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    solusi manual advance acc zy Chap019 solusi manual advance acc zy Chap019 Document Transcript

    • Chapter 19 – Not-for-Profit Entities CHAPTER 19 NOT-FOR-PROFIT ENTITIES ANSWERS TO QUESTIONS Q19-1 Initially, tuition scholarships are included in revenue for the period in order to measure fully the revenue obtainable. If the university requires an employment-type work for the tuition scholarship, then they are also shown as an expense. However, if no employment-type work is required of the recipient, then the university also records the tuition scholarship as a revenue-reduction item. Q19-2 In the statement of financial position for private colleges, the net assets are designated as (1) unrestricted, (2) temporarily restricted, or (3) permanently restricted. Permanently restricted assets result from contributions that the donors have specified must be retained into perpetuity. Earnings from the principal are then used in accordance with the wishes of the donor. Temporarily restricted assets are those which the donor has contributed for specific use or which have been contributed for use in a future period. All other assets are classified as unrestricted. Q19-3 The accounting and reporting for public universities is specified by the GASB, and GASB 35 provides specific guidance that public universities should be accounted for as special-purpose governments in accordance with GASB 34. Private universities have their accounting and financial reporting specified by the FASB. FASB 117 provides the format and requirements for financial reporting for private universities. Q19-4 The accrual basis of accounting is used in a hospital's general and restricted funds. Donor restricted contributions are held in the restricted fund until the conditions are met and then are transferred to the general fund. Q19-5 Donated services are included as a revenue and a corresponding expense at their fair value if the services are significant and would otherwise be performed by salaried personnel. The criteria for recognition require that the services either (a) create or enhance the nonfinancial assets of the hospital or (b) the services provided require specialized skills, are provided by individuals possessing those skills, and would need to be purchased if not provided by donation. Donated equipment is accounted for as a contribution in a temporarily restricted fund until placed into service, at which time it is transferred to the general fund. Donated medical supplies are recorded as revenue and charged to expenses as used. Q19-6 The $15,000 is accounted for as a contribution to a specific purpose restricted fund. When the $15,000 is expended by the general fund, the specific purpose restricted fund transfers the resources to the general fund to reimburse the general fund or pay for the intensive care operating expenses. The expense is reported as an expense of the general fund and the reimbursement from the restricted fund is reported as net assets released from the restricted fund. Q19-7 Net patient service revenue of a hospital is computed by deducting contractual adjustments from total billings for inpatient and outpatient services provided. Charity care is excluded. 19-1
    • Chapter 19 – Not-for-Profit Entities Q19-8 The general fund records a gain on the sale of hospital properties. The gain is reported in the hospital's statement of activities. Q19-9 Depreciation is recorded on an accrual basis by hospitals. It must be accounted for because depreciable assets constitute a significant part of the total cost of providing medical services. Q19-10 The accrual basis of accounting is used for the unrestricted current fund of a VHWO. The accrual basis of accounting is also used for all other funds, including the restricted current fund, the land, building, and equipment fund (plant fund), and the endowment fund. Q19-11 If separate funds are maintained, fixed assets are recorded in the land, building, and equipment fund (plant fund) in a VHWO. If separate funds are not maintained, fixed assets would be recorded in the unrestricted fund along with all other assets. Q19-12 The $10,000 contribution is accounted for as contribution revenue in a temporarily restricted (specific purpose) fund when it is received. The expense of the $10,000 for public health education service is accounted for as a program services expense of the unrestricted fund and as a net asset released from the temporarily restricted fund. Q19-13 Pledges from donors that are unconditional promises to give are recognized as contribution revenue in the period in which the pledge is received. Although the total amount of the pledge is recorded as a contribution receivable, an adequate allowance for uncollectibles must be recognized. The estimated amount that actually will be collected is recognized as contribution revenue. Pledges applicable to future periods or restricted in use by the donor should be recorded in the temporarily restricted or permanently restricted fund, as appropriate. Q19-14 It would not be appropriate to report funds whose use is restricted as revenue in the unrestricted fund prior to the time the restriction was met. Contributions that must be permanently retained are included as contribution revenue in the permanently restricted fund. Those received with restriction as to use or that must be used in a future time period are recorded as contribution revenue in the temporarily restricted fund(s). Q19-15 Many VHWOs are heavily dependent upon donated services. However, such services typically are not recorded and included for financial reporting purposes. For example, neighborhood solicitations are an integral part of the activities of many charitable organizations but no accounting recognition is given for these efforts. To be recognized, donated services must (a) create or enhance nonfinancial assets or (b) require specialized skills, be provided by individuals possessing those skills, and typically be purchased if not provided by donation. If these conditions are satisfied, the value of the donated services received should be reported as part of revenue and public support and the cost of the services recognized as an expense item of the period. 19-2
    • Chapter 19 – Not-for-Profit Entities Q19-16 The statement of functional expenses details the items reported in the expense section of the statement of activities. The individual expense categories generally are assigned to each major programmatic activity and to general management and efforts. As a result, much greater insight can be gained into the way in which funds are spent. Voluntary health and welfare organizations are required to prepare a statement of functional expenses. Q19-17 The contribution of $12,000 is accounted for as a contribution of a temporarily restricted net asset at the time of receipt. When the expense of $12,000 is made for a community service activity, the amount used is recognized as funds released from program use restrictions in the statement of activities. Q19-18 All organizations subject to FASB jurisdiction must meet the qualifications for recognition of contributed services set forth in FASB 116. Thus, most hospitals and ONPO will be expected to account for donated services in the same manner. Both hospitals and ONPOs must demonstrate that the services received either (a) created or enhanced nonfinancial assets or (b) required specialized skills, were provided by individuals possessing those skills, and would have been purchased if the services had not been contributed. ONPOs also have been required to demonstrate that the services of the ONPO were not principally intended for the benefit of the organization's members in the past. As a result, ONPOs seldom have recorded donated services. If donated services are recognized, an ONPO records them as public support; hospitals recognize donated services as revenue. Q19-19 The market value unit method of accounting for investments may be used for pooled investments. Under this method, a fund is assigned a number of units based on the fund's contribution to the pool and the total market value of all investments in the pool at the time of the contribution. Q19-20 As an ONPO, a Rotary Club should record depreciation expense because the omission of depreciation would result in an understatement of the costs of providing the organization's services. Q19-21 The statement of activities for both an ONPO and VHWO reports the support, revenue, expenses, net assets released from restriction, and changes in net assets during the fiscal period. The particular items reported and the size of the various revenue and expense categories may vary rather substantially between such entities, however, due to differences in the overall missions and types of activities the organizations are involved in on a routine basis. Q19-22 Temporarily restricted contributions of ONPOs would include funds for specific programs such as sponsoring a child to summer camp, purchasing reading materials for vacation church school, or acquiring manuscripts for a research library. Permanently restricted funds require the creation of an endowment with the principal to be held intact. Examples would be the creation of an endowment with the earnings to be used to help underwrite the cost of bringing in one or more large symphonies each year to perform at a local concert hall, to provide for landscaping and lawn service at a local cemetery, or to assist in recruiting and training new Girl Scout leaders. 19-3
