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Government Accounting and Purchasing Bonds

The accounting for trusts is dependent upon donor stipulations.

To promote computer education, a leading computer manufacturer donates $4 million to the Kerrville Independent School District. The donor stipulates that the district is to establish an endowment, from which only income is expendable. Income is defined 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 inflation, 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

a. Purchased bonds having a face value of $3 million for $2.97 million and common stock for $1 million

b. Received $180,000 in interest and recognized an increase of $3,000 in the fair value of the bonds

c. Sold $500,000 of the common stock at a gain of $50,000 and used the proceeds to purchase additional common stock

d. 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 permanent fund to record the year's transactions.

2. Prepare a statement of revenues, expenditures, and changes in fund balance and a balance sheet for the 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 school district's government-wide statements?

See attached file for full problem description.


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Q3. The nature of investment gain is speculative and there are chances of declining of value in future and therefore to mitigate that risk the restriction is placed by donors. Its limitation is that no gain of ...

Solution Summary

The solution examines purchased bonds.