NON-PROFIT ORGANIZATION (NPO)

1
 NON-PROFIT ORGANIZATION

The four categories of NPOs are

(a) colleges and universities (C&Us),

(b) health care organizations (HCOs),

(c) voluntary health and welfare organizations (VHWOs), and

(d) certain (other) nonprofit organizations (CNOs).

The five main characteristics of NPOs are

(a) the absence of an ownership interest to report to,

(b) a mission to provide services but not at a profit,

(c) the dependence on significant amounts of contributions,

(d) the restriction of donated assets as to their use, and

(e) tax-exempt status for private NPOs (public NPOs are automatically
exempt from income taxes).

The title of the operating statement of private NPOs is statement of activities.

This title is used because NPOs do not have the objective to generate income
but to meet their program costs.

FAS 117 defines financial flexibility as the NPO’s freedom to use resources for
various purposes. Financial flexibility is addressed by requiring display of the
three categories of net assets:

2
 (a) unrestricted,

(b) temporarily restricted, and

(c) permanently restricted.

The two categories of restrictions used in FAS 116 and FAS 117 are

(1) temporarily restricted and

(2) permanently restricted.

FAS 116 states that works of art, historical treasures, and similar assets
(collection items) need not be capitalized as assets and concurrently
recognized as contributions in the statement of activities.

FAS 116 requires that contributed (donated) services be recognized only if they
(a) create or enhance nonfinancial assets or (b) require specialized skills.
Other contributed services cannot be recognized.

Certain contributed (donated) services are not recognized in the statement of

activities because of (a) concerns about the cost to provide that
information and (b) user skepticism about the information provided by
recognizing such services. Furthermore, by preventing such recognition,
inconsistencies in measurements and assumptions between entities are
avoided. This also minimizes biased reporting practices such as a
possible tendency to present favorable ratios of program or fund-raising
costs to total expenses.

3
Only in the absence of explicit donor stipulations concerning a time use may
NPOs classify gifts of long-lived assets as increasing unrestricted net
assets.

Under FAS 116, conditional promises to give are not reported in the financial
statements unless (a) assets have been received (even then they are not
reported in the statement of activities but as refundable advances until the
condition has been satisfied) or (b) the possibility that a condition will not
be met is remote (which substantively makes the contribution
unconditional).

4
PROBLEM A: The following are the transactions of PAREX University:

a. Ms. Pearl Black granted P300,000 to be used for defraying the cost of
holding conference for Accounting updates.
b. By year end- the grant mentioned above had been applied to it purpose
costing the university an amount of P 200,000.
c. The grant provided that the amounts not awarded by year end are to be
transferred to the endowment fund. The liability to the fund is recorded.
d. An alumnus, Ms. Co, who was a former president of the student council
the university, contributed P 50,000 to assist in search for basketball
coach.

1. Prepare the Journal Entries for each transaction.

a. Cash – 300,000
Revenue -Temporary Restricted Contribution – 300,000
b. Expense – 200,000
Cash – 200,000
c. Reclassification Out – Temporary Restricted – SODR (Satisfaction of
Donor Restriction) – 200,000
Reclassification In – Unrestricted –SODR(Satisfaction of Donor
Restriction) -200,000
d. Reclassification Out – TemRes – SODR (Satisfaction of Donor
Restriction) –100,000
Reclassification In – PerRes –SODR(Satisfaction of Donor
Restriction) -100,000
e. Permanent Restricted Net Asset – 100,000
Due to Endowment fund – 100,000
f. Cash – 50,000
Revenue – Temporary Restricted Contribution – 50,000
2. How much is the total Revenue from temporary restricted contribution?
a. 0
b. 50,000
c. 300,000
d. 350,000

5
suggested solution: (D)
Revenue from Temporary Restricted Contribution = 300,000 + 50,000

Refer to entries A and F.

PROBLEM B:The following are the transactions for AMV university:

a. Student tuition and feels billed for the year for P4,000,000, which was used
for educational and general purposes. Prior experience shows P50,000 will
be uncollectible.

b. P3,600,000 of the billings in 'a' were collected.

c. Unrestricted income from endowment funds amounted to P 92,500.

d. Auxiliary enterprise included P87,500 form student residence halls;

P100,000 from cafeterias; and P375,000 from the college store sales. All
amounts have been collected.

e. P150,000 of Term Endowments funds are now available for unrestricted

use.

f. Operating Expenses are paid as follows: Instruction P150,000; Research

P75,000; Academic Support P25,000; Student Services P12,500;
Institutional Support P60,000

g. University's student aid committee granted student tuition and fee

reductions of P100,000.

h. Auxiliary expenses amounted to P375,000

i. The trustees have specified certain current fund revenues must be

transferred to meet the debt service provisions relating to the university's
institutional properties. These mandatory transfers amount to P275,000.

