Question

The “60‐day rule” may not be applicable to all types of revenues.

Manor County was awarded a state grant to establish evening athletic programs for at‐risk youth. The $3.6 million award, to cover the calendar year 2021, was announced on November 15, 2020.

According to the terms of the grant, the county will be reimbursed for all qualifying costs within 30 days of its filing an appropriate request‐for‐reimbursement form (a “voucher”).

During 2021, the county incurred $300,000 of costs each month. It filed a reimbursement claim shortly after the end of each month and received a reimbursement check approximately 45 days after the end of the month in which it incurred the costs. Hence, it received 12 checks, the first on March 15, 2021, and the last on February 15, 2022.

The county operates on a fiscal year beginning October 1.

1. Prepare journal entries to summarize the county's grant‐related activity for its fiscal year ending September 30, 2021, on a modified accrual basis.
2. Suppose alternatively that the state would reimburse the county for its costs in four installments, the first on June 30, 2021, and the last on March 31, 2022. Do you think that the county, in its fund financial statements, should recognize the reimbursement of December 31, 2021, as revenue of the county's fiscal year ending September 30, 2021? Justify your answer.

Answer 1

The modified accrual practice follows the cash method of accounting when economic events affecting the short-term have occurred. An economic event is recorded in the short-term when the cash balance has been affected. The result of this rule is that almost all items recorded on the income statement are recorded using the cash basis, and items including accounts receivable and inventory are not recorded on the balance sheet.

The Costs incurred and Reimbursement received were as follows:

Costs Incurred Reimbursement Received January 20211 300000 February 2021 300000 March 2021 300000 300000 April 2021 300000 300000 May 2021 300000 300000 June 2021 300000 300000 July 2021 300000 300000 August 2021 300000 300000 September 2021 300000 300000 October 2021 300000 300000 November 2021 300000 300000 December 2021 300000 300000 January 2022 300000 February 2022 300000

Journal Entries for the fiscal year ending on September 30 2021 are as follows:

Date Dr/Cr Particulars Amount Program Costs 01-31-2021 Dr 300000 Cr Cash 300000 [Being Program costs incurred for the month) Program Costs 02-28-2021 Dr Cr Cash [Being Program costs incurred for the month) 300000 300000 300000 300000 03-15-2021 Dr Cash Cr Grant [Being Grant Received] Program Costs 03-31-2021 Dr Cash Beina Program costs incurred for the monthil 300000 300000

300000 300000 04-15-2021 Dr Cash Grant [Being Grant Received] Program Costs 04-30-2021 Dr Cash [Being Program costs incurred for the month) 300000 300000 300000 300000 05-15-2021 Dr Cash Grant [Being Grant Received] Program Costs 05-31-2021 Dr Cr Cash [Being Program costs incurred for the month) 300000 300000

300000 300000 06-15-2021 Dr Cash Grant [Being Grant Received] Program Costs 06-30-2021 DI Cash [Being Program costs incurred for the month 300000 300000 300000 300000 Cr 07-15-2021 Dr Cash Grant [Being Grant Received] Program Costs 07-31-2021 Dr Cash [Being Program costs incurred for the month] 300000 300000 Cr 08-15-2021 Dr Cash Grant [Being Grant Received] 300000 300000 Cr

Program Costs 08-31-2021 Dr |Сг Cash [Being Program costs incurred for the month] 300000 300000 300000 300000 09-15-2021 Dr Cash Grant [Being Grant Received] Program Costs 09-30-2021 Dr Cash [Being Program costs incurred for the month] 300000 300000 CI

The County should not recognise the reimbursement of December 31 as revenue in its fiscal year ending september 30 2021 as these are short term economic events and modified accrual practice follows the cash method of accounting when economic events affecting the short-term have occurred.