ADVANCED ACCOUNT CHAPTER 6 QUESTIONS WITH
ACCURATE ANSWERS
Explain the relationship between Debt Service Funds and Capital Projects Funds. - CORRECT
ANSWER✅✅✅The relationship between Debt Service Funds and Capital Project Funds is
that the latter are used to record the receipt and disbursement of resources to acquire or build
capital assets, whereas, Debt Service Funds are used to account for the accumulation of resources
and the payment of principal and interest on debt as it comes due.
Are acquisitions of capital assets always accounted for through the Capital Projects Funds?
Explain. - CORRECT ANSWER✅✅✅No. Capital assets of a relatively minor nature, such
as vehicles, equipment, and furniture often are acquired with General Fund or Special Revenue
Fund resources. Capital Projects Funds usually are established to account for the
construction/acquisition of capital facilities, such as buildings and infrastructure assets (roads,
bridges, etc.) and other major capital assets (buses, fire trucks, etc.).
Under what circumstances are Capital Projects Funds used? - CORRECT
ANSWER✅✅✅Capital Projects Funds are used to record the transactions incurred in the
acquisition or construction of capital facilities and other major capital assets, other than those
financed by proprietary and trust funds. Capital Projects Funds must be used when a capital
project is funded in whole or in part by general obligation bond proceeds, or when they are
legally required.
How are Capital Projects Funds controlled? - CORRECT ANSWER✅✅✅Capital Projects
Funds are controlled through the provisions of bond indentures, restrictive provisions of grant
agreements, and so forth. In addition, formal budgetary integration into the accounts can be used
as an additional control tool. Usually governmental units also use encumbrance accounting to
control the expenditures.
Why is encumbrance accounting generally used for Capital Projects funds? - CORRECT
ANSWER✅✅✅Encumbrance accounting is part of the overall control system used for
Capital Projects Funds. Its purpose is to limit the amount of expenditures that can be made for a
given project. By using encumbrance accounting, a project manager will be able to determine,
through the subsidiary ledgers, the amount that has been approved for a certain project and the
amount that has either been spent or committed. Thus, through the use of encumbrance
accounting, a project manager will be able to determine the remaining expendable resources for a
given project.
, Are closing entries necessary in the accounting records for a capital project that is not completed
in the first year? - CORRECT ANSWER✅✅✅Yes, as a practical matter. Closing entries are
used to accumulate information necessary for the preparation of financial statements on an
annual basis. This process makes it easier to prepare the financial statements. Since the life of a
Capital Projects Fund is based on the project and not periodic accounting cycles, the same
information can be gleaned from the records without closing the books. For lengthy projects, it is
much simpler, however, to use the closing process.
Are capital assets recorded in Capital Projects Funds? Why or why not? - CORRECT
ANSWER✅✅✅Capital assets are not recorded in Capital Projects Funds because the
purpose of such funds is to provide control over the acquisition and use of financial
resources to acquire and/or build capital facilities. The assets themselves are not financial
resources (or, "financial" assets), therefore, they are not accounted for in these funds
Under what circumstances are Debt Service Funds used? - CORRECT ANSWER✅✅✅Debt
Service Funds are used when required by law or if a government is accumulating financial
resources for principal and interest payments maturing in future years.
How are the activities of debt service funds controlled? - CORRECT ANSWER✅✅✅The
operations of Debt Service Funds generally are controlled through the provisions of bond
indentures (debt agreements) and budgetary authorizations. Managers must review these
provisions to be sure that the governmental unit does not violate any restrictive covenants. Some
governmental units even record budgets in the accounts to control the spending activities of these
funds.
Are budgets typically recorded in Debt Service Funds? - CORRECT ANSWER✅✅✅No.
Some governments use budgets to control spending activities in Debt Service Funds. Due to the
limited activities of these funds, however, it is possible to control their activities without
formally recording a budget in the accounts.
When is the interest recorded as an expenditure in Debt Service Funds? - CORRECT
ANSWER✅✅✅Interest generally is recorded as an expenditure of a Debt Service Fund
when it is currently due and payable. The reason for not accruing interest is that the assets that
will be used to pay the interest are usually not provided until the interest is due. If a
governmental unit accrued the interest, the Debt Service Fund may have a deficit fund balance.