    • Chapter 19 – Not-for-Profit Entities SOLUTIONS TO CASES C19-1 Accounting for Donations a. Donated services are a vital element of many not-for-profit entities, including hospitals, voluntary health and welfare organizations and other not-for-profit organizations. The criteria established in FASB 116 for recognition of donated services require: 1. The services performed create or enhance nonfinancial assets or, 2. The services (a) require specialized skills, (b) are provided by individuals possessing those skills, and (c) the services would be purchased if not donated. In general, donated services are not recognized unless they represent an important contribution to the operations of the organization. For example, in the hospital setting, a volunteer who staffs a nursing station on a regular shift but accepts no compensation clearly provides services which meet the criteria for recognition. The hospital would need to hire another nurse if these services were not volunteered. Moreover, the hospital has the ability to supervise and directly control the activities of the volunteer in the same manner as a paid employee. On the other hand, a group of high school youth who visit patients and attempt to make their stay in the hospital more pleasant would not qualify for recognition. If the services were not provided it is unlikely the hospital would use its resources to hire staff to perform this function. Voluntary health and welfare organizations often receive donated services for concentrated fund raising efforts and for supplementary programs. Because of the difficulty in determining the value of these services and the absence of controls over the persons providing the services, VHWOs normally do not account for donated services unless the first three criteria are met. Even when these are met, it may be appropriate to recognize the donated services only if the amount of time donated is significant and represents an integral part of the activities provided by the organization. Other not-for-profit organizations often rely heavily on donated services as well. However, many of these are for the benefit of other members rather than for some general public purpose and there has been reluctance to recognize donated services in the financial statements. In many cases the services are not under the direct control of the organization and are very difficult to value. b. Donations of capital assets are recorded as a contribution in a restricted fund and carried in the fund until the asset is placed into service, at which time it is transferred to the general fund. The donation is recorded at its fair value. Once the asset is placed in service, depreciation is recorded for the use of the asset in order to measure fully the cost of providing the hospital's services. 19-4
    • Chapter 19 – Not-for-Profit Entities C19-1 (continued) c. As in all not-for-profit organizations, the accounting for cash contributions to a hospital depends on whether or not the donor places a restriction on the use of the cash. If the gift is unrestricted, it is accounted for as contribution revenue in the general fund. If the gift is restricted, it is recorded as a contribution of temporarily restricted or permanently restricted net assets. In the period in which the restriction is met, the appropriate amount is reported in the general fund as released from use or passage of time restriction. Cash contributions to a voluntary health and welfare organization or an other not-forprofit organization are accounted for as public support in the period the contribution is received as an addition to unrestricted or restricted net assets. If the contribution is restricted by its donor, the gift is treated as a contribution of a temporarily restricted or permanently restricted net asset at the time of receipt and then reported as released from restriction in the period in which the restriction is met. C19-2 Public Support to an Other Not-for-Profit Organization a. The $25,000 of unrestricted contributions should be accounted for as public support revenue in the statement of activities for the current period. b. The $15,000 of restricted contributions should be accounted for as a temporarily restricted asset in the restricted fund, if a restricted fund is used or in the general fund if a separate restricted fund is not maintained. The $15,000 should be recorded as a contribution in the period of receipt. The expense of $6,000 for public health advertisements triggers recognition of $6,000 as funds released from a use restriction with both the expense and release of funds included in the statement of activities for the period. If a separate temporarily restricted fund is maintained and the $6,000 expense is made from the unrestricted operating fund, the restricted fund would then reimburse the unrestricted fund for its expenses. It does not matter that unrestricted assets were used for the actual expense. The remaining $9,000 of restricted resources should be reported as a part of its temporarily restricted net assets on the ONPO's balance sheet. 19-5
    • Chapter 19 – Not-for-Profit Entities 1C19-3 A Brief Analysis of the Financial Disclosures of United Way of America The United Way of America’s (UWA) web site is www.unitedway.org. The navigation to the consolidated financial statements and Form 990 (the form that the IRS requires tax exempt charitable organizations to file) is as follows: (Click on each of the following, in turn) 1.) About United Way; 2.) United Way of America; 3.) Financial Info (990); and then you will be at the links for the Form 990 and the Consolidated Financial Statements and Supplemental Schedule. The most recent year of availability will provide the specific data for the questions, but the following are general answers to the questions in the case. a. From footnote 1 of the Consolidated Financial Statements: The reporting entity includes the following: United Way of America (UWA) and its subsidiaries, United Way Store and United eWay. The statements also include UWA’s regional office of United Way of Tri-State, Inc. Operationally, the United Way Store is a for-profit subsidiary to provide sales fulfilment services to UWA and other organizations. United eWay provides on-line giving along with pledge processing and fund distribution services for corporations working with UWA. In June 2005, United Way of Tri-State, Inc (UWTS) became a Tri-State Regional office of the UWA and is responsible for raising charitable funds and working with companies whose employees live and/or work in the New York Tri-State region. And there are a large number of local United Way chapters that manage local fund raising campaigns. b. The Consolidated Statements of Financial Position includes eliminations for intraorganizational payables and receivables (Due from affiliates and Due to affiliates) and the capital accounts of the for-profit United Way Store (against the investment in subsidiary account of the parent, UWA. These eliminating entries are the same type as in the consolidating workpaper used for a parent and its subsidiary companies as presented in the first ten chapters of this textbook. The major components of the consolidated assets and equity will depend on the specific year analyzed. Because UWA is an organization that focuses on raising and distributing charitable funds, the consolidated statement of financial position will reflect unrestricted and restricted amounts, custodial funds (both as an asset and a liability), campaign receivables, and fixed assets such as building, land, and equipment. The custodial funds are described in footnote 1. UWA is the fiscal agent for a Federal Emergency Management Agency (FEMA) program to distribute federal funds through the Emergency Food and Shelter (EF&S) program which is not consolidated into UWA’s financial statements. UWA is the custodian of the federal funds and distributes these funds in accordance with the directions of the national board established to determine needs that can be met with these funds. Thus, UWA reports both an asset and a liability in the same amount for any undistributed funds for which it is the custodian. c. The consolidated statement of activities shows the typical types of revenues and expenses of a large fund raising not-for-profit entity. Revenues will include public support through membership, campaigns, and contributions. Also, United Way Stores generates revenue from sales of promotional materials. Expenses include program services, particularly Public Policy, which footnote 1 describes as federal advocacy efforts and coordination of national activities at the regional level, and crisis response. 19-6
    • Chapter 19 – Not-for-Profit Entities C19-3 (continued) The total consolidated fund raising expenses are included in supporting services. In 2006, these costs were $577,000, which is a relatively small percentage of total expenses as compared with other fund raising not-for-profit entities. UWA has successfully worked with a large number of businesses and other entities to coordinate UWA fund raising activities in those entities. Thus, the businesses and other entities provide a relatively large part of UWA’s fund raising efforts. d. The supplementary schedule of functional expenses presents expense information on each of the program services described in footnote 1 of the consolidated financial statements. Public policy is generally the largest, followed by brand leadership, investor relations, Center for Community Leadership and community impact leadership. Note that supporting services are presented separately from program services. The three largest expense categories are scholarships, grants, and awards (primarily given through the public policy program); salaries, and professional fees and contract services (across all program services and supporting services, but especially under brand leadership). e. Form 990 contains much of the same information as provided in the consolidated financial statements, but in a format that permits the IRS to easily compare information for tax-exempt organizations. Most students will not have seen a Form 990 before this case and can quickly see that Form 990 can be prepared from information from the consolidated financial statements. 19-7
