The General Fund of the Town of Mashpee transfers $115,000 to the debt service fund for a $100,000 bond principal and $15,000 interest payment. Subsequent payment of the principal and interest would include:

• A. A debit to Expenditures—Bond Interest in the debt service fund.
• B. A debit to Expenditures—Bond Principal in the debt service fund.
• C. A debit to Revenue—Interest.
• D. A debit to Expenditures—Debt Service.

Answer: (A)

The key idea is that debt service payments in a debt service fund are recorded as expenditures, not as revenues. When a debt service fund actually pays the debt, it uses specific expenditure accounts to reflect the use of resources for principal and for interest.

Here, the transfer from the General Fund supplies the debt service fund with 115,000 to cover 100,000 of principal and 15,000 of interest. When the payment is made, the debt service fund records the outflows as expenditures in the appropriate debt service categories. The interest portion is recorded as a debit to Expenditures—Bond Interest, reflecting the cost of servicing the debt. The principal portion would similarly be recorded as a debit to Expenditures—Bond Principal (or another principal-specific debt service expenditure account). Revenue is not involved in this transaction, and while a general Expenditures—Debt Service account could exist, the more precise recording for the interest portion is Expenditures—Bond Interest.