The City of Falmouth’s fiscal year ends on December 31. On October 1, 2027, the city issued $1,000,000 of 3%, 10-year term bonds with semiannual interest payments due on April 1 and October 1 each year, beginning on April 1, 2028. What amount of expenditures should the city recognize in its debt service fund for the years 2027 and 2028?

• A. $15,000 in 2027; $15,000 in 2028.
• B. $0 in 2027; $60,000 in 2028.
• C. $0 in 2027; $30,000 in 2028.
• D. $30,000 in 2027; $0 in 2028.

Answer: (C)

Debt service expenditures in a governmental debt service fund are recognized when current financial resources are used to pay debt service, i.e., when payments are due. Here, the bonds were issued on October 1, 2027, with semiannual interest payments on April 1 and October 1, beginning April 1, 2028. The first due date is in 2028, so no debt service payments are due during the 2027 year. Therefore, expenditures in 2027 are zero.

In 2028, two interest payments are due: April 1 and October 1. The annual coupon on the 1,000,000 issue at 3% is 30,000, which is paid as 15,000 each semiannual period. Since both payments occur in 2028, the total debt service expenditures recognized for that year are 30,000. Principal payments don’t begin until the maturity of the bonds (10 years after issue), so there are no principal payments in 2028.