Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 6: Accounting for capital projects and debt service

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Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 6: Accounting for capital projects and debt service. Chapter 6 - Accounting for capital projects and debt service. In this chapter, the learning objectives are: Why and how governments use capital projects funds, why and how governments use debt service funds, how governments account for special assessments, what arbitrage is, the nature of debt refundings.
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Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 6: Accounting for capital projects and debt service. Chapter 6 - Accounting for capital projects and debt service. In this chapter, the learning objectives are: Why and how governments use capital projects funds, why and how governments use debt service funds, how governments account for special assessments, what arbitrage is, the nature of debt refundings..

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Click icon to add picture Chapter 6 Accounting for Capital Projects and Debt Service Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 6 | 1 All rights reserved. Learning Objectives •Why and how governments use capital projects funds •Why and how governments use debt service funds •How governments account for special assessments •What arbitrage is •The nature of debt refundings Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 6 | All rights reserved. Capital Projects Funds(CPF)-Definition •A fund that accounts for and report financial resources that are legally restricted and contractually required for the acquisition of capital assets. •The primary purpose is to ensure and demonstrate the expenditure of the dedicated financial resource is both legally and contractually compliant. •The total cost of a capital project is accumulated in a single expenditures account, which accumulates until the project is completed, at which time the fund ceases to exist. •i.e. Fund has a “Project-life focus,” not year-to-year focus. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 6 | All rights reserved. Overview •Governments must maintain capital projects funds for resources that are legally restricted, committed, or assigned to expenditure for capital outlays. •Basis of Accounting • Fund Statements -- Modified accrual basis • Government-wide statements -- Full accrual basis. •Two types of capital projects • General (public benefit) • Examples: public buildings, roads, highways and bridges, park improvements, sewer systems, plant and equipment; etc. • Special assessment (private benefit) Benefits citizens in a specified benefit district. • Examples: street improvements, curbs, sidewalks, street lighting, sewage, etc. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 6 | All rights reserved. CPF: Capital Assets- Acquisition Assume that Simple City proceeds with the creation of a capital equipment replacement fund (which would be considered a capital projects fund). To create the fund, the general fund transfers (this means to give – without the expectation of repayment) $1,000,000 to the new capital equipment replacement fund. General Fund Other financing uses Cash $1,000,000 1,000,000 Capital Equipment Replacement Fund (CPF) Cash $1,000,000 Other financing sources 1,000,000 Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 6 | All rights reserved. CPF: Capital Assets-Construction Three Phases: Phase 1: Preconstruction Phase Project & Financing authorization Phase 2: Construction Phase Phase 3: Debt Servicing Phase Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 6 | All rights reserved. Phase 1: Project & Preconstruction Phase Financing authorization Financing Acquire extensive, long-term financing (3 types) ◦ Type I - Tax Supported Debt ◦ General obligation (tax-supported) bonds or special taxes restricted to payment of debt ◦ Type II - Grants ◦ Type III - Other forms of financing ◦ Special Assessments ◦ (Special Assessments actually claim only 2 phases because financing & construction are a single phase) Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 6 | All rights reserved. Type I Tax Supported Debt Overview Voter approval required Memo entry for bond/tax authorization Proceeds accounted for as “other financing sources.” Difference between face value of bonds and cash received is attributed to: Issue costs. Premiums and discounts. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 6 | All rights reserved. Type I - Example Assume that bonds with a face value of $5,000,000 were issued at 101 to finance the project. Capital Projects Fund: Dr. Cr. Cash $5,050,000 Other Financing Sources-Bond proceeds Other Financing Sources-Bond premium 5,000,000 50,000 Gov’t.-wide (Gov’tal.Activities)*: Cash Bonds Payable $5,050,000 5,000,000 Premium on Bonds Payable 50,000 Granof, et a*Note:ioThis entry is not made on the books, this is the conversion at the eoy Chapter 6 | All rights reserved. Type II Grants-Example Assume approval is obtained for a federal grant as partial funding for a city’s office building project. Upon approval, the following journal entry would be made: Capital Projects Fund: Dr. Cr. Due from other Governmental Units Revenues $100,000 100,000 Govt.-wide (Gov’tal. Activities)*: Due from Other Governmental Units $100,000 Program Revenues-Capital Grants and Contributions-General Government 100,000 Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 6 | *Note: This entry is not madelon the books, this is the conversion at the end of year Type II Example (cont’d) The amount due from the federal government for the previously recorded capital grant was received in full. Capital Projects Fund: Dr. Cr. Cash $100,000 Due from Other Governmental Units 100,000 Gov’t.-wide (Gov’tal.Activities)*: Same entry. *Note: This entry is not made on the books, this is the conversion at the eoy Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 6 | All rights reserved. Type III – Other Forms of Financing

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