Chapter 12

Not-for-Profit Organizations

TRUE/FALSE (CHAPTER 12)

1. FASB Statement No. 117 directs that revenues and expenses be reported in a statement of
financial position.

2. In the statement of activities, FASB Statement No. 117 requires revenues to be reported as
increases in one of the three categories of net assets, depending on donor-imposed
restrictions; however, all expenses should be reported as decreases in unrestricted net assets.

3. Restricted contributions may be reported as unrestricted if the restriction has been met in the
same period as the contribution is made.

4. FASB Statement No. 95 requires not-for-profits to use the direct method in their statements of
cash flows.

5. In accounting for investments, not-for-profits, like businesses, must report their investments
at fair value and classify the investments as either trading, available-for-sale, or held-to-
maturity.

6. FASB Statement No. 93 makes the recognition of depreciation on plant and equipment assets
optional at the discretion of the not-for-profit.

7. Temporarily restricted funds related to plant and equipment generally account only for
resources restricted to their purchase or construction, not for the plant and equipment itself,
which are typically reported in the unrestricted fund.

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MULTIPLE CHOICE (CHAPTER 12)

1. The basis of accounting used by not-for-profit organizations in their external financial reports
is
a) Industry-specific basis of accounting.
b) Cash basis of accounting.
c) Modified accrual basis of accounting.
d) Accrual basis of accounting.

2. FASB require the balance sheets of not-for-profits to display

a) Net assets in four separate categories—unrestricted, temporarily restricted, permanently
restricted, and restricted by creditors.
b) Three separate funds—unrestricted, temporarily restricted, and permanently restricted
net assets.
c) Six totals—total assets, total liabilities, total net assets, total unrestricted net assets, total
temporarily restricted net assets, and total permanently restricted net assets.
d) Unrestricted, temporarily restricted, and permanently restricted retained earnings.

3. FASB requires external financial reports to provide information about

a) Donor-imposed restrictions on resources.
b) All restrictions on resources.
c) Donor and creditor restrictions on resources.
d) None of the above.

4. Expenses incurred by not-for-profit organizations should be reported as

a) Decreases in one of the three categories of net assets.
b) Decreases in unrestricted net assets.
c) Decreases in temporarily restricted net assets.
d) Decreases in permanently restricted net assets.

5. Revenues of a not-for-profit organization should be reported as

a) Increases in one of the three categories of net assets.
b) Increases in unrestricted net assets.
c) Increases in temporarily restricted net assets.
d) Increases in permanently restricted net assets.

6. Restricted gifts to not-for-profit organizations

a) Must always be shown as an increase in restricted net assets.
b) Must always be shown as an increase in unrestricted net assets.
c) May be shown as an increase in unrestricted net assets if the restriction is met in the
same period.
d) May be shown as an increase in unrestricted net assets at the discretion of management.

7. The account title “Resources Released from Restriction” is reported by a ‘restricted fund’ as a
a) Revenue account.
b) Contra-revenue account.
c) Expense account.
d) Contra-expense account.

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8. The account title “Resources Released from Restriction” is reported by an unrestricted “fund”
as a
a) Revenue account.
b) Contra-revenue account.
c) Expense account.
d) Contra-expense account.

9. FASB requires that all not-for-profit organizations report expenses

a) By object.
b) By function.
c) By natural classification.
d) By budget code.

10. The National Association for the Preservation of Wildlife received $10,000 from a benefactor
to support the overall objective of the organization. This amount will be recognized as
revenue
a) In the period received.
b) In the period spent.
c) Never, because it is not earned.
d) In the period it becomes susceptible to accrual.

11. Not-for-profit organizations report their cash flows in which of the following categories?
a) Operating, noncapital financing, capital financing, investing.
b) Operating, noncapital financing, investing.
c) Operating, capital financing, investing.
d) Operating, financing, investing.

12. Not-for-profit organizations should report contributions restricted for long-term purposes in
which of the following cash flows categories?
a) Operating
b) Financing.
c) Capital financing.
d) Investing.

13. Not-for-profit organizations should report interest and dividends earned and restricted for
long-term purposes in which of the following cash flows categories?
a) Operating
b) Financing.
c) Capital financing.
d) Investing.

14. The characteristic that most clearly distinguishes a contribution from an exchange transaction
is which of the following?
a) Cash is always received.
b) An exchange transaction is a reciprocal transfer of resources.
c) An exchange transaction is a nonreciprocal transfer of assets.
d) There are always restrictions attached to use of the assets received as a result of a
contribution.

