C5

Accounting for Other Governmental Fund Types: Capital Projects, Debt Service, and Permanent

It rivals anything in the history of the world built by men. (Matthew Amorello, chairman of the Massachusetts Turnpike Authority on the completion of Boston’s “Big Dig,” a $14.6 billion underground highway. Since opening, the project has gained notoriety for a criminal investigation into faulty materials and problems with hundreds of leaks. In July 2006, 12 tons of ceiling tiles fell to the roadway, killing one person.)

I place . . . public debt as the greatest of the dangers to be feared . Thomas Jefferson, 3rd president of the United States, whose administration negotiated the Louisiana Purchase, financing 80 percent of the purchase with govern-ment debt.

Learning Objectives

Apply the modified accrual basis of accounting in the recording of typical • transactions of capital projects, debt service, and permanent funds. Prepare the fund-basis financial statements for governmental funds. • Record capital lease transactions related to governmental operations. • Classify and identify appropriate fund reporting for trust agreements. •

Chapter 4 describes accounting and financial reporting for the General Fund and special revenue funds. This chapter describes and illustrates the accounting for

the remaining governmental funds: capital projects, debt service, and permanent.

Chapter Five

123

ILLUSTRATION 5–1 Summary of Governmental Type Funds

Fund Name Fund Description Fund Term

General Fund

Special Revenue

Capital Projects

Debt Service

Permanent

✓

✓

✓

✓

✓

Accounts for all financial resources not required to be reported in another fund.

Accounts for legally restricted revenue sources, other than those restricted for capital projects or debt service.

Accounts for financial resources to be used for acquisition or construction of major capital facili-ties (other than those financed by proprietary or fiduciary funds).

Accounts for financial resources to be used for payment of interest and principal on general long-term debt (not needed for debt paid from proprietary or fiduciary funds).

Accounts for resources that are legally restricted to the extent earnings (but not principal) may be used to support government programs.

Indefinite life.

For each period that a substantial portion of the resources are provided by one or more restricted or com-mited revenue sources.

From the period resources are first provided until the capital facility is complete.

From the period funds are first accu-mulated until the final interest and principal payment is made.

Indefinite life, beginning with the initial contribution.

Mo

dif

ied

Acc

rual

Bas

is

Fin

anci

al

Res

ou

rce

Focu

s

Rec

ord

Bu

dg

ets

Encu

mb

ran

ces

✓

✓

✓

✓*

✓

✓

✓

✓

✓

✓

*Debt service funds are required to report only matured interest and principal payments as current liabilities. Unmatured principal installments and accrued interest, although due shortly after year-end are not required to be reported as liabilities in the debt service fund until due.

124 Chapter 5

Representative transactions and fund-basis financial statements are presented for the Village of Elizabeth.

Illustration 5–1 provides a summary of governmental funds. Many of the prac-tices described in Chapter 4 apply to capital projects, debt service, and permanent funds. All of the governmental funds use the modified accrual basis of accounting and the current financial resources measurement focus. Budgets are typically not recorded for capital projects, debt service, and permanent funds. Similarly, encum-brance accounting is typically not used for debt service and permanent funds.

Governmental fund types account for revenues, other financing sources, expendi-tures, and other financing uses that are for capital outlay and debt service purposes, as well as for current purposes. General fixed assets that are acquired with govern-mental fund resources are recorded as expenditures in the governmental funds but are displayed as capital assets in the government-wide financial statements. Simi-larly, the proceeds of general long-term debt incurred for governmental activities are recorded as other financing sources in governmental funds but the liability is displayed as long-term debt in the government-wide statements.

Since long-term liabilities are not recorded in the governmental funds, payments of principal are recorded as expenditures, rather than reductions of outstandings li-abilities. Capital projects funds and debt service funds, in particular, are used to ac-quire major fixed assets and to issue and service long-term debt, although the General Fund may also be used for these purposes. Adjustments needed to record the general fixed assets and long-term debt transactions prior to preparing the government-wide statements are identified in this chapter but are illustrated more fully in Chapter 8 of this text. The general fixed assets and long-term debt for the Village of Elizabeth are included in the government-wide statements illustrated in Chapter 8.

