Sam Smith died, leaving a will that provided that $1,000,000 be transferred to a private not-for-profit college. The college is to invest the funds for 10 years and give $40,000 each year to the granddaughter. At the end of the 10 years, the $1,000,000 can be used for any purpose desired by the college. Which of the following is true?
A) The college would record revenue in the amount of $1,000,000, increasing temporarily restricted net assets.
B) The college would record revenue in an amount equal to the $1,000,000 less the present value of the 10 payments to the granddaughter.
C) The college would record revenue in an amount equal to the present value of the 10 payments to the granddaughter.
D) The college would not record revenue for 10 years; then a revenue would be recorded, increasing unrestricted net assets.

Question

Quizplus · Accepted Answer

The college should recognize the assets held in trust at their fair market value when received. A liability to the donor's granddaughter should be recorded at the present value of the future payments to be distributed over the next ten years. The difference between the asset and liability is recognized as contribution revenue if the college is a private not-for-profit and as a deferred inflow if the college is a public institution.

Sam Smith Died, Leaving a Will That Provided That $1,000,000