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15. Revenue from an exchange transaction may be classified as an increase in which class of net
assets?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) Any of the above.

16. During the annual fundraising drive, the Cancer Society raised $900,000 in pledges of
financial support for their general operations. By the fiscal year-end, the Society had
collected $600,000 of the pledges. The Society estimates that 10% of the remaining pledges
will be uncollectible. The NET amount of revenue the Society should recognize during the
current year from this pledge drive is
a) $900,000.
b) $870,000.
c) $810,000.
d) $600,000.

Use the following information to answer Questions 17 through 20.

United Charities’ annual fund raising drive in 2006 raised pledges of $600,000 of which
$400,000 were collected in 2006 and $100,000 were collected in 2007. United Charities
estimates $75,000 of the remaining pledges will never be collected.

17. The increase in unrestricted net assets in 2006 as a result of the fund raising drive is
a) $600,000.
b) $525,000.
c) $400,000.
d) $125,000.

18. The increase in temporarily restricted net assets in 2006 as a result of the fundraising drive is
a) $600,000.
b) $525,000.
c) $400,000.
d) $125,000.

19. In 2007, the change in temporarily restricted net assets is

a) $0
b) $100,000 decrease.
c) $100,000 increase.
d) $500,000 decrease.

20. In 2007, the change in unrestricted net assets is

a) $0
b) $100,000 increase.
c) $100,000 decrease.
d) $500,000 increase.

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21. In a prior year, United Charities received a $100,000 gift to be used to acquire vans to
provide transportation for physically challenged adults. During the current year, United
acquired two vans at a cost of $60,000 each. The appropriate entry(ies) to record the
acquisition should be
a) UNRESTRICTED FUND
Resources released from restriction $100,00
Cash $100,000
RESTRICTED FUND
Fixed Assets $120,000
Cash $ 20,000
Resources released from restriction $100,000
b) RESTRICTED FUND
Resources released from restriction $ 100,000
Cash $100,000
UNRESTRICTED FUND
Fixed Assets $120,000
Resources released from restriction $100,000
Cash $ 20,000
c) UNRESTRICTED FUND
Fixed Assets $120,000
Cash $120,000
d) RESTRICTED FUND
Fixed Assets $120,000
Cash $120,000

22. In the current year National Pet Charities, which uses fund-type accounting to maintain its
books and records, received a $30,000 contribution to help educate people on responsible pet
ownership. During the current year, the entry to record this donation is
a) UNRESTRICTED FUND. No entry.
RESTRICTED FUND. Debit Cash $30,000; Credit Revenues $30,000.
b) UNRESTRICTED FUND. No entry.
RESTRICTED FUND. Debit Cash $30,000; Credit Net Assets $30,000.
c) UNRESTICTED FUND. Debit Cash $30,000; Credit Revenues $30,000.
RESTRICTED FUND. No entry.
d) UNRESTRICTED FUND. Debit Cash $30,000; Credit Net Assets $30,000.
RESTRICTED FUND. No entry.

23. During the current year a not-for-profit entity received a contribution of $50,000 to use for
scholarships. In the current year the entity had already budgeted $200,000 for scholarships.
During the current year, the entity disbursed $175,000 for scholarships. The amount the
entity can consider as ‘released from restriction’ in the current year is
a) $0.
b) $50,000.
c) $175,000.
d) $200,000.

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24. Grace Church, a not-for-profit entity, operates a school in connection with the Church. This
year members of the Church decided to construct a new wing on the school with six
classrooms. The Church hired an architect and a construction supervisor. The bulk of the
labor for construction was donated by Church members who were willing workers but not
necessarily skilled carpenters. Materials for the construction cost $300,000 and the paid
labor was $100,000. The fair value of the completed building is $1 million. When the
building is completed what should be the balance in the asset account “Building” and the
account “Contributed Revenue”?
a) Building $400,000; Contributed Revenue $0.
b) Building $400,000; Contributed Revenue $600,000.
c) Building $1 million; Contributed Revenue $600,000.
d) Building $1 million; Contributed Revenue $0.

