English 1

1)   Pledges must be distinguished by the extent to which they are restricted.

A private college receives the following pledges of support.

  • 1. As part of its annual fund drive, alumni and friends of the college pledge $8 million. The college estimates that about 15 percent of the pledges will prove uncollectible.
  • 2. A CPA firm promises to establish an endowed chair in the accounting department by donating $500,000. The chair agreement will provide that the funds be used to purchase investment grade securities and that the income from the securities be used to supplement the salary of the chair holder and support his or her academic activities.

    Sundown State University, Fund Balance Sheet (in thousands)

      Current Loan Endowment Plant Total
    Cash and temporary investments $18,567 $22,108 $29,611 $10,853 $81,139
    Accounts receivable   2,736   45,974 48,710
    Inventories 1,990       1,990
    Loans to other funds 8,557   6,879   15,436
    Land, buildings, and equipment, net of accumulated depreciation         283,181   283,181
        Total assets $29,114 $24,844 $36,490 $340,008 $430,456
    Accounts payable $23,024     $      1,704 $  24,728
    Loans from other funds   $        32   15,404 15,436
    Bonds payable     24,505     188,466   212,971
        Total liabilities $23,024 $24,537 $     0 $205,574 $253,135
        Net assets $  6,090 $      307 $36,490 $134,434 $177,321
    Fund balances          
    Restricted $ 4,102   $20,346 $134,434 $158,882
    Designated by the university 1,002   10,000   11,002
    Unrestricted         986 $      307       6,144               0       7,437
        Total fund balance $  6,090 $      307 $36,490 $134,434 $177,321
  • 3. A private foundation promises to donate $100,000 to be used to support a major revision of the college’s accounting curriculum.
  • 4. An alumnus pledges $25,000 to the college’s loan fund, which is used to make loans to students requiring financial assistance.
  • 5. The college is seeking support for construction of a new athletic field house. A local real estate investor promises to donate ten acres of land on which a field house could be built if the college is able to raise the funds required to construct the building. The land has a market value of $1 million.

Indicate the category of net assets (unrestricted, temporarily restricted, or permanently restricted) in which each of the contributions should be recorded and the amount of revenue, if any, that should be recognized when the pledge was made. Briefly explain your response.

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2)   A single contribution may affect all three types of funds.

The following events and transactions relate to a single contribution.

  • 1. A high-tech firm pledged to contribute $1 million in the company’s common stock to a university’s business school if the school would establish a new program in the management of information technology. The securities were to be placed in an endowment fund and the annual dividend earnings were to be used to purchase computer hardware and software.
  • 2. The business school established the program and thereby satisfied the conditions to receive the contribution.
  • 3. The business school received the stock and placed it in an endowment fund.
  • 4. In the first year after receiving the stock, the business school earned $30,000 in cash dividends. They were credited to an appropriate fund.
  • 5. The business school purchased $20,000 of computer equipment.
  • 6. The computer equipment was estimated to have a useful life of four years (no salvage). The school charged one year’s depreciation.

Prepare journal entries, as necessary, to record these events and transactions. Be sure to indicate the type of fund (permanently restricted, temporarily restricted, or unrestricted) that would be affected by the entries.