Test Questions & Answers Not-For-Profit Organizations Ch.12

Chapter 12

Not-for-Profit Organizations

/(CHAPTER 12)

1. FASB Statement No. 117 directs that revenues and expenses be reported in a statement of financial position.

2. In the statement of activities, FASB ASU 2022-14 requires net assets to be classified in one of the two categories of net assets – net assets without donor restrictions and net assets with donor restrictions.

3. Donor restrictions are only recognized when there is a specific purpose for the donated resources.

4. FASB Statement No. 95 requires not-for-profits to use the direct method in their statements of cash flows.

5. In accounting for investments, not-for-profits, like businesses, must report their investments at fair value and classify the investments as trading, or available-for-sale, or held-to-maturity.

6. FASB Statement No. 93 makes the recognition of depreciation on plant and equipment assets optional at the discretion of the not-for-profit.

7. Temporarily restricted funds related to plant and equipment generally account only for resources restricted to their purchase or construction, not for the plant and equipment itself, which are typically reported in the unrestricted fund.

8. All not-for-profit organizations, including city-owned museums and two-year community colleges, must adhere to FASB accounting and financial reporting standards.

9. Expenses should be classified as with or without restrictions, consistent with the classification of the resources used to finance them.

10. Not-for-profits should not recognize revenue related to contribution of an art collection, unless they elect to capitalize the collection.

11. Not-for-profits generally should not recognize as revenues contributions that they have agreed to pass along to other specific beneficiaries.

12. The primary source of authoritative accounting and financial reporting guidance for a private college is the AICPA.

13. Whether a not-for-profit’s resources are classified as restricted or unrestricted depends on the presence or absence of donor stipulations.

14. Traditional financial ratios, such as measures of liquidity and debt burden, are seldom useful for assessing the fiscal health of not-for-profits.

15. The focus on donor-mandated restrictions imposes special responsibilities on management to utilize the funds as the donor requested.

16. Assets without donor restrictions cannot be restricted, including by the governing board or other outside parties

17. Exchange transactions between an individual and a not-for-profit organization are considered to be with donor restrictions for presentation on the financial statements of a not-for-profit organization.

ANSWERS TO /(CHAPTER 12)

MULTIPLE CHOICE (CHAPTER 12)

1. The basis of accounting used by not-for-profit organizations in their external financial reports is
   1. Industry-specific basis of accounting.
   2. Cash basis of accounting.
   3. Modified accrual basis of accounting.
   4. Accrual basis of accounting.
2. The FASB requires the balance sheets of not-for-profits to display
3. Net assets in two separate categories—donor-imposed restrictions and unrestricted.
4. Four separate funds—unrestricted, partially restricted, temporarily restricted, and permanently restricted net assets.
5. Six totals—total assets, total liabilities, total net assets, total unrestricted net assets, total temporarily restricted net assets, and total permanently restricted net assets.
6. Unrestricted and restricted retained earnings.
7. The FASB requires external financial reports to provide information about
   1. Donor-imposed restrictions on resources.
   2. All restrictions on resources.
   3. Donor and creditor restrictions on resources.
   4. None of the above.
8. Expenses incurred by not-for-profit organizations should be reported as
   1. Decreases in one of the two categories of net assets.
   2. Decreases in unrestricted net assets.
   3. Decreases in revenue
   4. Decreases in donor restricted net assets.
9. Revenues of a not-for-profit organization should be reported as
   1. Increases in one of the two categories of net assets.
   2. Increases in unrestricted net assets.
   3. Increases in expenses.
   4. Increases in permanently restricted net assets.
10. Gifts restricted by the donor to not-for-profit organizations
    1. Must be recorded in restricted net assets.
    2. Must always be shown as an increase in unrestricted net assets.
    3. May be shown as unrestricted if the board votes to release the restrictions.
    4. May be shown as an increase in unrestricted net assets at the discretion of management.

