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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

CHAPTER 18
ACCOUNTING AND REPORTING FOR PRIVATE
NOT-FOR-PROFIT ORGANIZATIONS
Chapter 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.

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

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 partys 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.

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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
another?

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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

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over an extended period of time. Conversely, if too much uncertainty exists (a value for the
land 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
organizations officials for whatever purpose they deemed necessary.

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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.

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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 childrens 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
exchange transaction.
17. If a not-for-profit organization gains control over another organization, combined financial
statements should be prepared. This type of transaction is viewed as an acquisition.
If two not-for-profit organizations come together to form a new, third not-for-profit with a
new governing board, combined statements are also needed. However, this event is
viewed as a merger.
18. Because one party gained control over the other, this transaction is viewed as an
acquisition.

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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.

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Answers to Problems
1. C (Amounts charged to patients less contractual adjustments)
2. A
3. B (Private NFPs report depreciation expense. A public university is normally
reported as an Enterprise Fund. Enterprise Funds also record depreciation
expense.)
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
$780,000.)
7. C (The work of the librarian does not enhance a nonfinancial asset nor does it
require a specialized skill that would be purchased if not donated.)
8. D (If the other information that is included contains a call for a specific action
that will help accomplish the mission of the charity and if the mailing is not
directed solely to potential donors, a portion of the costs can be allocated
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

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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 not-for-profit organizations come together to form a new not-forprofit organization with a new governing board, a merger has occurred. In a
merger, the carryover method is used. Thus, book value is retained. The
$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.)

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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.)
27. A
28. B
29. A (The fund-raising costs and administrative salaries are supporting service
expenses.)
30. B
31. D
32. (10 minutes) (Reporting of various account balances by a not-for-profit health
care organization)
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)

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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 assets reported balance rather than as Salary Expense.

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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 organizations 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 ............................................................................
Anticipated Amount Deemed to be Uncollectible (15%)
Net Pledge Balance.....................................................

$600,000
(90,000)
$510,000

Increase in Unrestricted Net Assets in 2013


Contributed Support (60% of above)........................

$306,000

Increase in Temporarily Restricted Net Assets in


2013Contributed 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.

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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

$210,000

$78,000
3,000

Public Support
a. Contributions
b. Contribution
Interest
Revenue
c. Membership dues
d. Investment income

30,000
3,900

9,100

e.
Net assets released from
restriction

72,000

(72,000)

Total Public Support and


Revenue

$315,900

Permanently Restricted
Net Assets

$18,100

Expenses
Program service expenses
cure disease
f. Salaries
g. Depreciation
h. Supplies
Total

(26,500)
(16,000)
(93,000)
(135,500)

Supporting service expenses


General and administrative
i. Salaries
j. Depreciation
Total

(32,000)
(2,000)
(34,000)

Fund-raising
k. Salaries
l. Advertising
m. Depreciation
Total

(26,500)
(2,000)
(2,000)
(30,500)

Total Expenses

(200,000)

Change in Net Assets

$115,900

$18,100

-0-

400,000

200,000

$100,000

$515,900

$218,100

$100,000

Net Assets at Beginning


of Year
Net Assets at End of
Year

18-14

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

36. (continued)
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
to overall total).
j. Depreciation. Of the total for the period, 10 percent was allocated to general
and administrative expenses.
k. 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).
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.

18-15

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

---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.
36. (continued)
b.
Statement of Financial Position
Assets
a. Cash
$738,000
b. Pledge Receivable
81,000
c. Equipment
$300,000
d. Accumulated Depreciation
(20,000)
280,000
Total Assets
Liabilities
e. Salaries Payable
f. Notes Payable

$1,099,000

$5,000
250,000

g. Donated Amount That Is Due to


Separate Organization
Net Assets (see Statement of Activities)
Unrestricted
Temporarily Restricted
Permanently Restricted

10,000

$265,000

$515,900
218,100
100,000

834,000

Explanation of Balances:
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.

18-16

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

g. Donated Amount That Is Due to Separate Organization. Amount given by a


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)
a. InvestmentsInternally Restricted ................................
Cash........................................................................

160,000

b. Cash...................................................................................
Contributed Support
permanently Restricted Net Assets .................

80,000

c. Inventory of Medicines.....................................................
Cash........................................................................

25,000

ReclassificationTemporarily
restricted Net Assets..................................................

160,000

80,000
25,000
25,000

ReclassificationUnrestricted
Net Assets.........................................................

25,000

d. Accounts ReceivablePatients......................................
Accounts receivableThird-Party
Payors...........................................................................
Patient service revenues.......................................

120,000

e. Depreciation Expense......................................................
Accumulated Depreciation...................................

38,000

f. Cash...................................................................................
Interest Revenue
Unrestricted Net Assets (internally restricted)

15,000

g. Bad Debt Expense............................................................


Allowance for Uncollectible
Accounts...........................................................

20,000

Contractual Adjustment...................................................
Allowance for Reduced Charges.........................

30,000

37. (continued)

18-17

480,000
600,000
38,000

15,000

20,000
30,000

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

h. Supplies Expense ............................................................


Inventory of Medicines..........................................

