Chapter -4

Accounting for Capital Project and Debt Service Fund.

4.1 Accounting for capital project fund
Capital project funds are established to account for financial resources that are to be used to
construct or otherwise acquire major long-lived “general government” capital facilities; such as
building, highways, bridge etc. However, not all general government fixed asset acquisitions are
financed through capital project fund. Because, routine fixed asset purchases may be financed
with resources of general fund or special revenue fund.
4.1.1. Sources of capital project fund
1. Bond issues or other long-term general obligation debt issues.
2. Grants or shared revenues from other government
3. Transfer from other fund
4. Interest earned on temporary investments of project resources.
4.1.2. Capital Project Fund life cycle
A capital project fund is authorized by action of the legislative body on either the project or debt
issue.
In general, the life of capital project fund seems like as follows:
1. Receipt of all resources will occur and revenue or other financing sources will be credited.
2. Expenditures will be recorded and paid.
3. Any remaining resources and the balance of the fund will be closed out when the assets are
transferred to another fund or disposed of in some other way as required by law or contract. The
law or contracts will determine the disposition of any unused balance remaining in the capital
project fund at completion of its mission. Unused fund balance may refund to the grantors who
participated in financing the project. The projects financed through capital projects funds usually
are planned in the government’s long-term capital budget and the detailed general ledger control
accounts are used instead of revenue & expenditure subsidiary ledger.
4.1.3. Costs charged to project.
All expenditure necessary to bring the capital facility to a state of readiness for its intended
purpose are properly chargeable as capital project fund expenditure. The direct cost of items such
as land, building, material, and labor would be included. Additionally, the total project cost

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would include such related items as engineering and architect fee, transportation cost, damages
occasionally by the project
4.1.4. Residual equity Surplus & Deficit
During the accomplishment of the project, there may be a resource surplus or deficit.
 If there is residual equity surplus when the project is completed, it may be transferred to
-Debt service fund
- Donors /contributors
- The balance might be retained for future maintenance of the bridge.
 If the fund resulted deficit financing, source may be arranged from;
- Inter fund transfers
- Other governmental units such as; donation or grant
- Debt security issuance
Illustration: Sample ledger entries for a CPF
Assume that in 2002 the governing body of a government unit decides to construct a bridge
expected to cost $ 3,000,000. The bridge construction and related costs are to be financed as
follows;

Total Percent
Federal grant $1,200,000 40%
State grant 600,000 20
Bond issue proceed 900,000 30
Transfer from general fund 300,000 10
$3,000,000 100%
The $600,000 state grant is a fixed sum irrevocably granted for the bridge project, and will revert
to the state only if the bridge is not built. But the federal grant is for 40% of the qualifying
project expenditures, with a maximum grant limit of $1,200,000; and any excess grant cash
received would revert to the federal government. Thus, the federal grant is an expenditure-driven
grant and federal grant revenues will be recognized accordingly.
The bridge is to be constructed by a private contracting firm, ABC Construction Company,
selected by preserved bid based on engineering specifications; the government’s work force will
do related earth moving & landscape work.

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The estimated costs of the bridge project are:
Company contract ------------------------------------------------------------------------------ $ 2,400,000
Earth moving and landscaping (government road department):
Labor------------------------------------------------------------$300,000
Machine time ---------------------------------------------------200,000
Fuel & materials ----------------------------------------------100,000 600,000
$ 3,000,000
In addition, 5% of the amounts payable to ABC Construction Company under the contract will
be retained as a further guarantee of the quality of the work. Assume that the bridge construction
is begin in 2002 and should be completed in 2003.
 The budgetary entry during the year will be:
Estimated revenue---Federal grant -------------------------------$1,200,000
Estimated revenue----state grant ---------------------------------------600,000
Estimated other financing Sources--bond proceeds-------------------900,000
Estimated other financing sources--operating transfer from GF ---300,000
Appropriation- company contract -----------------------------------$ 2,400,000
Appropriation - labor -----------------------------------------------------300,000
Appropriation - machine time --------------------------------------------200,000
Appropriation -fuel & materials ------------------------------------------100,000
 The 2002 transactions and events:
The following entries summarize the several capital project fund transactions and events
that occurred during 2002:
1) The contract with ABC Construction Company was signed & work began on the bridge.
Encumbrance- ABC contract ------------------$ 2,400,000
Reserve for encumbrance -----------------------------------2,400,000
2) The bond was sold at a slight premium (101) for $ 909,000.
Cash ------------------------------------ 909,000
Other financing sources –bond proceed ---------- 909,000
3) Fuel & materials ordered during the year totaled $ 55,000.
Encumbrance- fuel &materials -------------------------------$55,000
Reserve for encumbrance ---------------------------------------------55,000

