Advanced Public Sector Accounting

CAPITAL PROJECT FUNDS

The objectives of creating a fund to account for a capital project is to provide a formal
mechanism to enable administrators to ensure revenues dedicated to a certain purpose are used
for that purpose and no other, and to enable administrators to report to creditors, and other
grantors of capital projects fund resources that their requirement regarding the use of the
resources were met. They are useful for holding resource manager accountable thereby helping
to assure that the resources for such projects are used legally and also in the most economical
manner. They provide information for legal compliance as well as sound financial management
and enable good reporting to source providers.

The previous unit indicates that long lived assets such as office equipment, government vehicles
and other relatively minor items may be acquired by a governmental unit by expenditures of
appropriations of the general fund or one or more of its special Revenue funds. Long-lived assets
used by activities accounted for by a governmental fund types are called general fixed assets.
Acquisitions of General Fixed Assets that require major amounts of money ordinarily cannot be
financed from general fund or special revenue fund appropriations. Major acquisitions of general
fixed assets are commonly financed by issuance of long term debt to be repaid from tax
revenues, or by special assessments against property deemed to be particularly benefited by the
long lived asset. Other sources financing the acquisitions of long lived assets include grants from
other governmental units, transfers from other funds, gifts from individual or organizations or by
a combination of several of these sources. if money received from these sources is restricted,
legally or morally to the acquisition or construction of specified capital assets, it is recommended
that a capital projects fund be created to account for these resources to be used for major
construction or acquisition projects.
GENERAL OUTLINE OF CAPITAL PROJECTS FUND

Dear Learner!Capital Projects Funds (CPF) account for financial resources to be used for the
acquisition or construction of major capital facilities (other than those financed by proprietary
funds & trust funds). Examples of major capital facilities are Administration Buildings, Civic
Centers and libraries etc. these funds do not account for the acquisition of smaller fixed assets,
such as vehicles, machinery & office equipment which are normally budgeted for & recorded as
 Advanced Public Sector Accounting

expenditures in the general fund. it is also possible that a construction project could simply have
a subsidiary ledger within the General Fund, rather than its own distinct fund. the existence of
the Capital projects fund, as any other fund will depend on the legal requirements and the need
for good financial management.
CPF do not account for the fixed assets acquired only for the construction of the fixed assets. It
exists only for the period of acquisition or construction of the fixed assets. After the acquisition
or construction is completed, the Capital Projects Fund will be abolished. The Fixed Assets
constructed are accounted for in the GFAAG. It does not also account for the repayment &
servicing of any debt obligations issued to raise money to finance the acquisition of capital
facilities. Such debt & debt related servicing activities are accounted for in the General Long
Term Debt Account Group (GLTDAG) & Debt service fund (DSF). Since the purpose of capital
projects fund is to account for the acquisition and deposition of revenues for specific purpose, it
contains balance sheet accounts for only liquid assets and for the liabilities to be liquidated by
those assets.

Virtually all-governmental buildings are constructed by the governmental unit & are mostly
financed by bond offerings. In commercial accounting, all the activities (the construction of the
building, the subsequent capitalization & accounting for the building & the servicing of the debt
incurred to finance the construction of the building is accounted using one general ledger. In
governmental, four general ledgers are used, of which two are funds & two are account groups.

Example
* Issuance of bonds for Br 500,000
1. Capital Projects Fund (CPF) - receives cash from bond offerings & uses cash to construct
fixed assets.
2. General Long Term Debt Account Group(GLTDAG) - accounts for matured General
Long Term Debt, at the maturity date, the liability is transferred to a DSF.

CPF
Cash 500,000
O.F.S Bond proceeds 500,000

3. GFAAG – accounts for fixed assets during & after construction.

 Advanced Public Sector Accounting

* Construct new building

C.P.F
Expenditures 500,000
Cash 500,000

GFAAG
Building 500,000
Investment in F.A –CPF 500,000

4. D.S.F. – services GLTD, making both interest & principal payments using money obtained
from tax levies on operating transfers from General Fund.

