through the general fund. The general fund would debit expenditures for the interest and credit cash. On June 30, which is the end of the current year, the government would close out the expenditures to fund balance and when the expenditures are closed out to the fund balance, it would decrease the fund balance at the end of the year.

Answer A is incorrect because interest expenditures are increased when the interest on the bonds are paid.

Answer B is incorrect because when the interest is paid the general fund will debit expenditures and credit cash, not interest payable as the modified accrual basis of accounting is used.

Answer C is incorrect because the general fund debits interest expenditure and not interest expense.

[abanhiqbal]

A debt service fund is only used when a) government mandated or b) is created to repay other governmental fund debt. Alternatively, a general fund can be used to pay principal and interest on debt. In this question it insinuates that the general fund will be used for all debt expenditures because a debt service fund is non-existent. The fiscal agent it is referring to is a debt service fund.

[jessanqi]

Thank yo so much for the help!!!! 🙂

[Author]

Replies