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P. Accounting for Capital Projects Funds

P. Accounting for Capital Projects Funds

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Module 21: Governmental (State and Local) Accounting



934



The following transactions illustrate the entries encountered in a capital projects fund:





a. City Council approved the construction of a new city hall at an estimated cost of $10,000,000. General

obligation long-term serial bonds were authorized for issuance in the face amount of $10,000,000. (No

formal entries are required for approval of capital projects.)

b. $10,000,000 in 8% general obligation serial bonds were issued for $10,100,000. Assume that the premium

is transferred to a debt service fund for the eventual payment of the debt. (Premiums and discounts in

governmental funds are not amortized in the fund financial statements.)







Cash

Other Financing Sources—Proceeds of Bonds

Other Financing Uses—Transfers Out

Cash



10,100,000

10,100,000

100,000

100,000



Note the credit to Proceeds of Bonds. This is an Other Financing Source on the operating statement,

whereas the Transfers Out is an Other Financing Use. Both accounts are temporary accounts that are closed to

Unreserved Fund Balance at year-end.

The transfer requires an entry in the debt service fund.

Debt Service Fund

Cash

Other Financing Sources—Transfer In



100,000

100,000



This entry will be explained in more detail later.

c. The bond issue proceeds are temporarily invested in a Certificate of Deposit (CD) and earn $50,000. The

earnings are authorized to be sent to the debt service fund for the payment of bonds.







Capital Projects Fund

Investment in CD



10,000,000



Cash

Cash



10,000,000

50,000



Revenues—Interest



50,000

Debt Service Fund



Other financing uses—

Transfers out

Cash







Cash

50,000



50,000



Other financing sources—

50,000



Transfers in



50,000



d. The lowest bid, $9,800,000, is accepted from a general contractor.

Encumbrances

Reserved for Encumbrances5







9,800,000

9,800,000



e. $2,000,000 of the temporary investments are liquidated.

Cash

Investment in CD



2,000,000

2,000,000



As previously noted, Reserved for Encumbrances is a fund equity account used to segregate the portion of fund balance related to

outstanding encumbrances.



5 



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Module 21: Governmental (State and Local) Accounting



f. Progress billings due to the general contractor for work performed amount to $2,000,000. The contract

allows 10% of the billings to be retained until final inspection and approval of the building. The contractor

was paid $1,800,000.

Reserved for Encumbrances

Encumbrances

Expenditures—Construction

Contracts Payable

Contracts Payable

Cash

Contracts Payable—Retained Percentage







2,000,000

2,000,000

2,000,000

2,000,000

2,000,000

1,800,000

200,000



The account “Contracts Payable—Retained Percentage” is a liability account. Note, also, that the fixed asset

is not recorded in the capital projects fund because the capital projects fund is a governmental fund and

governmental funds are expendable and do not have a capital maintenance objective.

g. Interest accrued on a CD at the end of the year amounted to $40,000. This was authorized to be sent to the

debt service fund for the payment of debt.

Capital Projects Fund

Interest Receivable

Revenues—Interest

Other Financing Uses—

Transfers Out

Due to Other Funds







935



40,000

40,000



40,000

40,000



Debt Service Fund

Due from Other Funds

Other Financing Sources—

Transfers In



40,000

40,000



The interest is recognized because it is measurable and will soon be available to finance debt service fund

expenditures.

h. Closing entries for the capital projects fund would appear as follows:

(1)



(2)



(3)



Revenues—Interest

Other Financing Sources—Proceeds of Bonds

Fund Balance—Unreserved

Fund Balance—Unreserved

Encumbrances

Expenditures—Construction

Fund Balance—Unreserved

Other Financing Uses—Transfers Out



90,000

10,100,000

10,190,000

9,800,000

7,800,000

2,000,000

190,000

190,000



The GASB requires that the totals for “major” capital projects funds appear in the balance sheet and the

Statement of Revenues, Expenditures, and Changes in Fund Balances, for governmental funds. Combining

statements are required in the CAFR for nonmajor capital projects funds along with other nonmajor governmental

funds.

