Question

Problem 3. On December 31, 2017, the City of Danville received a gift of $10,000,000 to endow a new public library. Terms of the gift provide that the principal be held intact and invested in appropriate securities. The donor specifies that income is to be used for library acquisitions.                      

On January 2, 2018, the gift was invested in securities having an annual yield of 3 percent, payable quarterly. Library acquisitions costing $250,000 were made during 2018; $30,000 remains unpaid at year-end, December 31, 2018.               

Instructions:                                                                                                   

a. Identify the fund in which the above events would be recorded.          

b. Prepare appropriate journal entries (including closing entries) for 2017 and 2018.        

c. Present the fund financial statements for 2018.

Answer 1

1. This event would be recorded in a Permanent Fund.

2. Journal Entries

Date	Account Title and Explanation	Debit	Credit
1	Investment	$10,000,000
	Cash		$10,000,000
2	Cash (Income)	$300,000
	Investment Income ($10,000,000×3%)		$300,000
3	Expenditure	$250,000
	Cash -Income		$220,000
	AccountsPayable		$30,000
4	InvestmentIncome	$300,000
	Expenditure		$250,000
	Fund balance- restricted		$50,000

C. Permanent Fund Balances Sheet, December 31,2018

Assets	Amount	Liabilities and Fund Balance	Amount
Cash Income	$80,000	Accounts Payable	$30,000
Investment	$10,000,000	Fund Balances
		Nonspendable	$10,000,000
		Restricted	$50,000
Total	$10,080,000	Total	$10,080,000

Permanent Fund , Statement of Revenue , Expenditure and Change in Fund Balance For the Year 2018

Revenue : Interest Income	$300,000
Expenditure	$250,000
Access of Revenue over expenditure	$50,000
Beginning Fund Balance	$10,000,000
Ending Balance	$10,050,000