* Bond matures
GLTDAG
Bonds Payable. 500,000
Amt To Be Provided 500,000

DSF
Expenditures 500,000
Bonds payable 500,000

* Operating transfer made from GF.

DSF
Bonds payable 500,000
Cash 500,000

* Redeem Bond
DSF
Bonds Payable 500,000
Cash 500,000
 Advanced Public Sector Accounting

ESTABLISHMENT & OPERATION

C.P.F is usually established on a project-by-project basis, because legal requirements may vary
from one project to another. So the existence of the C.P.F as any other fund will depend on the
legal requirement & the need for good financial management.
The focus of the CPF is the entire life of the project. It is by definition an expendable fund, and
all its resources are expected to be used up. However, CPFs do not have the same year-by-year
focus as the G.F because of the multi-year focus of CPFs, some accountants prefer not to close a
CPF annually, but others do. Whether or not to close the CPF annually will depend on the unique
factors of each case & will be strongly influenced by the requirement of the financing source.

The decision to use budgetary accounts will also depend on the features & financing source of
the particular CPF. It will be based on the particular project & be strongly influenced by the
requirement of the financing source. The decision to use or not to use budgetary accounts is
influenced by factors such as.

- The number of projects in the C.P.F

- The amount of detail in the C.P.F budget
- The use of an annual budget (rather than a
project life budget) in the CPF

FINANCING A CAPITAL PROJECT

Capital projects project obviously need large amount of financing. Typically source of financing
include;

- Long term debt issue proceeds

- Grants from other governmental units
- Transfers from other funds with in the
governmental entity
- Interest income from temporary
investments.
- Gifts from individuals or foundations
- Special taxes or;
 Advanced Public Sector Accounting

A combination of more than one of those Intergovernmental grants, gifts, special taxes
&investment interests are considered as Revenues, whereas Inter Fund Transfers & Long Term
Debt issue proceeds are not revenues and are presented as Other Financing Sources and are
presented that way on the statement of changes.

Whether to have a separate capital fund for each project or to account for all capital funds for
each project or to account for all capital projects in one fund depends in part on what type of
financing involved. Different bond issues & different inter-governmental transfers might well
have different legal requirements & each might require a separate C.P.F. on the other hand if one
bond issue is used to finance several projects, a single fund may be both permissible advisable.

OTHER CONSIDERATIONS

Means of Acquisition
Accomplishment of capital acquisition or construction project may be brought about in one or
more of the following ways:

1. Outright purchase from fund cash

2. By construction, utilizing the governmental units own force
3. By construction, utilizing the services of private contractors
4. By capital lease agreement.

Costs Included

All expenditures for getting the project ready are put in the CPF, including architect fees,
transport costs, damages etc…. usually major capital facilities are constructed by contracted
labor. Construction costs incurred are charged to expenditures. At the completion of the project
the cost of the facility is recorded as a fixed asset in the GFAAG. Until then any costs incurred
are shown as construction work in progress in the GFAAG. Generally the year-end closing entry
in the CPF triggers the recording of an amount in the GFAAG equal to the credit to the
expenditures account.
 Advanced Public Sector Accounting

Retained Percentages
It is common in construction contracts for the entity to hold back the portion of the last payment
of the contract and to require contractors on large Scale contracts to give performance bonds,
providing indemnity to the Governmental Unit for any failure on the contractors party to comply
with terms and specifications of the agreement to provide more prompt adjustment on
shortcomings not legal or convincing enough to justify legal actions and not recoverable under
contractor’s bond as well as those the contractor may admit but not be in a position to rectify, it
is a common practice to withhold a portion of the contractors remuneration until final inspection
& acceptance have come about. The withheld portion is normally a contractual percentage of the
amount due on each segment of the contract.

This is to prevent the contractor from doing a poor quality work, especially in a rush to finish at
the end. Basically the entity will pay part of the final sum, and then have its own engineers come
and inspect the contractors work. if the contractors work passes the inspection, the balance of the
amount owed is paid. if the engineer finds poor quality or undone work, the contractor must then
correct the problem before the final retained sum is paid this amount withheld by the
governmental entity is known as retained percentage.