A “stand-alone” Statement of Revenues, Expenditures, and Changes in Fund Balances is shown below for the

capital projects fund example.



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Module 21: Governmental (State and Local) Accounting

City of X

Capital Projects Fund

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES

IN FUND BALANCES

Year Ended June 30, 2013

Revenues:

Interest on Temporary Investments

Expenditures:

Construction of City Hall

Excess of Expenditures over Revenues



$ 90,000

2,000,000

(1,910,000)



Other Financing Sources and Uses:

Proceeds of General Obligation Bonds



$10,100,000



Transfer to Debt Service Fund

Excess of Revenues and Other Financing Sources over Expenditures and

Other Financing Uses

Fund Balance—Beginning of Year

Fund Balance—End of Year



(190,000)



9,910,000

8,000,000

-$8,000,000



At the beginning of the second year, the following entry would be made to reestablish the Encumbrances

balance:

Encumbrances

Fund Balance—Unreserved



7,800,000

7,800,000



The purpose of this entry is to permit the recording of expenditures in the normal manner (i.e., reverse the

encumbrances before recording the expenditures). It should be noted that capital projects funds differ from other

governmental fund types because they have a “project focus” rather than a fiscal year focus. However, closing

entries are made in capital projects funds in order to facilitate the preparation of financial statements at the end of

the fiscal year.

When the city hall project is finished, the capital projects fund should be closed. Assuming there are no

cost overruns, the excess cash left in the fund upon project completion must be transferred to some other fund,

normally a debt service fund. This entry is described along with other interfund transactions and transfers in

Section V.

Impairment of capital assets. In accordance with GASB Statement No. 42, Accounting and Financial

Reporting for Impairment of Capital Assets and for Insurance Recoveries, governments must evaluate prominent

events or changes in circumstances affecting capital assets to determine whether impairment of the assets has

occurred. Such events include evidence of physical damage, enactment or approval of laws or regulations, changes

in environmental factors, technological changes or evidence of considered impaired if (a) the decline in service

utility of the asset is large in magnitude, and (b) the event or change in circumstance is outside the normal life

cycle of the capital asset (e.g., unexpected).

Impaired capital assets that are no longer used by the government should be reported at the lower of carrying

value or fair value. Impairment losses on capital assets that will continue to be used by the government should

be measured using the method that best reflects the asset’s diminished service utility. As an example, if the asset

is damaged, the loss should be measured at an estimate of the cost to restore the capital asset (the restoration

approach). If the asset is affected by changes in environmental factors or obsolescence, the impairment should be

measured using an approach that compares the service units provided by the asset before and after the impairment

(the service units approach). If the asset is affected by a change in the manner or duration of use, the loss generally

should be measured using the service units approach or the depreciated replacement cost approach which

quantifies the cost of the service currently provided by the capital asset and converts that cost to historical cost.

Any insurance recovery associated with events or changes in circumstances resulting in impairment of a capital

asset should be netted against the impairment loss.





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Q. Debt Service Funds

Debt service funds account for and report financial resources that are restricted, committed, or assigned to

expenditure for the payment of general obligation long-term debt principal and related interest. General obligation

debt is secured by the full faith and taxing power of the governmental unit. Repayment of debt financed by internal



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Module 21: Governmental (State and Local) Accounting



937



service and enterprise funds (proprietary fund types) is accounted for in those individual funds. Consequently,

debt service funds are normally established as the result of issuing general obligation bonds for capital projects.

The bond liability to be extinguished is not recorded in the debt service fund until it matures (is legally due).

Outstanding general long-term debt is reported only in the government-wide financial statements (statement of net

position).

