CHAPTER six

ACCOUNTING FOR GENERAL LONG TERM ASSETS AND

CAPITAL PROJECT FUND
6.1 Accounting for General Capital Assets (General Long Term
Assets)
Long-lived assets used by activities financed by the General Fund or
other governmental funds are called general capital assets. General
capital assets should be distinguished from capital assets that are
specifically associated/ related with activities financed by proprietary
and fiduciary funds.
Acquisitions of general capital assets that require major amounts of
money ordinarily cannot be financed from General Fund or special
revenue fund appropriations.
Major acquisitions of general capital assets are commonly financed by
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 for financing the acquisition of long-lived assets include
grants from other governments, transfers from other funds, gifts from
individuals or organizations, capital leases, or a combination of several
of these sources.
Governmental Accounting Standards Board (GASB) standards require
that general capital assets be recorded at historical cost or fair value at

1
time of receipt if assets are received by donation. Historical cost
includes acquisition cost plus ancillary costs necessary to put the asset
into use. Ancillary costs may include items such as freight/ cargo and
transportation charges, site preparation costs, and set-up costs. If the cost
of a capital asset was not recorded when the asset was acquired and is
unknown when accounting control over the asset occurred, it is
acceptable to record an estimated cost.
Classification of General Capital Assets
a. Land
The cost of land acquired by a government through purchase should
include not only the contract price but also such other related costs as
taxes and other liens assumed, title search costs, legal fees, surveying,
filling, grading, draining, and other costs of preparing for the use
intended.

b. Buildings and Improvements of Buildings

If a definition of assets classified as buildings is needed, they may be
said to consist of those structures erected above ground for the purpose
of sheltering persons or property. Improvements other than buildings
consist of land attachments of a permanent nature, other than buildings,
and include, among other things, walks, walls, and parking lots.

2
The determination of the cost of buildings and improvements obtained
through construction by some agency of the government (sometimes
called force account construction) is slightly more difficult. In these
cases, costs should include not only all direct and indirect expenditures
of the fund providing the construction but also materials and services
furnished by other funds.
c. Machinery and Equipment
Machinery and equipment are usually acquired by purchase.
Occasionally/infrequently, however, machinery and equipment may be
constructed by the government, perhaps financed by an internal service
fund. In such cases, the same rules will apply as for buildings and
improvements constructed by governmental employees. The cost of
machinery and equipment purchased should include items conventional
under business accounting practice: purchase price, transportation costs
if not included in purchase price, installation cost, and other direct costs
of readying for use. Cash discounts on machinery and equipment
purchased should be treated as a reduction of costs.
d. Construction Work in Progress
Construction Work in Progress is the account needed to record
construction expenditures accumulated to the end of the fiscal year on
projects financed by capital projects funds. As described later in this
chapter, construction expenditures by capital projects funds are
ordinarily closed to Fund Balance at the end of each year, but the

3
amounts are not capitalized in the funds financing the construction.
Instead, the amounts to be capitalized are debited to the account
Construction Work in Progress in the governmental activities general
journal at the government-wide level.
e. Infrastructure Assets
Infrastructure assets are capital assets, such as highways, streets,
sidewalks, storm drainage systems, and lighting systems that are
stationary in nature and normally can be preserved for a longer life than
most other capital assets.
f. Intangible Assets
Intangible assets are defined by the GASB as capital assets that lack
physical substance, have a useful life of more than one reporting period,
and are nonfinancial in nature. Examples of government intangible
assets include patents, copyrights, easements, water rights, and computer
software.
6.2 General Capital Assets Acquired under Capital Lease
Agreements
FASB Statement No. 13 (SFAS 13) defines and establishes accounting
and financial reporting standards for a number of forms of leases, only
two of which, operating leases and capital leases, are of importance in
governmental accounting.
GASB standards accept the SFAS 13 definitions of these two forms of
leases and prescribe accounting and financial reporting for lease

4
agreements of state and local governments. If a particular lease meets
any one of the following classification criteria, it is a capital lease.
1. The lease transfers ownership of the property to the lessee by the end
of the lease term.
2. The lease contains an option to purchase the leased property at a
bargain price.
3. The lease/contract term is equal to or greater than 75 percent of the
estimated economic life of the leased property.
4. The present value of rental or other minimum lease payments equals
or exceeds 90 percent of the fair value of the leased property less any
investment tax credit retained by the lessor.
If no criterion is met, the lease is classified as an operating lease by
the lessee. Rental payments under an operating lease for assets used
by governmental funds are recorded by the using fund as expenditures
of the period. In many states, statutes prohibit governments from
entering into obligations extending beyond the current budget year.
Because of this legal technicality, governmental lease agreements
typically contain a “fiscal funding clause.
6.2.1 Costs Incurred after Acquisition/Gaining
Governmental accounting procedures should include clear-cut
provisions for classifying costs incurred in connection with capital assets
after the acquisition cost has been established. In general, any outlay that
definitely adds to the utility or function of a capital asset or enhances the

