Investment losses cannot be accounted for as the mirror image of investment gains.
On December 31, 2013, the Child Crisis Center establishes an endowment fund with a $5 million gift of securities. Income from the endowment is to be used exclusively to support a nutrition program. Expendable income is defined in the indenture agreement so as to include all investment gains, both realized and unrealized. Investment gains and losses are to be accounted for as recommended by the FASB.
During 2014, the endowment earns $100,000 in interest and dividends and spends the entire amount on the nutrition program. The value of its securities portfolio increases by $500,000, from $5 million to $5.5 million.
During 2015, the endowment again earns $100,000 in interest and dividends and spends the entire amount on the nutrition program. This year, however, the value of the securities portfolio decreases by $800,000, from $5.5 million to $4.7 million.
During 2016, the endowment continues to earn and spend $100,000 in interest and dividends. This year the portfolio recovers $400,000 of its investment losses and at year end is worth $5.1 million.
At the start of 2014, the center had a cash balance of $600,000 in an unrestricted fund. Over the three year period, this balance was unaffected by transactions other than those just described.
1. Prepare a schedule for each of the three years (2014-2016) in which you summarize the transactions as they affect permanently restricted, temporarily restricted and unrestricted net assets.
2. At the beginning of 2015, the ear of the loss, the total value of the security portfolio was $5.5 million. Of this amount, the initial $5 million was classified as permanently restricted, and the balance as temporarily restricted. Assuming that you adhered to the FASB pronouncements, how much of the loss did you assign to the permanently restricted assets, and how much to the temporarily restricted assets? How can you justify this division of the loss?