Chapter 4

Accounting For Other

Governmental Funds: Capital
project fund, Debt service fund &
Permanent fund
 Capital Project Fund
 A major source of funding for capital projects funds is the issuance of
long-term debts.
 In addition, CPFs may receive grants from other governmental units,
transfers from other funds; gifts form individuals, organizations or
combinations of several of these sources.
 Proceeds of debt issues are recorded as proceeds of bonds or proceed
of long-term Notes, rather than as revenue and are reported in the
Other Financing Sources section of the statement of revenues,
expenditures, and change in fund balance.
 Capital Project Fund
Capital projects funds exist only for the duration of the
project for which they are created.
Expenditures of CPFs are reported in the capital outlay
character classification in the government-wide statement of
revenues, expenditures, and changes in fund balances.
Encumbrance accounting is used, to account for outstanding
construction and purchase orders; and are reported as
reserved fund balances in the governmental funds balance
sheet.
 Capital Project Fund
Assumed that early in 2019 the municipality of a city
authorized an issue of 1,200,000; 8%, 10 year regular serial
tax-supported bond, to finance construction of additional fire
station. The total cost of the station was expected to be
2,000,000, with 600,000 to be financed by grants from other
governmental units and 200,000 to be transferred from an
enterprise fund. Completion of the project was expected
within the year. Transactions and entries illustrated as
follows.
 Capital Project Fund
Trxn.1: Birr100,000 was borrowed from the National Bank
for defraying engineering and other preliminary costs
incurred that the bonds could be sold. The debt will be repaid
in the current period from bond proceeds and are recorded as
a liability in the CPF.

Cash------------------------------------100,000
Bond anticipated notes payable-------------------100,000
 Capital Project Fund
Trxn.2: The receivables from the enterprise fund and other
governmental units were recorded; a receipt was expected
during the current year.

Due from other funds-------------------------------200,000

Due from other governmental units-----------600,000
Other financing sources- transfer-------------------200,000
Revenues control----------------------------------------600,000
 Capital Project Fund
Trxn.3: Total purchase orders for supplies, materials, items
of minor equipment, and labor required for the project
amounted to 215,000.
Encumbrance control--------------------- 215,000
FB, reserved for encumbrance---------------------- 215,000
Trxn.4: A contract was issued for the major part of the work
to be done by a private contractor in the amount of 1,500,000.
Encumbrance control----------------------1,500,000
FB, reserved for encumbrance--------------------1,500,000
 Capital Project Fund
Trxn.5: Special engineering/ designing and miscellaneous
preliminary cost that had not been encumbered were paid in
the amount of 97,500.
Construction expenditures----------------------97,500
Cash-----------------------------------------------------97,500
Trxn.6: When the project was half-finished, the contractor
submitted billing for a payment of 750,000.
 Two entries are required: One to reverse the construction
order, and another to record the bill.
 Capital Project Fund
FB, reserved for encumbrance-------------750,000
Encumbrances control-----------------------750,000
Construction expenditures---------------750,000
Contracts payable-----------------------------750,000
 Trxn.7: The transfer was received from the enterprise fund, and
300,000 Br was received from other governmental units.
Cash------------------------------------500,000
Due from other funds---------------------------200,000
Due from other governmental units--------300,000
 Capital Project Fund
Trxn.8: The bond was sold at a premium of 12,000 Br. under
modified accrual accounting; bond premiums are used to
finance general long-term debts.
Cash-------------------------------------1,212,000
OFS, bond proceeds---------------------------1,200,000
OFS, bond premium-------------------------- 12,000

OFU, transfer out-------------------- 12,000

Cash---------------------------------------------------- 12,000
 Capital Project Fund
If bonds were sold at discount, either the difference would be
makeup by a transfer from another fund, or the capital projects
fund would have fewer resources available for the project.
Generally, bonds issue costs would be involved, and would be
recorded as expenditures.
When bonds were sold between interest dates, the governmental
unit would collect the amount of interest accrued to date from
the purchaser.
 Capital Project Fund
Trxn.9: The municipality’s CPF pays the bond anticipated
notes and interest (assumed to amount to 2,500) and records
the following journal entry:

Bond anticipation notes payable-----------------100,000

Interest expenditures-------------------------------- 2,500
Cash------------------------------------------------------102,500
 Capital Project Fund
Trxn.10: The contractor’s initial claim (see entry 6) was paid,
less 5% retention. Retention of a contractually stipulated
percentage from payments to contractors is common until the
construction is completed and has been inspected for
conformity with specifications and plans.
Contracts payable-----------------------750,000
Cash----------------------------------------------------------712,500
Contracts payable- retained parentage----------- 37,500
 Capital Project Fund
Trxn.11:
Disbursements for items ordered at an estimated cost of 215,000
(included in the amount recorded by entry 3) amounted to
216,500.
FB, Reserved for encumbrance--------------215,000
Encumbrances control--------------------------------- 215,000

