CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsMedium
A county government received a $3,000,000 federal grant to fund a specific environmental protection program. The grant stipulates that the funds can only be used for eligible program expenditures, and any unspent funds must be returned to the federal government. The county uses modified accrual accounting for its governmental funds. During the current fiscal year, the county incurred and paid $1,200,000 in eligible program expenditures. How should the county recognize revenue from this grant in its governmental funds for the current fiscal year?
- A$0 as grant revenue; all funds are recorded as deferred inflows of resources.
- B$1,800,000 as grant revenue.
- C$3,000,000 as grant revenue.
- D$1,200,000 as grant revenue.
Show answer & explanationAnswer & explanation
Correct answer: D. $1,200,000 as grant revenue.
Under modified accrual accounting for governmental funds, revenue from expenditure-driven grants is recognized when qualifying expenditures have been incurred. The grant is conditional on incurring eligible expenses, so only the amount spent is recognized as revenue.
Why the other options are wrong
- A. This would be incorrect. While unearned portions are deferred, the amount for which expenditures have been incurred should be recognized as revenue.
- B. This represents the unspent portion, not the amount earned and recognized as revenue.
- C. This would be incorrect under modified accrual accounting for expenditure-driven grants, as the full amount is not yet earned.
Expenditure-Driven Grant Revenue Recognition (Modified Accrual)
For governmental funds using modified accrual, revenue from expenditure-driven (reimbursement-type) grants is recognized only when the qualifying expenditures have been incurred.
- Grant funds are contingent on specific spending.
- Revenue is recognized 'as earned' through expenditures.
- Unspent portions are typically recorded as deferred inflows of resources.
Memory trick: Spend to earn, then record the grant money.