Deck 6: Capital Projects Funds, Debt Service Funds, and Permanent Funds

Question 1

Financial assets and near-term liabilities are accounted for in Capital Projects Funds, Debt Service Funds, and Permanent Funds.

Answer 1

True

Question 2

Capital Projects Funds are used to account for the acquisition or construction of all a government's major capital facilities and other capital assets.

Answer 2

False

Question 3

Encumbrance accounting is ordinarily used by Capital Projects Funds.

Answer 3

True

Question 4

When a bond is issued in a Capital Projects Fund, a journal entry is made that includes a credit to a Bonds payable account.

Question 5

Bonds and grant proceeds are common financing sources for Capital Projects Funds.

Question 6

When bonds are issued at a premium in a Capital Projects Fund, a journal entry is made that includes a credit to an Other financing source-bond issue premium account.

Question 7

Bond issue costs are capitalized and amortized over the life of the associated bonds in the governmental-type fund that pays them.

Question 8

Arbitrage refers to borrowing money at a certain interest rate while investing the money at a higher interest rate.

Question 9

General obligation debt is unsecured debt of a government.

Question 10

Governments finance the acquisition or construction of capital assets through such mechanisms as general obligation bonds, leases or lease purchase agreements, and service concession arrangements.

Question 11

Government should report the portion of general obligation bonds due within one year as current liabilities in its Debt Service Fund.

Question 12

Interest on long-term debt generally is not recorded as an expenditure in the Debt Service Fund until it becomes legally due.

Question 13

When resources are available for Debt Service Fund payments and those payments will be made within the first month of the next accounting period, governments have the option, under GAAP, to record the liability and the associated expenditures for bond principal and interest at the end of the year before the payments are due.

Question 14

The required financial statements for Debt Service Funds are a statement of revenues, expenditures, and changes in fund balance; a balance sheet; and a statement of cash flows.

Question 15

Refunding bonds refers to a refund that the holders of a government's debt receives if the government decides to retire its bonds early.

Question 16

The GASB identifies two types of leases for nonfinancial assets-short-term leases and long-term leases-and the accounting and financial reporting is different in governmental-type funds for the two types of leases.

Question 17

A lease is a short-term lease if the maximum possible lease term is 12 months or less excluding any options to extend the lease.

Question 18

A characteristic of a Permanent Fund is that only the earnings on the principal held can be expended to benefit those outside the government-individuals, organizations, or other governments.

Question 19

Permanent Funds should be established only when required by legal trust agreement or by law.

Question 20

A contractor sends a progress billing to a city requesting payment of $4,000,000 for work done on a new fire station for the city. The city approves the payment less a 10 percent retainage but has not yet written a check to the contractor. What journal entry should be made in the city's Capital Projects Fund?
a.
$\begin{array}{lrr}\text { Expenditures-construction costs } & 4,000,000 \\\quad \text { Construction contracts payable } && 4,000,000 \\\end{array}$

b.
$\begin{array}{lrr}\text { Expenditures-construction costs } & 4,000,000 \\\quad \text { Retainage payable } &&400,000 \\\quad \text { Construction contracts payable } &&3,600,000 \\\end{array}$

c.
$\begin{array}{lrr}\text { Capital assets-fire station } &4,000,000 \\\quad \text { Retainage payable } &&400,000 \\\quad \text { Construction contracts payable } && 3,600,000 \\\end{array}$

d.
$\begin{array}{lrr}\text { Expenditures-construction costs } &3,600,000 \\\quad \text { Construction contracts payable } &&3,600,000\end{array}$

Question 21

A city receives a grant from the state to help pay for the construction of a new fire station. An eligibility requirement is that the city must incur eligible construction expenditures on the fire station. The state sends the city $2,800,000 prior to the city beginning construction on the fire station. What journal entry should the city make to record the receipt of $2,800,000 from the state in the Capital Projects Fund?
a.
$\begin{array}{lll}\text { Cash } & 2,800,000 & \\\quad \text { Advance on construction grant } && 2,800,000 \\\end{array}$

b.
$\begin{array}{lll}\text { Cash } & 2,800,000 & \\\text { Revenues-construction grant }& & 2,800,000 \\\end{array}$

c.
$\begin{array}{lll}\text { Cash } & 2,800,000\\\text { Construction contracts pavable } & & 2,800,000\end{array}$

d. No entry is necessary because the city has not yet begun construction on the fire station.

