20.4

Question 1

Gridiron University is a private, not-for-profit university. A successful alumnus has recently donated $1,000,000 to Gridiron for the purpose of funding a “center for the study of sports ethics.” This donation is conditional upon the university raising matching funds within the next 12 months. The university administrators estimate that they have a 50% chance of raising the additional money. How should this donation be accounted for?

Answer 1

As a refundable advance.

Conditional promises to give are recognized only when the conditions are substantially met. A transfer of assets subject to a conditional promise is treated as a refundable advance, not as contribution revenue, until the conditions are substantially met.

Question 2

Pahn, a nongovernmental not-for-profit organization, received an unconditional pledge of $50,000. The donor stipulated that the pledge must be used in the next fiscal year. Pahn received and spent the $50,000 in the next year. For the current fiscal year, what element of Pahn’s statement of financial position will increase as a result of the unconditional pledge?

Answer 2

Pledge Receivables.

Unconditional promises (pledges) to give, with amounts due in future periods, are reported as donor-restricted support unless the donor clearly intended support for current activities. Unconditional promises to give future cash amounts usually increase net assets with donor restrictions. The unconditional promise to give should be based on sufficient verifiable documentation that a promise was given and received. Assuming this documentation exists, the entry is to debit a receivable (pledge receivables) and credit contribution revenue that increases net assets with donor restrictions. Without a clear promise, a communication nevertheless may be recognized as an unconditional promise to give. However, it must indicate a legally enforceable unconditional intention to give.

Question 3

Whitestone, a nongovernmental not-for-profit organization, received a contribution in December, Year 1. The donor restricted use of the contribution until March, Year 2. How should Whitestone record the contribution?

Answer 3

Report as income in year 1.

A nongovernmental NFP recognizes contributions received as revenues or gains in its statement of activities. A contribution is unconditional, voluntary, and not reciprocal, and the donor does not act as an owner. Thus, it does not result from an exchange transaction. A donor-imposed restriction does not preclude recognition of contribution revenue or gain (income). It merely limits the use of contributed assets.

Question 4

In a statement of cash flows, which of the following items is reported as a cash outflow from financing activities by a nongovernmental not-for-profit organization?

I. Payments to retire real estate mortgage notes
II. Interest payments on real estate mortgage notes
III. Payments on the principal of seller-financed debt related to a purchase of equipment

Answer 4

I & III only.

Financing activities include issuance of stock, payment of dividends and other distributions to owners, treasury stock transactions, issuance of debt, receipt of donor-restricted resources to be used for long-term purposes, and repayment or other settlement of debt obligations. Thus, payment of the principal of a real estate mortgage note and payment on the principal of seller-financed debt related to a purchase of equipment are outflows from financing activities.

Question 5

In its statement of cash flows issued for the year ending June 30, a nongovernmental not-for-profit entity reported a net cash inflow from operating activities of $119,000. The following adjustments were included in the supplementary schedule reconciling cash flow from operating activities with net income:

Depreciation: $47,000
Increase in net accounts receivable: 38,000
Decrease in inventory: 18,000
Increase in accounts payable: 64,000
Increase in interest payable: 14,000

Net income is

Answer 5

$14,000.

To derive net income from net cash inflow from operating activities, various adjustments are necessary. The depreciation of $47,000 should be subtracted because it is a noncash expense included in the determination of net income. The increase in net accounts receivable of $38,000 should be added because it signifies that sales revenue was greater than the cash collections from customers. The first step in the adjustment from cash paid to suppliers to cost of goods sold is to subtract the increase in accounts payable. It indicates that purchases were $64,000 greater than cash payments to suppliers. The second step is to subtract the decrease in inventory. This change means that cost of goods sold was $18,000 greater than purchases. The $14,000 increase in interest payable also should be subtracted because it indicates that interest expense was greater than the cash paid to lenders. Net income is therefore $14,000.
$119,000 Operating cash inflow
(47,000) Depreciation
38,000 Increase in net AR
(64,000) Increase in AP
(18,000) Decrease in inventory
(14,000) Increase in interest payable
$ 14,000 Net income

Question 6

NFPs must report information about expenses by

Answer 6

Functional and natural classifications.

NFPs must report information about expenses by functional classifications (major classes of 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).