25. Mary’s Extended Care Center, a not-for-profit entity, enjoys the services of a group of high
school age people who each agree to work three afternoons a week for three hours each
afternoon performing a variety of patient-related services such as writing letters for those who
are unable to do so, delivering mail to the patient rooms, and pushing wheel-chair patients
across the grounds. The services rendered by these young people enhance the quality of life
for the residents. They could not be provided if they were not donated because there are not
enough resources to do so. The past year the young people donated 5000 hours in total. The
services would have cost $6.00 per hour if they had been purchased but they were worth $10
an hour to St. Mary’s. What is the amount of contributed revenue that should be recognized
by St. Mary’s related to these services?
a) $50,000.
b) $30,000
c) $0.
d) Cannot determine.

26. Simplex Games, a not-for-profit entity organized to provide athletic competition

opportunities for high school students, utilizes a number of volunteers in carrying out its
mission. At the 2007 Games 50 volunteers provided a total of 1000 hours of service
performing tasks such as picking up litter and delivering water to the athletes. A local CPA
firm donates its services to prepare the annual tax return and other federal and state required
paperwork which must be filed to maintain its status as a tax-exempt organization. During
2007 the CPA firm provided 50 hours of service. If purchased, the CPA services would have
cost $50 per hour and the game workers would have cost $5 per hour. How much contributed
service revenue should Simplex Games recognize in 2007?
a) $7,500.
b) $5,000.
c) $2,500.
d) $0.

27. A not-for-profit Art Museum that has elected not to capitalize its art collection receives a
donation of a rare piece of Tlinket Indian art. The donor paid $8,000 for the piece several
years ago. Today the piece has an estimated fair value of $50,000. What entry should the Art
Museum make upon receipt of this donation?
a) Debit Collection Items $50,000; Credit Donated Revenue $50,000.
b) Debit Collection Items $8,000; Credit Donated Revenue $8,000.
c) Debit Collection Items $50,000; Credit Unrestricted net assets $50,000.
d) No entry required.

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28. Greene County Historical museum, a not-for-profit entity that capitalizes its collection items,
received a gift of several Civil War artifacts to be used for display and research. The donor
found these items while cleaning out the closet of an old house. The fair value is hard to
estimate but a dealer in these types of artifacts estimates their value at $2,000. The entry to
record this donation is
a) Debit Collection Expense, $2,000; Credit Contributions Revenue $2,000.
b) Debit Collection Items $2,000; Credit Contributions Revenue $2,000.
c) No entry is required because the cost to the donor was $0.
d) No entry required because the value of the items is estimated.

29. Native Art Museum, a not-for-profit entity that elects not to capitalize its collection items,
purchased for $10,000 a wonderful totem pole for display near the door of the Museum. As a
result of this transaction, which of the following entries should be made?
a) Debit Collection Items $10,000; Credit Cash $10,000.
b) Debit Collection Expense $10,000; Credit Cash $10,000.
c) Debit Unrestricted Net Assets $10,000; Credit Cash $10,000.
d) No entry is required.

30. The Nature Conservatory, a not-for-profit entity, engaged in a fundraising drive to raise
money to buy land to provide a habitat for the endangered Sleepy Eagle. A donor pledged $1
million to the project provided that the Nature Conservatory was able to raise an additional
$1.5 million from other sources. What entry should the Nature Conservatory make at the
time of the $1 million pledge?
a) Debit Pledge Receivable $1 million; Credit Unrestricted Revenue $1 million.
b) Debit Pledges Receivable $1 million; Credit Temporarily Restricted Revenue $1 million.
c) Debit Pledges Receivable $1 million; Credit Temporarily Restricted Net Assets $1
million.
d) No entry is made at the time of the pledge.

31. When should a not-for-profit entity recognize pledge revenue that is contingent upon raising a
matching amount?
a) When the pledge is made.
b) When the cash is received.
c) When the matching funds have been raised.
d) When the project is completed.

32. A donor pledges $100,000 to the Shakespeare Foundation to be used only to support the
summer Shakespeare Theater—an event that has been held every summer for 38 years. This
is an example of a
a) Conditional Contribution.
b) Unconditional contribution.
c) Restricted contribution.
d) Unrestricted contribution.

33. United Charities accepted a contribution from a donor and agreed to transfer the assets to Aid
for Friends, a not-for-profit that provides temporary shelter to the homeless. United Charities
should debit cash or other assets and credit
a) Unrestricted revenue.
b) Temporarily restricted revenue.
c) Liability to Aid for Friends.
d) United Charities should not make an entry.