1. What is the strictest condition that must be met before recognizing revenue from a donor with restrictions?
2. Signing the contract with the donor
3. Satisfy all performance obligations
4. Receipt of cash from donor
5. Donations are not recognized as revenue
6. Not-for-profit organizations report their cash flows in which of the following categories?
   1. Operating, noncapital financing, capital financing, investing.
   2. Operating, noncapital financing, investing.
   3. Operating, capital financing, investing.
   4. Operating, financing, investing.
7. Not-for-profit organizations should report contributions not restricted to long-term purposes in which of the following cash flows categories?
   1. Operating
   2. Financing.
   3. Capital financing.
   4. Investing.
8. Not-for-profit organizations should report interest and dividends earned and restricted for long-term purposes in which of the following cash flows categories?
   1. Operating
   2. Financing.
   3. Capital financing.
   4. Investing.
9. Which of the following characteristics most clearly distinguishes an exchange transaction from a contribution?
10. A contribution is always in cash.
11. An exchange transaction is a reciprocal transfer of resources.
12. An exchange transaction is a nonreciprocal transfer of assets.
13. Contributions of assets always have restrictions attached as to their use.
14. Revenue from an exchange transaction may be classified as an increase in which class of net assets?
15. Unrestricted net assets when performance obligation is met.
16. Unrestricted restricted net assets when performance obligation is defined.
17. Restricted net assets.
18. Any of the above.
19. During the annual fund-raising drive, the Better Health Society raised $900,000 in pledges of financial support for general operations. By fiscal year-end, the society had collected $600,000 of the pledges. The society estimates that 10% of the remaining pledges will be uncollectible. The NET amount of revenue the society should recognize during the current year from this pledge drive is
20. $900,000.
21. $870,000.
22. $810,000.
23. $600,000.
24. Together Communities Charities’ annual fund-raising drive in 2022 raised pledges of $1,200,000 to support general operating activities of which $800,000 were collected in 2022 and $200,000 were collected in 2023. United Charities estimates $150,000 of the remaining pledges will never be collected. The increase in unrestricted net assets in 2022 as a result of the fund-raising drive is
25. $1,200,000.
26. $1,050,000.
27. $800,000.
28. $250,000.
29. In a prior year, Together Communities Charities received a $125,000 gift to be used to acquire vans to provide transportation for physically challenged adults. During the current year, United acquired two vans at a cost of $75,000 each. The appropriate entry(ies) to record the acquisition is

a) UNRESTRICTED FUND

Resources released from restriction $125,000

Cash $125,000

RESTRICTED FUND

Fixed assets $150,000

Cash $ 25,000

Resources released from restriction $125,000

b) RESTRICTED FUND

Resources released from restriction $ 125,000

Cash $125,000

UNRESTRICTED FUND

Fixed assets $150,000

Resources released from restriction $125,000

Cash $ 25,000

c) UNRESTRICTED FUND

Fixed assets $150,000

Cash $150,000

d) RESTRICTED FUND

Fixed assets $150,000

Cash $150,000

1. In the current year National Pet Charities, which uses fund-type accounting to maintain its books and records, received a $30,000 contribution to help educate people on responsible pet ownership. During the current year, the entry to record this donation is
   1. UNRESTRICTED FUND. No entry.

RESTRICTED FUND. Debit Cash $30,000; Credit Revenues $30,000.

• 1. UNRESTRICTED FUND. No entry.

RESTRICTED FUND. Debit Cash $30,000; Credit Net assets $30,000.

• 1. UNRESTICTED FUND. Debit Cash $30,000; Credit Revenues $30,000.

RESTRICTED FUND. No entry.

• 1. UNRESTRICTED FUND. Debit Cash $30,000; Credit Net assets $30,000.

RESTRICTED FUND. No entry.

