Chapter

6
Accounting for Capital
Projects and Debt
Services
 Capital Projects Funds

Two types of capital projects:

 General (public benefit)
 Examples: public buildings; roads, highways and
bridges; park improvements; etc.
 Special assessment (private benefit)
 Examples: street improvements, curbs,
sidewalks, street lighting, sewage, etc.
Deemed to benefit citizens in a
specified benefit district.
 Capital Projects Funds (Cont’d)

Characteristics of capital projects:

 Involves long-lived assets (e.g, buildings, roads
and bridges, etc.)
 Usually involves a construction project
 Usually requires long-range planning and

extensive financing
 Have a project-life focus, rather than a year-to-

year
 Capital Projects Funds (Cont’d)

Reasons for maintaining separate funds

 Often funds are legally restricted
 Commonly financed with bonds not taxes

 Accounted for on the modified accrual basis of

accounting
 Budgets are typically project based not fiscal
based
 Reminder: Long term bonds not recorded in the
capital projects fund
 Most bonds are issued at either a premium or a
discount ! Bond accounting never goes away!!!!!
 Capital Projects Bonds

 Premium Bonds
 All premiums are transferred to the debt services
fund

 Discount Bonds
 Amount of discount must either:
 Be transferred in from the general fund
 The project must reduce its costs by the amount of

the discount
See examples on page 206-209
 Illustrative Transactions for
Capital Projects Funds

Project authorization/preconstruction phase

 Usually planned for in a multiyear capital
improvement plan
 Usually requires long-term financing

 Voter approval required for general obligation (tax-

supported) bonds or special taxes for capital projects
(memo entry only for bond/tax authorization)
 Apply for and obtain grants

 Obtain other forms of financing

CPF - Illustrative Transactions (Cont’d)

Assume approval is obtained for a federal grant as partial

funding for a city’s office building project. Upon
approval the following journal entry would be made:
Capital Projects Fund: Dr. Cr.
Due from other Governmental Units 100,000
Revenues 100,000
Governmental Activities:
Due from Other Governmental Units 100,000
Program Revenues
100,000
CPF - Illustrative Transactions (Cont’d)

It may also be necessary to obtain interim financing,

particularly to complete architectural and
engineering design. Assume for the office building
project, $50,000 was borrowed from the General
Fund, to be repaid later from bond proceeds.
Capital Projects Fund: Dr.Cr.
Cash 50,000
Due to General Fund 50,000
Governmental Activities:
No entry needed.
CPF - Illustrative Transactions (Cont’d)

A contract was let in the amount of $50,000 with an

architectural firm to complete the architectural design
for the new city office building. The following entry
would be required in the capital projects fund.

Capital Projects Fund: Dr.

Cr.
Encumbrances 50,000
Reserve for Encumbrances
50,000

Governmental Activities:
No entry needed.
 CPF - Illustrative Transactions (Cont’d)

The architectural firm for which an encumbrance of

$50,000 had been recorded (see preceding slide),
tendered its final billing in the amount of $48,000.
The city immediately paid the amount due.
Capital Projects Fund: Dr. Cr.
Construction Expenditures 48,000
Reserve for Encumbrances 50,000
Cash 48,000
Encumbrances
50,000
Governmental Activities:
Construction Work in Progress 48,000
Cash 48,000
 CPF - Illustrative Transactions (Cont’d)

Assume that bonds with a face value of $5,000,000 were issued

at 101 to finance the project.
Capital Projects Fund: Dr. Cr.
Cash 5,050,000
Other Financing Sources- Bonds Proceeds 5,050,000
Other Financing Uses – Transfer of Premium 50,000
Due to Debt Service Fund 50,000
Governmental Activities:
Cash 5,050,000
Bonds Payable 5,000,000
Premium on Bonds Payable 50,000
 CPF - Illustrative Transactions (Cont’d)

Project implementation/construction phase. The amount due

from the federal government for the previously recorded
capital grant was received in full
Capital Projects Fund: Dr. Cr.
Cash 100,000
Due from Other Governmental Units 100,000

Governmental Activities:
Cash 100,000
Due from Other Governmental Units 100,000
CPF - Illustrative Transactions (Cont’d)

The $50,000 due to the General Fund was repaid and

$50,000 transferred to the debt service fund

Capital Projects Fund: Dr.

