Listed below are various transactions affecting the City of Highland Flats General Fund for the fiscal year ending June 30, 20X4.
Transactions:
1. Near the beginning of the year, the City was sued by one of its residents claiming that the resident was injured due to a hazardous sidewalk. The resident is asking for damages of $500,000. The City expects to win the case.
2. Later in the year, the City decided to settle the aforementioned lawsuit on the advice of its legal counsel. The government settled the suit for $300,000, paying $100,000 now, and $50,000 on August 1 for each of the next 4 years. For these types of lawsuits, the City is self-insured for the first $50,000 and 100% insured for the remaining payments. Because of a cash flow issue, the city borrowed $50,000 on a 6 month, 3% note that comes due 2 months after year end. No money was received from the insurance company by year end, but the total amount due was expected by August 15.
3. The city’s employees earned $25,000 in compensated absences during the year. Of this amount, $10,000 was paid during the year, and another $7,500 is due and payable in the first 45 days of the following year. In addition, $5,000 due at the end of previous year was paid in the current year. Finally, $7,000 earned in earlier years became due and payable and was paid this year.
4. The City’s OPEB Plan’s net OPEB liability, none of which is due and payable, increased $15,000 during the year. $5,000—the approximate amount of retiree healthcare costs paid for the year—was paid to the plan.
Requirements:
1. Prepare the journal entries for the above events, including any necessary year-end adjusting entries. If a transaction requires no entry, state “No entry required” and explain why.
2. Demonstrate the effects of these transactions on the accounting equation for the General Fund and the General Capital Assets and General Long-term Liabilities accounts.
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