CHAPTER FOUR

Capital Project fund

Introduction
The previous unit indicated that long lived assets such as office equipment, government vehicles
and other relatively minor items may be acquired by a governmental unit by expenditures or
appropriations of the general fund or one or more of its special revenue funds. Long – lived
assets used by activities accounted for by a governmental fund types are called General fixed
assets. Acquisitions of General fixed assets that require major amounts of money ordinarily
cannot be financed from general fund or special revenue fund appropriations. Major acquisitions
of General fixed assets are commonly financed by the issuance of long term debt to be repaid
from tax revenues, or by special assessments against property deemed to be particularly
benefited by the long lived asset. Other sources of financing the acquisitions of long lived assets
include grants from other governmental units, transfers from other funds, gifts from individuals
or organizations or by a combination of several of these sources. If money received from these
sources is restricted, legally or morally to the acquisition or construction of specified capital
assets, it is recommended that a capital project fund be created to account for these resources to
be used for major construction or acquisition projects. Long term debts will mature in the future
and have to be repaid. The repayments of long term debts are accounted in a debt service fund. In
general, this chapter will discuss how capital project fund are accounted.

4.1 Capital Project Fund

Capital project Funds account for financial resources to be used for the acquisition or
construction of major capital facilities (other than those financed by proprietary funds &
trust funds). Examples: Administration Buildings, Civic Centers and libraries etc. These funds
do not account for the acquisition of smaller fixed assets, such as vehicles, machinery & office
equipment which are normally budgeted for & recorded as expenditure in the General fund. It
is also possible that a construction project could simply have a subsidiary ledger within the
General fund, rather than its own distinct fund. The existence of the capital project fund, as
any other fund will depend on the legal requirement and the need for good financial
management.

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 Note capital project fund do not account for the fixed assets acquired only for the
construction of the fixed assets. It exists only for the period of acquisition or construction
of the fixed assets. After the acquisition or construction is completed, the capital projects
fund will be abolished. The fixed assets constructed are accounted for in the general capital
asset account at the governmental wide level. It does not also account for the repayment &
servicing of any debt obligations issued to raise money to finance the acquisition of capital
facilities. Such debt & debt related servicing activities are accounted for in the General long
term debt accounts & Debt service funds. Since the purpose of capital project fund is to account
for the acquisition and deposition of revenues for specific purpose, it contains balance sheet
accounts for only liquid assets and for the liabilities to be liquidated by those assets.
4.1.1 Operation of Capital Project Funds
Capital project funds are usually established on a project – by – project basis, because
legal requirements may vary from one project to another. So, the existence of capital project
fund as any other fund will depend on the legal requirement & the need for good financial
management.
The focus of capital project fund is the entire life of the project. It is by definition an
expendable fund, and all its resources are expected to be used up. However, capital project funds
do not have the same year – by – year focus as the General fund. Because of the multi – year
focus of capital project fund, some accountants prefer not to close a capital project fund
annually, but others do. Whether or not to close the capital project fund annually will depend on
the unique factors of each case & will be strongly influenced by the requirement of the financing
source.
[Link] Financing Capital Project Funds
Capital projects obviously need large amount of financing. Typical source of financing
includes:
 Long term debt issue proceeds
 Grants from other governmental units
 Transfers from other funds within the governmental entity
 Interest income from temporary investments
 Gifts from individuals or foundations
 Special taxes