    • Chapter 19 – Not-for-Profit Entities C19-4 Case on Conditional Gift to a Not-for-Profit Organization MEMO To: Betty Gardner, Treasurer, Central Illinois Chapter From: Re: , CPA Victor Wyatt pledge Mr. Wyatt has pledged $20,000 per year for five years to the Central Illinois Chapter, with the condition that the chapter sponsor annual educational programs over the next five years. Mr. Wyatt’s pledge should be considered as a conditional promise to give, under the requirements stated in paragraph 22 of FASB Statement No. 116. The first $20,000 gift, which has already been received by the chapter, should be recognized either as a contribution or as a refundable advance, depending on whether the conditions associated with the contribution have been substantially met. [FASB 116, Par. 22] Because the first educational workshop has been organized and scheduled and has been approved by Mr. Wyatt, I believe that this amount can be recognized as a contribution during the current fiscal year. Although the chapter does intend to fulfil Mr. Wyatt’s conditions in order to receive the additional contributions, at this point in time these conditions are not substantially met. Therefore, the additional $80,000 that Mr. Wyatt has pledged should not be recognized in the current fiscal year. Mr. Wyatt has clearly stated that the additional contributions will not be made if the chapter does not continue with the educational programs. Thus there is no ambiguity about whether Mr. Wyatt’s promise to give is conditional or unconditional. Determining whether a promise is conditional or unconditional can be difficult if it contains donor stipulations that do not clearly state whether the right to receive payment or delivery of the promised assets depends on meeting those stipulations. It may be difficult to determine whether those stipulations are conditions or restrictions. In cases of ambiguous donor stipulations, a promise containing stipulations that are not clearly unconditional shall be presumed to be a conditional promise. [FASB 116, Par. 23] Although the chapter cannot recognize the $80,000, the pledge should be disclosed. The chapter should disclose the following with respect to Mr. Wyatt’s conditional promise: a. The total of the amounts promised, and b. A description and amount for each group of promises having similar characteristics, such as amounts of promises conditioned on establishing new programs, completing a new building, and raising matching gifts by a specified date. [FASB 116, Par. 25] Primary references FASB 116, Par. 22 FASB 116, Par. 23 Query Used condition* gift* condition* giv* Other references 19-8
    • Chapter 19 – Not-for-Profit Entities FASB 116, Par. 25 FASB 116, Par. 79 19-9
    • Chapter 19 – Not-for-Profit Entities C19-5 Accounting for Contributions to and Activities of a Not-for-Profit Organization MEMO To: Gerry Finley, Manager From: Re: , CPA Auction Extravaganza There are two different problems with the way that the Community Chest is reporting the proceeds of the Auction Extravaganza event. First, paragraph 24 of FASB Statement No. 117 (FASB 117) requires that the revenues and expenses from the event be reported as gross amounts and should not be netted together. Although FASB 117 does permit net reporting for investment income or gains from certain peripheral activities [FASB 117, Par. 24-25], these exceptions do not apply to a major event like the Auction Extravaganza. Therefore, the statement of activities should include the gross revenue from the event in the revenues section and should identify the event expenses in the expense section of the statement. The second accounting issue is the donations that the Community Chest receives for the Auction Extravaganza event. Community Chest is recording as revenue the event ticket sales and the auction proceeds but is not reporting donated auction items and services as contributions. In paragraph 5 of FASB Statement No. 116 (FASB 116), contributions received by a not-for-profit organization are defined as an unconditional transfer of cash, other assets, or services. The items that businesses donated to be auctioned meet the definition of contributions. FASB 116 provides that contributions received are to be recorded at fair value. [FASB 116, Par. 8] Because the donated items are immediately used by the Community Chest in the auction, the fair value of the items should be estimated and recognized as both a revenue and an expense in the current reporting period. Contributions received shall be recognized as revenues or gains in the period received and as assets, decreases of liabilities, or expenses depending on the form of the benefits received. [FASB 116, par. 8] The Community Chest should also estimate a fair value for the services provided by the auctioneer and the musicians. These meet the requirement for recognition that the services are specialized skills that the Community Chest would have to purchase if the donation was not made. [FASB 116, Par. 9] Again, since the services are both donated to and consumed in the Auction Extravaganza, the fair values should be recognized as both revenue and expense. Although these changes will have no net effect on the change in net assets reported in the statement of activities, they will provide more complete information about the Auction Extravaganza event, which complies with the FASB’s intent in issuing FASB 116. Primary references FASB 117, Par. 24 profit Other references FASB 116, Par. 9 19-10 Query Used revenue* expense* net* not-for-
    • Chapter 19 – Not-for-Profit Entities FASB 116, Par. 5 FASB 116, Par. 8 FASB 116, Par. 72 contribution* contribution* service* C 19-6 An Analysis of the Financial Statements for the American Red Cross, a Voluntary Health and Welfare Organization a. Read the independent auditor’s report of the U. S. Army Audit Agency that is disclosed in the annual report of the American Red Cross (ARC). In this report, it states that “The Act of Congress that incorporated the American Red Cross, as implemented by Department of Defense Directive 1330.5 and Army Regulation 930.5, requires the U. S. Army Audit Agency perform an annual audit of the financial statements of the American Red Cross.” b. Look at the statement of functional expenses for the most recent year. This statement is a required financial statement for the ARC. From this financial statement, you can determine the ratio of program expenses to total expenses for the most recent year. The ratio of program expenses to total expenses for the ARC has been around the 90% level. This ratio is substantially better than the 60% threshold recommended by the Better Business Bureau. c. Read the revenue recognition note. In this note to the financial statement, the ARC reports that “Contributions, which include unconditional promises to give (pledges) are recognized as revenues in the period received or promised.” To answer the question on the amount of temporarily restricted contributions receivable as of the most recent balance sheet date, you should look at the consolidated statement of financial position. On this statement, the portion of temporarily restricted contributions receivable that are reported under current assets should be added to the temporarily restricted contributions receivable that are reported under noncurrent assets to get the answer. d. Read the note on net assets. In this note, the amount of unrestricted net assets that are undesignated by the Board of Governors at June 30 of the most recent year is disclosed. e. Read the note on contributions receivable. In this note, the discount rate used to present value long-term pledges is disclosed. f. Look at the consolidated statement of activities for the most recent year. On this statement, the ARC reports the amount “net assets released from restrictions.” This is the amount that was reclassified from temporarily restricted net assets to unrestricted net assets due to satisfaction of purpose and/or time restrictions. g. Look at the statement of functional expenses for the most recent year. In past years, Biomedical has had the highest total cost for salaries and wages and employee benefits. h. Read the note on organization and basis of presentation. In this note, temporarily restricted net assets are those “net assets subject to donor-imposed restrictions on their use that may be met either by actions of the Organization or the passage of time.” 19-11
    • Chapter 19 – Not-for-Profit Entities i. Read the note dealing with contributed services and materials. In this note, you will find the amount of contributed service revenue that was reported for the most recent year. C19-6 (continued) j. Read the note on contributions receivable. In this note, the ARC reports the amount of conditional contributions at the end of the most recent year. Conditional contributions are not reported as revenues for the current year because the conditions have not been met. After the conditions are met, the contributions will become unconditional and revenue will be reported. k. Read the note on investments. In this note, the amount of dividend and interest revenue for the most recent year is reported for all three net asset categories. l. In the past, the ARC disclosed that its unrelated business income came from the following sources: • Rental income; • Parking garage; • S-corp income; and • Charitable gaming. m. Read the note on revenue recognition. In this note, it states that “When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are released and reclassified to unrestricted net assets in the consolidated statement of activities.” n. Read the note on revenue recognition. In this note, it states that “Donor-restricted contributions are initially reported in the temporarily restricted net asset class, even if it is anticipated such restrictions will be met in the current reporting period.” o. Read the note on contributed services and materials. In this note, it states that “… in the absence of donor-imposed restrictions, gifts of long-lived assets are reported as unrestricted revenue. 19-12
