Colleges and Universities Test Bank Answers Chapter 13

Chapter 13

Colleges and Universities

/(CHAPTER 13)

1. Government (public) colleges and universities must adhere to the FASB pronouncements.

2. Private not-for-profit colleges and universities are subject to the same FASB standards, including ASU 2016-14, as other not-for-profit entities.

3. ASU 2016-14 requires that all colleges and universities report both revenues and expenses by function.

4. GASB requires that tuition revenues be reported net of any uncollectible amount.

5. In a public university setting, general administration and sponsored research are examples of revenues classified by source.

6. There is consistency in the classification of operating and non-operating activities on the statement of activities of not-for-profit colleges and university.

7. Investments of a public college must be reported at amortized cost.

8. Tuition revenue should be reported net of tuition discounts and scholarships.

9. In accounting for colleges and universities, related entities should either be disclosed in the Notes to the Financial Statements or reported as component entities, depending on the degree of control and economic interest.

10. Public colleges and universities have the option to report as a single purpose government engaging in business-like activities, including reporting on a full accrual basis.

11. Private colleges and universities should account for all grants on the accrual basis as exchange transactions.

12. Dormitories and bookstores are examples of auxiliary enterprises (business-type activities) engaged in by both private and public universities.

13. When a semester starts and ends in different fiscal years, FASB standards require not-for-profit colleges to apportion tuition and fees between the two years.

14. Private colleges that receive federal grants are required to apply government accounting standards set by the GASB.

15. The single largest source of revenues for not-for-profit universities is tuition and fees.

16. FASB requires that revenue at private not-for-profit colleges and universities be separated into two categories, restricted and non-restricted, as defined by the Board of Regents.

ANSWERS TO /(CHAPTER 13)

1. F
2. T
3. F
4. T
5. F
6. F
7. F
8. T
9. T
10. T
11. F
12. T
13. F
14. F
15. T
16. F

MULTIPLE CHOICE (CHAPTER 13)

1. Financial statements for Smith College, a church-supported college, should be prepared according to standards set by

1. AICPA.
2. FASB.
3. GASB.
4. Smith may choose any of the above.

2. For a not-for-profit college or university, which of the following categories of net assets is NOT appropriate in its external financial statements?

• 1. Restricted net assets.
  2. Temporarily restricted net assets.
  3. Unrestricted net assets.
  4. All of the above are appropriate.

3. Landon College, a private college, received a $1 million donation. The donor specified that the principal of her gift could never be used for program activities, but the earnings on the principal must be used to provide scholarships to academically qualified students in the business school. The $1 million gift would increase which of the following categories of net assets?

1. Restricted net assets.
2. Unrestricted net assets.
3. None of the above.
4. Both of the above.
5. During the current year, Luis University received a $50,000 that specified that it must be used to pay travel costs for faculty to attend health care conferences in foreign countries. During the year the university spent $8,000 to support travel to a health care conference in Italy. How much revenue is recognized this year?
6. $0
7. $8,000
8. $42,000
9. $50,000.

Use the following information for Questions 5 and 6.

Lane College Foundation is governed by a board, some members of which are appointed by the president of Lane College and some of which are elected by the alumni. The foundation was created to solicit and accept donations on behalf of Lane College, a private not-for-profit college. Lane College and its foundation are deemed to be financially interrelated. All funds collected by the foundation must be used to support activities of Lane College. The foundation board can select which activities of Lane College it supports. Lane Foundation received a $1 million bequest from the estate of a 1940 graduate.

5. At the time the foundation receives the donation, the foundation should debit Cash for $1 million and credit what account for $1 million?

1. Unrestricted revenue.
2. Restricted revenue.
3. Liability.
4. No entry should be made by the foundation.

6. At the time the foundation receives the donation, Lane College should debit Asset $1 million and credit what account for $1 million?

• 1. Unrestricted revenue.
  2. Donor restricted revenue.
  3. Liability.
  4. No entry should be made by Lane College.

