5-4. The citizens of Spencer County approved the issuance of $2,000,000 in 6 percent general obligation bonds to finance the construction of a courthouse annex. A capital projects fund was established for that purpose. The preclosing trial balance of the courthouse annex capital project fund follows:

Trial BalanceDecember 31, 2015

Debits Credits

Cash900,000

Contract payable$550,000

Due from state government200,000

Encumbrances85,000

Expenditures-capital1,850,000

Intergovernmental grant400,000

OFS: premium on bonds 45,000

OFS: proceeds sale of bonds 2,000,000

Budgetary fund balance-reserve for encumbrances 85,000

Transfer out45,000

$3,080,000 $3,080,000

1. Prepare any closing entries necessary at year-end.

DebitsCredits

Intergovernmental grant400,000

OFS: premium on bonds45,000

OFS: proceeds sale of bonds2,000,000

Budgetary fund balance85,000

Expenditures-capital1,850,000

Other financing uses: Transfer out45,000

Fund balance550,000

Encumbrances85,000

My questions

1) Why are "Encumbrances"& "Budgetary fund balance-reserve for encumbrances" included in closing entries?

2) Can you explain why $550,000 was used as a credit in the closing entries? I used the same figure, but only because it was the only way I could get the entries to balance.

Thank you!

Yumi