Solution manual advanced accounting 11th edition joe ben hoyle chap018

Historically, the financial reporting for private not-for-profit entities has differed significantly according to the type of organization such as a health care entity versus a college o

CHAPTER 18 ACCOUNTING AND REPORTING FOR PRIVATE

NOT-FOR-PROFIT ORGANIZATIONSChapter Outline

I Historically, the financial reporting for private not-for-profit entities has differed significantly according to the type of organization (such as a health care entity versus a college or university) The reporting of these entities has now been largely standardized by FASB pronouncements that focus on the reporting of financial statements for the entity as a whole and on significant events such as the receipt of contributions and the recording of mergers and acquisitions However, public colleges and universities and similar organizations still must follow the standards issued by GASB

A This chapter looks at the financial reporting for private not-for-profit organizations with special emphasis on private colleges and universities, voluntary health and welfare organizations, and health care entities.

B Reporting for these organizations should be similar to a business entity unless a critical difference exists that impacts the needs of financial statement users Several critical differences can be identified.

1 Many private not-for-profit organizations receive a significant amount of their

financial resources from contributions rather than from revenues or capital

investments.

2 Some of the resources given to a private not-for-profit organization include

donor-imposed restrictions.

3 No single indicator of success is present in the financial reporting No number such

as net income provides a means for evaluation as it does for a for-profit business entity.

II FASB has established the following financial statements for a private not-for-profit

organization.

A Statement of Financial Position reports assets, liabilities, and net assets.

B Statement of Activities and Changes in Net Assets reports revenues, expenses, gains, and losses.

C Statement of Cash Flows

D A voluntary health and welfare organization is also required to present a Statement of Functional Expenses which indicates the allocations of resources to program services (to meet the goals of the organization) and supporting services (to operate the

organization and raise funds).

III For reporting purposes, the economic resources held by a private not-for-profit organization are classified within one of three categories.

A "Unrestricted net assets" indicates the amount of an entity's resources that are not subject to external donor restrictions Officials of the organization can make whatever use they wish of these assets.

B "Temporarily restricted net assets" are restricted by an outside party (often a donor) for

a particular purpose or for use in a future period of time When the restriction is

satisfied, these resources are switched to unrestricted net assets Thus, on the

statement of activities and changes in net assets, temporarily restricted net assets are shown as being reclassified as unrestricted net assets when the appropriate time has passed or the resource is used as stipulated

C "Permanently restricted net assets" are expected to remain restricted for as long as the organization exists Income from these assets is normally unrestricted or temporarily restricted based on the specifications of the donor.

IV Contributions should be recognized as revenues when received.

A Restricted contributions are recognized as revenue either within temporarily restricted net assets or permanently restricted net assets based upon the stipulations of the donor.

B Donated assets are recorded at fair value Recognition of art works, historical treasures, and the like is not required (although still allowed) if three conditions are all met.

1 The items are added to a collection for public exhibition, education, or research.

2 The items are protected and preserved.

3 If sold, receipts must be used to acquire other collection items.

C Unconditional promises to give that are received by a private not-for-profit organization should be reported immediately as both a receivable and revenue.

1 If not to be collected within one year, the promise is recorded at the present value of the future cash flows Subsequent amortization of the discount is recorded as contribution revenue rather than as interest.

2 Uncollectible balances are also estimated and deducted.

3 Conditional promises are not recognized until the conditions are met.

D Services contributed to a not-for-profit organization should be recognized as revenue if the services (1) create or enhance a nonfinancial asset or (2) require a specialized skill possessed by the donor and would be purchased if not donated.

E If a not-for-profit organization accepts a donation that must be conveyed to a separate individual or other beneficiary, the organization normally records the asset along with an accompanying liability to reflect the accepted responsibility However, if the organization

is given variance powers to change the beneficiary, revenue is recognized instead of a liability because the donation is under that party’s control.

