On May 1, the City of Spencer was notified of approval of a $300,000 federal operating grant, payable on a reimbursement basis as the city expends resources. As of May 1, no expenditures had been made. The journal entry to record approval of this grant will include:

• A. Debit Expenditures—Grant 300,000; Credit Grants Payable 300,000
• B. Debit Cash 300,000; Credit Deferred Inflows of Resources—Grant Proceeds 300,000
• C. No journal entry will be made until authorized expenditures occur
• D. Debit Grants Receivable 300,000; Credit Grant Revenue 300,000

Answer: (D)

A grant that is approved and payable on a reimbursement basis creates an enforceable right to receive funds, even before any expenditures occur. Under accrual accounting for government-wide reporting, revenue is recognized when the government is entitled to the resources and the amount can be measured. The grant approval establishes that entitlement, so the city records a Grants Receivable for the $300,000 and recognizes Grant Revenue for the same amount. Cash will come later when the funds are actually received.

That’s why the entry records a debit to Grants Receivable and a credit to Grant Revenue. The other options would either assume cash has been received, treat this as a liability to be paid, or defer recognition until expenditures occur, which isn’t consistent with entitlement-based revenue recognition for grants that are approved and measurable.