7. Bristol Public School Foundation had available of donor restricted funds in excess of $200,000. The donor stipulates that the principle can be invested conservatively and cannot be spent. Income derived from the funds can be used for projects approved by the foundation board. The foundation decided to invest this money temporarily until it needs the funds for the restricted purpose. The donors had made no specific stipulations regarding investment earnings but the foundation board had voted to use the earnings on the projects for which the gift had originally been restricted. At year-end, the securities had a fair value of $200,500. The appropriate way to recognize the change in fair value is

1. Debit Investment $500; Credit Unrestricted revenue $500.
2. Debit Investment $500; Credit Grant revenue $500.
3. Debit Investment $500; Credit Testricted revenue $500.
4. No entry should be made until the securities are sold.

8. An accountant has encountered a perplexing financial reporting issue related to the private college for which he is preparing financial statements. The issue is not specifically addressed by FASB Statements. To what standards would the accountant first look for guidance?

1. GASB Statements.
2. AICPA accounting and auditing guide, Not-for-Profit Organizations.
3. AICPA accounting and auditing guide, Audits of Colleges and Universities and/or AICPA SOP 74-8, Financial Accounting and Financial Reporting by Colleges and Universities.
4. College textbooks.

9. Current operating expenses of a public college may be classified by which of the following?

1. Object classes
2. Organizational Units
3. Program functions
4. All of the above

10. Which of the following criteria must be met for a public university to report affiliated organizations as component units?

I. The university is entitled to access the resources

II. The economic resources are significant to the component

III. The economic resources received or held are almost entirely for the direct benefit of the university

1. I only
2. III only
3. I and III
4. All three criteria

11. Although it no longer is required for external financial reporting, the AICPA’s 1973 Audits of Colleges and Universities provides for which of the following in its guidance on fund structure?

1. Plant funds
2. Loan funds
3. Annuity funds
4. All of the above

12. In June 2018, a public university bills and collects $45 million in tuition for the summer semester that runs from June 1 through July 15. In addition, in May and June it bills $300 million for the fall semester that runs from September 1 through December 15. Of this amount it collects only $120 million (expecting to collect the balance prior to September 1). In its statement of revenues, expenses, and changes in net position for the fiscal year ending June 30, 2018 it should recognize as tuition revenue

a) $30 million

b) $45 million

c) $150 million

d) $165 million

13. A not-for-profit university operates its college book-store as an auxiliary enterprise. During the year the store has revenues of $30 million and expenses of $27 million. In its statement of activities the university should report

a) Operating revenues of $3 million

b) Operating revenues of $30 million

c) Nonoperating revenues of $3 million

d) Nonoperating revenues of $30 million

14. In 2017, a public university was awarded a federal reimbursement grant of $18 million to carry out research. Of this, $12 million was intended to cover direct costs and $6 million to cover overhead. In a particular year, the university incurred $4 million in allowable direct costs and received $3.4 million from the federal government. It expected to incur the remaining costs and collect the remaining balance in 2018. For 2017 it should recognize revenues from the grant of

a) $3.4 million

b) $4.0 million

c) $6.0 million

d) $18.0 million

15. A not-for-profit university maintained as endowment of $800,000, the income of which was restricted for an annual conference on international relations. In a particular year, the market value of the endowment increased by $80,000. The university held a conference on international relations at a cost of $86,000. The university should report

a) No revenue and unrestricted expenses of $86,000

b) Unrestricted revenues of $80,000 and unrestricted expenses of $86,000

c) Donor restricted revenues of $80,000, unrestricted expenses of $80,000 and donor restricted expenses of $6,000

d) Restricted revenues of $80,000 and unrestricted expenses of $86,000

16. A public university had tuition and fees for the year ended June 30, 2015, in the amount of $27,000,000. Scholarships, for which no services were required, amounted to $2,100,000. Graduate assistantships, for which services were required, amounted to $1,950,000. The amount to be reported by the university as net tuition and fee revenue would be

a) $27,000,000

b) $25,050,000

c) $24,900,000

d) $22,950,000

1. During the year, Dakota University’s board of trustees established a $500,000 fund to be retained and invested for scholarship grants. The fund earned $30,000, which had not been distributed by December 31. What amount should Dakota report in a board-designated (quasi) endowment fund’s net position at December 31?