Question 22

The City of Twizzle issues $1,000,000 face value of general obligation bonds for $1,100,000. The bonds will be used for the construction of new city streets. What journal entry should the City make in its Capital Projects Fund to record the issuance of these bonds?
a.
$\begin{array}{ll}\text { Cash } & 1,100,000 \\\text { Other financing source--long-term debt issued } && 1,100,000 \\\end{array}$

b.
$\begin{array}{ll}\text { Cash } & 1,000,000 \\\text { Other financing source-long-term debt issued } && 1,000,00\end{array}$

c.
$\begin{array}{lr}\text { Cash } & 1,100,000 \\\text { Other financing source-long-term debt issued } && 1,000,000 \\\text { Other financing source--bond issue discount } && 100,000\end{array}$

d.
$\begin{array}{lr}\text { Cash } & 1,100,000 \\\text { Other financing source-long-term debt issued } && 1,000,000 \\\text { Other financing source--bond issue premium } && 100,000\end{array}$

Question 23

The City of Twizzle issues $10,000,000 face value of general obligation bonds for $9,800,000. The bonds will be used for the construction of new city streets. What journal entry should the City make in its Capital Projects Fund to record the issuance of these bonds?
a.
$\begin{array}{lrr}\text { Cash } & 9,800,000 \\\quad \text { Other financing source-long-term debt issued } && 9,800,000 \\\end{array}$

b.
$\begin{array}{lrr}\text { Cash } & 10,000,000 & \\\text { Other financing source--long-term debt issued } & & 10,000,000\end{array}$

c.
$\begin{array}{lr}\text { Cash } & 9,800,000 \\\text { Other financing use - bond issue discount } & 200,000 \\\quad \text { Other financing source- long-term debt issued } && 10,000,000\end{array}$

d.
$\begin{array}{lr}\text { Cash } & 9,800,000 \\\text { Other financing use-bond issue discount } & 200,000 \\\quad \text { Other financing source-long-term debt issued } && 9,800,000 \\\text { Revenue-bond issue premium } && 200,000\end{array}$

Question 24

The City of Matlock issues $20,000,000 face value of general obligation bonds for $19,900,000. The bonds will be used for the construction of new streets and sidewalks to make downtown more walkable. The City incurred $8,000 in bond issue costs. What is the amount of expenditures that the City report in its Capital Projects Fund?

A) $108,000
B) $100,000
C) $8,000
D) $0

Question 25

Which of the following are methods that governments use to finance capital assets?

A) Capital leases
B) Serial general obligation bonds
C) Term general obligation bonds
D) Service concession arrangements
E) All of the above.

Question 26

Which of the following is a characteristic of general obligation term bonds that is different from the characteristics of general obligation serial bonds?

A) Term general obligation bonds come due at a single, specified future date.
B) Term general obligation bonds mature over a period of time.
C) Term general obligation bonds is backed by the full faith and credit of the government issuer.
D) Interest income earned on term general obligation bonds is generally tax exempt.
E) None of the above.

Question 27

A Debt Service Fund collects $1,000,000 in current-year property taxes that are dedicated to the payment of debt service principal and interest during the year. It also expects to collect an additional $60,000 of dedicated current-year property taxes during the first 60 days of the next fiscal year. The General Fund transferred $250,000 to the Debt Service Fund during the current year. Earnings on investments in the Debt Service Fund for the current year were $28,000. How much revenue should the Debt Service Fund report for the current year?

A) $1,338,000
B) $1,310,000
C) $1,278,000
D) $1,088,000
E) $1,028,000

Question 28

A Debt Service Fund collects $1,000,000 in current year property taxes that are dedicated to the payment of debt service principal and interest during the year. It also expects to collect an additional $60,000 of dedicated current year property taxes during the first 60 days of the next fiscal year. The General Fund transferred $250,000 to the Debt Service Fund during the current year. Earnings on investments in the Debt Service Fund for the current year was $28,000. How much other financing sources should the Debt Service Fund report for the current year?