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4) The state grant was received; but the governing body authorized only a $ 130,000
transfer from the general fund during 2002, which was received, and will authorize the
remainder in 2003;
Cash-----------------------------------------730,000
Revenue—state grant -----------------------------------------------600,000
Other financing source -- operating transfer from GF ---------130,000
5) Invoice were received and vouchered for fuel & material $49,000 (Encumbered at
$48,000), machine time, $81,000 and the ABC construction company $ 1,000,000 (as
encumbered).
a) Reserve for encumbrance --------------------------- $ 1,048,000
Encumbrance –fuel & material ----------------------------------------48,000
-ABC contract -----------------------------------------1,000,000
(To reverse encumbrance)
b) Expenditures -fuel& material -------------------------- 49,000
-Machine time -------------------------- 81,000
-ABC contract ------------------------- 1,000,000
Contract payable (1,000,000 X 5%) ---------------------$ 50,000
Voucher payable ----------------------------------------------1,080,000
(To record vouchering expenditure for payment & 5% retain on ABC contract).
6) Cash Disbursements during 2002 were: vouchers payable $970,000, investments $400,000,
payroll $140,000. The entries will be
Voucher payable -------------------------- $ 970,000
Investment --------------------------------- 400,000
Expenditure- labor ----------------------- 140,000
Cash ---------------------------------------------------------- 1,510,000
(To record paid voucher & payroll)
7) Filed for federal grant reimbursement for 40% of the expenditures (transaction 5&6 incurred
for the project during 2002).
Due from federal government --------------------- $508,000
Revenues- federal grant ----------------------------- 508,000
(To record filing for federal grant reimbursement for qualifying expenditure)

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Calculated as; (40% (1,130,000+140,000))
8) Accrued interest receivable on investment at year end was $ 18,000.
Accrued interest receivable --------------------18,000
Interest revenue --------------------------------- 18,000
(To record accrued revenue at year end).
4.2. Accounting for Debt service fund
The purpose of debt service funds is to account for the accumulation of resource for, and the
payment of general long term debt principal and interest. Long term debt of a government could
be in the form of bonds. Bond is a written promise to pay a specified principal sum at a specified
future date, usually with interest at a specified rate. A government unit may issue two basic types
of bonds i.e. term bond and serial bonds.
A. Term bond: Bonds for which the entire principal is payable at a single specified
maturity date.
B. . Serial bond: Bonds in which the principal is repaid in periodic installments over
the life of the issue.
 Types of serial bonds:
I. Regular serial bond - Bonds payable in which the total principal is repayable in a
specified number of equal annual installments.
II. Deferred serial bond- If the first installment is delayed for a period of more than
one year after the date of the issue but thereafter installments fall due on a regular
basis, the bonds are known as deferred serial bonds.
III. Annuity serial bond - If the amount of annual principal repayments is scheduled
to increase each year by approximately the same amount that interest payments
decrease (interest decreases because the amount of outstanding bonds decreases),
the bonds are called annuity serial bonds.
IV. Irregular serial bond – May have any pattern of repayment that does not fit the
other three categories.
4.2.1. Budgeting for Debt Service
If taxes for payment of interest and principal on long-term debt are recorded directly in the debt
service fund, they are budgeted as estimated revenues of the debt service fund. Interest on the
investments recorded in the debt service fund is also budgeted as estimated revenue by the debt

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service fund. If resources, such as taxes, are to be raised by another fund and transferred to the
debt service fund, they must be included in the revenues budget of the fund that will raise the
revenue (often the General Fund). Since the debt service fund is a budgeting and accounting
entity, it should prepare a revenue and other financing sources budget that include operating
transfers from other funds as well as revenues it will raise directly or earn on its investment.

The appropriations budget of a debt service fund must provide for the payment of all interest on
general long-term debt that will become legally due during the budget year and for the payment
of any principal amounts that will become legally due during the budget year.
4.2.2. Accounting for serial bonds
Accounts recommended for use by debt service funds are similar to but not exactly the same as
those recommended for use by the general fund and special revenue funds. Because the number
of sources of revenues and other financing sources is relatively small in a typical debt service
fund, as is the number of purposes for which expenditures are made, it is generally not necessary
to use control and subsidiary accounts such as those used by the general fund. Moreover, because
debt service funds do not issue purchase orders or contracts for goods and services, the use of
encumbrance accounting is unnecessary.