Permanent funds reflect resources that are restricted so that principal may not be expended and earnings are used to benefit the government or its citizenry. If both earnings and principal may be expended, the activities should be reported in a special revenue fund. In this chapter, a cemetery perpetual care fund is used to illustrate permanent funds.

CAPITAL PROJECTS FUNDS

A major source of funding for capital projects funds is the issuance of long-term debt. In addition to debt proceeds, capital projects funds may receive: grants from other governmental units, proceeds of dedicated taxes, transfers from other funds, gifts from individuals or organizations, or a combination of several of these sources.

Capital projects funds differ from General Funds in that a capital projects fund ex-ists only for the duration of the project for which it is created. In some jurisdictions, governments are allowed to account for all capital projects within a single capital projects fund. In other jurisdictions, laws require each project to be accounted for by a separate capital projects fund. Even in jurisdictions that permit the use of a single fund, managers may prefer to use separate funds to enhance control over individual

Accounting for Other Governmental Fund Types 125

projects. In such cases, a fund is created when a capital project or a series of related projects is legally authorized; it is closed when the project or series is completed.

GASB standards require capital project fund-basis statements to be reported using the modified accrual basis of accounting. Proceeds of debt issues should be recognized by a capital projects fund at the time the debt is actually incurred, rather than at the time it is authorized, because authorization of an issue does not guarantee its sale. Proceeds of debt issues are recorded as Proceeds of Bonds or Proceeds of Long-Term Notes rather than as Revenues and are reported in the Other Financing Sources section of the Statement of Revenues, Expenditures, and Changes in Fund Balances. Similarly, revenues raised by the General Fund or a special revenue fund and transferred to a capital projects fund are recorded as Transfers In and reported in the Other Financing Sources section of the operat-ing statement. Taxes or other revenues raised specifically for a capital project are recorded as revenues of the capital projects fund. Grants, entitlements, or shared revenues received by a capital projects fund from another governmental unit are considered revenues of the capital projects fund, as is interest earned on temporary investments of the capital projects fund.

Expenditures of capital projects funds generally are reported in the capital outlay character classification in the Governmental Funds Statement of Revenues, Expen-ditures, and Changes in Fund Balances. Capital outlay expenditures result in addi-tions to the general fixed assets reported in the government-wide Statement of Net Assets. Even though budgetary reporting is not required for capital projects funds, encumbrance accounting is used.

Illustrative Case The following case illustrates representative transactions of a capital projects fund. Assume that early in 2012 the Village Council of the Village of Elizabeth authorized an issue of $1,200,000 of 8 percent 10-year regular serial tax- supported bonds to finance construction of a fire station addition. The total cost of the fire station addition was expected to be $2,000,000, with $600,000 to be financed by grants from other governmental units and $200,000 to be transferred from an enterprise fund of the Village of Elizabeth. The project would utilize land already owned by the Village and was to be done partly by a private contractor and partly by the Village’s own working force. Completion of the project was expected within the year. Transactions and entries are illustrated next. For economy of time and space, vouchering of liabilities and entries in subsidiary ledger accounts are not illustrated.

The $1,200,000 bond issue, which had received referendum approval by taxpay-ers, was officially approved by the Village Council. No formal entry is required. A memorandum entry may be made to identify the approved project and the means of financing it.

The sum of $100,000 was borrowed from the National Bank for defraying engi-neering and other preliminary costs incurred before bonds could be sold. The notes will be repaid in the current period and are recorded as a liability in the capital project fund.

126 Chapter 5

1. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Bond Anticipation Notes Payable . . . . . . . . . . . . . . . . . . . . . . . .