25,000

i. Cash ..................................................................................

172,000

25,000

InvestmentsInternally Restricted......................
Gain on Sale of InvestmentsUnrestricted
Net Assets.........................................................
Equipment.........................................................................
Cash ($172,000 + $15,000 + $25,000)...................
ReclassificationTemporarily
Restricted Net Assets.................................................
ReclassificationUnrestricted
Net Assets.........................................................
j. Cash...................................................................................
Pledges Receivable (present value)...............................
Allowance for Uncollectible Pledges...................
Contributed SupportUnrestricted
Net Assets.........................................................
Contributed SupportTemporarily
Restricted Net Assets......................................

160,000
12,000
212,000
212,000
25,000
25,000
12,600
98,000
9,000
12,600
89,000

37. (continued)

a. No change

Calculation of Changes in Net Assets


Unrestricted
Temporarily Restricted
Permanently Restricted
Net Assets
Net Assets
Net Assets

b. Donation
Income for
Salaries
c. Stipulation
MetReclassification

80,000

25,000

d. Patient
Services

600,000

e. Depreciation

(38,000)

f. Interest

(25,000)

15,000

18-18

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

g. Bad Debts
Contractual
Adjustment
h. Supplies
Expense
i. Gain on
Investments
Stipulation
MetReclassification
j. Pledges
Increase
(Decrease)
In Net
Assets

(20,000)
(30,000)

(25,000)
12,000

25,000

(25,000)

12,600

89,000

576,600

39,000

80,000

38. (60 minutes) (Produce journal entries for a private university as well as a
statement of activities)
a. Tuition Receivable
Tuition Revenues

1,200,000
1,200,000

b. Investments
ContributionsPermanently
Restricted

300,000

c. Cash
ContributionsTemporarily
Restricted

700,000

d. ScholarshipsFinancial Aid
Tuition Receivable

100,000

e. Salary Expenses
Cash

310,000

300,000

700,000
100,000
310,000

f. Salary Expense
Contributed Service Revenues
Unrestricted Net Assets

18-19

80,000
80,000

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

g. Equipment
Cash

200,000
200,000

Temporarily Restricted Assets


Reclassification
Unrestricted Net Assets
Reclassification

200,000
200,000

h. Investments
Unrealized Gain on Investments
Permanently Restricted Assets

30,000

i. Cash
Dividend RevenueUnrestricted
Net Assets

9,000

j. Depreciation Expense
Accumulated Depreciation

30,000

9,000
32,000
32,000

k. CashInternally Restricted
Cash

100,000
100,000

38. (continued)
l. Pledge Receivable
ContributionTemporarily
Restricted Assets
m.

7,000
7,000

No entry because of choice made by officials

n. Utilities and Other Expenses


Cash

212,000
212,000

o. No entrydoes not require a specialized skill.

18-20

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

38. (continued)
University of Danville
Statement of Activities
Unrestricted
Net
Assets
Revenues and Gains
-Tuition
1,200,000
-Scholarships (100,000)

1,100,000

-Unrealized Gain on
Investments
-Dividend Revenue

30,000

707,000

1,189,000

Net Assets Released


From Restriction

200,000

Totals

-Utilities and Other


Expenses
Total Expenses

1,389,000

707,000

30,000
9,000

300,000

1,007,000
80,000

330,000

2,226,000

80,000

Total Revenues, Gains,


And Contributions

Total

1,100,000

9,000

Contributions
-Cash and Other
Assets
-Services

Operating Expenses
-Salaries
-Depreciation

Temporarily Permanently
Restricted
Restricted
Net Assets Net Assets

(200,000)
507,000

330,000

390,000

2,226,000
390,000
32,000

32,000
212,000

212,000
634,000

634,000

Increase in Net Assets

755,000

507,000

Net AssetsBeginning
Of Year

400,000

Net AssetsEnd of
Year

1,155,000

200,000
707,000

330,000
100,000
430,000

1,592,000
700,000
2,292,000

39. (30 Minutes) (Series of questions about private not-for-profit organizations)

18-21

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

a. Many private non-for-profit organizations depend heavily on gifts and grants


from outside parties. An earning process is not present in connection with
such receipts. Asset inflows are simply created by donations. Such amounts
are reported as public (or contributed) support. These same organizations,
however, do sometimes earn (in an accounting sense) some of the funds that
are received. Membership dues, for example, are not viewed as gifts if rights
are conveyed to the members that have value. The organization may also have
receipts from sources such as interest or dividend income. Money derived in
this fashion is not the same as a donation and is, thus, recorded as an earned
revenue.
b. The statement of functional expenses is required to be reported by voluntary
health or welfare organizations and is permitted for all other private not-forprofit organizations. Because of its importance, many of these other
organizations do include it in their financial statements. It enables the reader
to determine the ultimate usage of the money that has been raised by the
organization. Expenses are separated according to program service
expenses (directed towards activities of the organization that relate to its
goals and mission) and supporting service expenses (dealing with the cost of
running the organization and raising funds). This statement permits
interested parties such as potential donors to see the utilization made of the
organizations resources.
c. Some charitable organizations (Goodwill Industries and the Salvation Army,
for example) receive a large portion of their contributions in the form of
donated materials such as clothing and furniture. If the value of these goods
has a clearly measurable basis, recording the gifts as contributed support is
appropriate.
d. A not-for-profit organization may receive gifts (or unconditional promises to
give) from outside parties that (1) must be expended for a particular purpose
or (2) cannot be expended until a particular point in the future. Because the
organization does not have the free use of these assets, they are labeled as
"Temporarily Restricted Assets." At the time that the stipulation is met or the
time period arrives, the asset is reclassified into the Unrestricted Net Asset
category.
Other gifts may be given where the donor specifies that only the subsequent
income can be expended (frequently for a designated purpose). Because the
assets received in the original gift cannot be expended, they are termed
Permanently Restricted Assets."