1. Eleanor Rigby’s Extended Care Center, a not-for-profit entity, enjoys the services of a group of high-school-age people who each agree to work three afternoons a week for three hours each afternoon performing a variety of patient-related services, such as writing letters for those who are unable to do so, delivering mail to the patient rooms, and pushing wheel-chair patients across the grounds. The services rendered by these young people enhance the quality of life for the residents. They could not be provided if they were not donated because there are not enough resources to do so. The past year the young people donated 5,000 hours in total. The services would have cost $6.00 per hour if they had been purchased but they were worth $10 an hour to Eleanor Rigby’s. What is the amount of contributed revenue that should be recognized by Eleanor Rigby’s related to these services?
2. $50,000.
3. $30,000
4. $0.
5. Cannot determine.
6. Go Sports Games, a not-for-profit entity organized to provide athletic competition opportunities for high school students, utilizes a number of volunteers in carrying out its mission. At the 2023 Games, 50 volunteers provided a total of 1,000 hours of service performing tasks such as picking up litter and delivering water to the athletes. A local CPA firm donates its services to prepare the annual tax return and other federal and state required paperwork which must be filed to maintain its status as a tax-exempt organization. During 2023, the CPA firm provided 50 hours of service. If purchased, the CPA services would have cost $60 per hour and the game workers would have cost $6 per hour. How much contributed service revenue should Simplex Games recognize in 2023?
7. $9,000.
8. $6,000.
9. $3,000.
10. $0.
11. Nectarine County Historical Museum, a not-for-profit entity group that capitalizes its collection items, received a gift of several Civil War artifacts to be used for display and research. The donor found these items while cleaning out the closet of an old house. The fair value is hard to estimate but a dealer in these types of artifacts estimates their value at $2,000. The entry to record this donation is
12. Debit Collection expense, $2,000; Credit Contributions revenue $2,000.
13. Debit Collection items $2,000; Credit Contributions revenue $2,000.
14. No entry is required because the cost to the donor was $0.
15. No entry required because the value of the items is estimated.
16. Neuroptera Art Museum, a not-for-profit group that elects not to capitalize its collection items, purchased for $10,000 a wonderful totem pole for display near the door of the museum. As a result of this transaction, which of the following entries should be made?
17. Debit Collection items $10,000; Credit Cash $10,000.
18. Debit Collection expense $10,000; Credit Cash $10,000.
19. Debit Unrestricted net assets $10,000; Credit Cash $10,000.
20. No entry is required.
21. Odonata Conservatory, a not-for-profit group, held a fund-raising drive to raise money to buy land to provide a habitat for the endangered Sleepy Eagle. A donor pledged $1 million to the project provided that Open Air Conservatory was able to raise an additional $1.5 million from other sources. What entry should Open Air Conservatory make at the time of the $1 million pledge?
22. Debit Pledge receivable $1 million; Credit Unrestricted revenue $1 million.
23. Debit Pledges receivable $1 million; Credit Restricted revenue $1 million.
24. Debit Pledges receivable $1 million; Credit Grant revenue $1 million.
25. No entry is made at the time of the pledge.
26. When should a not-for-profit entity recognize pledge revenue that is contingent upon raising a matching amount?
27. When the pledge is made.
28. When the cash is received.
29. When the matching funds have been raised.
30. When the project is completed.
31. A donor pledges $100,000 to the Stoneflies Foundation to be used only to support the summer not-for-profit Theater—an event that has been held every summer for 38 years. This is an example of a
32. Conditional Contribution.
33. Unconditional contribution.
34. Donor restricted contribution.
35. Unrestricted contribution.
36. Cricket Charities accepted a contribution from a donor and agreed to transfer the assets to Alderflies for Friends, a not-for-profit that provides temporary shelter to the homeless. Cricket Charities should debit cash or other assets and credit
    1. Unrestricted revenue.
    2. Restricted revenue.
    3. Liability to Aid for Friends.
    4. United Charities should not make an entry.
37. Music Lovers Foundation, a not-for-profit governed by an independent board, was founded to support the Northern State University Choir until such time as the state legislature adequately funds the choir. When the choir is adequately funded by appropriation, the Foundation may direct resources to other music projects that it deems acceptable. When Music Lovers accepts a contribution from a donor it should debit cash and/or other assets and credit
    1. Unrestricted revenue.
    2. Temporarily restricted revenue.
    3. Liability.
    4. It should not make an entry.
38. The Save the Animals Foundation received a gift of $500,000 from a donor who wanted the gift used to acquire habitat for endangered snails. The money may be invested but all earnings are restricted to habitat acquisition. During the year the entire gift was invested in corporate securities. At year-end, the securities had a value of $501,000. The appropriate way to recognize the change in fair value is
39. Debit Investments $1,000; Credit Unrestricted revenue $1,000.
40. Debit Investments $1,000; Credit Restricted revenue $1,000.
41. Debit Investments $1,000; Credit Gain Loss adjustent $1,000.
42. No entry should be made until the securities are sold.
43. During the year, a not-for-profit entity received $30,000 in dividends and $24,000 in interest on its investment portfolio. The entity also accrued $6,000 in interest on the portfolio. The increase in fair value of the portfolio during the year was $8,000. How much should the entity report as investment earnings during the year?
44. $62,000.
45. $54,000.
46. $8,000.
47. $0.
48. The Friends of the Library (FOL), a not-for-profit entity, received a gift restricted to the acquisition of a special piece of equipment used to restore books. Late last year FOL acquired the machine at a total cost of $19,000. The machine is estimated to have a useful life of eight years and a salvage value of $3,000. In what fund should FOL make the entry to record the depreciation for the current year?
49. Unrestricted fund.
50. Fiduciary fund.
51. Permanently restricted fund.
52. FOL should not recognize depreciation.
53. Which of the following entities should recognize depreciation expense on its operating statement?
54. Not-for-profit university.
55. Not-for-profit foundation.
56. Not-for-profit hospital.
57. All of the above.
58. A not-for-profit would include which of the following financial statements in its basic financial statements?
59. Statement of financial position and statement of activities.
60. Statement of financial position, statement of activities, and statement of cash flows.
61. Statement of financial position, statement of activities, statement of cash flows, and statement of functional expenses.
62. Statement of financial position, statement of activities, and statement of functional expenses.

