Question

The state government received $10,000,000 in federal grants that must be distributed to cities and towns for social services based on an assessment of community need. Which of the following fund types would the state government use to account for the receipt and transfer of these monies to local governments?

A) Agency.
B) Special revenue.
C) Private-purpose trust.
D) Any of the above would be acceptable.

Answer 1

The state government would use a Special revenue fund to account for the distribution of federal grants to cities and towns for social services, as these funds have restrictions attached for specific purposes. Hence, the correct answer is option (B).

Step-by-step explanation:

The federal grants received by the state government for distribution to cities and towns based on community need would be accounted for using a Special revenue fund. This fund is designed to account for proceeds from specific revenue sources that are legally restricted to expenditure for specified purposes. It is not an Agency or Private-purpose trust fund type, as these do not accurately represent the nature of these transfers and their restrictions.

Federal grants can be categorical grants, block grants, or general revenue sharing with each having different levels of restrictions and autonomy for the recipient governments, with categorical grants being the most restricted.