18-22

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

e. Donated services are extremely common in the operation of many not-forprofit organizations. Literally thousands of individuals solicit funds for
organizations such as the Heart Fund, Salvation Army, and March of Dimes. In
addition, individuals often voluntarily fill positions of responsibility
throughout many of these organizations. Donated services are formally
recognized in the accounting records but only if one of two specific
circumstances are met:
1. The service creates or enhances a nonfinancial asset or
2.

The service requires a specialized skill possessed by the donor that the
organization would have had to be purchased if not donated.

f. Prior to 1987, the costs of direct mailings and other solicitations for support
were recorded by private not-for-profit organizations as fund raising expenses
even if educational materials were included. In that year, this requirement was
modified so that an allocation of the joint costs could be made between
educational expenses (a program service cost) and fund raising (a supporting
service cost). Some organizations then took advantage of this rule. They
would include educational materials with their fund raising appeals because
they could allocate part of the distribution cost to program services which
made their statements look like they were spending more to meet their goals.
In 1998, the AICPA issued its Statement of Position 98-2 Accounting for Costs
of Activities of Not-for-Profit Organizations and State and Local Governmental
Entities That Include Fund-Raising which is now part of the FASB
Accounting Standards Codification. This rule stated that direct mailing costs
should be assigned entirely to fund-raising costs unless a specific call for
action was being made that was not limited to potential donors. This call for
action had to be one that would further the mission of the organization. If
these requirements were met, a portion of the direct mailing costs could be
assigned to program service expenses. Otherwise, the entire cost is included
within fund raising.
g. Donated materials are normally reported as assets at their fair value
accompanied by an increase in unrestricted net assets (see answer [c] above).
However, the recording of art works, historical treasures, and museum pieces
is optional. An item qualifies for such treatment if (1) it is part of a collection
for public exhibition, education, or research, (2) it is protected and preserved,
and (3) if sold, the money received must be used to acquire other collection
items. If these criteria are met, no recording is required (although recording is
allowed).

18-23

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

40. (25 Minutes) (Determine impact of various transactions on a private college.)


(1)---False. The January 1, Year One restriction is an internal action and,
therefore, causes no changes in the amount of unrestricted net assets. Such
changes can only be created by external donors.
(2)---True. The stipulation of the April 1, Year 1, gift is that only subsequent cash
income can be used for the designated purpose. Therefore, changes in value are
shown as adjustments to the permanently restricted net assets. The interest
income for the year is temporarily restricted
(3)---True. As indicated in (2), the donor has indicated that only cash income can
be used for the football stadium. The change in value increases (or decreases)
the amount held as permanently restricted net assets.
(4)---True. The school has properly spent the $500,000 earned on the donated
investments. The school has not set a policy that assumes a time restriction on
the use of this stadium. Therefore, the reclassification to unrestricted net assets
is made immediately at the time of proper expenditure. Spending of the boarddesignated $1.9 million does not change the amount of net unrestricted assets
just its composition.
(5)---False. Depreciation expense is appropriate for all long-lived assets with a
finite life regardless of the policy of the school. A time restriction indicates when
any related donations for this project are recognized as revenue.
(6)---False. This is the same answer as in (5). Depreciation expense is
appropriate for all long-lived assets with a finite life regardless of the policy of
the school about use of the property.
(7)---True. The acquisition of the football stadium seat has two effects. Because
the value of that seat for watching football games is $12,000, the school should
recognize that amount as revenue. Dr. Johnson paid an extra $18,000, apparently
as a gift to the school.
(8)---True. This is the same answer as in (7). Dr. Johnson paid an extra $18,000,
apparently as a gift to the school.
(9)---True. These donated services meet the requirement for being reported so
that contributed revenue as well as a salary expense must be recognized for the
$14,000 value.