Construction expenditures--------------------216,500
Cash----------------------------------------------------------216,500
 Capital Project Fund
Trxn.12:Assume the contractor completes construction of the
fire station and bill the municipality for the balance on the
contract:
FB, Reserved for encumbrance--------------750,000
Encumbrances control-------------------------------- 750,000
Construction expenditures-------------------- 750,000
Contracts payable-------------------------------------- 750,000
 Capital Project Fund
 Trxn.13: Assume that the remaining amount from other
governmental units was received.
Cash-------------------------------------------300,000
Due from other governmental units--------------300,000
 Trxn.14 Assuming that inspection revealed only minor imperfections
in the contractor’s performance, and upon correction of these, the
contractor’s bill and the amount previously retained were paid
Contract payable-Retained percentage-------37,500
Contracts payable------------------------------------750,000
Cash----------------------------------------------787,500
 Capital Project Fund
Trxn.15: After the final payment for the contractor is made,
183,500 Birr in cash remained in the capital projects fund.
That amount was transferred to a debt service fund for the
payment of interest and principal of the bond.
Other financing uses- Transfers out---------183,500
Cash---------------------------------------------------------183,500
 Capital Project Fund
Closing entries: Upon the completion of the project and
dispersion of any remaining cash, the following closing
entries will be made:
Revenue control------------------------- 600,000
OFS, transfer in-------------------------- 200,000
OFS, bond proceeds------------------ 1,200,000
OFS, bond premium------------------- 12,000
Construction expenditure---------------------------1,961,000
Interest expenditure----------------------------------- 2,500
OFU, Transfer out-------------------------------------- 195,500
 Debt Service Funds
• Is used to account for revenues and other financing sources
that are intended to service GLTDs, i.e. to pay the interest and
principal as they come due.
• If taxes and are levied specially for payment of interest and
principal on long-term debts, those taxes are recognized as
revenues of the debt service fund, and OFS if levied by
another fund & transferred to DSF.
• Modified accrual basis of Accounting is applied in DSF, but one
particularity interest on long-term debt is not accrued; it is
recognized as expenditure in the year in which the interest is
legally due.
 Debt Service Funds
Debt Service accounting for serial bonds
• There are four types of serial bonds: regular, differed, annuity
and irregular.
1.If the total principal of an issue is repayable in a specified
number of equal installments over the life of the issue, it is a
regular serial bond issue.
2.If the installment is delayed for a period of more than one
year after the issue date, but then after installment falls due
on a regular bases, the bonds are known as deferred serial
bonds.
 Debt Service Funds
Debt Service accounting for serial bonds
3.If the amount of annual principal repayment is scheduled to
increase each year by approximately the same amount that
interest payment is decrease interest payment decreases,
because the outstanding balance of the bond decrease so
that the total debt service remains relatively uniform over
the term of the bond, the bond is called annuity serial
bonds.
Entry 15 of the capital projects fund reflected a transfer of
183,500 cash to the debt service fund, representing the unused
construction funds.
 Debt Service Funds
Debt Service accounting for serial bonds
The corresponding entry is made in the DSF:
Cash-----------------------------------183,500
OFS, Transfer in---------------------------------183,500
 Debt Service Funds
At year-end, the debt service fund would reflect the following
closing entry:
OFS, transfer in---------------------------195,500
FB, reserved for debt service------------------195,500
 Permanent Fund
• Permanent funds are governmental funds that report resources
that are legally restricted, so that principal cannot be expended,
earnings from investments are to be expended for purpose that
benefit the government and its citizen (similar funds whose
earnings benefit individuals, private organization, or other
governments are private purpose trust funds).
• Permanent Funds are endowments or other nonexpendable trust
funds where the donor specifies that the earnings (& perhaps
principal) are to be used to benefit the government; for example,
to buy library books for the city library or support a government-
owned museum.
 Permanent Fund
• These are governmental funds, using modified accrual
accounting.
• Earnings are often transferred to a Special Revenue Fund.

Journal Entries for a Permanent Fund

Individual establishes an endowment of br. 900,000 in cash to
buy library books for the city library.
Cash------------------------------900,000
Endowment Contributions-------------------------900,000
 Permanent Fund
Equity investments are bought, br. 900,000.
Common Stock--------------------------- 900,000
[
Cash----------------------------------------------------900,000
Cash dividends are received, $18,000.
Cash-------------------------------18,000
Revenue-Dividends---------------------------------18,000
Stock increase in value $12,000.
Common Stocks ---------------------------------12,000
Revenue-Investments-----------------------------------12,000
 Permanent Fund
Fund is closed out at year-end & earnings transferred to a
Special Revenue Fund.

Revenue-Dividends-----------------18,000
Revenue-Investments------------- 12,000
Earnings Available to SRF---------30,000  
Transfer Out----------------------30,000
Cash-----------------------------------------------30,000
 Permanent Fund
Fund is closed out at year-end & earnings transferred to a
Special Revenue Fund.

Endowment Contributions--------------- 900,000

Earnings Available to SRF----------------- 30,000 Transfer
Out------------------------------------------------ 30,000
FB, Endowment------------------------------------------ 900,000
The End!!