Assume the City of X authorizes a debt service fund for the general obligation serial bonds issued to finance

the city hall project. The debt service fund is also authorized to pay the 8% interest on the $10,000,000 of debt on

December 31 and June 30. The fiscal year-end is June 30. Note that the debt service fund has received resources

from the general and capital projects funds. Transactions showing recognition and receipt of these resources were

illustrated in the discussions of the general and capital projects funds. They are repeated below as follows:

(1)

(2)

(3)

(4)

(5)



Due from General Fund

Other Financing Sources—Transfers In

Cash

Due from General Fund

Cash

Other Financing Sources—Transfers In

Cash

Other Financing Sources—Transfers In

Due from Capital Projects Fund

Other Financing Sources—Transfers In



50,000

50,000

50,000

50,000

100,000

100,000

50,000

50,000

40,000

40,000



(Transaction b. in

Section L.)

(Transaction i. in

Section L.)

(Transaction b. in

Section N.)

(Transaction c. in

Section N.)

(Transaction g. in

Section N.)



Assume the bonds were issued on July 1. In addition, assume that $250,000 of the bonds mature each six

months, starting June 30.





a. The property tax levy contains $870,000 portion allocable to the debt service fund. $20,000 of this amount

is estimated to be uncollectible.

Property Taxes Receivable—Current

Allowance for Uncollectible Taxes—Current

Revenues—Property Taxes







20,000

850,000



b. $840,000 of property taxes are collected during the year. The remainder of the property taxes is reclassified

as delinquent.

Cash

Property Taxes Receivable—Current

Property Taxes Receivable—Delinquent

Allowance for Uncollectible Taxes—Current

Property Taxes Receivable—Current

Allowance for Uncollectible Taxes—Delinquent







870,000



840,000

840,000

30,000

20,000

30,000

20,000



c. The semiannual interest is paid on December 31 and June 30. The following entries are made on

December 31:

Expenditures—Interest

Matured Interest Payable

Matured Interest Payable

Cash



400,000

400,000

400,000

400,000



The following entries are made on June 30:

Expenditures—Interest

Matured Interest Payable

Matured Interest Payable

Cash



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400,000

400,000

400,000

400,000



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Module 21: Governmental (State and Local) Accounting

Note that if interest were paid on dates other than December 31 and June 30, interest would not be

recorded in the debt service fund until it is legally due, but would be accrued at the end of the fiscal year in

the government-wide financial statements.

d. On June 30, the first $250,000 principal payment became due, and $200,000 was paid. The following entries

would be made in the debt service fund:

Expenditures—Principal

Matured Bonds Payable

Matured Bonds Payable

Cash







250,000

250,000

200,000

200,000



If a bank were used as the fiscal agent, cash would first be transferred to a “Cash with Fiscal Agent”

account, and payment would then be made from that account.

e. Appropriate closing entries are made based upon all information presented.

Revenues—Property Taxes

Other Financing Sources—Transfers In

Expenditures—Interest

Expenditures—Principal

Fund Balance—Reserved for Debt Service



850,000

240,000

800,000

250,000

40,000



The balance sheet for the debt service fund would appear as follows:



City of X

DEBT SERVICE FUND

BALANCE SHEET

June 30, 2013

Assets

Cash

Due from Capital Projects Fund

Property taxes receivable—Delinquent (net of

$20,000 allowance for uncollectible taxes)

Total Assets



Liabilities and Fund Equity

$40,000 Liabilities:

40,000

Matured Bonds Payable

Fund Equity: (See note below)

10,000

Fund Balance—Reserved for Debt Service

$90,000 Total Liabilities and Fund Equity



$50,000

40,000

$90,000



NOTE: For financial reporting purposes, GASB Statement No. 54 would require the fund balance—

reserved for debt service to be reported as restricted, committed, or assigned.



Under modified accrual accounting, expenditures for principal and interest are generally not accrued

but recorded when legally due. However, GASB Statement No. 36, Recipient Reporting for Certain Shared

Nonexchange Revenues—An Amendment of GASB Statement No. 33, provides that if resources are available at

year-end and payment is to be made within one month after year-end, an accrual may be made, if a debt service

fund is used.





