Chapter 4, Problem 25EP

a.

To determine

Prepare journal entries for the Endowment Fund transactions for the year ending June 30, 2017.

Explanation of Solution

Permanent funds: These are the funds that are instructed by donors to either invest or preserve their principal contributions, and account those as permanent endowments, but could use the earnings on such contributions for any public programs, or government plans, like maintenance of cemeteries, parks, libraries, or buildings.

Prepare journal entries for the Endowment Fund transactions for the year ending June 30, 2017.

1.

Entry to record the contribution received:

		General Ledger
		Debits	Credits
Permanent Fund:
Cash		$1,500,000
	Revenues–Contributions for Endowment		$1,500,000

Table (1)

2.

Entry to record purchase of certificate of deposit and bonds:

		General Ledger
		Debits	Credits
Permanent Fund:
Investment in Bonds		$406,300
Certificate of Deposit		$1,000,000
	Cash		$1,406,300

Table (2)

3.

Entry to record interest earnings on the investments:

		General Ledger
		Debits	Credits
Permanent Fund:
Cash		$37,000
	Revenues–Investment Earnings–Certificate of Deposit		$25,000
	Revenues–Investment Earnings–Bonds		$12,000

Table (3)

Working Notes:

Compute the semiannual interest received on certificate of deposit.

$\begin{array}{c}\text{Interest = Principal amount ×Rate of interest×Time period}\\ \text{=\$1,000,000×5\%×}\frac{\text{6}}{\text{12}}\\ \text{=\$25,000}\end{array}$

Compute the semiannual interest received on bonds.

$\begin{array}{c}\text{Interest = Principal amount ×Rate of interest×Time period}\\ \text{=\$400,000×6\%×}\frac{\text{6}}{\text{12}}\\ \text{=\$12,000}\end{array}$

4.

Entry to record transfer of earnings on investments to special revenue fund:

		General Ledger
		Debits	Credits
Permanent Fund:
Other Financing Uses–Interfund Transfers Out		$37,000
	Cash		$37,000

Table (4)

5.

Adjusting entry to record change in fair market value of investments at June 30, 2020:

		General Ledger
		Debits	Credits
Permanent Fund:
Investment in Bonds		$3,300
	Revenues–Changes in Fair Value of Investments		$3,300

Table (5)

Working Notes:

Compute the increase or decrease in fair value of bonds.

$\begin{array}{c}\text{Increase }\left(\text{Decrease}\right)\text{ in fair value = }\left\{\begin{array}{l}\text{Fair value on June 30, 2020–}\\ \text{Fair value on December 31, 2019}\end{array}\right\}\\ \text{=\$409,600–\$406,300}\\ \text{=\$3,300}\end{array}$

b-(1).

To determine

Prepare PDL Endowment Fund balance sheet for City F as of June 30, 2017.

Explanation of Solution

Fund balance sheet: This is the financial statement that reports the financial position of the fund, and includes the sections assets, liabilities, deferred inflows of resources, and fund balances.

Prepare PDL Endowment Fund balance sheet for City F as of June 30, 2017.

City F
PDL Endowment Fund Balance Sheet
As of June 30, 2017
Assets
Current assets:
Cash		$93,700
Total current assets		$93,700
Investments		$182,270
Bonds, at fair value (par $400,000)	$409,600
Certificate of deposit	$1,000,000
Total investments		$1,409,600
Total Assets		$1,503,300
Fund Balance
Fund balance:
Nonspendable–principal of endowment		$1,503,300
Total fund balances		$1,503,300

Table (6)

b-(2).

To determine

Prepare a statement of revenues, expenditures, and changes in fund balance of PDL Endowment Fund for City F for the year ended June 30, 2017.

Explanation of Solution

Statement of revenues, expenditures, and changes in fund balance: This is the operating statement that accounts for the revenues and expenditures, and changes in the fund balances of the governmental funds.

Prepare a statement of revenues, expenditures, and changes in fund balance of PDL Endowment Fund for City F for the year ended June 30, 2017.

City F
PDL Endowment Fund
Statement of Revenues, Expenditures, and Changes in Fund Balance
For the Year Ended June 30, 2017
Revenues
Contribution to endowment	$1,500,000
Interest on bonds	$12,000
Interest on certificate of deposit	$25,000
Increase in fair value of investments	$3,300
Total Revenues	$1,540,300
Other Financing Sources (Uses)
Operating transfers to PDL Maintenance Fund	$(37,000)
Excess (deficiency) of revenues over other financing uses	$1,503,300
Fund balances–July 1, 2016	$0
Fund Balances–June 30, 2017	$1,503,300

Table (7)

c.

To determine

Indicate the type fund PDL endowment should be classified as, and explain whether the fund requires budgetary entries.

Explanation of Solution

Type of fund: PDL Endowment Fund should be classified as permanent fund because the funds are instructed by JPL, the donor, to create and maintain a large fountain in front of the city hall. Hence, the contribution is preserved, and accounted for as permanent endowments. But earnings on the contribution can be used for maintenance of the fountain.

Requirement of budgetary entries: Since the endowment funds are permanent and nonspendable, the budgetary entries are not required. But the city can prepare budgets out of the earnings from investments.