At the end of 2015, Learning Tree, a not-for-profit organization, received a $5 million contribution (fair value), consisting entirely of investment securities. The contribution is required to be used to establish a permanent endowment, the income from which must be used exclusively to provide free “chapter books” to elementary school children. The endowment specifies that both realized and unrealized gains may be used for this purpose in addition to investment income. Learning
At the end of 2015, Learning Tree, a not-for-profit organization, received a $5 million contribution (fair value), consisting entirely of investment securities. The contribution is required to be used to establish a permanent endowment, the income from which must be used exclusively to provide free “chapter books” to elementary school children. The endowment specifies that both realized and unrealized gains may be used for this purpose in addition to investment income. Learning Tree applies FASB accounting standards for not-for-profit organizations.
At the start of 2016, Learning Tree had $600,000 in unrestricted net assets.
During 2016, the endowment earns $100,000 in dividends and interest. Learning Tree spends the entire amount on books and distribution costs. At year-end, the value of the endowment portfolio is $5.5 million.
During 2017, the endowment earns $100,000 in dividends and interest. The entire amount is spent on books. At year-end, the fair value of the endowment portfolio has decreased by $1 million to $4.5 million.
During 2018, the endowment earns $100,000 in dividends and interest. The entire amount is spent on books. At year-end, the fair value of the endowment portfolio has gone back up by $0.4 million to $4.9 million.
Assuming no other transactions, prepare a schedule showing the balances in unrestricted, temporarily restricted, and permanently restricted net assets for the years ending in 2016, 2017, and 2018.
b) What effect would there be on these three balances of net assets if the donor specified that all gains (realized and unrealized) must be reinvested?
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