Chapter 6 Accounting for Capital Projects and Debt Service

1. The voters of Salt Lake City authorized the construction of a new north-south expressway for a total cost of no more that $75 million. The voters also approved the issuance of $50 million of 5% general obligation bonds. The balance of the necessary funds will come from the following sources: $15 million from a federal grant and $10 million from a state grant. The City controls expenditures in capital project funds through project management. The City does not formally incorporate budgetary entries in the capital projects fund but it does use encumbrance accounting for control purposes. REQUIRED: Assuming the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, prepare journal entries, in the Capital Projects Fund, for the following transactions.

(a) The City issued $50 million of 5% general obligation bonds at 101.

(b) The City transferred the premium to the appropriate fund.

(c) The City incurred bid-related expenditures of $1,000.

(d) The City signed a contract with the lowest competent bidder for $48 million.

(e) The city received notice from the State that the grant had been approved and the proceeds will be forwarded to the City in the State’s current fiscal year.

(f) The City received the federal grant in full.

(g) The City received a progress billing from the contractor for $10 million. The City pays the billing.

2. The City of Eugene has the following balances in the accounts of its capital projects fund at year-end before closing entries. All accounts have normal balances. All amounts are in millions of dollars.

REQUIRED: (a) Prepare an operating statement for the capital projects fund.

(b) Prepare a Balance Sheet for the capital projects fund.

Cash $ 68

Deferred Revenue $ 5

Encumbrances $ 38

Expenditures $ 10

Fund Balance—Unreserved $ 14

Grants Receivable $ 10

Other Financing Sources $ 50

Other Financing Uses $ 1

Reserve for Encumbrances $ 38

Revenues $ 20

3. In 2006, the voters of Southside City authorized the construction of a new swimming pool for a total cost of no more that $5 million. The voters also approved the issuance of $5 million of 5% general obligation serial bonds to be repaid by a special property tax. Interest on these bonds is payable annually on June 30. On June 30, 2006, the City sold the bonds at 101 and signed contracts for the construction of the swimming pool. Principal payments of $250,000 are due each June 30, beginning in 2007. If the property tax is not sufficient to make the necessary principal and interest payments, the City is obligated to transfer the necessary monies from the general fund to the debt service fund. The City does not formally incorporate budgetary entries in the debt service fund but it does use encumbrance accounting for control purposes. The City has a June 30 fiscal year end.

REQUIRED: Assuming that the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, prepare journal entries, in the Debt Service Fund, for the following transactions.

(a) The City immediately transferred the premium to the Debt Service Fund. The Debt Service Fund may not use the premium to pay principal or interest until the year 2021.

(b) On June 30, the City invested the premium in a 10-year 5% Certificate of Deposit at a local financial institution. The Certificate pays interest annually on June 30. The interest is automatically reinvested in the Certificate.

(c) Property taxes in the amount of $300,000 were collected by June 30, 2007. The City expects to collect another $50,000 by August 31.

(d) The City transferred, to the debt service fund, the cash necessary to make the June 30, 2007 principal and interest payments. The checks will be mailed on July 1.

(e) The City recognizes interest earned on the Certificate of Deposit.

(f) The City recognizes the appropriate liabilities in the debt service fund.

4. A City received voter approval to issue $10 million of 5% bonds to construct a city office building. The estimated total cost of construction is $15 million. The City hopes to raise the balance needed through private donations. The City has a June 30 fiscal year-end.

REQUIRED: Assuming that the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, prepare journal entries to record the following transactions. Indicate in which fund the entry is being made.

(a) On July 1 the City issued $10 million of 5% serial bonds at face to fund construction of the new office buildings. The bonds pay interest on January 1 and July 1. The first principal payments are due five years hence.

(b) On July 15 the City signed a $15 million contract with a local construction company for construction of the buildings.

(c) On September 1 a local benefactor donated $5 million cash for the office buildings.

(d) On October 1, the contractor requested a progress payment of $2 million for the earthwork and foundation work on the new buildings. The City paid the contractor.

