Capital Project Funds: Instructor: Janice H. Fergusson

ACCT 505 Fall 2015
Chapter 7
Capital Project Funds
Instructor: Janice H. Fergusson
Certain materials used with

permission of Pearson Prentice Hall
Why Use Capital Projects Funds?
CPFs used to account for financial resources

that are used to construct / acquire major,
long-lived general capital facilities
Examples
Buildings
Highways & bridges
Storm water drainage systems
Typical Capital Asset Acquisitions

Not Using a CPF
Routine capital asset purchases school

buses and other equipment
Capital leases
Purchases of fund-specific capital assets to
be used in Proprietary Funds or Trust Funds
Life Cycle of CPF
CPF may last for several fiscal years

whatever is the life of the project
Expenditures are typically all capital outlay
Upon termination, any necessary funds
returned to providers of financing and
remainder transferred to service debt (DSF)
or to General Fund (GF)
Financing Capital Projects
General Long-term Debt
Account for the issuance in CPF

Debt Service Fund used to repay debt
Short-term borrowing (if necessary)

Interfund transfers
Interest and other revenues
Intergovernmental grants
Special assessments
Budgeting for a Capital Project
Usually prepared for the life of the project

appropriations do not lapse at end of fiscal
year
Separate budget may not be required if one
project financed by single CPF and project
costs are controlled through specifications
Interim Financing
Authorized bond issue may take considerable

time to issue
Interim financing used to fill the void known
as bond anticipation notes (BANs)
If properly used, may be long-term rather
than short-term debt
BANs issued in conjunction with legally authorized

bond issue
BANs are to be repaid (or have been repaid) from
proceeds of bond issue
Interim
Financing
Comparison
Short-Term
Borrowing
BAN Financing
Recorded as liability of
fund
Expenditure is for
capital outlay
Results in artificial
deficit in Fund Balance
Recorded as OFS
Expenditure is for
capital outlay
OFS and expenditure
cancel out no artificial
deficit
Project Costs
Overhead
General government overhead rarely charged

unless reimbursable
Other overhead may be charged costs from
ISFs or incremental overhead from project
Interest
Short-term debt interest is project cost

Long-term debt interest not capitalized
Intergovernmental Revenues
Unrestricted grants usually recognized as

revenues in General Fund or SRF
proceeds may be transferred to CPF
Restricted (capital) grants normally
recognized as revenues in CPF, once it is
earned (grantee incurred expenditures that
are authorized for reimbursement)
CPF Case Illustration

Project Financing
Total
Federal Grant
Percent
1,200,000
40
State Grant
600,000
20
Bond issue
900,000
30
Transfer from General Fund
300,000
10
3,000,000
100
TOTAL
Budget entry
Estimated Revenues Federal Grant
Estimated Revenues State Grant
Estimated OFS Bonds
Estimated OFS Transfer from GF
Appropriations Bean & Co. Contract
Appropriations Labor
Appropriations Machine Time
Appropriations Fuel & Materials
1,200,000
600,000
900,000
300,000
2,400,000
300,000
200,000
100,000
Sign Contract
Encumbrances Contract
Encumbrances Outstanding
2,400,000
2,400,000
Issue Bonds at a Premium

Cash
OFS Bond Principal
OFS Bond Premium
Expenditures Bond Issue Costs
Cash
911,000
900,000
11,000
2,000
2,000
Effect on GCA-GLTL accounts:
Net Position
Bonds Payable
Bond Premium
911,000
900,000
11,000
Supplemental Order
Encumbrances Fuel & Mat.
55,000
Supplemental order for fuel and materials for project

over and above the cost of the contract.
55,000
Financing Received
Cash
Revenues State Grant
OFS Transfer from GF
730,000
600,000
130,000
The State Grant is obviously not expenditure-driven that is why

it was all received up front.
The funding from the General Fund (GF) may be
received all at once or at various times, as is the case here.
Invoices received
1,048,000
Expenditures Fuel & Mat.