18-24

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

(10)---False. Based on the information given, both the revenue and the expense
must be reported. Might implies an option which is not available for this type
of donation. If a donated service meets the criteria, it is reported.
(11)---False. The answer is the same as in (10). Both the revenue and the
expense must be reported. Unrestricted net assets both go up (for the
contribution revenue) and go down (for the salary expense).
(12)---False. If this painting does not qualify as a work of art, the school must
record the asset at $30,000 along with contribution revenue of that same amount.
However, if the painting qualifies as a work of art, the school can either make the
above entry or simply make no entry. Therefore, under one set of circumstances,
recognition of contribution revenue is not required.
(13)---False. As in answer (12), the handling depends on whether this painting
qualifies as a work of art. However, if the value of the gift is $30,000, no situation
can exist where the school is not allowed to recognize revenue.
41. (30 Minutes) (Determine changes in net asset balances for several different
types of transactions)
Part (1)
--Unrestricted Net Assets No net change. When the $22,000 in designated
funds is spent properly, a reclassification of that amount is made into
Unrestricted Net Assets. At that time, though, a faculty salary expense of the
same amount is also recognized. The two amounts balance out for no net
impact.
--Temporarily Restricted Net Assets Category increases by $9,000. The
$31,000 of investment income increases this category because its use is
restricted. However, it is then reduced by the $22,000 reclassified into
Unrestricted Net Assets because that amount is properly spent.
--Permanently Restricted Net Assets Category increases by $400,000. The
current donation increases this category. Because subsequent income must be
spent for salaries, it is recorded as an increase in Temporarily Restricted Net
Assets.
Part (2)
--Unrestricted Net Assets No net change. Because of the restriction on the
use of the machine for this period of time, the $200,000 gift is initially reported as
an increase in Temporarily Restricted Net Assets. At the end of the year, the
asset balance will be reduced by $20,000 in depreciation. Thus, a $20,000
reclassification moves $20,000 from Temporarily Restricted Net Assets to
Unrestricted Net Assets. That $20,000 increase will exactly offset the $20,000 in
depreciation expense also recognized within Unrestricted Net Assets.

18-25

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

--Temporarily Restricted Net Assets Category Increases by $180,000.


Because of the restriction on the time use of the asset, the $200,000 is initially
recorded in Temporarily Restricted Net Assets. The $20,000 reclassification
discussed above reduces that net increase to $180,000.
--Operating Expenses Category increases by the $20,000 in depreciation
expense for the year.
Part (3)
--Unrestricted Net Assets Category increases by $1.6 million. The tuition
revenue of $2 milion is reduced by the $700,000 in financial aid for a net increase
of $1.3 million. However, because $300,000 of previously restricted net assets
was used here, a reclassification of that amount from Temporarily Restricted Net
Assets to Unrestricted Net Assets causes the overall increase to be $1.6 million.
--Operating Expenses There are no operating expenses. Financial aid is a
reduction to tuition revenue and not an operating expense.
--Temporarily Restricted Net Assets Category decreases by $300,000. Money
that had previously been restricted was properly utilized. Thus, a reclassification
of this amount is reported.
42. (65 Minutes) (Prepare financial statements for a private not-for-profit
organization.)
a.

Entries for this not-for-profit organization are presented below. The numbers
in parenthesis indicate account totals at that point in time during the period.
This method is used as an easy way to gather account balances.

Pledges receivable...................................... 20,000


Contribution revenueinterest--unrestricted
net assets...........................................
Cash ............................................................ 100,000
Allowance for uncollectible pledges........
4,000
Pledges receivable.................................
Cash ............................................................ 180,000
Contributions revenueunrestricted
net assets.............................................
Salary expense............................................
Cash ......................................................
Reclassification - temporarily restricted
net assets..................................................
Reclassification - unrestricted net

18-26

(220,000)
20,000

(200,000)
104,000

(net of 120,000)
(380,000)

180,000

(180,000)

90,000

( 90,000)
(290,000)

90,000

15,000

( 20,000)

( 15,000)

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

assets.....................................................
Cash ............................................................ 12,000
Contributions revenuetemporarily restricted
(To record gift to go to a specified beneficiary.
Organization reports revenue because it
has variance powers.)
Land, buildings, and equipment .............. 500,000
Note payable............................................
Cash ......................................................

Reclassification - temporarily restricted


net assets..................................................
Reclassification - unrestricted net
assets.....................................................
(To record reclassification of restricted
amount properly spent.)

Cash.............................................................. 30,000
Investment revenueunrestricted net assets
(Income is earned on permanently restricted
net assets but use of the income is unrestricted.)

12,000

(302,000)
( 12,000)

450,000
50,000

(700,000)
(450,000)
(252,000)

( 65,000)
50,000

( 65,000)

30,000

(282,000)
( 30,000)

30,000

(312,000)
( 30,000)

43,000

( 12,000)
( 15,000)
( 16,000)
(269,000)

12,000
15,000
16,000

Pledges receivable...................................... 149,000


Contributions revenuetemporarily restricted
net assets ...........................................
(Although pledge is unrestricted, it will not
be collected for five years and, therefore,
the proceeds are viewed as temporarily
restricted.)

18-27

( 15,000)

50,000

Cash ............................................................. 30,000


Membership revenueunrestricted net assets
(Membership dues are listed as revenues
and not contributions because members
receive substantial benefits.)

Rent expense...............................................
Advertising expense ..................................
Utilities expense .........................................
Cash ......................................................

15,000

(269,000)
149,000

(161,000)

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

Pledges receivable......................................
6,000
Contribution revenueinterest--temporarily
restricted net assets .........................
Depreciation expense ................................
Land, buildings, and equipment .........

