*This is a fictitious college and case study. Any relatedness to actual colleges, individuals or situations is purely coincidental.
The primary subject matter of this case concerns financial reporting issues in higher education using fund accounting. Secondary issues examined include endowment investment issues, adjusting entries, pledge accounting, and capital projects as they all relate to fund accounting. The case would be appropriate for a senior level undergraduate course as well as a graduate course. This case is designed to be taught in one to two class hours in conjunction with a section on not-for-profit accounting or auditing and is expected to require approximately two to three hours of outside preparation by the students.
In this case, students are introduced to Adam Counterman, a staff accountant at a regional accounting firm, who is assigned to the engagement team auditing Smallville College. The College is a new engagement for Adam's accounting firm. Fund accounting is generally used in higher education and to date, Adam has not been exposed to this form of accounting. The trial balance of Smallville College is unadjusted so there may be some adjusting entries that are needed that the client has missed. The students will need to lead Adam through the steps of preparing proper adjusting entries so the client will be able to prepare accurate financial statements.
Smallville College contains the schools of liberal arts and professional studies. Student enrollment is around 1,500 and full time employees total 325. In the prior year, Smallville College has had one of its business school alumni, Martin Moneybags, donate $50,000,000 effectively doubling its endowment. Martin Moneybags made his money investing in the Gifthorse hedge fund that had very favorable historic returns as compared to the standard and poor's index. As Mr. Moneybags also serves on the board of trustees he recommended the Gifthorse hedge fund to members of the investment committee of the board of trustees. Upon Mr. Moneybags recommendation, the board decided to put the entire equity position of the endowment in this hedge fund. The investment committee has a board approved investment policy of 80% equities and 20% fixed income.
Smallville College has a June 30 year end and is classified as a not-for-profit using fund accounting. During the current year they approved a new billing date of June 15 to allow students and their families 60 days instead of 30 days to pay.
The College has several fund types that make up its general ledger. An unadjusted trial balance has been provided.
Budget Fund - This is the main operating fund for the College. All tuition, fees, room and board charges are recorded here as are all of the main operating expenses such as financial aid, wages, fringe benefits and general operating expenses.
Endowment Funds - This is actually a group of individual donor funds that are pooled and invested permanently. A portion of the market value is allocated for spending each year by the board and this is withdrawn from the investment pool and spent according to each donor's wishes. The current endowment consists of 300 separately named funds with varying restrictions, i.e. endowed chairs, scholarships, and direct support of specific programs.
Plant and Project Funds - This group of funds tracks the overall property, plant and equipment of the College along with the associated accumulated depreciation. There are also individual funds to track major construction projects.
Agency Funds - This group of funds contains the student senate and the individual clubs the senate supports. The activity in these funds is not included in the College's statement of activities.
SMALLVILLE COLLEGE - ASSETS
The College's assets consist of cash, student accounts receivable, pledges receivable, long-term investments, buildings and equipment. …