CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsMedium
A public university, which is considered a component unit of the state government, received a $2,000,000 endowment from an alumnus. The donor stipulated that the principal must be invested in perpetuity, and the income generated from the investment should be used to fund scholarships for students. How should the university classify this endowment in its Statement of Net Position?
- AIncrease Unrestricted Net Position by $2,000,000.
- BIncrease Net Investment in Capital Assets by $2,000,000.
- CIncrease Restricted Net Position by $2,000,000.
- DIncrease Deferred Inflows of Resources by $2,000,000.
Show answer & explanationAnswer & explanation
Correct answer: C. Increase Restricted Net Position by $2,000,000.
Endowments where the principal must be maintained in perpetuity represent a permanent restriction on the net assets. These are classified as Restricted Net Position in the government-wide (and proprietary fund) Statement of Net Position.
Why the other options are wrong
- A. This is incorrect; the endowment has donor-imposed restrictions.
- B. This is incorrect; the endowment is cash/investments, not capital assets.
- D. Deferred inflows of resources are for unearned revenues or assets not yet available, not permanent endowments.
Permanent Endowments (Government-Wide/Proprietary Funds)
Permanent endowments, where the principal must be invested in perpetuity, are classified as Restricted Net Position in the government-wide Statement of Net Position due to the externally imposed restriction on the asset's use.
- Principal held in perpetuity.
- Income may be restricted or unrestricted.
- Classified as Restricted Net Position.
Memory trick: Net position shows what's invested, what's locked, and what's free.