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Managing Capital Projects and Debt Services Effectively

Learn about accounting for capital projects and debt services, including funds, bonds, and illustrative transactions. Explore project authorization, financing, and fund maintenance.

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Managing Capital Projects and Debt Services Effectively

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  1. 6 Chapter Accounting for Capital Projects and Debt Services

  2. 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.

  3. 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-to-year

  4. 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!!!!!

  5. 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

  6. 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 (tax-supported) bonds or special taxes for capital projects (memo entry only for bond/tax authorization) • Apply for and obtain grants • Obtain other forms of financing

  7. 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: Dr. Cr. Due from other Governmental Units 100,000 Revenues 100,000 Governmental Activities: Due from Other Governmental Units 100,000 Program Revenues 100,000

  8. 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: Dr. Cr. Cash 50,000 Due to General Fund 50,000 Governmental Activities: No entry needed.

  9. 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: Dr. Cr. Encumbrances 50,000 Reserve for Encumbrances 50,000 Governmental Activities: No entry needed.

  10. 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. Cr. Construction Expenditures 48,000 Reserve for Encumbrances 50,000 Cash 48,000 Encumbrances 50,000 Governmental Activities: Construction Work in Progress 48,000 Cash 48,000

  11. 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: Dr. Cr. Cash 5,050,000 Other Financing Sources- Bonds Proceeds 5,050,000 Other Financing Uses – Transfer of Premium 50,000 Due to Debt Service Fund 50,000 Governmental Activities: Cash 5,050,000 Bonds Payable 5,000,000 Premium on Bonds Payable 50,000

  12. 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 100,000 Due from Other Governmental Units 100,000 Governmental Activities: Cash 100,000 Due from Other Governmental Units 100,000

  13. 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: Dr. Cr. Due to General Fund 50,000 Due to Debt Service Fund 50,000 Cash 100,000 Governmental Activities: No entry needed.

  14. CPF - Illustrative Transactions (Cont’d) A contract was signed with Capital Construction Company in the amount of $5,050,000. Capital Projects Fund: Dr. Cr. Encumbrances 5,050,000 Reserve for Encumbrances 5,050,000 Governmental Activities: No entry needed.

  15. CPF - Illustrative Transactions (Cont’d) A partial billing of $3,000,000 was received from Capital Construction Company. Capital Projects Fund: Dr. Cr. Construction Expenditures 3,000,000 Reserve for encumbrances 3,000,000 Contracts payable 3,000,000 Encumbrances 3,000,000 Governmental Activities: Construction Work in Progress 3,000,000 Contracts Payable 3,000,000

  16. 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: Dr. Cr. Construction Expenditures 2,000,000 Reserve for Encumbrances 2,050,000 Contracts Payable 2,000,000 Encumbrances 2,050,000 Governmental Activities: Construction Work in Progress 2,000,000 Contracts Payable 2,000,000

  17. 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: Dr. Cr. Other Financing sources -Bond Proceeds 5,050,000 Revenues 100,000 Construction Expenditures 5,048,000 Fund Balance 52,000 Other Financing Uses – Bond Proceeds 50,000

  18. CPF - Illustrative Transactions (Cont’d) To close the accounts at the government-wide level Governmental Activities: Dr. Cr. Program Revenues-Capital Grant and Contributions-General Government 100,000 Net Assets-Invested in Capital Assets, Net of Related Debt 100,000 Building 5,048,000 Construction Work in Progress 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).

  19. General Capital Assets-Required 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.

  20. 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 • Example – St. Joseph City water being provided to farms & residents in Royalton Township

  21. 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

  22. 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

  23. Miscellaneous Topic: Arbitrage Arbitrage defined: The issuance of debt at relatively low, tax-exempt 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!

  24. 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

  25. 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

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