Chapter 14 Health Care Providers Test Bank Docx

Chapter 14

Health Care Providers

/(CHAPTER 14)

1. The statement of financial position of a not-for-profit health care organization should distinguish among nonrestricted and donor restricted net assets.

2. Unlike businesses, not-for-profit health care providers often serve patients who they know will be unable to pay any portion of the amounts billed.

3. Health care organizations provide uncompensated patient care as a matter of policy but not law.

4. AICPA’s current industry guide, Health Care Entities, combined with FASB guidelines represent GAAP for government-owned hospitals.

5. Charity care provided by a health care organization would be recorded in a contra-revenue account.

6. In a not-for-profit health care organization, the cost of malpractice must be accrued if it is either probable that impairment has occurred or if the amount of loss can be reasonably estimated.

7. Not-for-profit health care entities must provide information on the two categories of net asset donor restrictiveness.

8. The statement of activities must indicate net assets released from restriction and any transfers between funds.

9. In the long run, the health of a hospital depends mainly on the demand for its services and the ability to meet that demand at a reasonable cost.

10. Prepaid health care plans that earn revenue from agreements to provide services record revenue when services are rendered.

11. Medicaid is a federally sponsored and managed health care program for retirees.

12. The services of Preferred Provider Organizations are prepaid and fixed.

13. Capitation fees paid by HMOs to hospitals, physicians, and other medical groups generally are based on the number of persons covered and expected costs to be incurred rather than on actual services provided.

14. Not-for-profit hospitals are accounted for similarly to businesses but must adhere to the FASB’s standards for not-for-profit entities.

15. FASB requires that hospitals present charity care in the financial statements based on the amount charged to the patient on the invoice, not the actual costs of providing the service.

ANSWERS TO /(CHAPTER 14)

12.

13.

14.

15.

MULTIPLE CHOICE (CHAPTER 14)

1. For a not-for-profit hospital, which of the following financial statements is not required?
2. Statement of financial position.
3. Statement of activities.
4. Statement of cash flows.
5. Statement of functional expenses.

2. In 2022 St. Martin’s Hospital received a $50,000 cash gift to be used to buy supplies and other items for the pediatric department of the hospital. In 2023, St. Martin’s purchased puppets and other items to be used in explaining medical procedures to young children. The acquisition of the items causes a NET decrease in which class(es) of net assets?

1. Nonrestricted net assets only.
2. Donor restricted net assets.
3. Both nonrestricted and donor restricted net assets.
4. Neither nonrestricted nor donor restricted net assets.

Use the following information to answer Questions 3 and 4.

Pearl Hospital, a not-for-profit entity, received a pledge from a donor in support of a fund-raising effort by the hospital to finance construction of a new facility for cancer treatment. The donor promised to pay $2 million in equal annual installments of $200,000 over the next 10 years. The present value of the gift at the risk-free interest rate is $1,472,000.

3. The amount of nonrestricted revenue that should be recognized by Pelican in the year of the gift is

1. $2 million.
2. $1,472,000.
3. $200,000.
4. $0.

4. The amount of restricted revenue that should be recognized by Pelican in the year of the gift is

1. $2 million.
2. $1,472,000.
3. $200,000.
4. $0.

5. An accountant has encountered a perplexing financial reporting issue related to the hospital for which she is preparing financial statements. The issue is not specifically addressed by FASB statements. To which of the following sources would the accountant probably look first for industry-specific guidance?

• 1. GASB Statements.
  2. AICPA accounting and auditing guide, Not-for-Profit Organizations.
  3. AICPA accounting and auditing guide, Health Care Organizations.
  4. Pronouncements of the HFMA or AHA.

6. In prior years, a not-for-profit hospital received funds from a donor who restricted the use of those funds to providing nursing scholarships. During the current year $8,000 of scholarships were awarded. These scholarships should be reported

1. As expenses in the nonrestricted fund.
2. As reductions in the revenue section in the nonrestricted fund.
3. As expenses in the donor restricted fund.
4. As expenses in the general fund.

