A city government issues $1,000,000 in general obligation bonds at 101 to finance a capital project. The premium of $10,000 is required by law to be used for debt service. How should the $10,000 premium be recorded in the Capital Projects Fund?

Answer options:

Other Financing Uses - Transfer Out

Revenue

Other Financing Sources - Bond Premium

Expenditure

How to approach this question

In governmental funds, flows between funds are Interfund Transfers (Other Financing Sources/Uses). If the CPF receives the cash and sends the premium to the DSF, it is a Transfer Out.

Full Answer

A.Other Financing Uses - Transfer Out✓ Correct

When bonds are sold at a premium, the premium is typically designated for debt service. If the Capital Projects Fund receives the full proceeds, it must transfer the premium to the Debt Service Fund. This transfer is reported as 'Other Financing Uses - Transfer Out' in the Capital Projects Fund and 'Other Financing Sources - Transfer In' in the Debt Service Fund.

Common mistakes

Recording the transfer as an expenditure; recording the premium as revenue.

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