20.2 Flashcards
During Year 4, Jones Foundation received the following support:
- A cash contribution of $875,000 to be used at the board of directors’ discretion
- A promise to contribute $500,000 in Year 5 from a supporter who has made similar contributions in prior periods
- Contributed legal services with a value of $100,000, which Jones would have otherwise purchased
At what amounts should Jones classify and record these transactions?
Revenue increasing net assets without donor restrictions:
Revenue increasing net assets with donor restrictions:
$975,000
$500,000
The cash contribution ($875,000) was a revenue received in Year 4 that was without donor-imposed restrictions. Thus, it is classified as support that increases net assets without donor restrictions. The unconditional promise to give ($500,000) with the amount due in Year 5 meets the definition of a contribution (assuming sufficient evidence in the form of verifiable documentation exists to recognize a promise to give). The NFP should recognize an asset and contribution revenue. Because (1) the amount is to be received in a future period, and (2) the donor did not indicate clearly that the support was to be used for current activities, the $500,000 should be reported as net assets with donor restrictions. Contributions of services are recognized as revenues at fair value ($100,000) if they (a) require special skills (e.g., legal training), (b) are provided by those having such special skills, and usually would be purchased if not donated. They are classified as support that increases net assets without donor restrictions because the services presumably have been rendered, and any purpose for which the resource was restricted has been fulfilled. Consequently, revenue increasing net assets without donor restrictions is $975,000 ($875,000 + $100,000), and revenue increasing net assets with donor restrictions is $500,000.
Fact Pattern:
On June 30, Year 4, ORCA, a nongovernmental not-for-profit entity (NFP), received a building and the land on which it was constructed as a gift from Tyler Corporation. The building is intended to support the entity’s education and training mission or any other purpose consistent with the entity’s mission. Immediately prior to the contribution, the fair values of the building and land had been appraised as $350,000 and $150,000, respectively. Carrying amounts on Tyler’s books at June 30, Year 4, were $290,000 and $75,000, respectively.
Tyler Corporation should record its contribution of the building and land as a
$500,000 expense.
Contributions made should be recognized as (1) expenses and (2) decreases in assets or increases in liabilities in the period made. They should be measured at the fair value of the assets contributed ($350,000 + $150,000 = $500,000).
Following the destruction of its house of worship by fire, a religious organization held a rebuilding party. Part of the labor was donated by professional carpenters. The remainder was donated by members of the organization. Recognition is required for the value of the services provided by
The professional carpenters and the members.
Contributions of services by the professional carpenters should be recognized because they require (1) special skills, (2) that are provided by those having such skills, and (3) that usually would be purchased if not donated. Moreover, donated services creating or enhancing nonfinancial assets must be recognized even though specialized skills are not involved. Because the members’ labor helped rebuild the church (a nonfinancial asset), their contributions of services also should be recognized.
On January 1, Year 4, a nongovernmental not-for-profit botanical society received a gift of an exhaustible fixed asset with an estimated useful life of 10 years and no salvage value. The donor’s cost of this asset was $20,000, and its fair value at the date of the gift was $30,000. What amount of depreciation of this asset should the society recognize in its Year 4 financial statements?
$3,000.
NFPs must recognize depreciation. Moreover, contributions are recorded at their fair value when received. Assuming the straight-line method is used, the amount of depreciation that the NFP should recognize is $3,000 [($30,000 fair value – $0 salvage value) ÷ 10 years].
A nongovernmental not-for-profit entity reported cost of goods sold for its publications of $350,000 for the current year. Additional information is as follows:
Inventory
January 1: $80,000
December 31: $100,000
Accounts Payable:
January 1: $48,000
December 31: $40,000
What amount should be reported as cash paid to suppliers in the current-year statement of cash flows (direct method)?
$378,000.
To reconcile cost of goods sold to cash paid to suppliers, a two-step adjustment is needed. First, purchases is calculated by adding the increase in inventory to cost of goods sold. Second, cash paid for goods sold is calculated by adding the decrease in accounts payable to purchases. Thus, cash paid for goods sold equals $378,000 [$350,000 + ($100,000 – $80,000) + ($48,000 – $40,000)].