V Education institutions record tuition revenue at the gross amount billed and show revenue net of scholarships and financial aid in the Statement of Activities

VI Mergers and acquisitions have become common in private not-for-profit organizations at least in part because of the economic downturn Recording is different than for a for-profit business combination because the transaction can be either an acquisition or a merger

A In an acquisition, one entity gains control over another

1 All identifiable assets and liabilities of the acquired company are combined at fair value

on the date of acquisition.

2 If the acquisition value of the acquired company is greater than the sum of the fair value

of all identified assets and liabilities, the difference is often reported as goodwill

3 However, if the acquisition value of the acquired company is greater than the sum of the fair value of all identified assets and liabilities, the difference is charged off immediately

if the acquired company expects to be predominantly supported by contributions and investment income in the future

VII Health care organizations exhibit some unique reporting features that must be addressed in not-for-profit accounting.

A Third-party payors such as Medicare and insurance companies have a significant impact

on the reporting process because of their need for usable financial information

B A net patient service revenue figure is actually reported by these organizations but only after reduction for contractual adjustments These adjustments are decreases allowed for some third-party payors based on the approved cost for a particular service in that geographic region.

C Charity care services are not included in receivables or revenues if there is no

expectation of collection.

D FASB requires the inclusion of performance indicators (such as revenues in excess of expenses) to help show operational effectiveness because net income is not viewed as applicable for a not-for-profit organization

Answers to Discussion Questions

Are Two Sets of GAAP Really Needed for Colleges and Universities?

Over the last few years, a number of differences have appeared between the accounting for public colleges and universities and for those that are private GASB holds authority over the reporting of public schools whereas FASB has authority over private educational institutions Consequently, GASB statements do not apply to private schools and FASB Statements do not apply to pubic schools unless specifically made applicable by GASB For this reason, FASB pronouncements on depreciation, pledges, contributions, and financial statement format for not-for-private organizations do not affect public schools until and unless so stated by GASB Because of this split, the financial statements for these two types of schools have developed several significant, unique differences GASB states that public schools must follow the

guidelines of GASB 34 which created financial statements for state and local governments However, these guidelines are not as radically different from private schools as might be first imagined Public colleges and universities are allowed to label themselves as solely Enterprise Funds if they meet the required criteria If this decision is made, the school need report only fund financial statements as would be produced by a proprietary fund These statements have

a definite resemblance to the statements prepared by private schools.

However, important distinctions do continue to exist Students can be asked to address the question of whether a public and a private school need to have comparable financial

statements Net income is not an issue, rather the sources and utilization of resources is usually emphasized Is the adoption of a single set of generally accepted accounting principles

necessarily essential? Will a decision-maker care if the University of North Carolina at Chapel Hill (a public school) has one statement format but Duke University (a private school) has

This controversy leads to the important question of user needs Why does a company or individual look at the financial statements of a college or university? Donors might have one answer to that question while creditors could have an entirely different response Once that question has been addressed, the need for comparability is easier to assess No ultimate answer for that query currently exists but students can be asked to develop their own list of user needs and then note whether the existence of two different sets of GAAP has an adverse impact on those needs.

Is This Really an Asset?

In theory, accounting for a pledge is a relatively straightforward process If unconditional, a receivable is established (at present value if not to be received within the year) along with an adequate allowance for doubtful collections However, in practice, the process might be much more complicated

In this case, for example, was a pledge actually made or was this just a superfluous statement spoken at a moment of overwhelming emotions? Is this a promise to give or an intention to give? Can the donor change his mind? Does this potential donor really own land in Idaho and can it be sold for $15 million? How can an adequate allowance be determined for this pledge?

If the indivdiual's mother should die, would he lose interest in supporting the hospital? If the $5 million is reported as a receivable and then is not collected, what is the impact on the readers

of the financial statements? How much time and energy should the hospital invest in attempting

to arrive at a proper method of financial reporting for this item? The accountant must address all of these questions (and more) to determine the appropriate accounting treatment.