7. During the current year, Lady Madonna’s Hospital ,a not-for-profit entity, earned, based on its normal billing rate, $1 million in patient service revenues. Many of these patients belong to a health plan that has an established pay schedule. Based on the specific services rendered to members of the plan, the hospital estimates that $0.05 million will not be collectible from the plan or the patient. Some of the patients are hospital employees. These employees are given a 50 percent discount on the services rendered. Employee discounts for the current year total $0.01 million. Some of the patients are uninsured and the hospital estimates that, of the amount billed to the uninsured patients, $0.2 million will not be collectible (bad debts). The amount of net patient service revenues for Lady Madonna’s Hospital for the current year is

1. $1 million.
2. $0.94 million.
3. $0.87 million.
4. $0.74 million.

8. A consortium of physicians agrees to provide services to the employees of a large county government. The agreement calls for monthly payments from the county to the consortium in the amount of $200,000 per month. County employees are not billed for services rendered by the consortium. All county employees are required to use the consortium under their health care program (any services rendered to county employees by other physicians are not covered under the health plan). During the month the consortium performed services for county employees for which it would have billed $170,000. The consortium referred patients to other health care providers for services they could not perform. The consortium estimates that patients will be billed $10,000 for those services. The amount of revenue that should be recognized for the month by the consortium is

1. $200,000.
2. $190,000.
3. $170,000.
4. $160,000.

9. Lapis Lazuli Hospital estimates that, based on past experience, it will incur $5 million in malpractice claims as a result of services rendered in the current period. The hospital carries a malpractice insurance policy with a yearly $2 million deductible clause. The amount that should appear on its year-end financial statement as Claims Expense (Loss) should be

a) $0.

b) $2 million.

c) $3 million.

d) $5 million.

10. Sapphire Hospital carried a 2-year malpractice insurance policy that allows for retroactive premium adjustments based on experience (claims actually incurred). The basic premium is $300,000, payable in advance. At the end of the first year the hospital estimates that it will have to pay an additional $80,000 in premiums as a result of claims filed in the current year and it estimates that it will incur additional premiums in the second year of $100,000 as a result of claims filed in the second year. The amount of insurance expense that should appear on the financial statements at the end of the first year should be

a) $150,000.

b) $230,000.

c) $300,000.

d) $480,000.

11. Sponsors of not-for-profit health care organizations generally include:

1. Universities
2. Community Organizations
3. Religious Organizations
4. Any of the above

12. The specialized health care facility, Moonstone Health, normally purchases its medicines. However, this month a wealthy philanthropist donates the medicines. The donated medicines should be recorded at fair market value and should be credited to:

1. Deferred revenue
2. Nonrestricted net assets
3. Non-operating gains
4. Other revenues

13. The Chickadee Bank is holding a $750,000 donation in an independent permanent trust with the investment income dedicated for use by Citrine Hospital for operating purposes.
The $750,000 principal should be:

1. Disclosed in notes to the financial statements of the hospital
2. Reported as a permanently restricted net asset of the hospital
3. Reported as non-operating revenue of the hospital
4. Reported as an asset limited as to use by the hospital

14. Which of the following would normally be considered ongoing or central transactions for a not-for-profit hospital?

1. Recovery room fees for surgical patients
2. Room and board fees from patients
3. Both of the above
4. Neither of the above

15. The Garnet community hospital of Blossom normally includes proceeds from sales of meals in its cafeteria as

1. Ancillary service revenues
2. Other revenues
3. Deductions from dietary meal service expenses
4. Patient service revenues

16. In accounting for health care organizations, restricted net assets are:

1. Not available for current operating use; however, the income generated is available for current operating use.
2. Not available unless the directors remove the restrictions.
3. Restricted as to use only for board-designated purposes.
4. Restricted as to use by the donor, grantor, or other source of the resources.

