Vacation City was awarded a $500,000 federal operating grant for use in year 2. On December 1 of year 1, half of the grant money was received by the City. The journal entry to record receipt of the grant funds will include:

Question

Quizplus · Accepted Answer

When a grant is received, it is recognized as Deferred Inflows of Resources-Grant Proceeds, which is a liability account. This recognizes that the city has an obligation to the grantor to use the funds in accordance with the grant agreement. Therefore, the journal entry would include a credit to Deferred Inflows of Resources-Grant Proceeds in the amount of $250,000. No revenues are recognized until the conditions of the grant are met, which usually involves spending the funds in a specific manner. Expenditures are also not recognized until they occur in Year 2.

Vacation City Was Awarded a $500,000 Federal Operating Grant for Use