20.1 Flashcards
The prepaid rent of a nongovernmental not-for-profit entity was $80,000 at December 31, Year 2, and $60,000 at December 31, Year 1. Rent expense was $60,000 for Year 2 and $40,000 for Year 1. What amount of cash payments for rent is reported in the Year 2 net cash flows from operating activities presented using the direct method?
$80,000.
The amount of cash payments for rent equals $80,000 ($80,000 Year 2 ending balance of prepaid rent + $60,000 Year 2 expense – $60,000 Year 2 beginning balance of prepaid rent).
Which of the following is a transfer to a nongovernmental not-for-profit organization acting as an agent or intermediary that most likely is not recognized as a contribution?
A nongovernmental NFP enters into a revocable arrangement with a donor. The donor contributes assets to the NFP, and the NFP agrees to pay a fixed amount annually to the donor’s uncle.
Under trusts or other arrangements, NFPs may share benefits with the donor or third-party beneficiaries. A revocable split-interest agreement is accounted for only as an intention to give. Assets received are recognized at fair value when received and as refundable advances (a liability).
A nongovernmental not-for-profit entity discovered that equipment purchased on January 1, Year 1, for $750,000 was incorrectly expensed instead of capitalized. The equipment should have been depreciated (straight-line method) over 5 years with no salvage value. What amount should be recorded as accumulated depreciation at January 1, Year 5, when the error was discovered?
$600,000.
Any error related to a prior period discovered after the statements are available to be used must be reported as an error correction by restating the prior period statements. The carrying amounts of (1) assets, (2) liabilities, and (3) net assets at the beginning of the first period reported are restated for the cumulative effect of the error on the prior periods. Corrections of prior period errors must not be included in the change in net assets from operations for the current year. Accumulated depreciation should be credited and net assets without donor restrictions should be debited for $600,000 [($750,000 ÷ 5 years) × 4 years], the total accumulated depreciation that should have been recorded for Years 1 through 4. Also, equipment should be debited and net assets without donor restrictions should be credited for $750,000 for the purchase of the equipment.
A nongovernmental not-for-profit entity discovered that equipment purchased on January 1, Year 1, for $650,000 was incorrectly expensed instead of capitalized. The equipment should have been depreciated (straight-line method) over 5 years with no salvage value. What amount should be recorded as depreciation expense in the fifth year when the error was discovered?
$130,000.
Any error related to a prior period discovered after the statements are available to be used must be reported as an error correction by restating the prior period statements. The carrying amounts of (1) assets, (2) liabilities, and (3) net assets at the beginning of the first period reported are restated for the cumulative effect of the error on the prior periods. Corrections of prior period errors must not be included in the change in net assets from operations for the current year. Thus, no change in depreciation expense should be made for the prior-period errors. The correction is made by restating the prior-period statements or beginning net assets. Deprecation expense for Year 5 is $130,000 [($650,000 – $0 residual value) ÷ 5 years].
A nongovernmental not-for-profit entity discovered that a $300,000 rent payment on January 1, Year 1, was expensed instead of recorded as prepaid rent. The prepaid rent is to be amortized over the 3-year rental period. What is the adjustment, if any, to rent expense at January 1, Year 2, when the error was discovered?
$0.
Any error related to a prior period discovered after the statements are available to be used must be reported as an error correction by restating the prior period statements. The carrying amounts of (1) assets, (2) liabilities, and (3) net assets at the beginning of the first period reported are restated for the cumulative effect of the error on the prior periods. Corrections of prior period errors must not be included in the change in net assets from operations for the current year. Thus, no change in rent expense should be made for the prior period errors. The correction is made by restating the prior period statements or beginning net assets.
A voluntary health and welfare entity (VHWE) included the following costs in its statement of activities for the year:
Program Services
Medicine: $230,000
Physician services: 175,000
Research: 120,000
Support Activities Publicity and conducting campaigns: $150,000 Health and safety services: 110,000 General: 50,000 Maintenance of donor lists: 25,000
All of the following are reported in the correct category except
Health & Safety services.
A VHWE is an NFP. All NFPs report expenses for program services and supporting activities. An analysis also must be presented that disaggregates functional expense classifications by natural expense classifications (e.g., salaries, interest, rent, and depreciation). Program services distribute goods and services to beneficiaries, customers, or members to fulfill the purposes of the entity. Support activities are all other activities. Thus, health and safety services are program services.
The Cats and Dogs League was organized as a nongovernmental not-for-profit organization. The League received a pledge of $10,000 to be used to build an addition to the kennel. This donation will not be received for 3 years. How should this pledge be recorded?
As donor-restricted support of the present value of $10,000.
Revenues or gains from contributions that increase net assets with donor restrictions are reported as donor-restricted support. The pledge of $10,000 to be used to build an addition to the kennel is subject to a purpose restriction. A contribution ordinarily is measured at fair value. Present value may be used to measure the fair value of an unconditional promise to give cash.
A nongovernmental not-for-profit organization provided the following data in regard to $500,000 of donations received during the year:
Purchase of investments to be held in perpetuity at the donor’s request: $100,000
Future repairs to the organization’s building and equipment at the donor’s request: 250,000
General operations at the discretion of the board of directors: 100,000
Specific program services as indicated by the donor: 50,000
If the organization uses the minimum required presentation of net assets and properly reflects receipt of the donations, net assets should increase in the amount of
$100,000 net assets without donor restrictions and $400,000 net assets with donor restrictions.
