The accounting for trusts is dependent on donor stipulations.

To promote computer education, a leading computer manufacturer donates $4 million to the Kerrville

Independent School District. The donor stipulates that the district is to establish an endowment, from which

income only is expendable. Income is defined to include interest, dividends, and investment gains. All

income is to be recorded initially in a nonexpendable permanent fund. Each year the district is to transfer

to an expendable endowment fund (i.e., a special revenue fund) all income of the year that exceeds the rate

of inflation as measured by the consumer price index times the beginning fund balance. The expendable

funds are to be used exclusively to acquire computer-related materials and to provide computer training

for teachers.

In the year the contribution was received, the district:

Purchased bonds having a face value of $3 million for $2,970,000 and common stock of $1 million

Received $180,000 in interest and recognized an increase of $3,000 in the fair value of the bonds

Recognized an increase in the value of the common stock to $1.1 million

Sold half of the shares of common stock for $550,000 and used the proceeds to purchase additional

common stock

Transferred expendable income to a newly established special revenue fund (during the year the

consumer price index increased by 5 percent)

How would you prepare journal entries, including closing entries, in the nonexpendable permanent fund to record the year's transactions.

How could you Prepare a statement of revenues, expenses, and changes in fund balance and a balance sheet for the nonexpendable endowment (permanent) fund.

Some donors stipulate that no investment gains are expendable. What is the most probable purpose of

that restriction? What is its limitation? In what way is the approach taken by the donor in this example

preferable?

4. How would the permanent fund be reported in the district's government-wide statements?