6
Chapter
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-toyear

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 (taxsupported) 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:
Due from other Governmental Units
Revenues
Dr.
Cr.
100,000
100,000
Governmental Activities:
Due from Other Governmental Units
Program Revenues
100,000
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:
Cash
Due to General Fund
Governmental Activities:
No entry needed.
Dr.
Cr.
50,000
50,000
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:
Encumbrances
Reserve for Encumbrances
Governmental Activities:
No entry needed.
Dr.
Cr.
50,000
50,000
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.
Construction Expenditures
Reserve for Encumbrances
Cash
Encumbrances
48,000
50,000
Cr.
48,000
50,000
Governmental Activities:
Construction Work in Progress
Cash
48,000
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:
Cash
Other Financing Sources- Bonds Proceeds
Other Financing Uses – Transfer of Premium
Due to Debt Service Fund
Dr.
Cr.
5,050,000
5,050,000
50,000
50,000
Governmental Activities:
Cash
Bonds Payable
Premium on Bonds Payable
5,050,000
5,000,000
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
Due from Other Governmental Units
100,000
100,000
Governmental Activities:
Cash
Due from Other Governmental Units
100,000
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:
Due to General Fund
Due to Debt Service Fund
Cash
Governmental Activities:
No entry needed.
Dr.
Cr.
50,000
50,000
100,000
CPF - Illustrative Transactions (Cont’d)
A contract was signed with Capital Construction Company
in the amount of $5,050,000.
Capital Projects Fund:
Encumbrances
Reserve for Encumbrances
Governmental Activities:
No entry needed.
Dr.
5,050,000
Cr.
5,050,000
CPF - Illustrative Transactions (Cont’d)
A partial billing of $3,000,000 was received from
Capital Construction Company.
Capital Projects Fund:
Construction Expenditures
Reserve for encumbrances
Contracts payable
Encumbrances
Dr.
Cr.
3,000,000
3,000,000
3,000,000
3,000,000
Governmental Activities:
Construction Work in Progress
Contracts Payable
3,000,000
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:
Construction Expenditures
Reserve for Encumbrances
Contracts Payable
Encumbrances
Dr.
Cr.
2,000,000
2,050,000
2,000,000
2,050,000
Governmental Activities:
Construction Work in Progress
Contracts Payable
2,000,000
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:
Other Financing sources -Bond Proceeds
Revenues
Construction Expenditures
Fund Balance
Other Financing Uses – Bond Proceeds
Dr.
Cr.
5,050,000
100,000
5,048,000
52,000
50,000
CPF - Illustrative Transactions (Cont’d)
To close the accounts at the government-wide level
Governmental Activities:
Program Revenues-Capital Grant and
Contributions-General Government
Net Assets-Invested in Capital Assets,
Net of Related Debt
Building
Construction Work in Progress
Dr.
Cr.
100,000
100,000
5,048,000
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 AssetsRequired 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
– St. Joseph City water being provided to
farms & residents in Royalton Township
 Example
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, taxexempt 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