17. In the process of general purpose external financial reporting, a health care organization is required to present

1. A separate statement of changes in equity, net assets, or fund balances
2. A statement of activities or operations
3. Performance indicators (required only of for-profit entities)
4. Fund group information (required only of not-for-profit organizations)

18. Hospital revenue usually includes which of the following?

Revenue from

Educational Programs Nonrestricted Gifts

1. Yes Yes
2. No No
3. Yes No
4. No Yes

19. The Aquamarine Clinic, a well-established health care organization, received a $1,500,000 pledge in fiscal year 2024 that was restricted to cover operating expenses. The gift was received over two years; $600,000 in the first year and $900,000 in the second year. The following table reflects the funds received as well as the amounts spent on operating the clinic.

Fiscal Year Ended

June 30, 2024 June 30, 2025

Gifts received $600,000 $ 900,000

Clinic operating expenses $ 40,000 $1,020,000

What should the clinic report as Net Assets Released from Restrictions on the statement of activities for the fiscal year ended June 30, 2025?

a) $900,000

b) $960,000

c) $1,020,000

d) $1,500,000

20. During the current year, Amber Welfare, a voluntary health and welfare organization receives $800,000 in nonrestricted pledges. Of this amount, $300,000 has been designated by donors for use next year to support operations in the pharmacy. If 20 percent of the nonrestricted pledges are expected to be uncollectible, what amount of nonrestricted support should the organizations recognize in its current-year financial statements?

a) $800,000

b) $700,000

c) $500,000

d) $400,000

21. Daniel, an auditor, is performing a routine review of a not-for-profit hospital and notes the following account balances in the statement of activities for the fiscal year ending September 30, 2023:

Gross patient service revenue from all $4,450,000

services at the hospital’s established

billing rate

Bad debts expense $ 90,000

Contractual adjustments $ 420,000

What amount should the hospital report as net patient service revenue in its statement of activities for the fiscal year ending September 30, 2023?

a) $4,080,000

b) $4,140,000

c) $4,030,000

d) $4,410,000

22. Based upon St. Taxman Hospital’s established billing rate structure, the hospital would have earned patient service revenue of $5,100,000 for the year. However, the hospital does not expect to collect this amount because of charity care provided in the amount of $600,000 and contractual allowances to third-party payers of $450,000. How much should the hospital record as patient service revenue for the year?

1. $5,100,000
2. $4,650,000
3. $4,500,000
4. $4,050,000

23. The Rose Quartz Healthcare Foundation donated 1,800,000 as a permanent endowment to a senior citizen health and welfare organization during the year. The foundation stipulated that the income and investment appreciation be used to maintain its preventive care center for the elderly. The endowment principal had an investment appreciation of $120,000 and investment income of $160,000. The organization spent $140,000 to maintain its preventive care center during the year. What is the amount of change in nonrestricted net assets that the organization should report?

a) $140,000

b) $160,000

c) $280,000

d) $1,940,000

24. A not-for-profit hospital, Spinel Hospital, signs a contract with an insurance company in which the company agrees to pay the hospital $9 million in capitation fees for the year July 1, 2023, through June 30, 2024. Between July 1, 2023 and December 31, 2023, the hospital provides services that, at its standard rates, would bill at $5.1 million. Between January 1, 2023, and June 30, 2024, it provides services that it would bill at $4.2 million. For the year ending December 31, 2023, the hospital should recognize capitation revenue of

1. $0
2. $4.5 million
3. $5.1 million
4. $9 million

25. During a particular year, Morganite Hospital, a not-for-profit hospital, provides services that at standard rates would be billed at $400 million. This amount includes $20 million of charity care. Of the remaining $380 million, the hospital estimates that $240 million will be billed to third-party providers which, per contractual agreements, will pay only 75 percent of the standard rate (i.e., $180 million). Of the $140 million to be billed to individuals, the hospital estimates that $80 million will have to be written off as bad debts. The hospital should recognized net patient care revenue of

a) $240 million

b) $320 million

c) $380 million

d) $400 million

26. A “term endowment” is a gift with donor specifications whereby

a) The principal is available for expenditure after a specific period of time.

b) The principal must be returned to the donor after a specific period of time.

c) The income generated must be added to the principal after a specific period of time.

d) The income generated must be expended within a specified period of time.

