UNIT 4: CAPITAL PROJECT FUNDS

4.1. INTRODUCTION
Capital Projects Funds (CPF) account for financial resources to be used for the acquisition or
construction of major capital facilities (other than those financed by proprietary funds & trust
funds). Examples of major capital facilities are Administration Buildings, Civic Centers and
libraries etc. these funds do not account for the acquisition of smaller fixed assets, such as
vehicles, machinery & office equipment which are normally budgeted for & recorded as
expenditures in the general fund. it is also possible that a construction project could simply
have a subsidiary ledger within the General Fund, rather than its own distinct fund. the
existence of the Capital projects fund, as any other fund will depend on the legal requirements
and the need for good financial management.

CPF do not account for the fixed assets acquired only for the construction of the fixed assets.
It exists only for the period of acquisition or construction of the fixed assets. After the
acquisition or construction is completed, the Capital Projects Fund will be abolished. The
Fixed Assets constructed are accounted for in the GFAAG. It does not also account for the
repayment & servicing of any debt obligations issued to raise money to finance the
acquisition of capital facilities. Such debt & debt related servicing activities are accounted for
in the General Long Term Debt Account Group (GLTDAG) & Debt service fund (DSF).
Since the purpose of capital projects fund is to account for the acquisition and deposition of
revenues for specific purpose, it contains balance sheet accounts for only liquid assets and for
the liabilities to be liquidated by those assets.

Virtually all-governmental buildings are constructed by the governmental unit & are mostly
financed by bond offerings. In commercial accounting, all the activities (the construction of
the building, the subsequent capitalization & accounting for the building & the servicing of
the debt incurred to finance the construction of the building is accounted using one general
ledger.

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Example
* Issuance of bonds for Br 500,000
1. Capital Projects Fund (CPF) - receives cash from bond offerings & uses cash to
construct fixed assets.
2. General Long Term Debt Account Group(GLTDAG)
Group(GLTDAG) - accounts General Long Term
Debt, at the maturity date, the liability is transferred to a DSF.

CPF
Cash 500,000
O.F.S- Bond proceeds 500,000
( to record proceeds from issuance of bond for construction )
3. GFAAG – accounts for fixed assets during & after construction.
* Construct new building
C.P.F
Expenditures 500,000
Cash 500,000
(To record cost of constructed building)
GFAAG
Building 500,000
Investment in F.A –CPF 500,000
( to record acquired building from construction )

4. D.S.F.
D.S.F. – services GLTD, making both interest & principal payments using money
obtained from tax levies on operating transfers from General Fund.
* Bond matures
GLTDAG
Bonds Payable. 500,000
Amt To Be Provided 500,000
( To record matured bond )
DSF
Expenditures 500,000
Bonds payable 500,000
( to record payment for bond )

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 DSF
Bonds payable 500,000
Cash 500,000
( To record payment of Matured bond )

4.2. Establishment & operation

C.P.F are usually established on a project-by-project basis, because legal requirements may
vary from one project to another. So the existence of the C.P.F as any other fund will depend
on the legal requirement & the need for good financial management.

The focus of the CPF is the entire life of the project. It is by definition an expendable fund,
and all its resources are expected to be used up. However, CPFs do not have the same year-
by-year focus as the G.F because of the multi-year focus of CPFs, some accountants prefer
not to close a CPF annually, but others do. Whether or not to close the CPF annually will
depend on the unique factors of each case & will be strongly influenced by the requirement of
the financing source.

The decision to use budgetary accounts will also depend on the features & financing source of
the particular CPF. It will be based on the particular project & be strongly influenced by the
requirement of the financing source. The decision to use or not to use budgetary accounts is
influenced by factors such as.
- The number of projects in the C.P.F
- The amount of detail in the C.P.F budget
- The use of an annual budget (rather than a project life budget) in the CPF

4.3. Financing a capital project

Capital projects project obviously need large amount of financing. Typically source of
financing include;
- Long term debit issue proceeds

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 - Grants from other governmental units
- Transfers from other funds with in the governmental entity
- Interest income from temporary investments.
- Gifts from individuals or foundations
- Special taxes or;
A combination of more than one of those

Intergovernmental grants, gifts, special taxes & investment interests are considered as
Revenues, whereas Inter Fund Transfers & Long Term Debt issue proceeds are not revenues
and are presented as Other Financing Sources and are presented that way on the statement of
changes.

