A city government received $2,000,000 from the sale of general obligation bonds for capital improvements. The bonds carry a 5% interest rate, payable semi-annually. The bond proceeds were immediately transferred to a Capital Projects Fund. How should this interfund transfer be reported in the governmental funds' financial statements?
- AAs an Interfund Loan in both funds.
- BAs an Other Financing Source in the Capital Projects Fund and an Other Financing Use in the issuing fund (e.g., General Fund, if applicable).
- CAs an Interfund Transfer In in the Capital Projects Fund and an Interfund Transfer Out in the issuing fund.
- DAs an Interfund Reimbursement in both funds.
Show answer & explanationAnswer & explanation
Correct answer: C. As an Interfund Transfer In in the Capital Projects Fund and an Interfund Transfer Out in the issuing fund.
Transfers of financial resources between funds that do not represent loans, services provided, reimbursements, or equity contributions should be reported as interfund transfers. In governmental funds, bond proceeds are typically recorded as an 'Other Financing Source' in the Capital Projects Fund initially, and the transfer from the fund that received the proceeds (often a Debt Service Fund or General Fund if proceeds are initially received there) would be an 'Interfund Transfer Out'. However, the question describes bond proceeds being received and immediately transferred to the Capital Projects Fund for capital improvements. The primary reporting of the transfer itself is as an Interfund Transfer In/Out. The 'Other Financing Source' specifically refers to the bond proceeds themselves in the Capital Projects Fund, not the act of transfer from another fund.
Why the other options are wrong
- A. Interfund loans imply repayment, which is not the case for bond proceeds transferred for a capital project.
- B. While bond proceeds are an Other Financing Source *in* the Capital Projects Fund, the *transfer* itself is an Interfund Transfer. This option describes the proceeds, but not the specific interfund transaction.
- D. Interfund reimbursements are for expenditures initially made by one fund on behalf of another, which is not the scenario here.
Interfund Transfers
Nonreciprocal flows of assets between funds. They are reported as 'Other Financing Sources' (for the receiving fund) or 'Other Financing Uses' (for the disbursing fund) in governmental funds, and as 'Transfers In' or 'Transfers Out' in proprietary funds.
- Do not represent loans, reimbursements, or services.
- Affect fund balance in governmental funds.
- Are eliminated in government-wide statements.
Memory trick: Interfund: Loans, Reimbursements, Services, or Transfers.