    • Chapter 19 – Not-for-Profit Entities C19-7 An Analysis of the Financial Statements of the University of Notre Dame, a Private University. The specific answers your students provide for the questions will depend on the most recent year for which the annual report is provided on university’s web site. The following are general guidance for the answers to the questions. a. In the notes to the financial statements, read the note on restricted net assets and endowment. In this note, temporarily restricted contributions received for buildings and equipment is disclosed for the most recent year. b. Read the note that contains a summary of significant accounting policies. In this note, the University states “Non-operating activity in the statements of changes in unrestricted net assets includes unrestricted contributions from bequests designated by the University for endowment and acquisition of physical facilities and equipment, investment return in excess of or less than the amount distributed under the spending plan, any gains or losses on other financial instruments, net assets released from restrictions designated for investment and physical facilities, and other activities considered to be more of an unusual and non-recurring nature.” c. Read the most recent statements of changes in unrestricted net assets. On this statement, net assets released from restrictions are disclosed in two places – (1) the operating section and (2) the Nonoperating section. This question asks for the amount of net assets released from restrictions for operations. d. Read the note on land, buildings, and equipment. In this note, the University states that it “…does not capitalize…the cost or fair value of its art collection.” e. Read the note that discloses the summary of significant accounting policies. In this note, read the section that deals with contributions. In this note, it states that “Contributions to be received in future years are discounted at a U. S. Treasury rate commensurate with the payment plan.” f. Read the note that discloses the details of contributions receivable. In this note, the University discloses the gross amount of its contributions receivable and subtracts an allowance for uncollectible amounts and an amount that discounts contributions that are time restricted. The note also discloses the allocation of the contributions receivable, net, to the various net asset categories. g. Read the statements of financial position to answer this question. The University discloses the unrestricted net assets that are designated by the Board in the net asset section. h. True, operating expenses on the statements of changes in unrestricted net assets are disclosed by function. In the summary of significant accounting policies, it states that “Operating expenses are reported by functional categories, after allocating costs for operations and maintenance of plant, interest on indebtedness, and depreciation expense. i. Read the section of the annual report that is titled “development update.” In this section, the number of individual donors who supported the University during the most recent year is disclosed. 19-13
    • Chapter 19 – Not-for-Profit Entities C19-7 (continued) j. True, the University’s land, buildings, and equipment, net of accumulated depreciation, are reported in the unrestricted net asset class. Look at the note that discloses the composition of restricted net assets and endowment. In this note, the items that make up temporarily restricted and permanently restricted net asset classes do not include land, buildings, or equipment. The temporarily restricted net asset class does include contributions for the acquisition of buildings and equipment; however, the University will release these net assets when the buildings and equipment are acquired and subsequently will report these assets in unrestricted net assets. k. To answer this question, first read the note on investment return. This note provides the total investment return for the most recent year. Note that investment return includes (1) investment income, net, (2) realized gain (loss), and (3) unrealized gain (loss). To answer the question dealing with the unrestricted portion of the investment return, you should read the most recent statements of changes in unrestricted net assets. The investment return that is unrestricted includes (1) investment income and (2) net gain (loss) on investments. l. To answer this question, read the section of the report on “development update.” In this section, the criteria that should be met to be a member of the President’s Circle are disclosed. m. To answer this question, you should read the section of the annual report that covers “endowment review.” The endowment’s annualized returns for the past ten years will be mentioned in this section. n. To answer this question, read the note that discloses “restricted net assets and endowments.” In this note, endowment funds that are reported in the permanently restricted net asset class are disclosed. Note that this answer cannot be found on the statements of financial position because this statement discloses a single amount for investments for all three net asset categories. o. Read the section of the annual report that contains the endowment review. This section will disclose how the University’s endowment ranks amongst U. S. universities. 19-14
    • Chapter 19 – Not-for-Profit Entities C19-8 Profiles of Large Charitable Organizations The Give.org web site is well known by persons interested in donating larger amounts to a charity. The web site is a good source for obtaining an overview of the national charities and the availability of the same information for each of the charities makes comparisons easier. a. The Standards for Charity Accountability are found under the Charity Standards link. These 20 standards were established to measure: a.) governance and oversight; b.) effectiveness in establishing its mission; c.) finances to ensure that the charity is raising its funds honestly and spending those funds prudently in furtherance of its mission; d.) fund raising and informational materials to ensure that the charity’s fund raising materials are accurate and truthful, that financial reports are available to the public and that the privacy rights of its donors are met. b. The BBB Wise Giving Report for the American Red Cross includes charity contact information, the BBB evaluation conclusions; the charity’s programs, its tax status, its governance, fund raising information and financial information. The information provided is more of a thumbnail, but can quickly provide the types of information many donors wish to have before giving to a charity. c. It will be interesting to have your students talk about their selected charities, why they selected the ones they did, and what types of information they found of interest. 19-15
    • Chapter 19 – Not-for-Profit Entities SOLUTIONS TO EXERCISES E19-1 Multiple-Choice Questions on Colleges and Universities [AICPA Adapted] 1. a 2. c 3. a 4. c $7,500,000 assets - $4,500,000 liabilities 5. d $550,000 unrestricted + $330,000 of restricted 6. b $200,000 for fair value of donated services. Travel is an additional cost of the services provided by the university. Expenses Contribution Revenue Cash 218,000 200,000 18,000 E19-2 Multiple-Choice Questions on Hospital Accounting [AICPA Adapted] 1. a 2. c 3. d 4. a 5. d 6. a 7. d 8. c 9. d 10. a 11. b 12. Net patient service revenue represents total billings less contractual adjustments. d 19-16
    • Chapter 19 – Not-for-Profit Entities E19-3 Entries for a Hospital’s Unrestricted (General) Fund a. Journal entries for the general fund. 1. Accounts Receivable Patient Services Revenue 6,200,000 2. Nursing Services Expense Other Professional Services Expense Fiscal Services Expense General Services Expense Bad Debts Expense Administration Expense Depreciation Expense Cash Allowance for Uncollectibles Accumulated Depreciation Accounts Payable Inventory Donated Services 2,070,000 1,250,000 225,000 1,510,000 125,000 260,000 500,000 3. Contractual Adjustments Accounts Receivable 220,000 4. Cash Net Assets Released from Program Use Restrictions 200,000 6. Cash Contributions – Unrestricted 155,000 7. Cash Allowance for Uncollectibles Accounts Receivable 4,785,000 125,000 500,000 210,000 240,000 80,000 180,000 Cash Net Assets Released from Equipment Acquisition Restriction 6,200,000 5. 8. 180,000 200,000 5,905,000 75,000 Investment Securities Unrealized Holding Gain on Investment Securities – Designated for Other Than Current Operations 19-17 220,000 155,000 5,980,000 70,000 70,000
    • Chapter 19 – Not-for-Profit Entities E19-3 (continued) b. Sycamore Hospital Statement of Operations For the Year Ended December 31, 20X6 Revenues, gains, and other support: Net patient services revenue Contributions Net assets released from program use restriction $5,980,000 155,000 180,000 Total revenues, gains, and other support Expenses and losses: Nursing services Other professional services Fiscal services General services Bad debts Administration Depreciation Total operating expenses $6,315,000 $2,070,000 1,250,000 225,000 1,510,000 125,000 260,000 500,000 Operating income 5,940,000 $ 375,000 Other income -0- Excess of revenues over expenses $ 375,000 Unrealized gains designated in excess of amounts for current operations Net assets released from restrictions used for purchase of equipment Increase in unrestricted net assets 70,000 200,000 $ 645,000 19-18
    • Chapter 19 – Not-for-Profit Entities E19-4 Entries for Other Hospital Funds 1. 2. 3. 4. Endowment Fund Cash Contributions – Permanent Endowments Contributions – Term Endowments 270,000 Plant Replacement and Expansion Fund Pledges Receivable 1,500,000 Allowance for Uncollectibles Contributions – Plant Replacement and Expansion (Note that FASB 116 provides that pledges receivable within the next year should be measured at net realizable value with the estimated uncollectibles as a reduction of contribution revenue.) Specific-Purpose Fund Cash Contributions – Research Contributions – Education 80,000 Endowment Fund Cash Investment Income – Permanent Endowment Specific-Purpose Fund Cash Investment Income – Research 6. 31,000 32,000 270,000 Plant Replacement and Expansion Fund Investments Cash 160,000 75,000 19-19 50,000 30,000 45,000 31,000 55,000 Endowment Fund Investments Cash Specific-Purpose Fund Investments Cash 1,350,000 100,000 45,000 Specific-Purpose Fund Net Assets Released from Program Use Restriction – Research Net Assets Released from Program Use Restriction – Education Cash Due to General Fund 150,000 100,000 Plant Replacement and Expansion Fund Cash Investment Income 5. 150,000 120,000 70,000 17,000 270,000 160,000 75,000
