Final answer:
The correct journal entry to reestablish the Encumbrances account for a multi-year capital project in the capital projects fund is to debit Encumbrances and credit Reserve for Encumbrances at the beginning of the fiscal year.
Step-by-step explanation:
When reestablishing the Encumbrances account at the beginning of the fiscal year for a multi-year capital project in a capital projects fund, the correct journal entry that should be made is:
- Debit Encumbrances
- Credit Reserve for Encumbrances
The Encumbrances account is essentially a record of purchase orders or contracts that have been issued but not yet fulfilled, and therefore, the expenditure has not yet been realized. The Reserve for Encumbrances is an account that holds the corresponding funds, indicating that they are committed and not available for other purposes. Upon the start of a new fiscal year, Encumbrances from the prior year that are still outstanding need to be reestablished. Hence, the correct entry to reestablish Encumbrances for ongoing projects would be to debit the Encumbrances account and credit the Reserve for Encumbrances account (Answer d). This recognizes that these funds continue to be committed to the capital project in the new fiscal year.