ctcLink Accounting Manual | 40.70.40 Accounting for Capital Asset COPs (Governmental Funds)

40.70.40 Accounting for Capital Asset COPs (Governmental Funds)

When COP financed capital assets are acquired in governmental funds (usually Fund 147 for local capital projects), the acquisition or construction is recorded as an expenditure using Accounts 5040140-5040270 “COP xxxxxxxx” (OFM requires distinct accounts for COP expenditures) and the proceeds are recorded in the same fund using 4040020 “COP Proceeds New."

The capital assets acquired are recorded in Fund 997 “General Capital Assets Subsidiary Account” and the COP liability is recorded in Fund 999 “General Long-Term Obligations Subsidiary Account.”

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40.70.40.1 Equipment Purchase COP in Governmental Funds

The following example is used to illustrate entries for equipment certificates of participation (COP) in a governmental fund type account. A college operating in a governmental fund type account purchases a piece of equipment for $10,000, and finances it with a COP.

40.70.40.1.a COP Details

Details of the COP issue are:

Par amount of $10,115,
Original issue premium (OIP) of $10,
Underwriter’s discount (UD) of $50, and
Costs of issuance (COI) of $75.

Details of the COP debt service are:

1st year $2,000 principal, $600 interest, and
2nd year $2,200 principal.

Note: The actual par value of the COP is slightly higher than the proceeds required by the college to cover issue costs, such as costs of issuance (COI) and the original issue discount (OID) and underwriter’s discount (UD).

The OID, results when the par of the COP is more than the purchase price. Original issue premium (OIP) results when the par of the COP is less than the purchase price. Discounts that are related to underwriters’ fees are handled consistent with other issue costs. COI are generally included in the proceeds and paid separately by OST.

OST provides agencies with a statement detailing this information. The college is to include the financing costs as part of the cost of the asset that is capitalized and depreciated.

When the COP is sold by OST, it becomes an obligation of the college even if the cash proceeds have not yet been received by the college. The time period between the COP sale date and closing date is generally two weeks or less. Please contact State Board for other considerations regarding crossing fiscal years.

To record the COP liability, original issue discount, underwriter’s discount, and the expense of the costs of issuance (paid by OST) make the following entries:

40.70.40.1.b Record COP Entries

Governmental Operating Fund

Entry Method: AR Direct Journal

Account	Account Description	Source	DR	CR
1010020	Accounts Receivable ST	Project	$ 10,000
5110050	Other Debt Costs	(UD +COI)	$ 125
4040010	Other Rev/Financing Sources	(OIP)		$ 10
4040020	COP Proceeds New	(Par Value)		$ 10,115

* If the purchase and subsequent reimbursement is occurring over a year end, the receivable must be moved to 1010180 and the appropriate subsid for Bond Retirement and Interest (010) used.

40.70.40.1.c Record COP Debt

Fund 999 Class 311

Entry Method: General Journal Entry

Account	Account Description	Source	DR	CR
1110040	Amt Prvdd-Rtrmnt of LT Oblig	(Par Value)	$ 10,015
2050010	COP Liability ST	(Due w/in a year)		$ 2,000
2130040	COP Payable	(Due > year)		$8,115

* To record the college’s purchase of equipment, the subsequent reimbursement with COP proceeds from OST, and the capitalization of the equipment in Fund 997. The purchase of the equipment and the reimbursement from OST may be several months apart.

40.70.40.1.d Capitalized Asset Purchase

Governmental Operating Fund

Entry Method: AP Voucher*

Account	Account Description	DR	CR
5040010	Capitalized Furnishings & Equip	$ 10,000
1000070	Cash In Bank		$ 10,000

* Net result of voucher and subsequent payment

40.70.40.1.e Reimbursement from OST

Governmental Operating Fund

Entry Method: Accounts Receivable

Account	Account Description	DR	CR
1000070	Cash In Bank	$ 10,000
1010020	Accounts Receivable ST		$ 10,000

* Reimbursement requested and received from Treasury would be recorded as payment on the receivable created at time of COP issuance for $10,000 noted above.

40.70.40.1.f Expenditure Reclassification

Governmental Operating Fund

Entry Method: General Journal Entry

Account	Account Description	DR	CR
5040144	COP Capitalized Office Furniture & Equipment	$ 10,000
5040010	Capitalized Furnishings & Equip		$ 10,000

* OFM/OST require all assets purchased to be recorded under COP accounts to allow for reconciliation between COPs and COP purchases.