A) $1,310,000
B) $1,278,000
C) $1,250,000
D) $278,000
E) $250,000

Question 29

A city sells $5 million of 20-year general obligation bonds on October 1, 2019. Interest on the debt is payable at the rate of 5% a year on the unpaid balance of the debt, every six months commencing March 31, 2020. How much should the city report as an interest expenditure in the Debt Service Fund for the calendar year ending December 31, 2019?

A) $0
B) $30,000
C) $60,000
D) $120,000

Question 30

A city sells $15 million of general obligation bonds on October 1, 2019. The bonds mature at the rate of $1 million a year each September 30, starting September 30, 2020. The amount due September 30, 2020 is paid. How much should the city report as outstanding debt in the Debt Service Fund in its year-end fund level financial statements on December 31, 2020?

A) $15,000,000
B) $14,000,000
C) $13,750,000
D) $0

Question 31

A city sells $15 million of general obligation bonds on October 1, 2019. The bonds mature at the rate of $1 million a year each September 30, starting September 30, 2020. The amount due September 30, 2020 is paid. Also, the current year's annual interest on the bonds of $450,000 was paid on September 30, 2020. How much should the city report as expenditures in the Debt Service Fund in its year-end fund level financial statements on December 31, 2020?

A) $14,000,000
B) $1,450,000
C) $1,000,000
D) $450,000

Question 32

A city sells $5 million of 6% ten-year general obligation bonds on April 1, 2019. The first installment of debt principal ($250,000) is due to be paid on September 30, 2019. What entry should the city make on September 30, 2019 in the Debt Service Fund regarding the bond principal?

A) It should recognize a $250,000 liability for Matured bonds payable.
B) It should reduce the $5 million long-term liability by $250,000.
C) It should do nothing in the Debt Service Fund, but it should reduce Bonds payable by $500,000 in the Capital Projects Fund
D) It should make no entry anywhere until the principal is actually paid.

Question 33

A city keeps its books on a calendar-year basis. On April 1, 2019, the city sold $500,000 of 6% general obligation bonds, payable in semi-annual installments. The first installment, due October 31, 2019 covered interest of $15,000 and principal of $25,000. For the year ended December 31, 2019, how much should the Debt Service Fund report as expenditures?

A) $15,000
B) $40,000
C) $15,000, plus an accrual for three months' interest
D) $40,000, plus an accrual for three months' interest and principal

Question 34

A Debt Service Fund accumulates resources to retire debt that is due in a lump sum in the year 2021. The Fund held marketable securities that cost $900,000 when purchased during 2013 and 2014. The securities had fair values of $875,000 on January 1, 2020, and $930,000 on December 31, 2020. The average fair value during the year was $895,000. At what amount should the Fund report the securities in its balance sheet on December 31, 2020?

A) $875,000
B) $895,000
C) $900,000
D) $930,000

Question 35

A Debt Service Fund held marketable securities that cost $1,000,000 when purchased during 2011. The securities had fair values of $900,000 on December 31, 2019, and $960,000 on December 31, 2020. The average fair value during the year was $950,000. Assuming the government made no journal entries for these securities during 2020, what journal entry should be made in the Debt Service Fund to report the securities in its balance sheet on December 31, 2020?
a.
$\begin{array}{lll}\text { Investments } & 60,000 & \\\quad \text { Revenues-net increase in fair value of investments } &&60,000\\\end{array}$

b.
$\begin{array}{lll}\text { Investments }&40,000\\\quad\text { Revenues-net decrease in fair value of investments }&&40,000\end{array}$

c.
$\begin{array}{lll}\text { Investments } & 50,000\\\text { Revenues-net increase in fair value of investments }& & 50,000\end{array}$

d. No entry is necessary because the securities were not sold and no gain or loss was realized.

Question 36

Governments may enter into short-term or long-term leases for nonfinancial assets, such as a building or equipment-for use in its everyday operations. What is a distinguishing factor of a short-term lease?

A) A short-term lease is recorded at the present value of payments expected to made during the lease.
B) A short-term lease has a maximum possible lease term of 12 months or less including any options that are expected to be exercised to extend the lease.
C) A short-term lease provides the lessee with an intangible right to use an asset that should be recorded when the lease is signed.
D) A short-term lease has a maximum possible lease term of three months or less if accounted for in a governmental-type fund.

