Chapter 6 - Capital Projects Funds, Debt Service Funds and Permanent Funds PDF

ACCT 5610/6610 Governmental and Not for Profit Accounting Allison D. Edge, CPA, CGMA  Chapter 6 Capital Projects Funds, Debt Service Funds and Permanent Funds 2 CAPITAL PROJECTS FUNDS (CHAPTER 2 REVIEW) ▪ Used to account for financial resources...

ACCT 5610/6610 Governmental and Not for Profit Accounting Allison D. Edge, CPA, CGMA  Chapter 6 Capital Projects Funds, Debt Service Funds and Permanent Funds 2 CAPITAL PROJECTS FUNDS (CHAPTER 2 REVIEW) ▪ Used to account for financial resources restricted or otherwise limited to spending for capital outlays. ▪ Required to use CPF if capital outlays financed from general obligation bond proceeds. ▪ Used to account for acquisition or construction of major capital facilities and other capital assets (other than those financed by proprietary and trust funds). ▪ Examples ▪ Buildings ▪ Roads ▪ Bridges ▪ Other capital assets 3 © CAMBRIDGE BUSINESS PUBLISHERS CAPITAL BUDGETS ▪ Capital budgets used to control capital projects. ▪ May be for multiple years—5 to 10 years 4 © CAMBRIDGE BUSINESS PUBLISHERS 5 © CAMBRIDGE BUSINESS PUBLISHERS CAPITAL PROJECTS FUNDS ▪ Financing – General obligation bonds – Federal or state grants – Transfers from other funds – Investment earnings ▪ Resources remaining in Capital Projects Fund at end of project are transferred to another fund, or in the case of grants, possibly returned to the grantor. ▪ Encumbrance accounting is used. 6 © CAMBRIDGE BUSINESS PUBLISHERS JOURNAL ENTRIES ▪ Initial budget entry 1. Debit Estimated revenues 2. Debit Estimated other financing sources 3. Credit Appropriations 4. Debit or Credit Budgetary fund balance ▪ Receipt of proceeds from bonds sold at par 1. Debit Cash 2. Credit Other financing source—long-term debt issued 7 © CAMBRIDGE BUSINESS PUBLISHERS JOURNAL ENTRIES ▪ Receipt of state grant proceeds prior to qualifying expenditure occurring 1. Debit Cash 2. Credit Advance on construction grant (a liability account) ▪ Entry after qualifying expenditures made and eligibility requirements met 1. Debit Advance on construction grant (a liability account) 2. Credit Revenues—construction grant 8 © CAMBRIDGE BUSINESS PUBLISHERS RETAINAGE PAYABLE ▪ A percentage of the amount billed by a contractor for work performed is “retained” by the government until the work is completed and approved to provide the contractor an incentive to satisfactorily complete the job on a timely basis. – A Retainage payable account is credited when a government is billed by a contractor. 9 © CAMBRIDGE BUSINESS PUBLISHERS JOURNAL ENTRIES ▪ Progress billing for construction project* 1. Debit Expenditures—construction costs 2. Credit Retainage payable 3. Credit Construction contracts payable (1-2) *Encumbrance accounting is used in Capital Projects Funds so another entry would be needed to reverse the encumbrance when the related expenditure is recorded. Remember, an encumbrance is recorded when a construction contract is signed and reversed when the contractor bills the government for work performed. 10 © CAMBRIDGE BUSINESS PUBLISHERS JOURNAL ENTRIES ▪ End of first year of construction – Close budgetary accounts – Close nominal operating accounts – Close encumbrance accounts ▪ Beginning of following year – Record budget – Reestablish encumbrance accounts ▪ Remainder of retainage payable account paid to contractor when job satisfactorily completed. 