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  A combination of more than one of the above
Intergovernmental grants, gifts, special taxes & investment interests are considered as revenues,
whereas, Inter Fund Transfers & Long Term Debt issue proceeds are not revenues and are
presented as other financing sources and are presented that way on the statement of changes in
financial position.
Whether to have a separate capital project funds for each project or to account for all capital
project funds in one fund depends in part on what type of financing involved. Different bond
issues & different inter governmental transfers might well have different legal requirements &
each might require a separate capital project fund. On the other hand if one bond issue is
used to finance several projects, a single fund may be both permissible and advisable.
[Link] Other consideration of CPF
1. Means of Acquisition: Accomplishment of capital acquisition or construction project may be
brought about in one or more of the following ways:
1. Outright purchase from Fund’s cash.
2. By construction, utilizing the governmental units own force.
3. By construction, utilizing the services of private contractors.
4. By capital lease agreement.
2. Costs Included: All expenditures for setting the project ready are put in the capital project
fund, including architect fees, transport costs, damages, etc. Usually, major capital facilities
are constructed by contracted labor. Construction costs incurred are charged to
expenditures. At the completion of the project, the cost of the facility is recorded as a fixed
asset in the general capital asset account at the governmental wide level. Until then, any costs
incurred are shown as construction work in progress in the general capital asset account.
Generally, the year – end closing entry in the capital project fund triggers the recording of an
amount in the General capital Asset Account equal to the credit to the expenditures account.
3. Retained Percentage: It is common in construction contracts for the entity to hold back
some percentage of the last payment of the contract and to require contractor on large scale
contract to give performance bond. This is to prevent the contractor from doing a poor quality
work, especially in a rush to finish at the end. Basically, the entity will pay part of the final
sum, and then have its own engineers come and inspect the contractor’s work. If the
contractor’s work passes the inspection, the balance of the amount owed is paid. If the engineer

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finds poor quality or undone work, the contractor must then correct the problem before the final
retained sum is paid. This amount withhold by the governmental entity is known as retained
percentage.
4. Encumbrance: Some governmental units include annual capital budgets as part of their
annual appropriated budget in which case the annual capital is recorded in the general
ledgers of the various capital project funds. However, since the amount involved in a capital
project is usually large, an encumbrance account is highly recommended & it is necessary
in case of multiple subcontractors for a project. Because of this, an encumbrance accounting
procedures alone are usually deemed sufficient for control purposes. So, recording of the budget
in the general ledger might not be necessary. In capital project fund, encumbrance is also
recorded by the same amount in which the construction contract agreement is made between the
governmental unit and the contractor and also in the same manner as that of the general and
special revenue fund.
5. Treatment of Residual Equity or Deficits: If necessary expenditures & other financing uses
are planned & controlled carefully, actual does not exceed plans. Revenues & other financing
source of the capital project fund should equal or slightly exceed the expenditures and other
financing uses leaving a residual equity (surplus) and if long term debt had been incurred for
the purpose of the capital project fund and under this case, there are three possible options;
1. The balance could be transferred to the debt service fund, as residual equity transfer for
retiring the debt, which has been incurred for the purpose of the project.
2. If the residual equity were deemed to have come from grants or shared revenues
restricted for capital acquisitions or constructions, legal advice may indicate that any
residual equity may return to its source in proportional amount or;
3. The balance might be retained for future maintenance purpose.
In some situations, in spite of careful planning and cost control, expenditures and other financing
use of a capital project fund may exceed its revenues and other financing source resulting in a
negative fund balance (deficit). If the deficit is small, an additional transfer will probably be
requested from one or more other funds. If the deficit is relatively large and/or intended
transfers are not feasible, the governmental unit may seek additional grants or shared revenues
from other governmental units to cover the deficits. If no other alternative is available, the
governmental unit would need to finance the deficit by issuing bonds. Under these

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circumstances, a legal or disciplinary action might have been sought against the project manager,
since public money was being used.
6. Investment: All the money necessary to pay for capital project is usually raised near the
inception of the project by issuing bond; but contractors are paid as work in progresses. Excess
cash, therefore, may be temporarily invested in high quality interest bearing securities such as:
Treasury bills, Bank notes, Certificates of deposit and government bonds with short maturities.
4.2 Accounting for Capital Project Fund
Financial activities such as revenues earned and expenditures incurred for the construction
or acquisition of capital projects are recorded in almost the same manner as that of the General
and Special Revenue funds. At the end of each fiscal year prior to a completion of a capital
project, the Revenues, other financing sources, Expenditures, other financing uses and
encumbrance ledger accounts of the capital projects fund are closed to the unreserved and
undesignated fund balance account.
Upon completion of the project, the entire capital project fund is closed by a transfer of
any unused cash to the Debt Service fund or to the General fund, as appropriate. The
unreserved and undesignated fund balance ledger account of the receiving fund would be for
Residual equity transfer. Any cash deficiency in the capital projects fund probably would be
made up by a General fund. This operating transfer would be credited to the other financing
sources ledger account of the capital projects fund and debited to the other financing uses
account of the general fund. The assets constructed with the resources of the capital projects
fund are not included in that funds balance sheet. The constructed plant assets are recorded in
the governmental units general capital assets account at the governmental wide level.
Furthermore, the bonds issued to finance the capital projects fund are not a liability of the fund.
Prior to maturity date of the bond, the liability is carried to the General Long Term Debt
account and when the bond matures, it will be transferred to Debt service fund. The
following illustration will show how the construction and related activities are accounted for in a
capital projects funds.
Illustration - 4.1: Assume the town of Burkitu wants to construct a new library on the site
owned by the town. The construction is expected to cost Br.50, 000,000. It is expected to be
completed within two years on June 30, year 7. In a special meeting held on July 2, year 5, the
members of the town council approved a Br.30,000,000 issuance of general obligation Bonds