Cr.
Due to General Fund 50,000
Due to Debt Service Fund 50,000
Cash 100,000

Governmental Activities:
No entry needed.
 CPF - Illustrative Transactions (Cont’d)

A contract was signed with Capital Construction

Company in the amount of $5,050,000.

Capital Projects Fund: Dr.

Cr.
Encumbrances 5,050,000
Reserve for Encumbrances 5,050,000

Governmental Activities:
No entry needed.
CPF - Illustrative Transactions (Cont’d)

A partial billing of $3,000,000 was received from

Capital Construction Company.

Capital Projects Fund: Dr. Cr.

Construction Expenditures 3,000,000
Reserve for encumbrances 3,000,000
Contracts payable 3,000,000
Encumbrances 3,000,000

Governmental Activities:
Construction Work in Progress 3,000,000
Contracts Payable 3,000,000
CPF - Illustrative Transactions (Cont’d)

Capital Construction Company completed the city

office building project and tendered its final bill in the
amount of $2,000,000.

Capital Projects Fund: Dr.Cr.

Construction Expenditures 2,000,000
Reserve for Encumbrances 2,050,000
Contracts Payable 2,000,000
Encumbrances 2,050,000

Governmental Activities:
Construction Work in Progress 2,000,000
Contracts Payable 2,000,000
CPF - Illustrative Transactions (Cont’d)

The project being complete the City closed all temporary

accounts and transferred the residual equity to the debt
service fund.

Capital Projects Fund: Dr. Cr.

Other Financing sources -Bond Proceeds 5,050,000
Revenues 100,000
Construction Expenditures 5,048,000
Fund Balance 52,000
Other Financing Uses – Bond Proceeds 50,000
 CPF - Illustrative Transactions (Cont’d)

To close the accounts at the government-wide level

Governmental Activities: Dr. Cr.

Program Revenues-Capital Grant and
Contributions-General Government 100,000
Net Assets-Invested in Capital Assets,
Net of Related Debt 100,000

Building 5,048,000
Construction Work in Progress
5,048,000

NOTE: The premium on the bond payable should be amortized at the government-wide level,
using the effective interest rate method (not shown here).
 General Capital Assets-
Required Financial Statements
For the illustrative transaction:
 The building is included in the governmental
activities Statement of Net Assets as a capital
asset, net of accumulated depreciation.
 The long-term liabilities are reported in the
governmental activities column of the Statement of
Net Assets.
 Depreciation expense is reported at the
government-wide level on the Statement of
Activities as a direct expense of the General
Government function.
 Special Assessments

What is a special Assessment?

 When the government constructs projects or
provides services that primarily benefit a
particular group of property owners rather than
the citizens at large.
 Citizens of that area must approve by voting (simple
majority vote required).
 Must pay the capital and interest portion

 Example – St. Joseph City water being provided to

farms & residents in Royalton Township
 Government Obligations for Special
Assessments
Government must account for this debt as its own as
long as it is obligated in some manner to assume
responsibility for the debt even if the owner
defaults!!!

 Governments are obligated unless:

 Prohibited by constitution, charter, contract, or
statute
 Publicly indicates that it will not honor the debt in
the event of default
 Government Obligations for Special
Assessments
If the government is not obligated for the debt then
do the following:

 Report debt in Agency fund

 Report construction in Capital improvements fund
 Report capital assets in the Government-wide statements
 Disclose in footnote amount of debt & governments role as
tax collection agency
 DO NOT REPORT DEBT IN LONG TERM
OBLIGATIONS OF THE GOVERNMENT-WIDE
STATEMENTS
 Miscellaneous Topic: Arbitrage

Arbitrage defined:
The issuance of debt at relatively low, tax-
exempt rates of interest and then investing the
proceeds in a taxable security yielding a higher
return!

Arbitrage undermines the federal governments

rational for exempting state and local debt from
federal taxation! Today Arbitrage earnings are
usually remitted back to the federal government!
Miscellaneous Topic: Debt Refunding

Debt Refunding:
Governments don’t buy their bonds back on the
open market.

Usually only pay off bonds early when bonds

have a call option

When bonds are paid off early, any gain or loss

on the bonds is amortized over the life of the new
bonds
Miscellaneous Topic: Debt Refunding

 Generally no economic gains for debt refunding

 Accounting gains and losses will probably need

to be recognized
 Recognize over the life of the new debt or can
also recognize over the life of the old debt.
 This gain is recognized at the governmental
activities level not in the funds