Expenditures Machine Time
Expenditures Contract
Contracts Payable Retainage
Vouchers Payable
49,000
81,000
1,000,000
48,000
1,000,000
50,000
1,080,000
Construction in Progress (CIP)

Net Position
1,130,000
1,130,000
Retained Percentage
Done to ensure completion of the project per

the contract
Will be paid to contractor when final project is
accepted
Alternate methods of insuring completion
Insurance policies
Certificates of Deposit (not subject to fair value
rules from Chapter 5)
Bonding
Cash Disbursements
Vouchers Payable
Investments
Expenditures Labor
Cash
970,000
400,000
140,000
1,510,000

Net Position
140,000
140,000
Notes:
Could bill each time allowable charge incurred.
Amount received may be less than amount billed if Federal
Government does not allow all expenditures.
Federal Grant Reimbursement

Due from Federal Government
Revenues Federal Grant
Qualifying Expenditures
Payment to contractor
Fuel & materials
Machine time
Payroll
Total Qualifying Expenditures
Allowable percentage
Allowable charge
508,000
508,000
1,000,000
49,000
81,000
140,000
1,270,000
40%
508,000
Interest on Investments
Accrued Interest Receivable
Revenues Interest
18,000
18,000
Closing Entries
Year-end closing entries not particularly

relevant to CPFs more concerned with
life of project than by end of year
Financial statements then become interim
statements for CPFs
Options for Closing Entries

Accounts Not Closed
Use worksheet to
create pro forma
closing entries which
arent posted to
accounts
Financial statements
prepared from
worksheet just like
normal
Accounts Closed
Use same routine as
used in earlier chapters
Closing entries typically
result in artificial deficits
Appropriated fund
balance reported for
unexpended amounts
CPF Financial Statements
Required
Balance Sheet
Statement of Revenues, Expenditures, and
Changes in Fund Balance [Operating Statement]
Optional
Budgetary statement or schedule

Not required under GAAP but may be required by
government, rating agencies, or bondholders
Completing the Bridge: Year 2

Reverse some of adjusting/closing entries
made in previous year gets budgetary
accounts back in balance
Invoices Received
1,407,000
Expenditures Contract
Expenditures Fuel & Mat.
Expenditures Machine Time
Vouchers Payable
1,410,000
43,000
108,000
1,400,000
7,000
70,500
1,490,500

Net Position
1,561,000
1,561,000
Cash Receipts
Cash
Due from Federal Government
Investments
Revenues Interest
OFS Transfer from GF
1,798,000
508,000
690,000
400,000
30,000
170,000
Cash Disbursements
Vouchers Payable
Expenditures Labor
Cash
1,600,500
129,000
1,729,500

Net Position
129,000
129,000
Settlement with the Feds: Part I

Allowable Costs
Bean & Co. Contract
Labor
Machine Time
Fuel & Materials
Total Allowable Costs
Less: Interest Earned
Allowable Costs
2,400,000
269,000
189,000
92,000
2,950,000
30,000
2,920,000
Settlement with the Feds: Part II

Allowable costs
Federal Grant Share
Reimbursement from Federal Government
Federal Grant Revenue recognized to date
Due to Federal Government

2,920,000
40%
1,168,000
1,198,000
30,000
30,000
30,000
Final Settlements
Cash
120,500
30,000
150,500
CPF Fund Balance transferred to DSF

Fund Balance
2,000
1,130,000
140,000
1,561,000
129,000
30,000
911,000
730,000
508,000
690,000
30,000
170,000
47,000
OFU Transfer to DSF

Cash
47,000
47,000
Project Operating Statement
Governments usually report one year at a

time
With completed project, reporting all
revenues and expenditures could be useful
helps explain the artificial deficits from earlier
year(s)
Other CPF Issues
Bond anticipation notes

