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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.
Encumbrances Outstanding

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
Encumbrances Outstanding
Encumbrances Fuel & Mat.
Encumbrances Contract

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

Effect on GCA-GLTL accounts:

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

Effect on GCA-GLTL accounts:

Construction in Progress (CIP)


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
Encumbrances Outstanding
Encumbrances Contract
Encumbrances Fuel & Mat.

1,407,000

Expenditures Contract
Expenditures Fuel & Mat.
Expenditures Machine Time
Contracts Payable Retainage
Vouchers Payable

1,410,000
43,000
108,000

1,400,000
7,000

70,500
1,490,500

Effect on GCA-GLTL accounts:

Construction in Progress (CIP)


Net Position

1,561,000
1,561,000

Cash Receipts
Cash
Due from Federal Government
Revenues Federal Grant
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

Effect on GCA-GLTL accounts:

Construction in Progress (CIP)


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

Revenues Federal Grant


Due to Federal Government

2,920,000
40%
1,168,000
1,198,000
30,000

30,000
30,000

Final Settlements
Contracts Payable Retainage
Due to Federal Government
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.
Effect on GCA-GLTL accounts:

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