20.9 Flashcards
On January 1, Read, a nongovernmental not-for-profit organization, received $20,000 and an unconditional pledge of $20,000 for each of the next 4 calendar years to be paid on the first day of each year. The present value of an ordinary annuity for 4 years at a constant interest rate of 8% is 3.312. What amount of net assets with donor restrictions is reported in the year the pledge was received?
$66,240.
Contributions received are accounted for at fair value. The fair value of the annual $20,000 payments may be estimated using the present value of payments. The present value of the payments equals $66,240 ($20,000 × 3.312). Unconditional promises to give cash amounts in the future are reported as donor-restricted support unless the donor clearly intended support for current activities. Because unconditional promises to give amounts in future periods usually increase net assets with donor restrictions, the amount of $66,240 is reported accordingly. The $20,000 received on January 1 increases net assets without donor restrictions.
`
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?
Report as income for 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.
The purpose of a statement of financial position for a nongovernmental not-for-profit entity is to provide relevant information about
The assets, liabilities, and net assets, and about their relationships to one another at a moment in time.
A statement of financial position is equivalent to a for-profit entity’s balance sheet. It presents information about assets, liabilities, the classes of net assets, and their relationships at a moment in time.
The prepaid rent of a nongovernmental not-for-profit entity was $80,000 at December 31, Year 2, and $60,000 at December 31, Year 1. Rent expense was $60,000 for Year 2 and $40,000 for Year 1. What amount of cash payments for rent is reported in the Year 2 net cash flows from operating activities presented using the direct method?
$80,000.
The amount of cash payments for rent equals $80,000 ($80,000 Year 2 ending balance of prepaid rent + $60,000 Year 2 expense – $60,000 Year 2 beginning balance of prepaid rent).
Terry, an auditor, is performing test work for a not-for-profit hospital. Listed below are components of the statement of operations:
Revenue relating to charity care: $100,000
Bad debt expense: 70,000
Net assets released from restrictions used for operations: 50,000
Other revenue: 80,000
Net patient service revenue (includes revenue related to charity care): 500,000
What amount would be reported as total revenues, gains, and other support on the statement of operations?
$530,000.
The total revenues, gains, and other support subtotal includes (1) net patient service revenue, (2) premium revenue, (3) other revenue, and (4) net assets released from restrictions used for operations of an NFP. 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 thus do not qualify for recognition as revenue or receivables. Thus, the total revenues, gains and other support is $530,000 ($500,000 net patient service revenue – $100,000 charity care + $50,000 net assets released from restrictions used for operations + $80,000 other revenue).
Net assets is an element of the financial statements of nongovernmental not-for-profit entities (NFPs). It
Is the residual interest in the assets of an NFP after subtracting its liabilities.
Net assets equals the residual interest in the assets of an entity that remains after subtracting its liabilities. In an NFP, which has no ownership interest in the same sense as a business, net assets is classified at a minimum as net assets without donor restrictions and net assets with donor restrictions.
The League, a nongovernmental not-for-profit entity, received the following pledges:
Unrestricted: $200,000
Restricted for capital additions: 150,000
All pledges are legally enforceable and are expected to be received in the upcoming year. The League’s experience indicates that 10% of all pledges prove to be uncollectible. What amount may the League report as a reasonable estimate of the fair value of pledges receivable?
$315,000.
NFPs must 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 that are expected to be collected within 1 year may be recognized as revenue at net realizable value (net settlement value). The reason is that NRV is a reasonable estimate of fair value. The NFP therefore may report net pledges receivable of $315,000 [($200,000 + $150,000) × (1.0 – 0.1 estimated uncollectible)].
Chris donated securities with a cost of $20,000 and a fair market value of $50,000 to a local civic theater. Chris’s tax deduction was limited to $35,000. At what amount should the theater record the securities at the date of donation?
$50,000.
Contributions received ordinarily are accounted for when received at fair value by a nongovernmental not-for-profit entity (NFP). 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., services when the contribution is received and used at the same time). Credits are (1) revenue if the transaction relates to major or central operations (e.g., soliciting contributions) or (2) a gain if the transaction is peripheral or incidental.
Accordingly, the $50,000 fair market value is the initial measurement of the securities at the date of donation.`
Which of the following financial categories are used in a nongovernmental not-for-profit organization’s statement of financial position?
Assets, liabilities, and net assets.
The categories used in an NFP’s statement of financial position are assets, liabilities, and net assets. Assets and liabilities must be classified into reasonably homogeneous groups. Net assets are classified at a minimum as net assets without donor restrictions and net assets with donor restrictions.
The Turtle Society, a nongovernmental not-for-profit entity (NFP), receives numerous contributed hours from volunteers during its busy season. Chris, a clerk at the local tax collector’s office, volunteered 10 hours per week for 24 weeks transferring turtle food from the port to the turtle shelter. His rate of pay at the tax office is $10 per hour, and the prevailing wage rate for laborers is $6.50 per hour. What amount of contribution revenue should Turtle Society record for this service?
$0.
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. The volunteer’s efforts meet neither of these criteria. Thus, no contribution revenue is recognized.
Tyler Pain Easing Group, a nongovernmental not-for-profit organization, had the following balances in its statement of functional expenses:
Medicine: $500,000
Research: 30,000
Management and general: 150,000
Fundraising: 130,000
What amount should Tyler report as expenses for support services?
$280,000.
The expenses of NFPs are classified functionally as 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. The categories are (1) management and general, (2) fundraising, and (3) membership development. Thus, the amount of expenses for support activities is $280,000 ($150,000 management and general + $130,000 fundraising). Medicine and research most likely are program services of the NFP.
Which of the following is not a characteristic of a split-interest agreement?
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.
Forkin Manor, a nongovernmental not-for-profit entity (NFP), wants to reformat its financial statements using terminology that is more readily associated with for-profit entities. The director believes that the term “operating profit” and the practice of segregating recurring and nonrecurring items more accurately depict the NFP’s activities. Under what condition will Forkin be allowed to use “operating profit” and to segregate its recurring items from its nonrecurring items in its statement of activities?
The NFP reports the change in net assets without donor restrictions for the period.
In its statement of activities, an NFP may use such classifications as (1) operating and nonoperating, (2) expendable and nonexpendable, (3) recognized and unrecognized, and (4) recurring and nonrecurring. Furthermore, if an intermediate operating measure (e.g., operating income or operating profit) is used, it must be in a financial statement that at a minimum reports the change in net assets without donor restrictions.
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:
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.
Flat Rock college is a not-for-profit entity. It assessed its students $5,000,000 for tuition and fees. Flat Rock also provided $120,000 for scholarships, $80,000 for fellowships, and $100,000 for tuition waivers. What should Flat Rock report as its total revenue from tuition and fees?
$5,000,000.
The gross amounts of revenues and expenses from the NFP’s ongoing major or central operations are reported. Accordingly, the full amount of the tuition and fees assessed is reported as revenue. Tuition waivers, scholarships, and like items are recorded as expenses if given in exchange transactions. Refunds are accounted for by debiting revenues and crediting cash. Thus, tuition is automatically reported net of refunds.
