C, a debt service fund
A debt service fund is is a cash reserve that is used to pay for some principals and interests on some debts.
A debt service fund is calculated by dividing the net operating income by the debt.
In the case of the question, the premium of the fire station capital projects funds should be transferred to the debt service fund because should the contruction work not have enough fund to continue it, the premium will be used to continue and complete the construction work.
The correct answer is (c)
Bonds and stocks are used to generate financing. The city of Fargo has issued bonds to finance the construction of a new fire station. The bond is a type of debt funding and the premium must be transferred to a debt service fund. A debt service fund will be used to pay out the principal payments on those bonds.