Question

PROBLEM 18-2 Capital Projects Fund and Related Funds
The Town of Green River authorized a municipal building to be constructed at a cost of $175,000. The construction
will be financed from the proceeds from the issue of $175,000 of 6% bonds. Any difference between the par
value of the bonds and the proceeds from their sale is transferred to the Debt Service Fund.
Transactions and events relating to this project include the following:
1. The proceeds from the sale of the bonds were received and included a premium on the bond issue in the
amount of $15,000. The premium was transferred to Debt Service Fund.
2. Encumbrances were recorded on signing of the construction contract in the amount of $175,000.
3. Contract billings in the amount of $85,000 were approved for payment.
4. Contract billings were paid in the amount of $85,000.
5. All nominal accounts were closed and construction in progress was recorded in the appropriate account
group in anticipation of the preparation of financial statements.
6. Encumbrances that were closed in anticipation of the preparation of financial statements are reestablished in
the Capital Projects Fund.
7. Contract billings in the amount of $90,000 were approved on the completion of the municipal building.
8. Contract billings of $90,000 less a retention of 5% were paid.
9. The building was accepted, all construction liabilities were paid, and the building was recorded as an asset in
the appropriate account group.
Required:
Prepare the journal entries relating to the Capital Projects Fund and the Debt Service Fund for the transactions
and events described above. Clearly identify the fund in which each entry is recorded.

Answer 1

1.         To record proceeds of the bond issue and to transfer the premium to the DSF.

(CPF)    CASH                                                                                     140,000

                        OFS – Proceeds from Bond Issue                                                       140,000

(CPF)    OFU – Transfer to Debt Service Fund                                     15,000

                        CASH                                                                                                15,000

(DSF)    CASH                                                                                       15,000

                        OFS – Transfer from Capital Projects Fund                                    15,000

2.         To record encumbered amount for construction project.

(CPF)    ENCUMBRANCES                                                                175,000

                        RESERVE FOR ENCUMBRANCES                                                          175,000

3.         To record expenditures for contract billings.

(CPF) RESERVE FOR ENCUMBRANCES                                    85,000

                        ENCUMBRANCES                                                                          85,000

(CPF)   EXPENDITURES                                                                     85,000

                        CONTRACT PAYABLE                                                                 85,000

(CPF)    DEFERRED REVENUE – State Grant                                   50,000   

                        REVENUE – State Grant                                                                   50,000

4.         To record payment of contract billings.

(CPF)   CONTRACT PAYABLE                                                          85,000

                        CASH                                                                                                 85,000

5. To close the nominal accounts in the CPF and DSF in preparation of year-end financial statements.

(CPF)   OFS – Proceeds from Bond Issue                                             140,000

REVENUE – State Grant                                                           50,000

OFU – Transfer to Debt Service Fund 15,000

EXPENDITURES 85,000

FUND BALANCE – Restricted 90,000

RESERVE FOR ENCUMBRANCES                                                  90,000

                        ENCUMBRANCES                                                                          90,000

(DSF)   OFS – Transfer from Capital Projects Fund                             15,000

                        FUND BALANCE - Restricted                                                         15,000

6.         To reinstate the encumbrances account at the beginning of the year.

(CPF) ENCUMBRANCES                                                                            90,000

                        RESERVE FOR ENCUMBRANCES                                                          90,000

7.         To record expenditures for contract billings.

(CPF)   RESERVE FOR ENCUMBRANCES                                     90,000

                        ENCUMBRANCES                                                                          90,000

(CPF)   EXPENDITURES                                                                     90,000

                        CONTRACT PAYABLE                                                                  90,000

8.         To record payment of contract billings, less 5% retention.

(CPF)   CONTRACT PAYABLE                                                          90,000

                        CONTRACT PAYABLE - Retained %                                                 4,500

                        CASH                                                                                                 85,500

9.         To record final payment and to close out the Capital Projects Fund.

(CPF)   CONTRACT PAYABLE – Retained %                                   4,500

                        CASH                                                                                                 4,500

(CPF) FUND BALANCE - Restricted                                             90,000

                        EXPENDITURES                                                                              90,000