Encumbrances

Some governmental units include annual capital budgets as part of their annual appropriated
budget in which case the annual capital is recorded in the general ledgers of the various CPFs.
However, since the amount involved in a capital project are usually large, an encumbrance
account is highly recommended & is very necessary in case of multiple subcontractors for a
project. Because of this, an encumbrance accounting procedures alone are usually deemed
sufficient for control purposes. So recording of the budget in the general ledger might not be
necessary. In capital projects fund, Encumbrance is also recorded by the same amount in which
the construction contract agreement is made between the governmental unit and the contractor
and also in the same manner as that of the general and special revenue fund when items are
ordered through purchase orders.

Re-establishment of Encumbrance- the year end closing procedures for use by capital projects
funds artificially chops the construction expenditures pertaining to each continuing projects into
 Advanced Public Sector Accounting

fiscal year segments rather than allowing the total cost of each project to be accumulated in a
single Construction Expenditures Account. Similarly closing the encumbrance account of each
project to fund balance at year-end creates some procedural problems in accounting in the
subsequent year. the procedures illustrated for general and special revenue funds (using separate
Encumbrance, Fund Balance Reserved for Encumbrances, and Expenditure Accounts for each
year) could be followed. The authorization (Appropriation) for a capital projects fund however
does not expire at the end of a fiscal year but continues over the life of the project. Accordingly,
it appears desirable to re-establish Encumbrance account at the beginning of each year in order to
facilitate accounting for expenditures for goods and services ordered in one year and received in
a subsequent year.

ALTERNATIVE TREATMENT OF RESIDUAL EQUITY OR DEFICITS

If necessary expenditures & O.F.U are planned carefully & controlled carefully so that actual
does not exceed plans. Revenues & O.F.S of the C.P.F should equal or slightly exceed the
expenditures and other financing uses leaving a residual equity (surplus) and if long term debt
had been incurred for the purposes of the capital projects fund and under this case, There are
three possible options;
1. The balance could be transferred to the DSF, as residual equity transfer for retiring the debt,
which has been incurred for the purpose of the project.
2. If the residual Equity is were deemed to have come from grants or shared revenues restricted
for capital acquisitions or constructions, legal advice may indicate that any residual equity
may return to its source in proportionate amount or;
3. The balance might be retained for future maintenance purpose.

In some situations, in spite of careful planning and cost control, Expenditures and OFU of a CPF
may exceed its revenues and OFS resulting in a negative fund balance (deficit). If the deficit is
small an additional transfer will probably be requested from one or more other funds. If the
deficit is relatively large and/or intended transfers are not feasible, the governmental unit may
seek additional grants or shared revenues from other governmental units to cover the deficits if
no other alternative is available, the governmental unit would need to finance the deficit by
 Advanced Public Sector Accounting

issuing bonds. And under these circumstances, a legal or disciplinary action might have been
sought against the project manager, since public money was being used.

BOND PREMIUMS, DISCOUNT AND ACCRUED INTEREST ON BONDS SOLD

Issuance of Bonds at a Premium

Bond premiums arise because of adjustments to the interest rates. The bond indenture
agreements usually specify that any bond premium is to be set-aside in the related DSF. This is
desirable because it remains the incentive to spend more on a project than is authorized merely
by raising additional cash by increasing the interest rate in the CPF. There are two ways of
accounting the bond proceeds and the associated premium.

1. The proceed including the premium could be recorded in the CPF as OFS-Bond proceeds

Cash 110,000
OFS- Bond proceeds 110,000

2. Or, only the par value of the bond is considered as OFS of the CPF

Cash 110,000
OFS- bond proceed 100,000
Due to DSF 10,000

In the first case the transfer of the premium to the DSF is reported as an Operating Transfer Out
in the CPF and an Operating Transfer In in the DSF.

