A city issues $10 million of debt that it uses to acquire an office building. In the year that it issues the debt and acquires the building the city neither makes any interest payments nor repays any of the debt principal. Assume that the city accounts for all capital acquisitions in a capital projects fund and all payments of interest and principal in a debt service fund. The transaction would

1. Increase expenditures of the capital projects fund
2. Increase other financing sources of the debt service fund
3. Increase fund balance of the capital projects fund
4. Increase expenditures of the debt service fund