(e) On January 1, the City transferred from the general fund the amount necessary to make the first interest payment. The City made the first interest payment on the bonds.

(f) On June 1 the contractor requested, and received, a progress payment of $10 million.

5. Krauss County had outstanding $35 million in Series 1991 general obligation bonds on June 30, 2007. The bonds were issued at an interest rate of 10 percent with interest payable on June 30 and December 31. In July 2007, interest rates had declined substantially, and the County issued refunding bonds in the amount of $35 million at 5 percent. The proceeds of the new refunding bonds were placed in escrow along with $2,800,000 held in the County’s debt service fund as a sinking fund for the 1991 debt. The proceeds of the refunding bonds and the sinking fund amount would be used in December 2007 (the call date) to purchase the 1991 debt at a 3 percent call premium, totaling $1,050,000, plus accrued interest of $1,750,000. The County had $250,000 of unamortized debt issue costs on the 1991 bonds, which it reported in its government-wide financial statements. This amount combined with the call premium resulted in a $3,050,000 “loss” on the refunding. REQUIRED:

(a) What journal entries should the County make in July 2007 to record the in-substance defeasance of the 1991 debt in its debt service fund?

(b) What debt should be reported in the County’s government-wide financial statements at July 2007?

(c) What journal entry should be made in the County’s debt service fund in December 2007 to record the purchase of the old debt at the call date?

(d) How should the “loss” on the refunding be recognized in the government-wide financial statements? Why did the GASB choose this method of recognition?

6. In 2007, the citizens living on Coolidge Avenue agreed to a capital improvement special assessment to replace sidewalks on both sides of the avenue. The City will oversee the construction, issue special assessment debt to pay for it, and bill (assess) homeowners for their portion of the cost. The estimated cost of the project is $3.0 million. The City itself will be responsible for 25 percent of the cost ($750,000). However, the City also has indicated that it will be responsible for any defaults on the part of homeowners. Because the City uses a separate capital projects fund for the project, it does not integrate budgetary accounts. However it does use encumbrance accounting. REQUIRED: Provide journal entries for the City’s funds and discussion as follows. Be sure to indicate which fund would record the entry.

(a) The City puts the project out for bid and accepts the lowest competent bid of $2.8 million.

(b) The contractor does the work and bills the City for $2.9 million, $0.1 million over contracted amount. The City Council approves the overage. The City lends resources from its General Fund to pay the bill, pending issuance of special assessment debt.

(c) The City issues $3.0 million in 10-year special assessment debt. The City receives $2.9 million, an amount that is net of debt issue costs of $0.1 million.

(d) The Capital Projects Fund repays the City’s General Fund.

(e) The City assesses taxpayers on Coolidge Avenue a total of $2.75 million in special assessments. The City has an enforceable legal claim against those taxpayers on the date of the assessment.

(f) Several taxpayers pay their assessment immediately. During the 2007, the City receives a total of $.775 million in special assessment revenues.

7. A government held the following equity securities in its debt service fund as of January 1, 2007. During 2007 it engaged in the following transactions as indicated.

Beginning Bal. Ending Bal.

Security Cost FMV Purch. Sales Cost FMV

A 600 800 600 840

B 380 300 380 275

C 100 140 150 -

D 700 700 710

Total 1,080 1,240 700 150 1,680 1,825

A. Ignoring dividends, what would be the impact of the transactions on 2007 debt service fund revenues or expenditures?

B. What would be the impact of the transactions on 2007 government-wide revenues or expenses?

8. To construct a new junior high school, the Central Scholl District, on October 1, 2007, issued, at par, $20 million of 6 percent bonds. The first interest payment of $600,000 is due on March 31, 2008. In December 2007 the district transferred $600,000 from its general fund to a debt service fund to cover the March 2008 interest payment. How much interest expense/expenditure should the district recognize for 2007 in its

3. general fund ____________

4. debt service fund ____________

5. government-wide statements _____________