C.P.F
O.F.U- operating transfer out 10,000
Cash 10,000

DSF
Cash 10,000
OFS –operating transfer in 10,000
 Advanced Public Sector Accounting

Whereas in the second case, the bond premium is accounted as a liability of the CPF because it
must be remitted to the DSF. Similarly, when bonds are sold between interest payment dates the
amount of accrued interest is included in the total selling price. conceptually accrued interest
sold is an offset to the interest expenditure on the first interest payment date.

Following the sale of the bonds generally in practice, however accrued interest sold is recorded
as revenue of the DSF.
Issuance of Bonds at a Discount
Bond discount are rare because the stated the interest rate is usually set enough set high enough
so that no discounts may result (many Governmental units are legally propitiated from issuing
bonds at a discount). If a discount does result, theoretically there should be a transfer from the
related DSF to the CPF to cover the shortfall. In practice such a transfer may not be possible
because money may not be available in the related DSF or because of legal restraints. In such
case, the project may be curtailed or the shortage may be covered by an operating transfer from
the GF.

E.g

Cash 100,000
Due from 10,000
OFS- bond proceed 110,000

Accrued Interest on Bonds Sold

When bonds are sold between the interest payment dates the amount of accrued interest is
included in the total selling price. Conceptually, accrued interest sold is an offset to the interest
expenditures on the first interest payment date following the sale of the bonds. Generally in
practice, however accrued interest sold is recorded as revenue of the Debt Service Fund.

BOND ANTICIPATION NOTES PAYABLE

 Advanced Public Sector Accounting

The “bond anticipation” description of the debt signifies an obligation to retire the notes from the
proceeds of the proposed bond issue The account is increased and decreased for the same reason
and in the same manner employed for Tax anticipation Notes Payable in General Fund.
INVESTMENTS

All the money necessary to pay for the capital project is usually raised near the inception of the
project, but contractors are paid as work progresses. Excess cash, therefore may be temporarily
invested in high quality interest bearing securities. Interest rates payable by the governmental
unit on general long term debt have been lower than interest rates the governmental units can
earn on temporary investments of high quality such as Treasury bills and notes, Bank notes,
Bank Certificates of deposit and government bonds with short maturities. consequently, there is
considerable attraction to the practice of selling bonds as soon as possible after capital project is
legally authorized, and investing the proceeds to earn a net interest income. The interest earned
on the temporary investment is available for use by the CPF in same jurisdictions; in others, laws
a local practice require the interest income to be transferred to the DSF or to the GF. If interest
income is available to the CPF, it should be recognized on the accrual basis as a credit to
revenues. If it will be collected by the CPF but must be transferred, the credit for the income
earned should be Due to other funds. If the interest will be collected by the DSF or other fund
that will recognize it as Revenue, no entry by the CPF is necessary.

ACCOUNTING FOR CAPITAL PROJECTS FUND

Financial activities such as revenues earned expenditures incurred for the construction or
acquisition are recorded in almost the same manner as that of the General and Special Revenue
Fund. at the end of each fiscal year prior to a completion of a capital project, the Revenues,
Other Financing sources, Expenditures, Other Financing Uses and encumbrance ledger accounts
of the capital projects fund are closed to the unreserved and undesignated fund balance account.
upon completion of the project, the entire capital project fund is closed by a transfer of any
unused cash to the Debt Service Fund or to the General fund, as appropriate; the unreserved and
undesignated fund balance ledger account of the receiving fund would be for Residual Equity
Transfer.
 Advanced Public Sector Accounting

Any cash deficiency in the capital projects fund probably would be made up by a General fund;
this operating transfer would be credited to the other financing sources ledger account of the
capital projects fund and debited to the other financing uses account of the general fund. a capital
projects fund issues the same financial statements as General Fund-statement of revenues
Expenditures and change in fund balance and a Balance sheet. To reiterate, the assets constructed
with the resources of the capital projects fund are not included in that funds balance sheet. The
constructed plant assets are recorded in the governmental units general fixed assets account
group. Furthermore the bonds issued to finance the capital projects fund are not a liability of that
fund. Prior to maturity date or dates of the bonds, the liability is carried to the General Long
Term Debt Account Group.
Dear Learner!The following illustration will show how the construction and related activities
are accounted for in a capital projects fund.

