. What is the correct debit or credit for the following scenario: A contract was issued for the major part of work to be done by a private contractor in the amount of $1,200,000 for a new County court house? A) Debit: Budgetary Fund Balance -- Reserve for Encumbrances. B) Debit: Construction

A debit to Encumbrances ie Debit : Encumbrances.

though the option is not given in your question.

Explanation:

An encumbrance Is a restriction placed to control  how an organization or firm spends money so as  to reserve revenue for a future use, such as a purchase order, construction, etc.

In companies and business, once a contract is signed or issued, the accountant registers  the encumbrance in the organization's accounts once the money has been  reserved and when eventually paid out, removes  encumbrance account and reports the money as a paid expense.

In this case,  A contract was issued for the major part of work to be done by a private contractor in the amount of $1,200,000 for a new County court house? Placing the money in an encumbrance account tells the contractor staff the money is committed to the project and can't be spent on anything else and therefore  A debit to Encumbrances is marked

Though the option is not in the question, but this should be a debit to Encumbrances.

Explanation:

Encumbrances are transactions that are recorded to show expected principal payments will be due within the current accounting period.

In the case of this question, the $1,200,000 contract sum for a new County court house is the principal payment that is expected to be due within accounting period. Therefore, the correct entry is a debit to Encumbrances.

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