40,000

Interest expense..........................................
Cash ......................................................

15,000

(275,000)
6,000

6,000)

40,000

( 40,000)
(660,000)

15,000

( 15,000)
(254,000)

42. (continued)
Based on the final balances computed above, the following statements can be
prepared.
WATSON ORGANIZATION
STATEMENT OF ACTIVITIES
For Year Ending December 31, 2013
Unrestricted
Net Assets
Contributions revenue
$ 180,000
Contributions -- interest revenue
20,000
Investment revenue
30,000
Membership revenue
30,000
Total revenues
$ 260,000
Net assets released from
restriction

65,000

Total revenues and net assets


released from restriction

$ 325,000

Expenses:
General and administrative
Rent
Salary
Advertising
Utilities
Depreciation
Interest

$ (12,000)
(90,000)
(15,000)
(16,000)
(40,000)
(15,000)

18-28

Temporarily
Restricted
Net Assets
$ 161,000
6,000
_______
$ 167,000
( 65,000)
$ 102,000

Permanently
Restricted
Net Assets

________

________
________

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

Total expenses

$(188,000)

Excess of total revenues and net


assets released from restriction
over expenses
$137,000
Net assets at beginning of year
Net assets at end of year

$102,000

-0-

400,000

100,000

$300,000

$537,000

$202,000

$300,000

42. (continued)
b.
WATSON ORGANIZATION
STATEMENT OF FINANCIAL POSITION
December 31, 2013
ASSETS
Cash
Pledges receivable (net)
Investments
Land, buildings, and equipment (net)
Total assets

$ 254,000
275,000
300,000
660,000
1,489,000

LIABILITIES
Notes payable

450,000

NET ASSETS
- Unrestricted
- Temporarily restricted

$537,000
202,000

- Permanently restricted

300,000

$1,039,000

43. (40 minutes) (Accounting for mergers and acquisitions)


a. In an acquisition, the assets and liabilities of the acquired organization
are included at fair value. Thus, the buildings and equipment reported by
Swim For Safety must be increased by $140,000 from $590,000 to
$730,000. Because the acquisition value ($1 million) exceeds the total fair
value recognized for the individual assets and liabilities ($1,470,000 plus
$140,000 less $690,000 or $920,000), the excess ($80,000 in this case) is
reported as goodwill.

18-29

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

Cash held by Help & Save must be reduced by the $1 million payment as
must the balance shown for its unrestricted net assets.
The increases in the buildings & equipment ($140,000) as well as the increase
in goodwill ($80,000) are reflected by increases in unrestricted net assets
since no external restriction is in place for these assets.
Balances To Be Reported:
--Cash - $1,100,000 ($1,600,000 less $1,000,000 plus $500,000)
--Pledges receivable (net) - $280,000 ($70,000 plus $210,000)
--Investments - $470,000 ($300,000 plus $170,000)
--Buildings & equipment - $1,430,000 ($700,000 plus $730,000)
43. (continued)
--Goodwill - $80,000 (above)
--Total assets - $3,360,000 (summation)
--Accounts payable and accrued liabilities - $180,000 ($110,000 plus $70,000)
--Notes payable - $1,720,000 ($1,100,000 plus $620,000)
--Total liabilities - $1,900,000 (summation)
--Unrestricted net assets - $740,000 ($1,100,000 less $1,000,000 payment plus
$140,000 increase in buildings and equipment plus $80,000 in goodwill
plus $420,000 from Swim for Safety)
--Temporarily restricted net assets - $440,000 ($250,000 plus $190,000)
--Permanently restricted net assets - $280,000 ($110,000 plus $170,000)
--Total net assets - $1,460,000 (summation)
--Total liabilities and net assets - $3,360,000 ($1,900,000 plus $1,460,000)
b. In an acquisition, the assets and liabilities of the acquired organization
are included at fair value. Thus, the buildings and equipment reported by
Swim For Safety must be increased by $140,000 from $590,000 to
$730,000. Because the acquisition value ($990,000) exceeds the total fair
value recognized for the individual assets and liabilities ($1,470,000 plus
$140,000 less $690,000 or $920,000), the excess ($70,000 in this case) is
normally reported as goodwill. However, one exception is made. If the
acquired company is predominantly supported by contributions and
investment income (as is the case here), then the excess $70,000 is not
recognized as an asset. Instead, the excess $70,000 within the $990,000
payment is a reduction in unrestricted net assets with no accompanying
increase in goodwill.

