20.3

Question 1

Stanton College, a nongovernmental not-for-profit entity, received a building with no donor stipulations as to its use. Stanton does not have an accounting policy implying a time restriction on donated assets. What type of net assets should be increased when the building was received?

I. Without donor restrictions
II. Temporarily restricted
III. Permanently restricted

Answer 1

I only.

Contributions without donor-imposed restrictions are reported as support that increases net assets without donor restrictions.

Question 2

In its fiscal year ended June 30, Year 4, Barr College, a large nongovernmental not-for-profit entity, received $100,000 designated by the donor for scholarships for superior students. On July 26, Year 4, Barr selected the students and awarded the scholarships. How should the July 26 transaction be reported in Barr’s statement of activities for the year ended June 30, Year 5?

Answer 2

As both an increase and a decrease of $100,000 in net assets without donor restrictions.

When the NFP received the contribution, it should have been classified as net assets with donor restrictions because it was to be used for a specified purpose. When the purpose is fulfilled, the restriction expires. The amount then should be reclassified as a decrease in net assets with donor restrictions and an increase in net assets without donor restrictions. When the scholarships are awarded, net assets without donor restrictions is decreased.

Question 3

What is the appropriate characterization of the net assets of a nongovernmental not-for-profit organization?

Answer 3

Excess or deficiency of assets over liabilities.

General-purpose financial reporting of an NFP organization is based on a net assets model. Net assets is the excess or deficiency of the assets of an NFP over its liabilities. Net assets are classified as (1) net assets without donor restrictions and (2) net assets with donor restrictions.

Question 4

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 equipment at January 1, Year 5, when the error was discovered?

Answer 4

$650,000.

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. Equipment should be debited and unrestricted net assets should be credited for $650,000 for the purchase of the equipment. Also, accumulated depreciation should be credited and net assets without donor restrictions should be debited for $520,000 [($650,000 ÷ 5 years) × 4 years], the total accumulated depreciation that should have been recorded for Years 1 through 4.

Question 5

Fenn Museum, a nongovernmental not-for-profit organization, had the following balances in its statement of activities:

Education: $300,000
Fundraising: 250,000
Management and general: 200,000
Research: 50,000

Fenn reports support activities expenses of $500,000. Which of the following adjustments, if any, should be made to the reported amount?

Answer 5

$50,000 of decrease.

The expenses of NFPs are classified by function: program services or support 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 relate to the NFP’s mission or service delivery objectives. Support activities are all other activities of an NFP: (1) management and general, (2) fundraising, and (3) membership development. Thus, the amount of expenses for support activities is $450,000 ($250,000 fundraising + $200,000 management and general). Education and research are most likely program services of the Fenn museum. The appropriate adjustment of the reported amount is a decrease of $50,000 ($500,000 – $450,000).

Question 6

When should a conditional pledge to a nongovernmental not-for-profit organization be recognized as revenue?

Answer 6

When the pledge conditions are met.

A contribution is one entity’s (1) unconditional, (2) voluntary, and (3) nonreciprocal transfer of assets to another entity (or a settlement of its liabilities). Assets include donations of services. Assets also include unconditional promises to give those items in the future. A donor-imposed condition specifies a future and uncertain event. Its occurrence or nonoccurence gives the donor a right of return or releases the donor from an obligation. Thus, a conditional promise to give is not recognized until the condition is substantially met. If the condition is not substantially met, a receipt of assets is accounted for as refundable.

Question 7

Nongovernmental not-for-profit entities recognize a conditional promise to give when

Answer 7

The conditions are met.

A conditional promise to give depends on the occurrence of a specified future uncertain event to establish the promisor’s obligation. It is recognized when the conditions are substantially met, i.e., when the conditional promise becomes unconditional. If the possibility is remote that the condition will not be met, the recognition criterion is satisfied.

Question 8

The following information was reported by a nongovernmental not-for-profit entity at the end of its current fiscal year:

Gross accounts receivable
January 1: $37,500
December 31: 49,300
Sales on account and cash sales: 359,000
Uncollectible accounts: 2,000

No accounts receivable were written off or recovered during the year. If the direct method is used in the statement of cash flows, cash collected from customers is

Answer 8

$347,200.

