A school district receives a grant from the federal government to support programs directed at special needs students. The grant is a matching grant in which each dollar spent by the school district on teacher salaries for special needs education will be matched up to $1 million by the federal government. The federal government agrees that it will advance monies to the school district so that the school district will be able to pay a portion each month of teachers salaries from federal funds. The grants contractual terms stipulate that the school district must not commingle the federal monies that it has been advanced with other monies of the school district. The school district also is required to file quarterly and annual reports showing the amounts that the school district has spent on special needs education and the resultant amount that is either a receivable from or payable to the federal government.

As a new comptroller, you must decide which funds should be used to account for the federal grant and the school district match. After some research, you believe that the school district has some options as to the governmental funds that it will use for financial reporting purposes. What are the options? In which funds would you report the transactions associated with the federal grant and school district match? Should they be accounted for in the same fund? What factors influenced your decision?