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R. Permanent Funds

A fifth type of governmental fund, introduced by GASB Statement No. 34, is the permanent fund type.

Permanent funds account for and report resources that are restricted to the extent that only the earnings and not

the principal may be used to support government programs which benefit the government or its citizens. For

illustrative purposes all revenue and expenditure transactions below are recorded in the permanent fund. An

alternative approach is to record interest from investments as revenue in the permanent fund, then record the

transfer of the interest as an other financing use—transfer out to the general (or a special revenue fund). The

general fund (or special revenue fund) would record the transfer as an other financing source—transfer in and

record the expenditures of the earnings for the specified purpose.



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Module 21: Governmental (State and Local) Accounting



939



A common example would be a cemetery perpetual care fund. Assume a local citizen was concerned about

the deplorable condition of the city cemetery and on January 2, 2012, contributed $500,000 with the stipulation

that the funds be invested and held; the income is to be used for the purpose of maintaining the city cemetery. On

January 2, the cash was received and invested.

Cash

Revenues—Additions to Permanent Endowments

Investments

Cash



500,000

500,000

500,000

500,000



During 2012, $30,000 was earned on the investment, and $25,000 was expended.

Cash (and/or interest receivable)

Revenues—Investment Income

Expenditures

Cash (or Vouchers Payable)



30,000

25,000

25,000







S. Accounting for Special Assessments

GASB Statement No. 52, Land and Other Real Estate Held as Investments by Endowments, provides that land and

other real estate held by an endowment for investment purposes should be reported at fair value at each reporting

date. Changes in fair value during the period should be reported as a part of investment income. GASB Statement

No. 6, Accounting and Reporting for Special Assessments, outlines the accounting and financial reporting for

special assessments. Special assessments are levied for projects to be paid primarily by the property owners who

benefit from the improvement project (for example, a street lighting or sidewalk project).

Under GASB Statement No. 6, the accounting and reporting for special assessment capital projects depends on

the liability of the governmental unit for the special assessment debt. If the governmental unit is not obligated in

any way for the debt and merely acting in a collecting capacity, the special assessment activities will be accounted

for in an agency fund. However, if the governmental unit is either primarily or potentially liable for the debt,

the accounting and reporting will take place as if it were any other capital improvement and financing transaction.

Construction activities will be recorded in a capital projects fund and debt principal and interest activities would

be recorded in a debt service fund.







T. Accounting for Proprietary Funds

GASB standards provide two types of proprietary funds: Internal Service and Enterprise Funds. Internal service

funds are established to account for the provision of goods and services by one department of the government

to other departments within the government, generally on a cost-reimbursement basis. The extent of the use of

internal service fund services are managed through the budgets of the user departments. Internal service funds

are normally established for the following types of activities: central garages, motor pools, central printing and

duplicating, stores departments, self-insurance, etc. Enterprise funds, on the other hand, account for activities

for which the government provides goods and services that are (1) rendered primarily to the general public,

(2) financed substantially or entirely through user charges, and (3) intended to be self-supporting. Enterprise funds

are usually established for public utilities, airports, toll roads and bridges, transit systems, golf courses, solid waste

landfills, etc.

Proprietary funds use the accrual basis of accounting and are nonexpendable; capital is to be maintained.

Revenues and expenses are recorded generally as they would be in commercial enterprises. Fixed assets are

recorded in proprietary funds, and depreciation expense is deducted from revenues. Proprietary funds also report

their own long-term liabilities. The GASB has provided a special rule regarding the use of FASB pronouncements

in accounting for enterprise funds of state and local governments. That rule has two parts.









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30,000



1. Enterprise funds should follow FASB pronouncements issued prior to November 30, 1989, unless those

FASB pronouncements conflict with GASB pronouncements.

