Property taxes

Property taxes are not necessarily recognized as revenue in theyear collected.

The fiscal year of Duchess County ends on December31. Property taxes are due March 31 of the year in whichthey are levied.

Prepare journal entries (excluding budgetary and closingentries) to record the following property tax-relatedtransactions in which the county engaged in 2014 and2015.

a. On January 15, 2014, the county council leviedproperty taxes of $170 million for the year endingDecember 31, 2014. Officials estimated that 1percent would be uncollectible.

b. During 2014 it collected $120 million.

c. In January and February 2015, prior to preparingits 2014 financial statements, it collected an additional$45 million in 2014 taxes. It reclassified asdelinquent the $5 million of 2014 taxes not yetcollected.

d. In January 2015, the county levied property taxesof $190 million, of which officials estimated 1.1percent would be uncollectible.

e. During the remainder of 2015 the county collected$2.5 million more in taxes relating to 2014,$160 million relating to 2015, and $1.9 million (inadvance) applicable to 2016.f. In December 2015 it wrote off $1 million of 2014taxes that it determined would be uncollectible.

2. Suppose the county were to prepare government-widestatements and account for property taxes on a fullaccrual basis of accounting rather than the modifiedaccrual basis. How would your entries differ? Explain.

Irrespective of how capital assets are acquired, they are recordeddifferently in governmental funds than in businesses.

In a recent year Ives Township acquired six police carsat a total cost of $200,000. The vehicles are expected tohave a useful life of four years.

1. Prepare the journal entries that the township wouldmake in its general fund in the year of acquisition foreach of the following assumptions:

a. It paid for the cars in cash at the time of acquisition.

b. It leased the cars and agreed to make, starting in theyear of acquisition, four equal payments of $63,095,an amount that represents the annuity required toliquidate a loan of $200,000 at 10 percent interest.The lease would satisfy the criteria necessary to beaccounted for as a capital lease.

c. It issued $200,000 in installment notes to the cardealer, agreeing to repay them in four annual paymentsof $63,095, starting in the year of acquisition.

2. Comment on how any ‘‘off the balance sheet’’ assetsor obligations would be reported in supplementaryschedules and the government-wide statements.
Capital projects funds account for construction expenditures, notfor the assets that are being constructed.

The Wickliffe City Council authorizes the restorationof the city library. The project is to be funded by theissuance of bonds, a reimbursement grant from the state,and property taxes.

1. Prepare journal entries in the capital projects fund toreflect the following events and transactions:

a. The city approves (and gives accounting recognitionto) the project’s budget of $9,027,000, of which$6,000,000 is to be funded by general obligationbonds, $2,500,000 from the state, and the remaining$527,000 from the general fund. The city estimatesthat construction costs will be $8,907,000 and bondissue costs $120,000.

b. The city issues 9 percent, 15-year bonds that havea face value of $6,000,000. The bonds are sold for$6,120,000, an amount reflecting a price of $102.The city incurs $115,000 in issue costs; hence, thenet proceeds are $6,005,000.

c. The city transfers the net premium of $5,000 to itsdebt service fund

d. It receives the anticipated $2,500,000 from thestate and transfers $527,000 from the generalfund.

e. It signs an agreement with a contractor for$8,890,000.

f. It pays the contractor $8,890,000 upon completionof the project.

g. It transfers the remaining cash to the debt servicefund.

2. Prepare appropriate closing entries.

Debt service funds account for resources accumulated to servicedebt, not the debt itself.

On July 1, a city issued, at par, $100 million in 6percent, 20-year general obligation bonds. It established adebt service fund to account for resources set aside to payinterest and principal on the obligations.In the year that it issued the debt, the city engagedin the following transactions involving the debt servicefund:

1. It estimated that it would make interest payments of$3 million and have interest earnings of $30,000 frominvestments. It would transfer from the general fundto the debt service fund $2.97 million to pay interestand $500,000 to provide for the payment of principalwhen the bonds mature. Further, as required bythe bond indentures, it would transfer $1 million ofthe bond proceeds from the capital projects fund to thedebt service fund to be held in reserve until the debtmatures.

2. Upon issuing the bonds, the city transferred $1 millionof the bond proceeds from the capital projects fund. Itinvested $977,254 of the funds in 20-year, 6 percentTreasury bonds that had a face value of $1 million.
The bond discount of $22,746 reflected an effectiveyield rate of 6.2 percent.

3. On December 31, the city received $30,000 intereston the Treasury bonds. This payment representedinterest for six months. Correspondingly, the marketvalue of the bonds increased by $294, reflecting theamortization of the discount.

4. On the same day the city transferred $2.97 millionfrom the general fund to pay interest on the bondsthat it had issued. It also transferred $500,000 for theeventual repayment of principal.

5. Also on December 31, it made its first interest paymentof $3 million to bondholders.

a. Prepare appropriate journal entries in the debt servicefund, including budgetary and closing entries.
b. The bonds issued by the city pay interest at the rateof 6 percent. The bonds in which the city investedits reserve have an effective yield of 6.2 percent.Why might the difference in rates create a potentialliability for the city?

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