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ctcLink Accounting Manual | 40.70.50 Accounting for Capital Asset COPs (Proprietary Funds)

40.70.50 Accounting for Capital Asset COPs (Proprietary Funds)

When COP-financed capital assets (equipment) are acquired in proprietary funds (in most cases in ctcLink this involves funds beginning with 4 or 5), the acquisition or construction is ultimately recorded as an asset and liability in the acquiring proprietary fund (see details below).

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Using the same COP details as in the governmental example above:

In proprietary fund type accounts COP issue costs, such as COI and UD are expensed using account 5110070 “Original Issue-COP Debt Costs.”

If the OID or OIP is deemed material, it should be deferred using Account 1110060 “Unamortized Discounts of COP” or account 2120010 “Unamortized Premiums COPs Sold” respectively. The amount deferred should be amortized over the life of the COP using account 5070030 “Amortization Premiums/Discount.”  If the OIP or OID is deemed immaterial, it should be recorded in the same manner as the other issuance costs. The college must include the financing costs as part of the cost of the asset being capitalized and depreciated.

40.70.50.1.a Recording the COP (if expensing OIP/OID)

Proprietary Fund

Entry Method: AR Direct Journal
Account Account Description Source DR CR
1010020 Accounts Receivable ST Invoice $ 10,000  
5110070 Prop - Orig. Iss. COP Debt Costs (UD +COI + OIP) $ 115  
2050010 COP Liability ST Par Value ST   $ 2,000
2130040 COP Payable (Par Value LT)   $ 8,115

40.70.50.1.b Purchasing Equipment (if expensing OIP/OID)

Purchase of equipment in Fund 4xx or 5xx – Net result of voucher and subsequent payment.

Proprietary Fund

Entry Method: AP Voucher
Account Account Description Source DR CR
5040010 Capitalized Furnishings & Equip Invoice $ 10,000  
2000010 AP Control Liability     $ 10,000
2000010 AP Control Liability   $ 10,000  
1000070 Cash in Bank     $ 10,000

When equipment is added to Asset Management, the $10,115 ($10,000 purchase plus $115 debt costs) is automatically reclassed from 5040010 to 1121070. To properly complete the recording of equipment purchased with COP funding, the following entry must be made in the GL.

Proprietary Fund

Entry Method: Journal

Account Account Description Source DR CR
5040010 Capitalized Furnishings & Equip Invoice/COP $ 10,115  
5110080 Prop Adj - COP Debt Costs     $115
5040540 Prop Adj - Furnshg & Equip     $10,000

40.70.50.1.c Recording the COP (if amortizing OIP/OID)

Proprietary Fund

Entry Method: AR Direct Journal
Account Account Description Source DR CR
1010020 Accounts Receivable ST Invoice $ 10,000  
5110070 Prop - Orig. Iss. COP Debt Costs (UD + COI) $125  
2120010 Unamortized Premiums COPs Sold OIP   $10
2050010 COP Liability ST Par Value ST   $2,000
2130040 COP Payable Par Value LT   $8,115

The $10 should be amortized over the life of the COP by debiting 2120010 and crediting 5070030 for the applicable portion of the OIP.

40.70.50.1.d Purchasing Equipment (if amortizing OIP/OID)

Purchase of equipment in Fund 4xx or 5xx – Net result of voucher and subsequent payment.

Proprietary Fund

Entry Method: AP Voucher
Account Account Description Source DR CR
5040010 Capitalized Furnishings & Equip Invoice $ 10,000  
2000010 AP Control Liability     $ 10,000
2000010 AP Control Liability   $ 10,000  
1000070 Cash in Bank     $ 10,000

When equipment is added to Asset Management, the $10,125 ($10,000 purchase plus $125 debt costs) is automatically reclassed from 5040010 to 1121070. To properly complete the recording of equipment purchased with COP funding, the following entry must be made in the GL.

Proprietary Fund

Entry Method: Journal

Account Account Description Source DR CR
5040010 Capitalized Furnishings & Equip   $ 10,125  
5110080 Prop Adj - COP Debt Costs     $10,000
5040540 Prop Adj - Furnshg & Equip     $125

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

40.70.50.2.a Debt Service Interest Only Payment

Proprietary 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

40.70.50.2.b Debt Service Principal and Interest Payment

Proprietary Fund

Entry Method: AP Voucher
Account Account Description Source DR CR
2050010 COP Liability ST 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

40.70.50.2.c Reclass Long-Term to Short Term

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

Proprietary Fund

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

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

A college operating in a proprietary 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.

40.70.50.3.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).

40.70.50.3.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.

40.70.50.3.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.

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

This example assumes that net construction period interest is material and is therefore capitalized, and that the OIP is immaterial, and therefore expensed.

UD and COI are always expensed as issuance costs.  If the OIP had been deemed material, it would be deferred in account 2120010 “Unamortized Premiums on Certificates of Participation” and amortized over the life of the COP using account 5070030 “Amortization Premiums/Discounts.”