2. Enterprise funds may or may not follow FASB pronouncements issued after November 30, 1989, which

do not conflict with GASB pronouncements. The decision regarding whether or not to follow such FASB

pronouncements must be applied consistently to all FASB pronouncements, and the choice must be

disclosed.



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Module 21: Governmental (State and Local) Accounting

When proprietary funds are initially established, a contribution or advance is usually received from the general

fund. A contribution is a transfer and would be recorded by the internal service or enterprise fund as follows:

Cash

Transfer from the General Fund



xx

xx



The transfer from the general fund would be closed to net position—unrestricted at the end of the fiscal year.

The transfer would be reported in the Statement of Revenues, Expenses, and Changes in Net Position. On the

other hand, an advance from the general fund is a long-term loan and would be recorded by an internal service or

enterprise fund as follows:

Cash

Advance from General Fund



xx

xx



The term “advance from” is used to indicate that the liability is long term and would be reported on the

proprietary fund’s balance sheet as a long-term liability. The advance would be reported as a long-term asset on

the general fund’s balance sheet, which requires a reservation of fund balance because it is not available for current

operations.

Accounting entries for proprietary funds are similar to those for business enterprises. “Operating Revenues—

Charges for Services” is a common operating revenue account for both internal service and enterprise funds. As

indicated earlier, revenues and expenses are recognized on the full accrual basis and are classified as operating and

nonoperating. Some features that distinguish the accounting for proprietary funds are





1. Long-term debt is recorded directly in internal service and enterprise funds. Revenue bonds are those that

are backed only by the revenues of the proprietary fund activity. However, revenue bonds with general

obligation backing and general obligation bonds that are to be paid with revenues of the proprietary fund

activities are also recorded in the proprietary funds.

2. Interest on long-term debt is accrued as an expense, unlike interest on general long-term debt, which is

generally not recorded until it is legally due (see Section Q). Premiums and discounts on debt issuances, as

well as debt issue costs, are recorded with the debt and amortized over the life of the bonds.

3. Fixed assets are capitalized and depreciated, using one of the generally accepted methods used by business

enterprises. Interest incurred during construction is capitalized.

4. Revenues, expenses, capital contributions, and transfers are closed out to net position at year-end. Three

categories of net position exist, as indicated earlier: (a) net investment in capital assets, (b) restricted, and (c)

unrestricted. These are the same asset categories as are used in the government-wide Statement of Net Position.

5. Net position—net investment in capital assets, would be the net of fixed assets, less accumulated

depreciation, less any long-term debt issued to finance capital assets. Net position—restricted would offset,

for example, by any resources held for future debt service in accord with bond indenture requirements.

6. A special problem exists with self-insurance funds, which are often classified as internal service funds.6

Governments transfer resources from other funds to self-insurance funds, from which claims are paid. To

the extent that the transfers do not exceed the actuarially determined liability of the government, they are

recorded as expenditures or expenses. Any transfers in addition to the actuarially determined liability are

classified as transfers.

7. Another special problem exists with municipal waste landfills, which are often classified as enterprise funds.

Many of the solid waste landfills in the US are operated by local governmental units. The problem which arises

in accounting for municipal landfills is that most revenue is earned early in the useful life of the landfill, as

various persons and organizations pay to dispose of waste; conversely, a significant portion of the costs, termed

closure and postclosure care costs as defined by US Government regulations, occur up to twenty to thirty years

later. The GASB requires that these future costs be estimated and charged against periodic revenues on a “units

of production” basis according to the amount of landfill capacity consumed during each period. If a municipal

waste landfill is operated as an enterprise fund, expenses and liabilities are accounted for on a full accrual basis

and recorded directly in the enterprise fund. If the municipal waste landfill is operated through a governmental

fund, the expenditure and fund liability would be limited to the amount that will be paid with currently

available resources, and the remaining liability would be reported in the government-wide statements.



















GASB requires that, if self-insurance is to be recorded in a single fund, that fund must be an internal service or the general fund.



6



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