A county government received a federal grant of $1,000,000 to be used exclusively for the construction of a new public library. The grant funds were received on October 1, 2024. Construction is expected to begin in January 2025. Which fund will account for the receipt of these grant funds, and how will it be classified in that fund's financial statements for the fiscal year ending December 31, 2024?
- APermanent Fund; Revenue
- BSpecial Revenue Fund; Other Financing Source
- CGeneral Fund; Revenue
- DCapital Projects Fund; Deferred Inflow of Resources
Show answer & explanationAnswer & explanation
Correct answer: D. Capital Projects Fund; Deferred Inflow of Resources
Grant funds for capital projects are accounted for in a Capital Projects Fund. Under modified accrual accounting, revenues from grants are recognized when measurable and 'available.' Since construction isn't expected until January 2025, the funds are not 'available' to finance current period expenditures (i.e., 2024). Therefore, the grant would be recorded as a 'Deferred Inflow of Resources' in the Capital Projects Fund until it becomes available (e.g., when the funds are expended for the project in 2025).
Why the other options are wrong
- A. Permanent Funds are for resources legally restricted to the extent that only earnings, and not principal, may be used. This grant's principal is for construction. It also wouldn't be revenue if not available.
- B. Special Revenue Funds are for operating activities from specific revenue sources. Capital Projects Funds are for major capital outlays. Also, 'Other Financing Source' is for bond proceeds, not typically grants that are deferred.
- C. General Fund is for general operations; capital projects have dedicated funds. Also, it wouldn't be recognized as revenue if not available.
Deferred Inflow of Resources (Governmental Funds)
A governmental fund financial statement element representing an acquisition of net assets by the government that is applicable to a future reporting period. For grants, this often occurs when funds are received but not yet 'available' under modified accrual.
- Used in governmental funds.
- Modified accrual accounting.
- Represents resources received but not yet recognized as revenue.
Memory trick: Money comes 'IN' but is 'DEFERRED' if it's not 'READY' for this year's bills.