Debits

100,000

Credits

100,000

The receivables from the enterprise fund and the other governmental units were recorded; receipt was expected during the current year.

2. Due from Other Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Due from Other Governmental Units . . . . . . . . . . . . . . . . . . . . . . .

Other Financing Sources—Transfers In . . . . . . . . . . . . . . . . . . .

Revenues Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

200,000

600,000

200,000

600,000

Total purchase orders for supplies, materials, items of minor equipment, and con-tracted services required for the project amounted to $247,698.

3. Encumbrances Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Budgetary Fund Balance—Reserve for Encumbrances . . . . . . .

247,698

247,698

A contract was issued for the major part of the work to be done by a private con-tractor in the amount of $1,500,000.

4. Encumbrances Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Budgetary Fund Balance—Reserve for Encumbrances . . . . . .

1,500,000

1,500,000

Special engineering and miscellaneous preliminary costs that had not been en-cumbered were paid in the amount of $97,500.

5. Construction Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

97,500

97,500

When the project was approximately half-finished, the contractor submitted bill-ing for a payment of $750,000. The following entry records conversion of a commit-ment (Encumbrances) to a liability, eligible for payment upon proper authentication. Contracts Payable records the status of a claim under a contract between the time of presentation and verification for payment.

Accounting for Other Governmental Fund Types 127

6. Budgetary Fund Balance—Reserve for Encumbrances . . . . . . . . .

Construction Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Encumbrances Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Contracts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Debits

750,000

750,000

Credits

750,000

750,000

The transfer ($200,000) was received from the enterprise fund, and $300,000 was received from the other governmental units.

7. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Due from Other Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Due from Other Governmental Units . . . . . . . . . . . . . . . . . . . . . .

500,000

200,000

300,000

The bond issue, dated January 2, was sold at a premium of $12,000 on that date. In this example, as is generally the case, the premium must be used for debt service and is not available for use by the capital projects fund; therefore, the premium is transferred to the debt service fund. Entry 8a records the receipt by the capital proj-ects fund of the proceeds of the bonds, and 8b records the transfer of the premium amount to the debt service fund.

8a. Cash

Other Financing Sources—Proceeds of Bonds . . . . . . . . . . . . .

Other Financing Sources—Premium on Bonds . . . . . . . . . . . .

8b. Other Financing Uses—Transfers Out . . . . . . . . . . . . . . . . . . . . .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,212,000

12,000

1,200,000

12,000

102,500

If bonds were sold at a discount, either the difference would be made up by a transfer from another fund, or the capital projects fund would have fewer resources available for the project. Generally, bond issue costs would be involved and would be recorded as expenditures.

If bonds were sold between interest dates, the government would collect from the purchaser the amount of interest accrued to the date of sale, because a full six months’ interest would be paid on the next interest payment date. Interest payments are made from debt service funds; therefore, cash in the amount of accrued interest sold at the time of bond issuance should be recorded in the Debt Service Fund.

The Village of Elizabeth’s Capital Projects Fund pays the bond anticipation notes and interest (assumed to amount to $2,500), and records the following journal entry:

9. Bond Anticipation Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100,000

2,500

102,500

128 Chapter 5

The contractor’s initial claim (see entry 6) was paid, less a 5 percent retention. Retention of a contractually stipulated percentage from payments to a contractor is common until the construction is completed and has been inspected for conformity with specifications and plans.

10. Contracts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Contracts Payable—Retained Percentage . . . . . . . . . . . . . . . . . . . . .

Debits

750,000

Credits

712,500

37,500

Upon final acceptance of the project, the retained percentage is paid. In the event that the government finds it necessary to spend money correcting deficiencies in the contractor’s performance, the payment is charged to Contracts Payable—Retained Percentage.

Disbursements for items ordered at an estimated cost of $217,000 (included in the amount recorded by entry 3) amounted to $216,500.

