CHAPTER FOUR- PART II

ACCOUNTING FOR GOVERNMENTAL

FUNDS

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4.3. ACCOUNTIGN FOR CAPITAL PROJECT
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 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).
 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, it
accounts only for the construction of the fixed assets. 1-2
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 CPF 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).
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 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.
 In commercial accounting, all the activities accounted
using one general ledger. In governmental, four general
ledgers are used, of which two are funds & two are
account groups.
Capital Projects Fund (CPF); GFAAG; DSF
General Long Term Debt Account Group(GLTDAG)
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 C.P.F are 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. 1-5
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 The decision to use budgetary accounts will also depend
on the features & financing source of the particular CPF.
 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
 

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FINANCING A CAPITAL PROJECT
 Capital projects 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 within the governmental entity

 Interest income from temporary investments.

 Gifts from individuals or foundations

 Special taxes or;

 A combination of more than one of those

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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.

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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.
Retained Percentages
 Is amount withheld by the governmental entity to correct the
problem before the final retained sum is paid, if the engineer finds
poor quality or undone work 1-9
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Encumbrances
 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.

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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 fiscal year
segments rather than allowing the total cost of each
project to be accumulated in a single Construction
Expenditures Account.
 Therefore after closing encumbrance it is 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. 1-11
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Residual equity or deficit
 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 there are three possible
options;
 The balance could be transferred to the DSF
 any residual equity may return to its source in
proportionate amount or;
 The balance might be retained for future maintenance
purpose. 1-12
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Residual equity or deficit
 In some situations 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
issuing bonds.
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Illustrations
 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.
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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.
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
3.Preliminary engineering and planning costs of 320,000
were paid to the contractor. There had been no
encumbrances for this cost. 1-15
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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.
5.The town of X library CPF invested its 10,000,000 bond
proceeds on the Federal Government treasury bills.
6.A construction contract for 44,270,000 is authorized and
signed.
7. Orders were placed for materials estimated to cost
550,000.
8.The materials previously ordered (Transaction 7) were
received at a cost of 510,000.
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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.
10.Received cash of 1,000,000 from the General fund as an
operating transfer.
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.
12.When the project was approximately half finished, the
contractor submitted billing for a payment of 12,000,000.
13.The contractor’s initial claim was fully verified and paid.
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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.
15.The Library CPF transferred the premium on the Bond to the DSF
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.
17. All outstanding liabilities of the town of X Library CPF are paid
except remaining balance.
18.Received the remaining balance from the Irrevocable State Grant.

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

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4.3. ACCOUNTIGN FOR CAPITAL PROJECT
No.
FUND   Dr Cr
Cash 500,000.00  
1. 1. Bond Anticipation
Solution Notes Payable   500,000.00
1. 2. Cash 5,000,000.00  
Due from State Grant 15,000,000.00  
Revenue   20,000,000.00
1. 3. Construction
Expenditure 320,000.00  
Cash   320,000.00
1. 4. Cash 30,300,000.00
OFS-Bond
proceeds  30,000,000.00
1. 5. Short-term Inves’t-
Treasury Bills 10,000,000.00  
Cash   10,000,000.00
1. 6. Encumbrance 44,720,000.00  
Reserve for
Encumbrance   44,720,000.00
1. 7. Encumbrance 550,000.00  
Reserve for
Encumbrance   550,000.00
1. 8. Encumbrance 550,000.00  
Reserve for
Encumbrance   550,000.00
Consn. Expenditure 510,000.00   1-20
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No.   Dr Cr
1. 9 Encumbrance 3,900,000.0  
Reserve for Encumbrance   3,900,000.00
Reserve for encumbrance 3,900,000.00  
Encumbrance   3,900,000.00
Consn. Expenditure 3,900,000.00  
Consn. Payable   3,900,000.00
Consn. Payable 3,100,000.00  
Cash   3,100,000.00
1. 10.
Cash 1,000,000
OFS 1,000,000
1. 12 Cash 10,000,000
Due from sate grant 10,000,000
Bond Anticipation Notes Payable 500,000
Interest expenditure 10,000
Cash 501,000
1. 13 Reserve forEncumbrance 12,000,000  
Encumbrance   12,000,000.0
Consn. Expenditure 12,000,000  
Consn. Payable   12,000,000.0
Consn. Payable 12,000,000.00  
Cash   12,000,000.00
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Financial statements

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Closing entries:
No.
  Dr Cr
Revenue 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- FB 14,260,000

Unreserved and undesignated- FB 32,270,000

Encumbrance 32,270,000

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Second year transactions
No.   Dr Cr
1. 14 Cash 10,500,000
Short term investment on TB 10,000,000
Interest revenue 500,000
1. 15 Due to DSF 300,000
Cash 300,000
1. 16. Encumbrance 32,270,000
a Unreserved fund balance 32,270,000
Construction expenditure 32,270,000
Construction payable 29,043,000
Constn. Payable- retained 3,270,000
16.b. OR FB reserved for encumbrance 32,270,000
Construction payable 29,043,000
Constn. Payable- retained 3,270,000
1. 17. Construction payable 29,043,000
Cash 29,043,000
1. 18. Cash 5,000,000
Due from State Grant 5,000,000
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Second year financial statements

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Closing entries
  Dr Cr
Encumbrance 3,900,000.0  
Reserve for Encumbrance   3,900,000.00

Transactions and events after the construction has finished

No.   Dr Cr
19. Consn. Payable- Retained Percentage 3,227,000
Cash 3,227,000
20. Residual Equity transfer out 2,490,000
Cash 2,490,000

To close fund balance:

Unreserved and Undesignated- FB 2,490,000
Residual Equity transfer out 2,490,000

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END

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