Investment of idle cash
Disposing of fund balance (deficit)
Reporting several projects in single fund
Combining CPF financial statements
Bond Anticipation Notes (BANs)

Reasons for use:
Time lag in issuing approved bond issue
when cash is needed immediately to start the
project
Interest rates on the decline, so postponing
issuing bonds will save the government
money
Issue the BANs

Cash
OFS BAN Principal
500,000
500,000
BANs issued at par since the term is short, this is usually the case.
Issuance can be recorded as long-term if two conditions exist:

1. The project has an authorized bond issue.
2. Government will repay BANs from the bonds, once they are
issued.
Net Position
BANs Payable
500,000
500,000
Issue Bonds
Cash
Expenditures Bond Issue Costs
OFS Bond Principal
OFS Bond Premium
909,000
2,000
900,000
11,000
Recall that as a result of this event, the Bond Issue Costs,

Bond Payable, and Bond Premium are recorded in the
GCA and GLTL accounts.
Repay the BANs

OFU BAN Principal Retirement
Expenditures Interest on BANs
Cash
500,000
30,000
530,000
At the same time the BAN principal will be removed from the
General Long-Term Liabilities accounts.
BANs Payable
Net Position
500,000
500,000
Investments & Arbitrage
A significant amount of cash can flow

through a CPF cash flow planning is a
must
Issuing bonds early in project may be
mandated need to invest proceeds to
maximize interest
Remaining Fund Balance
If cash is left over when project is complete,

difference is usually transferred to DSF to
assist in repaying amounts borrowed
If project is in deficit (not enough cash)
Additional transfers needed from other funds

OR
Scope of the project must be cut back
Reporting Multiple Projects
Government may elect to use single fund to

report many projects
Easiest way to combine information is to
prepare separate statements for each
project, then consolidate for reporting
purposes
End of Chapter 7
Exercises 7-1, 7-2, 7-4

Problems 7-1, 7-2, 7-3,
7-4 (a) GL entries only

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ACCT 505 Fall 2015

Instructor: Janice H. Fergusson

Certain materials used with

Why Use Capital Projects Funds?

CPFs used to account for financial resources

Typical Capital Asset Acquisitions

Routine capital asset purchases school

Life Cycle of CPF

CPF may last for several fiscal years

Financing Capital Projects

General Long-term Debt

Account for the issuance in CPF

Short-term borrowing (if necessary)

Budgeting for a Capital Project

Usually prepared for the life of the project

Authorized bond issue may take considerable

BANs issued in conjunction with legally authorized

General government overhead rarely charged

Short-term debt interest is project cost

Unrestricted grants usually recognized as

CPF Case Illustration

Transfer from General Fund

Issue Bonds at a Premium

Effect on GCA-GLTL accounts:

Supplemental order for fuel and materials for project

The State Grant is obviously not expenditure-driven that is why

Expenditures Fuel & Mat.

Effect on GCA-GLTL accounts:

Construction in Progress (CIP)

Done to ensure completion of the project per

Effect on GCA-GLTL accounts:

Construction in Progress (CIP)

Federal Grant Reimbursement

Year-end closing entries not particularly

Options for Closing Entries

CPF Financial Statements

Budgetary statement or schedule

Completing the Bridge: Year 2

Effect on GCA-GLTL accounts:

Construction in Progress (CIP)

Effect on GCA-GLTL accounts:

Construction in Progress (CIP)

Settlement with the Feds: Part I

Settlement with the Feds: Part II

Revenues Federal Grant

CPF Fund Balance transferred to DSF

OFU Transfer to DSF

Project Operating Statement

Governments usually report one year at a

Other CPF Issues

Bond anticipation notes

Bond Anticipation Notes (BANs)

Issue the BANs

Issuance can be recorded as long-term if two conditions exist:

Recall that as a result of this event, the Bond Issue Costs,

Repay the BANs

Investments & Arbitrage

A significant amount of cash can flow