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

Cash held by Help & Save must be reduced by the $990,000 payment as must
the balance shown for its unrestricted net assets.
The increase in the buildings & equipment ($140,000) is reflected by an
increase in unrestricted net assets since no external restriction is in place
for these assets. Goodwill is not recognized so that no additional
increase in unrestricted net assets is needed.
Balances To Be Reported:
--Cash - $1,110,000 ($1,600,000 less $990,000 plus $500,000)
--Pledges receivable (net) - $280,000 ($70,000 plus $210,000)
--Investments - $470,000 ($300,000 plus $170,000)
--Buildings & equipment - $1,430,000 ($700,000 plus $730,000)
--Total assets - $3,290,000 (summation)
43. (continued)
--Accounts payable and accrued liabilities - $180,000 ($110,000 plus $70,000)
--Notes payable - $1,720,000 ($1,100,000 plus $620,000)
--Total liabilities - $1,900,000 (summation)
--Unrestricted net assets - $670,000 ($1,100,000 less $990,000 payment plus
$140,000 addition to buildings and equipment plus $420,000 balance for
Swim for Safety)
--Temporarily restricted net assets - $440,000 ($250,000 plus $190,000)
--Permanently restricted net assets - $280,000 ($110,000 plus $170,000)
--Total net assets - $1,390,000 (summation)
--Total liabilities and net assets - $3,290,000 ($1,900,000 plus $1,390,000)
c. This transaction is a merger: two not-for-profit organizations are brought
together to form a new not-for-profit under a newly-formed governing
body.
As a merger, the carryover method is used. Book values are simply added
together to get the new balances to be reported. No cash was spent and
no adjustments to fair value are made.

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

Balances To Be Reported:
--Cash - $2,100,000 ($1,600,000 plus $500,000)
--Pledges receivable (net) - $280,000 ($70,000 plus $210,000)
--Investments - $470,000 ($300,000 plus $170,000)
--Buildings & equipment - $1,290,000 ($700,000 plus $590,000)
--Total assets - $4,140,000 (summation)
--Accounts payable and accrued liabilities - $180,000 ($110,000 plus $70,000)
--Notes payable - $1,720,000 ($1,100,000 plus $620,000)
--Total liabilities - $1,900,000 (summation)
--Unrestricted net assets - $1,520,000 ($1,100,000 plus $420,000)
--Temporarily restricted net assets - $440,000 ($250,000 plus $190,000)
--Permanently restricted net assets - $280,000 ($110,000 plus $170,000)
--Total net assets - $2,240,000 (summation)
--Total liabilities and net assets - $4,140,000 ($1,900,000 plus $2,240,000)

44. (10 minutes) (Adjusting totals for incorrectly reported student tuition)
a. The tuition was properly recorded as revenue. However, the financial aid
figure should have been a direct reduction to the tuition revenue rather
than an expense. In either case, the aid reduces unrestricted net assets
so the $400,000 total computed at the end of the year is correct.
b. As indicated in (a), the financial aid should not have been an expense but,
rather, a reduction in the tuition revenue. Removing the $140,000 from the
recognized amount of expenses reduces that total from $500,000 to
$360,000.

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

45. (15 minutes) (Adjusting totals for incorrectly recorded restricted giving)
a. Because the use of the interest was specified by the donor, both interest
balances should have been recorded initially as increases within
Temporarily Restricted Net Assets. Later, when properly spent, these
amounts would have been reclassified into Unrestricted Net Assets.
Instead, the organization recorded these amounts immediately in
Unrestricted Net Assets. Since the amounts have now been properly
spent, they did wind up in the category where they were supposed to be
reported. The $400,000 shown as unrestricted net assets is correct.
b. Each amount was reported as expenses in unrestricted net assets and
that handling was correct. No change is needed so that the $500,000
reported as expenses is shown properly.
c. As indicated in (a), the $5,000 and the $7,000 should have gone to
Temporarily Restricted Net Assets and then been removed through a
reclassification leaving no net effect. Because nothing was recorded by
the organization in Temporarily Restricted Net Assets, the total of
$300,000 is correct.
46. (15 minutes) (Adjusting the incorrect recording of a donation and subsequent
expenditure)
a. Because a time restriction has been assumed, only $5,000 ($50,000/10
years) should have been reclassified from Temporarily Restricted Net
Assets into Unrestricted Net Assets. However, the organization increased
Unrestricted Net Assets by $50,000. The final balance being reported,
therefore, is $45,000 too high. Removing this $45,000 inflation reduces the
final Unrestricted Net Asset figure from $400,000 down to $355,000.
b. Depreciation expense of $5,000 ($50,000/10 years) was recorded within the
Unrestricted Net Assets. That handling is appropriate so that the $500,000
expense figure that is reported is correct.
c. The problem says that the correct entry was made in Year One. Thus, a
$50,000 balance resides in Temporarily Restricted Net Assets as a result
of the gift. Because a time restriction was assumed, only an amount
($5,000) equal to the depreciation recorded should have been reclassified
to Unrestricted Net Assets. That $5,000 amount was never removed.
Reclassifying the $5,000 reduces Temporarily Restricted Net Assets from
the reported $300,000 to $295,000. The $50,000 reclassification error does
not affect this category.

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

47. (5 minutes) (Incorrect reporting of membership dues)


In this case, because nothing was received in exchange for the members
dues, these dues should have been recorded as a $100,000 per year
contribution revenue which would increase Unrestricted Net Assets.
Instead, the dues were recorded as membership (or earned) revenue
which is incorrect but it does properly increase Unrestricted Net Assets by
the correct amount. So, the source is wrongly reported but the total
Unrestricted Net Assets is correctly stated at $400,000.
48. (15 minutes) (Reporting of donated services)
a. The problem here is that an expense of $70,000 was reported when the
donation was a garage that should have been capitalized as an asset.
Subsequently, though, this asset would have been depreciated at the rate
of $7,000 per year. For this reason, the expenses are overstated by
$63,000 ($70,000 minus $7,000) which causes Unrestricted Net Assets to
be understated by $63,000. Instead of an Unrestricted Net Assets balance
of $400,000, the organization should have reported $463,000.
b. The organization has reported no assets as a result of the contributed
garage. The organization should have reported a $70,000 garage less
$7,000 in accumulated depreciation. The net balance of $63,000 should be
added to the reported total for assets of $900,000 to arrive at a corrected
figure of $963,000.
c. As indicated in (a) above, the expenses were overstated by $63,000.
Removing this $63,000 drops the expense total from $500,000 to $437,000.
49. (10 minutes) (Reporting a gift that must be transferred to another party)
a. This money is still under the control of the donor. Consequently, the
organization should have recorded a liability back to the donor until a final
resolution. Instead, the charity recorded contribution revenue which
served to increase Unrestricted Net Assets. That $40,000 should be
removed so that Unrestricted Net Assets are $360,000 and not $400,000.
b. The issue in this problem is about whether a contribution or a liability
should be reported by the organization. The total amount reported as
assets is not in question and is, thus, correctly stated at $900,000.

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

Develop Your Skills


Research Case 1
This is an excellent assignment to demonstrate the wealth of information that is
available on the Internet about charities and other not-for-profit organizations.
Many individuals want to be generous and help organizations that deserve their
assistance. Determining, though, whether an organization is truly worthy of
support is not necessarily easy. Every organization will claim that it is effectively
helping to improve some element of society that is in need.
Obviously, the information that a student finds at this website will depend upon
the specific charities that are examined. However, some of the information that is
normally available includes:
stated purpose of the organization,
year it was started,
Website address,
the existence of any affiliated organizations,
whether this organization has met all of the standards of the group that
created the website and, if not, what was the problem,
a discussion of the organizations programs along with the program
expenses,
identification of the chief executive officer (along with compensation),
number of individuals on the board and the number of staff members
working in the organization,
methods used for fund-raising,
tax status,
sources of funding, including dollar amounts
From this type of information, a student should be able to write a detailed
overview of the organization and its operations and finances.
Research Case 2
This case is designed to introduce students to the information that can be found
on the Form 990 that must be made public by tax-exempt organizations. Much of
the information is the same as is shown on the organizations financial
statements but the availability of the Form 990 ensures that such information is
made public.
Most not-for-profit organizations that a student might research will qualify as
Section 501(c)(3) charities.

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

The salary information will give an opportunity to discuss whether officials of


these organizations made too much or too little. Do the amounts seem
reasonable in comparison to the amount of revenues generated or the amount of
assets held? What, for example, would the president of a comparable for-profit
business make in salary and other compensation?
Throughout the chapter, mention was made of the statement of functional
expenses and the amount expended by an organization for program service
expenses. One possibility is to make a list in class of a number of well known
charities and compare their ratio of program service expenses to total expenses
just to see the range present.
Another exercise that can be done is to simply list on the classroom board the
types of information that the students uncover. Which of these is most important
and why is each of the items listed included?
Research Case 3
Students often have trouble envisioning the amount of evolution that can take
place in accounting and financial reporting. By comparing the 1987 financial
statements for Georgetown University to the current statements, students should
note how much change has taken place. Here are just a few of the more obvious
examples that students may list.
--The influence of government accounting at that time is obvious. These
statements resemble fund financial statements for the Governmental Funds of a
state or local government more than they resemble the current financial
statements of a private not-for-profit organization.
--Instead of a statement of activities, the university reports a statement of
changes in fund balance.
--The statements have multiple columns that include Current Funds, Loan Funds,
and Plant Funds.
--Current funds are separated into unrestricted and restricted but the type of
restriction (temporarily restricted or permanently restricted) is not evident.
--Expenditures are listed rather than expenses.
--Scholarships and fellowships are listed as expenditures and not as reductions
in tuition revenue.
--Transfers between funds are listed.
--There is no statement of cash flows.

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

Analysis Case 1
Many times a potential donor may be interested in an array of information that
can best be found by studying the actual financial statements of a not-for-profit
organization. The purpose of financial statements is to provide a complete
picture of the financial operations and position of the organization to help
outsiders make decisions. Students can observe the construction of financial
statements in textbooks but only by actually making use of these statements can
they come to appreciate the information that is available. One way to approach
this assignment is to ask the students to list the five most interesting pieces of
information that they uncover about a particular charity.
The web site for many not-for-profit organizations can be found by going to
www.give.org and then clicking on Charity Reports and Standards and then
clicking on List of National BBB Wise Giving Reports. At that spot, a large
number of charitable organizations are listed. By clicking on a specific charity,
the student can get considerable information including the organizations website
address.
The exact information that is found will, obviously, depend on the particular notfor-profit organization that is studied. As just one example, the following
information comes from recent financial statements for the American Heart
Association for the year ended June 30, 2010:
1--This not-for-profit organization has four different program services
listed in its financial statements: research, public health education,
professional education and training, and community services.
2--The charity reported total expenses for 2010 in excess of $591 million.
Of that total, more than $141 million was incurred in connection with
supporting services. Thus, approximately 24 percent of each dollar of
expense was incurred in connection with supporting services. Notice that
expenses were down significantly from 2009 which was probably an
indication that the recession was having an impact on the work of the
charity.
3--In the statement of activities, the American Heart Association recognized
$52.1 million in contributed services and materials for the year ended June
30, 2010. The biggest single source was public service announcements.
Note 1, section i, spells out additional information about these donations
as well as other donated services that were not recognized.