    • Chapter 19 – Not-for-Profit Entities E19-5 Multiple-Choice Questions on Voluntary Health and Welfare Organization Accounting [AICPA Adapted] 1. c 2. b 3. d 4. c 5. b 6. d 7. c 8. a 9. c $800,000 x .50 = $400,000 $400,000 x .10 = (40,000) $360,000 $275,000 = $240,000 + $35,000 19-20
    • Chapter 19 – Not-for-Profit Entities E19-6 Entries for Voluntary Health and Welfare Organizations a. Journal entries. 1. Pledges Receivable Allowance for Uncollectible Pledges Contributions – Unrestricted Contributions – Temporarily Restricted 700,000 2. Grants Receivable Contributions – Temporarily Restricted 150,000 3. Cash – Unrestricted Pledges Receivable 520,000 Allowance for Uncollectible Pledges Pledges Receivable Contributions – Unrestricted $520,000 pledges collected 506,000 recorded as contributions $ 14,000 Adjustment to contributions 44,000 4. Land, Buildings, and Equipment Cash – Unrestricted 15,000 5. Mortgage Payable Cash – Unrestricted 6. Cash – Unrestricted Cash – Temporarily Restricted Investment Income – Unrestricted Investment Income – Temporarily Restricted 3,000 Cash – Permanently Restricted Endowment Investments Gain on Sale of Investment – Permanently Restricted 7. 27,200 5,400 6,000 56,000 506,000 138,000 150,000 520,000 30,000 14,000 15,000 3,000 27,200 5,400 5,000 1,000 Community Services Expense Public Health Education Expense Research Expense Fund Raising Expense General and Administrative Expense Accumulated Depreciation 19-21 12,000 7,000 10,000 15,000 9,000 53,000
    • Chapter 19 – Not-for-Profit Entities E19-6 (continued) 8. 9. b. Community Services Expense Public Health Education Expense Research Expense Fund Raising Expense General and Administrative Expense Cash – Unrestricted 250,600 100,000 81,000 39,000 61,000 531,600 Fund Raising Expense Donated Services 2,400 2,400 Midwest Heart Association Statement of Activities For the Year Ended December 31, 20X2 Revenues, gains, and other support: Contributions, net of estimated uncollectible pledges Grants Investment income Gain on investments Donated services Total revenues, gains and other support Program services and support: Program services: Community services Public health education Research Total program services Supporting services: General and administrative Fund raising Total supporting services Total expenses Change in net assets Net assets at beginning of year Net assets at end of year Unrestricted $520,000 27,200 Temporarily Restricted $138,000 150,000 5,400 2,400 $549,600 $293,400 Permanently Restricted $ 1,000 $ 1,000 Total $658,000 150,000 32,600 1,000 2,400 $844,000 $262,600 107,000 91,000 $460,600 $262,600 107,000 91,000 $460,600 $ 70,000 54,000 $124,000 $584,600 $ -0- $ -0- 70,000 54,000 $124,000 $584,600 $(35,000) 281,000 $246,000 $293,400 87,000 $380,400 $ 1,000 219,000 $220,000 $259,400 587,000 $846,400 19-22
    • Chapter 19 – Not-for-Profit Entities E19-7 Determination of Contribution Revenue a. Journal entries 1. Property, Plant and Equipment Contributions – Property, Plant and Equipment 2. Pledges Receivable – Unrestricted Pledges Receivable – Restricted for Passage of Time Pledges Receivable – Restricted for Program Use Pledges Receivable – Restricted for Construction Contributions – Unrestricted Contributions – Restricted for Passage of Time Contributions – Restricted for Program Use Contributions – Restricted for Construction $ 50,000 present value of initial payment 260,318 present value of 7 payments of $50,000 each discounted at 8 percent $310,318 present value of construction pledge 42,000 120,000 70,000 90,000 310,318 50,000 Vision Testing Expense Cash – Unrestricted 45,000 Cash – Unrestricted Reclassification from Temporarily Restricted Contributions to Unrestricted 38,000 Reclassification of Contributions from Temporarily Restricted Cash – Restricted for Program Use b. 120,000 70,000 90,000 310,318 Cash – Restricted for Construction Pledges Receivable – Restricted for Construction 3. 42,000 50,000 45,000 38,000 38,000 Pledges Receivable – Restricted for Construction Contributions – Restricted for Construction $20,825 = $260,318 x .08 20,825 Cash – Restricted for Construction Pledges Receivable – Restricted for Construction 38,000 50,000 19-23 20,825 50,000
    • Chapter 19 – Not-for-Profit Entities E19-8 Multiple-Choice Questions on Other Nonprofit Organizations [AICPA Adapted] 1. a 2. a 3. b 4. d 5. c 6. d 7. c Note: Board designations are internal; therefore, not restricted. 8. d $830,000 = $680,000 + $90,000 + $60,000 Note: Nonexpendable gifts for loan purposes are classified as temporarily restricted ($30,000) and permanently restricted ($25,000). 9. a Note: All other expenses are for supporting services. 10. c Note: Gains on endowment investments are considered principal unless otherwise stated. Note: Annual report has program and service intent. 19-24
    • Chapter 19 – Not-for-Profit Entities E19-9 Statement of Activities for an Other Nonprofit Organization Pleasant School Statement of Activities – Unrestricted Operating Fund Only Year Ended June 30, 20X2 Support and revenue: Tuition and fees Contributions Auxiliary activities Investments income Other revenue Net assets released from restriction: Temporarily restricted net assets Permanently restricted assets Total support and revenue Expenses: Program services: Instruction Auxiliary activities Supporting services: Administration Fund raising Total program and support services expenses Increase in net assets Fund balance, July 1, 20X1 Fund balance, June 30, 20X2 Operating Funds Unrestricted $1,200,000 165,000 40,000 32,000 38,000 130,000 12,000 $1,617,000 $1,050,000 37,000 250,000 28,000 $1,365,000 $ 252,000 420,000 $ 672,000 19-25
    • Chapter 19 – Not-for-Profit Entities SOLUTIONS TO PROBLEMS P19-10 Financial Statements for a Private, Not-for-Profit College a. Friendly College Statement of Financial Position June 30, 20X3 and 20X2 Item Cash Accounts receivable (student tuition and fees, less allowance for uncollectibles of $11,000 and $9,000, respectively) State appropriations receivable Investments Total assets 341,000 75,000 60,000 $693,000 $ 59,000 158,000 $ 45,000 66,000 716,000 117,900 50,000 $1,100,900 515,000 67,000 -0$693,000 Friendly College Statement of Activities For Year Ended June 30, 20X3 Unrestricted Revenues, gains, and other support: Tuition and fees $1,900,000 State appropriation 50,000 Interest income 6,000 Contributions 25,000 Gain on sale of investments Investment income Net assets released from temporary restriction* 13,000 Total revenue, gains, and other support $1,994,000 Expenses and other deductions Change in net assets Net assets at beginning of Year Net assets at end of year 20X2 $217,000 137,000 50,000 89,000 $1,100,900 Accounts payable Deferred revenue Net assets: Unrestricted Temporarily restricted by donors Permanently restricted by donors Total liabilities and net assets b. 20X3 824,900 $ 1,793,000 $ 201,000 515,000 $ 716,000 Temporarily Permanently Restricted Restricted $ 7,000 50,000 5,000 1,900 $ 50,000 Total $1,900,000 50,000 13,000 125,000 5,000 1,900 (13,000) $ 50,900 $ 50,000 $ 50,900 67,000 $117,900 $ 50,000 $ 50,000 $2,094,900 1,793,000 $ 301,900 582,000 $ 883,900 *The transfers of temporarily restricted resources are reported as Net Assets Released from Temporary Restriction and included in unrestricted expenses. 19-26
    • Chapter 19 – Not-for-Profit Entities P19-10 (continued) Proof of selected items: (1) Cash = Beginning balance of $217,000 plus receipts of: $ 100,000 from alumnus 1,686,000 from student tuition and fees 158,000 from fee revenue deferred to next year 349,000 from outstanding accounts receivable 6,000 from interest received 75,000 from prior year’s state appropriation 25,000 from unrestricted gift from alumni 26,000 from sale of investments 1,900 from investment interest income 7,000 from interest on savings certificates Less payments of: $ 50,000 to acquire savings certificates 1,718,000 to operating expenses ($1,777,000 - $59,000 unpaid) 13,000 to items for restricted purposes 45,000 to prior year’s accounts payable = Ending balance of $824,900 (2) Accounts receivable = Beginning balance of $350,000 gross plus $1,834,000 for net increase in tuition ($1,900,000 - $66,000) Less collections of: $1,686,000 collection of current year’s tuition and fees 349,000 collection of prior year’s accounts receivable 1,000 write-off of remainder of prior year’s receivable = Ending balance of $148,000 gross (less estimated uncollectibles of $11,000) (3) Investments = Beginning balance of $60,000 plus $ 50,000 acquire certificate of deposit Less decreases of: $ 21,000 sale of restricted investments = Ending balance of $89,000 (4) Expenses and other deductions = $1,777,000 unrestricted operating expenses recorded + 3,000 year-end accrual for increase in estimated uncollectibles + 13,000 transferred from temporarily restricted and spent in unrestricted $1,793,000 19-27
    • Chapter 19 – Not-for-Profit Entities P19-11 Balance Sheet for a Hospital Brookdale Hospital Balance Sheet December 31, 20X4 Current Assets: Cash Contributions receivable Investments in marketable securities Interest receivable Accounts receivable Inventory Total current assets Long-term assets: Buildings and equipment Less: Accumulated depreciation Net investment in buildings and equipment Land Investment in marketable securities Total long-term assets Total assets Liabilities: Accounts payable Mortgage payable Total liabilities Net assets: Unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets $ 100,000 100,000 200,000 15,000 55,000 35,000 $ 750,000 (325,000) $ 425,000 95,000 300,000 $ 40,000 320,000 $ 555,000 80,000 330,000 Proof of selected amounts: Accumulated depreciation: Buildings: ($600,000 / 30 years) x 11 years expired Equipment: ($150,000 / 10 years) x 7 years expired Land: for amount of historical cost Temporarily restricted net assets: $50,000 of short-term investments plus $30,000 in temporarily restricted contributions receivable. Permanently restricted net assets: $300,000 of long-term investments plus $30,000 in permanently restricted contributions receivable. Unrestricted net assets = $555,000 balancing plug after corrections, or $1,140,000 preadjusted balance for reduction of building and equipment to historical (185,000) cost (65,000) for correction of accumulated depreciation (25,000) for reduction of land to fair value at time of donation 40,000 for unrecognized, unrestricted contributions receivable for preadjusted temporarily and permanently restricted (350,000) net assets 19-28 $ 505,000 820,000 $1,325,000 $ 360,000 965,000 $1,325,000 = $220,000 = 105,000 $325,000