Illustration
The town of X wants to construct a new library on the site owned by the town. The construction
is expected to cost 50,000,000. It is expected to be completed within two years on June 30 year
7. In a special meeting held on July 2 year 5, the members of the town council approved a
30,000,000 issue of General Obligation Bonds maturing in 20 years. The proceeds of this sale
will be used to help finance the construction of the new library. The remaining 20,000,000 will
be financed by an Irrevocable State Grant that has been awarded.

The following transactions occurred during the fiscal year ended June 30 year 6.

1. The General fund loaned 500,000 to the library Capital Projects Fund for defraying
Engineering and other preliminary expenses by receiving a note which is later to be
Settled from the bond issue proceeds

Cash 500,000
Bond Anticipation Notes Payable 500,000

2. Out of the Irrevocable grant of 20,000,000, the state contributed 5,000,000 and the
remaining is deemed to be susceptible to accrual
 Advanced Public Sector Accounting

Cash 5,000,000
Due from State Grant 15,000,000
Revenue 20,000,000

3. Preliminary engineering and planning costs of 320,000 were paid to the contractor.
There had been no encumbrances for this cost.

Construction Expenditure 320,000

Cash 320,000

4. The Bonds were sold at 101. the bond indenture agreement requires that any premium
to be set aside in the related Debt Service Fund.

Cash 30,300,000
OFS-Bond proceeds 30,000,000
Due to DSF 300,000

5. The town of X library CPF invested its 10,000,000 bond proceeds on the Federal
Government treasury bills.

Short Term Investment-Treasury Bills 10,000,000

Cash 10,000,000

6. A construction contract for 44,270,000 is authorized and signed.

Encumbrances 46,000,000
Fund Balance Reserved for Encumbrances 46,000,000
 Advanced Public Sector Accounting

7. Orders were placed for materials estimated to cost 550,000.

Encumbrances 550,000
Fund Balance Reserved for Encumbrances 550,000

8. The materials previously ordered (Transaction 7) were received at a cost of 510,000.

a) Fund Balance reserved for Encumbrance 550,000

Encumbrance 550,000
b) Construction exp 510,000
Constr. Payable 510.00

9. In addition to the construction contract of transaction 6; 3,900,000 was incurred for

the services of the architects and engineers; of this amount 3,100,000 was paid.

Encumbrances 3,900,000
Fund Balance Reserved for Encumbrances 3,900,000

Fund Balance Reserved for Encumbrance 3,900,000

Encumbrance 3,900,000

Construction Expenditure 3,900,000

Construction Payable 3,900,000

Construction Payable 3,100,000

Cash 3,100,000

10. Received cash of 1,000,000 from the General fund as an operating transfer.

Cash 1,000,000
OFS- Operating transfers in 1,000,000
 Advanced Public Sector Accounting

11. A partial payment of 10,000,000 was received from the state irrevocable Grants and
the General Fund loan was repaid with interest amounting to 10,000.

Cash 10,000,000
Due from State Grant 10,000,000

Bond Anticipation Notes Payable 500,000

Interest Expenditure 10,000
Cash 510,000

12. When the project was approximately half finished, the contractor submitted billing for a
payment of 12,000,000.

Fund Balance Reserved for Encumbrance 12,000,000

Encumbrance 12,000,000

Construction Expenditure 12,000,000

Construction Payable 12,000,000

13. The contractor’s initial claim was fully verified and paid.

Construction Payable 12,000,000

Cash 12,000,000
 Advanced Public Sector Accounting

Town of X Library Capital Projects fund

Trial Balance
June 30, Year 6

Account Title Debit Credit

Cash 20,870,000
Short term investment-Treasury Bills 10,000,000
Due from State Grant 5,000,000
Construction Payable 1,310,000
Due to DSF 300,000
Fund Balance Reserved For Encumbrance 32,270,000
Unreserved and Undesignated Fund Balance -
Revenues 20,000,000
OFS- Bond Proceeds 30,000,000
OFS- Operating transfers 1,000,000
Construction Expenditures 16,730,000
Interset Expenditures 10,000
Encumbrances 32,270,000 .
Total 84,880,000 84,880,000
 Advanced Public Sector Accounting