At a minimum, hospital officials need to contact this donor and have a long discussion He needs to understand their reasons for attempting to establish a valuation of this promise In class discussion, students can be asked to identify questions that should be posed to this person They would probably include the following:

—Does he really plan to give $5 million to the hospital?

—When does he project that the land will be sold and the gift made?

—How did he establish a $15 million price? Could the land be sold for less and, if so, how will that impact on the gift to the hospital?

—How does he want the $5 million to be used?

—Is there any chance that he will change his mind?

—What other charities has he supported? Has he previously made such large gitfs?

—Would he be willing to furnish financial statements as well as a list of references who could verify his intentions and his ability to carry out those intentions?

—Does the hospital have legal recourse for the promise since it is in writing and signed?

If this individual has supported other charities over the years, is committed to the work of Mercy Hospital, has adequate financial resources, and if the land appears to be worth $15 million, the hospital should report the pledge as a receivable However, a large allowance should probably

be established simply because of the uncertainties involved with collecting this amount of money

cannot be determined or the individual refuses to provide information about his ability to meet this commitment), the hospital may decide that this is not a pledge at all but merely the promise

of a possible future pledge the donor intends to give In that case, the information should be adequately spelled out in a footnote Unless clear evidence exists to substantiate the pledge, disclosure is most likely

Answers to Questions

1 The Financial Accounting Standards Board (FASB) has authority for establishing accounting standards for private not-for-profit organizations In addition, audit and accounting guides produced by the AICPA provide further guidance for the preparation of financial statements

by these organizations.

2 If a user of financial statements is a potential donor, that party is interested in assessing whether a gift to a not-for-profit organization is a wise use of resources To make that assessment, the individual needs to know whether the organization uses its resources appropriately to achieve its stated goals In this way, donors can decide which organization deserves to receive support and how much will be donated That is a reason that the division between the amount spent on program services and supporting services can be so helpful

If a user of financial statements is a creditor, that company or person is primarily interested

in whether the organization can generate sufficient cash flows to pay its debts as they come due.

3 According to FASB, three financial statements are required to be produced by private not-for-profit organizations: a statement of financial position, a statement of activities and changes in net assets, and a statement of cash flows A voluntary health and welfare organization must also produce a statement of functional expenses.

4 Temporarily restricted assets have been restricted by an external donor or grantor for a specified purpose or for use at a future point in time For example, cash might be given that had to be spent to buy a bus to be used by the organization or that could not be spent for three years Such restrictions are eventually lifted when the intended usage is fulfilled or when the time limit has been met.

5 Permanently restricted assets have been restricted by an external donor and grantor That restriction is expected to last for as long as the organization continues to function

Normally, any income generated by these assets can be used by the organization although its specific usage may be restricted For example, investments worth $3 million could be given to a private not-for-profit organization with the stipulation that that could never be sold However, the income produced by these investments over time could be designated by the donor for the purchase of computer equipment or might be available to the organization’s officials for whatever purpose they deemed necessary.

6 Private not-for-profit organizations report (a) program service expenses and (b) supporting service expenses Program service expenses are those that relate to the goals and

objectives of the organization Supporting service expenses encompass the costs of

operating the organization (general and administrative) and raising funds.

7 Not-for-profit organizations are frequently evaluated based on the ratio of program service expenses to total expenses This ratio tells the readers of the statements what portion of each dollar of expense can be attributed to achieving the goals identified by the

organization.

8 A statement of functional expense is produced by a voluntary health and welfare

organization to assist the reader of the statements in measuring its efficiency in using resources The assumption is that an entity should use a greater portion of its resources to meet stated goals and a smaller part for administrative costs and fund raising This

statement provides a simple way of evaluating one not-for-profit organization in comparison

to another.