Question 7

A nongovernmental not-for-profit entity should recognize a conditional promise to give when

Answer 7

The possibility that the condition will not be met is remote.

A conditional promise to give is recognized when the conditions on which it depends are substantially met, i.e., when the promise becomes unconditional. A conditional promise to give is unconditional when the possibility that the condition will not be met is remote.

Question 8

Functional expenses recorded in the general ledger of ABC, a nongovernmental not-for-profit entity, are as follows:

Soliciting prospective members: $45,000
Printing membership benefits brochures: 30,000
Soliciting membership dues: 25,000
Maintaining donor list: 10,000

What amount should ABC report as fundraising expenses?

Answer 8

$10,000.

The major functional classes of expenses for an NFP are 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). Supporting activities include (1) management and general, (2) fundraising, and (3) membership-development activities. Fundraising expenses include maintaining donor lists ($10,000). Soliciting members and dues and printing membership benefits brochures are membership-development activities.

Question 9

A storm damaged the roof of a new building owned by K-9 Shelters, a nongovernmental not-for-profit entity. A supporter of K-9, a professional roofer, repaired the roof at no charge. In K-9’s statement of activities, the damage and repair of the roof should

Answer 9

Be reported as an increase in both expenses and contributions.

Contributions of services at fair value are recognized if they (1) create or enhance nonfinancial assets or (2) (a) require special skills, (b) are provided by individuals having those skills, and (c) usually would be purchased if not donated. Thus, K-9 should report an expense and contribution revenue for the services received.

Question 10

Famous, a nongovernmental not-for-profit art museum, has elected not to capitalize its permanent collections. In Year 3, a bronze statue was stolen. The statue was not recovered, and insurance proceeds of $35,000 were paid to Famous in Year 4. This transaction should be reported in

I. The statement of activities as revenues that increase net assets with donor restrictions.
II. The statement of cash flows as cash flows from investing activities.

Answer 10

II only.

Contributions or purchases of such items as works of art and historical treasures need not be capitalized (and recognized as revenues if contributed) if they are added to items that meet the criteria for a collection. If collection items are not capitalized, the entity must report the proceeds from insurance recoveries of lost or destroyed collection items as an increase in the appropriate class of net assets. However, the facts do not indicate whether that class is net assets with donor restrictions. Furthermore, cash flows from purchases, sales, and insurance recoveries of uncapitalized collection items are reported in the investing activities section of the statement of cash flows.

Question 11

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 is the depreciation expense presented on the cash flow statement (indirect method) dated December 31, Year 3?

Answer 11

$150,000.

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 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, depreciation expense should not be adjusted for the prior-period errors. The correction is to restate the prior period statements or beginning net assets. Accordingly, the financial statements for Year 3 should report depreciation expense of $150,000 [($750,000 ÷ 5 years) – $0 salvage value]. This noncash expense is included in the change in net assets. It is therefore added to the change in net assets in the reconciliation to net cash flow from operating activities.

Question 12

At the beginning of the current year, a nongovernmental not-for-profit environmental organization received a gift of depreciable equipment. The equipment is estimated to have a useful life of 10 years and a $2,000 salvage value. The donor’s cost of this equipment was $11,000, and its fair value at the date of the gift was $12,000. What amount of depreciation of this equipment should the organization report for the current year assuming the straight-line method is used?

Answer 12

$1,000.

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 expense that the NFP should recognize is $1,000 [($12,000 fair value – $2,000 salvage value) ÷ 10 years].

Question 13

Arkin Corp. is a nongovernmental not-for-profit entity involved in research. Arkin’s statements should classify which of the following as support activities?

Answer 13

Salaries of fundraisers for funds used in research.

Supporting activities are all activities of an NFP other than program services. Generally, they include management and general, fundraising, and membership-development activities.

Question 14

Lane Foundation, a voluntary health and welfare entity, received a perpetual endowment of $500,000 in Year 3 from Gant Enterprises. The endowment assets were invested in publicly traded securities, and Gant did not specify how gains and losses from dispositions of endowment assets were to be treated. No donor-imposed restrictions were placed on the use of dividends received and interest earned on fund resources. In Year 4, Lane realized gains of $50,000 on sales of fund investments and received total interest and dividends of $40,000 on fund securities. Lane’s governing board has not appropriated any part of the investment return. If the Uniform Prudent Management of Institutional Funds Act (UPMIFA) applies, what amount of these capital gains, interest, and dividends increases net assets without donor restrictions?

