CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsEasy
A city government received $750,000 from a federal grant to fund a specific program. The grant terms stipulate that the funds are to be used for eligible expenditures incurred during the current fiscal year. By year-end, the city had incurred and paid $600,000 of eligible expenditures. Under modified accrual accounting, what amount should the city report as grant revenue for the current fiscal year in its governmental funds?
- A$150,000
- B$750,000
- C$600,000
- D$0
Show answer & explanationAnswer & explanation
Correct answer: C. $600,000
Under modified accrual accounting for expenditure-driven grants, revenue is recognized only to the extent that eligible expenditures have been incurred. The remaining portion is reported as a deferred inflow of resources.
Why the other options are wrong
- A. This represents the unspent portion, which is a deferred inflow, not revenue.
- B. The full grant amount is not recognized as revenue until all eligible expenditures are incurred.
- D. Revenue is recognized as expenditures are incurred, not zero.
Expenditure-Driven Grant Revenue Recognition (Modified Accrual)
For governmental funds using modified accrual accounting, revenue from expenditure-driven grants is recognized only when qualifying expenditures are incurred.
- Revenue recognition is tied to expenditures.
- Unspent portions are recorded as deferred inflows of resources.
- Applies to governmental funds.
Memory trick: Grant money only becomes 'revenue' when the 'receipts' (expenditures) are in hand.