Choice "B" is correct. The $40,000 for equipment is the only designation provided in the fact pattern. Other data represent distractors. In Year 2 when the $200,000 certificate of deposit matures, it is transferred from the internal term endowment fund (temporarily restricted assets) to the internal current unrestricted fund (unrestricted net assets). Of the $200,000 proceeds, $40,000 is board-designated for the preschool program, the remaining $160,000 is undesignated. The $16,000 interest revenue for Year 2 is donor-restricted to finance salaries for a preschool program; therefore, it is recorded in the internal current restricted fund (temporarily restricted net assets) as revenue. The Year 2 year-end balance sheet should report net assets designated for the preschool program of $40,000.
Choice "c" is incorrect. Part of the proceeds of the certificate of deposit is board-designated and therefore would appear in the balance sheet as such.
Choice "d" is incorrect. The $16,000 interest revenue is donor-restricted. It is recorded in the internal current restricted fund and temporarily restricted on external financial statements.
Choice "a" is incorrect. Only part of the proceeds of the certificate of deposit is board-designated and therefore would appear in the balance sheet as such. The interest revenue is donor-restricted. As such, it is recorded as revenue in internal current restricted funds and as temporarily restricted for external financial statements.