Chapter 17, Problem 17.5E

a

To determine

Concept introduction:

Accounting for expenditures: The governmental funds use a variety of controls over expenditures to ensure that the legal restrictions are followed. The expenditure process in governmental accounting comprises the following sequential order, appropriation, encumbrance, expenditure, and disbursement. The budgets are prepared for target expenditure and an encumbrance is a reservation for that budgetary appropriation and these encumbrances will be recognized at the time of placing the order for goods or services. The main aim of encumbrance is to see that expenditures are within the budgeted appropriations.

Requirement 1

The entries related to encumbrances assuming that the city has a policy that outstanding encumbrance’s lapse at the end.

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/03/X2	Encumbrance	21,000
	Budgetary fund balance − reserved for encumbrances		21,000
	(New computer equipment ordered)
12/31/X2	Budgetary fund balance − reserved for encumbrances	21,000
	Encumbrances		21,000
	(Closing of budgeted encumbrances on non-receipt of computer equipment)
	Fund balance − unreserved	21,000
	Fund balance − reserved for encumbrance		21,000
	(Encumbrance reserves transferred to unreserved fund balance account)
01/01/X3	Fund Balance − reserved for encumbrances	21,000
	Fund balance − unreserved		21,000
	(Outstanding encumbrance on computer equipment accepted)
	Encumbrances	21,000
	Budgetary fund balance − reserved for encumbrances		21,000
	(Renewal of prior year encumbrances)
01/18/X3	Budgetary fund balance − reserved for encumbrances	21,000
	Encumbrance		21,000
	(Budgetary reserve for goods received removed)
	Expenditures	21,800
	Vouchers payable		21,800
	(Actual cost of goods received recognized)
12/31/X3	Fund balance − unreserved	21,800
	Expenditures		21,800
	(Closure of expenditure account for the year)

1. Encumbrance recorded at the order of equipment, the budgeted amount will be debited to the encumbrance account and budgetary provision is created in the budgetary fund account.
2. At the end of the year encumbrance is reversed due to non-receipt of equipment, and reserved fund for encumbrance transferred to the unreserved fund balance at the end of the year.
3. Outstanding encumbrances of the previous year accepted in the current year and debited to encumbrance account.
4. Budgetary reserve removed on receipt of goods, and expenditure on receipt of goods recognized with an actual cost of $21,800.
5. Expenditure account closed by payment from the unreserved fund balance account.

b

To determine

Concept introduction:

Governmental accounting: Generally, the fund-based system of accounting is used in governmental entities but in some of the funds a modified accrual accounting method is used. All the resources collected and all the expenditures that have made to fulfill societal needs must be appropriately recognized. The governmental accounting system must be in accordance with accepted legal and contractual provisions. A system of comprehensive budgetary accounting is used under governmental accounting that helps in the establishment of the significant control mechanism and also useful for comparison of actuals against budgeted amounts.

Requirement 2

The entries related to encumbrances assuming that the city has a policy that outstanding encumbrance’s are non-lapsing at the end of the year.

Explanation of Solution

Date	Particulars	Debit $	Credit $
11/03/X2	Encumbrance	21,000
	Budgetary fund balance − reserved for encumbrances		21,000
	(New computer equipment ordered)
12/31/X2	Budgetary fund balance − reserved for encumbrances	21,000
	Encumbrances		21,000
	(Closing of budgeted encumbrances on non-receipt of computer equipment)
	Fund balance − unreserved	21,000
	Fund balance − reserved for encumbrance		21,000
	(Encumbrance reserves transferred to unreserved fund balance account)
01/01/X3	Fund Balance − reserved for encumbrances	21,000
	Fund balance − reserved for encumbrances 20X2		21,000
	(Outstanding encumbrance on computer equipment reclassified)
01/18/X3	Encumbrances -20X2	21,000
	Encumbrances -20X3	800
	Vouchers payable		21,800
	(Actual expenditure for goods received recognized)
12/31/X3	Fund balance − reserved for encumbrance 20X2	21,000
	Expenditure 20X2		21,000
	(Prior year encumbrance expenditure paid and closed)
	Fund balance − Unreserved	800
	Expenditure 20X3		800
	(Current year expenditure account closed)

1. Encumbrance recorded at the order of equipment, the budgeted amount will be debited to the encumbrance account and budgetary provision is created in the budgetary fund account.
2. At the end of the year encumbrance is reversed due to non-receipt of equipment, and reserved fund for encumbrance transferred to the unreserved fund balance at the end of the year.
3. Encumbrance lapsed in the prior year reclassified in the current year and credited to fund balance reserved for the encumbrance account.
4. Actual expenditure on receipt of goods recognized.
5. Encumbrances of the previous year paid and closed from by debiting reserve for encumbrance account and additional expenditure on encumbrance transferred to unreserved funds balance account.

c

To determine

Concept introduction:

Governmental accounting: Generally, the fund-based system of accounting is used in Governmental entities but in some of the funds a modified accrual accounting method is used. All the resources collected and all the expenditures that have made to fulfill societal needs must be appropriately recognized. The governmental accounting system must be in accordance with accepted legal and contractual provisions. a system of comprehensive budgetary accounting is used under governmental accounting that helps in the establishment of the significant control mechanism and also useful for comparison of actuals against budgeted amounts.

Requirement 3

The entries required on January 1 20X3 to cancel the encumbrance reserve for the equipment ordered on November 3, 20X2

Explanation of Solution

Date	Particulars	Debit $	Credit $
1/1/X3	Fund balance- Reserved for encumbrances	21,000
	Fund balance − Unreserved		21,000
	(Outstanding encumbrances cancelled)

Encumbrance on November 3, 20X2 has been cancelled on January 1, 20X3.