Thus, the budgetary accounts typically used for a debt service fund are Estimated Revenues,
Estimated Other Financing Sources, Appropriations, Estimated Other Financing Uses, and
Budgetary Fund Balance. The actual operating accounts usually include only a few revenue
accounts, Other Financing Sources, Expenditures— Bond Interest and Expenditures—Bond
Principal.
Illustration:
The town of Z serial bond debt service fund balance sheet as of December 31, 1996 is presented
below.
Town of Z
Serial bond DSF balance sheet
As of December, 1996
Assets:
Cash-------------------------------------------------1,500
Investment ----------------------------------------500,000

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Interest receivable --------------------------------12,500
Total -----------------------------------------514,000
Fund equity:
Fund balances ---------------------------------------514,000
Total fund balances --------------------------514,000
Additional information:
1. The revenue budget for the serial bond DSF for the year 1997 consists of estimated revenues
of $330,000 to be raised from the debt service tax levy and estimated revenue of $30,000 from
earning on investment. Appropriations budget consists of bond interest to be paid on January 1,
1997 is $100,000 and interest to be paid on July 1 is $100,000.
Estimated revenues ---------------------------360,000
Appropriation ----------------------------------------200,000
Fund balance -------------------------------------------160,000
2. Tax receivable in the amount of $340,000 and estimated uncollectable taxes $10,000 are
recorded.
Tax receivable (current) -----------------------------340,000
Revenue -----------------------------------------------------------------330,000
Estimated uncollectable (current) -------------------------------------10,000
3. Half of the gross tax levy is collected in cash
Cash --------------------------------------- 170,000
Tax receivable (current) -----------------------------------------170,000
4. Checks were written and mailed for the interest payment due on January 1, 1997.
Expenditure (interest) --------------------------------100,000
Cash------------------------------------------------100,000
5. Cash in the amount $70,000 was invested.
Investment --------------------------------------70,000
Cash ---------------------------------------------70,000
6. Interest receivable as of 1996 is collected and invested. (See the amount in the balance sheet)
Cash ----------------------------12,500
Interest receivable --------------------------------12,500
Investment ----------------------12,500

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 Cash ----------------------------------------------12,500
7. Taxes in the amount of $160,000 are collected in cash.
Cash ----------------------------160,000
Tax receivable -------------------------160,000

8. Checks were written and mailed for the interest payment due on July 1, 1997.
Expenditure (interest) ---------------------100,000
Cash --------------------------------------------------------100,000
9. Interest on investment is received in cash in the amount of $15,000; cash in the amount of
$75,000 is invested.
Cash -------------------------------15,000
Interest income ---------------------------------------15,000
Investment ---------------------------------75,000
Cash ---------------------------------------------------75,000
10. Accrual interest receivable on investment at year end is computed to be $13,000
Interest receivable --------------------------13,000
Interest income -----------------------------------------13,000
11. Budgetary and operating statement accounts were closed and tax receivable current and the
related estimated uncollectable accounts are designated as delinquent.
a. Appropriations -------------------------------200,000
Fund balance ---------------------------------160,000
Estimated revenue ------------------------------360,000
b. Revenues----------------------------------330,000
Interest income ---------------------------28,000
Expenditure ---------------------------------------------200,000
Fund balance --------------------------------------------158,000
c. Tax receivable (delinquent) ----------------------- 10,000
Estimated uncollectable tax (current) --------------10,000
Tax receivable (current) -----------------------------10,000
Estimated uncollectable (delinquent) ---------------10,000

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 4.2.3. Accounting for term bond
Example:
On January 1990, the town of X issued $1,500,000, 5% term bond maturing in 20 years. Interest
on the bond is payable semiannually on January 1, and July 1. Sinking fund to be established
with equal additional to be made semi annually on January 1 and July 1 each year. The sinking
fund investments are expected to yield a return of 6% per annum compounded semi annually.
Investment earning is added to the sinking fund principal.
The town of X term bond DSF would have the following trial balance as of December 31, 1990.
Debit Credit
Investment -----------------------40,383.95
Fund balance ------------------------------------------40,383.95
Total -----------40,383.95 40,383.95
 Assume that the future amount of $1 invested at the end of each period will amount to
$75.4012597 at the end of 40 periods.
Required: A. Prepare a schedule showing the required addition to the sinking fund, the expected
semi annual earning and the end of period balance in the sinking fund for each of the 40 periods.