Use the following information to answer Questions 31 and 32.

In Year 1, the Expert Gardeners Group receives a $60,000 grant to promote its “Grow-Ur-Own” green vegetables program among Desert City residents. In Year 2, the group spends the grant funds for the stipulated purpose.

1. How should receipt of the grant be recorded?

a) Debit Cash; Credit Revenue from contributions (unrestricted fund)

b) Debit Cash; Credit Revenue from contributions (restricted fund)

c) Debit Cash; Credit Revenue from investments

d) No entry required until the grant funds are spent.

1. How should expenditure of the funds be recorded?

a) Debit program expense; Credit Cash (unrestricted fund).

b) Debit Net assets released from restriction; Credit Cash.

c) Debit Program expense; Credit Net assets released from restriction.

d) Both b) and c).

1. According to AICPA guidance, a not-for-profit organization (X) is required to consolidate a related not-for-profit organization (Y) in its financial statements when

a) The relationship results from a merger of X and Y.

b) X has a controlling financial interest in Y through direct or indirect ownership of a majority voting interest.

c) X can control Y through a contract or affiliation agreement, even though X does not have a majority ownership or voting interest.

d) Any of the above.

1. The Mantids Health Society placed an advertisement in prominent publications in the region. The advertisement provided information about symptoms of the diseases and offered practical advice for controlling their immediate effects. The society’s accountants estimate that about 75 percent of the advertising copy was devoted to information about the disease and the remainder was an appeal for funds. The advertisement cost $20,000. Using the physical units method of separating joint costs, how much of the cost of the advertisement should be reported as program costs?

a) $20,000.

b) $15,000.

c) $10,000.

d) $5,000.

1. “Net assets released from restriction” for a not-for-profit organization is comparable to which of the following for a government?

a) Other financing sources (uses)—Nonreciprocal transfer

b) Expenditures

c) Expenses

d) Unassigned fund balance

1. Liquidity is reported by the not-for-profit with

a) quantitative information about the ability of the not-for-profit to meet obligations

b) an assessment signed by the executive director that the not-for-profit can meet its obligations

c) via a press release

d) measures of liquidity do not have to be reported

1. Which of the following is not a characteristic of a contribution to a not-for-profit according to the FASB’s definition in ASU 2018-08?
2. Deferred
3. Unconditional
4. Voluntary
5. Nonreciprocal
6. Ladybug League, a not-for-profit organization, should not consolidate which of the following related not-for-profit organizations?
7. Caterpillar Coop, a not-for-profit organization, where Ladybug League is a general partner
8. Lacewing Leaders, a not-for-profit organization, where Ladybug League is a limited partners and owns 30% of the shares and has one of the five Board seats
9. Bumble Bee Boys, a not-for-profit organization that Ladybug League contracts with and Ladybug League holds a majority of the Board seats
10. Mayfly Mission, a not-for-profit organization that Ladybug League has ownership of 80% of the shares as a limited partner, but no Board seats

PROBLEMS (CHAPTER 12)

1. Caddisflies Charities, a not-for-profit entity, supports activities for lower-income families. They have regularly engaged in activities such as providing transportation for physically challenged individuals, shelters for the temporarily homeless, group meals for the homeless, and shelters for abused women and children.

