CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsMedium
A state government received a federal grant of $5,000,000 to be used for a specific highway improvement project. The grant agreement states that the funds are contingent upon the state incurring eligible expenditures. As of year-end, the state had incurred $2,000,000 in eligible expenditures for the project, and the federal government had reimbursed the state for $1,500,000. Under modified accrual accounting, what amount should the state government recognize as revenue from this grant for the current fiscal year?
- A$2,000,000
- B$5,000,000
- C$1,500,000
- D$0
Show answer & explanationAnswer & explanation
Correct answer: A. $2,000,000
Under modified accrual accounting for expenditure-driven (reimbursement) grants, revenue is recognized when the qualifying expenditures are incurred. The state incurred $2,000,000 in eligible expenditures, so that amount should be recognized as revenue, regardless of the cash received.
Why the other options are wrong
- B. Incorrect. The full grant amount is not recognized until all eligible expenditures are incurred.
- C. Incorrect. Cash received is not the determinant for revenue recognition in expenditure-driven grants under modified accrual.
- D. Incorrect. Revenue is recognized as expenditures are incurred.
Expenditure-Driven Grant Revenue Recognition (Modified Accrual)
For governmental funds using modified accrual accounting, revenue from expenditure-driven (reimbursement) grants is recognized when eligible expenditures are incurred by the recipient government.
- Applies to governmental funds
- Revenue recognized upon incurring eligible expenditures
- Cash receipt is not the trigger for revenue recognition
Memory trick: E-D-G = Expenditure-Driven Grants