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Accounting Tutorial › Without Fund Accounting

Here we will record the transactions relating to SpringTime’s bond, the amortization of the bond premium and the interest earned. Half of the interest will be allocated back to the endowment, and half of the interest will be added to the deferred contributions of the Spring Fling program to be matched against future SpringFling expenses.

SpringTime purchased a bond for 10200 with a par value of 10000. The premium on the bond was 200. Let us set up a separate account for the premium, reducing what was previously recorded as a "bond," as we will need to keep track of this premium.

  dr cr
Bond   200
Premium on bond 200  

The bond was purchased on June 30, 2000 and matures on June 30, 2010. Therefore we will need to amortize the premium over ten years. We will amortize the premium against the deferred contributions of the Spring Fling program on a straight line basis. We need to amortize the entire premium against the Spring Fling deferred contributions to ensure the original endowment is maintained. (At the end of ten years, the endowment fund will receive $200 more interest than the Spring Fling program and the endowment balance will be recovered.)

The amortization of the premium for the period June 30, 2000 to December 31, 2000 amounts to $10. (200/10 years/0.5 years)

We can record the following entry:

  dr cr
Premium on bond   10
Deferred contributions -SF 10  

We can also accrue six months of the interest we will receive:

(10000 X 5%) X 1/2 year = $250

  dr cr
Accounts receivable 250  
Deferred contributions - SF   125
Endowment receipts - see below   125

Endowment Receipts

The interest earned to be added to the endowment will not be shown as revenue in the statement of operations. The amount will be recorded as a direct increase in net assets, with appropriate disclosure of the change in the net asset or fund balance, either in the statement of changes in net assets or the statement of changes in fund balances.

The Bond’s Market Price

We are told that the market price of the bond is $10,000 at December 31, 2000. This is below the cost recorded in the accounts but we are told that the market price for bonds is expected to increase over the next few years. The bond is held for endowment purposes and is therefore a long term investment. Accordingly, we would not adjust the carrying value of the bond for a temporary decline. Disclosure of our reasoning would be provided in the notes, along with the market value.

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