40.70.40.1.g Record Fixed Assets

Fund 997 Class 211

Entry Method: General Journal Entry

Account	Account Description	DR	CR
1121070	COP Capitalized Office Furniture & Equipment	$ 10,000
3000050	Capitalized Furnishings & Equip		$ 10,000

* OFM/OST require all assets purchased to be recorded under COP accounts to allow for reconciliation between COPs and COP purchases.

40.70.40.2 COP Debt Service in Governmental Funds

Normally, debt service payments are due twice a year with one payment consisting only of interest and the other consisting of principal and interest.

40.70.40.2.a Debt Service Interest Only Payment

Governmental Operating Fund

Entry Method: AP Voucher

Account	Account Description	Source	DR	CR
5110040	COP Lease/Purchase Interest	Debt Schedule/OST	$ 300
2000010	AP Control Liability			$ 300
2000010	AP Control Liability		$ 300
1000070	Cash In Bank			$ 300

40.70.40.2.b Debt Service Principal and Interest Payment

Governmental Operating Fund

Entry Method: AP Voucher

Account	Account Description	Source	DR	CR
5110030	COP Lease/Purchase Principal	Debt Schedule/OST	$ 2,000
5110040	COP Lease/Purchase Interest	Debt Schedule/OST	$ 300
2000010	AP Control Liability			$ 2,300
2000010	AP Control Liability		$ 2,300
1000070	Cash In Bank			$ 2,300

40.70.40.2.c Reduction of Short-Term Liability

Fund 999 Class 311

Entry Method: General Journal Entry

Account	Account Description	Source	DR	CR
2050010	COP Liability ST	Debt Schedule	$ 2,000
1110040	Amt Prvdd-Rtrmnt of LT Oblig	Debt Schedule		$ 2,000

At fiscal year-end colleges should reclassify that portion of principal due within the next fiscal year as short-term liability. At fiscal year-end, the amount in account 2050010 should agree with the next year’s principal payment on the district’s COP amortization schedule.

40.70.40.2.d Reclass Long-Term Liability to Short Term

Fund 999 Class 311

Entry Method: General Journal Entry

Account	Account Description	Source	DR	CR
2130040	COP Payable	Debt Schedule	$ 2,200
2050010	COP Liability ST	Debt Schedule		$ 2,200

40.70.40.3 Real Estate/Construction COP in Governmental Funds

The following example is used to illustrate entries for real estate certificates of participation (COP) in a governmental fund type.

A college operating in a governmental fund type must obtain proper State Board and legislative approval for construction of a new building and must apply to the Office of the State Treasurer (OST) for COP financing. OST sells bonds which combine multiple COPs. Proceeds of the COP are used to pay for construction costs and interest incurred during the construction period.

40.70.40.3.a Details of the COP Issue

Par amount of $73.6 million,
Original issue premium (OIP) of $.7 million,
Underwriter’s discount (UD) of $.2 million,
Costs of issuance (COI) of $.1 million,
COP proceeds for construction $60 million,
COP proceeds for interest costs $14 million, and
Net COP proceeds held by OST for the college $74 million ($60 million for construction costs and $14 million for construction period interest).

40.70.40.3.b COP Original Issue Premiums and Discounts

Original issue discount (OID) results when the par of the COP is more than the purchase price.
An OIP results when the par of the COP is less than the purchase price.
Discounts that are related to underwriters’ fees are handled consistent with other issue costs.
COI are generally included in the proceeds and paid separately.
OST receives cash proceeds for the COI, but not for the UD and the OID.

40.70.40.3.c First Year Details

$10 million is expended on construction
Debt service is $4 million, interest only, and
Unspent construction funds earn $.8 million in interest revenue.
Unspent proceeds are held by OST and invested in the Local Government Investment Pool (LGIP) or with a trustee.

Unspent proceeds are held by OST and invested in the Local Government Investment Pool (LGIP) or with a trustee.

Construction period interest is recognized as an expense in the period incurred.

To record the COP liability, original issue discount, underwriter’s discount, and the expense of the costs of issuance (paid by OST) make the following entries.

40.70.40.3.d Record Certificate of Participation

When the COP is sold by OST, it becomes an obligation (liability) of the college, even if the cash proceeds have not yet been received by the college. The time period between the COP sale date and the closing date is generally two weeks or less.

To record the liability for the real estate COP, and the original issue premium, underwriter’s discount, and the expense of the costs of issuance (paid by OST) colleges should make the following entries.

