Choice "A" is correct. Interest expense associated with debt in an enterprise fund is accounted for on the accrual basis. Interest expense is computed as the amount of interest paid plus an accrual of any unpaid amount attributable to the accounting period presented. Interest expense for Cedar City would be computed in any number of ways as follows:Alternative #1
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|---|
| Interest paid (4/1 - 9/30: $1,000,000 × 6% × 6/12) | $ 30,000 |
| Interest accrued (10/1 - 12/31: $30,000 × 3/6) | 15,000 |
| Total interest expense | $ 45,000 |
Alternative #2
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|---|
| Annual interest ($1,000,000 × 6%) | $ 60,000 |
| Fraction of year elapsed (4/1 - 12/31) | × 9/12 |
| Total interest expense | $ 45,000 |
Choice "d" is incorrect. An enterprise fund would report interest expense on its outstanding debt.Choice "c" is incorrect. An enterprise fund would report interest expense on the accrual basis, not the cash basis. Amounts incurred rather than amounts paid would be reported consistent with commercial accounting.Choice "b" is incorrect. An enterprise fund would only record the interest expense incurred during the accounting period reported as its annual interest expense, not the full annual amount associated with the obligation.
