—————————————-———-Chapter 6———————————————
REVIEW QUESTIONS
Q6-1 The relationship between Debt Service Funds and Capital Project Funds is
that the latter are used to record the receipt and disbursement of resources
Q6-2 No. Capital assets of a relatively minor nature, such as vehicles, equipment,
and furniture often are acquired with General Fund or Special Revenue Fund
Q6-3 Capital Projects Funds are used to record the transactions incurred in the
acquisition or construction of capital facilities and other major capital assets,
Q6-4 Capital Projects Funds are controlled through the provisions of bond
indentures, restrictive provisions of grant agreements, and so forth. In
Q6-5 Encumbrance accounting is part of the overall control system used for
Capital Projects Funds. Its purpose is to limit the amount of expenditures
Q6-6 Yes, as a practical matter. Closing entries are used to accumulate
information necessary for the preparation of financial statements on an
Q6-7 Capital assets are not recorded in Capital Projects Funds because the
purpose of such funds is to provide control over the acquisition and use of
Q6-8 Debt Service Funds are used when required by law or if a government is
Q6-9 The operations of Debt Service Funds generally are controlled through the
provisions of bond indentures (debt agreements) and budgetary
Q6-10 No. Some governments use budgets to control spending activities in Debt
Q6–11 Interest generally is recorded as an expenditure of a Debt Service Fund
when it is currently due and payable. The reason for not accruing interest is
Q6–12 The principal of general long-term debt is recorded in Debt Service Funds
when it matures. The reason for not recording the principal in a Debt
Q6–13 Some of the information a city oversight body can obtain from a Debt Service
Fund is whether:
a. the governmental unit is accumulating resources to service its
Q6–14 Investments generally are valued at fair value on a governmental balance
Q6–15 The effect of a premium on bonds issued to finance a capital project is that
more resources are received on the issuance of the bonds than originally
planned. The use of these resources will depend on the terms of the bond
issue. This extra cash may be used in the construction activities, or, in some
Q6–16 “Arbitrage” refers to the practice of borrowing money at a given rate of
interest and simultaneously investing that money at a higher interest rate,
Q6–17 Permanent Funds are used to account for resources that are legally restricted in a
Q6–18 The operations of Permanent Funds are controlled through applicable state laws
Q6–19 No, unless required by legal provisions. The earnings from Permanent
Q6–20 Permanent Funds must benefit a government’s own programs. Fiduciary Funds
are used to hold assets in a trustee capacity for the benefit of entities or
DISCUSSION SCENARIOS AND ISSUES
D6-1
Green Valley should consider issuing serial bonds. These bonds allow governments to
stagger the maturity dates of individual bonds in an effort to smooth the annual cash
outflows over the life of the bonds. If term bonds are issued, a sinking fund should be
established so that annual payments will be made to the fund and accumulated to pay off the
6-5
D6-2
Ms. Figgie should bring information regarding financing alternatives to the meeting.
Sources of moneys such as state and federal grants, bond issues, designated property taxes,
D6-3
Ms. Well is mistaken. The financial statements are read by many individuals and
organizations, such as investment analysts, bond rating agencies, and so forth. In addition,
D6-4
Resources in Capital Projects Funds and Debt Service Funds are restricted in their use and
borrowing from them may be illegal. Whether or not the General Fund can borrow from a
Capital Projects Fund or a Debt Service Fund depends on the factors leading to the
EXERCISES
E6-1 (10 minutes)
1. is
E6-2 (15 minutes)
To: Council Member Cannedy
Capital Projects Funds are used where they are legally required or where the projects are
funded in whole or in part by general obligation bond proceeds. The principal reason for
E6-3 (15 minutes)
1. d
2. d
6-7
10. a
E6-4 (15 minutes)
Assuming that restricted resources are used to construct a major capital asset, the receipt
E6-5 (30 minutes)
Waste, Inc.
1. Cash 300,000
2. Equipment 300,000
3. Bonds payable 15,000
Interest expense 7,500
4. Depreciation expense 22,500
Accumulated depreciation, equipment 22,500
Croton Heights Village
1. In Capital Projects Fund
2. In Capital Projects Fund
To record acquisition of equipment.
