Several years ago, Grant County was sued by a former county employee for wrongful discharge. Although it was to be contested by the county, at the time of the lawsuit the attorneys believed that the county was likely to lose the suit and the estimated amount of the ultimate judgment would be $100,000. This year, the case was finally settled with a judgment against the county of $150,000, which was paid. Assuming that the county maintains its books and records in a manner to facilitate the preparation of its fund financial statements, the entry in the current year should be
A) Debit Expenditures $150,000; Credit Cash $150,000.
B) Debit Expenses $150,000; Credit Cash $150,000.
C) Debit Expenditures $50,000 and Claims payable $100,000; Credit Cash $150,000.
D) Debit Expenses $50,000 and Claims payable $100,000; Credit Cash $150,000.

Question

Quizplus · Accepted Answer

The correct entry for the settlement of the lawsuit in the fund financial statements of a governmental entity like Grant County would be to debit Expenditures for the full amount of the settlement ($150,000) and credit Cash for the same amount. This reflects the outflow of resources in the current period. The distinction between Expenditures and Expenses is important here; Expenditures are used in governmental fund accounting, while Expenses are used in accrual-based accounting such as the government-wide financial statements. Since the question specifies the preparation of fund financial statements, the correct answer involves Expenditures, not Expenses.

Several Years Ago, Grant County Was Sued by a Former