Whether to have a separate capital fund for each project or to account for all capital fund for
each project or to account for all capital projects in one fund depends in part on what type of
financing involved. Different bond issues & different inter governmental transfers might well
have different legal requirements & each might require a separate C.P.F. on the other hand if
one bond issue is used to finance several projects, a single fund may be both permissible
advisable.
Accounting for Capital Projects Fund

The following illustration will show how the construction and related activities are accounted
for in a capital projects fund.
Illustration
The town of X wants to construct a new library on the site owned by the town. The
construction is expected to cost 50,000,000. It is expected to be completed within two years
on June 30 year 7. In a special meeting held on July 2 year 5, the members of the town
council approved a 30,000,000 issue of General Obligation Bonds maturing in 20 years. The
proceeds of this sale will be used to help finance the construction of the new library. The
remaining 20,000,000 will be financed by an Irrevocable State Grant that has been awarded.

The following transactions occurred during the fiscal year ended June 30 year 6.

1. The General fund loaned 500,000 to the library Capital Projects Fund for defraying
Engineering and other preliminary expenses by receiving a note which is later to be

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 Settled from the bond issue proceeds.

Cash 500,000
Bond Anticipation Notes Payable 500,000

2. Out of the Irrevocable grant of 20,000,000, the state contributed 5,000,000 and the
Remaining is deemed to be susceptible to accrual

Cash 5,000,000
Due from State Grant 15,000,000
Revenue 20,000,000

3. Preliminary engineering and planning costs of 320,000 were paid to the contractor.
There had been no encumbrances for this cost.

Construction Expenditure 320,000

Cash 320,000
4. The Bonds were sold at 101 the bond indenture agreement requires that any premium
to be set aside in the related Debt Service Fund.

Cash 30,300,000
OFS-Bond proceeds 30,000,000
Due to DSF 300,000

5. The town of X library CPF invested its 10,000,000 bond proceeds on the Federal
Government treasury bills.

Short Term Investment-Treasury Bills 10,000,000

Cash 10,000,000
6. A construction contract for 46,000,000 is authorized and signed.

Encumbrances 46,000,000
Fund Balance Reserved for Encumbrances 46,000,000
7. Orders were placed for materials estimated to cost 550,000.

Encumbrances 550,000

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 Fund Balance Reserved for Encumbrances 550,000
8. The materials previously ordered (Transaction 7) were received at a cost of 510,000.

a) Fund Balance reserved for Encumbrance 550,000

Encumbrance 550,000
b) Construction exp 510,000
Constr. Payable 510.00
9. In addition to the construction contract of transaction 6; 3,900,000 was incurred for
the services of the architects and engineers; of this amount 3,100,000 was paid.

Encumbrances 3,900,000
Fund Balance Reserved for Encumbrances 3,900,000

Fund Balance Reserved for Encumbrance 3,900,000

Encumbrance 3,900,000

Construction Expenditure 3, 100,000

Construction Payable 3, 100,000

Construction Payable 3,100,000

Cash 3,100,000
10. Received cash of 1,000,000 from the General fund as an operating transfer.

Cash 1,000,000
OFS- Operating transfers in 1,000,000

11. A partial payment of 10,000,000 was received from the state irrevocable Grants and
the General Fund loan was repaid with interest amounting to 10,000.

Cash 10,000,000
Due from State Grant 10,000,000

Bond Anticipation Notes Payable 500,000

Interest Expenditure 10,000
Cash 510,000

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12. When the project was approximately half finished, the contractor submitted billing for a
payment of 12,000,000.
Fund Balance Reserved for Encumbrance 12,000,000
Encumbrance 12,000,000

Construction Expéditeur 12,000,000

Construction Payable 12,000,000
13. The contractors initial claim was fully verified and paid.
Construction Payable 12,000,000
Cash 12,000,000

Town of X Library Capital Projects fund

Trial Balance
June 30, Year 6

Account Title Debit Credit

Cash 20,870,000
Short term investment-Treasury Bills 10,000,000
Due from State Grant 5,000,000
Construction Payable 1,310,000
Due to DSF 300,000
Fund Balance Reserved For Encumbrance 32,270,000
Unreserved and Undesignated Fund Balance -
Revenues 20,000,000
OFS- Bond Proceeds 30,000,000
OFS- Operating transfers 1,000,000
Construction Expenditures 16,730,000
Interset Expenditures 10,000
Encumbrances 32,270,000 .
Total 84,880,000 84,880,000

