Question

A wealthy alumnae donates $500,000 in marketable securities to her alma mater to establish a scholarship fund. Per the trust agreement only the interest and dividends (including any gains in fair value) from the securities can be distributed to scholarship recipients. In addition, she stipulates that the recipients must be graduates of her own high school and members of its honor society and are to be selected by a committee of teachers from that high school.

1. In what type of fund would the resources be accounted for and reported.
2. Prepare journal entries in that fund to record the following events and transactions.
a. The university accepted the marketable securities.
b. The securities increased in fair value by $20,000
c. The university received $14,000 in interest and dividends
d. The university transferred $6,000 to its general fund to cover the tuition of a student who was selected as a scholarship recipient.
3. In what way would your answer to the above questions differ if the university, rather than the high school, selected the scholarship recipient and there were no specific constraints on who could be selected.

Answer 1

Wealthy Alumnae Requirement 1 The resources are accounted for a specific reserve or specific fund that is 'Scholarship fund' because the money of this fund will be going to be used only for the specific purpose of providing scholarships to the students of the high school. The fund cannot be used for any other purpose during the life of the school or the amount of the fund cannot be transferred to any other account. Requirement 2 Journal Enteries Debit in $ Credit in $ Trans. Particulars Marketable Securities a/c Dr. 500000 a. To Investment Liability To record the acceptance of marketable securities) 500000 The school is receiving the marketable from wealthy alumnae which is an asset for the school. However, on the same side, it is creating a liability on the school to provide scholarships to the students from the income of the asset. Thus, the marketable securities are debited and investment liability is credited. b. Unrealised gain a/c To Scholarship Fund (To record gain on value of maketable securities) Dr. 20000 20000 The increase in the value is an unrealized gain for the school which they need to credit in the scholarship fund because it is increasing their liability towards the students. Thus, the unrealized gain is debited and the scholarship fund is credited. Bank a/c Dr. 14000 C. To Scholarship Fund (To record receipt of investment and dividend) 14000 The school has received the interest and dividend on the marketable securities which is increasing their liability or increasing the scholarship fund. Thus, the bank account is debited and scholarship fund is credited. d. No entry, because it is a scholarship fund and the amount cannot be transferred to any other fund or account. Requirement 3 Debit in $ Credit in $ 6000 Trans. Particulars Scholarship Fund a/c To General Fund Dr. 6000 (To record receipt of investment and dividend) The fund is transferring from scholarship account to general fund account, thus the scholarship fund is being debited and the general fund account is credited.