A public university, a component unit of the state government, received a $5,000,000 endowment. The donor stipulated that the principal must be held in perpetuity, but the earnings from the investment of the principal can be used for any purpose determined by the university's board of trustees. How should this endowment be classified in the university's Statement of Net Position?
- AAs 'Net Investment in Capital Assets'.
- BAs 'Unrestricted Net Position'.
- CAs 'Restricted Net Position - Nonexpendable'.
- DAs 'Restricted Net Position - Expendable'.
Show answer & explanationAnswer & explanation
Correct answer: C. As 'Restricted Net Position - Nonexpendable'.
Endowments where the principal must be held in perpetuity are classified as 'Restricted Net Position - Nonexpendable'. This is because the principal itself cannot be spent, representing a permanent restriction. The earnings, if restricted, would be 'Restricted Net Position - Expendable', or if unrestricted, would flow to 'Unrestricted Net Position'. The question specifically asks about the endowment itself (the principal).
Why the other options are wrong
- A. Incorrect. This category is for capital assets net of related debt.
- B. Incorrect. The principal is permanently restricted by the donor.
- D. Incorrect. This category would be for earnings from such an endowment if they were restricted for a specific purpose or time, but not the principal.
Permanent Endowments (NFP/Governmental Component Unit)
For a not-for-profit or governmental component unit, the principal of a permanent endowment (where the donor stipulates it must be held in perpetuity) is classified as 'Restricted Net Position - Nonexpendable' in the Statement of Net Position.
- Principal held in perpetuity (permanent restriction).
- Classified as 'Restricted Net Position - Nonexpendable'.
- Earnings may be expendable (restricted or unrestricted).
- Applies to government-wide statements for component units and NFP statements.
Memory trick: R-N-E = Restricted Nonexpendable Endowment