On May 1, a federal operating grant is approved but expenditures have not yet occurred; which entry is recorded on May 1?

• A. Record Grant Revenue
• B. Record a Liability
• C. No entry until expenditures occur
• D. Record Cash

Answer: (C)

The key idea is that government grant revenue is earned when eligible expenditures are incurred (or when the grant terms require it to be recognized), not simply when the grant is approved. Approving a federal operating grant does not by itself create revenue or an asset; revenue is recognized only as the government meets the conditions and incurs the related costs.

Since expenditures have not occurred, there are no eligible costs to match the grant, so no revenue is earned and no receivable is yet established. There is also no cash received to record a receipt. Hence, no entry is recorded on May 1.

If funds were received in advance, you’d record a liability (unearned revenue) until the expenditures occur and the grant is earned. If expenditures occur later, you would then recognize the grant revenue to match those costs.