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 expense in the governmental activities accounts for the fiscal year ending December 31, 2027?

• A. 75,000.
• B. 45,000.
• C. 90,000.
• D. 67,500.

Answer: (A)

Interest expense in governmental activities is recognized on an accrual basis and is based on the debt outstanding during the period, not on the cash payments made. Here, bonds are issued March 2, 2027, at 3% annual interest on a $3,000,000 face amount. The semiannual interest amount is 1.5% of the face value, which equals 45,000 per six-month period.

The first interest payment occurs on September 1, 2027, covering March 2 through September 1, 2027. So for the portion of the year from March 2 to September 1, 2027, interest expense is 45,000.

For the remaining period in 2027, from September 2 to December 31, 2027, four months out of the six-month cycle accrue. That portion is 4/6 of 45,000, which is 30,000.

Total interest expense recognized for the year 2027 is 45,000 + 30,000 = 75,000.

Cash paid in 2027 is 45,000 on September 1, and the 30,000 difference is recorded as interest payable at year-end. The first principal redemption occurs March 1, 2028, so the principal does not affect 2027 interest expense.