Collections from customers equal sales revenue adjusted for the change in gross accounts receivable and write-offs and recoveries. Because no accounts receivable were written off or recovered during the year, no adjustment for these transactions is needed. Accounts receivable increased by $11,800 ($49,300 – $37,500). This amount is an excess of revenue recognized over cash received. Cash collected from customers is $347,200 ($359,000 – $11,800).

Question 9

Cancer Educators, a nongovernmental not-for-profit entity, incurred costs of $10,000 in its combined program services and fundraising activities. Which of the following cost allocations might Cancer Educators report in its statement of activities?

Program services:
Fundraising:
General Services:

Answer 9

$6,000.
$4,000.
$0

NFPs must provide information about expenses reported by functional classification. An analysis also must be presented that disaggregates functional expense classifications by natural expense classifications (e.g., salaries, interest, rent, and depreciation). The $10,000 of costs should therefore be divided between program services and fundraising.

Question 10

A donor gives $10,000 to a nongovernmental not-for-profit organization with instructions that it must be used to fund the organization’s general operating expenses during the following fiscal year. If the organization uses the minimum required presentation of net assets, the donation will increase

Answer 10

Net assets with donor restrictions.

Restrictions may be for (1) support of operating activities; (2) investment for a specified term (term endowments); (3) use in a specified future period; (4) acquisition of long-lived assets; (5) assets (e.g., land or works of art) to be used for a specified purpose, preserved, and not sold; or (6) assets to be invested to provide permanent income (e.g., donor-restricted perpetual endowments). The contribution is donor-restricted to use for general operating expenses in the next fiscal year. Thus, the purpose restriction expires in the next period and the contribution increases net assets with donor restrictions.

Question 11

Which of the following is not a characteristic of a split-interest agreement?

Answer 11

At the end of the agreement, the remaining assets must be distributed by the trustee.

A split-interest agreement is an arrangement under which a not-for-profit entity (NFP) may share benefits with others. It may be revocable or irrevocable. The period covered may be a specific number of years (or in perpetuity) or the remaining life of a designated individual or individuals. The assets are invested by the NFP, a trustee, or a fiscal agent, and distributions are made to beneficiaries during the term of the agreement. At the end of the agreement, the remaining assets are distributed to or retained by either the NFP or another beneficiary.

Question 12

A nongovernmental not-for-profit entity discovered that equipment purchased on January 1, Year 1, for $450,000 was incorrectly expensed instead of capitalized. The equipment should have been depreciated (straight-line method) over 5 years with no salvage value. What is the required adjustment to net assets without donor restrictions at January 1, Year 5, when the error was discovered?

Answer 12

$90,000 credit.

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. Accumulated depreciation should be credited and net assets without donor restrictions should be debited for $360,000 [($450,000 ÷ 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 $450,000 for the purchase of the equipment. Thus, the net effect on net assets without donor restrictions is a $90,000 credit ($450,000 credit – $360,000 debit).

Question 13

A nongovernmental not-for-profit entity reported cost of goods sold for its publications of $200,000 for the current year. Additional information is as follows:

Inventory
January 1: $50,000
December 31: $100,000

Accounts Payable
January 1: $28,000
December 31: $10,000

What amount should be reported as cash paid to suppliers in the current-year statement of cash flows (direct method)?

Answer 13

$268,000.

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 $268,000 [$200,000 + ($100,000 – $50,000) + ($28,000 – $10,000)].

Question 14

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 1, to help Society win recognition, Food Company gave $5,000 to Society in advance. How should the event be reported on Society’s statement of financial position for Year 1?

Assets:
liabilities:
Net Assets with Donor Restrictions:

Answer 14

Increase
Increase
No effect.

A donor-imposed condition specifies a future and uncertain event. Its occurrence or nonoccurence gives the donor a right of return or releases the donor from an obligation. A conditional promise to give is not recognized until the condition is substantially met. If the condition is not substantially met, a receipt of assets is accounted for as refundable. Accordingly, the amount of $5,000 should be recorded as a refundable advance (liability), and cash (asset) should be debited. No revenue is recognized. Net assets are not affected.

