Carolina City places an order for a specific item of equipment and encumbers $6,000 for that item. The equipment arrives with an invoice for $5,700. Which of the following entries should the city make upon receipt of the equipment?
A) A debit to expenditures for $5,700, a debit to accounts payable for $300, and a Credit to encumbrances for $6,000.
B) A debit to expenditures for $5,700, a debit to reserve for encumbrances for $6,000, a Credit to accounts payable for $5,700, and a Credit to encumbrances for $6,000.
C) A debit to expenditures for $5,700, a debit to reserve for encumbrances for $300, and a Credit to accounts payable for $6,000.
D) A debit to expenditures for $300, a debit to reserve for encumbrances for $5,700, and a Credit to encumbrances for $6,000.

Question

Quizplus · Accepted Answer

The correct entry involves debiting expenditures for the invoice amount ($5,700), debiting reserve for encumbrances for the original encumbered amount ($6,000) to release the funds reserved for the purchase, crediting accounts payable for the invoice amount ($5,700) to recognize the liability, and crediting encumbrances for the original encumbered amount ($6,000) to close the encumbrance. This reflects the actual cost of the equipment and releases the encumbered funds not used.

Carolina City Places an Order for a Specific Item of Equipment