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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40.70.50.1 Equipment Purchase COP in Proprietary Funds

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

40.70.50.2 COP Debt Service in Proprietary 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.

40.70.50.2.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

40.70.50.3 Real Estate/Construction COP in Proprietary Funds

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

40.70.50.4 Advance Refunding Real Estate COP in Proprietary Funds

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)

40.70.50.5 Accounting for Additional Proceeds in Proprietary 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 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: