20.6

Question 1

Settam, a nongovernmental not-for-profit entity (NFP), received a donation of stock with donor-stipulated requirements as follows:

• Shares valued at $8,000,000 are to be sold, with the proceeds used for renovation.
• Shares valued at $2,000,000 are to be retained, with the dividends used to support current operations.

What amount should Settam include as net assets without donor restrictions as a result of this donation?

Answer 1

$0.

The shares measured at $8,000,000 are subject to a purpose restriction that increases net assets with donor restrictions. The shares measured at $2,000,000 are subject to a donor-imposed restriction in perpetuity (a perpetual endowment) that increases net assets with donor restrictions.

Question 2

Hann School, a nongovernmental not-for-profit entity (NFP), spent $1 million of donor-restricted cash to acquire land and a building. How should this be reported in a statement of activities that presents the minimum required net asset classes?

Answer 2

Increase in net assets without donor restrictions.

The expiration of a restriction is recognized when the stipulated time has elapsed, the purpose of the restriction has been fulfilled, or both. All such amounts released during the period are reported in the statement of activities as net assets released from restrictions. Accordingly, the use of $1 million (presumably for the donor’s intended purpose) decreases net assets with donor restrictions and increases net assets without donor restrictions.

Question 3

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.

The gift should be recorded by the entity as

Increasing net assets without donor restrictions:
Increasing assets with donor restrictions:

Answer 3

$500,000.
$0.

The terms of this contribution allow the long-lived assets to be used for any purpose consistent with the NFP’s mission. Accordingly, the building and land on which it was constructed should be recorded at fair value as a contribution received without donor-imposed restrictions. It is reported as support that increases net assets without donor restrictions.

Question 4

At which of the following amounts should a nongovernmental not-for-profit organization report investments in debt securities?

Answer 4

Fair Value.

Equity securities with readily determinable fair values and all debt securities are measured at fair value in the statement of financial position at the statement date. But purchased investments are recorded initially at acquisition cost.

Question 5

Pharm, a nongovernmental not-for-profit entity, is preparing its year-end financial statements. Which of the following statements is required?

Answer 5

Statement of Cash Flows.

A complete set of financial statements of an NFP must include (1) a statement of financial position as of the end of the reporting period, (2) a statement of activities and a statement of cash flows for the reporting period, and (3) accompanying notes to financial statements.

Question 6

Janna Association, a nongovernmental not-for-profit entity, received a cash gift with the stipulation that the principal be held for at least 20 years. How should the cash gift be recorded?

Answer 6

Net assets with donor restrictions.

Net assets with donor restrictions result from restrictions removable by the passage of time or by the actions of the NFP unless they are imposed in perpetuity. A stipulation that the principal be held for at least 20 years is a time restriction.

Question 7

A nongovernmental not-for-profit animal shelter receives contributed services from the following individuals valued at their normal billing rate:

Veterinarian provides volunteer animal care: $8,000
Board members volunteer to prepare books for audit: 4,500
Registered nurse volunteers as receptionist: 3,000
Teacher provides volunteer dog walking: 2,000

What amount should the shelter record as contribution revenue?

Answer 7

$12,500.

Contributions of services are recognized if they (1) create or enhance nonfinancial assets or (2) (a) require special skills, (b) are provided by those having such skills, and (c) would usually be purchased if not donated. The services provided by the veterinarian and the board members are recognized as contribution revenue. The services provided by the registered nurse and the teacher are not. Veterinary services and bookkeeping (1) require special skills, (2) are provided by persons with such skills (assuming the board members have accounting experience or training), and (3) usually would be paid for by an animal shelter if not donated. Thus, the animal shelter should record $12,500 ($8,000 + $4,500) as contribution revenue.

Question 8

Which of the following is a false statement about a transfer of assets to a nongovernmental not-for-profit entity that raises or holds contributions for others?

Answer 8

If an entity has variance power, the transfer is recognized as a liability.

A donor may make a contribution to a nongovernmental not-for-profit entity that agrees to use it on behalf of a third-party beneficiary. If the recipient has no variance power, it recognizes the fair value of the assets as a liability to the specified beneficiary when it recognizes the assets received from the donor. Variance power is the unilateral ability to direct the use of the assets to another beneficiary. If the recipient has variance power, it recognizes the fair value of the assets as revenue.

Question 9

In a statement of financial position, a nongovernmental not-for-profit entity must at a minimum report amounts for which of the following classes of net assets?

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

Answer 9

I & II only.

A not-for-profit entity must at a minimum report amounts for two classes: net assets without donor restrictions and net assets with donor restrictions. Information regarding the nature and amounts of restrictions must be provided on the face of the statement or in the notes. Also, separate line items may be included in (1) net assets with donor restrictions or (2) the notes.