Fact Pattern: A labor union had the following receipts and expenses for the current year ended December 31: Receipts: Per capita dues: $680,000 Initiation fees 90,000 Gift restricted by donor for loan purposes for 10 years 30,000 Gift restricted by donor for loan purposes in perpetuity 25,000 Expenses: Labor negotiations $500,000 Fundraising 100,000 Membership development 50,000 Administrative and general 200,000 Management sales of organizational supplies 60,000
Additional information: The union’s constitution provides that 10% of the per capita dues are designated for the Strike Insurance Fund to be distributed for strike relief at the discretion of the union’s executive board.
The statement of activities for the year ended December 31 reported program expenses of $650,000 and supporting activities expenses of $260,000. Which of the following adjustments, if any, should be made to the reported amounts?
Decrease program services expenses by $150,000 and increase supporting activities expenses by $90,000.
Program services include the expenses that relate directly to the primary missions of the NFP. These expenses include both the direct expenses clearly identified with the program and a systematic and rational allocation of indirect costs. Because the $500,000 labor negotiation expenses are the only expenses that relate directly to the primary mission of the labor union, $500,000 should be reported in the statement of activities. The entity therefore should decrease program expenses by $150,000. Supporting activities categories include (1) management and general, (2) fundraising, and (3) membership development. The entity therefore should increase supporting activities expenses by $90,000 [($200,000 + $100,000 + $50,000) – $260,000]. Also, sales of organizational goods should be reported as receipts, not expenses.
During the current year, a voluntary health and welfare entity received $300,000 in pledges without donor-imposed restrictions. Of this amount, $100,000 has been designated by donors for use next year to support operations. If 15% of the pledges without donor-imposed restrictions are expected to be uncollectible, what amount of support that increases net assets without donor restrictions should the entity recognize in its current-year financial statements?
$170,000.
Only $200,000 of the pledged total constitutes support that increases net assets without donor restrictions. These pledges may be recognized at net realizable value (NRV) if their collection is expected in less than 1 year. The NRV of these pledges is $170,000 [$200,000 × (1.0 – .15 estimated uncollectible)].
Fact Pattern:
NFP, a nongovernmental not-for-profit entity, reported a change in net assets of $300,000 for the current year. Changes occurred in several balance sheet accounts as follows:
Equipment: $25,000 increase
Accumulated depreciation: 40,000 increase
Note payable: 30,000 increase
Additional Information:
- During the current year, NFP sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.
- In December of the current year, NFP purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000.
- Depreciation expense for the year was $52,000.
In NFP’s current-year statement of cash flows, net cash provided by operating activities should be
$347,000.
An NFP should adjust the change in net assets for the effects of items that have no effect on net cash provided by operating activities. Depreciation is included in the determination of the change in net assets but has no cash effect. Thus, depreciation should be added. The sale of equipment resulted in a gain included in the determination of the change in net assets, but the cash effect is classified as an inflow from an investing activity. Thus, the gain should be subtracted. The cash outflow for the purchase of equipment is from an investing activity and has no effect on the change in net assets. Thus, it requires no adjustment. The net cash provided by operating activities is $347,000 ($300,000 change in net assets + $52,000 depreciation – $5,000 gain).
Collections are works of art, historical treasures, and similar items that meet certain criteria. An NFP may not choose to
Capitalize part of its collections.
Capitalization of part of a collection is not permitted. An NFP may choose to (1) capitalize its collections, (2) capitalize prospectively only those items acquired after a given date, or (3) not capitalize collections.
During the current fiscal year, Foxx, a nongovernmental not-for-profit entity, received pledges of $300,000. Of the pledged amount, $200,000 was designated by donors for use during the current year, and $100,000 was designated for next year. Five percent of the pledges are expected to be uncollectible. What amount should Foxx report as net assets with donor restrictions (contributions) in the statement of activities for the current year?
$95,000.
Contributions are classified as increases in net assets with donor restrictions if, for example, the donor stipulates that resources are to be used only after a specified date. Pledges in the amount of $100,000 were stipulated for use next year. Of this amount, 5% is expected to be uncollectible. Accordingly, $95,000 [$100,000 – ($100,000 × 5%)] is reported as net assets with donor restrictions (contributions).
A nongovernmental not-for-profit entity discovered that equipment purchased for cash 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 purchases of equipment on a cash flow statement (indirect method) dated December 31, Year 5?