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34. Music Lovers Foundation, a not-for-profit governed by an independent board, was founded to
support the Northern State University Choir until such time as the state legislature shall
adequately fund the choir. When the Choir is adequately funded by appropriation the
Foundation may direct resources to other music projects that it deems acceptable. When
Music Lovers accepts a contribution from a donor it should debit cash and/or other assets and
credit
a) Unrestricted revenue.
b) Temporarily restricted revenue.
c) Liability.
d) It should not make an entry.

35. The Save the Animals Foundation received a gift of $500,000 from a donor who wanted the
gift used to acquire habitat for endangered snails. The money may be invested but all
earnings are restricted to habitat acquisition. During the year the entire gift was invested in
corporate securities. At year-end, the securities had a value of $501,000. The appropriate
way to recognize the change in fair value is
a) Debit Investment $1,000; Credit Unrestricted Revenue $1,000.
b) Debit Investment $1,000; Credit Temporarily Restricted Revenue $1,000.
c) Debit Investment $1,000; Credit Permanently Restricted Revenue $1,000.
d) No entry should be made until the securities are sold.

36. During the year, a not-for-profit entity received $15,000 in dividends and $12,000 in interest
on its investment portfolio. The entity also accrued $3,000 in interest on the portfolio. The
increase in fair value of the portfolio during the year was $4,000. How much should the
entity report for investment earnings during the year?
a) $31,000.
b) $27,000.
c) $4,000.
d) $0.

37. The Friends of the Library (FOL), a not-for-profit entity, received a gift restricted to
acquisition of a special piece of the equipment used to restore books. Late last year FOL
acquired the machine at a total cost of $19,000. The machine is estimated to have a useful
life of eight years and a salvage value of $3,000. In what fund should FOL make the entry to
record the depreciation for the current year?
a) Unrestricted fund.
b) Temporarily restricted fund.
c) Permanently restricted fund.
d) FOL should not recognize depreciation.

38. Which of the following entities should recognize depreciation expense on its operating
statement?
a) Not-for-profit university.
b) Not-for-profit foundation.
c) Not-for-profit hospital.
d) All of the above.

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39. A not-for-profit would include which of the following financial statements in its Basic
Financial Statements?
a) Statement of Financial Position and Statement of Activities.
b) Statement of Financial Position, Statement of Activities, and Cash Flow Statement.
c) Statement of Financial Position, Statement of Activities, Cash Flow Statement, and a
Statement of Functional Expenses.
d) Statement of Financial Position, Statement of Activities, and a Statement of Functional
Expenses.

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PROBLEMS (CHAPTER 12)

1. United Charities, a not-for-profit entity, supports activities for lower-income families. They
have regularly engaged in activities such as providing transportation for physically challenged
individuals, providing shelters for the temporarily homeless, providing congregate meals for the
homeless, and providing shelters for abused women and children. Record the following
transactions. Your account titles should clearly indicate to which class of net assets the entry will
be closed or the fund in which the entry is being made. If no entry is required, write “No entry
required.”

a. United Charities engaged in a fund-raising campaign that resulted in pledges of $600,000 to

support activities of the current year. During the year, United collected $500,000 on these
pledges.

b. A local citizen pledged $50,000 to purchase and equip a van to provide transportation for
physically challenged individuals. This citizen has donated regularly and there is no reason
to believe that this pledge will not be collectible.

c. In prior years, an advocacy group for abused women donated $10,000 to be used to furnish a
“safe-house” for abused women and children. During the current year renovation of the safe
house was completed and furniture was acquired at a total cost of $15,000.

d. A wealthy benefactor pledged $100,000 to United if United successfully raises a matching

amount in a capital asset fund-raising drive being conducted over a 12-month period.

e. $60,000 cash is received from a donor who specifies that the money must be spent to provide
educational activities for children who will be living in the “safe-house.” It will be next year
before the “safe-house” has its first residents.

f. A local attorney has agreed to provide legal services to United on a pro bona basis. During
the current period the attorney provided services for which she would have billed $1,500.

g. Several older housewives provide services at the United Charities congregate meal setting
facility. These women work in the kitchen serving meals and cleaning up the kitchen. If
these services were not donated they would have had to purchase them. The value of these
services at the prevailing wage rate for similar employees would have amounted to $50,000
for the current year.

h. Fixed assets belonging to United Charities had an original cost of $270,000, an estimated
salvage value of $70,000, and an estimated useful life of 20 years. Record depreciation if
applicable.

i. $75,000 is received from a donor who specifies that $25,000 is for use by United Charities
and $50,000 is to be used by Zimbabwe Charities, United’s sister organization in Africa.