11. Budgetary Fund Balance—Reserve for Encumbrances . . . . . . . . . . .

Construction Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Encumbrances Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

217,000

216,500

217,000

216,500

Assume the contractor completes construction of the fire station and bills the Village of Elizabeth for the balance on the contract:

12. Budgetary Fund Balance—Reserve for Encumbrances . . . . . . . . . . .

Construction Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Encumbrances Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Contracts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

750,000

750,000

750,000

750,000

Assume the amount remaining from other governmental units was received:

13. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Due from Other Governmental Units . . . . . . . . . . . . . . . . . . . . . . .

300,000

300,000

Invoices for goods and services previously encumbered in the amount of $30,698 were received and approved for payment in the amount of $30,500. Additional con-struction expenditures, not encumbered, amounted to $116,500. The entire amount was paid in cash.

Accounting for Other Governmental Fund Types 129

14. Budgetary Fund Balance—Reserve for Encumbrances . . . . . . . .

Construction Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Encumbrances Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Debits

30,698

147,000

Credits

30,698

147,000

Assuming that inspection revealed only minor imperfections in the contractor’s performance, and upon correction of these, the contractor’s bill and the amount previously retained were paid, entry 15 should be made:

15. Contracts Payable—Retained Percentage . . . . . . . . . . . . . . . . . . .

Contracts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37,500

750,000

787,500

After entry 15 is recorded, $36,500 in cash remained in the capital projects fund. That amount was transferred to a debt service fund for the payment of bonds:

16. Other Financing Uses—Transfers Out . . . . . . . . . . . . . . . . . . . . .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36,500

36,500

Upon completion of the project and disposition of any remaining cash, the fol-lowing closing entry was made:

17. Revenues Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other Financing Sources—Transfers In . . . . . . . . . . . . . . . . . . . .

Other Financing Sources—Proceeds of Bonds . . . . . . . . . . . . . . .

Other Financing Sources—Premium on Bonds . . . . . . . . . . . . . .

Construction Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other Financing Uses—Transfers Out . . . . . . . . . . . . . . . . . . . .

600,000

200,000

1,200,000

12,000

1,961,000

2,500

48,500

Financial statements for the Fire Station Addition Capital Projects Fund are pre-sented as part of the Governmental Funds Balance Sheet (Illustration 5–3) and the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances (Illustration 5–4) provided near the end of this chapter. Because the Vil-lage’s fire station project was completed and the remaining resources transferred to the debt service fund, there are no balances remaining in the fund and it does not appear in the governmental funds Balance Sheet (Illustration 5–3). However, the assets, liabilities, and fund balances of major capital projects continuing into the next period would appear in governmental fund Balance Sheets. Fund balances of

130 Chapter 5

capital projects funds are classified among the categories identified in GASB State-ment 54: Nonspendable, Restricted, Committed, or Assigned. In the case of capital projects funds, it is common for net resources to be classified as Restricted . For example, the bond issue may be the result of a referendum in which the voters both approved the debt issue and established its intended use. Intergovernmental grants and taxes dedicated to capital improvements are also likely to be classified as Re-stricted. Resources not meeting the definition of restricted are likely to be reported as Committed Fund Balance. GASB Statement 54 requires that resources intended to fulfill contractual obligations (such as long-term construction contracts) be re-ported as Committed. Any remaining net resources would be reported as Assigned, the residual classification for funds other than the General Fund.

The addition to the fire station, excluding interest, will be capitalized and shown as an addition to the capital assets in the government-wide financial statements. In addition, the $1,200,000 in bonds will be recorded as a liability in the government-wide statements. See Chapter 8 for the adjustments necessary as a result of this project.