6
3. Prepare the journal entries necessary to record the selected transactions.

Suggested Answer:
a. Accounts Receivable 4,000,000
Revenue-Student Tuition and Fees 3,950,000
Allowance for Uncollectibles 50,000

b. Cash 3,600,000
Accounts Receivable 3,600,000

c. Cash 92,500
Revenue-Endowment Income 92,500

d. Cash 562,500
Revenue-Auxiliary Enterprises 562,500

e. Cash 150,000
Revenue-Endowment Income 150,000

f. Expenses-Instruction 150,000
Expenses-Research 75,000
Expenses-Academic Support 25,000
Expenses-Student Services 12,500
Expenses-Institutional Support 60,000
Cash 322,500

g. Expenses-Student Aid 100,000

Accounts Receivable 100,000

h. Expenses-Auxiliary Services 375,000

Cash 375,000

i. Transfer Out-Plant Funds 275,000

Cash 275,000

7
PROBLEM C: The following events involve a loan fund of Orison Yliad University:

a. To establish the Bermeo Student Loan Fund, two sisters donated

P20,000 cash and securities that cost P40,000. Market value of the
securities at time of donation was P80,000.

b. The securities were later sold for P94,500. The original agreement
stipulated that any gain on the sale or income received from the securities
be added to the loan fund.

c. An appreciative board of trustees transferred P15,000 cash from the

Unrestricted Current Fund to the loan fund.

d. Loans of P70,000 were made to students at 6% annual interest.

e. The board of trustees agreed that loans to students in the amounts of

P4,500 were uncollectible. At year end, the board took action to write off
the uncollectible loans outstanding of P4,500.

f. Collections on Bermeo loans amounted to P6,500 plus P225 in interest.

4. Prepare the journal entries necessary to record the selected transactions.

Suggested Answer:
a. Cash 20,000
Investments 80,000
Revenues – Temporarily Restricted 100,000
Contribution
To record establishment of Hanson Loan
Fund.

8
b. Cash 94,500
Investments 80,000
Revenues – Temporarily Restricted Net
Realized
Gains on Investments 14,500
To record sale of investments.

c. Cash 15,000
Revenues--Unrestricted 15,000
To record discretionary transfer from
Unrestricted Current Funds.

d. Loans Receivable 70,000

Cash 70,000
To record loans made.

e. Expenses – Institutional Support (Loan Write- 4,500

offs)
Loans Receivable 4,500
To record uncollectible student loans
made from restricted funds.

f. Cash 6,725
Loans Receivable 6,500
Revenues – Unrestricted Other Investment 225
Income
To record loan repayments and interest.

9
PROBLEM D: Record the following events of PGH Hospital:

a. Patient Henry was billed for the following: Room and Board, Physicians
care, Laboratory and Xray for the amount of P 500,000, 250,000 and
150,000,respectivey.
b. A donation of drugs with fair value of P150,000 was received from a,
Mr. Sy, a doctor. The said drug is normally purchased.
c. The other following revenues were collected: Parking lot charges,
vending machines and snack bar of P 50,000; 10,000 and 30,000,
respectively.
d. Medicare cleared charges above with contractual adjustments granted
to patients for medicare charges totaled P 150,000.
e. Interim payments received from medicare amounted to P 80,000.

5. Prepare the Journal Entry for each transaction:

a. AR – 900,000
Patient Service Revenue – 900,000
b. Inventory – 150,000
Other Operating Revenue – Unrestricted – 150,000
c. Cash – 90,000
Other Operating Revenue – Unrestricted – 90,000
d. Cash – 750,000
Contractual Adjustment – 150,000
AR – 900,000
e. Cash -80,000
Contractual Adjustment 80,000

6. How much is the Net Patient Service Revenue?

a. 670,000
b. 830,000
c. 900,000
d. 1,110,000

10
suggested solution: (B)
Net patient Service Revenue = 900,000 - 150,000 + 80,000 = 830,000

Gross Patient Service Revenue 900,000

+ Credit Contractual Adjustment + 80,000

- Debit Contractual Adjustment - 150,000

Net Patient Service Revenue 830,000

7. How much is the Other Operating Revenue – Unrestricted?

a. 90,000
b. 150,000
c. 240,000
d. 1,140,000

suggested solution: (B)

Other Operating Revenue = B + C = 150,000 + 90,000 = 240,000

8. How much is the total revenue?

a. 910,000
b. 980,000
c. 1,070,000
d. 1,140,000

suggested solution: (B)

Total Revenue = Net Patient Service Revenue + Other Operating Revenue

= 830,000 + 240,000 = 1,070,000

11
PROBLEM E: The following data apply to Alandia Hospital, a not-for-profit
organization.

a. Summarized cash receipts showed cash received from the following:

Patients and third-party payers P903,420
Other operational activities 57,120
Donor restricted gifts for programs 11,220
Unrestricted interest from investments 25,100

b. Summarized cash payments showed cash paid to the following:

Suppliers and employees P892,140
The bank to cover interest charges 14,500
For the purchase of equipment 45,450

c. Donation of P100,000 cash received with donor restriction that it be

permanently restricted. Income may be used for replacement of
equipment.

d. Bonds payable that would have matured in two years were retired on an
interest date at a face value of P18,000.

e. The cash balance on January 1, 2018, was P168,020. On December 31,

2018, the cash balance was P294,790.

8.How much is the net cash provided by operating activities and

nonoperating revenue?
a. 45,450
b. 82,000
c. 90,220
d. 126,770

12
suggested solution: (C)

Cash flows from operating activities and nonoperating

revenue:
Cash received from patients and third-party payers P903,420
Cash received from other operational activities 57,120
Cash received from restricted gifts 11,220
Cash received from unrestricted interest 25,100
Cash paid to suppliers and employees (892,140)
Cash paid to bank for interest charges (14,500)
Net cash provided by operating activities and P 90,220
nonoperating revenue

9.How much is the net cash provided by investing activities?

a. (45,450)
b. 82,000
c. (90,220)
d. 126,770

suggested solution: (A)

Cash flows from investing activities:

Purchase of equipment P (45,450)
Net cash used by investing activities P (45,450)

9.How much is the net cash provided by financing activities?

a. 45,450
b. 82,000
c. 90,220
d. 126,770

13
 suggested solution: (B)

Cash flows from financing activities:

Retirement of long-term bonds payable P (18,000)
Contributions received restricted for long-term investment 100,000
Net cash provided by financing activities P 82,000

10.How much is the net increase in cash?

a. 45,450
b. 82,000
c. 90,220
d. 126,770

suggested solution: (B)

Cash flow from Operating activities: 90,220

Cash flows from Investing activities: +(45,450)
Cash flows from financing activities: + 82,000
Net Cash Increase (Decrease) 126,770

11.How much is the ending cash balance?

a. 126,770
b. 168,020
c. 294,790
d. 301,250
suggested solution: (C)

Net increase in cash P126,770

Cash balance at beginning of year 168,020
Cash balance at end of year P294,790

14
PROBLEM F: VHWO is a voluntary welfare organization funded by contributions
form the general public. During 2016, unrestricted pledges of P300,000 were
received, of which it was estimated that P36,000 would be uncollectible. By the
end of 2016, P240,000 of the pledges had been collected, and it was expected
that an additional P24,000 of these pledges would be collected in 2017, with the
balance to be written off as uncollectible. Donors did not specify any periods
during which the donations were to be used. Also, during 2016, VHWO sold a
computer for P9,000. Its cost was P10,500, and its book value was P7,500.
VHWO made the correct entry to record the gain on the sale.

12. What amount should VHWO include as unrestricted support in 2016 for
contributions?
a. P240,000
b. P268,000
c. P275,500
d. P300,000 AICPA-adapted

suggested answers: (B)

Collected pledge during the year 240,000

Expected additional collectible within 1 year + 24,000

Unrestricted support 268,000

Because donors placed no restrictions on the pledges, none of them will be

considered restricted support. Moreover, the pledge receivables are expected to be
collected within 1 year and should be reported at their net realizable value.

Amounts estimated as uncollectible should be deducted from pledges received, and

an allowance for uncollectible pledges account should be established.

15