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2. The Heritage Art Museum, a not-for-profit entity specializing in art items created by natives of
the Pacific Northwest, has a December 31 fiscal year-end. The Museum has a policy of NOT
capitalizing collection items. Your entry should clearly indicate to which class of net assets
the account would be closed, or in which fund the entry is being made. If no entry is required,
write “No entry required.”

a) During the current year the Museum received admissions fees in cash $500,000.

b) Citizens of the local community are encouraged to participate in a program called “Friends
of the Museum.” For a yearly contribution of $25 per family, a family is entitled to free
admission to the Museum during the calendar year. A “Friend of the Museum” also
receives a monthly one-page newsletter announcing upcoming events. At year-end, there
were 1000 members in the “Friends of the Museum.”

c) During the current year the Museum incurred salary expense of $1 million of which
$60,000 remains unpaid at year-end.

d) During the year the Museum incurred operating expenses of $400,000 of which $30,000
remains unpaid at year-end. Of the $400,000, $50,000 was used to buy supplies of which
$20,000 remains on hand at year-end.

e) Office equipment owned by the Museum has a historical cost of $100,000, salvage value
of $20,000 and can be depreciated over 8 years on the straight-line basis.

f) During the year the Museum conducted a fund-raising drive to raise money to acquire new
art items for the Museum. The Museum received pledges of $200,000 of which the
Museum had collected $150,000 by year-end and expected to ultimately collect another
$20,000.

g) The Museum had a small portfolio of investments in equity securities.. At the beginning
of the year the portfolio had a fair value of $60,000. During the year the Museum
collected $3,000 in dividends on the securities. At year-end the portfolio had a market
value of $61,000.

h) During the year a citizen died and willed his wonderful collection of native art to the
Museum. The appraised value of the collection was $600,000.

i) To balance its collection, the Museum sold two of its collection items for $250,000, which
approximates fair value. These items had a historical cost to the Museum of $10,000.

j) The proceeds of the sale were used to acquire two new items at a cost of $310,000.

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3. Save the Children Foundation has the following types of cash receipts and disbursements
during its current fiscal year. Indicate in which categories each of these flows would be
reported in the Foundation’s statement of cash flows.

a. Unrestricted contributions
b. Sales of handmade crafts
c. Contributions restricted to capital asset acquisition
d. Contributions to endowments
e. Investment earnings on endowments, not required to be added to the
endowment
f. Salaries
g. Interest paid on short-term loan
h. Capital asset purchases
i. Investments sold
j. Short-term loan proceeds
k. Contributions made to other organizations
l. Capital lease payments.

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4. In June 2006, the wealthy parents of a college sophomore pledge to donate $3 million to the
college she attends, making payments of $1 million at the end of each of her remaining years
at the school until her expected graduation in 2009. Assuming the college does not use
separate funds to track restricted resources, prepare the entries required, if any, to recognize
the pledge in 2006. The college applies a discount rate of 3%. Based on that rate, the present
value of $1 for three periods is $2.82861. What entries, if any, would be required to record
the receipt of the first $1 million at the end of year 1?

5. In December 2006, Technology University received a $2 million grant from the National
Hockey Association to develop an effective neck brace to prevent injuries in its non-goalie
hockey players. The NHA grant was intended to cover $1.5 million of direct costs and $0.5
million in overhead costs. The grant stipulated that the NHA would be the sole beneficiary of
the research. Technology carried out the research in 2007. As estimated, direct costs were
$1.5 million.

REQUIRED:

a. What accounting entries, if any, should Technology make when notified of the grant?
b. What accounting entries, if any, should Technology make in 2007? (Be sure to indicate
in which funds the entries would be recorded.)
c. Would your answer be different if the research were made available to the general public,
and not just the NHA? Explain.
d. Would your answer be different if the NHA indicated it would not make any payments on
the research until Technology delivers the final research product?