40.70.40.3.e Record COP Issuance

Governmental Construction Fund

Entry Method: AR Direct Journal

Account	Account Description	Source	DR	CR
1010020	Accounts Receivable ST	Project	$ 74 m
5110050	Other Debt Costs	(UD +COI)	$ .3 m
4040110	Original Issue Premium - COPs	(OIP)		$ .7 m
4040020	COP Proceeds New	(Par Value)		$73.6 m

* If the COP had an OID instead of an OIP, the OID amount would be added to the UD and COI.

Because interest only is due during the construction period, the entire obligation is initially coded long-term.

Fund 999 Class 311 (General Long-Term Obligations)

Entry Method: AR Direct Journal

Account	Account Description	Source	DR	CR
1110040	Amt Prvdd-Rtrmnt of LT Oblig	Project	$ 73.6 m
2130040	COP Payable			$ 73.6 m

* Because interest only is due during the construction period, the entire obligation is initially coded long-term.

40.70.40.3.f Construction Expenditures

Construction Fund

To record construction expenditures of $ 10 million.

Entry Method: AP Voucher/Payment

Account	Account Description	DR	CR
5040015-80	Building & related expenditures	$ 10.0 m
2010040	Construction Contracts Pybl ST		$ 10.0 m
2010040	Construction Contracts Pybl ST	$ 10.0 m
1000070	Cash in Bank		$ 10.0 m

40.70.40.3.g Reimbursement from OST

Construction Fund

Entry Method: AR Payment

Account	Account Description	DR	CR
1000070	Cash in Bank	$ 10.0 m
1010020	Accounts Receivable ST		$ 10.0 m

40.70.40.3.h Reclassify Capital Expenditures to COP Capital Expenditures

Construction Fund

Entry Method: General Journal Entry

Account	Account Description	DR	CR
5040170-270	COP Capital Expenditures	$ 10.0 m
5040015-80	Capital Expenditures		$ 10.0 m

Note: If a COP has been authorized and construction project costs are incurred in one fiscal year, but the COP is not issued until the subsequent year, colleges should debit a receivable, such as account 1010160 Due from Other Governments, and credit expenditures to account 5040170-5040270 in the year the project costs are initially incurred. When the COP is issued in the subsequent year, the college should credit the account 1010160 and establish the account 1010180 from OST.

40.70.40.3.i Record Interest During Construction

To record first year interest-only debt service payment made by OST from the COP proceeds held by OST to cover interest expense during the construction period.

Construction Fund

Entry Method: AP Voucher

Account	Account Description	Source	DR	CR
5110040	COP Lease/Purchase Interest	Debt Schedule/OST	$ 4.0 m
2000010	AP Control Liability			$ 4.0 m
2000010	AP Control Liability		$ 4.0 m
1000070	Cash In Bank			$ 4.0 m

Entry Method: AR Payment

Account	Account Description	Source	DR	CR
1000070	Cash In Bank		$ 4.0 m
1010020	Accounts Receivable ST			$ 4.0 m

40.70.40.3.j Reconcile Bank Statement

Because the interest payments during construction are taken directly from the proceeds (held by the State Treasurer) recorded by the college as a receivable at the time of issuance, two sets of entries are needed.

In the AP sub-module, colleges should create a voucher and mark it as manually paid on the date the Treasurer removes the interest payment from the proceeds account.

In the AR sub-module, create a receipt for an amount equivalent to the interest payment to reduce the receivable from the treasurer. In order to zero out, both entries will use 10000xx Cash in Bank as offsets and these will need to be reconciled in the Bank Statement Reconciliation process.

Both entries (AP and AR) will appear on the college activity side with no offset on the bank activity side. This maintains the desired activity in the GL as coming from the appropriate submodules and maintaining the integrity of the customer and supplier accounts.

40.70.40.3.k Record Interest Earned

During the period after the COP was issued and funds are released for construction costs, OST invests the COP funds in an interest earning account in LGIP. Interest earned belongs to the college and should be recorded in the construction fund.

Construction Fund

Entry Method: AR Direct Journal

Account	Account Description	Source	DR	CR
1010020	Accounts Receivable ST	OST/LGIP Stmt	$ .8 m
4120010	Investment Income			$ .8 m

40.70.40.3.l Construction in Progress

At a minimum, this entry should be made at fiscal year-end. Construction in progress is equal to the sum of construction expenditures ($10 million) and COI and UD ($.3 million) less OIP ($.7 million).

