Question

Beach City received a gift of corporate stock valued at $1,200,000 on the date of the gift. The donor specified that the principal amount of the gift be maintained in perpetuity, but that earnings can be used to acquire works of art to improve the appearance of public buildings. All changes in fair value are to increase or decrease the principal amount of the gift.
Assuming that Beach City uses a permanent fund to account for the endowment and a special revenue fund to account for the earmarked earnings from the endowment, explain the accounting process for:

(1) receipt of the original gift.
(2) receipt of quarterly dividends.
(3) notification that fair value of the original stock increased by $3,000 during the year.
(4) the effect on fund balances of closing temporary accounts at year-end (Note: Ignore the effects of the transactions at the government-wide level).

Answer 1

Answer:

(1) The receipt of the original gift is usually documented as a form of donation in a permanent fund. It does not affect the special revenue fund an can be debited from an investment account.

(2)The quarterly dividend is mostly documented as revenue in the permanent fund. It is usually moved to the special revenue fund for other purposes such as the construction of a public building.

(3) There will be a change in the revenue and investment account if there is a change (i.e. an increase) in the fair value of the stock.

(4) If the fund balances are closed, the original donation will increase as well as the investment value. There will also be a change in the dividend income and the special revenue fund will increase when the dividend and fund balance are close.

Explanation:

(1) The receipt of the original gift is usually documented as a form of donation in a permanent fund. It does not affect the special revenue fund an can be debited from an investment account.

(2)The quarterly dividend is mostly documented as revenue in the permanent fund. It is usually moved to the special revenue fund for other purposes such as the construction of a public building.

(3) There will be a change in the revenue and investment account if there is a change (i.e. an increase) in the fair value of the stock.

(4) If the fund balances are closed, the original donation will increase as well as the investment value. There will also be a change in the dividend income and the special revenue fund will increase when the dividend and fund balance are close.