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The City of Middleton sells a $2,000,000, 3%, 16-year general obligation bond issue on January 2, 2016 at par.

The bond pays interest semi-annually on July 1 and January 2, with the first principal payment scheduled for January 2, 2017. A city hall annex must be constructed with the bond proceeds. The bond premium must be used to pay interest on the debt.

a. Budgets are adjusted to account for the sale of the bond. The debt service fund budget should be adjusted to accommodate the new debt issues. If the debt service fund does not have sufficient resources to pay expenditures, the needed funds will be provided by the General Fund.
b. On February 1, 2016, $1,000,000 of the cash from the sale of the bonds is invested for one year at a rate of 1.26%. Earnings on the investment are available for construction of the city hall annex.
c. July 1, 2016 the first interest payment is due.
d. December 31, 2016 adjusting entries are prepared.

For the five related transactions provided, prepare all necessary journal entries for the affected funds and at the governmental activities level. Clearly indicate the fund journal or the government-wide journal in which the entry is being recorded.

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Marcus M. | Business ExpertBusiness Expert
So... I started answering this question but there are three things that stopped me: 
1.  It just took forever to type out and explain why I was doing one step to the next
2.  Even if I explained it, I don't know how much you understand already, but hopefully this is a moot point since this question is 6 months old
3.  There is missing information about the investment, so I don't know how often the fund is receiving payments, which makes a difference on whether there will be any other transaction for the fund journal prior to year-end closing. If the investment's 1.26% return is supposed to be paid in full on Feb 1 of next year, then there is no other transaction in the fund and adjusting entries will be required for the 11 months. And there are a whole host of real world issues this missing information opens up that makes accounting for it impossible without the information. I would simply have to make assumptions to fill in the gap.