CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsMedium
A county government issued $10,000,000 in general obligation bonds at par to finance the construction of a new administrative building. The bonds have a 20-year maturity. During the construction phase, the county incurred $2,000,000 in architect fees and $5,000,000 in contractor payments. Which of the following statements accurately describes the accounting treatment for the bond proceeds within the governmental funds?
- AThe $10,000,000 bond proceeds increase 'Fund Balance' directly in the General Fund.
- BThe $10,000,000 bond proceeds are recorded as a 'Revenue' in the Capital Projects Fund.
- CThe $10,000,000 bond proceeds are recorded as 'Other Financing Sources' in the General Fund.
- DThe $10,000,000 bond proceeds are recorded as 'Other Financing Sources' in the Capital Projects Fund.
Show answer & explanationAnswer & explanation
Correct answer: D. The $10,000,000 bond proceeds are recorded as 'Other Financing Sources' in the Capital Projects Fund.
General obligation bond proceeds for capital projects are recorded as 'Other Financing Sources' in the Capital Projects Fund, which is used to account for financial resources to be used for the acquisition or construction of major capital facilities.
Why the other options are wrong
- A. Bond proceeds are not a direct increase to Fund Balance; they are initially recorded as Other Financing Sources which then affect the fund balance.
- B. Bond proceeds are not considered 'Revenue' in governmental funds; they are 'Other Financing Sources' because they increase spendable resources without being earned through normal operations.
- C. Bond proceeds for capital projects are not typically recorded in the General Fund unless transferred there for general operations, which is not the primary purpose for capital projects.
Capital Projects Fund - Bond Proceeds
Proceeds from issuing general obligation bonds to finance major capital facility construction or acquisition are recorded as 'Other Financing Sources' in the Capital Projects Fund.
- Used for major capital outlays.
- Bond proceeds are 'Other Financing Sources'.
- Not considered 'Revenue'.
Memory trick: Capital projects get special treatment, funding 'sourced' not 'earned'.