Final answer:
The question concerns the journal entry for a gift received by Western University. The gift amounting to $2,000,000 is to be recorded as permanently restricted net assets because the principal must remain intact, with only the income used for scholarships and fellowships.
Step-by-step explanation:
The question involves recording a financial transaction for Western University, a not-for-profit organization, which received a gift of $2,000,000 with restrictions set by the donors. The restrictions require that the principal remains intact and the generated income is to be used exclusively for scholarships and fellowships.
In the accounting for not-for-profit organizations, such contributions are typically recorded as permanently restricted net assets. Accordingly, the journal entry to record the initial receipt of the gift would generally debit an asset account (such as cash or investments) for $2,000,000 and credit the permanently restricted net assets for the same amount, reflecting both the receipt of the funds and the obligation to honor the donor's restrictions.
The entry records the inflow of resources while also indicating, through the credit, that these resources have restrictions on their use. Importantly, due to the nature of the restrictions, only the income generated from investing the principal can be used for the scholarships and fellowships; the principal cannot be spent.