11 © CAMBRIDGE BUSINESS PUBLISHERS JOURNAL ENTRIES ▪ Transfer of remaining funds in Capital Projects Fund to appropriate fund when project complete 1. Debit Transfer out to… 2. Credit Cash ▪ Make closing entries Practice – P6-53 on page 6-37 12 © CAMBRIDGE BUSINESS PUBLISHERS 13 BONDS ISSUED AT A PREMIUM ▪ Bonds sold for more than face value 1. Debit Cash 2. Credit Other financing source—long-term debt issued 3. Credit Other financing source—bond issue premium ▪ Bond covenant typically establish how bond premium may be used. – May be used for capital project – May be transferred to Debt Service Fund to repay debt 14 © CAMBRIDGE BUSINESS PUBLISHERS BONDS ISSUED AT A DISCOUNT ▪ Bonds sold for less than face value 1. Debit Cash 2. Debit Other financing use—bond issue discount 3. Credit Other financing source—long-term debt issued ▪ Consequences of receiving less bond proceeds than expected – Scale down project or – Seek additional resources 15 © CAMBRIDGE BUSINESS PUBLISHERS BONDS ISSUANCE COSTS ▪ Bond issue costs include: – Legal advisor – Financial advisor – Accounting – Underwriting – Registration fees ▪ Record bond issuance cost 1. Debit Expenditures—bond issue costs 2. Credit Cash (or a payable) 16 © CAMBRIDGE BUSINESS PUBLISHERS ARBITRAGE ▪ Borrow money at lower tax-exempt interest rate – Invest money received at a higher interest rate on taxable investments ▪ Must pay excess interest to federal government, or – Subject to excise tax on excess earnings OR – Lose tax-exempt status for debt ▪ Professional guidance recommended Practice – P6-54 17 © CAMBRIDGE BUSINESS PUBLISHERS 18 TYPES OF GOVERNMENT DEBT ▪ General obligation debt – Backed by “full faith and credit” of government – Not serviced by enterprise/internal service funds – “Servicing the debt” occurs when a government pays principal and interest on the debt. ▪ Short-term ▪ Tax or revenue anticipation notes ▪ Reported in funds and interest accrued ▪ Long-term ▪ Term bonds—principal matures on a single, specified date ▪ Serial bonds—principal matures over a period of time ▪ Smooth debt service payments ▪ Bank notes, certificates of obligation, commercial paper 19 © CAMBRIDGE BUSINESS PUBLISHERS TYPES OF GOVERNMENT DEBT ▪ Leases or lease-purchase arrangements ▪ Service concession arrangements – Operator finances and builds a facility (e.g., a road) for a government – Governments owns facility Transfers right to use to operator for a defined number of years – Operator charges and collect fees for use of facility 20 © CAMBRIDGE BUSINESS PUBLISHERS DEBT SERVICE FUNDS CHAPTER 2 REVIEW ▪ Used to account for financial resources that are restricted or otherwise limited to spending for principal and interest on general long-term debt ▪ Required when – Legally mandated – Financial resources being accumulated for principal and interest payments that come due in future years ▪ Long-term liabilities ▪ Reported when due and payable ▪ Option to record a portion of long-term liability before it is due and payable ▪ At the end of its fiscal year, a government may record a liability and associated expenditure for debt service payments made within the first month of the next fiscal year if resources are available in the Debt Service Fund for the payment. ▪ Debt service payments include principal and interest. 21 © CAMBRIDGE BUSINESS PUBLISHERS  DEBT SERVICE FUNDS ▪ Interest on long-term debt – Not recorded as an expenditure until it legally matures (due and payable) Option for interest paid in first month of next fiscal year (see previous slide) – Most governments appropriations only include principal and interest that come due during the fiscal year. Accruing a liability before payment is legally due could result in a debit balance (deficit) in the fund balance account because resources to make the payment may not yet be available in the Debt Service Fund. 22 © CAMBRIDGE BUSINESS PUBLISHERS DEBT SERVICE FUNDS ▪ Common funding sources – Property taxes assessed specifically to service debt – Transfer in from General Fund or other funds (other financing source) – Investment earnings 23 © CAMBRIDGE BUSINESS PUBLISHERS JOURNAL ENTRIES ▪ Initial budget entry 1. Debit Estimated revenues 2. Debit Estimated other financing sources 3. Credit Appropriations 4. Debit or Credit