When bonds are sold at a premium for a capital project, the premium amount generally:

• A. Is recorded as revenue in the capital projects fund.
• B. Is transferred to the debt service fund.
• C. Reduces the cost of the project in the capital projects fund.
• D. Is shown as an asset in the debt service fund.

Answer: (B)

When a capital project is financed with bonds, the proceeds for the project come from the bond sale, but any premium on that sale is not counted as revenue for the capital projects fund. That premium represents additional financing that is intended to support debt service obligations rather than to fund the project itself. The usual practice is to transfer this premium to the debt service fund, where it can help pay future principal and interest on the debt.

So the premium increases the overall resources available, but it does not reduce the project’s cost or become revenue in the capital projects fund. It isn’t treated as a standalone asset for the debt service fund; rather, it is moved to the debt service fund to bolster debt service payments.