ExpertMedium1 markMultiple Choice
CPA · Question 48 · Area III: State & Local Governments
A government places a purchase order for a new police car costing $40,000. When the car is received, the actual invoice is $42,000. Which of the following entries should be made in the General Fund upon receipt of the car?
A government places a purchase order for a new police car costing $40,000. When the car is received, the actual invoice is $42,000. Which of the following entries should be made in the General Fund upon receipt of the car?
Answer options:
A.
Debit Expenditure $42,000; Credit Cash $42,000
B.
Debit Reserve for Encumbrances $40,000; Credit Encumbrances $40,000; Debit Expenditure $40,000; Credit Cash $40,000
C.
Debit Budgetary Fund Balance Reserved for Encumbrances $40,000; Credit Encumbrances $40,000; AND Debit Expenditures $42,000; Credit Vouchers Payable/Cash $42,000
D.
Debit Encumbrances $42,000; Credit Reserve for Encumbrances $42,000
How to approach this question
Two steps when goods arrive: 1. Reverse Encumbrance (at original PO amount). 2. Record Expenditure (at actual Invoice amount).
Full Answer
C.Debit Budgetary Fund Balance Reserved for Encumbrances $40,000; Credit Encumbrances $40,000; AND Debit Expenditures $42,000; Credit Vouchers Payable/Cash $42,000✓ Correct
C
When the order is filled: First, reverse the encumbrance entry for the original amount ($40,000). Second, record the expenditure for the actual amount ($42,000).
Common mistakes
Reversing encumbrance at actual cost; recording expenditure at encumbered amount.
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