OTHER ISSUES INVOLVING ACQUISITION OF CAPITAL ASSETS

Acquisition of General Fixed Assets by Lease Agreements FASB SFAS No. 13 defines and establishes accounting and financial reporting stan-dards for a number of forms of leases including operating leases and capital leases. GASB Statement No. 13 accepts the FASB’s SFAS No. 13 definitions of these two forms of leases and prescribes accounting and financial reporting for lease agreements of state and local governments. If a noncancelable lease meets any one of the following criteria, it is a capital lease:

The lease transfers ownership of the property to the lessee by the end of the lease 1. term. The lease contains an option to purchase the leased property at a bargain price. 2. The lease term is equal to or greater than 75 percent of the estimated economic 3. life of the leased property. The present value of rental or other minimum lease payments equals or exceeds 4. 90 percent of the fair value of the leased property.

If none of the criteria are met, the lease is classified as an operating lease by the lessee. Rental payments under an operating lease for assets used by the govern-mental funds are recorded by the governmental funds as current expenditures of the period. The GASB has issued specific guidelines for state and government entities with operating leases with scheduled rent increases ( Statement No. 13 ). Discussion of this special case is beyond the scope of this text.

If a government acquires general fixed assets under a capital lease agreement, the asset should be recorded in the government-wide financial statements at the

132 Chapter 5

Special assessment projects may be accounted for in one of two ways. If the government is either primarily or secondarily liable for the payment of debt prin-cipal and interest, the project is accounted for as if it were a governmental proj-ect. A capital projects fund should account for the proceeds of the debt and the construction expenditures. The capitalized cost of the project will be recorded in the government-wide statements. The debt should be recorded in the government-wide statements, and the special assessment tax levy and debt service expenditures should be recorded in a debt service fund, as illustrated for general government debt in this chapter.

Alternatively, if the government is not liable for the special assessment debt di-rectly or through guarantee, the special assessment is accounted for in an agency fund. Accounting for agency and other fiduciary funds is discussed and illustrated in Chapter 7.

DEBT SERVICE FUNDS

As we just observed, major capital additions are commonly financed through bond or other debt issues. Another fund type, the debt service fund, is used to account for financial resources that are intended to provide payments of interest and prin-cipal as they come due. Debt service funds are not created for debt issues where the activities of proprietary funds are intended to generate sufficient cash to make interest and principal payments.

If taxes and/or special assessments are levied specifically for payment of inter-est and principal on long-term debt, those taxes are recognized as revenues of the debt service fund. More commonly, undesignated taxes are levied by the General Fund and transferred to a debt service fund to repay debt. In that case, the taxes are recorded as revenues by the General Fund and as transfers to the debt service fund. Because the amounts of bond issues and the associated capital projects are often ap-proved by the voters, bond premiums and unexpended capital project resources are generally required by state law to be transferred to debt service funds.

The Modified Accrual Basis—As Applied to Debt Service Funds GASB standards require debt service accounting to be on the same modified accrual basis of accounting as General, special revenue, and capital project funds. One pe-culiarity of the modified accrual basis as applied to debt service accounting is that interest on long-term debt is not accrued; it is recognized as an expenditure in the year in which the interest is legally due. For example, if the fiscal year of a gov-ernment ends on December 31, and the interest on its bonds is payable on April 1 and October 1 of each year, interest payable would not be reported as a liability in the Balance Sheet of the Debt Service Fund prepared as of December 31. The rationale is that, since interest is not legally due until April 1 of the following year, resources need not be expended in the current year. The same reasoning applies to principal amounts that mature in the next fiscal year; expenditures and liabilities

Accounting for Other Governmental Fund Types 133

are recognized in the debt service fund in the year for which the principal is legally due. The only exception permitted by GASB is that if a government has resources available for payment in a debt service fund and the period of time until interest or principal payment is due is no more than one month, then the interest or principal payment may be accrued.

Additional Uses of Debt Service Funds Debt service funds may be required to service, in addition to term and serial bonds, debt arising from the use of notes, capital leases, or warrants having a maturity more than one year after the date of issue. Although each issue of long-term debt is a separate obligation, all debts to be serviced from tax revenues may be accounted for by a single debt service fund, if permitted by state laws and covenants with credi-tors. If more than one debt service fund is required by law, as few funds of this type should be created as possible.