Question 15

The following information pertains to a nongovernmental not-for-profit entity’s statement of activities for the 12 months just ended:

Income from continuing operations: $110,000
Error in the previous year’s statement of activities discovered during the current period: (20,000)
Cumulative effect of change in accounting principle: 30,000

The change in net assets from operations for the year is

Answer 15

$110,000.

The cumulative effect of a change in accounting principle and prior period errors has no effect on current period income. They must be accounted for retrospectively. Retrospective application requires the beginning balance of net assets to be adjusted for the cumulative effect of (1) applying a new principle and (2) errors on the prior period statement of activities. The change in net assets includes only income from continuing operations of $110,000.

Question 16

On December 31, Year 3, Dahlia, a nongovernmental not-for-profit entity, purchased a vehicle with $15,000 unrestricted cash and received a donated second vehicle having a fair value of $12,000. Dahlia expects each vehicle to provide it with equal service value over each of the next five years and then to have no residual value. The donor stipulated a 5-year time restriction on the donated vehicle. In Dahlia’s Year 4 statement of activities, what depreciation expense should be included under changes in net assets without donor restrictions?

Answer 16

$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 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.

Question 17

A nongovernmental not-for-profit entity has the following current information to be reflected in its statement of cash flows:

A/R:
January 1: $9,500
December 31: $16,000
Allowance for Bad Debts:
January 1: $300
December 31: $700
Prepaid Rent Expense:
January 1: $7,200
December 31: $4,400
A/P: 
January 1: $8,700
December 31: $10,700

The current-year change in net assets is $55,000. Net cash provided by operating activities in the statement of cash flows should be

Answer 17

$53,700.

The change in net assets should be adjusted for the effects of items properly included in its determination but having either a different effect or no effect on net operating cash flow. The increase in gross accounts receivable should be subtracted. The increase indicates that revenues exceeded cash received. The increase in the allowance for bad debts should be added. This amount is a noncash expense. The decrease in prepaid rent expense should be added. The cash was paid in a prior period, but the expense is recognized currently as a noncash item. The increase in accounts payable should be added. It indicates that liabilities and related expenses were recognized without cash outflows. The net cash provided by operating activities is therefore $53,700.
$55,000 Change in net assets
(6,500) Increase in gross AR  
400 Increase in allowance for bad debts 
2,800 Decrease in prepaid rent 
2,000 Increase in accounts payable 
$53,700 Changes in Net Assets

Question 18

A nongovernmental not-for-profit entity discovered that a $600,000 rent payment on January 1, Year 1, was expensed instead of recorded as prepaid rent. The prepaid rent is to be amortized over a 3-year rental period. What is the adjustment, if any, to prepaid rent on the cash flow statement (indirect method) dated December 31, Year 3?

Answer 18

$200,000 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 $200,000 is the annual rent expense. This noncash expense is included in the change in net assets for Year 3 net income. It is therefore added in the reconciliation to net cash flow from operating activities.

Question 19

A voluntary health and welfare entity (VHWE) included the following costs in its statement of activities for the year:

Fundraising: $250,000
Administrative: 50,000
Research: 120,000
Medicine: 230,000
Biomedical services: 90,000

The total of functional expenses for program services is

Answer 19

$440,000.

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. Support activities are all other activities. Thus, the amount of expenses for program services is $440,000 ($120,000 research + $230,000 medicine + $90,000 biomedical services).

Question 20

In Year 2, the Nord Association, a nongovernmental not-for-profit organization, received a $100,000 contribution to fund scholarships for medical students. The donor stipulated that only the interest earned on the contribution be used for the scholarships. Interest earned in Year 2 of $15,000 was used to award scholarships in Year 3. What amount should Nord report as net assets with donor restrictions at the end of Year 2?

Answer 20

$115,000.

The donee may use up or expend the donation of interest as specified. It is satisfied by the passage of time or by actions of the donee. Accordingly, the interest earned on the contribution is donor restricted until the donee awards the scholarships (appropriated for expenditure with all time and purpose restrictions met). The scholarships are not awarded until Year 3, so the interest is donor restricted at the end of Year 2. Because the donor stipulated that only the interest earned may be used, the $100,000 contribution is to be invested in perpetuity and therefore is donor restricted.