5
value of an integral part of it may be capitalized as part of the asset.
Thus, drainage of land, addition of a room to a building, and changes in
equipment that increase its output or reduce its cost of operation are
clearly recognizable as additions to assets. Special difficulty arises in the
case of large-scale outlays that are partly replacements and partly
additions or betterments.
6.2.2 Reduction of Cost
Reductions in the cost of capital assets may relate to the elimination of
the total amount expended for a given item or items, or they may consist
only of removing the cost applicable to a specific part. Thus, if an entire
building is demolished, the total cost of the structure should be removed
from the appropriate accounts; but if the separation applies only to a
wing or some other definitely identifiable portion, the cost eliminated
should be the amount estimated as applying to the identifiable portion.
Accounting for cost reductions consisting of entire assets is a relatively
simple matter if adequate asset records have been kept. If the reduction
is only partial, the cost as shown by the capital assets record must be
modified to reflect the change with a complete description of what
brought about the change.
6.2.3 Asset Impairments and Insurance Recoveries
GASB standards provide accounting and reporting guidance for
impairment of assets, as well as for insurance recoveries. The GASB
defines an asset impairment as a significant, unexpected decline/fail in

6
the service utility of a capital asset. Impairments occur as a result of
unexpected circumstances or events, such as physical damage,
obsolescence/ uselessness, enactment/ performing of laws or regulations
or other environmental factors, or change in the manner or duration of
the asset’s use.
When asset impairment has occurred, the estimated amount of
impairment is reported as a write-down/ record in the carrying value of
the asset.
Impairment capital assets that will no longer be used by the government
should be reported at the lower of carrying value or faire value.
Insurance recoveries means any proceeds from insurance polices or
other sources covering any loss or effect to the extent used to mitigate
losses or replace damaged or destroyed assets or properties.
Acquiring/obtaining Capital Assets
General capital assets are acquired/ location from expenditures of:
 The General Fund
 Special revenue funds
 Capital project funds
Illustrative Entries for accounting for Acquisition of General
Capital Assets
Acquisition of general capital assets requires a debit to the appropriate
governmental activities asset account and a credit to Cash or a liability
account. Thus, if office equipment is purchased for the

7
treasurer/property’s office from General Fund resources, the following
journal entries would be made in the general journals for the General
Fund (ignoring encumbrances) and governmental activities at the
government-wide level:
Example:

Example: Purchased office equipment for the Mayor’s office and paid
$50,000 cash from the General Fund
General Fund: Dr. Cr.
Expenditures 50,000
Cash 50,000
Governmental Activities:
Equipment 50,000
Cash 50,000
Assuming a building that cost $100,000 and with $80,000 of
accumulated depreciation is retired without revenue or expenditure to
the General Fund, the following entry in the governmental activities
general journal would be required:

8
Assuming that in the preceding example the General Fund incurred
$3,000 for the demolition of the building, an entry in the following form
should be made on the General Fund books:

Accounting for Capital Leases

Example: Capital lease with present value of minimum lease payments
of $50,000
Special Revenue Fund: Dr. Cr.
Expenditures 50,000
Other Financing Sources—
Capital Lease Agreements 50,000
Governmental Activities:
Equipment 50,000
Capital Lease Obligations Payable 50,000

6.3 CAPITAL PROJECT FUND

Capital Projects Funds. Capital projects funds are used to account for
and report financial resources that are restricted, committed or assigned
to expenditures for capital outlays, including the acquisition or
construction of capital facilities and other capital assets.
Capital projects funds differ from the General Fund and special revenue
funds in that the latter categories have a year-to-year life, whereas
capital projects funds have a project-life focus.

9
In some jurisdictions, governments are allowed to account for all capital
projects within a single capital projects fund. In other jurisdictions, laws
are construed as requiring 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
each project. 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.
Two types of capital projects Funds:
 General (public benefit)
Examples: public buildings; roads, highways and bridges; park
improvements; etc.
 Special assessment (private benefit)
Examples: street improvements, curbs, sidewalks, street lighting,
sewage, etc.
 Characteristics of capital projects:
 Involve long-lived assets (e.g., buildings, roads and bridges, etc.)
 Usually involve a construction project
 Usually require long-range planning and extensive financing
 Have a project-life focus, rather than a year-to-year focus
 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.

