CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsHard
A public university, which is considered a component unit of the state government, received a cash contribution of $5,000,000 from an alumnus to establish an endowed scholarship fund. The donor stipulated that the principal must be invested in perpetuity, and only the investment earnings can be used for scholarships. How should the university classify this contribution in its financial statements?
- AAs an increase in temporarily restricted net assets.
- BAs revenue with donor restrictions and then released when scholarships are awarded.
- CAs an increase in permanently restricted net assets.
- DAs revenue without donor restrictions.
Show answer & explanationAnswer & explanation
Correct answer: C. As an increase in permanently restricted net assets.
When a donor stipulates that the principal of a contribution must be maintained in perpetuity, and only the earnings can be spent, this constitutes a permanent restriction. Therefore, the contribution should be classified as an increase in permanently restricted net assets.
Why the other options are wrong
- A. The restriction on the principal is permanent, not temporary.
- B. This describes a temporary restriction. The principal of an endowment is permanently restricted, not released when scholarships are awarded (only the earnings are released).
- D. The donor has placed a permanent restriction on the principal, so it cannot be recorded as without donor restrictions.
Permanently Restricted Net Assets (NFP)
Net assets of a not-for-profit organization whose use is limited by donor-imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by actions of the organization. Typically applies to endowment principal.
- Donor-imposed restriction on principal in perpetuity.
- Only investment earnings may be spent.
- Reported separately on the Statement of Financial Position.
Memory trick: NFP Net Assets: Without, With (Temporary), Permanently Locked.