Fund 997 Class 211

Entry Method: General Journal Entry

Account	Account Description	DR	CR
1120020	Construction in Progress	$ 9.6 m
3000050	Investment-Gen Capital Assets		$ 9.6 m

40.70.40.3.m Year-End Short-Term Liability Reclass

At fiscal year-end, the amount in account 2050010 COP Liability ST should agree with the next year’s principal payment on the college’s COP amortization schedule.

Fund 999 Class 311

Entry Method: General Journal Entry

Account	Account Description	Source	DR	CR
2130040	COP Payable	Debt Schedule	$ 2.0 m
2050010	COP Liability ST			$ 2.0 m

40.70.40.4 Advance Refunding Real Estate COP in Governmental Funds

The following example is used to illustrate entries for an advance refunding of a real estate certificate of participation (COP) in a governmental fund type.

An advance refunding occurs when a bond is issued to refund another bond in advance of the redemption date. When a college requests an advance refunding, OST issues new bonds (at a lower interest rate) and uses those funds to pay the old COP. The funds are usually invested in U.S. Treasuries or other taxable government securities and redeems the old bonds as they become due.

40.70.40.4.a Refunding Details

Details of the old (refunded) COP are:

Principal balance $250,000, and
Interest due $1,400

Details of the new (refunding) COP are:

Principal balance $239,000,
Original issue premium (OIP) $15,000,
Underwriter’s discount (UD) $1,600,
Costs of issuance (COI) $1,000, and
Total reacquisition price $251,400 ($239,000 + 15,000 – 1,600 – 1,000).

40.70.40.4.b Accounting for Advance Refund Issuance

When the new COP is sold by OST, it becomes an obligation of the college. An amount equal to the principal balance of the old (refunded) COP plus any interest due is sent to the escrow agent bank to refund the old COPs. When the old COP is refunded, it is no longer an obligation of the college, and it is removed from Fund 999.

To record the liability for the new (refunding) COP, the original issue premium, underwriter’s discount, and the expense of the costs of issuance (paid by OST), and the payment to the escrow agent bank the following entries are recorded:

Governmental Operating Fund (e.g., Fund 148)

Entry Method: General Journal Entry

Account	Account Description	Source	DR	CR
4040030	COP Payable	¹	$ 251,400
4040050	Underwriter Discount	UD + COI	$ 2,600
4040070	Refunding COPs Proceeds - OST Held	Proceeds of COP		$ 239,000
4040060	Original Issue Premium - Refunding COPs	²		$15,000

¹Old COP Principal + Interest due on old COP. (If this was a current refunding of a COP (instead of an advance refunding), the amount to be paid to the escrow agent would be recorded as an expenditure to account 5110010 “Principal” and/or account 5110020 “Interest.”)

²OIP Refunding COP (If the COP had an Original Issue Discount (OID) instead of an OIP, Account 4040040 “Original Issue Discount – Refunding COPs” would be debited.)

Fund 999 Class 311

Entry Method: General Journal Entry

Account	Account Description	Source	DR	CR
2050010/2130040	COP Principal (Old)	¹	$ 250,000
1110040	Amt Prvdd-Rtrmnt of LT Oblig	¹		$ 250,000
1110040	Amt Prvdd-Rtrmnt of LT Oblig	²	$ 239,000
2050010/2130040	COP Principal (New)	²		$ 239,000

¹Old COP Principal (Short-Term and Long Term)

²New COP Principal (Short-Term and Long Term)

40.70.40.5 Accounting for Additional Proceeds Governmental Funds

COP funding and re-funding can produce additional proceeds over and above project costs and issuance costs. These funds are held by OST and used for partial payment of the next payment due with the college remitting the difference and are not available for use on the project. The additional proceeds should be recorded in the governmental operating fund (NOT the construction fund) from which future payments will be made.

Additional Proceeds $4,700
First payment (interest only) $46,100

40.70.40.5.a Issuance and Payment in Same Fiscal Year

If the issuance and first payment fall within the same fiscal year, recording the additional proceeds will be done through Voucher entry when the first payment is due, as follows:

Governmental Operating Fund

Entry Method: Voucher

Account	Account Description	Source	DR	CR
5110040	COP Lease/Purchase Interest		$ 46,100
4040020	COP Proceeds New	(OST)		$ 4,700
1000070	Cash in Bank			$ 41,400

40.70.40.5.b Issuance and Payment Cross Fiscal Years

If the issuance and first payment cross fiscal years, a journal to accrue the receivable must be entered at year end as a reversing entry and the above voucher entered when the payment is due, as follows: