Sugar City issued $2 million of bonds to fund the construction of a new city office building. The bonds have a stated rate of interest of 5 percent and were sold at 101. Which of the following entries should be made in the capital projects fund to record this event? Debit Cash $2.02 million; Credit Bonds payable $2 million and Premium on bonds payable $0.02 million Debit Cash $2.02 million; Credit Bonds payable $2 million and Other financing sources $0.02 million Debit Cash $2.02 million; Credit Other financing sources $2.02 million Debit Cash $2.02 million; Credit Other financing sources $2 million and Revenue $0.02 million

Debit Cash $2.02 million; Credit Other financing sources

Explanation:

If Sugar City issued $2 million of bonds to fund the construction of a new city office building, and the bonds were sold at 101. The entries that should be made in the capital projects fund to record this event is: Debit Cash $2.02 million; Credit Other financing sources.

Sugar City practices governmental or public sector accounting which is a bit different from private sector accounting where the credit would have been treated differently.

Since this is a project and no encumbrance has been made against fund balance, and the cash is coming in from fresh issue of bond; the entry would be a debit to cash for the receipt and a credit to 'other financing sources'

Debit Cash $2.02 million; Credit Other financing sources $2.02 million

Explanation:

The Governmental Accounting Standards Board (GASB), is the organization responsible for establishing standards uses by state and local governments. Their accounting standards are not the same as those established by US GAAP for private businesses, and in this case, GASB Statement 34 must be followed.

The capital project fund must be debited to record net cash proceeds and any other type of related expenditures (e.g. issuing costs, fees). You should also credit Other financing sources for the full amount of the face value (always, since discount is debited as other financing uses), and in this case, since the bond was sold at a premium, the total amount should be credited. Other financing sources must be equal or higher to the bond's face value, it cannot be lower.  

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