Solution: Since the amount needed for bond repayment at the end of 40 six-month periods is
$1,500,000, the tax levy for bond principal repayment must yield $1,500,000 divided by
75.4012597, i.e. $19,893.57, at the end of each six-month period throughout the life of the
bonds. It can be calculated as follows:

$1 ===75.4012597
? (X) ===1,500,000
X == $19,893.57 and it is scheduled as follows below
 Interest earning amount == Balance at end of period X interest rate
Example: Interest for the 2nd period = 19,893.57 X 0.03 = 596.81
Interest for the 3rd period == 40383.95 X 0.03 = 1211.52

Year Period Addition at end of Period 3% inter/period Balance at end of Period

1990 1 $19,893.57 $ –0– $19,893.57
2 19,893.57 596.81 40,383.95

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 1991 3 19,893.57 1,211.52 61,489.04
4 19,893.57 1,844.67 83,227.28
B. Prepare entries in the general journal form to reflect the following transactions for fiscal
year ended December 1991.
1. The revenue budget for the term bond DSF for 1991 consists of estimated revenues of
117,843.33 (i.e. $19,893.57 x 2 +$37,500 x 2 (expected revenue to be collected for the payment
of bond interest for the two periods) + 1,211.52 + 1,844.67) and the appropriations budget bond
interest payments in January 1 and July 1 $37,500 (i.e. 1,500,000 x 5% x ½) each.

Estimated Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,843.33

Fund Balance . . . . . . . . . . . . . . . . . . . . . . . . . . ……….42, 843.33
Appropriations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000.00
2. Tax receivable in the amount of $120,000 and estimated uncollectable taxes in the amount of
$3,000 are recorded.
Taxes Receivable—Current . . . . . . . . . . . . . . . . . . . . . . . . . 120,000.00
Estimated Uncollectible (Current Taxes) . . . . . . . . . . . . . . . . 3,000.00
Revenues . . . . . . . . . . . . . . . . . . . . . . . …………………… 117,000.00
3. Taxes in the amount of $57,400 are collected in cash.
Cash ---------------------------------------------57,400
Tax receivable ----------------------------------- 57,400
4. Paid $57,393.57 of which $37,500 for the semi annual interest payments and $19,893.57 is for
additions to the sinking fund.
Expenditure -------------------------------37,500
Investment -------------------------------19,893.57
Cash -------------------------------------------57,393.57
5. Sinking fund investment earned $1261.91 for the six month ending June 30, 1991.
Investment -------------------------------1261.91
Interest earning ----------------------------------1261.91
6. During the 2nd 6th tax collection for the term bond DSF totaled $58,000. Moreover, the
required to the Investment account is made and interest of $37,000 was paid.

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a. Cash --------------------------------58,000
Tax receivable ------------------------------58,000
b. Expenditure ------------------------------37,500
Investment --------------------------------19,893.57
Cash -----------------------------------------------57,393.57
7. Sinking fund interest earned $1883.10 for the last 6 th month ending on December 31, 1991.
This amount was added to the investment account.
Investment ------------------------------- 1883.10
Interest earning --------------------------------1883.10
8. Tax receivable current and the related estimated uncollectable tax are recorded as delinquent.
Tax receivable (delinquent) ---------------------------4,600
Estimated uncollectable tax (current) ----------------3,000
Tax receivable (current) --------------------------------------- 4,600
Estimated uncollectable tax (delinquent) ---------------------3.000
9. The budgetary and operating statement accounts were closed as December 31, 1991.
Appropriation ------------------------------75,000
Fund balance --------------------------------42,843.33
Estimated revenue --------------------------------117,843.33

Revenue -------------------------------117,000
Interest earning ----------------------3,145.09
Expenditure ----------------------------------75,000
Fund balance ---------------------------------45,143

C. Prepare balance sheet

Town of X
Term bond DSF balance sheet
As of December 31, 1991.
Assets Fund equity
Cash ---------------------------613 Fund balance -----------------85,529
Investment -------------------83,316 Total fund equity ------------85,529

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 Tax receivable (delinquent) ---4,600
(-) estimated uncoll.tax --------1,600
Total asset ---------------------85,529
D. Prepare statement of revenues, expenditure and change in fund balance for the year ended
December 31, 1991.
Town of X
Statement of revenues, expenditure and change in fund balance
December 31, 1991
Revenues:
Taxes -------------------------------------------117,000
Interest earning --------------------------------3,145
Total revenue -----------------------------------120,145
Expenditures:
Interest on bond ----------------------------------------------75,000
Excess of revenue over expenditure & OFU-------------45,145
Fund balance beginning ----------------------------------------40,384
Fund balance December 31, 1991 -----------------------------85,529.

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