Question 37

A county enters into a lease for maintenance equipment. The lease is for $1,000 a month for eight months, and the lease cannot be extended. The present value of the lease payments is $7,860. What journal entry should the county make in its General Fund when it signs the lease but before any payments are made?

A) Expenditures-capital outlay 8,000 Other financing source-short-term lease 8,000
B) Expenditures-capital outlay 7,860 Other financing source-short-term lease 7,860
C) Expenditures-capital outlay 7,860 Lease payable 7,860
D) No entry is needed until payments are actually made on the short-term lease

Question 38

A county enters into a lease for maintenance equipment. The lease is for $1,000 a month for eight months, and the lease cannot be extended. The present value of the lease payments is $7,860. What journal entry should the county make in its General Fund when it makes its first payment on the lease?
a.
$\begin{array}{lr}\text { Expenditures-capital outlay } & 8,000 \\\quad \text { Cash } &&1,000 \\\quad \text { Leases payable } && 7,000 \\\end{array}$

b.
$\begin{array}{lr}\text { Leases payable } &1,000 \\\quad \text { Cash } && 1,000 \\\end{array}$

c.
$\begin{array}{lr}\text { Expenditures-lease } &1,000 \\\quad \text { Cash } & &1,000 \\\end{array}$

d.
$\begin{array}{lr}\text { Expenditures-lease principal } &983 \\\text { Expenditures-interest } &17\\\text { Cash }&&1,000\end{array}$

Question 39

How should a long-term lease agreement be recorded in a General Fund?

A) At the present value of payments expected to made during the lease, by debiting Expenditures-Capital outlay and crediting Other financing sources-long-term leases
B) At the total amount of payments expected to made during the lease, by debiting Expenditures-Capital outlay and crediting Other financing sources-long-term leases
C) At the present value of payments expected to made during the lease, by debiting Expenditures-Capital outlay and crediting Long-term leases payable.
D) No entry is needed until payments are actually made on the long-term lease agreement.

Question 40

A city leases equipment on January 1, 2019 by means of a long-term lease agreement. The agreement calls for paying the leasing company $300,000 in three $100,000 annual payments, starting December 31, 2019. The present value of the three lease payments, using a 6% annual interest rate, is $267,301. The city will make the lease payments from the General Fund. What journal entry should the city make in the General Fund on January 1, 2019?
a.
$\begin{array}{ll}\text { Expenditures-capital outlay } & 300,000 \\\quad \text { Other financing source-long-term leases } &&32,699 \\\quad \text { Leases payable } && 267,301 \\\end{array}$

b.
$\begin{array}{ll}\text { Expenditures-capital outlay } &267,301 \\\quad \text { Leases payable } & &267,301 \\\end{array}$

c.
$\begin{array}{ll}\text { Expenditures-capital outlay } &267,301 \\\quad \text { Other financing source-long-term leases } &&267,301 \\\end{array}$

d.
$\begin{array}{ll}\text { Expenditures-capital outlay } &300,000\\\quad \text { Leases payable }&&300,000\end{array}$

Question 41

A city leases equipment on January 1, 2019 by means of a long-term lease agreement. The agreement calls for paying the leasing company $300,000 in three $100,000 annual payments, starting December 31, 2019. The present value of the three lease payments, using a 6% annual interest rate, is $267,301. The city will make the lease payments from the General Fund. What journal entry should the city make in the General Fund when it makes its first annual payment on the lease on December 31, 2019?
a.
$\begin{array}{lrr}\text { Expenditures-lease principal } & 100,000 \\\quad \text { Cash } && 100,000 \\\end{array}$

b.
$\begin{array}{lrr}\text { Expenditures-lease principal } & 82,000 \\\text { Expenditures-lease interest } & 18,000 \\\quad \text { Cash } &&100,000 \\\end{array}$

c.
$\begin{array}{lrr}\text { Lease payable } & 100,000 \\\quad \text { Cash } && 100,000 \\\end{array}$

d.
$\begin{array}{lrr}\text { Lease payable } & 82,000 \\\text { Expenditures-lease interest } & 18,000 \\\quad \text { Cash } &&100,000\end{array}$