40.70.50.3.d Record the 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/construction 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:

Proprietary 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-OIP)   $ .4 m
2130040 COP Payable (Par Value)   73.6 m

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

40.70.50.3.e Construction Expenditures

Proprietary Fund

To record construction expenditures of $10 million.

Entry Method: AP Voucher/Payment
Account Account Description DR CR
5040015-110 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

40.70.50.3.f Reimbursement from OST

Proprietary Fund

Entry Method: AR Payment
Account Account Description DR CR
1000070 Cash in Bank $ 10.0 m  
1010020 Accounts Receivable ST   $ 10.0 m

40.70.50.3.g Reclassify Capital Expenditures to COP Capital Expenditures

Proprietary Fund

Entry Method: General Journal Entry
Account Account Description DR CR
1120020 Construction in Progress $ 9.6 m  
5110050 Other Debt Costs $ .4 m  
5040570-670 Proprietary Adjustment (Capital Expenditures)   $ 10.0 m

40.70.50.3.h Interest Earned on Unspent COP Proceeds

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 proprietary fund.

Proprietary 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

40.70.50.3.i Interest During Construction

Record first year interest expense only debt service payment – this payment is made by OST from the proceeds held by OST to cover interest expense during the construction period.  Once the COP proceeds held by OST to cover interest expense during the construction period are expended, the interest payments will be paid by the college to OST.

Proprietary 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

40.70.50.3.j Reconciling the 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.

40.70.50.3.k 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.

Proprietary Fund

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

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

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.

40.70.50.4.a Refunding Details

Details of the old (refunded) COP are:

  • Principal balance $251,000 (5 years remaining)
  • Details of the new (refunding) COP are:
  • Principal balance $250,000 (10 years),
  • Original issue premium (OIP) $10,000 (assume material),
  • Underwriter’s discount (UD) $2,600,
  • Costs of issuance (COI) $2,400, and
  • Total reacquisition price $255,000 ($250,000 +10,000 - 2,600 -2,400).

40.70.50.4.b Accounting for the 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 new (refunding) COP, the removal of the old (refunded) COP, and the deferred amount on the COP refunding the following entries are recorded:

Proprietary Fund (e.g., Fund 570)

Entry Method: General Journal Entry
Account Account Description Source DR CR
2050010/2130040 COP Principal (Old) 1 $ 251,000  
5110050 Other Debt Costs (UD+COI) $ 5,000  
1200010 Deferred Outflows on COP3 (Old COP) $ 4,000  
2050010/2130040 COP Principal (New) 2   $ 250,000
2120010 Unamortized Premiums COPs Sold (OIP New)   $ 10,000

1Old COP Principal (Short-Term and Long Term) combined for demonstration only.

2New COP Principal (Short-Term and Long Term) combined for demonstration only.

3If the deferred amount was a credit, it would be recorded to account 2200010 “Deferred Inflow on COP Refunding.”

40.70.50.4.c Accounting for the Annual Amortization (Old COP)

To record the annual amortization of the Deferred Outflow on the COP Refunding on a straight-line basis over 5 years (the remaining life of the old COP) the following entries are recorded:

Proprietary Fund

Entry Method: General Journal Entry
Account Account Description Source DR CR
5070030 Amortization Premiums/Discounts   $ 800  
1200010 Deferred Outflows on COP 1   $ 800

1Amortizing the amount from third line above (Old COP)

40.70.50.4.d Accounting for the Annual Amortization (New COP)

To record the annual amortization of the original issue premium (OIP) on a straight-line basis over 10 years (the life of the new COP) the following entries are recorded:

Proprietary Fund

Entry Method: General Journal Entry
Account Account Description Source DR CR
2120010 Unamortized Premiums COPs Sold   $ 1,000  
5070030 Amortization Premiums/Discounts 1   $ 1,000

1 Amortizing the amount from third line above (Old COP)

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 proprietary fund from which future payments will be made.

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

40.70.50.5.a Issuance and Payment fall 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:

Proprietary 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

40.70.50.5.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:

Proprietary Fund

Entry Method: General Journal Entry (year-end)
Account Account Description Source DR CR
1010180 Due From Other St Agencies ST 1 $ 4,700  
4040020 COP Proceeds New (OST)   $ 4,700

1Requires a Subsid for Agency 010 – Bond Retirement & Interest

Proprietary Fund

Entry Method: Reversing General Journal Entry (new year)
Account Account Description Source DR CR
4040020 COP Proceeds New   $ 4,700  
1010180 Due From Other St Agencies ST 1   $ 4,700

1Requires a Subsid for Agency 010 – Bond Retirement & Interest

Proprietary 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

 

Page Manager: slocke@sbctc.edu
Last Modified: 1/30/24, 4:49 PM

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