REQUIRED:

Record the following transactions. Your entries should clearly indicate the fund in which the entry is made or the class of net assets to which the entry will be closed. If no entry is required, write “No entry required.”

a. Caddisflies Charities engaged in a fund-raising campaign that resulted in pledges of $600,000 to support activities of the current year. During the year, Caddisflies collected $450,000 on these pledges.

b. A local citizen pledged $50,000 to purchase and equip a van to provide transportation for physically challenged individuals. This citizen has donated regularly and there is no reason to believe that this pledge will not be collectible.

c. In prior years, an advocacy group for abused women donated $10,000 to be used to furnish a “safe-house” for abused women and children. During the current year renovation of the safe house was completed and furniture was acquired at a total cost of $25,000.

d. A wealthy benefactor pledged to give $100,000 to Caddisflies if Caddisflies successfully raises a matching amount in a capital asset fund-raising drive being conducted over a 12-month period.

e. Cash of $60,000 is received from a donor who specifies that the money must be spent to provide educational activities for children who will be living in the “safe-house.” It will be next year before the “safe-house” has its first residents.

f. A local attorney has agreed to provide legal services to Caddisflies on a pro bono basis. During the current period the attorney provided services for which she would have billed $1,500.

g. Several older housewives provide services at the Caddisflies Charities group meal facility. The women work in the kitchen serving meals and cleaning up the kitchen. If these services were not donated United would have to purchase them. The cost of the services at the prevailing wage rate for similar employees would be $50,000 for the current year.

1. Fixed assets belonging to Caddisflies Charities had an original cost of $370,000, an estimated salvage value of $70,000, and an estimated useful life of 20 years. Record depreciation if applicable.

i. Cash of $90,000 is received from a donor who specifies that $30,000 is for use by Caddisflies Charities and $60,000 is to be used by Wasp Charities, Caddisflies’s sister organization in Africa.

2. The Heritage Art Museum, a not-for-profit entity specializing in art items created by natives of the Pacific Northwest, has a December 31 fiscal year-end. The museum has a policy of not capitalizing collection items.

REQUIRED:

Your entries should clearly indicate the fund in which the entry is made or to which class of net assets the account would be closed. If no entry is required, write “No entry required.”

a. During the current year the museum received admissions fees of $500,000 in cash.

b. Citizens of the local community are encouraged to participate in a program called “Friends of the Museum.” For a yearly contribution of $25 per family, a family is entitled to free admission to the museum during the calendar year. A “friend of the museum” also receives a monthly one-page newsletter announcing upcoming events. At year-end, there were 1,000 members in “Friends of the Museum.”

c. During the current year the museum incurred salaries expense of $1 million of which $40,000 remains unpaid at year-end.

d. During the year the museum incurred operating expenses of $450,000 of which $30,000 remains unpaid at year-end. Of the $450,000, $50,000 was used to buy supplies and $20,000 of supplies remain on hand at year-end.

e. Office equipment owned by the museum has a historical cost of $140,000 and a salvage value of $20,000 and is being depreciated over 8 years on the straight-line basis.

f. During the year the museum conducted a fund-raising drive to raise money to acquire new art items for the museum. The museum received pledges of $200,000 of which the museum had collected $160,000 by year-end and expected to ultimately collect another $20,000.

g. The museum had a small portfolio of investments in equity securities.. At the beginning of the year the portfolio had a fair value of $60,000. During the year the Museum collected $3,000 in dividends on the securities. At year-end the portfolio had a market value of $62,000.

h. During the year a citizen died and willed his wonderful collection of native art to the museum. The appraised value of the collection was $600,000.

i. To balance its collection, the museum sold two of its collection items for $250,000, which approximates fair value. These items had a historical cost to the museum of $10,000.

j. The proceeds of the sale and additional cash were used to acquire two new items at a cost of $310,000.

1. Scorpion Foundation had the following types of cash receipts and disbursements during its current fiscal year.

REQUIRED:

Indicate in which categories each of these flows would be reported in the foundation’s statement of cash flows.

• • 1. Unrestricted contributions
    2. Sales of handmade crafts
    3. Contributions restricted to capital asset acquisition
    4. Contributions to endowments
    5. Investment earnings on endowments, not required to be added to the endowment
    6. Salaries
    7. Interest paid on short-term loan
    8. Capital asset purchases
    9. Investments sold
    10. Short-term loan proceeds
    11. Contributions made to other organizations
    12. Capital lease payments.

4. In June 2022, the wealthy parents of a college sophomore pledge to donate $1.5

million to the college she attends, making payments of $0.5 million at the end of each of her remaining years at the school until her expected graduation in 2019. The college applies a discount rate of 3 percent. At that rate, the present value of $1 for three periods is $2.82861.

REQUIRED:

What entry, if any, would be required to recognize the pledge? What entry(ies), if any, would be required to record the receipt of the first $0.5 million at the end of year 2022? Assume that the college uses separate funds to track restricted resources and indicate in which fund each entry is made.

1. In December 2022, Technology University received a $2 million grant from the National Hockey Association to develop an effective neck brace to prevent injuries in its non-goalie hockey players. The NHA grant was intended to cover $1.5 million of direct costs and $0.5 million of overhead costs. The grant stipulated that the NHA would be the sole beneficiary of the research. Technology carried out the research in 2023. As anticipated, direct costs were $1.5 million.

REQUIRED:

1. What accounting entries, if any, should Technology make when notified of the grant?
2. What accounting entries, if any, should Technology make in 2023? (Be sure to indicate in which funds the entries would be recorded.)
3. Would your answer be different if the research were made available to the general public and not just the NHA? Explain.
4. Would your answer be different if the NHA indicated it would not make any payments on the research until Technology delivered the final research product?

ANSWERS TO PROBLEMS (CHAPTER 12)

Problem 1

a. NONRESTRICTED FUND

Pledges receivable $150,000

Revenue $150,000

NONRESTRICTED FUND

Cash $450,000

Revenue $450,000

b. DONOR RESTRICTED FUND

Pledges receivable $ 50,000

Donor restricted revenue $ 50,000

c. DONOR RESTRICTED FUND

Resources released from restriction $ 10,000

Cash $ 10,000

UNRESTRICTED FUND

Fixed assets $ 25,000

Resources released from restriction $ 10,000

Cash 15,000

d. No entry required.

e. DONOR RESTRICTED FUND

Cash $ 60,000

Revenue $ 60,000

f. UNRESTRICTED FUND

Legal expenses $ 1,500

Revenue $ 1,500

g. No entry required.

h. UNRESTRICTED FUND

Depreciation expense $ 15,000

Accumulated depreciation $ 15,000

i. UNRESTRICTED FUND

Cash $ 90,000

Revenue $ 30,000

Payable to Zimbabwe Charities 60,000

Problem 2

a. NONRESTRICTED FUND

Cash $ 500,000

Revenue $ 500,000

b. NONRESTRICTED FUND

Cash $ 25,000

Revenue $ 25,000

c. NONRESTRICTED FUND

Salaries expense $1,000,000

Cash $ 960,000

Salaries payable 40,000

d. NONRESTRICTED FUND

Operating expenses $ 430,000

Supplies $ 20,000

Cash $ 420,000

Accounts payable 30,000

e. NONRESTRICTED FUND

Depreciation expense $ 15,000

Accumulated depreciation $ 15,000

f. NONRESTRICTED FUND

Cash $ 160,000

Pledges receivable 40,000

Allowance for uncollectible accounts $ 20,000

Revenue 180,000

g. NONRESTRICTED FUND

Cash $ 3,000

Investments 2,000

Investment revenue $ 5,000

h. No entry required. Note disclosure is required.

i. NONRESTRICTED FUND

Cash $ 250,000

Revenue $ 250,000

j. NONRESTRICTED FUND

Acquisition expense $ 310,000

Cash $ 310,000

(Note disclosure is required.)