Town of X library Capital Projects Fund

Statement of Revenues, Expenditures and Changes in Fund Balance
For the year ended June 30, year 6
Revenues:
Irrevocable State Grant 20,000,000
Expenditures:
Construction Expenditures 16,730,000
Interest Expenditure 10,00016,740,000
Excess of Revenue over Expenditure 3,260,000
Other Financing Sources(Uses)
OFS- Bond Issue Proceeds 30,000,000
OFS- Operating transfers in 1,000,00031,000,000
Excess of Revenue and OFS over Expenditure 34,260,000
Add: Fund Balance - July 1, Year 5 -
Fund Balance - June 30, Year 6 34,260,000

Town of X Library Capital Projects Fund

Balance Sheet
June 30, year 6
Assets
Cash 20,870,000
Short Term Investment- Treasury Bills 10,000,000
Due from State Grant 5,000,000
Total Asset 35,870,000
Liabilities and Fund Balance
Construction Payable 1,310,000
Due to DSF 300,000
Fund Balance:
Reserved for Encumbrance 32,270,000
Unreserved and Undesignated 260,000
Total Liabilities and Fund Balance 35,870,000
________________________________________________________________________
 Advanced Public Sector Accounting

Closing Entries
Revenues 20,000,000
OFS- Bond Proceeds 30,000,000
OFS- Operating Transfer 1,000,000
Construction Expenditure 16,730,000
Interest Expenditure 10,000
Unreserved and undesignated-
Fund Balance 14,260,000

Unreserved and Undesignated-

Fund Balance 32,270,000
Encumbrances 32,270,000
________________________________________________________________________
The following transactions related to the town of X Library Capital Projects Fund occurred
during the fiscal beginning July 1 Year 6 and ending June 30, Year 7.

14. Received 10,500,000 at maturity date of the Federal Government Treasury Bills.

Cash 10,500,000
Short Term Investment-Treasury Bills 10,000,000
Revenues 500,000

15. The Library CPF transferred the premium on the Bond to the DSF

Due to DSF 300,000

Cash 300,000

16. A progress billing of 32,270,000 was received from the contractors for the final work
done on the project. as per the term of the contract, the town withhold 10% of the
billing.
a) If Encumbrances are Re-established at the beginning of the fiscal period (July 1,Year 6)
-Entry on July 1, year 6 would be;
 Advanced Public Sector Accounting

Encumbrances 32,270,000
Unreserved and Undesignated-
Fund Balance 32,270,000

- Then, the entry for the current transaction would be

Construction Expenditure 32,270,000

Construction Payable 29,043,000
Construction Payable-
Retained Percentage 3,227,000

b) If there is no re-establishment of encumbrance (this is not very common in CPF)

On July 1, year 6;

Fund Balance Reserved for Encumbrance 32,270,000

Construction Payable 29,043,000
Construction Payable-
Retained Percentage 3,227,000

17. All outstanding liabilities of the town of X Library CPF are paid except remaining
balance.

Construction Payable 30,353,000

Cash 30,353,000

18. Received the remaining balance from the Irrevocable State Grant.

Cash 5,000,000
Due from State Grant 5,000,000
 Advanced Public Sector Accounting

________________________________________________________________________
Town of X Library Capital Projects Fund
Statement of Revenues, Expenditures and Change in Fund Balance
For the year ended June 30, Year 7.
Revenues 500,000
Add: Unreserved and Undesignated Fund Balance July 1, Year 6 1,990,000
Fund Balance June 30, year 7 2,490,000

Town of X Library Capital Projects Fund

Balance Sheet
June 30, Year 7
Assets
Cash 5,717,000
Liabilities and Fund Balance
Construction Payable- Retained Percentage 3,227,000
Unreserved and Undesignated Fund Balance 2,490,000
Total Liabilities and Fund Balance 5,717,000
________________________________________________________________________
Closing Entry
Revenue 500,000
Unreserved and Undesignated-
Fund Balance 500,000
________________________________________________________________________
Dear learner!The following transactions and events take place after the construction has
finished

19. The Retained percentage balance has been paid to the contractor because the work
has been performed as per the term of the contract.