a) $0

b) $30,000

c) $500,000

d) $530,000

1. During the year, Goodman College received the following:
   • An unrestricted $280,000 pledge to be paid the following year
   • A $140,000 cash gift restricted for study-abroad scholarships
   • A notice from a recent business school graduate that he has named the college as a beneficiary of $60,000 in his will

What amount of contribution revenue should Goodman College report in its statement of activities?

a) $140,000

b) $200,000

c) $420,000

d) $480,000

1. In the current year, Generous University awarded scholarships to graduate students in the amount of $5,000,000. The recipients are not required to provide any services in return for the scholarships. How should the university record the award?

a) Scholarship expense $5,000,000

Accounts payable $5,000,000

b) Tuition deductions—unrestricted

student aid $5,000,000

Accounts receivable $5,000,000

c) Scholarship expense $5,000,000

Accounts receivable $5,000,000

d) Tuition deductions—unrestricted

student aid $5,000,000

Accounts payable $5,000,000

1. Declines in the stock market can affect the fiscal health of colleges and universities. Which of the following is the least likely reason for that?

a) Reduction in endowment income.

b) Decrease in demand for university scholarship funds.

c) Reduced ability of parents and students to pay tuition.

d) Decrease in donors’ willingness and ability to make contributions.

PROBLEMS (CHAPTER 13)

• 1. Roberta College is a not-for-profit entity.

REQUIRED:

Record the following transactions for the fiscal year ended June 30, 2017.

That year…

a. Tuition revenue for the fall semester 2016 (August - December) was $4 million; tuition for the Spring semester 2017 (January - May) was $3.8 million; tuition for the summer semester 2017 (June 1-August 15) was $2 million. All tuition was received in cash.

b. Faculty salaries for the fall semester were $3 million; for the spring semester, $2.9 million; and for the summer semester, $0.6 million. All salaries are paid at the end of the month earned. Salaries earned in summer are June $0.3 million, July $0.2 million, and August $0.1 million.

c. During June, $3.2 million of tuition applicable to the fall 2017 semester was received in cash.

d. During the year a wealthy benefactor pledged $1 million to the university for the fund-raising campaign to renovate the oldest building on the campus. The benefactor will deliver the cash when renovation is substantially complete.

e. Fixed assets of the university have a historical cost of $120 million, an estimated salvage value of $20 million, and an estimated useful life of 40 years.

f. During the year the university’s college of business received notice of a $100,000 grant from the federal government to conduct a research project on the effect of different budgeting techniques on the performance of government employees. During the year the university spent $8,000 on printing questionnaires and $12,000 on faculty salaries for activities directly related to the grant. By year-end the university had not received any cash from the federal government.

2. In January 2016, the Free Cancer Foundation accepted an endowment of $500,000, the income from which is restricted to promoting research related to recovery from cancer. All gains, whether realized or unrealized are available for distribution. During 2016 the market value of endowment's investment portfolio increased to $520,000. Accordingly, at year-end $20,000 was credited to a unrestricted expendable fund. During 2017 the market value of the portfolio decreased to $480,000 and the foundation spent $12,000 on qualifying projects.

Owing to these events and transactions, compute:

REQUIRED:

What should be the reported net asset balance of the following categories during 2017 (assuming a zero beginning balance in unrestricted net assets):

1. Donor restricted
2. Unrestricted

1. Betterman College, a not-for-profit institution, engaged in the following transactions during its fiscal year ending June 30, 2017.