9 When an organization conveys a gift to a private not-for-profit organization (such as the United Way) that must be conveyed to a separate beneficiary, a question arises as to the recording of the expense and the contribution revenue Under normal circumstances, the original donor records an expense at the time of the gift while the charity reports both an asset and a liability until the gift can be conveyed to the beneficiary At the same time, the eventual beneficiary should record a receivable and contribution revenue because action has been taken that will lead to the receipt of this gift The organization that initially

collected and then conveyed the gift recorded neither expense nor revenue

Other possibilities do exist if the donor has given the initial charity variance powers that allow for a change in beneficiaries

10 If a donor makes a contribution to a charity for conveyance to a separate beneficiary but can still revoke or redirect the gift before it is made, the donor records a receivable (rather than an expense) until the gift is actually conveyed to the beneficiary At that point, the receivable is reclassified as an expense The charity initially receiving the gift shows a liability but, in this situation, it is directed to the donor and not to the beneficiary Because the beneficiary is not completely certain that the gift will be received, no recording is made until the time of receipt The donor has retained a significant degree of control which impacts the method by which the gift is reported.

11 If a donor makes a contribution to a charity for conveyance to a separate beneficiary but grants it variance powers to change the identity of the beneficiary, the donor reports an expense immediately Because control of the gift now lies with the charity, that party should record contribution revenue instead of a liability The beneficiary makes no entry until the gift

is received because of the uncertainty involved The identity of the ultimate recipient may still change Here, the charity initially receiving the gift records both a revenue and,

eventually, an expense for the contribution even though it was not the original donor.

12 The value of donated services is recognized by a private not-for-profit organization if the service (a) creates or enhances a nonfinancial asset (such as adding a room to a building)

or (b) requires a specialized skill possessed by the donor that would have been purchased

by the organization except for the gift An example of this second criterion is the donation of medical services by a surgeon to a children’s hospital.

13 Normally, the costs of a direct mailing that contains a solicitation for funds will be classified entirely as a fund-raising (supporting services) expense However, under a specific set of circumstances, these costs can be allocated in a logical manner between supporting

services and program services This allocation is allowed where the mailing has a specific call for action that would have been made even without the fund raising solicitation This call for action must further the mission of the organization and the appeal cannot be made purely to potential donors

For example, if a mailing was made by a private not-for-profit blood service asking all previous blood donors to donate blood during the next six weeks and was accompanied by

a request for donations, the direct mail costs should probably be allocated between

program service costs and supporting service costs.

14 Unconditional promises to give must be recorded immediately by a private not-for-profit organization at present value (if not to be received within the next year) and net of an allowance for uncollectibles An unconditional promise requires no future service or action

by the charity.

15 An unconditional promise to give is recorded immediately by the private not-for-profit

organization that anticipates receiving the gift Conversely, an intention to give is not to be recorded In practice, the difference between the two can be rather subtle If donors have the ability or the right to change their minds, the assumption is that they have only

expressed their intention to make a gift at some time in the future but have not yet made an unconditional promise

If an action is required of the charity in advance of the gift, the promise is not unconditional.

16 A number of private not-for-profit organizations assess dues of their membership and also receive contributions Dues are considered earned revenues rather than contributions if the member receives a benefit in return That benefit can take the form of a periodic newsletter

or journal or can be the use of the facilities (such as at the YMCA) and services of the organization However, if nothing of value is really being given to the member, the dues are considered to be merely donations Here, earned revenues indicate some type of

Here, the acquisition value is in excess of the fair value of all identifiable assets and

liabilities by $200,000 ($2.3 million less $2.1 million) In a for-profit consolidation, this excess is reported as goodwill, an intangible asset The same is true for many combined statements created when a not-for-profit entity gains control over another organization However, if this acquired entity is expected to be predominantly supported by contributions and investment income, then the extra $200,000 is reported as a reduction in unrestricted net assets on the statement of activities Thus, the amount is not capitalized as goodwill.

19 If Helping Hand acquires Fancy Fingers, then the reported value on consolidated

statements for the equipment will be $2.3 million That is the book value reported by

Helping Hand ($1.1 million) plus the fair value of the property held by Fancy Fingers ($1.2 million).