Construction Payable- 3,227,000

Retained Percentage
Cash 3,227,000
 Advanced Public Sector Accounting

20. The town council decides to transfer the residual fund balance of the Library CPF to
the DSF.

Residual Equity transfer out 2,490,000

Cash 2,490,000

================================================================
Closing Fund Balance

Unreserved and Undesignated- 2,490,000

Fund Balance
Residual Equity transfer out 2,490,000

ASSIGNMENT II
Give short answer for the following questions
1. Describe how and which kinds of activities are accounted for in a Capital Projects Fund.
___________________________________________________________________________
_________________________________________________________________
2. Explain the use of encumbrance and its re-establishment in CPF.
___________________________________________________________________________
_________________________________________________________________
3. Discuss the concept of budgeting in CPF and its difference with that of GF and SRF.
___________________________________________________________________________
_________________________________________________________________
4. Describe the use of investment as a source of financing in CPF.
___________________________________________________________________________
_________________________________________________________________
5. Explain the mechanism how construction process and the contractor is controlled from
doing poor quality work?
 Advanced Public Sector Accounting

____________________________________________________________________________
__________________________________________________________________
6. IF bonds sold to finance a project for the construction of general Fixed Assets are sold
at a discount, what legal questions arises? What about at a Premium? Discuss.
____________________________________________________________________________
______________________________________________________________
7. Explain how financial reporting are made in that of CPF in contrast that of GF.
____________________________________________________________________________
________________________________________________________________
8. Describe the sources of financing in a CPF by indicate the major and most common sources.
____________________________________________________________________________
__________________________________________________________________
9. Explain the treatments for the remaining residual balance or for a deficit after the
construction of a major capital facility by a CPF.
____________________________________________________________________________
__________________________________________________________________
10.Describe the factors that influence the decision to use or not to use budgetary accounts
in a CPF.
____________________________________________________________________________
_________________________________________________________________
 Advanced Public Sector Accounting

DEBT SERVICE FUND

From time to time governmental entities have a shortage of cash to carry out their activities. In
such cases, governmental entities may turn to borrowing to supply the needed cash. This
especially is true when cash is needed for capital projects. The size of the project typically means
that cash cannot be easily obtained by taxes or other means of generating revenue. When money
is borrowed therefore, there should be plan to repay it and the resources which have been
designated to repay the debt with its interest should not be used for any other purpose. For the
purpose of administering the repayment plan and to keep separate resources designated for the
payment of the debt and its interest, the debt service fund is created.

GENERAL OUTLINE OF DEBT SERVICE FUND

A. Characteristics
1. Debt service fund is used to account for both the repayment of the principal and
payment of interest of the long-term debt when they are due. Often Debt service
funds are legally mandated. Other times, the government administrator might think
a Debt Service Fund is useful for management of resources being accumulated for
Debt Service.
2. DSF is governmental funds and therefore are Expendable. Although, like a CPF,
they have focus more than a year. Debt service funds are for general long-term debt
(GLTD), which has been used to provide resources for one of the other
governmental fund types. Often they arise from the Capital projects. Proprietary
funds also borrow on a long term basis, but their repayment is accounted for in the
proprietary fund itself rather than a separate debt service fund.
3. As expendable funds, DSF use the modified accrual basis of accounting. An
application of modified accrual, which is of special interest to DSF, has to do with
interest payable. Interest payable is not accrued in the DSF. It is only recorded as a
liability in the period when it becomes due. For example, interest due on January
31, 20x1 would not be accrued and recorded on December 31, 20 x 0 Balance
Sheet.
 Advanced Public Sector Accounting

