Question

The cash and investment pool of Lake City allocates dividends, interest, and capital gains and losses on a periodic basis. When the cash and investment pool accrues interest earned on investments in debt securities, pending allocation to participating funds, it would credit which of the following accounts?

a. Interfund loans
b. Undistributed Earnings on Pooled Investments
c. Revenues
d. Interfund Receivables

Answer 1

Undistributed Earnings on Pooled Investments. Thus the correct option is (b).

Step-by-step explanation:

The accrual of interest earned on investments in debt securities is recorded in the Undistributed Earnings on Pooled Investments account. This account serves as a temporary holding place for income that has been earned but not yet allocated to the participating funds. The allocation process ensures a fair distribution of earnings among the funds in the cash and investment pool.Thus the correct option is (b).

When interest is earned on debt securities, it increases the overall earnings of the cash and investment pool. However, until this income is formally allocated to the respective funds, it is held in the Undistributed Earnings on Pooled Investments account. This approach allows for a transparent and systematic distribution of earnings, aligning with proper accounting principles.

In summary, the choice of crediting Undistributed Earnings on Pooled Investments accurately reflects the accrual of interest earned on investments in debt securities, providing a clear trail of income distribution within the Lake City cash and investment pool.