To offset engineering and design costs incurred prior to the issuance of a long-term bond issue, a capital projects fund borrowed the sum of $75,000 on a short-term basis from First National Bank. This transaction should be recorded in:

• A. The capital projects fund.
• B. The general fund.
• C. The debt service fund.
• D. A special revenue fund.

Answer: (A)

Temporary financing of a capital project belongs in the capital projects fund because that fund is used to account for financial resources dedicated to acquiring or constructing major capital facilities, from initial financing through completion. When engineering and design costs are incurred before long‑term financing is in place, a government often borrows on a short‑term basis to bridge the gap. Recording this in the capital projects fund keeps the project’s sources and uses of funds distinct from daily operating activities and from debt‑service planning.

In this fund, the short‑term borrowing is treated as a financing source for the project and a liability to be repaid when the permanent financing (the bond issue) is obtained. This structure reflects that the resources will be dedicated to the capital project and then replaced by long‑term debt proceeds once bonds are issued. The debt service fund, by contrast, is organized to accumulate resources for paying interest and principal on long‑term obligations after they are issued; it does not track the initial project financing. The general fund handles the government’s day‑to‑day operations, not the financing of a capital project. A special revenue fund would apply only if there were restricted revenues dedicated to a specific program, not to financing a project that will be supported by bond proceeds.