27. Nonrestricted revenues of a not-for-profit health care organization generally are subdivided into “patient care revenue” and “other revenue.” Which of the following revenues would not be considered patient care revenue?

a) Fees for providing medical records.

b) Charges for room and board.

c) Charges for operating room services.

d) Laboratory and pharmacy fees.

28. At the time a not-for-profit receives a noncash contribution, revenues should be recognized using which of the following methods to determine value for recognition purposes?

1. Historical value such as amount paid by the donor or industry averages
2. Fair Market Value
3. Value prescribed by the donor in the documentation for the transfer
4. Noncash contributions are not recognized as revenues

PROBLEMS (CHAPTER 14)

1. St. Anna’s Hospital is a private not-for-profit entity that provides health care services to citizens of the small rural community in which the hospital is located. The most recent construction at the hospital was financed using Opal funds. During the current month, St. Anna’s engaged in the following transactions.

REQUIRED:

Make the appropriate journal entries for St. Anna's for the current month.

a. Based on the hospital’s established billing rate, services rendered to patients amounted to $1.5 million. Of this amount $1,000,000 will be billed to Delta Medical Group; a third-party payor that insures many state employees; $190,000 will be billed to uninsured patients; $250,000 is provided to indigents and will be considered charity care; and $60,000 was for services rendered to hospital employees.

1. Delta Medical Group pays for services rendered to its insurees on a rate schedule based on types of procedures rendered. For the services rendered during the current month to Delta insurees, Delta will reimburse the hospital $975,000. Part of the agreement between St. Anna’s and Delta is that Delta insurees will not be billed for the difference between the amount that the hospital bills and the amount that Delta pays.

c. Based on prior experience with uninsured patients, the Hospital estimates that $75,000 of the $190,000 will be uncollectible.

d. The hospital provides a 50 percent discount for services rendered to its employees.

e. The hospital recognizes the value of charity services rendered.

f. The hospital is the defendant in a malpractice suit. Attorneys for the hospital are reasonably sure the hospital will be found liable and that the best estimate of the amount of the loss is $1,500,000. The hospital carries medical malpractice insurance with a $500,000 deductible clause.

1. The hospital has numerous capital assets on its books. Straight-line depreciation on the assets is $150,000 for the current period.
2. The Topaz not-for-profit residential assisted-living center engaged in the following transactions during the year.

REQUIRED:

Prepare appropriate journal entries.

a. The center billed residents for $4,100,000. Of this amount it estimates that $2,000,000 will be paid by third-party providers at a rate of only 80 percent. Of the remaining balance, it estimates that 2 percent will be uncollectible.

b. The center collected $3,400,000.

c. The center received a cash contribution of $70,000 to be used exclusively for residents’ educational and cultural programs. Of this amount, the center spent $55,000 on qualified activities during the year.

d. The center earned interest and dividends of $25,000 (cash) on its endowment of $500,000. Income from the endowment is nonrestricted. However, it is the policy of the center’s board of trustees that only income greater than 2 percent of the principal balance will be available for expenditures. The balance will be retained in the endowment to compensate for inflation. Thus, only $15,000 of the income was made available for expenditure.

e. The market value of the endowment’s investments increased by $10,000.

f. The center recognized $170,000 of depreciation on the building and $55,000 on equipment.

g. The center incurred other operating expenses of $3,500,000, of which $3,300,000 was paid in cash.

h. At year-end the center received a pledge of $4,200,000 toward the center’s new building campaign. It will be paid at the rate of $1,400,000 at the end of each of the following three years. The center uses a discount rate of 3 percent to value noncurrent pledges. Based on that rate, the present value of the annuity is $3,960,040.

