Different types of funds justify different practices as to budgets and commitments.
Review the budget note to the Smith City's financial statements presented in the previous problem. Assume that the city engaged in the following transactions in 2020 and 2021:
In 2020, it signed a service contract with a private security company. The company agreed to provide security services to the city's for one year at a cost of $72,000 ($6,000 per month.) By year end the company provided, and paid for, services for three months.
In 2021, the company preformed, and the city paid for, the remaining nine months of the contract. However, because of the agreed-upon changes in the services provided by the company, the total charges for 2021 were reduced from $54,000 to $50,000.
- The city properly budgeted for the services and appropriated the funds consistent with policies set forth in the note. Prepare all the budgetary, encumbrance, and expenditure entries relating to the service contract that would be required in 2020 and 202 In 1020, when the city signed the contract, it appropriated the entire $72,000. Then, at the start of 2021, inasmuch as the city expended only $18,000 in 2020, it reappropriated $54,000.
- Assume first that the contract was accounted for in the smith’s general fund.
- Assume next that it was accounted for in a capital projects fund established for the construction of its Walnut Creek Amphitheatre. The city prepares annual financial statements for capital project funds, but it does not close out its accounts. Moreover, it prepares budgets for the entire project, not for particular periods. The project was started in 2020 and completed in 2021.
Homework Answers
1.
a. General Fund
2020
Fund balance $72,000
Appropriations $72,000
To record an appropriation for the full amount of the contract
Encumbrances $72,000
Reserve for encumbrances $72,000
To establish a reserve for encumbrances
Expenditures $18,000
Cash $18,000
To record expenditures for three months of services
Reserve for encumbrances $18,000
Encumbrances $18,000
To reverse entry establishing encumbrances
Appropriations $72,000
Fund balance $72,000
To close the budgetary account
Fund Balance $72,000
Expenditures $18,000
Encumbrances $54,000
To close encumbrances and expenditures
2021
Fund balance $54,000
Appropriations $54,000
To record the budget for nine months of services
Encumbrances $54,000
Fund balance $54,000
To restore encumbrances
Expenditures $50,000
Cash $50,000
To record expenditures for nine months of services
Reserve for encumbrances $54,000
Encumbrances $54,000
To reverse entry establishing encumbrances
Appropriations $54,000
Fund balance $54,000
To close the budgetary account
Fund balance $50,000
Expenditures $50,000
To close expenditures
b. Capital Projects Fund
2020
Fund balance $72,000
Appropriations $72,000
To record the budget for 12 months of services (the full cost to be incurred over the period of the contract)
Encumbrances $72,000
Reserve for encumbrances $72,000
To establish a reserve for encumbrances
Expenditures $18,000
Cash $18,000
To record expenditures for three months of services
Reserve for encumbrances $18,000
Encumbrances $18,000
To reverse entry establishing encumbrances
2021
Expenditures $50,000
Cash $50,000
To record expenditures for nine months of services
Reserve for encumbrances $54,000
Encumbrances $54,000
To reverse remaining balances in encumbrances and reserve for encumbrances
Appropriations $72,000
Fund balance $72,000
To close the budgetary account
Fund balance $68,000
Expenditures $68,000
To close expenditures
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