Answer 14

$0.

The donor did not specify how income (interest and dividends), gains, and losses were to be treated. Nevertheless, the NFP is subject to UPMIFA. This statute extends a donor restriction (i.e., on the endowment held in perpetuity) to use of the assets, including the return, until appropriation for expenditure by the governing board. Thus, without other language in the gift instrument, the assets in the fund (including the return) are net assets with donor restrictions until appropriation. An appropriation reduces net assets with donor restrictions if all time and purpose restrictions have been met. The result is a reclassification to net assets without donor restrictions. Without a contrary legal interpretation, appropriation occurs upon approval for expenditure. In the absence of an appropriation by the governing board, the NFP’s capital gain, interest, and dividends therefore increase net assets with donor restrictions, not net assets without donor restrictions.

Question 15

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 used in investing activities should be

Answer 15

$2,000.

Cash flows from investing activities include the cash inflow from the sale of equipment and the cash outflow from the purchase of equipment. The issuance of a note payable as part of the acquisition price of equipment is classified as a noncash financing and investing activity. The cash inflow from the sale of equipment (carrying amount + gain) is $18,000 [($25,000 – $12,000) + $5,000]. The cash outflow from the purchase of equipment is $20,000. Thus, net cash used is $2,000 ($20,000 – $18,000).

Question 16

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 at January 1, Year 2?

Answer 16

$50,000 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 the prior-period errors. The correction is to restate the prior-period statements or beginning net assets. The amortization recognized in Year 1 was $150,000 ($300,000 prepaid rent ÷ 2 years). The amount that should have been recognized was $100,000 ($300,000 ÷ 3 years). Accordingly, prepaid rent should be debited and net assets without donor restrictions should be credited for $50,000 ($150,000 – $100,000).

Question 17

Hospital established Foundation, a nongovernmental not-for-profit entity. Foundation agrees to manage donations on behalf of Hospital and to return the donated items to Hospital upon its request. Which of the following is correct?

Answer 17

Hospital records an asset on its statement of financial position.

Hospital is the beneficiary. Foundation is the recipient. Variance power is the unilateral power to redirect the use of the assets to another beneficiary. Because Foundation must return the donated items to Hospital upon its request, Foundation does not have variance power. Accordingly, Foundation recognizes the fair value of the assets as a liability when it recognizes the assets received from donors. Hospital records an asset on its statement of financial position.

Question 18

Which of the following nongovernmental not-for-profit entities is required to prepare a statement of functional expense?

Answer 18

None of these are correct.

A statement of activities or the notes must provide information about expenses by functional classification (e.g., program services and supporting activities). Moreover, all NFPs must report information about all expenses in one place: (1) the statement of activities, (2) a schedule in the notes, or (3) a separate statement. An NFP also must present an analysis that disaggregates functional expense classifications by natural expense classifications (e.g., salaries, interest, rent, and depreciation).

Question 19

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
Sales of organizational supplies: 60,000
Gift by donor for any purpose consistent with the union’s mission: 30,000
Gift by donor for the union’s general support: 25,000
Expenses:
Labor negotiations: $500,000
Fundraising: 100,000
Membership development: 50,000
Management and general: 200,000

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 donor-restricted support of $123,000. Which of the following adjustments, if any, should be made to the reported amount?

Answer 19

Decrease donor-restricted support by $123,000.

Contribution revenues or gains with donor-imposed restrictions are reported as donor-restricted support. But the $55,000 ($30,000 + $25,000) of gifts by donors has neither purpose nor time restrictions. Moreover, the $68,000 ($680,000 × 10%) board-designated for strike relief is from per capita dues (revenue from exchange transactions), not donors. Also, internal designations do not result in donor-restricted support.

Question 20

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

Program Services
Fundraising: $250,000
Medicine: 230,000
Biomedical services; 90,000

Support Activities
Administrative: $50,000
Data processing: 30,000

All of the following are reported in the correct category except

Answer 20

Fundraising.

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, fundraising is not a program service and is classified as a supporting activity.