REQUIRED:

Prepare appropriate journal entries, indicating the types of funds (by restrictiveness) in which they would be recorded.

• • 1. The college collected $64,800,000 in student tuition. Of this amount $4,500,000 was applicable to the summer semester, which ran from June 1 to August 30, and $300,000 was applicable to the fall semester that began the following September.
    2. The college received a contribution of $2,000,000 in stocks and bonds to establish an endowed chair in chemistry. Income from the chair must be used to supplement the salary of a professor of chemistry.
    3. During the year, the chemistry chair endowment earned interest and dividends of $70,000, all of which was used to supplement the salary of the chair holder.
    4. The market value of the investments of the chemistry chair endowment declined by $60,000.
    5. Using funds restricted for this purpose, the college purchased $300,000 of equipment for intercollegiate athletics. Intercollegiate athletics is accounted for as an auxiliary enterprise. The college charged depreciation of $60,000.
    6. The annual alumni campaign yielded $2,800,000 in pledges. The college estimated that 2 percent would be uncollectible. During the year the college collected $2,400,000 on the pledges.

1. In January 2017, Granite Hills State University received a $500,000 government grant to be used to finance a study to determine the effects of the federal stimulus bill on the regional economy. During 2017, expenditures of $125,000 were incurred and paid on the research project.

REQUIRED:

1. Record these transactions in the accounts of Granite Hills State University, and explain how the effects of the transactions should be reported in the college’s financial statements.

2. Repeat requirement (1) under the assumption that the grant was to finance plant expansion.

ANSWERS TO PROBLEMS (CHAPTER 13)

Problem 1

a) Cash $9.8 million

Revenue $7.8 million

Deferred revenue $2.0 million

b) Salaries expense $5.9 million

Prepaid salaries $0.3 million

Cash 6.2 million

c) Cash $3.2 million

Deferred revenue $3.2 million

d) A pledge may be recorded when pledged or when received, depending on the circumstances. This appears to be a conditional pledge and should not be recorded until the specified conditions are met.

e) Depreciation expense $ 2,500,000

Accumulated depreciation $ 2,500,000

f) Printing expense $ 8,000

Salaries expense 12,000

Cash $ 20,000

Due from federal government $100,000

Restricted revenue $ 80,000

Revenue 20,000

Problem 2

• • 1. Permanently restricted

$500,000

• • 1. Unrestricted

$20,000 - $12,000 - $40,000 = ($32,000)

Problem 3

1. Tuition

Cash $64,800,000

Tuition revenue $61,500,000

Deferred tuition revenue 3,300,000

To record tuition revenue for fiscal 2017 (in an unrestricted fund). Deferred revenue includes 2/3 of the $4,500,000 ($3,000,000) in summer school tuition and $300,000 of fall tuition.

2. Endowment gift

Investments $ 2,000,000

Investment revenue $ 2,000,000

To record an endowment gift (in a restricted fund)

3. Endowment income and dividends

Cash $ 70,000

Investment earnings $ 70,000

To record the endowment dividends and interest, which are restricted for support of a chair in chemistry (in an unrestricted fund, since the funds were spent in the year earned)

Instructional expenses (faculty salaries) $ 70,000

Cash $ 70,000

To record the expenditure of the endowment earnings (in an unrestricted fund)

4. Endowment loss

Due from unrestricted fund $ 60,000

Investments $ 60,000

To record the decline in market value of the chemistry chair endowment investment (in a restricted fund)

Loss on endowment investments $ 60,000

Due to endowment (permanently restricted) fund $ 60,000

To charge the endowment loss to an unrestricted fund

Endowment contribution

Loss on endowment investments $ 60,000

Due to endowment fund $ 60,000

To charge the endowment loss to an unrestricted fund

5. Acquisition of equipment and depreciation

Equipment $ 300,000

Net assets released from restriction $ 300,000

To record the purchase of equipment

Net assets released from restriction $ 300,000

Cash $ 300,000

To record the outlay of cash and release of resources

Depreciation expense $ 60,000

Equipment — accumulated depreciation $ 60,000

To record the depreciation

6. Contributions

Cash $ 2,400,000

Contribution revenue $ 2,400,000

To record the contribution collected during the year

Pledges receivable $ 400,000

Pledges receivable — allowance for uncollectibles $ 56,000

Contribution revenue 344,000

To record the contributions expected to be collected in the future

Problem 4

1.