10
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.
The decision to use budgetary accounts will also depend on the features
& financing source of the particular Capital project fund. It will be based
on the particular project & be strongly influenced by the requirement of
the financing source. The decision to use or not to use budgetary
accounts is influenced by factors such as:
- The number of projects in the capital project fund
- The amount of detail in the Capital project fund budget
- The use of an annual budget (rather than a project life budget) in
the capital project fund
 Financing source of Capital Project Funds
- Long term debt issue proceeds
- Grant from other governmental units
- Transfers from other funds within the governmental entity

11
 - Interest income from temporary investments.
- Gifts from individuals or foundations
- Special taxes
- 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.
There are two ways of accounting the bond proceeds and the associated
premium.
1. The proceed including the premium could be recorded in the CPF
as OFS-Bond proceeds
Cash 110,000
OFS- Bond precedes 110,000

12
 2. Or, only the par value of the bond is considered as OFS of the
CPF
Cash 110,000
OFS- bond proceed 100,000
Due to DSF 10,000
In the first case the transfer of the premium to the DSF is reported as an
Operating Transfer Out in the CPF and an Operating Transfer in the
DSF.
C.P.F
O.F.U- operating transfer out 10,000
Cash 10,000
DSF
Cash 10,000
OFS –operating transfer in 10,000
In the second case the bond premium is accounted as a liability of the
CPF because it must be remitted to the DSF. Similarly, when bonds are
sold between interest payment dates the amount of accrued interest is
included in the total selling price. Conceptually accrued interest sold is
an offset to the interest expenditure on the first interest payment date.
Following the sale of the bonds generally in practice, however accrued
interest sold is recorded as revenue of the DSF.
Issuance of Bonds at a Discount

13
Bond discount are rare because the stated the interest rate is usually set
high enough so that no discounts may result (many Governmental units
are legally propitiated from issuing bonds at a discount). If a discount
does result, theoretically there should be a transfer from the related DSF
to the CPF to cover the shortfall. In practice such a transfer may not be
possible because money may not be available in the related DSF or
because of legal restraints. In such case, the project may be curtailed or
the shortage may be covered by an operating transfer from the GF. E.g.
Cash 100,000
Due from-- 10,000
OFS- bond proceed 110,000
Illustration: 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 issue of general
obligation Bonds maturity 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

14
 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 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.

15
 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
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
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 exp 510,000
Construction Payable 510,000
9. In addition, 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.
Encumbrances 3,900,000
Fund balance Reserved for Encumbrances 3,900,000
Fund balance Reserved for Encumbrances 3,900,000
Encumbrance 3,900,000
Construction expenditure 3,900,000

16
 Construction payable 3,900,000
Construction payable 3,100,000
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.

17
Construction payable 12,000,000
Cash 12,000,000
1. Financial reporting for capital project Fund.
Each capital project fund that meets the definitions of major fund must
be reported in a balance sheet and statement of revenue, expense and
change in fund balance. These two financial statements are prepared for
the town of Burkitu after posting and preparing trial balance for the
forgoing transactions as follows.
6.4 Illustrative Financial Statements for a Capital Projects Fund
Inasmuch as all balance sheet accounts of the Town of Brighton Burkitu
Capital
Projects Fund are closed in the case just illustrated, there are no assets,
liabilities, or fund equity to report in a balance sheet.
Town of Burkitu Library Capital projects Fund
Trial balance
June 30, Year 6
Account Title Debit Credit
Cash Br.20, 870,000
Short term investment – Treasury Bills 10,000,000
Due from state Grant 5,000,000
Construction payable Br.1, 310,000
Due to DSF 300,000

18
Fund balance Reserved for encumbrance
32,270,000
Unreserved and Undesignated fund balance -
Revenues 20,000,000
OFS – Bond Proceeds 30,000,000
OFS – Operating transfers 1,000,000
Construction Expenditures 16,730,000
Interest Expenditures 10,000
Encumbrances 32,270,000 _________
Total Br.84, 880,000 Br.84, 880,000
Town of Burkitu library capital projects fund
Statement of revenues, expenditures and changes in fund balance
For the year ended June 30, year 6
Revenues:
Irrevocable State grant 20,000,000
Expenditures:
Construction Expenditures 16,730,000
Interest Expenditure 10,000 16,740,000
Excess of Revenue over Expenditure 3,260,000
Other financing sources (Users)
OFS – Bond Issue Proceeds 30,000,000
OFS – Operating transfers in 1,000,000 31,000,000
Excess of Revenue and OFS over Expenditure 34,260,000

19
Add: Fund balance – July 1, Year 5 _________
Fund balance – June 30, year 6 34,260,000

Town of Burkitu Library Capital projects Fund

Balance Sheet
June 30, Year 6
Assets
Cash 20,870,000
Short Term Investment – Treasury bills 10,000,000
Due from state Grant 5,000,000
Total Asset 35,870,000
Liabilities and Fund Balance
Construction Payable 1,310,000
Due to DSF 300,000
Fund Balance:
Reserved for Encumbrance 32,270,000
Unreserved and undesignated 1,990,000
Total Liabilities and Fund balance 35,870,000

After preparing the financial reports, some of the accounts which require
closure will be closed as follows:
Revenues 20,000,000
Other financing source – Bond Proceeds 30,000,000

20
Other financing source– Operating Transfer In 1,000,000
Construction Expenditure 16,730,000
Interest Expenditure 10,000
Unreserved and undesignated fund Balance 34,260,000

Unreserved and Undesignated – fund balance 32,270,000

Encumbrance 32,270,000

21