20.8 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 asset without donor restrictions:
Revenue increasing asset 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:
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
$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).
Which of the following should normally be considered ongoing or central transactions for a not-for-profit hospital?
I. Room and board fees from patients
II. Recovery room fees
Both I & II.
Revenues result from an entity’s ongoing major or central operations. Revenues of an HCE include (1) patient service revenue, (2) premium revenue, and (3) other revenue. Room and board fees and recovery room fees are patient services revenues.
Valley’s community hospital normally includes proceeds from the sale of cafeteria meals in
Other revenues, gains, or losses.
Other revenue, gains, or losses are derived from services other than providing healthcare services or coverage to patients. This category includes proceeds from sale of cafeteria meals and guest trays to employees, medical staff, and visitors.
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.
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 net assets with donor restrictions:
$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.
Birdlovers, a nongovernmental not-for-profit entity, incurred $5,000 in management and general expenses during the year. In Birdlovers’ statement of activities for the year ended December 31, the $5,000 should be reported as
Part of supporting services.
The major functional expenses of NFPs are incurred for either program services or 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 expenses relate directly to the primary mission of the entity. Expenses of supporting activities, i.e., general administration, membership development, and fundraising, do not. The $5,000 in management and general expenses incurred therefore should be reported as part of supporting activities.
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.
Foundation is a nongovernmental not-for-profit entity. Its prepaid insurance was $75,000 at December 31, Year 2, and $50,000 at December 31, Year 1. Insurance expense was $30,000 for Year 2 and $25,000 for Year 1. What amount of cash payments for insurance is reported in Foundation’s Year 2 net cash flows from operating activities presented using the direct method?
$55,000.
Cash payments for insurance equal $55,000 [$75,000 (Year 2 ending balance) + $30,000 (Year 2 expense) – $50,000 (Year 2 beginning balance)].
A nongovernmental, not-for-profit organization held the following investments:
Stock A (1000 shares)
Cost: $50 per share
FV (beginning of year): $45
FV ( end of year): $51
Stock B (2000 shares)
Cost: $40 per share
FV (beginning of year): $41
FV ( end of year): $45
What amount of stock investments should be reported in the year-end statement of financial position?
$14,900.
Measurement of equity securities subsequent to acquisition is at fair value at each reporting date. This accounting applies whether the entity is for-profit or an NFP (a nongovernmental, not-for-profit organization). The fair value of Stock A is $5,100 (100 shares × $51), and the fair value of Stock B is $9,800 (200 shares × $49). The total reported is $14,900 ($5,100 + $9,800).
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?
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.
Rose Project is a nongovernmental not-for-profit entity established to help runaway children. Every year, Rose holds a charity benefit at which participants are asked to make pledges. This year, Rose received the following pledges:
Unrestricted: $500,000
Restricted for counseling programs: 200,000
The pledges are legally binding and are expected to be received within the next 12 months. Rose estimates that 5% of the pledges will be uncollectible. At what amount should the pledges be reported on Rose’s statement of financial position as pledges receivable?
$665,000.
NFPs recognize unconditional promises to give at fair value. The present value of estimated future cash flows is an appropriate measure of fair value. However, unconditional promises to give expected to be collected in less than 1 year may be recognized at net realizable value. Rose Project may therefore report net pledges receivable of $665,000 [($500,000 + $200,000) × (1 – .05)].
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.
An NFP received two donations of corporate stock during the year:
Donation 1 Number of shares: 1,000 Adjusted basis per share: $12 FV per share at donation date: $16 FV per share end of year: $15
Donation 2 Number of shares: 2,000 Adjusted basis per share: $7.50 FV per share at donation date: $8 FV per share end of year: $10
What is the carrying amount of the donated stock reported by the NFP at the end of the year assuming no other transactions in the stock?
$35,000.
Investments in equity securities (corporate stock) with readily determinable fair values ordinarily are measured subsequently at fair value in the statement of financial position. Accordingly, the carrying amount of the investments at the end of the year is $35,000 ($15,000 FV at year end + $20,000 FV at year end).
In a nongovernmental not-for-profit entity, which of the following should be included in total expenses?
Grants to other organizations:
Depreciation:
Yes
Yes
Depreciation expense is recognized for most property and equipment. It decreases net assets without donor restrictions. Other types of expenses based on a natural classification recognized by NFPs may include (1) salaries, (2) rent, (3) electricity, (4) interest, (5) awards and grants to others, (6) supplies, and (7) professional fees. But NFPs must report expenses by functional classification (major classes of program services and supporting activities). They also must provide an analysis that disaggregates functional classifications by their natural classifications.