January 2017

Cash-restricted for specific programs $ 500,000

Deferred revenues — federally sponsored research $ 500,000

To record receipt of restricted research grant

During 2017

Expenses — educational and grant $ 125,000

Cash — restricted for specific programs $ 125,000

To record expenses

Deferred revenues — federally sponsored research $ 125,000

Revenues — federal grants $ 125,000

To record nonoperating revenues upon incurring costs that satisfy the reimbursement eligibility requirements

2.

January 2017

Cash — plant expansion $ 500,000

Deferred revenues — capital contributions $ 500,000

To record capital grant received

During 2017

Construction in progress $ 125,000

Cash — plant expansion $ 125,000

To record construction costs incurred

Deferred revenues — capital contributions $ 125,000

Revenues — capital contributions $ 125,000

To record revenues from grants upon incurrence of qualifying costs

ESSAYS (CHAPTER 13)

• 1. Austin Community College, a public institution, issues stand-alone financial statements. Although the college maintains its accounts on a fund basis, it does not include a combined fund statement of net position or statement of revenues, expenses, and changes in net position in its financial statements. Can such a practice be consistent with generally accepted accounting principles? Explain, citing specific GASB provisions or pronouncements.
  2. What are the key reporting options available to public colleges and universities?
  3. How do the three major financial statements of a public college or university differ from those of a private not-for-profit college or university?

4. In what ways can declines in the stock market affect the fiscal health of colleges and universities?

ESSAY ANSWERS (CHAPTER 13)

1. Yes. Under GASB Statement No. 34, the college can report as a special-purpose entity engaged only in business-type activities. In that case, it need not present fund statements. It should present a statement of net position; a statement of revenues, expenses, and changes in net position; and a statement of cash flows for the college.

2. Public colleges and universities may elect to report as special-purpose entities engaging (1) only in business-type activities, (2) only in governmental activities, or (3) in both. If they elect to report as a government engaging in both business-type and governmental activities, they will have to present the full range of fund and government-wide statements. If they elect to report as a special-purpose government engaging only in governmental activities they also need to present both fund and government-wide statements, but can combine the two. If they elect to report as a government engaging only in business-type activities — as most public colleges and universities do — then they need to present a statement of net position; statement of revenues, expenses, and changes in net position; and a statement of cash flows, all on the full accrual basis of accounting.

3. The FASB’s requirements for a private college or university are similar to those of the GASB for a public college or university engaged only in business-type activities. That is, both types of entities must present a statement of net assets (or net position for public institutions); a statement of revenues, expenses, and changes in net assets (or net position for public institutions); and a statement of cash flows, all on the accrual basis of accounting. The FASB (but not the GASB) requires net assets to be reported in two categories: unrestricted and donor restricted restricted. The FASB requires the statement of cash flows to present three categories: operating, financing, and investing. The FASB encourages use of the direct method, but the indirect method is acceptable. The GASB requires use of the direct method and presentation of information in four categories: operating, non-capital financing, capital financing, and investing.

4. Declines in the stock market can affect the fiscal health of both public and private colleges in several ways.

• Decreases in endowment fund income and other investment income, which often are significant sources of resources for funding programs, research, and scholarships.
• Less ability and willingness by donors to make contributions.
• Greater difficulty on the part of parents and students in meeting tuition and fees,
• Greater demand for scholarships and other tuition assistance.
• Greater reluctance on the part of legislators to increase or even maintain the level of state appropriations and grants.
• Tighter budgets may reduce federal and corporate research grants.