What is the accurate journal entry for debt service principal payments related to demand bonds?

The accurate journal entry for debt service principal payments related to demand bonds is represented by the choice that includes "Expenditures - debt service principal $100" and "Other financing sources - demand bond principal payment $100." This is correct because it reflects the appropriate accounting treatment for a governmental entity under the modified accrual basis, which is commonly used for fund accounting.

When a governmental entity pays off the principal amount of bonds—known as debt service—this payment is recorded as an expenditure. This is because, under the modified accrual basis, expenditures are recognized when a liability is incurred, which is the case when the principal payment is made on the bonds.

Recording the payment this way also highlights the reduction in the outstanding liability associated with the bond. By crediting "Other financing sources," it acknowledges that the payment was made from funds that came from borrowing, which is an important aspect to track in public finance.

This entry ensures that the financial statements accurately reflect the government entity's financial position, as it affects both the expenditures and the liabilities on the balance sheet. It appropriately categorizes the transaction in a fund accounting context, helping users of financial statements understand how resources are being allocated and managed in relation to the bonds.