The two required net asset classes (with and without donor restrictions) constitute the minimum required presentation of net assets. Disaggregation of net assets with donor restrictions into, for example, temporarily and permanently restricted net assets is permitted but not required. Accordingly, (1) the $100,000 contribution to be used for general operations at the discretion of the board of directors increases net assets without donor restrictions, (2) the contributions for future repairs to the organization’s building and equipment at the donor’s request ($250,000) and specific program services as indicated by the donor ($50,000) increase net assets with donor restrictions, and (3) the $100,000 purchase of investments to be held in perpetuity at the donor’s request increases net assets with donor restrictions. The increase in net assets without donor restrictions is therefore $100,000, and the increase in net assets with donor restrictions is $400,000.
Ragg Coalition, a nongovernmental not-for-profit organization, received a gift of treasury bills. The cost to the donor was $20,000, with an additional $500 for brokerage fees that were paid by the donor prior to the transfer of the treasury bills. The treasury bills had a fair value of $15,000 at the time of the transfer. At what amount should Ragg report the treasury bills in its statement of financial position?
$15,000.
Contributions received ordinarily are accounted for when received at fair value as credits to revenues or gains. Debits are to assets, liabilities, or expenses. The fair value of the treasury bills is $15,000. Thus, the NFP’s statement of financial position reports the treasury bills at $15,000.
During the current year, the local humane society, a nongovernmental not-for-profit organization, received a $100,000 perpetual endowment from Cobb. Cobb stipulated that the income must be used to care for older horses that can no longer race. The endowment reported income of $8,000 in the current year. What amount of contribution revenue should the humane society report as an increase in net assets without donor restrictions for the current year?
$0.
The donor stipulated that the income from the perpetual endowment fund be used to care for older horses. Thus, the $100,000 contribution is donor-restricted support reported as contribution revenue that increases net assets with donor restrictions. The $8,000 of income from the donor-restricted perpetual endowment fund is investment income, not contribution revenue. Consequently, the increase in net assets without donor restrictions is $0.
A nongovernmental not-for-profit entity discovered that a $50,000 general liability insurance payment on January 1, Year 1, was recorded as prepaid insurance. But prepaid insurance was never amortized over the 2-year coverage period. Insurance was not purchased in Year 2. What is the adjustment, if any, to prepaid insurance on the cash flow statement (indirect method) dated December 31, Year 2?
$25,000 decrease.
Any error related to a prior period discovered after the statements are available to be used must be reported as an error correction by restating the prior period statements. The carrying amounts of (1) assets, (2) liabilities, and (3) net assets at the beginning of the first period reported are adjusted for the cumulative effect of the error on the prior periods. Corrections of prior-period errors must not be included in the change in net assets from operations for the current year. Thus, insurance expense should not be adjusted for prior-period errors. The correction is to restate the prior-period statements or beginning net assets. The $25,000 decrease is the amount of prepaid insurance amortized for Year 2. This noncash expense is included in the Year 2 change in net assets. It is therefore added in the reconciliation to net cash flow from operating activities.
A voluntary health and welfare entity (VHWE) included the following costs in its statement of activities for the year:
Publicity and conducting campaigns: $150,000 Maintenance of donor lists: 25,000 Management: 120,000 Medicine: 330,000 Health and safety services: 90,000
The total of functional expenses for supporting activities is
$295,000.
A VHWE is an NFP. All NFPs report expenses for program services and supporting activities. An analysis also must be presented that disaggregates functional expense classifications by natural expense classifications (e.g., salaries, interest, rent, and depreciation). Program services distribute goods and services to beneficiaries, customers, or members to fulfill the purposes of the entity. Supporting activities are all other activities. Thus, the amount of expenses for supporting activities is $295,000 ($150,000 publicity and conducting campaigns + $25,000 maintenance of donor lists + $120,000 management).
A nongovernmental not-for-profit entity prepaid $300,000 of rent on January 1, Year 1, for a 3-year rental period. Although the payment was properly recorded as prepaid rent, it was amortized over a period of 2 years. What is the adjustment, if any, to prepaid rent on the cash flow statement (indirect method) dated December 31, Year 2?
$100,000 decrease.
Any error related to a prior period discovered after the statements are available to be used must be reported as an error correction by restating the prior period statements. The carrying amounts of (1) assets, (2) liabilities, and (3) net assets at the beginning of the first period reported are adjusted for the cumulative effect of the error on the prior periods. Corrections of prior period errors must not be included in the change in net assets from operations for the current year. Thus, rent expense should not be adjusted for prior-period errors. The correction is to restate the prior-period statements or beginning net assets. The amount of $100,000 is the annual rent expense. This noncash expense is included in the change in net assets for Year 2. It is therefore added to the change in net assets in the reconciliation to net cash flow from operating activities.
How should a nongovernmental not-for-profit organization classify gains and losses on investments purchased with net assets with donor restrictions?
Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in net assets without donor restrictions.
Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in net assets without donor restrictions.
A nongovernmental not-for-profit entity discovered that a $300,000 rent payment on January 1, Year 1, was expensed instead of recorded as prepaid rent. The prepaid rent is to be amortized over the 3-year rental period. What is the adjustment, if any, to prepaid rent at January 1, Year 2, when the error was discovered?
$200,000 debit.
Any error related to a prior period discovered after the statements are available to be used must be reported as an error correction by restating the prior period statements. The carrying amounts of (1) assets, (2) liabilities, and (3) net assets at the beginning of the first period reported are restated for the cumulative effect of the error on the prior periods. Corrections of prior period errors must not be included in the change in net assets from operations for the current year. Thus, rent expense should not be adjusted for the prior period errors. The correction is to restate the prior period statements or beginning net assets. Prepaid rent should be debited and net assets without donor restrictions should be credited for $200,000 [($300,000 ÷ 3 years) × 2 remaining years].
