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 income only 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:
• Purchased bonds having a face value of $3 million for $2,970,000 and common stock of $1 million
• Received $180,000 in interest and recognized an increase of $3,000 in the fair value of the bonds
• Sold $500,000 of the common stock at a gain of $50,000 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 nonexpend able 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?