Chapter 5
Capital Project, Debt Service, and Permanent Funds
- Capital Projects Fund – used to account for acquisition or
construction of major capital facilities (other than those financed by
proprietary or trust funds), e.g., construction of a road, bridge, or
building. Acquisition of a small asset, like an auto or furniture, is
accounted for through the general fund or special revenue fund
Begin with capital budget, then financing and contracts are
dealt with, e.g., issue bonds, solicit grants, seek bids from contractors, and let out the contracts to low bidder
Invest excess funds
Payments are made to contractors and others as work is
done (a retain percentage is kept for major contractors)
At completion, any remaining funds are transferred out
- Control of Activities
Budgetary entries are not required for Capital Projects funds, though they are permissible; the needed information will be provided. An encumbrance systemisrequired.
Focus is on spendable resources, so does not have fixed
assets or depreciation and uses modified accrual basis of
accounting
- Information concerning expected sources of revenue and expenditures in the coming year is:
A $9,000,000 receivable is due from another governmental
unit, i.e., the state government, $2,000,000 is expected from the issuance of a bond, there is a $300,000 expected transfer in from another fund, and appropriations are approved for $10,000,000.
- Set up receivables from other funds or governmental units,
e.g., may be receiving transfers in, issue bonds, or may receive a
grant from the state or federal government. As cash is collected, reduce the receivable.
Due from State Government9,000,000
Due from Special Revenue Fund 300,000
Revenues Control9,000,000
Other Financing Sources-Transfers In 300,000
(To record receivables from the state and transfer in from
other fund.)
Cash9,000,000
Due from State Government9,000,000
(To record receipt of receivable from state.)
Cash 300,000
Due from Special Revenue Fund300,000
(To record transfer in from other fund.)
- Will receive cash from bond issues during the year. When there
is a premium on bond issuance, e.g., issue it for $2,010,000, then
the additional $10,000 would go to the debt service bond to pay on
the bond.
Cash2,010,000
Other Fin. Sources -Proceeds
from Bond 2,000,000
Other Fin. Sources-Premium 10,000
(To record the issuance of bonds.)
Other Fin. Uses-Transfers Out 10,000
Cash10,000
(To transfer premium to Debt Service Fund.)
- Capital projects funds may hold significant monies for long
periods of time before they use it. Excess cash is usually invested
in stocks and bonds, upon which interest and dividends will be
received. In addition, at the end of the year interest and dividends
that have been earned but not yet paid are accrued and the
portfolio of investments is adjusted to fair value. Examples of
these entries are shown in the discussion of the Permanent Fund.
- Use encumbrance system for supplies, materials, and minor
equipment and labor for the project. Note that the credit is
to Budgetary Fund Balance-Resv for Encumbrances.
Encumbrance Control350,000
Bud Fund Bal - Resv for Encumb 350,000
(To record encumbrance for supplies, materials, items of
minor equipment and labor.)
Bud Fund Bal - Resv for Encumb350,000
Encumbrance Control 350,000
(To record receipt of supplies and other items ordered.)
Construction Expenditure Control353,000
Vouchers Payable 353,000
(To record liability for them.)
Voucher payable353,000
Cash 353,000
(To record payment for them.)
- Some miscellaneous items, however, e.g., special engineering and
preliminary costs may not have to be encumbered. These items
are just expenditured as they come in.
Construction Expenditure Control100,000
Cash100,000
(To record purchase of miscellaneous costs of project.)
- The main contract for the construction of the project is dealt
with a little differently than these two. Encumbrance is set up as
contracts are let out to contractors. When work is completed and
bills are submitted, reverse Encumbrance entry out and record as
an expenditure and payable, less a retainage percentage, and
subsequently pay the contractor.
Encumbrance Control9,650,000
Bud Fund Bal Resv for Encumb 9,650,000
(To record construction contract encumbrance.)
- To record progress billing as contract is completed
Bud Fund Bal Resv for Encumb6,000,000
Encumbrance Control 6,000,000
(To recognize work completed by contractor.)
Construction Expenditure Control6,000,000
Contract Payable 6,000,000
(To record expenditure for work completed by contractor.)
Contract Payable6,000,000
Contract Payable-Retained Percentage 600,000
Cash 5,400,000
(To record payment to constr. contractorless a 10%
retainage amount.)
- To record completion of the contract by contractor and requisite payment
Bud Fund Bal Resv for Encumb3,650,000
Encumbrance Control 3,650,000
(To recognize work completed by contractor.)
Constr.Expenditure Control3,650,000
Contract Payable 3,650,000
(To record expenditure for work completed by contractor.)
Contract Payable3,650,000
Contract Payable-Retained Percentage 365,000
Cash3,285,000
(To record payment on workless a 10% retainage amount.)
- To send final payment to contractor after inspection of building and no faults are found
Contr. Payable-Retained Percentage 965,000
Cash 965,000
(To record final payment to constr. contractor assuming
work is found acceptable.)