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ESSAYS (CHAPTER 12)

1. For each of the cases below state whether the contributed services would be recognized, how
much would be recognized, and how it would be recognized. Explain your answer in terms of the
existing standard. Also explain why, in your opinion, the standard permits/prohibits recognition
of this particular type of contribution.

a. A church votes to construct a new educational wing on its existing facility. The church will
hire an architect to design the new wing and a construction supervisor to oversee the
construction. Church members will provide most of the labor for the construction. Labor
donated by members who have construction experience or who are considered professional
craftsmen at the prevailing wage for their trade or craft is $500,000. Labor donated by
persons possessing non-building specialized skills (doctors, teachers, lawyers, etc.) at their
prevailing wage rates is $700,000. Labor donated by non-professionals measured at the
minimum wage is $300,000. The appraised value of the building when completed is $3
million. The architect was paid $700,000, the construction supervisor was paid $50,000 and
the materials purchased for use in the building cost $1 million.

b. An investment advisor, a member of the Board of a not-for-profit entity, provides pro bona
investment advice to the NFP. The NFP does not have a particularly large investment
portfolio and without the advice of the Board member the NFP would probably invest its idle
cash in certificates of deposits at an insured commercial bank to protect itself against loss of
its principal. If the investment advisor had provided similar services to his customers he
would have charged $2,000.

b. Members of a religious order provide professional nursing services for a healthcare facility
that is run by their order. The members are not compensated but their order provides lodging,
food, and other necessities. The cost of the lodging, food, etc., is paid by the healthcare entity
and classified as Nursing Service Expense. At the end of the year the balance in the Nursing
Service Expense account is $3 million. The value of the nursing services provided, measured
at the prevailing wage for nurses, is $5 million.

2. A generous benefactor pledges $1 million to The R. J. Smith Foundation, a not-for-profit

entity that promotes the arts. The gift is to be used to provide scholarships for talented musicians
at a music camp operated by the Foundation. The gift was given in August 2006 to support the
Summer 2007 music program. The Foundation Director argues that the gift is a conditional
restricted gift and therefore cannot be recognized as revenue in 2006. The accountant argues that
the gift is an unconditional restricted gift and must be recognized in the current year. What is the
basis for the Director’s argument? What is the basis for the accountant’s argument? In your
answer provide an explanation of the terms conditional, unconditional, restricted and unrestricted.

3. Alpha Hospital is a recipient of Hill-Burton funds and must provide some hospital care
for which it will not be compensated. During the current year, Alpha Hospital provided $1
million in charity care. What is the current financial reporting requirement for charity care? Do
you agree or disagree with the current financial reporting requirement? Why or why not? If you
do not agree, how do you think charity care should be reported? If you agree with the current
standards, what alternative reporting requirements do you believe would be proposed by those
who do not agree with the current standards?

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ANSWERS TO TRUE/FALSE (CHAPTER 12)

1. T
2. T
3. T
4. F
5. F
6. F
7. T

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ANSWERS TO MULTIPLE CHOICE (CHAPTER 12)

1. D
2. C
3. A
4. B
5. A
6. C
7. B
8. A
9. B
10. A
11. D
12. B
13. B
14. B
15. A
16. B
17. C
18. D
19. B
20. B
21. B
22. A
23. B
24. C
25. C
26. C
27. D
28. B
29. B
30. D
31. C
32. C
33. C
34. A
35. B
36. A
37. A
38. D
39. B

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ANSWERS TO PROBLEMS (CHAPTER 12)

Problem 1

There are two approaches to the entries. The textbook assumes that all assets received with
restrictions are recorded in a restricted fund. FASB SFAS No. 117 illustrations show all assets in
the unrestricted fund with the only identification of restrictions being the balance in restricted
(temporarily or permanently) net assets. Solution #1A presents the textbook solutions. Solution
#1B presents entries that would be used if the FASB illustration were used.

Solution #1A

a) TEMPORARILY RESTRICTED FUND

Pledges Receivable $100,000
Revenue $100,000

UNRESTRICTED FUND
Cash $500,000
Revenue $500,000

b) TEMPORARILY RESTRICTED FUND

Pledge Receivable $ 50,000
Temporarily Restricted Revenue $ 50,000

c) TEMPORARILY RESTRICTED FUND

Resources Released from Restriction $ 10,000
Cash $ 10,000

UNRESTRICTED FUND
Fixed Assets $ 15,000
Resources released from Restriction $ 10,000
Cash $ 5,000

d) No entry required.

e) TEMPORARILY RESTRICTED FUND

Cash $ 60,000
Revenue $ 60,000

f) UNRESTRICTED FUND
Legal Expenses $ 1,500
Revenue $ 1,500

g) No entry required.

h) UNRESTRICTED FUND
Depreciation Expense $ 10,000
Accumulated Depreciation $ 10,000