Problem 3

Cash flows from operating activities

a. Unrestricted contributions

b. Sales of handmade crafts

e. Investment earnings on endowments

f. Salaries

g. Interest paid on short-term loan

k. Contributions made to other organizations

Cash flows from investing activities

h. Capital asset purchases

i. Investments sold

Cash flows from financing activities

c. Contributions restricted to capital asset acquisition

d. Contributions to endowments

j. Short-term loan proceeds

l. Capital lease payments

Problem 4

In June 2022:

Pledges receivable $1,414,305

Revenue from contributions $1,414,305

To record a pledge of three annual payments of $500,000, the present value of which, discounted at 3 percent is $1,414,305 (temporarily restricted fund)

In June 2023:

Net assets released from restriction $ 457,571

Pledges receivable $ 457,571

To release the resources upon collection of cash in the first year (temporarily restricted fund)--$500,000 cash received less interest at a rate of 3 percent on the pledge balance of $1,414,305

Cash $500,000

Net assets released from

restriction $ 457,571

Contributions--Interest revenue 42,429 To record the first year’s payment of $500,000 (unrestricted fund)

Problem 5

• 1. This grant has the characteristics of an exchange transaction rather than a contribution. No entry would be required when the grant is received (the contract signed). In essence, the grant is a contract. At the time the grant is received, Technology has not yet performed its promised research services; the NHA has not yet made any payments.
  2. The grant is a contract that, by definition, is not donor restricted. All entries would be recorded in the unrestricted fund.

2023

Research expenses (direct) $1.5 million

Cash (or accounts payable) $1.5 million

To record research expenses

Grants and contracts receivable $2 million

Revenue from sponsored research $2 million

To recognize revenue from the sponsored research

c. If the research were to be made available to the general public rather than just to the NHA, the grant would be a nonexchange transaction rather than an exchange transaction. Temporarily restricted grant revenue would be recognized when the pledge was received.

d. FASB Statement No. 116 stipulates that revenue from conditional contributions should not be recognized until the conditions are satisfied. Therefore, Technology would not recognize revenue from NHA’s contribution until it had completed the research.

ESSAYS (CHAPTER 12)

1. For each of the cases below, state whether the contributed services would be recognized and, if so, how much would be recognized and how it would be recognized. Explain your answer in terms of the existing standards. Also explain why, in your opinion, the standards permit or prohibit recognition of this particular type of contribution.

1. A church votes to construct a new educational wing on its existing facility. The church will hire an architect to design the new wing and a construction supervisor to oversee the construction. Church members will provide most of the labor for the construction. Labor donated by members who have construction experience or who are considered professional craftsmen at the prevailing wage for their trade or craft is $500,000. Labor donated by persons possessing non-building specialized skills (doctors, teachers, lawyers, etc.) at their prevailing wage rates is $700,000. Labor donated by non-professionals measured at the minimum wage is $300,000. The appraised value of the building when completed is $3 million. The architect was paid $700,000, the construction supervisor was paid $50,000 and the materials purchased for use in the building cost $1 million.
2. An investment advisor, a member of the board of No Fleas Please, a not-for-profit animal care organization, provides pro bono investment advice to NFP. NFP does not have a particularly large investment portfolio and, without the advice of the board member, NFP probably would invest its idle cash in certificates of deposit at an insured commercial bank to protect itself against loss of principal. If the investment advisor had provided similar services to his customers he would have charged $2,000.
3. Members of a religious order provide professional nursing services for a healthcare facility that is run by their order. The members are not compensated but their order provides lodging, food, and other necessities, the cost of which is paid by the healthcare entity and classified as nursing services expense. At the end of the year the balance in the nursing services expense account is $3 million. The value of the nursing services provided, measured at the prevailing wage for nurses, is $5 million.

2. A generous benefactor pledges $1 million to The R. J. Smith Foundation, a not-for-profit entity that promotes the arts. The gift is to be used to provide scholarships for talented musicians at a music camp operated by the Foundation. The gift was given in August 2013 to support the Summer 2014 music program. The foundation director argues that the gift is a conditional restricted gift and therefore cannot be recognized as revenue in 2013. The accountant argues that the gift is an unconditional restricted gift and must be recognized in the current year. What is the basis for the director’s argument? What is the basis for the accountant’s argument? In your answer provide an explanation of the terms conditional, unconditional, restricted and unrestricted.

3. Per FASB standards, not-for-profits must classify their net assets into three classes. What is the basis for distinguishing the three classes? What is the rationale for this basis? How is each class defined?