Question 42

A county's Debt Service and Capital Projects Funds had the following resource inflows during 2019. State whether each of the inflows should be reported as revenues or as other financing sources in the fund-level statements of revenues, expenditures and changes in fund balances.
a. Property taxes levied specifically for the Debt Service Fund
b. Cash received from General Fund to finance debt service payments
c. Cash received from General Fund to finance part of the cost of new police headquarters
d. Grant from state to finance part of cost of new police headquarters
e. Proceeds of bonds issued to finance part of the cost of new police headquarters
f. Interest earned on investment of resources being accumulated to finance construction of new police headquarters
g. Increase in fair value of investments being accumulated to finance construction
h. Bond premium received by Debt Service Fund from Capital Projects fund

Question 43

Prepare journal entries to record the following transactions related to acquisition of capital assets by a county. The county does not use encumbrance accounting. Identify the fund(s) used.
a. The county issues general obligation bonds in the amount of $900,000, receiving cash for the full face value of the bonds. The cash will be used to acquire a building and related capital assets.
b. The county buys a prefabricated building for $750,000, using part of the bond proceeds. The building is delivered and the invoice for the building is received.
c. The invoice in b. is approved and paid.
d. The General Fund transfers cash of $55,000 to another fund in anticipation of the payment of the first installment of interest ($30,000) and principal ($25,000) on the general obligation bonds issued in a.
e. The first installment of debt service on bonds issued in a. becomes due and payable (see entry d. for amounts).
f. Debt service on the bonds issued in a. is paid.

Question 44

The City of Cowling decides to construct a new library, which it estimates will cost $8.5 million. The City will finance the library with a state construction grant of $3 million; a general obligation bond issuance of $5 million; and a transfer from the General Fund of $500,000. Prepare journal entries to record the following transactions in the Capital Projects Fund. No budgetary entries other than encumbrances should be recorded.
a. The General Fund transfers $500,000 to the Capital Projects Fund.
b. The bonds are issued at face value of $5 million.
c. The City signs a contract with the lowest bidder, Pert Construction, to build the library at a cost of $8.3 million.
d. The state pays the City $3 million for the construction grant. The City has met all eligibility requirements for the grant.
e. The construction is complete and the City receives a bill from Pert Construction for $8.4 million. The City agrees to the $100,000 increase in the cost of the project. A provision of the contract states that the city will hold 10 percent retainage until the project is inspected and approved.
f. The City pays the amount owed to the contractor less the retainage.
g. The City inspector approves the construction project and the contractor is paid the retainage.
h. The City transfers the remaining cash in the Capital Projects Fund to the fund that will service the payment of the debt.

Question 45

You are the Finance Director of the Town of Blue Mountain. Presented below is the trial balance for a Capital Projects Fund of the Town at October 31, 2019. The Town Engineer has advised you that the project accounted for within this fund, a new system of bicycle trails, is complete and formal acceptance by the Town is pending. The Town Council has directed you to abolish this fund and transfer any remaining net assets to the Town's Debt Service Fund. Prepare the entries necessary to settle the remaining liabilities of the fund, close the nominal accounts, transfer the remaining net assets to the Debt Service Fund, and close the transfer account.
$$\begin{array} { l r r } & { \begin{array} { c } \text { Town of Blue Mountain } \\\text { Capital Projects Fund } \\\text { Preclosing Trial Balance } \\\text { October 31, 2019 }\end{array} } & \\& { \text { Debits } } & \text { Credits } \\\text { Cash } & \$ 70,160 \\\text { Vouchers payable } && \$ 24,450\\\text { Retainage payable } & & 42,750 \\\text { Restricted fund balance } & & 117,285 \\\text { Revenues-interest } && 50,175 \\\text { Expenditures-capital outlay } & 197,000 \\\text { Transfer in from General Fund }&\underline{\quad\quad}&\underline { \mathbf { 3 2 , 5 0 0 } }\\&\$\underline { \mathbf { 2 6 7 , 1 6 0 } }&\$\underline { \mathbf { 2 6 7 , 1 6 0 } }\end{array}$$