    • Chapter 19 – Not-for-Profit Entities P19-12 Entries and Statement of Activities for an Other Nonprofit Organization [AICPA Adapted] a. Community Sports Club Transactions For the Year Ended March 31, 20X3 1. Cash Revenue – Annual Dues 20,000 2. Cash Revenue – Snack Bar and Soda Fountain 28,000 28,000 3. Cash Investment Income 6,000 4. Expense – House Expense – Snack Bar and Soda Fountain Expense – General and Administrative Accounts Payable 17,000 26,000 11,000 5. Accounts Payable Cash 55,000 6. Assessments Receivable Deferred Capital Support 10,000 7. Cash Support – Bequest (unrestricted) 19-29 20,000 5,000 6,000 54,000 55,000 10,000 5,000
    • Chapter 19 – Not-for-Profit Entities P19-12 (continued) Adjustments March 31, 20X3 1. 2&3. 4. Investments Unrealized Gain on Investment Note: ONPOs may value investments at full market values 7,000 Depreciation Expense – House Depreciation Expense – Snack Bar and Fountain Depreciation Expense – General and Administrative Accumulated Depreciation – Building Accumulated Depreciation – Furniture and Equipment 9,000 2,000 Expense – Snack Bar and Soda Fountain Inventories 4,000 b. 1,000 7,000 4,000 8,000 4,000 Community Sports Club Statement of Activities For the Year Ended March 31, 20X3 Revenues, gains and other support Snack bar and soda fountain sales Dues Investment income Bequest Total revenue, gains and other support $ 28,000 20,000 6,000 5,000 $ 59,000 Expenses Snack bar and soda fountain House General and administrative Total expenses $32,000 26,000 12,000 Change in net assets before unrealized gain on investments Unrealized gain on investments Change in net assets Net assets on April 1, 20X2 Net assets on March 31, 20X3 19-30 70,000 $(11,000) 7,000 $ (4,000) 12,000 $ 8,000
    • Chapter 19 – Not-for-Profit Entities P19-13 Entries and Statements for General Fund of a Hospital a. Journal entries: 1. Accounts Receivable Patient Services Revenue 2. Contractual Adjustments Accounts Receivable 3. Nursing Services Other Professional Services Fiscal Services General Services Bad Debts Administration Depreciation Expense Cash Allowance for Uncollectibles Accumulated Depreciation Accounts Payable Accrued Expense Inventories Prepaid Expenses Nonoperating Gain – Donated Services 4. 5. 6. 7. 8. 9. 6,160,000 330,000 1,800,000 1,200,000 250,000 1,550,000 120,000 280,000 400,000 Cash Due from Specific-Purpose Fund Net Assets Released from Program Use Restriction 6,160,000 330,000 4,580,000 120,000 400,000 170,000 35,000 195,000 30,000 70,000 75,000 25,000 100,000 Inventories Prepaid Expenses Cash 176,000 24,000 Cash Investment Income from Endowment Fund Investments [Note that the general fund directly recorded this income because it is unrestricted income from the endowment investments.] 85,000 Cash Accumulated Depreciation Property, Plant, and Equipment Gain on Sale of Equipment 17,000 20,000 200,000 Cash Allowance for Uncollectibles Accounts Receivable 85,000 5,800,000 132,000 Investments Cash 60,000 19-31 30,000 7,000 5,932,000 60,000
    • Chapter 19 – Not-for-Profit Entities P19-13 (continued) 10. 11. Cash Investment Income from Board – Designated Investments 72,000 Accounts Payable Accrued Expenses Cash 150,000 55,000 12. Cash Deferred Revenue – Reimbursement 13. Cash Net Assets Released from Fixed Asset Acquisition Restriction 14. b. 72,000 205,000 20,000 20,000 140,000 140,000 Cash Other Operating Revenue – Cafeteria and Gift Shop Sales 63,000 63,000 Comparative balance sheets: Serene Hospital Balance Sheet – General Fund For Years Ended December 31, 20X2 and 20X1 20X2 Assets Cash Accounts receivable Less: Allowance for uncollectibles Due from specific-purpose fund Inventories Prepaid expenses Investments Property, plant, and equipment Less: Accumulated depreciation Total $ 1,352,000 298,000 (38,000) 65,000 76,000 14,000 960,000 6,070,000 (1,880,000) $ 6,917,000 20X1 $ 125,000 400,000 (50,000) 40,000 95,000 20,000 900,000 6,100,000 (1,500,000) $ 6,130,000 Liabilities and Fund Balance Accounts payable Accrued expenses Deferred revenue – reimbursements Bonds payable Unrestricted net assets Total 19-32 $ 170,000 35,000 95,000 3,000,000 3,617,000 $ 6,917,000 $ 150,000 55,000 75,000 3,000,000 2,850,000 $ 6,130,000
    • Chapter 19 – Not-for-Profit Entities P19-13 (continued) c. Statement of operations for the unrestricted general fund: Serene Hospital Statement of Operations for the Unrestricted General Fund For the Year Ended December 31, 20X2 Unrestricted revenues, gains, and other support: Net patient services revenue Gain on sale of equipment Cafeteria and gift shop sales Investment income Donated services Net assets released from: Program use restriction Total revenues, gains and other support Operating expenses: Nursing services Other professional services Fiscal services General services Bad debts Administration Depreciation Total expenses Excess of revenues over expenses Other item: Net assets released from fixed asset acquisition restriction Increase in unrestricted net assets $ 7,000 63,000 157,000 70,000 100,000 $1,800,000 1,200,000 250,000 1,550,000 120,000 280,000 400,000 $ 5,830,000 397,000 $ 6,227,000 (5,600,000) $ 627,000 $ 140,000 767,000 $ 627,000 Statement of changes in net assets (not required) Serene Hospital Statement of Changes in Net Assets For the Year Ended December 31, 20X2 Operating Income Net assets released from fixed asset acquisition restriction Increase in unrestricted net assets Net Assets at Beginning of Year Net Assets at End of Year 140,000 767,000 2,850,000 $ 3,617,000 $ 19-33
    • Chapter 19 – Not-for-Profit Entities P19-13 (continued) d. Statement of cash flows for the general fund (indirect method): Serene Hospital Statement of Cash Flows for the General Fund For the Year Ended December 31, 20X2 Cash flows from operating activities: Change in net assets Adjustments to reconcile changes in net assets to net cash provided by operating activities: Depreciation Gain on sale of property, plant, and equipment Decrease in net patient accounts receivable Increase in due from specific-purpose fund Decrease in inventories Decrease in prepaid expenses Net change in accounts payable and accrued expenses Increase in deferred revenue – reimbursements Net assets released from fixed asset restriction Net cash provided by operating activities Cash flows from investing activities: Sale of property, plant, and equipment Transfer in from restricted plant fund Purchase of investments Net cash provided by investing activities $ 767,000 400,000 (7,000) 90,000 (25,000) 19,000 6,000 -020,000 (140,000) $1,130,000 $ 17,000 140,000 (60,000) $ 97,000 Cash flows from financing activities $ Net increase in cash Cash at beginning of year Cash at end of year $1,227,000 125,000 $1,352,000 19-34 -0-
    • Chapter 19 – Not-for-Profit Entities P19-13 (continued) Optional d. Statement of cash flows for the general fund (direct method):* Serene Hospital Statement of Cash Flows for the General Fund For the Year Ended December 31, 20X2 Cash flows from operating activities and gains and losses: Cash received from patients and third-party payers Cash paid to employees and suppliers Other receipts from operations Income on endowment investments Income on board-designated investments Net cash provided by operating activities $ 5,883,000 (4,985,000) 75,000 85,000 72,000 $ 1,130,000 Cash flows from investing activities: Sale of property, plant, and equipment Transfer in from restricted plant fund Purchase of investments Net cash provided by investing activities $ 17,000 140,000 (60,000) 97,000 Cash flows from financing activities $ -0- Net increase in cash Cash at beginning of year Cash at end of year $ 1,227,000 125,000 $ 1,352,000 $ * If the direct method is used, a supplementary schedule is required to reconcile "revenue and gains in excess of expenses and losses to net cash provided by operating activities and gains and losses." This required supplementary schedule is similar to the cash flows from operating activities section under the indirect method of presenting cash flows as presented for part d above. 19-35
    • Chapter 19 – Not-for-Profit Entities P19-14 Statements for Current Funds of a Voluntary Health and Welfare Organization [AICPA Adapted] Community Association for Handicapped Children Statement of Activities Year Ended June 30, 20X4 Public support and revenue: Public support: Contributions (net of estimated uncollectible pledges of $2,000) Revenue: Membership dues Program service fees Investment income Net assets released from: Time restriction (from Endowment Fund) Use restriction Total support and revenue Expenses: Program services: Deaf children Blind children Total program services Supporting services: Management and general Fund raising Total supporting services Total expenses Unrestricted Temporarily Restricted $298,000 $ 15,000 25,000 30,000 10,000 20,000 5,000 $388,000 (20,000) (5,000) $(10,000) $120,000 150,000 $270,000 $ 49,000 9,000 $ 58,000 $328,000 Change in net assets Fund balances, July 1, 20X3 Fund balances, June 30, 20X4 $ 60,000 38,000 $ 98,000 ___ ____ $__ _-0$(10,000) 23,000 $ 13,000 Note: The use restriction transfer of $5,000 from the temporarily restricted fund to the unrestricted fund is for the $4,000 and $1,000 of expenses initially recorded in the temporarily restricted fund. FASB 117 requires that all not-for-profit organizations report all entity expenses in the unrestricted fund. Therefore, the temporarily restricted fund will not report any expenses. The management and general, and the fund raising amounts in the unrestricted fund include the $4,000 and $1,000 expenses transferred from the temporarily restricted fund. 19-36
