Problem 1

To promote computer education, the CEO Max of a leading computer manufacturer donates $2 million to the Kingswood School District. The donor stipulates that the district is to establish an endowment, from which income only is expendable. Income is de?ned to include interest, dividends, and investment gains. All income is to be recorded initially in a nonexpendable permanent fund. Each year the District is to transfer to an expendable endowment fund (i.e., a special revenue fund) all income of the year that exceeds the rate of in?ation as measured by the consumer price index times the beginning fund balance. The expendable funds are to be used exclusively to acquire computer-related materials and to provide computer training for teachers.

In the year the contribution was received, the district:

• Purchased bonds having a face value of $1.5 million for $1,485,000 and common stock of $.5 million

• Received $90,000 in interest and recognized an increase of $1,500 in the fair value of the bonds

• Sold $250,000 of the common stock at a gain of $25,000 and used the proceeds to purchase additional common stock

• Transferred expendable income to a newly established special revenue fund (during the year the consumer price index increased by 5 percent)

1. Prepare journal entries, including closing entries, in the nonexpendable permanent fund to record the year's transactions.

2. Prepare a statement of revenues, expenses, and changes in fund balance and a balance sheet for the nonexpendable endowment (permanent) fund.

3. Some donors stipulate that no investment gains are expendable. What is the most probable purpose of that restriction? What is its limitation? In what way is the approach taken by the donor in this example preferable?

4. How would the permanent fund be reported in the district's government-wide statements?

Problem 2

On December 31, 2014, The Parent Crisis Center establishes an endowment fund with a $2.5 million gift of securities. Income from the endowment is to be used exclusively to support a special needs program. Expendable income is de?ned in the indenture agreement so as to include all investment gains, both realized and unrealized. Investment gains and losses are to be accounted for as recommended by the FASB.

During 2015, the endowment earns $50,000 in interest and dividends and spends the entire amount on the special needs program. The value of its securities portfolioincreases by $250,000, from $2.5 million to $2.75 million.

During 2016 the endowment again earns $50,000 ininterest and dividends and spends the entire amount onthe special needs program. This year, however, the value ofits securities portfolio decreases by $400,000, from $2.75 million to $2.35 million.

During 2017 the endowment continues to earn andspend $50,000 in interest and dividends. This year theportfolio recovers $200,000 of its investment losses and atyear-end is worth $2.55 million.

At the start of 2015, the center had a cash balanceof $300,000 in an unrestricted fund. Over the three-yearperiod, this balance was unaffected by transactions otherthan those just described.

1. Prepare a schedule for each of the three years (2015through 2017) in which you summarize the transactions as they affect permanently restricted, temporarilyrestricted, and unrestricted net assets.

2. At the beginning of 2016, the year of the loss, thetotal value of the security portfolio was $2.75 million.Of this amount, the initial $2.55 million was classi?edas permanently restricted, the balance as temporarilyrestricted. Assuming that you adhered to the relevantFASB pronouncement, how much of the loss did youassign to the permanently restricted assets and howmuch to the temporarily restricted assets? How can youjustify this division of the loss?