3. In Debt Service Fund
Expenditures – bond principal 15,000
Expenditures – bond interest 7,500
E6-6 (10 minutes)
1. servicing the debt
E6-7 (10 minutes)
Use of a single Debt Service Fund for all of a city’s bond issues is in compliance with
E6-8 (15 minutes)
1. c
E6-9 (15 minutes)
Expenditures are controlled in the General Fund through the use of budgets,
encumbrance accounting, and allotment accounting. Budgets place a limit on the
amount of spending a particular governmental unit can make in a specific category
E6–10 (10 minutes)
Debt Service Fund:
(a)Estimated revenues 2,500,000
Appropriations 2,000,000
E6–11 (10 minutes)
Since the lease is noncancellable and the life of the lease is greater than 75% of the asset’s
PROBLEMS
P6-1 (Moderate, 60 minutes)
(a)
1. Estimated revenues 4,000,000
Estimated other financing sources 75,000,000
6-10
2. Cash 76,000,000
Other financing sources—long-term debt issued 75,000,000
3. Investments 74,900,000
Cash 74,900,000
4. Budgetary fund balance reserved for encumbrances 25,000
5. Budgetary fund balance reserved for encumbrances 3,000,000
Encumbrances—capital project 3,000,000
6. Cash 3,050,000
9. Budgetary fund balance reserved for encumbrances 8,000,000
Encumbrances—capital project 8,000,000
6-11
11. Construction contracts payable 7,520,000
Cash 7,520,000
13. Cash 10,000
6-12
(b)
City of Watersville
Capital Projects Fund
Concert Arena Fund
Trial Balance
December 31, 2012
Debits Credits
Cash $4,595,000
Expenditures—architect fees 25,000
Expenditures—construction costs 11,000,000
Transfer out to Debt Service Fund 1,000,000
(c)
Appropriations 75,000,000
Budgetary fund balance 4,000,000
Estimated revenues 4,000,000
Estimated other financing sources 75,000,000
6-13
Budgetary fund balance reserved for encumbrances 63,975,000
Encumbrances—capital project 63,975,000
(d)
City of Watersville
Capital Projects Fund
Concert Arena Fund
Statement of Revenues, Expenditures, and Changes in Fund Balance
For the Year ended December 31, 2012
Revenues:
Expenditures:
Architect fees 25,000
Excess of expenditures over revenues 6,905,000
Other financing sources (uses):
Other financing sources—long-term debt issued 75,000,000
City of Watersville
Capital Projects Fund
Concert Arena Fund
Balance Sheet
December 31, 2012
Assets:
Cash $ 4,595,000
Liabilities and Fund Balance
Liabilities:
Retainage payable $ 660,000
(e)
Encumbrances—capital project 63,975,000
Budgetary fund balance reserved for encumbrances 63,975,000
P6-2 (Moderate, 60 minutes)
(a)
1. Estimated revenues—federal grant 25,000,000
Estimated revenues—investment earnings 4,000,000
2. Cash 90,000,000
5. Budgetary fund balance reserved for encumbrances 45,000
Encumbrances—capital project 45,000
6. Budgetary fund balance reserved for encumbrances 25,000,000
Encumbrances—capital project 25,000,000
6-16
7. Cash 5,020,000
8. Cash 3,500,000
Revenues—investments 3,500,000
10. Budgetary fund balance reserved for encumbrances 25,000,000
Encumbrances—capital project 25,000,000
11. Cash 16,000,000
12. Construction contracts payable 23,750,000
Cash 23,750,000
6-17
(b)
City of Spainville
Capital Projects Fund
City Hall Fund
Trial Balance
June 30, 2013
Debit Credit
Cash $1,975,000
Expenditures—architect fees 45,000
Expenditures—construction costs 50,000,000
Estimated revenues—federal grant 25,000,000
Estimated revenues—investment earnings 4,000,000
(c)
Revenues—investments 5,170,000
Revenues—federal grant 25,000,000
6-18
Assigned fund balance 64,955,000
(d)
City of Spainville
Capital Projects Fund
City Hall Fund
Statement of Revenues, Expenditures, and Changes in Fund Balance
For the Year Ended June 30, 2013
Revenues:
Federal grant $25,000,000
Excess of expenditures over revenues (19,875,000)
Other financing sources and (uses):
City of Spainville
Capital Projects Fund
City Hall Fund
Balance Sheet
June 30, 2013
Assets:
Cash $ 1,975,000
Liabilities and Fund Balance
Liabilities:
Retainage payable $ 2,500,000
(e)
Encumbrances—capital project 69,955,000
6-20
P6-3 (Moderate, 20 minutes)
(a)
CPF Estimated other financing sources 4,000,000
Appropriations 4,000,000
(b)
Alternate methods of disposing of the bond premium of $200,000:
1) Transfer the premium to the Debt Service Fund immediately.
P6-4 (Moderate, 45 minutes)
(a)
1. CPF Estimated revenues 30,000
Budgetary fund balance 470,000
2. CPF Budgetary fund balance reserved for encumbrances 300,000