If Fancy Fingers acquires Helping Hand, then the reported value for the equipment will be

$2.4 million That is the book value reported by Fancy Fingers ($1.0 million) plus the fair value of the property held by Helping Hand ($1.4 million)

If the two companies are brought together to form a new, third entity under a new governing board, the equipment will be reported at $2.1 million This is a merger and the carryover method is used so that this is the combination of the book value of these assets on both sets of financial statements ($1.1 million plus $1.0 million)

20 A third-party payor is any outside party who assumes responsibility for a portion or even all

of a patient's medical charges The most commonly encountered third-party payors would include insurance companies, Medicare, and the like Because third parties bear such a significant portion of the medical costs in this country, they require extensive as well as accurate financial information Health care organizations have long been required,

therefore, to develop and maintain accounting systems that will provide this needed data.

21 A contractual adjustment refers to a portion of a patient's charged fee that the health care organization estimates will not be received because of agreements with third-party payors These arrangements specify that the provider (the health care entity) is willing to accept an amount that is less than its normal charge if the third-party payor determines that the lesser figure is reasonable for the services rendered

As an example, if a hospital charges $212,000 for a specific service but the third-party payor responsible for payment remits only $185,000 (based on its determination of reasonable costs for this service in this area of the world), the hospital must accept that amount as payment in full The $27,000 reduction is recorded by the hospital as a contractual

adjustment.

These reductions may take an extended period of time to finalize Thus, the expected amount of these reductions is estimated by the health care organization and recorded (for matching purposes) at the time that the original invoice is submitted.

4 B (Permanently restricted net assets have increased by only $120,000.)

5 B (Because the donor continues to have control, an asset [a receivable] will be reported until conveyed to Charity Two As a result of this uncertainty, Charity Two reports nothing until the money is actually collected.)

6 B (For private schools, financial aid is shown as a direct reduction to the tuition revenue so that revenues and support here should total only

to program service expenses Otherwise, they are entirely assigned to supporting services.)

9 A (FASB wanted to get away from financial reporting based on fund

accounting so that the statements provide information about the private not-for-profit organization as a whole.)

10 C (The money to be used for the building is temporarily restricted for that purpose whereas the other $2 million is permanently restricted so that only the subsequent income earned can be used.)

11 D (The charity must convey the donation to the designated beneficiary Unless the charity was given variance powers that allowed it to change the

beneficiary, this amount represents a liability to the Jones family The money is simply being passed through the charity to the ultimate

beneficiary.)

12 B

13 A (Because of the time restriction, the amount spent for playground

equipment remains in temporarily restricted net assets until depreciated The equipment was bought at the end of the year so that no depreciation was recorded and no reclassification was made for this period.)

14 A (The new organization is expected to be predominantly supported by

contributions Thus, future exchange revenues will likely be minor The acquisition value ($1 million) in excess of the fair value of all assets and liabilities ($700,000) is $300,000 Because most support comes from

contributions and investment income, the $300,000 is charged off against unrestricted net assets on the statement of activities No goodwill is

recognized.)

15 A (When two profit organizations come together to form a new profit organization with a new governing board, a merger has occurred In a merger, the carryover method is used Thus, book value is retained The

not-for-$300,000 book value for BC plus the $500,000 book value for OP gives a reported land account of $800,000.)

16 B (This is an acquisition and the acquired company is not predominantly supported by contributions or investment income Thus, the difference in the acquisition value of Northeast ($980,000) and the fair value of the two recognized assets ($950,000 or $150,000 plus $800,000) is recognized as the intangible asset goodwill.)

17 D

18.C

19 C

20.D (The charity care work should not be recorded in any way because there is

no expectation of collection That reduces the reported amounts to

$600,000 The contractual adjustment is reported as a contra balance to the revenue reducing it to a net amount of $400,000 The bad debt amount is shown separately as an expense.)

21 B

22.B (Donated service here meets the rules for recognition so that both the

expense and the contribution revenue are reported.)

