The following pertains to Park Township's general fund at December 31, Year 1:

Total assets, including $200,000 cash: $1,000,000

Total liabilities: $600,000

Reserved for encumbrances: $100,000

Appropriations do not lapse at year-end. At December 31, Year1, what amount should Park report as unreserved fund balance in its general fund balance sheet ?

Answer is $300,000

I'm not sure why the answer is $300,000 and not $500,000.  Instead of adding the reserve for encumbrance to the net assets, the answer subtracts the resever for encumbrance to arrive at $300,000.

Can someone please explain, with the help of journal entries ?

Thx

For Governmental Funds,

CA = CL + Fund Equity or Fund Balance

or Fund Bal/equity = CA- CL

here, Fund Balance is : 10,00,000 - 600,000 = 400,000

Further, the encumbrances that do not lapse at the year end are transferred to Fund Balance and an amount is reserved to that extent.

Hence the Unreserved fund balance is decreased to that extent..so we got to subtract 400,000 - 100,000 = 300,000

Journal Entries:

for encumbrances wen the purchase order is received

Encumbrances Dr

Reserve for Encumbrances Cr

When the budgetary accs are to be close, reverse this journal entry

Reserves for Encumbrances Dr

Encumbrances Cr

Since these Encumbrances have not lapsed, we will transfer it as follows :

Fund balance unreserved Dr

Fund Balance reserved for Encumbrances Cr

Hope this clarifies ur doubt

I still don't get the concept.

If we have $100,000 as an unused balance for encumbrance, then shouldn't our fund balance increase at the end of the year ($400,000 + $100,000) due to the surplus?

I still don't get why we are subtracting the fund balance by $100,000.

The journal entry you listed is just the same entry as the entry in

Resolved. Reference F8-47, Becker