ACCURATE ANSWERS
Explain the relationship between Debt Service Funds and Capital Projects Funds. - CORRECT
ANSWER✅✅✅The relationship between Debt Service Funds and Capital Project Funds is
that the latter are used to record the receipt and disbursement of resources to acquire or build
capital assets, whereas, Debt Service Funds are used to account for the accumulation of resources
and the payment of principal and interest on debt as it comes due.
Are acquisitions of capital assets always accounted for through the Capital Projects Funds?
Explain. - CORRECT ANSWER✅✅✅No. Capital assets of a relatively minor nature, such
as vehicles, equipment, and furniture often are acquired with General Fund or Special Revenue
Fund resources. Capital Projects Funds usually are established to account for the
construction/acquisition of capital facilities, such as buildings and infrastructure assets (roads,
bridges, etc.) and other major capital assets (buses, fire trucks, etc.).
Under what circumstances are Capital Projects Funds used? - CORRECT
ANSWER✅✅✅Capital Projects Funds are used to record the transactions incurred in the
acquisition or construction of capital facilities and other major capital assets, other than those
financed by proprietary and trust funds. Capital Projects Funds must be used when a capital
project is funded in whole or in part by general obligation bond proceeds, or when they are
legally required.
How are Capital Projects Funds controlled? - CORRECT ANSWER✅✅✅Capital Projects
Funds are controlled through the provisions of bond indentures, restrictive provisions of grant
agreements, and so forth. In addition, formal budgetary integration into the accounts can be used
as an additional control tool. Usually governmental units also use encumbrance accounting to
control the expenditures.
Why is encumbrance accounting generally used for Capital Projects funds? - CORRECT
ANSWER✅✅✅Encumbrance accounting is part of the overall control system used for
Capital Projects Funds. Its purpose is to limit the amount of expenditures that can be made for a
given project. By using encumbrance accounting, a project manager will be able to determine,
through the subsidiary ledgers, the amount that has been approved for a certain project and the
amount that has either been spent or committed. Thus, through the use of encumbrance
accounting, a project manager will be able to determine the remaining expendable resources for a
given project.
, Are closing entries necessary in the accounting records for a capital project that is not completed
in the first year? - CORRECT ANSWER✅✅✅Yes, as a practical matter. Closing entries are
used to accumulate information necessary for the preparation of financial statements on an
annual basis. This process makes it easier to prepare the financial statements. Since the life of a
Capital Projects Fund is based on the project and not periodic accounting cycles, the same
information can be gleaned from the records without closing the books. For lengthy projects, it is
much simpler, however, to use the closing process.
Are capital assets recorded in Capital Projects Funds? Why or why not? - CORRECT
ANSWER✅✅✅Capital assets are not recorded in Capital Projects Funds because the
purpose of such funds is to provide control over the acquisition and use of financial
resources to acquire and/or build capital facilities. The assets themselves are not financial
resources (or, "financial" assets), therefore, they are not accounted for in these funds
Under what circumstances are Debt Service Funds used? - CORRECT ANSWER✅✅✅Debt
Service Funds are used when required by law or if a government is accumulating financial
resources for principal and interest payments maturing in future years.
How are the activities of debt service funds controlled? - CORRECT ANSWER✅✅✅The
operations of Debt Service Funds generally are controlled through the provisions of bond
indentures (debt agreements) and budgetary authorizations. Managers must review these
provisions to be sure that the governmental unit does not violate any restrictive covenants. Some
governmental units even record budgets in the accounts to control the spending activities of these
funds.
Are budgets typically recorded in Debt Service Funds? - CORRECT ANSWER✅✅✅No.
Some governments use budgets to control spending activities in Debt Service Funds. Due to the
limited activities of these funds, however, it is possible to control their activities without
formally recording a budget in the accounts.
When is the interest recorded as an expenditure in Debt Service Funds? - CORRECT
ANSWER✅✅✅Interest generally is recorded as an expenditure of a Debt Service Fund
when it is currently due and payable. The reason for not accruing interest is that the assets that
will be used to pay the interest are usually not provided until the interest is due. If a
governmental unit accrued the interest, the Debt Service Fund may have a deficit fund balance.