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maturing in 20 years. The proceeds of this sale will be used to help finance the construction of
the new library. The remaining Br.20, 000,000 will be financed by an irrevocable state Grant
that has been awarded. The following transactions occurred during the fiscal year ended June 30,
year 6.
1. The General fund loaned Br.500,000 to the library capital projects fund for Drafting,
Engineering and other preliminary expenses by receiving a note which is later to be settled
from the bond issue proceeds. The journal entry to record this will be:

Cash ------------------------- 500,000

Bond anticipation Notes Payable----- 500,000

2. Out of the irrevocable grant of Br.20,000,000, the state contributed Br.5,000,000 and the
remaining is deemed to be susceptible to accrual. This will be recorded as
Cash ----------------------- 5,000,000
Due from state grant-------------- 15,000,000
Revenue--------- ----------- 20,000,000
3. Preliminary Engineering and Planning costs of Br.320,000 were paid to the contractor. There
had been no encumbrances for this cost.
Construction Expenditure--------- 320,000
Cash ---------------------------- 320,000
4. The Bonds were sold at 101%. The bond indenture agreement requires that any premium to
be set aside in the related Debt Service fund.
Cash [101%*30,000,000] ------------------ 30,300,000
Other Financing source- Bond proceeds ---------- --30,000,000
Due to debt service fund ------------------------------- 300,000
5. The town of Burkitu library capital project fund invested its Br.10,000,000 bond proceeds on
the federal Government treasury bills.
Short Term Investment – Treasury Bills ---------10,000,000
Cash ----------------------------------------- 10,000,000
6. A construction contract for Br.44,270,000 is authorized and signed with the contractor.
Encumbrances ---------------------44,270,000
Fund balance Reserved for Encumbrances ------ 44,270,000
7. Orders were placed for materials estimated to cost Br.550,000.
Encumbrances ------------- 550,000
Fund Balance Reserved for Encumbrances------- 550,000

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8. The materials previously ordered (transaction 7) were received at a cost of Br.510,000.
a) Fund balance reserved for Encumbrance ---- 550,000
Encumbrance --------------------------------550,000
b) Construction expenditure------------------------- 510,000
Construction Payable ----------------------------510,000
9. In addition to the construction contract of transaction 6, Br.3,900,000 was incurred for the
services of the architects and engineers; of this amount Br.3,100,000 was paid.
No Encumbrance was recorded.
Construction expenditure -------------------- 3,900,000
Construction payable --------------------------------- 800,000
Cash ------------------------------------------------- 3,100,000

10. Received cash of Br.1,000,000 from the General fund as an operating transfer.
Cash -----------------------------------------1,000,000
Other financing source- Operating Transfers In----1,000,000

11. A partial payment of Br.10,000,000 was received from the state irrevocable grants and the
General fund loan was repaid with interest amounting to Br.10, 000.
Cash ------------------ 10,000,000
Due from state grant ------------------- 10,000,000

Bond anticipation notes payable------ ----500,000

Interest Expenditure --------------------- 10,000
Cash ---------------------------------- 510,000
12. When the project was approximately half finished, the contractor submitted billing for a
payment of 12,000,000.
Fund balance Reserved for Encumbrance------- 12,000,000
Encumbrance ---------------------------------------- 12,000,000
Construction Expenditure---------------------------12,000,000
Construction payable ---------------------------------12,000,000

13. The contractor’s initial claim was fully verified and paid.
Construction payable ----------------------- 12,000,000
Cash---------------------------------------------- 12,000,000