Town of X library Capital Projects Fund

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 Statement of Revenues, Expenditures and Changes in Fund Balance
For the year ended June 30, year 6
Revenues:
Irrevocable State Grant 20,000,000
Expenditures:
Construction Expenditures 16,730,000
Interest Expenditure 10,000 16,740,000
Excess of Revenue over Expenditure 3,260,000
Other Financing Sources(Uses)
OFS- Bond Issue Proceeds 30,000,000
OFS- Operating transfers in 1,000,000 31,000,000
Excess of Revenue and OFS over Expenditure 34,260,000
Add:
Add: Fund Balance - July 1, Year 5 -
Fund Balance - June 30, Year 6 34,260,000

Town of X Library Capital Projects Fund

Balance Sheet
June 30, year 6
Assets
Cash 20,870,000
Short Term Investment- Treasury Bills 10,000,000
Due from State Grant 5,000,000
Total Asset 35,870,000
Liabilities and Fund Balance
Construction Payable 1,310,000
Due to DSF 300,000
Fund Balance:
Reserved for Encumbrance 32,270,000
Unreserved and Undesignated 260,000
Total Liabilities and Fund Balance 35,870,000
________________________________________________________________________
Closing Entries

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 Revenues 20,000,000
OFS- Bond Proceeds 30,000,000
OFS- Operating Transfer 1,000,000
Construction Expenditure 16,730,000
Interest Expenditure 10,000
Unreserved and undesignated-
Fund Balance 14,260,000

Unreserved and Undesignated-

Fund Balance 32,270,000
Encumbrances 32,270,000
________________________________________________________________________

The following transactions related to the town of X Library Capital Projects Fund occurred
during the fiscal beginning July 1 Year 6 and ending June 30, Year 7.
7.

14. Received 10,500,000 at maturity date of the Federal Government Treasury Bills.
Cash 10,500,000
Short Term Investment-Treasury Bills 10,000,000
Revenues 500,000

15. The Library CPF transferred the premium on the Bond to the DSF
Due to DSF 300,000
Cash 300,000

16. A progress billing of 32,270,000 was received from the contractors for the final work
done on the project. as per the term of the contract, the town withhold 10% of the
billing.
a) If Encumbrances are Re-established at the beginning of the fiscal period (July 1,Year 6)
-Entry on July 1, year 6 would be;

Encumbrances 32,270,000
Unreserved and Undesignated-

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 Fund Balance 32,270,000

- Then, the entry for the current transaction would be

Construction Expenditure 32,270,000

Construction Payable 29,043,000
Construction Payable-
Retained Percentage 3,227,000

b) If there is no re-establishment of encumbrance (this is not very common in CPF)

On July 1, year 6;

Fund Balance Reserved for Encumbrance 32,270,000

Construction Payable 29,043,000
Construction Payable-
Retained Percentage 3,227,000

17. All outstanding liabilities of the town of X Library CPF are paid except remaining
balance.

Construction Payable 30,353,000

Cash 30,353,000
18. Received the remaining balance from the Irrevocable State Grant.

Cash 5,000,000
Due from State Grant 5,000,000
________________________________________________________________________

Town of X Library Capital Projects Fund

Statement of Revenues, Expenditures and Change in Fund Balance
For the year ended June 30, Year 7.
Revenues 500,000
Add: Unreserved and Undesignated Fund Balance July 1, Year 6 1,990,000

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Fund Balance June 30, year 7 2,490,000

Town of X Library Capital Projects Fund

Balance Sheet
June 30, Year 7

Assets
Cash 5,717,000
Liabilities and Fund Balance
Construction Payable- Retained Percentage 3,227,000
Unreserved and Undesignated Fund Balance 2,490,000
Total Liabilities and Fund Balance 5,717,000
________________________________________________________________________
Closing Entry
Revenue 500,000
Unreserved and Undesignated-
Fund Balance 500,000
________________________________________________________________________
The following transactions and events take place after the construction has finished

19. The Retained percentage balance has been paid to the contractor because the work
has been performed as per the term of the contract.

Construction Payable- 3,227,000

Retained Percentage
Cash 3,227,000

20. The town council decides to transfer the residual fund balance of the Library CPF to
the DSF.

Residual Equity transfer out 2,490,000

Cash 2,490,000
================================================================
Closing Fund Balance

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 Unreserved and Undesignated- 2,490,000
Fund Balance
Residual Equity transfer out 2,490,000
================================================================

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