# At the start of a year, the JKG Foundation received a $10 million bequest consisting of a

## Question:

The foundation immediately invested the $5 million cash in 20-year, 7 percent corporate bonds having a face value of $4,485,512. The bonds, which pay interest annually, were purchased to yield 6 percent. The total premium was $514,488, and hence the total purchase price was $5 million. The annual interest payments (7 percent of the face value) are $313,986. During the year, the fair value of the bonds decreased by $13,986, an amount equivalent to the first year's amortization of the bond premium.

The JKG Foundation leased out the warehouse for $600,000 per year. The useful life of the building is 20 years.

Per the terms of the bequest, income only is available for spending. However, neither the terms nor the applicable law specifies how income is to be determined.

1. Determine the amount available for expenditure, assuming that the foundation calculates income:

a. On a cash basis

b. On a full accrual basis, recognizing changes in the market value of the securities and depreciating (on a straight-line basis) the warehouse

2. Assume that the foundation spent all its income. Prepare both a cash-basis and an accrual-basis balance sheet.

3. Is there a difference in fund balance between the two balance sheets? If not, can it be said that one basis of accounting better preserves the endowment principal? Explain.

Face Value

Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...

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**Related Book For**

## Government and Not for Profit Accounting Concepts and Practices

**ISBN:** 978-1118983270

7th edition

**Authors:** Michael Granof, Saleha Khumawala, Thad Calabrese, Daniel Smith