Question 46

Prepare journal entries to record the following transactions in the City of Brock's Capital Projects Fund during its 2019 fiscal year.
a. The City of Brock issues $10 million face value of general obligation bonds to build a new water park. The City received an extra $500,000 million as a bond premium. The bond covenant states that bond premiums must be used for debt service. (This requires a journal entry for the bond issuance and a second journal entry for the transfer of the bond premium.)
b. The City of Brock issues $20 million face value of general obligation bonds to construct new sidewalks and to reconfigure streets for pedestrian traffic in its historic downtown. Unfortunately, the City received only $19.8 million from the bond issuance due to a rise in interest rates prior to their issuance.

Question 47

The Driscoll Township Debt Service Fund accumulates resources to pay its $2 million general obligation debt. The debt is payable in equal annual installments of principal over 10 years with 5% interest on the unpaid principal. Prepare journal entries to record the following transactions in the Debt Service Fund.
a. The Township levies a special property tax amounting to $500,000 to pay debt service on its long-term general obligation debt. The tax must be accounted for in the Debt Service Fund.
b. All the property taxes levied for debt service purposes are collected.
c. The Township invests $150,000 in a six-month certificate of deposit.
d. Debt service (interest of $100,000 and principal of $200,000) becomes due and payable.
e. The debt service liabilities in d. are paid.
f. The certificate of deposit in c. matures and the Township receives a total of $153,000, which includes $3,000 of interest.

Question 48

Prepare journal entries in the Capital Projects Fund to record the following transactions related to the construction of a building by the Village of Navajo Falls. (Note that only Capital Projects Fund journal entries are required.) The Village adopts a formal budget and uses encumbrance accounting.
a. The Village Council adopts a capital budget at the beginning of the year. To finance construction of the building, the Village will transfer $3 million from its General Fund and apply for a state grant of $1 million. It appropriates $4 million for construction.
b. The General Fund transfers $3 million to the Capital Projects Fund for the new project.
c. The state approves Navajo Falls's application for a $1 million construction grant and simultaneously sends a check to the Village. The grant is expenditure driven and thus requires that Navajo Falls incur qualifying expenditures.
d. Navajo Falls awards a construction contract in the amount of $3.4 million.
e. The contractor sends a progress billing to Navajo Falls in the amount of $1.6 million. The bill is approved by the Village's engineers and a payable for the construction costs is prepared, less a 10% retainage pending completion of the building and final approval by the Village. Navajo Falls considers 25 percent of the billing to be the state's share of the cost.
f. The payable for construction costs in e., above, is paid.
g. The contractor completes construction, and sends Navajo Falls an invoice for the remaining $1.8 million. The Village's engineers inspect the building and accept the work. The invoice is approved and paid, together with the amount retained on the progress billing in e., above. Navajo Falls considers $600,000 of the billing to be the state's share of the cost.

Question 49

Prepare journal entries to record the following transactions of a state, identifying the funds affected by each transaction. Record journal entries for all funds affected. The state prepares a budget for the Capital Projects Fund and uses encumbrance accounting in that fund.
a. The state records its capital budget. It appropriates $10 million for highway construction, which will be financed entirely with the issuance of bonds.
b. The state sells 20-year 6% bonds having a face value of $10 million. The bonds are sold at a discount, so the state realizes a total of $9,900,000. Equal installments of principal will be paid every six months, together with interest on the unpaid balance.
c. The state awards two contracts, one for highway construction ($6,500,000) and one for construction supervision ($350,000). Both contracts provide for progress payments. The highway construction contract provides for 10% retainage pending completion of the project. There is no retainage on the construction supervision contract.
d. The construction contractor submits an invoice for $1,500,000. The invoice is approved and a voucher is prepared, less the 10% retainage.
e. The construction supervisor submits an invoice for $100,000, and a voucher is prepared.
f. Both of the invoices in transactions d. and e. are paid.
g. The state transfers $800,000 from the General Fund to the Debt Service Fund in anticipation of the payment of debt service on the bonds.
h. The first semi-annual debt service on the 20-year bonds becomes due and payable (see transaction b).
i. The debt service in h., above, is paid.