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i) UNRESTRICTED FUND
Cash $ 75,000
Revenue $ 25,000
Payable to Zimbabwe Charity $ 50,000

Solution #1B (An Alternative)

a. Cash $500,000
Pledge Receivable $100,000
Unrestricted Revenue $500,000
Temporarily Restricted Revenue $100,000

b. Pledges Receivable $ 50,000

Temporarily Restricted Revenue $ 50,000

c. Fixed Assets $ 15,000

Cash $ 15,000

Temporarily Restricted Net Assets $ 10,000

Unrestricted Net Assets $ 10,000

d. No entry required.

e. Cash $ 60,000
Temporarily Restricted Revenue $ 60,000

f. Legal Expenses $ 1,500

Revenue $ 1,500

g. No entry required.

h. Depreciation Expense $ 10,000

Accumulated Depreciation $ 10,000

i. Cash $ 75,000
Revenue $ 25,000
Payable to Zimbabwe Charity $ 50,000

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Problem 2

There are two approaches to the entries. The textbook assumes that all assets received with
restrictions are recorded in a restricted fund. FASB SFAS No. 117 illustrations show all assets in
the unrestricted fund with the only identification of restrictions being the balance in restricted
(temporarily or permanently) net assets. Solution #2A presents the textbook solutions. Solution
#2B presents entries that would be used if the FASB illustration were used.

Solution #2A

a) UNRESTRICTED FUND
Cash $ 500,000
Revenue $ 500,000

b) UNRESTRICTED FUND
Cash $ 25,000
Revenue $ 25,000

c) UNRESTRICTED FUND
Salary Expense $1,000,000
Cash $ 940,000
Wages Payable $ 60,000

d) UNRESTRICTED FUND
Operating Expenses $ 380,000
Supplies $ 20,000
Cash $ 370,000
Accounts Payable $ 30,000

e) UNRESTRICTED FUND
Depreciation Expense $ 10,000
Accumulated Depreciation $ 10,000

f) TEMPORARILY RESTRICTED FUND

Cash $ 150,000
Pledges Receivable $ 50,000
Allowance for Uncollectible Accounts $ 30,000
Revenue $ 170,000

g) UNRESTRICTED FUND
Cash $ 3,000
Investment $ 1,000
Investment Revenue $ 4,000

h) No entry required. Note disclosure is required.

i) UNRESTRICTED FUND
Cash $ 250,000
Revenue $ 250,000

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j) UNRESTRICTED FUND
Acquisition Expense $ 310,000
Cash $ 310,000
(Note disclosure required)

Solution #2B

a) Cash $ 500,000
Unrestricted Revenue $500,000

b) Cash $ 25,000
Unrestricted Revenue $ 25,000

c) Salary Expense $1,000,000

Cash $ 940,000
Wages Payable $ 60,000

d) Operating Expenses $ 380,000

Supplies $ 20,000
Cash $ 370,000
Accounts Payable $ 30,000

e) Depreciation Expense $ 10,000

Accumulated Depreciation $ 10,000

f) Cash $ 150,000
Pledges Receivable $ 50,000
Allowance for Uncollectible Accounts $ 30,000
Temporarily Restricted Revenue $ 170,000

g) Cash $ 3,000
Investment $ 1,000
Investment Revenue $ 4,000

h) No entry required. Note disclosure is required.

i) Cash $ 250,000
Unrestricted Revenue $ 250,000

j) Acquisition Expense $ 310,000

Cash $ 310,000
(Note disclosure is required)

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Problem 3

Cash flows from operating activities

a. Unrestricted contributions
b. Sales of handmade crafts
e. Investment earnings on endowments
f. Salaries
g. Interest paid on short-term loan
k. Contributions made to other organizations

Cash flows from investing activities

h. Capital asset purchases
i. Investments sold

Cash flows from financing activities

c. Contributions restricted to capital asset acquisition
d. Contributions to endowments
j. Short-term loan proceeds
l. Capital lease payments

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Problem 4

In June 2006:
Pledges receivable $2,828,610
Temporarily restricted revenue $2,828,610

In June 2007:
Cash $1,000,000
Pledges receivable $ 915,142
Interest revenue $ 84,858

Temporarily restricted net assets $ 915,142

Unrestricted net assets $ 915,142

Problem 5

a. This grant has the characteristics of an exchange transaction rather than a

contribution. No entry would be required when the grant is received (the contract signed). In
essence, the grant is a contract. At the time the grant is received, Technology has not yet
performed its promised research services; the NHA has not yet made any payments.

b. The grant is a contract that, by definition, is not donor restricted. All entries
would be recorded in the unrestricted fund.