In some jurisdictions, there are no statutes that require the debt service function to be accounted for by a debt service fund. Whether or not required by statute or local ordinance, bond indentures or other agreements with creditors are often con-strued as requiring the use of a debt service fund. Unless the debt service function is very simple, it may be argued that good financial management would dictate the establishment of a debt service fund even when it is not legally required. If neither law nor sound financial administration requires the use of debt service funds, the function may be performed within the accounting and budgeting framework of the General Fund. In such cases, the accounting and financial reporting standards discussed in this chapter should be followed for the debt service activities of the General Fund.

Debt Service Accounting for Serial Bonds The principal on serial bonds is paid over the term of the bonds, rather than in a lump sum at the end. Usually the government designates a bank as fiscal agent to handle interest and principal payments for each debt issue. The assets of a debt service fund may, therefore, include Cash with Fiscal Agent, and the expenditures, and liabilities may include amounts for the service charges of fis-cal agents.

There are four types of serial bonds: regular, deferred, annuity, and irregular. If the total principal of an issue is repayable in a specified number of equal install-ments over the life of the issue, it is a regular serial bond issue. If the first install-ment is delayed for a period of more than one year after the date of the issue, but thereafter installments fall due on a regular basis, the bonds are known as deferred serial bonds. If the amount of annual principal repayments is scheduled to increase each year by approximately the same amount that interest payments decrease (in-terest decreases, of course, because the amount of outstanding bonds decreases) so that the annual debt service payments remain relatively uniform over the term of the issue, the bonds are called annuity serial bonds. Irregular serial bonds may have any pattern of repayment that does not fit the other three categories.

144 Chapter 5

Note that only current financial resources and obligations appear in the govern-mental funds Balance Sheet. The net position of each fund is displayed within the five categories of fund balances, but each fund balance has a separate line within those categories. Only the General Fund has an Unassigned Fund Balance . The govern-ment’s decision to record resources in special revenue, capital projects, debt service, or permanent funds is an indication that the resources are at least assigned to a particu-lar purpose. In this example, only the principal of the permanent fund appears as Non-spendable Fund Balance . If any of the funds had unused supplies or prepaid expenses, those resources would also have been classified as Nonspendable Fund Balance .

Statement of Revenues, Expenditures, and Changes in Fund Balances—Governmental Funds Illustration 5–4 presents the Statement of Revenues, Expenditures, and Changes in Fund Balances. This statement includes the funds in Illustration 5–3 plus the capital project fund illustrated in this chapter. In the Village of Elizabeth example, students should be able to trace the transactions in the illustrative problems to this statement.

SUMMARY This chapter illustrated representative transactions and the resulting financial state-ments for capital projects, debt service, and permanent funds. Like the General and special revenue funds, these governmental funds use the modified accrual basis and current financial resource measurement focus in the fund-basis financial state-ments. Unlike the General Fund, these funds do not typically record budgets and debt service and permanent funds do not record encumbrances. Characteristics of these funds are as follows:

• Capital projects funds. These funds commonly account for resources provided by long-term debt issues or dedicated taxes. The capital projects typi-cally involve significant construction contracts which may take months or years to complete. Typically, the expenditures are for capital assets that appear in the government-wide (but not the fund basis) financial statements.

• Debt service funds. Typically resources are provided through transfers from the General or other funds. There are two types of debt service expenditures: inter-est and principal. In most cases, liabilities for interest and principal payments are not recorded until payment is due.

• Permanent funds. These funds are created when resources are provided to a government with the intent they be used to generate income to support a particular purpose. The trust agreement stipulates that the earnings are intended to benefit the government or citizens and the principal may not be expended. Principal of perma-nent funds is classified as Nonspendable Fund Balance.

Now that you have finished reading Chapter 5, complete the multiple choice questions provided on the text’s Web site (www.mhhe.com/copley10e) to test your comprehension of the chapter.