3. Prepare journal entries for the following transactions of St. Clarabella’s Hospital, a not-for-profit health care entity.

a. St. Clarabella’s hospital billed the state Medicaid program $550,000 for services provided at its standard billing rate. The prospective payment system gives Medicaid a 38 percent discount from these rates.

b. The hospital has an arrangement with an HMO to provide hospital care to the HMO’s members at a specific rate per member, per month. In April the HMO paid the hospital $640,000 per agreement for patients treated in March. Based on pre-established billing rates, the hospital would have billed the HMO $735,000.

1. The hospital provided services to patients under “charity care” which amounted to $1,915,000 for the year.

d. At its standard billing rates St. Clarabella’s hospital provided services to Lowen, Inc., a third-party payor, for $3,580,000. The retrospective billing arrangement with Lowen, Inc. stipulates that the hospital would receive payment at an interim rate of 85 percent of its established rates, subject to retrospective adjustment based upon agreed-upon allowable costs. By the end of the fiscal year, Lowen, Inc. had paid all the billings. Before issuing its financial statements, the hospital estimated that it would need to refund $290,000 to Lowen, Inc., based on allowable costs.

ANSWERS TO PROBLEMS (CHAPTER 14)

Problem 1

a. Accounts receivable $1,250,000

Patient service revenues $1,250,000

b. Patient service revenues—contractual adjustments $ 25,000

Accounts receivable--allowance

for contractual adjustments $ 25,000

c. Bad debts expense $ 75,000

Allowance for bad debts $ 75,000

d. Patient service revenue—discounts $ 30,000

Accounts receivable--allowance

for employee discounts $ 30,000

e. No entry required. Note disclosure is required. The appropriate note disclosure explains the charity policies and reports the total value of the care provided.

f. Claims expense $ 500,000

Claims liability $ 500,000

• • • • 1. Depreciation expense $ 150,000

Accumulated depreciation $ 150,000

Problem 2

a. Patient billings

Accounts receivable $4,100,000

Bad debts expense 42,000

Allowance for contractual discounts $ 400,000

Allowance for bad debts 42,000

Resident services revenues 3,700,000

To record resident services revenues, contractual discount (20 percent of $2,000,000) and bad debts (2 percent of $2,100,000) (in a nonrestricted fund)

b. Collections

Cash $3,400,000

Accounts receivables $3,400,000

To record collections (in a nonrestricted fund)

c. Contributions

Cash $ 55,000

Contribution revenue $ 55,000

To record contribution revenue (in a nonrestricted fund) (The portion of the contribution that was spent in the same year as it was received may be recorded as nonrestricted revenue.)

Educational and cultural expenses $ 55,000

Cash $ 55,000

To record expenses (in a nonrestricted fund)

Cash $ 15,000

Contribution revenues $ 15,000

To record the remaining balance of the contribution (in a donor restricted fund).

d. Endowment earnings

Cash $ 25,000

Investment income $ 25,000

To record investment income (in a nonrestricted fund). The entire amount is nonrestricted in as much as the spending restriction was imposed by the board, rather than by outside donors.

e. Increase in market value of investments

Investments $ 10,000

Investment income $ 10,000

To record the increase in market value of investments (in a nonrestricted fund). As indicated in the problem, income from endowments is nonrestricted.

f. Depreciation

Depreciation expense $ 225,000

Accumulated depreciation — building $ 170,000

Accumulated depreciation — equipment $ 55,000

To record depreciation expense (in a nonrestricted fund)

g. Others operating expenses

Operating expenses $3,500,000

Cash $3,300,000

Accounts payable $ 200,000

To record the other operating expenses (in a nonrestricted fund)

.

h. Building fund pledge

Pledges receivable $3,960,040

Contribution revenues $3,960,040

Problem 3

a. Patient billings

Patient accounts receivable $ 550,000

Revenues from patient services-estimated

contractual adjustments 209,000

Patient accounts receivables- allowance for contractual discounts $ 209,000

Patients revenues 550,000

To patient revenues, and contractual discounts (38% of $550,000)

b. Capitation payments

Cash $ 640,000

Revenues from capitation fees $ 640,000

To recognize revenue from capitation fees

c. Charity care — No entry necessary; should not be recognized as revenue.