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

4--A question that is raised in connection with virtually any charitable


organization has to do with the amount of resources that are expended to
raise more resources. In the year ended June 30, 2010, the American Heart
Association, incurred $95.4 million in fund-raising expenses. That amount
makes up approximately 16 percent of the organizations total expenses for
the period.
5--The financial statements at June 30, 2010 show that the American Heart
Association held $175.7 million in unrestricted net assets, $226.9 million in
temporarily restricted net assets, and $149.6 million in permanently
restricted net assets.
6For the year ended June 30, 2010, $118.3 million of temporarily
restricted net assets were reclassified as unrestricted. Either the related
purpose restriction had been satisfied ($78.5 million) or a time restriction
expired ($39.8 million).
Analysis Case 2
Most private colleges and universities now place their latest audited financial
statements on their Web site. However, in some cases, a bit of searching is
needed to locate these statements. The method by which the statements are
made available is certainly not standardized.
The information that will be uncovered by reading through these financial
statements will depend entirely on the school being used. Here are the answers
to the posed questions for the University of Richmond as of June 30, 2010, and
the year then ended (http://controller.richmond.edu/common/pdf/about/annualfinancial-reports/financial-stmt-10.pdf).
1--Tuition and fee revenue for the period totaled $146.1 while the schools
scholarship allowance was $62.5 million. Hence, this financial aid
covered approximately 42.8 percent of the tuition charged to students. To
put this information another way, the average student paid 57.2 percent
of the schools tuition charges.
2--The Universitys balance sheet shows pledges receivable of over $20.8
million. A look at note five to the financial statements indicates that over
79 percent of that money is expected to be received beyond one year into
the future. Because a lot of these gifts will not be received for some time,
the actual amount reported is the present value of the expected future cash
flows discounted at rates ranging from 2.4 percent to 10.6 percent.

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

3--This is an extremely difficult question for any school to answer because


the costs of educating the students can be included within several
different accounts: instruction, libraries, academic support, institutional
support, and the like. So, no exact comparison between educational costs
and research costs is possible here. However, considerable information
can be determined about the schools priorities simply by comparing
instruction expenses ($64.7 million) and research expenses ($7.3 million).
4--For 2010, the University of Richmond shows $7.0 million in operating
contributions and $3.4 million in non-operating contributions (such as for
buildings and equipment).
5--At the end of the 2010 fiscal year, the University of Richmond reported
$859 million in unrestricted net assets, $593.3 million in temporarily
restricted net assets, and $306.3 million in permanently restricted net
assets. For these last two figures, the restrictions had to have been put in
place by an outside party (probably the donor).
6--The statement of activities shows a total of both realized and unrealized
gains for the year of $120.0 million.
7--The problem with this computation is determining exactly what is meant
by education expenses. One way to compute that figure for the
University of Richmond for 2010 is as follows:
Net Tuition and Fees
Education Expenses (one way that term can be defined)
Instruction
$64,695,696
Libraries
12,533,338
Academic Support
23,755,148
Student Services
18,009,427
Institutional Support
37,320,019
Net Loss on Educating Students

$83,640,871

(156,313,628)
$(72,672,757)

Many students feel that, because of the high amounts being charged, colleges
and universities should be making a great profit from tuition. Depending on how
education costs are defined, most schools will show a monetary loss (and often a
considerable loss) from the process of educating students. This is one
computation that can really interest a college student.

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Chapter 18 - Accounting and Reporting for Private Not-for-Profit Organizations

Communication Case
Under the Core Concepts, there is a considerable amount of practical guidance
available at this Web site for the accountant of a private not-for-profit
organization. Students will already expect some of these recommendations
based on their education and their own experiences but much of it may be new to
them. What they focus on will depend on their personal interests.
Here are some of the Core Concepts that they may discuss.
--It is important for the staff to keep complete, accurate, and current financial
records and share appropriate records with the board in a timely manner.
--The board should review financial statements at least quarterly.
--Some organizations are required by law to have an audit. Almost every
organization should consider the benefits of having an audit, review, or
compilation by an independent CPA.
--Separating the audit committee from the finance committee provides a check
and a balance.
--The auditor reports to the board, not to the staff.
--A budget is the financial expression of an organizations yearlong plan.
--As bearers of fiduciary responsibility for the organization, the full board should
approve the budget, and receive regular financial statements to monitor the
implementation of the budget.
--The board approves and reviews reports to ensure the organization is following
sound financial practices.
--Whatever the level of operating reserves or an endowment, the board needs to
establish policies for managing and investing these funds.

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