2007

Research expenses (direct) $1.5 million

Cash (or accounts payable) $1.5 million
To record research expenses

Grants and contracts receivable $2 million

Revenue from sponsored research $2 million
To recognize revenue from the sponsored research

c. If the research were to be made available to the general public rather than just to the NHA,
the grant would be a nonexchange transaction rather than an exchange transaction.
Restricted grant revenue would be recognized when the pledge was received.

d. FASB Statement No. 116 stipulates that revenue from conditional contributions should not
be recognized until the conditions are satisfied. Therefore, Technology would not recognize
revenue from NHA’s contribution until it had completed the research.

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ESSAY ANSWERS (CHAPTER 12)

1. [Note: Asking for the students’ explanations of WHY the FASB prohibited/permitted
recognition of specific types of contributed services is designed to elicit thought by the student.
There are no technically correct answers to WHY the FASB prohibited/permitted recognition of
these specific types of contributed services.]

a. The value of all of the contributed services can be recognized because the services are used to
create or enhance a non-financial asset. The value that would be assigned to contributed
services would be the difference between the appraised value of the building ($3 million) and
directly attributable costs ($1 million for materials, $700,000 for the architect and $50,000 for
the construction supervisor). In this case the entry would be
Building $1,250,000
Contributed Revenue $1,250,000
FASB probably permitted the recognition of contributed services that create or enhance a
non-financial asset because not to do so would understate the value of the tangible asset on
the financial statements. An alternative would have been to allow the asset to be valued at
appraised value and record the $1,250,000 as a direct addition to equity. If this approach
were taken, however, not all changes in net assets would be reported in the statement of
activities.

b. The value of the contributed services cannot be recognized because the services, although
provided by a person possessing specialized skills, would not have been purchased if not
provided by donation. FASB probably prohibited recognition of this type because
recognition would overstate the costs incurred in delivering the goods or services when the
organization would not have otherwise have purchased these services.

c. The value of the contributed services should be recognized because the services require
specialized skill, are provided by someone with that skill, and would have to be purchased if
not provided. The amount that should be recognized is $2 (the difference between the market
value of the services and the disbursements on behalf of the members of the order).
Nursing Service Expense $2 million
Contributed Service Revenue $2 million
FASB probably permitted the recognition of contributed services that would otherwise be
purchased because to do otherwise would understate the cost of providing the goods or
services for which the entity was organized. [Note: Why FASB limited it to professionals is
less obvious. Students will probably have different ideas about why it is limited to
professionals.]

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2. All gifts, whether in tangible assets or in promises to give assets in the future, may be
classified as conditional or unconditional and as restricted or unrestricted. Conditional
promises or pledges are promises to give if, and only if, a specified future and uncertain event
occurs. All other promises or pledges to give are considered unconditional. A conditional
gift carries with it an uncertainty about its ultimate receipt. A restricted gift is a gift that must
be used for a purpose that is more limited than the general nature of the operations of an
entity. All other gifts are unrestricted. For example, in this case a gift to support the fine arts
would be considered unrestricted because the nature of the entity is to support the fine arts. A
gift to a comprehensive university to support fine arts would probably be restricted because
the nature and purpose of the entity encompasses more than the fine arts.

In this case, the Director considers the gift conditional because holding the summer music
camp is a future and uncertain event. The accountant must feel that there is little uncertainty
about holding the summer music camp. Both agree the gift is restricted because its purpose is
more limited than the purpose of the entity.

3. Current financial reporting standards specify that gross revenue should exclude the value of
services performed for charity care. The standards require disclosure of the policies for providing
charity care and the amounts provided based on the organization's rates, costs, or other measures.

[Note: Whether or not students agree with the standard will differ. The arguments against
including the value of charity care are generally based on the fact that the amounts will never be
recovered and were never intended to be recovered. The arguments for including charity care in
gross revenues are generally based on the notion that omission of the amounts understates the
value of services performed. There are costs incurred related to performing charity care and
omission of the related revenues causes the ratios of costs to revenues to be misleading.

The best alternative, of course, is to treat charity care in the same manner as bad debts. Include
within gross revenue the value of the charity care performed and include within the expenses an
amount equal to the value of charity care performed. Many students will believe that this is a
fairer presentation.]

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