The City of Apple Creek issued bonds at par for a construction project. Receipt of the bond proceeds would be recorded in which funds?

• A. Capital Projects Fund: Yes; Debt Service Fund: No
• B. Debt Service Fund: Yes; Capital Projects Fund: No
• C. Both funds
• D. General Fund

Answer: (A)

In government accounting, funds are set up by purpose. A Capital Projects Fund is used to account for financial resources intended for acquiring, constructing, or improving major capital assets. When bonds are issued to finance a construction project, the proceeds go into the Capital Projects Fund (recorded as an Other Financing Source—Proceeds of Bonds) and the cash increases. The Debt Service Fund, on the other hand, is focused on accumulating resources and making payments for debt service (principal and interest) and does not hold the bond proceeds at issuance. So the receipt of the bond proceeds belongs in the Capital Projects Fund, not the Debt Service Fund. The General Fund wouldn’t be the correct place for these proceeds because it handles operating activities, not capital project financing.