- Once project is complete, transfer out the remaining balance of
Cash
Other Operating Use-Transfer Out 1,197,000
Cash1,197,000
(To close the Capital Project fund since work is complete.)
- Closing journal entries at end of year
Other Fin. Sources-Proceeds from
Bond & Premium &Transfer In2,310,000
Revenue Control9,000,000
Const. Expenditure Control 10,103,000
Other Fin Uses-Transfer Out 1,207,000
(To close out revenue and expenditure accts. for the year.)
- ACQUISITON OF GENERAL FIXED ASSETS BY LEASE
AGREEMENTS
- A capital project fund may lease assets for use in the construction
of the road, bridge, building, or whatever. The leases will be
classified as either an operating lease or a capital lease.
- Operating Leases are where the assets leased are just rented and
there is no ownership transfer involved. Journal entries to pay
the periodic rental payments is just a debit to a rental expenditure
account and a credit to cash.
Expenditures-Rental1,000
Cash1,000
- Capital leases involve the transfer of ownership of the leased asset
to the governmental unit because the lease meets one of the
following four conditions:
1)There is a transfer of ownership in the lease agreement.
2)The lease contains a bargained purchase option at end of lease.
3)Lease term is 75% of estimated economic life of asset.
4)Present value of minimum lease payments equals or exceeds 90% of fair value of asset.
- If the equipment is classified as a capital lease asset, then the
lesser of the fair value of the asset or the present value of the
minimum lease payments is to be charged to both a revenue
account and an expenditure account in the year you acquire the
asset. Note that the revenues and expenditures recognized are
exactly offsetting. Subsequent payments are just charged to
expenditures.
Expenditure Control70,000
Other Fin. Sources-Capital Lease70,000
(To record a capital lease agreement.)
Expenditures Control3,000
Cash3,000
(To make regular payments of principal and interest on
capital lease agreement.)
- In addition, the government-wide financial statements are
required to record capital leased assets as both a long-term asset
and a long-term liability and to depreciate the asset off over its
estimated life.
- CONSTRUCTION OF GENERAL FIXED ASSETS FINANCED
BY SPECIAL ASSESSMENT DEBT
- Special assessments are special tax levies against tax payers who
are deemed to benefit the most from a service or project to be
paid for by the assessment on these tax payers. The two types of
assessments are service type and construction type.
- Service type special assessments, such as the assessment for police
protection or garbage removal on businesses benefited by a
special event downtown, are usually handled through the General
or the Special Revenue fund. They would be handled no
differently than any other tax assessment, i.e., a receivable would
be set up and revenue recognized, and as the receivable is paid it
is reduced.
- Construction type special assessments are usually long-term and
require the issuance of bonds, e.g., the installation of sidewalks
and streets in a new subdivision, where the property owners will
be assessed taxes to pay for the construction. If the government is
secondarily liable for the bond, then the construction should be
handled through a Capital Projects fund, the bond payments
made through a Debt Service fund, and the long-term assets and
liabilities resulting from the construction recorded on the books of
the government-wide financial statements. If the government is
not contingently liable for the bond, then all of the accounting is
handled through an Agency fund.
- Debt Service Fund – used to accumulate resources in order to pay
principal and interest on general obligation long-term debt.
Receives resources from general fund or other funds
Invests excess resources
Pays principal and interest as they comes due
- Control of Activities
Does not use budgetary accounting
Does not use encumbrance accounting
Does use modified accrual accounting
- Expected Revenue and Expenditures: Expect to receive $1,000,000 from property taxes, and $200,000 to be transferred in from General Fund, and $10,000 from premium on bond issuance. In addition have to pay in the current year principal of $100,000, interest of $900,000, and the fiscal agent a fee of $4,000.
Budgetary entries are not required for Debt Service Funds.
- Set up receivables for taxes and related revenue-taxes and
allowance account for uncollectibles. As cash is collected, reduce
the receivable for taxes, and as receivables become uncollectible,
write them off.
Property Tax Receivable-Current1,100,000
Est. Uncollec. Prop. Tax-Current 100,000
Revenues-Property Tax 1,000,000
(To record taxes levied.)
Cash910,000
Prop. Tax Receivable-Current910,000
(To record collection of property taxes.)
Est. Uncollec. Prop. Tax-Current20,300
Property Tax Receivable-Current 20,300
(To record write off uncollectible property taxes.)
- Money transferred from the general fund & for premium.
Cash210,000
Other Fin. Sources-Transfers In 210,000
(To record transfer from General Fund and receipt of
$10,000 from bond premium from Capital Project fund.)
- Debt Service funds may hold significant monies for a period of time before it is used. Excess cash is usually invested
in stocks and bonds, upon which interest and dividends will be
received. In addition, at the end of the year interest and dividends
that have been earned but not paid are accrued and the portfolio
of investments is adjusted to fair value. Examples of these entries
are illustrated in the discussion of the Permanent Fund.
- Record expenditures/matured interest or principal payable as it
comes due, and transfer cash to fiscal agent. Record payment reducing cash with fiscal agent and matured interest or principal payable when the agent comes back and says that it has been paid.
Expenditure-Bond Interest900,000
Expenditure-Bond Principal100,000
Matured Interest Payable 900,000
Matured Bonds Payable 100,000
(To record matured interest and principal on bonds.)
Cash with Fiscal Agent1,000,000
Cash 1,000,000
(To transfer interest and principal payable to fiscal agent.)
Matured Interest Payable900,000
Matured Bonds Payable100,000
Cash with Fiscal Agent 1,000,000
(Record payment of interest by fiscal agent when he says it
has been paid.)
Note that if interest or principal payments dates are other
than during this fiscal year, e.g., on January 1st of the next
year, accruals would not be made for the governmental fund
financial statements, but they would be made for the
government-wide financial statements.
The Debt Service fund normally would only account for
interest and principal to be paid in the current fiscal year, unless it has sufficient resources to make the payment, the payment is within one month of year end, and the governmental unit wants to accrue it.
- Pay fiscal agent their fee, i.e., an expenditure.
Expenditure-Fiscal Agent Fee4,000
Cash 4,000
(Pay the Fiscal Agent their fee.)
- In this example have Property Taxes Receivable and the related
allowance account that are classified as current that have to be
reclassified to delinquent. We will assume that $150,000 of the
receivables outstanding are expected to be collected in the first 60
days of the next fiscal year.
Property Taxes Receivable-Delinquent169,700
Property Taxes Receivable-Current169,700
Est. Uncoll. Prop. Taxes-Current79,700
Est. Uncoll. Prop. Taxes-Delinq79,700
Revenue-Property Taxes19,700
Deferred Revenues19,700
- Closing entries
Revenues-Property Tax 980,300
Other Fin. Sources-Transfers In 210,000
Expenditure-Interest 900,000
Expenditure-Principal 100,000
Expenditure-Fiscal Agent Fee 4,000
Fund Balance –Resv. For Debt Service 186,300
(To close operating accts for year.)
Since there are no budgetary entries and no encumbrances,
don’t have to worry about them.
- Accounting for a Deferred Serial Bond is more complex than these principal and interest payments illustrated since normally there are several years without principal payments, after which they resume. Term bonds, by contrast, mature entirely at maturity so that there are only interest payments until then.
- Permanent Fund – used to account for governmental funds whose
interest is restricted for purposes that benefit the government and its
citizens and its principal cannot be expended. As with the Debt Service Fund, it does not use budgetary accounting or encumbrance accounting.
- An example is a public cemetery supported by the city
government, for whose benefit a citizen has donated $500,000.
The $500,000 is to be invested and cannot be spent, and its
earnings are to be used for the support and benefit of the public
cemetery.
Cash500,000
Revenues-Additions to Perm. Endow.500,000
(To record donation to benefit the public cemetery.)
Investments-Stocks & Bonds500,000
Cash500,000
(To invest the donation in stocks and bonds.)
Cash25,000
Revenues-Interest & Dividends25,000
(To record interest & dividends paid on investments.)
Expenditures-Cemetery22,000
Cash22,000
(To pay for cemetery maintenance and other support.)
- At the end of the year, the interests and dividends that have been
earned since last interest and dividend payments are to be
accrued, and in addition the investments are to be adjusted to fair
value.
Accrued Interest Receivable5,000
Revenue-Interest & Dividends5,000
(To accrue interest and dividends earned but not yet paid.)
Investments-Stocks & Bonds10,000
Revenue-Net Increase in Fair Value 10,000
(To adjust investments to fair value.)
- Closing entry would be:
Revenue.-Add. to Perm Endow.500,000
Revenue.-Investment Income-Net
IncreaseIn Fair Value 10,000
Revenue.-Investment Income-Interest 30,000
Expenditures 22,000
Fund Balance-Resv. for Cemetery 518,000
(To close revenue and expenditures accounts at year end.)
- Ill. 5-3 provides an example of a governmental Balance Sheet
which includes a Debt Service fund and a Permanent fund, as well
as a General Fund and a Special Revenue fund.
The Balance Sheet shows the General Fund and major
funds. Sections include Assets, Liabilities, and Fund
Balances. Fund Balances is broken up between:
(1) non-spendable, (2) restricted, (3) committed,
(4) assigned, and (5) unassigned.
- Ill. 5-4 provides an example of a governmental Statement of
Revenues, Expenditures, and Changes in Fund Balances for a
Debt Service, Capital Project, and a Permanent fund.
Categories are Revenues, Expenditures, Excess of Revenues
over Expenditures, Other Financial Sources and Uses,
Special Items, Net Change in Fund Balances, Beginning
Fund Balance, and Ending Fund Balance.
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