23 A (Form 990 is the annual informational form that tax-exempt organizations are required to file by the IRS.)

24 A (As an educational institution, Belwood University will qualify to be a 501(c) (3) tax-exempt organization.)

25 D (These volunteer services, although important, do not meet the criteria for recognition.)

26 B (The gift was not specifically designated for this family so that organization recognizes both the revenue and expense.)

Donated medicines = an asset is reported as well as an increase in

unrestricted net assets because of the contribution revenue

Donated services (replacing salaried workers) = contribution revenue causes

an increase in unrestricted net assets along with an accompanying

decrease in unrestricted net assets because the expense is also

recognized

Donated services (not replacing salaried workers) = not recorded

Interest income = revenue is an increase in unrestricted net assets

Charges to patients = increase in unrestricted net assets shown as net patient service revenues

Charity care = not recorded if the organization has no intention of seeking collection; if recorded, it must be removed from the receivable and the revenue.

Bad debts = amount is anticipated and recorded as an expense that decreases unrestricted net assets and reduces the carrying amount of the

receivables.

33 (15 Minutes) (Series of questions about the reporting of health care entities)

a A third-party payor is an organization such as Medicare or an insurance

company that pays a portion, or all, of a patient's medical expenses They are common due to the high cost of medical care Because of their need for accurate financial information, such third party payors have exerted pressure over the decades on health care entities to develop adequate accounting principles and reliable accounting systems

b A contractual adjustment is a reduction to patient service revenues created when a lesser amount is paid by a third-party payor than the billed amount and accepted as payment in full by a health care entity These outside parties often establish contractual arrangements whereby the health care entity agrees to accept a lower amount for a service if the third party determines the figure to

be reasonable in that particular area These contractual adjustments create an

accounting problem for the health care organization since it is not always able

to determine the amount that eventually will be collected Consequently, the entity recognizes the full amount of the invoice as patient service revenue at the time the service is performed The health care entity then estimates and establishes an offsetting Contractual Adjustment account to reduce the net reported revenue to the amount anticipated as being collected.

c At the time that materials are donated to a health care entity (or any private not-for-profit organization), the fair value is recorded as an asset Because of the donation, Contribution Revenue is also recognized as an increase in

unrestricted net assets If the asset has an extended life, the organization can assume a time restriction on the use of the asset so that the Contribution Revenue is reported initially as an increase in temporarily resticted net assets Subsequently, an amount is then reclassified to unrestricted net assets each period equal to depreciation expense.

Donated services are recorded as Contribution Revenue and as Salary

Expense; both are shown as changes in unrestricted net assets FASB

requires private not-for-profit organizations to recognize donated services but only if they (a) enhance nonfinancial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would need to be purchased if not provided by donation If the donated service enhances a nonfinancial asset, the Contribution Revenue recognized is balanced with an increase in the asset’s reported balance rather than as Salary Expense.

34.(8 Minutes) (Reporting of various accounts by a not-for-profit organization)

Only $7.6 million is reported as patient service revenues Charity care of $1.4 million is not recorded because no attempt at collection is anticipated Then, the contractual adjustment total of $800,000 is netted with the revenue to leave the hospital with a net patient service revenue figure to report of $6.8 million.

The supplies are recorded at their $4,000 value with an offsetting entry to Contribution Revenue, which is an increase in unrestricted net assets As used, the $4,000 asset will be reclassified as an expense

All $860,000 of the board-designated assets (assets that have been internally restricted by management or the organization’s board) remain as unrestricted net assets because neither the cash nor investments have been restricted by

an external donor On the statement of financial position, these assets can be classified as "Assets Whose Use Is Limited" for disclosure purposes.

35 a) (8 Minutes) (Recording donations given to a voluntary health and welfare organization)

Pledges $600,000

Anticipated Amount Deemed to be Uncollectible (15%) (90,000 )

Net Pledge Balance $510,000

Increase in Unrestricted Net Assets in 2013—

Contributed Support (60% of above) $306,000

Increase in Temporarily Restricted Net Assets in

2013—Contributed Support (40% of above) $204,000

b) Donated services would be valued at $12,000 ($20 per hour times 600 hours) and recognized as contributed support while salary expense is recognized for this same amount Both are shown in Unrestricted Net Assets Therefore, no overall effect is created but the impact of the donation is reflected.