$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 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. Consequently, the purchase of equipment is not presented as a cash flow from investing activities in the statement of cash flows for Year 5. But $130,000 [($650,000 ÷ 5 years) – $0 salvage value] is added to the change in net assets in the reconciliation to net cash flow from operating activities.
Cura Foundation, a voluntary health and welfare entity (VHWE) supported by contributions from the general public, included the following costs in its statement of functional expenses for the year:
Fundraising: $500,000
Administrative (including data processing): 300,000
Research: 100,000
Cura’s functional expenses for program services included
$100,000.
An NFP’s statement of activities or notes should classify expenses by function. The major functional classes include 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). Management and general expenses, along with fundraising expenses, are classified in the supporting activities category. Program services expenses are those directly related to the administration of programs. Of the costs given, only the research costs ($100,000) are program services expenses.
Fact Pattern:
Society is a nongovernmental not-for-profit organization. Recently, Food Company made an oral conditional promise to donate $20,000 to Society contingent upon its recognition as “best foundation of the year” by local government. The $20,000 is restricted to construction of a children’s library.
In Year 4, Society expended the $20,000 that it received from Food Company in Years 1 and 3 on library construction. How should the event be reported on Society’s statement of financial position for Year 4?
As a decrease only in net assets with donor restrictions.
A contribution whose restrictions are met in the same period may be reported in net assets without donor restrictions. But expenditure in Year 4 (and expiration of the restriction) did not occur in the same period as the contribution (Year 1 and 3). When the $20,000 is expended in Year 4, the donor-imposed restriction expires, and net assets with donor restrictions decreases by $20,000 to reflect the expenditure. Net assets without donor restrictions increases by $20,000 to record the reclassification of net assets. Net assets without donor restrictions then decreases by $20,000. An increase of $20,000 and a decrease of $20,000 result in no effect on net assets without donor restrictions.
On January 1, Year 1, a nongovernmental not-for-profit entity received two donated assets with fair values of $15,000 and $12,000, respectively. The NFP expects each asset to provide service value evenly over the next 5 years, with no salvage value. The donated assets also are subject to a 5-year time restriction imposed by the donor. In the Year 4 statement of financial position, the NFP reports net assets without donor restrictions related to the donated depreciable assets of $5,400. Which of the following adjustments, if any, should be made to the reported amounts?
Increase net assets with donor restrictions by $5,400 and decrease net assets without donor restrictions by $5,400.
The expiration of a restriction is recognized in the accounting records. Expiration occurs when the stipulated time has elapsed, the purpose of the restriction has been fulfilled, or both. All amounts released during the period are reported in the statement of activities as net assets released from restrictions. The effect is to increase one class of net assets (net assets without donor restrictions) and decrease another (net assets with donor restrictions). In the case of a long-lived depreciable asset, the donor’s time restriction expires as the economic benefits are used. Depreciation expense then is reported as a decrease in net assets without donor restrictions. Consequently, the NFP should record each year a decrease in net assets without donor restrictions related to depreciation of $5,400 [($15,000 + $12,000) ÷ 5-year useful life], given no residual value. The amount of net assets with donor restrictions related to the donated items is therefore $5,400 [($15,000 + $12,000) – ($5,400 × 4 years)] at December 31, Year 4. This amount is the unexpired portion of the net assets with donor restrictions.
Hospital, Inc., a not-for-profit entity with no governmental affiliation, reported the following in its accounts for the current year ended December 31:
- Gross patient service revenue from all services provided at the established billing rates of the hospital (note that this figure includes charity care of $25,000): $775,000
- Provision for bad debts: 15,000
- Difference between established billing rates and fees negotiated with third-party payors (contractual adjustments): 70,000
What amount would the hospital report as net patient service revenue in its statement of operations for the current year ended December 31?
$680,000.
Net patient service revenue is recognized for fees charged for patient care, minus contractual adjustments and discounts. Reported net patient service revenue does not include charity care. Services performed as charity care are not expected to produce cash inflows and do not qualify for recognition as revenue or receivables. Bad debt expense, however, is recognized in total expenses. Thus, net patient service revenue equals $680,000 ($775,000 gross revenue – $25,000 charity care – $70,000 contractual adjustments).
