A college has adopted a xed rate of return approach to the distribution of investment income. Each

A college has adopted a “fixed rate of return” approach to the distribution of investment income. Each year it transfers 6 percent of its endowment value to expendable funds, irrespective of actual earnings. Suppose that in year one the fund actually earns 8 percent; in year two it earns 4 percent. Assuming the endowment earnings are not restricted to any particular purpose, how much should the college report as unrestricted earnings in each of the two years? How should the difference, if any, between what is transferred and what is reported be classified and accounted for?
Irrespective of whether the college is governmental or not-for-profit it should report as expendable earnings only the actual amounts that have been earned — thus 8 percent in year one and 4 percent in year two. The decision to adopt the fixed rate of return approach is an internal decision; it has no legal or contractual import. The difference between the 8 percent that is reported in year one as expendable earnings and the 6 percent that is actually made available for expenditure should be added to unrestricted net assets. In year two the difference between the 4 percent that is reported as expendable earnings and the 6 percent that is made available for expenditure should be subtracted from unrestricted net assets.