    • Chapter 19 – Not-for-Profit Entities P19-14 (continued) Community Association for Handicapped Children Statement of Financial Position June 30, 20X4 Cash Investments (at cost, which approximates market value) Pledges receivable (less $3,000 allowance for uncollectibles) Interest receivable Assets whose use is restricted Total assets Accounts payable Deferred revenue Total liabilities Net assets: Unrestricted Temporarily restricted Total net assets Total liabilities and net assets $ 40,000 100,000 9,000 1,000 13,000 $163,000 $ 50,000 2,000 $ 52,000 $98,000 13,000 111,000 $163,000 Note: The $13,000 for Assets whose use is restricted is the $14,000 of temporarily restricted assets minus the $1,000 of temporarily restricted liabilities. 19-37
    • Chapter 19 – Not-for-Profit Entities P19-15 Comparative Journal Entries for a Government Entity and a Voluntary Health and Welfare Organization [AICPA Adapted] a. 1. 2. 3. 4. Local Government Unit General Fund Expenditures – Purchase of Equipment Cash General Fund (or any other fund) Cash Revenue – Donations 25,000 100,000 Permanent Trust Fund Cash Investments Fund Balance – Restricted – Gain on Sale of Investments Capital Projects Fund Cash Other Financing Sources – Bond Issue Capital Projects Fund Construction Expenditures Cash 55,000 100,000 50,000 5,000 1,000,000 1,000,000 1,000,000 19-38 25,000 1,000,000
    • Chapter 19 – Not-for-Profit Entities P19-15 (continued) b. 1. Voluntary Health and Welfare Organization Unrestricted Fund Equipment Cash 25,000 Cash Net Assets Released from Fixed Asset Acquisition Restriction Temporarily Restricted Fund – Plant and Equipment Net Assets Released from Fixed Asset Acquisition Restriction Cash 2. 3. 4. Unrestricted Fund Cash Contributions – Unrestricted Permanently Restricted Fund – Endowments Cash Investments – Common Stocks Gain on Sale of Investments Unrestricted Fund Cash Bonds Payable 25,000 25,000 25,000 100,000 55,000 1,000,000 Buildings Cash 1,000,000 19-39 25,000 25,000 100,000 50,000 5,000 1,000,000 1,000,000
    • Chapter 19 – Not-for-Profit Entities P19-16 Matching Effects of Transactions on a Hospital’s Financial Statements [AICPA Adapted] 1. E The designation of intent is not a transaction. When the actual purchase is made, the transaction will be recorded. 2. A After the investment is actually made, the income from resources under the control of the governing board is recorded as unrestricted revenue. 3. C Resources contributed for capital expansion serve a specific purpose for which the resources should be used. This contribution is accounted for in a temporarily restricted fund, and reported as an increase in temporarily restricted net assets. 4. A The use of temporarily restricted resources in accordance with the donor’s specification results in a reclassification (transfer) of the resources from temporarily restricted to unrestricted. The following entries would be made in the case of the hospital maintaining a separate Plant Fund: Plant Fund: Net Assets Released – Plant Acquisition Cash Unrestricted Fund: Cash Net Assets Released from Capital Acquisition Restriction Property, Plant, and Equipment Cash XXXX XXXX XXXX XXXX XXXX XXXX 5. A Donated services to a hospital are accounted for in accordance with FASB 116 under which donated services are recognized if the services (a) create or enhance nonfinancial assets, or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donations. In the case of specialized accounting services, the hospital would recognize the estimated value of the donated services as an expense and a corresponding amount is reported as an increase in unrestricted revenues, gains, and other support. Given the five choices of A through E, A is the answer. 6. D The contribution of permanently restricted investments would normally be accounted for in an endowment fund which would be an increase in permanently restricted net assets. The income from the investments would be available for the unrestricted fund, but the investments themselves would be restricted in accordance with the donor’s specification. 19-40
    • Chapter 19 – Not-for-Profit Entities P19-17 Balance Sheet for a Hospital Havencrest Hospital Balance Sheet June 30, 20X8 Assets Current: Cash Accounts Receivable (net of the allowance of $5,000) Inventories Prepaid Expenses Total Current Assets Assets Limited as to Use: By Donors for Specific Purpose – Research By Donors for Plant Replacement and Expansion By Donors for Permanent Investment Investments Property, Plant, and Equipment (net of accumulated depreciation of $140,000) Total Assets Liabilities and Net Assets Current: Accounts Payable Accrued Expenses Deferred Revenues Current Portion of Long-term Debt Total Current Liabilities Long-term Debt: Mortgage Payable Total Liabilities Net Assets: Unrestricted Temporarily Restricted Permanently Restricted Total Net Assets Total Liabilities and Net Assets 19-41 $ 30,000 20,000 50,000 10,000 $ 110,000 $ 32,000 200,000 520,000 100,000 160,000 $1,122,000 $ $ 45,000 17,000 11,000 24,000 97,000 125,000 $ 222,000 $ 148,000 232,000 520,000 $ 900,000 $1,122,000
    • Chapter 19 – Not-for-Profit Entities P19-18 Matching of Transactions to Effects on Statement of Changes in Net Assets for a Hospital 1. A 2. E 3. B 4. G 5. C 6. C 7. A and D 8. 9. A D (A and B offset) 10. E 11. G 12. A P19-19 Matching of Transactions to Effects on Statement of Activities for a Voluntary Health and Welfare Organization 1. C 2. B 3. B 4. G 5. E 6. C 7. A and C 8. A 9. A 10. C 11. A 12. A board-designation is not an external, donor-imposed restriction. There is no change in the unrestricted net assets. D 19-42
    • Chapter 19 – Not-for-Profit Entities P19-20 Net Asset Identification for Transactions Involving a Private University 1. Unrestricted net assets increased $2,000,000. 2. Temporarily restricted net assets increased $1,000,000. 3. Unrestricted net assets decreased $200,000. 4. Temporarily restricted net assets increased $1,500,000. 5. Temporarily restricted net assets increased $150,000. 6. Temporarily restricted net assets increased $75,000. 7. Temporarily restricted net assets decreased $60,000, the result of a reclassification of $60,000 to unrestricted net assets. There is no effect on unrestricted net assets because the increase of $60,000 due to the reclassification is offset by a $60,000 increase in expenses. Expenses are decreases in unrestricted net assets. 8. There is no effect on unrestricted net assets as a result of this board designation. Net assets under the control of the governing board are unrestricted. The board of BU took cash that was unrestricted and designated that it be used for a specific purpose. This designation does not change the net asset classification of the cash. 9. Permanently restricted net assets increased $3,750,000. 10. There is no effect on unrestricted net assets as a result of the acquisition of debt securities by the board. The board took cash that was unrestricted and used it to acquire debt securities. 11. Unrestricted net assets increased $6,000. The interest revenue of $18,000 from the investments is an increase in unrestricted net assets, while the $12,000 used to fund summer research grants represents a $12,000 decrease in unrestricted net assets. 19-43
    • Chapter 19 – Not-for-Profit Entities P19-21 Questions on Voluntary Health and Welfare Organization [AICPA Adapted] Transaction 1. List A Effect B List B Effect N 2. B H 3. A H 4. G K 5. D N 6. G L P19-22 Contributions to a Hospital [AICPA Adapted] 1. E The board’s designation is not a required reportable event. 2. A The investments are under the board’s discretion; therefore, the income is recorded as unrestricted revenue. 3. C Funds provided specifically for a building expansion are temporarily restricted until the construction takes place. 4. A At the time the temporarily restricted resources are expended for the program specified by the donor, the funds are reclassified as unrestricted. 5. A Professional services contributed to the not-for-profit organization are valued at their fair value and recorded as unrestricted revenues, gains, and other support. 6. D The principal is permanently restricted by the donor. The income from the investments, when the income is earned, would be classified as temporarily restricted, to be used for the specific purpose specified by the donor. 19-44
    • Chapter 19 – Not-for-Profit Entities 1P19-23 Evaluating Items for a Hospital’s Statement of Operations 1. A Estimated uncollectibles from providing services is an operating expense. 2. A,A Both as a contribution revenue and an operating expense. If the supplies had not been used during the period they would be reported as contribution revenue and an increase in inventory. The operating expense would be recognized as they are consumed. 3. A Unrestricted investment income is included in unrestricted revenue. 4. A Assumes normal case that gain is not restricted. 5. B Net assets released for acquisition of equipment are nonoperating items. 6. A Net assets released for operations are part of operating items. 7. C The statement of operations reports only income/loss on unrestricted net assets. 8. C This investment income would be retained by the temporarily restricted fund. 9. C Pledges for planned new construction would be accounted for as contributions in the temporarily restricted building fund until released for acquisition of the equipment. They would then be accounted for as a net assets released to the unrestricted fund. 10. A Auxiliary services revenues are included in unrestricted revenues. 11. A,A Both as contribution revenue and an operating expense. 12. A Depreciation is an operating expense of the hospital. 13. C Board designations do not change the nature of the unrestricted resources. 14. A Contribution revenue would be recorded at the time of the gift and assets would be increased. Operating expense would be recorded for the periodic depreciation. 15. C Charity care not reported on the statement. Charity care is usually footnoted. 16. C Net patient care revenue is net of contractual adjustments. Therefore, contractual adjustments not directly shown on the statement of operations. 17. C A bond issue is shown as a liability in the hospital’s balance sheet. 18. C Only the periodic depreciation on these operating tables will be reported on the statement of operations. 19. B Investment income in excess of amounts designated for current operations are shown below the operating performance indicator. 19-45