1. Billing and retrospective adjustment

Patient accounts receivable $3,580,000

Revenue from patient services—estimated

contractual adjustments 537,000

Patient accounts receivable—allowance

for contractual adjustments $ 537,000

Patient services revenues 3,580,000

To recognize billings and estimated contractual adjustments

Cash $3,580,000

Patients accounts receivable $3,580,000

To recognize collections

Patient accounts receivable—allowance

for contractual adjustments $ 290,000

Accounts payable $ 290,000

To recognize refund due to Lowen, Inc.

ESSAYS (CHAPTER 14)

• 1. How do the three major financial statements of a private not-for-profit hospital differ from those of a government hospital?
  2. As the comptroller of a hospital, you were just informed that one of the surgeons failed to remove an instrument from a patient’s innards. The hospital is certain to be sued. How, if at all, should this information affect the hospital’s financial statements?

3. Tourmaline Hospital is a recipient of Turquoise funds and must provide some hospital care for which it will not be compensated. During the current year, the hospital provided $1 million in charity care. Discuss the following questions.

a. What is the current financial reporting requirement for charity care?

b. Do you agree or disagree with the current financial reporting requirement? Why or why not?

c. If you do not agree with the current financial reporting requirement, how do you think charity care should be reported?

d. Alternatively, if you do agree with the current standards, what alternative reporting requirements do you believe would be proposed by those who do not agree with the current standards?

ESSAY ANSWERS (CHAPTER 14)

1. Although not-for-profit and government health care organizations are accounted for similarly, there are significant differences. Not-for-profit hospitals must adhere to the provisions of FASB Statement No. 117 as to the form and content of their financial statements, whereas government hospitals follow GASB standards. Unlike the statement of net position of a government hospital, the statement of net assets of a not-for-profit hospital must display the three categories of donor restrictiveness: nonrestricted, temporarily restricted, and permanently restricted net assets. Changes in these categories, including net assets released from restrictions, must be reported in the statement of net assets or in a separate statement of changes in net assets. A not-for-profit hospital’s statement of cash flows must be divided into three categories of cash inflows and outflows (operations, financing and investing) and can be prepared using either the direct method (recommended by the FASB) or the indirect method. In contrast, GASB standards require the statement of cash flows of a government hospital to be prepared using the direct method and to report four categories of cash inflows and outflows (operations, capital financing, noncapital financing and investing).

2. The hospital must follow the provisions of FASB Statement No. 5 pertaining to contingencies. Therefore, it should accrue an estimated loss by a charge to operations as soon as both of the following conditions are met:

• It is probable that an asset has been impaired or a liability has been incurred.
• The amount of the loss can be reasonably estimated.

If neither of these conditions is met, but there is at least a reasonable possibility that a loss will be incurred, then the hospital should disclose the nature of the contingency and estimate the possible loss or range of loss, or state that an estimate cannot be made.

3. Current financial reporting standards specify that gross revenue should exclude the value of services performed for charity care. The standards require disclosure of the policies for providing charity care and the amounts provided based on the organization’s rates, costs, or other measures.

[Note: Whether students agree or disagree with the standard will differ.] The arguments against including the value of charity care in gross revenues generally are based on the fact that the amounts will never be recovered and were never intended to be recovered. The arguments for including charity care in gross revenues generally are based on the notion that omission of the amounts understates the value of services performed. Costs incurred related to performing charity care and omission of the related revenues causes the ratios of costs to revenues to be misleading. Students may suggest that a fairer presentation would be to treat charity care in the same manner as bad debts—that is, include within both gross revenues and expenses the value of the charity care performed.