On January 1,20X1,Washington City received 200,000 from an estate with the stipulation that the money be invested and the income be used to provide maintenance to the city cemetery.The money was invested in 7% governmental securities at 90 to yield an effective interest rate of 10%.The following journal entry would be made to account for the accrued interest of the permanent fund:

Question

Quizplus · Accepted Answer

Option A correctly follows the rules of accounting for a permanent fund. The accrued interest of $14,000 ($200,000 x 7% x 1/2 year) is credited to the income account of the permanent fund, while the same amount is debited to the fund balance. The income will be used for cemetery maintenance in future periods. Option B incorrectly debits the accrued interest to the income account, which results in an overstatement of income. Option C also incorrectly debits the accrued interest to the fund balance, which would result in a misstatement of the fund balance. Option D credits the accrued interest to the fund balance, which would result in a misstatement of the fund balance as unassigned fund balance cannot be used for cemetery maintenance.

On January 1,20X1,Washington City Received 200,000 from an Estate with the Stipulation