A nongovernmental not-for-profit college has a portfolio of bond investments that had an original cost of $2,000,000. The college's board of trustees voted to hold the principal of this fund intact in perpetuity and designated the earnings to reimburse faculty for travel to academic conferences. During the year, interest of $50,000 was earned in cash. The fair value of the bonds was $1,980,000.

What amount should the college report as permanently restricted net assets at year end?

Question

Antoine Hill

Business

29 October, 16:13

A nongovernmental not-for-profit college has a portfolio of bond investments that had an original cost of $2,000,000. The college's board of trustees voted to hold the principal of this fund intact in perpetuity and designated the earnings to reimburse faculty for travel to academic conferences. During the year, interest of $50,000 was earned in cash. The fair value of the bonds was $1,980,000.

What amount should the college report as permanently restricted net assets at year end?

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Answers (1)

Know the Answer?

Ben Juarez · Answer 1

A. $0

Explanation:

First, the multiple choices to the question:

A. $0

B. $1,980,000

C. $2,000,000

D. $2,030,000

Permanently Restricted Net Assets

A permanently restricted net asset condition is a condition of funds that arise when dealing with an endowment funds or donations received by non-governmental organisations or non profit organisations for specific purposes. These donations are always in form of investment funds or assets whose principals cannot be touched or should be held intact.

These funds known as permanently restricted assets as received from donor organisations are called restricted because the recipients can only use the fund in ways already designated by the donor and the principal amounts of such assets cannot be touched. Since, the principal of such funds cannot be touched, only the interests or incomes that arise from the investment of the principal amounts can be used towards the purposes they are restricted to by the donors.

From the question, Although the College's board of trustees placed a non-touchable hold in perpetuity clause on the bond investments, there is no Permanently restricted net assets clause on the proceeds or the interests of the bond investments. Hence, $0 should be reported as permanently restricted net assets for the year.

Another reason for the lack of a Permanently restricted net asset clause is that, based on the initial explanation, the bond investment was not reported to have been placed under the clause by the donor (we do not know the donor), instead, it was teh College's board of trustees who decided to keep the principal of the bond in perpetuity.