4. What is a charitable remainder trust? How should it be accounted for?

ESSAY ANSWERS (CHAPTER 12)

1. [Note: Asking for the students’ explanations of WHY the FASB prohibited or permitted recognition of specific types of contributed services is designed to elicit thought by the student. There are no technically correct answers.]

a. The value of all the contributed services can be recognized because the services are used to create or enhance a non-financial asset. The value that would be assigned to contributed services is the difference between the appraised value of the building ($3 million) and directly attributable costs ($1 million for materials, $700,000 for the architect, and $50,000 for the construction supervisor). The entry would be

Building $1,250,000

Contributed revenue $1,250,000

The FASB probably permitted the recognition of contributed services that create or enhance a non-financial asset because not to do so would understate the value of the tangible asset on the financial statements. An alternative would be to allow the asset to be valued at appraised value and record the $1,250,000 as a direct addition to equity. If this approach were taken, however, the statement of activities would not include all changes in net assets.

1. The value of the contributed services cannot be recognized because the services, although provided by a person possessing specialized skills, would not have been purchased if they had not been donated. The FASB probably prohibited recognition of this type of contributed services because recognition would overstate the costs incurred in delivering the goods or services when the organization would not otherwise have purchased these services.
2. The value of the contributed services should be recognized because the services require specialized skills, are provided by persons with those skills, and would have to be purchased if not provided. The amount that should be recognized is $2 million (the difference between the market value of the services and the disbursements on behalf of the members of the order).

Nursing services expense $2 million

Contributed services revenue $2 million

The FASB probably permitted the recognition of contributed services that would otherwise be purchased because to do otherwise would understate the cost of providing the goods or services for which the entity was organized. [Note: Why the FASB limited recognition to the cost of professional services is less obvious. Students will probably have different ideas about that. ]

1. All gifts, whether in tangible assets or in promises to give assets in the future, may be classified as conditional or unconditional and as restricted or unrestricted. Conditional promises or pledges are promises to give if, and only if, a specified future and uncertain event occurs. All other promises or pledges to give are considered unconditional. A conditional gift carries with it an uncertainty about its ultimate receipt. A restricted gift is a gift that must be used for a purpose that is more limited than the general nature of the operations of an entity. All other gifts are unrestricted. For example, in this case a gift to support the fine arts would be considered unrestricted because the nature of the entity is to support the fine arts. A gift to a comprehensive university to support fine arts would probably be restricted because the nature and purpose of the entity encompasses more than fine arts.

In this case, the director considers the gift conditional because holding the summer music camp is a future and uncertain event. The accountant must feel that there is little uncertainty about holding the summer music camp. Both agree the gift is restricted because its purpose is more limited than the purpose of the entity.

1. The basis for distinguishing among three classes of net assets is the presence or absence of restrictions placed by donors on how or when the net assets may be used. “Donors” comprise individuals or organizations that are external to and independent of the recipient not-for-profit organization. Thus, although the management of the organization may set aside resources for specific purposes, such resources are not considered “restricted” for purposes of accounting and financial reporting because the board or management may change its decision at any time without the constraint of obtaining agreement by an independent party. The three classes of net assets are: Unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets.

Unrestricted net assets do not have donor-restrictions placed on how or when they may be used. Unrestricted net assets include net assets with no restrictions by any party and also net assets that are set aside or earmarked by the organization itself, e.g., by action of its board or management, rather than by donors who are external to the organization. Net assets set aside by the board or management are considered unrestricted because the board or management may change its determination at any time without the participation of independent parties.

Temporarily restricted net assets consist primarily of resources that (external) donors have indicated must be used for specific purposes or in specific periods or when specified events have occurred. Permanently restricted net assets generally are endowments with a principal that must remain intact permanently and with only the income from the endowment available for expenditure. The income may be temporarily restricted or unrestricted, depending on the stipulations of the donor.

1. A charitable remainder trust is a type of split interest agreement—that is, an agreement whereby the donor makes a gift to a not-for-profit organization, but the organization is not the sole beneficiary. In a charitable remainder trust, the donor establishes a trust fund, contributes assets to it, and appoints a recipient not-for-profit organization as the trustee. Under the agreement, a set percentage of the trust assets will be distributed to the donor for the donor’s and his/her spouse’s life. Any additional earnings remain in the trust. The trust assets revert to the not-for-profit organization upon the demise of both the donor and spouse.

The not-for-profit organization (trustee) should record the assets upon receipt at their fair market value and a liability to the other beneficiaries. The liability should be measured at the present value of the estimated future payments (based on actuarial tables) to be made to the donor and spouse. The difference between the assets and liabilities would be recognized as contributions revenue.