4. Accounts recommended for use by a serial bond Debt service fund is similar with
thatof General Fund and Special Revenue fund. Even if it is not exactly the same
such as budgetary accounts (Estimated Revenue, Estimated Other Financing
Sources, Appropriations, Estimated Other financing Uses) or proprietary accounts
(Revenues, OFS, Expenditures, OFU)
5. The operations of DSF do not involve the use of purchase orders and contracts for
goods and services. So the Encumbrance accounting is not needed.
6. The ledger accounts of a Serial Bond Debt Service fund include liquid assets and
current liabilities and Fund Balance Accounts. Liquid Assets of serial Bond Debt
Service funds are held for the purpose of paying interest or outstanding bonds and
retiring the principal instalment s as they fall due; for the convenience of the bond
holders, the payment of interest and the and the redemption of matured bonds is
ordinarily handled through the Banking system. Usually the government designate a
bank as a “Paying Agent” or a “Fiscal Agent” to handle interest and principal
payments for each issue. The assets of a Debt service Fund may therefore include
Cash with paying Agent and the appropriations, Expenditures and liabilities may
include Amounts for the Services and Charges for Paying Agents.
7. Timing of Debt Service payments - mostly due to both political and financial
management considerations, the payment should be kept consistent over the life of
the issue. With serial bonds this is easy but with term bonds, it takes planning (the
type of long term bonds will be discussed later in this topic).

TYPES OF LONG TERM DEBTS

The followings are some of types of long term debts:

i. Bond- isa written promise to pay a specified principal sum at a specified
future date with interest. They are typically issued in 1000 and 5000
denominations. All long term debts of governmental units consists of one of
the following two basic types of bonds;.

ii. Term Bonds- term bonds are bonds whose principal is repaid in lump-sum at their
maturity date. Such lump-sum payment is usually made possible through accumulation
 Advanced Public Sector Accounting

of money in the DSF on an actuarial basis over the life of the bond issue in a sinking
fund.
iii. Serial Bonds - this are bonds, which have periodic maturities. the principal of a serial
bond so repaid at various ore determined dates over the life of the issue.
There are four types of serial bonds;
1. Regular Serial Bonds- The total Principal amount of an issue is repayable in a
specified number of equal annual instalments over the life of the issue.
2. Differed Serial Bond- The total principal amount of the issue is repaid in equal
annual instalments, but the first instalment is delayed for a period more than one
year.
3. Annuity Serial Bond- if the amount of annual principal repayment is scheduled to
increase each year by approximately the same amount that interest payments
decrease (interest decrease of course, because the amount of outstanding bond
decreases) so that the total DSF remains reasonably level over the term of the issue,
the bonds are called Annuity Serial Bonds.
4. Irregular Serial Bonds- these types of serial bonds may have pattern of repayment
that does not fit the other three categories.
Generally, there are other types of long-term debts (bonds) which also arise because of different
activities of Governmental units. This long term debts may or may not be accounted for under
DSF for their repayment. They may be categorized as follows;

a. Revenue Bonds- are issued to finance the establishment or expansion of

activities accounted for in Enterprise Funds (EF). These bondsare shown as
liabilities of EF. Because their repayment and servicing can only come from
money generated from the operations of those funds.
b. General Obligation Bonds- this bonds serviced from the enterprise funds are
also issued to finance establishment or expansion of activities accounted for in
EF. They bear the full faith and credit of the governmental unit. When such
bonds are to be repaid and serviced from money generated from the operations
of an EF, the bonds should be shown as liabilities of the EF and as a contingent
liability of the General Long Term Debt Account Group (GLTDAG).
 Advanced Public Sector Accounting

c. All other long-term debt fitting into one of the two preceding categories is
shown as a liability of the GLADAG. DSF is created for long-term debt that is
shown as a liability of the GLTDAG which is a self-balancing group of
accounts that keep track of all unmatured long term debt in group c above. DSF
account for the matured portion and the repayment of such principal and interest
on such long term debt.

In addition, to term bonds and serial bonds, debt service fund may be required to service debts
arising from the use of notes or warrants having a maturity period of more than a year after the
date of issue. Additionally, DSF may also be used to make periodic payments required by capital
lease agreements.