36 (65 Minutes) (Preparation of financial statements for a private not-for-profit organization)

a.

Statement of Activities

Unrestricted Net Assets Temporarily Restricted Net Assets Permanently Restricted Net Assets Public Support

Supporting service expenses

– General and administrative

-0-Net Assets at Beginning

Net Assets at End of

Explanation of Balances

a Contributions The balances to be reported are the unrestricted gifts ($210,000) plus present value of unrestricted pledge ($78,000) Pledge is viewed as temporarily restricted because it will not be collected for three years.

b Contribution-Interest The pledge is recorded at its present value of $78,000 Interest that must be recognized to raise the balance to the pledge amount is reported as contribution revenue

c Membership dues The amount received is shown as revenue and not as public support because rights are being conveyed to the members equal in value to the amount paid.

d Investment income Although this income ($13,000) is earned on permanently restricted net assets, 70 percent is shown as temporarily restricted because the donor has specified that it must be spent on advertising, whereas the remaining 30 percent is unrestricted.

e Net assets released from restriction Three restricted amounts were properly spent during the period: $20,000 for salaries, $50,000 for equipment, and

$2,000 for advertising No implied time restriction was assumed for the equipment so the entire reclassification was made immediately.

f Salaries During the period, $24,000 was paid in salaries (30 percent of $80,000 was assigned here) and another $2,500 was owed at the end of the year (50 percent of year-end accrual).

g Depreciation Of the total expense ($20,000) for the period, 80 percent was allocated to program service expenses because that amount of the equipment was used for that purpose.

h Supplies A total of $93,000 was acquired and used during the year.

i Salaries Administrative salaries amounted to $32,000 for the year (40 percent

l Advertising Only $2,000 in advertising costs were incurred during the period.

m Depreciation Of the total for the period ($20,000), 10 percent was allocated to fund-raising expenses.

-Because it qualifies as a museum piece, recording of the painting is optional Officials do not want to report the painting, and they are not required to report it -The $10,000 gift must be conveyed to an outside beneficiary and is reported by the not-for-profit organization as a liability.

a Cash The final balance is the beginning cash figure of $700,000 plus $210,000

in contributions, less $80,000 for salaries, less $50,000 for equipment, plus

$30,000 in membership dues, plus $10,000 contribution that must be conveyed

to separate organization, plus $13,000 investment income, less $2,000 paid for advertising, and less $93,000 paid for supplies.

b Pledges receivable The amount to be reported is the present value as of the end of the year (the original $78,000 plus the $3,000 interest accrued for the period).

c Equipment Organization acquired $300,000 of equipment during the year.

d Accumulated Depreciation The $20,000 amount of depreciation recorded for this initial year of ownership.

e Salaries Payable The amount owed employees as of the end of the year.

f Notes Payable The liability incurred in acquiring equipment.

donor that must be conveyed to a separate organization The amount must be shown as a liability since no mention was made that the organization had variance powers that would allow it to change the beneficiary.

37 (50 Minutes) (Effect of various transactions on unrestricted and restricted net assets)

restricted Net Assets 25,000

g Bad Debt Expense 20,000

Allowance for Uncollectible

Accounts 20,000 Contractual Adjustment 30,000

37 (continued)

Pledges Receivable (present value) 98,000

Contributed Support—Unrestricted

Net Assets 12,600 Contributed Support—Temporarily

Restricted Net Assets 89,000

Contributed Service Revenues—

Unrestricted Net Assets 80,000

Unrealized Gain on Investments—

Permanently Restricted Assets 30,000

m No entry because of choice made by officials

n Utilities and Other Expenses 212,000

Cash 212,000

o No entry—does not require a specialized skill.