    • Chapter 19 – Not-for-Profit Entities P19-24 True-False Questions About Not-for-Profit Accounting and Reporting 1. F Per FASB 117, a statement of functional expenses is required only for voluntary health and welfare organizations. 2. T According to FASB 116, pledge revenue is recorded net of estimated uncollectibles. 3. F Time restricted contributions should be recorded in the temporarily restricted net assets until the time restriction has expired. At that point, the resources may be transferred to the unrestricted net asset class. 4. F Contractual adjustments should be a direct reduction of patient revenue, not an expense. 5. F Designated resources are part of the unrestricted net asset class. Only external donor-restricted resources are reported in the restricted asset classes. 6. T The net asset transfer from the temporarily restricted net asset class is appropriate at the point the unrestricted net asset class expends the resources in accordance with the donor’s restrictions. 7. F According to FASB 116, donated supplies should be recognized as contribution revenue in the period received and as an operating expense in the period used. 8. T FASB 124 specifies that income on permanently restricted endowment assets should be recognized in the appropriate net asset class for which the income is directed. In this example, the income is restricted for a specific use. Therefore, the investment income should be recognized directly in the temporarily restricted net asset class. 9. F FASB 124 requires that investments held by not-for-profit organizations should be revalued to their fair values at each balance sheet date. The total investment return for the period would be determined and that portion designated for current operations would be reported above the operating performance measure in the statement of operations. 10. T FASB 116 states that contributions of art or historical works do not need to be recorded as contribution revenue and capitalized as assets of the not-forprofit organization if the works are for public display, the organization agrees to care and preserve the collection, and any proceeds from sales of any collection item will be used only for acquiring other items for the collection. 19-46
    • Chapter 19 – Not-for-Profit Entities P19-24 (continued) 11. F The building and equipment is recorded and reported in the hospital’s unrestricted net asset class (the general fund). The restricted building fund is used to account for resources, some of which might be contributions of equipment, to be used for obtaining buildings and equipment. Some contributions to the building fund might be equipment that is not put into service. At the time the resources are used for acquiring or using plant assets for providing services to patients, the resources are accounted for as net assets released from temporary restriction out of the building fund and also as net assets released from temporary restriction into the unrestricted, general fund. The unrestricted fund reports this transfer received below the operating performance measure on the hospital’s statement of operations. 12. T FASB 116 states that significant donated services that would otherwise need to be obtained should be recognized as contribution revenue and an expense in the period of the donation. 13. F Estimated uncollectibles from patient service receivables should be shown as a bad debt expense and a contra account to the receivables asset. 14. F FASB 116 states that conditional pledges should not be recognized until the conditions have been substantially met. Potentially possible is not equal to substantially met. 15. F The temporarily restricted net asset class should not report any expenses. Only the unrestricted net asset class may report expenses. The cost of the program should be reported in the unrestricted net asset class and then a net assets released from temporary restriction transfer should be made from the temporarily restricted net asset class to the unrestricted net asset class. 16. F FASB 116 states that time restricted contributions should be reported as contribution revenue in a temporarily restricted net asset class. At the end of the time restriction, the resources will be transferred to the unrestricted net asset class. 17. F Fund accounting is not required for hospitals, although many hospitals do use fund accounting for its account discipline. Hospitals and other not-forprofit organizations are required by FASB 117 to report net assets by unrestricted, temporarily restricted, and permanently restricted classes. Net assets are restricted only by external donors or laws that govern the organization. 19-47
    • Chapter 19 – Not-for-Profit Entities P19-24 (continued) 18. T The performance measure may have any descriptive title such as “Excess of revenues over expenses” but must separate the operating income (loss) from the nonoperating items. 19. F The building fund should record this transfer as a net assets released from the temporarily restricted fund. The unrestricted, general fund should record this transfer as net assets released from the temporarily restricted fund to the general fund. Note that it is not a revenue of the general fund because the revenue was already recognized in the temporarily restricted fund at the time of the donation. Contribution revenue should be recognized only once by the not-for-profit hospital. 20. F FASB 117 specified that the cost of a fund raising effort of a VHWO is an important piece of information for users of the financial statements of the VHWO. Thus, fund raising costs must be separately reported as an expense of the entity and cannot be reported as a direct reduction of the contribution revenue obtained in the fund raising effort. 19-48
    • Chapter 19 – Not-for-Profit Entities 1P19-25 Statement of Activities for a Voluntary Health and Welfare Organization United Ways Statement of Activities For the Year Ended December 31, 20X3 Unrestricted Revenues, gains, and other support: Contributions Investment income Donated services Net assets released from restriction: Program use restrictions Equipment acquisitions Total revenues, gains, and Other support $ $ 950,000 200,000 Permanently Restricted 150,000 100,000 $ 600,000 $ 1,450,000 800,000 15,000 $ 600,000 $ 2,265,000 (150,000) (100,000) 765,000 $ 900,000 Total $ 15,000 Program and supporting services expenses: Research $ Public health education Community services Management and general Fund raising Total expenses Change in net assets Net assets, beginning of the year Net assets, end of the year 500,000 Temporarily Restricted 250,000 100,000 150,000 140,000 115,000 $ 250,000 100,000 150,000 140,000 115,000 $ 755,000 $ 10,000 $ -0$ 900,000 $ -0$ 600,000 $ 755,000 $ 1,510,000 3,000,000 $3,010,000 5,000,000 $5,900,000 6,000,000 $6,600,000 14,000,000 $15,510,000 Notes: 1. The donated services of $15,000 are reported as an increase in unrestricted net assets and included as part of the $140,000 of expenses for management and general. 2. The uncollectible pledges of $50,000 are reported as a deduction from temporarily restricted contributions received in 20X3. 3. The $950,000 of pledges received in 20X3 is reported as temporarily restricted because of a time restriction—the pledges will not be received until 20X4. 4. The governing board’s designation of $225,000 for computer acquisitions is not reported on the Statement of Activities. The resources that were designated were reported as unrestricted, and the governing board’s designation of the resources does not change their classification. 5. FASB 117 permits temporarily restricted net assets that are spent in the same year in which the assets are received to be reported as unrestricted. In the problem, this means that the $150,000 of investment income that was earned in 20X3 and used for research in 20X3 could have been reported directly in unrestricted net assets, avoiding the need to report $150,000 of net assets released from restriction. 19-49
    • Chapter 19 – Not-for-Profit Entities 1P19-26 Reporting Transactions on the Statement of Cash Flows for Private, Not-for-Profit Entities 1. Report the $100,000 increase in accounts receivable as a deduction from the change in net assets in the operating activities section. 2. Report a deduction for the $200,000 contribution from the change in net assets in the operating activities section and disclose an increase of $200,000 in the financing activities section. 3. Report a deduction for the $25,000 contribution from the change in net assets in the operating activities section and disclose an increase of $25,000 in the investing activities section. 4. Report an addition to the change in net assets in the operating activities section for the increase of $20,000 in accounts payable. 5. Report the $70,000 borrowed as an increase in the financing activities section. 6. Report a deduction of $50,000 to acquire investments in the investing activities section. 7. Report a deduction for the investment income of $45,000 from the change in net assets in the operating activities section and report an increase of $45,000 in the financing activities section. 8. Report the $850,000 as a decrease in the investing activities section. 9. Report the loans made to students and faculty of $100,000 as a decrease in the investing activities section. 10. Report the $30,000 loan repayment as a deduction in the financing activities section. 11. Report the increase in accrued interest receivable as a deduction from the change in net assets in the operating activities section. 12. Report the increase of $12,000 in deferred revenue as an increase to the change in net assets in the operating activities section. 13. Report the $100,000 received as an increase in the investing activities section. 14. Report the increase of $2,500 in prepaid assets as a deduction to the change in net assets in the operating activities section. 15. Report the $35,000 unrealized gain on investment as a deduction from the change in net assets in the operating activities section. 19-50