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Chapter 6

ACCT 4421 Chapter 6: Chapter 6 Study Guide

Course Code
ACCT 4421
Donna Torres

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Chapter 6: Accounting for Capital Projects and Debt Service
Capital Projects Funds:
- Used to account for financial resources that are legally restricted and contractually
required for the acquisition of capital assets
o Proceeds from debt (bonds) are a common type of financial resource accounted
for by the CPF
- Primary purpose of this fund is to ensure and demonstrate the expenditure of the
dedicated financial resources is both legally and contractually compliant
- The total cost of a capital project is accumulated in a single expenditures account
o This accumulates until the project is completed
o Once completed, the fund ceases to exist
- CPF’s are project-life focused, not year to year focused
- The CPF does NOT account for capital assets themselves
o Capital assets are maintained in a Schedule of Capital Assets
*Neither CPF or DSF account for capital assets themselves or long-term debt
Two Types of capital projects
- General (public benefit)
o Ex. Public buildings, roads, bridges, parks, etc.
- Special Assessment (private benefit)
o Benefits citizen in a specified benefit district
o Ex. Curbs, street lighting, sidewalks, etc.
Funds Associated with Capital Acquisitions:
1) Capital Asset Fund
2) Capital Projects Fund
3) Debt Service Fund
4) Special Assessments
Three types of long-term Financing:
1. Tax Supported Debt General Obligation (tax-supported) bonds or special taxes restricted
to payment of debt
a. Voter approval required
b. Memo entry for bond/tax authorization
c. Proceeds accounted for as other financing sources
d. The difference between face value of bonds and cash received is attributed to:
i. Issue costs charges for underwriter services
ii. Premiums and Discounts difference between coupon rate and market
2. Grants
3. Other forms of financing
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Tax Supported Debt:
- Term Bonds
o Principal matures in one lump-sum amount at end of the bond term
o Not used as frequently for municipal financing or serial bonds
- Disadvantages:
o Usually requires a sinking fund and therefore investment management
o Sinking fund investments are reported at fair market value (FMV)
o Changes in FMV are reported as a component of investment earnings
o More complex accounting than for Serial Bonds
- Serial Bonds
o The amount budgeted for revenues or interfund tranfers in is usually just what is
needed that fiscal year for matured principal and interest
o Advantage: self-amortizing; no sinking fund needed
o Principal matures in annual installments
- When a governmental fund (like the General Fund) acquires a long term asset
o It records the cost as an expenditure in the year of acquisition
- When bonds are sold and the funds are used by a governmental fund type such as a CPF
o The funds are recorded as other financing sources proceeds from bonds and
This is due to the use of the modified accrual basis
Other Forms of Financing:
- Special Assessments benefit only a select group of individuals
o Improvements financed with assessments should be capitalized
- In the fund statements:
o DSF accounted for using modified accrual basis
o In the DSF, special assessment revenues and receivables are accounted for on a
full accrual basis
o Governments may or may not be obligated to account for special assessment debt
(both principal and interest)
o Government accounts for debt service on special assessment debt in a DSF when
the government is obligated in some manner for the debt
o GASB states the government is obligated if:
It is responsible for the debt in the event of property owner default, or
It is legally liable for assuming the debt or gives indication that it may
honor the debt in the event of default
o Both the special assessment debt and the debt service are accounted for in a
Custodial fund
o Disclose the amount of debt in the notes on the financial statements
- Special assessment debt is sometimes paid from a proprietary fund
o In this case, all trx are reported in the proprietary fund
o Improvements financed with assessments should be capitalized
Reporting Other forms of financing in the government wide statements:
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