Budgetary fund balance ▪ Property tax journal entries discussed in Chapter 5 ▪ Interest on long-term debt becomes due and payable 1. Debit Expenditures—interest 2. Cash or A/P ▪ Principal on serial bonds becomes due and payable 1. Debit Expenditures—bond payable 2. Cash or A/P ▪ End of year ▪ Close budgetary accounts ▪ Close nominal operating accounts 24 © CAMBRIDGE BUSINESS PUBLISHERS REFUNDING BONDS ▪ Refunding bonds involves the payment of old bonds from the proceeds of new bonds. – Governments may wish to refund bonds to: Lower the interest rate paid on existing bonds Extend the maturity date Change payment schedules Remove covenants associated with existing bonds 25 © CAMBRIDGE BUSINESS PUBLISHERS REFUNDING BONDS ▪ Two types of refundings – Current refunding Proceeds from the refunding bonds are used to immediately pay off existing bonds. – Advance refunding Proceeds from the refunding bonds are placed with an escrow agent and invested until the old debt is refunded at a later date. May occur because a government’s bonds are not callable until a later date. Practice – P6-57 26 © CAMBRIDGE BUSINESS PUBLISHERS 27 LEASED ASSETS – TWO TYPES Short Term Leases ▪ Maximum possible lease term of 12 months or less including options to extend the lease. ▪ Journal entry when lease payment made ▪ Debit Expenditures—short-term lease ▪ Credit Cash Long Term Leases ▪ Leases other than short-term leases ▪ Lessee receives an intangible right to use capital asset. ▪ Lessee has a lease liability associate with right to use capital asset. ▪ Liability = Present value of payments expected to be made during lease, including ▪ Fixed payments ▪ Variable payments, and ▪ Other payments reasonably certain to be made 28 © CAMBRIDGE BUSINESS PUBLISHERS LONG-TERM LEASE ▪ To record long-term lease – Debit Expenditures—capital outlay – Credit Other financing source—long-term leases 29 © CAMBRIDGE BUSINESS PUBLISHERS PRACTICE EXERCISE ▪ On the first day of its fiscal year, city officials sign a non-cancellable lease for computer equipment. ▪ The lease is for 10 years. ▪ The present value of payments expected to be made during the lease is $78,017. ▪ The city’s incremental borrowing rate is 6 percent. ▪ The $10,000 annual lease payment is due on the first day of each fiscal year beginning with the first payment being due when the lease is signed. 30 © CAMBRIDGE BUSINESS PUBLISHERS PRACTICE EXERCISE ▪ Prepare all journal entries necessary to record the lease transactions for the current year and the payment made in the next fiscal year. Assume that a voucher system is not used. Answer: Current Year GF Expenditures―capital outlay 78,017 Other financing source― long-term leases 78,017 GF Expenditures―lease principle 10,000 Cash 10,000 31 © CAMBRIDGE BUSINESS PUBLISHERS PRACTICE EXERCISE Next fiscal year GF Expenditures―lease principal 5,919 Expenditures―lease interest 4,081 Cash 10,000 Calculations: Original obligation $78,017 First payment (10,000) Current balance 68,017 Annual interest rate x.06 Interest = $ 4,081 Practice – P6-61 and 6-62 32 © CAMBRIDGE BUSINESS PUBLISHERS 33 PERMANENT FUNDS ▪ Accounts for resources legally restricted such that – Only earnings, and not principal, can be expended, and – These earnings must be used to support government’s own programs—benefit the government or its citizens. ▪ Contrast to Fiduciary Funds – Fiduciary funds accounts for fiduciary activities that benefit those outside the government— individuals, organizations, or other governments. – Resources not used to support government’s own programs. ▪ Journal entries similar to other governmental-type funds ▪ Earnings from a Permanent Fund may be transferred out to another fund. ▪ For example, earnings may be transferred out to a Special Revenue Fund to support a particular program. Practice – P6-63 on page 6-41 34 © CAMBRIDGE BUSINESS PUBLISHERS 35