Question 10

In Year 3, Gamma, a nongovernmental not-for-profit entity, deposited at a bank $1 million given to it by a donor to purchase endowment securities. The securities were purchased January 2, Year 4. At December 31, Year 3, the bank recorded $2,000 interest on the deposit. In accordance with the bequest, this $2,000 was used to finance ongoing program expenses in March Year 4. At December 31, Year 3, what amount of the bank balance should be included as current assets in Gamma’s classified statement of financial position?

Answer 10

$2,000.

An NFP may classify its assets and liabilities as current or noncurrent. Current assets are defined as those reasonably expected to be realized in cash, sold, or consumed during the operating cycle or within 1 year, whichever is longer. Accordingly, the $2,000 of interest recorded at December 31, Year 3, should be classified as current because the bequest stipulated that it be used for ongoing program expenses. However, the $1 million restricted to the purchase of endowment securities is not classified as current. Assets received with a donor-imposed restriction limiting their use to long-term purposes must not be classified with assets available for current use.

Question 11

XYZ Society is a nongovernmental not-for-profit organization. XYZ recently received $5,000 from a philanthropist and agreed to manage the donation on behalf of the Cruz family. XYZ does not have variance power. The journal entry to record XYZ’s receipt of the money is

Answer 11

Cash $5,000
Liability $5,000

A donor may make a contribution to an NFP that agrees to use it on behalf of a third-party beneficiary. If the recipient NFP has no variance power, it credits the fair value of the assets as a liability to the specified beneficiary when it debits the assets received from the donor. Variance power is the unilateral ability to redirect the use of the assets to another beneficiary. Thus, the NFP debits cash and credits a liability for $5,000.

Question 12

The basic statements reported by a nongovernmental not-for-profit healthcare entity (NN) include

I. Statement of financial position.
II. Statement of cash flows.
III. Statement of operations.
IV. Statement of changes in equity.

Answer 12

I, II, & III only.

For a nongovernmental HCE, the basic statements include: (1) a statement of financial position, (2) a statement of operations, (3) a statement of changes in net assets, and (4) a statement of cash flows.

Question 13

A cash contribution without a donor-imposed restriction should be reported in a nongovernmental not-for-profit entity’s statement of cash flows as an inflow from

Answer 13

Operating activities.

Cash contributions received by a nongovernmental NFP are recognized as revenues when received. If they do not have donor-imposed restrictions, they are reported as support that increases net assets without donor restrictions. Because these cash contributions are not defined as inflows from financing or investing activities, they are classified by default as inflows from operating activities.

Question 14

The net asset reclassifications of a nongovernmental not-for-profit organization would be reported on which of the following?

Answer 14

Statement of activities.

A statement of activities is an operating statement equivalent to a for-profit entity’s income statement. It reports reclassifications of net assets, which are simultaneous increases in one class of net assets and decreases in another class of net assets. They usually result from expiration of donor-imposed restrictions. The statement of activities also includes information about how resources are used to provide programs and services.

Question 15

A storm damaged the roof of a nongovernmental, not-for-profit organization’s building. A professional roofer repaired the roof at no charge. How should the roof repairs be recognized in the statement of activities?

Answer 15

As an increase in expenses and an increase in contributions from donated services.

Contributions of services are recognized if they (1) create or enhance nonfinancial assets or (2)(a) require special skills, (b) are provided by those having such skills, and (c) usually would be purchased if not donated. Contributions received ordinarily are accounted for when received at fair value. Debits are to (1) assets (e.g., cash or other assets), (2) liabilities (e.g., for payment of an NFP’s debt), or (3) expenses (e.g., when the contribution is received and used at the same time). Credits are to (1) contribution revenue if the transactions are part of the NFP’s ongoing major or central operations or (2) contribution gain if the transactions are peripheral or incidental. The contribution of services is received and used at the same time, so the debit is to expenses. The credit most likely is to contribution revenue.

Question 16

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?

Answer 16

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.

Question 17

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 17

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 18

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

Answer 18

Health and 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.

Question 19

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

Answer 19

$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).

Question 20

The Pel Museum, a nongovernmental not-for-profit entity (NFP), received a contribution of historical artifacts. It need not recognize the contribution if the artifacts are to be sold and the proceeds used to

Answer 20

Acquire other items for collections.

Contributions of such items as art works and historical treasures need not be capitalized and recognized as revenues if they are added to collections that are (1) held for public exhibition, education, or research for public service purposes rather than financial gain; (2) protected, kept unencumbered, cared for, and preserved; and (3) subject to a policy that requires the proceeds of sale of collection items to be used to acquire other collection items.