On March 2, 2027, 20-year, 3 percent, general obligation serial bonds were issued at the face amount of $3,000,000. Interest of 3 percent per annum is due semiannually on March 1 and September 1. The first payment of $150,000 for redemption of principal is due on March 1, 2028. Fiscal year-end occurs on December 31. What is the interest expenditure in the governmental funds for the fiscal year ending December 31, 2027?

• A. $90,000
• B. $0
• C. $45,000
• D. $135,000

Answer: (C)

In governmental funds, use the modified accrual basis: expenditures, including debt service interest, are recognized when the liability is due and available to be paid within the period.

These bonds were issued March 2, 2027. Semiannual interest is paid on March 1 and September 1. The first interest due after issuance within the 2027 fiscal year is on September 1, 2027. The amount for six months at 3% on a $3,000,000 face amount is 3,000,000 × 0.03 × 0.5 = 45,000. The March 1, 2028 payment is outside the 2027 year, and the first principal payment is March 1, 2028 (not within 2027), so there is no principal expenditure recognized in 2027.

Therefore, the interest expenditure in the governmental funds for the year ending December 31, 2027 is 45,000.