Accounting and Reporting For Private Not-For-Profit Entities

Chapter 18 - Accounting and Reporting for Private Not-for-Profit Entities
CHAPTER 18
ACCOUNTING AND REPORTING FOR PRIVATE
NOT-FOR-PROFIT ENTITIES
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 (a) the reporting of financial statements for the entity as a
whole and (b) 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 examines the financial reporting for private not-for-profit entities with
special emphasis on private colleges and universities, voluntary health and welfare
entities, and health care operations.
B. Reporting for these entities is usually similar to a business enterprise unless critical
differences exist that impact the needs of financial statement users. Several of these
critical differences can be identified.
1. Many private not-for-profit entities receive a significant amount of their financial
resources from contributions rather than from revenues or capital investments.
2. A significant amount of the financial resources given to a private not-for-profit entity
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 with a for-profit business.
II. FASB has established the following financial statements for private not-for-profit entities.
A. Statement of Financial Position reports assets, liabilities, and net assets.
B. Statement of Activities reports revenues, expenses, gains, and losses.
C. Statement of Cash Flows
D. A voluntary health and welfare entity is also required to present a Statement of
Functional Expenses which indicates the amount of resources spent for program
services (to meet the goals of the entity) and supporting services (to operate the entity
and raise funds).
III. For reporting purposes, all economic resources held by a private not-for-profit entity 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. Entity officials can make whatever use they wish
of these assets.
B. "Temporarily restricted net assets" are restricted by an outside party (often a donor) for
a particular purpose or for use in a future period of time. When the restriction is
eventually satisfied, the classification of these resources is switched to unrestricted net
assets. At that time, on the statement of activities, temporarily restricted net assets are
reclassified as unrestricted net assets when the appropriate time has passed or the
resource is used as stipulated.
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Education.
C. "Permanently restricted net assets" are expected to remain restricted for as long as the
entity exists. Income from these assets is normally unrestricted or temporarily restricted
based on the specifications of the donor.
IV. Contributions should be recognized as increases in net assets when received.
A. Restricted contributions are reported either within temporarily restricted net assets or
permanently restricted net assets based on stipulations established by the donor.
B. Donated assets are recorded at fair value. Recognition of art works, historical
treasures, and the like is not required (although 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 entity should
be reported immediately as both a receivable and an increase in net assets.
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 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 entity are recognized as increases in net assets
if the services (1) create or enhance a nonfinancial asset or (2) require a specialized
skill possessed by the donor that would have been purchased if not donated. If the
donated service comes from an affiliated group, the amount is recognized at the cost
paid to the employee by the affiliate. If that cost does not reflect the legitimate value of
the services rendered, the charity has the option of reporting fair value.
E. If a not-for-profit entity accepts a donation that must be conveyed to a separate
individual or other beneficiary, the entity normally records the asset along with an
accompanying liability to reflect the accepted responsibility. However, if the entity is
given variance powers to change the beneficiary, an increase in net assets is
recognized instead of a liability because the donation falls under the entitys control.
V. Education institutions (such as private colleges and universities) record tuition revenue at
the gross amount billed and then show the revenue net of scholarships and financial aid in
the statement of activities
VI. Over the years, mergers and acquisitions have become more common in private not-forprofit entities at least in part because of the economic downturn. The rules for recording
these combinations are different than those applied to a for-profit business because the
transaction can be either an acquisition or a merger.
A. In an acquisition, one entity gains control over another
1. All identifiable assets and liabilities of the acquired company are combined at fair
value on the date of acquisition.
2. If the acquisition value of the acquired company is greater than the sum of the fair
value of all identified assets and liabilities, the difference is often reported as
goodwill.
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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 excess is charged off
immediately as a reduction in net assets if the acquired company expects to be
predominantly supported by contributions and investment income in the future.
B. In a merger, two not-for-profits come together to form a new entity with a new governing
board. Identifiable assets and liabilities are not adjusted to fair value but retain their
previous carrying amounts.
VII. Health care entities 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 entities 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. The cost of that charity work must be disclosed.
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 entity.
Answers to Discussion Questions

Are Two Sets of GAAP Really Needed for Colleges and Universities?
Over the 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 entities do not affect public schools until and unless so stated by GASB.
Because of this division of responsibility, the financial statements for these two types of
schools have developed independently. GASB states that public schools must follow the
guidelines of GASB 34 which created appropriate financial statements for state and local
governments. However, these guidelines are not as radically different from private schools as
might be imagined. Public colleges and universities are allowed to identify 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 while Duke University (a private school) has
another? Should the financial statements for the College of William and Mary (a public school)
reflect the same reporting as the University of Richmond (a private school)?
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
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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 the money is not to be received within the year)
along with an adequate allowance for doubtful collections. However, in practice, the reporting
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 $30 million? How can an adequate allowance be determined for this pledge?
If the individual's mother should die, might he lose interest in supporting the hospital? If the
$10 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 serious 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 $10 million to the hospital?
When does he project that the land will be sold and the gift conveyed?
How did he establish a $30 million price? Could the land ultimately be sold for less and,
if so, how will that impact on the gift to the hospital?
How does the donor want the $10 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 gifts?
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 to force fulfillment of 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 the land appears to be worth $30
million, the hospital should report the pledge as a receivable. However, a large allowance
should probably be established because of the uncertainties involved in collecting this money
over an extended period of time. Conversely, if too much uncertainty exists (a value for the
land cannot be determined or the donor refuses to provide information about his ability to meet
the commitment), the hospital may decide that there is no pledge but merely the promise of a
possible future pledge. In that case, the information should be spelled out in a disclosure note.
Unless clear evidence exists to substantiate the pledge, disclosure is most likely.
Answers to Questions
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1. The Financial Accounting Standards Board (FASB) has authority for establishing
accounting standards for private not-for-profit entities. In addition, audit and accounting
guides produced by the AICPA provide further guidance for the preparation of financial
statements by these entities.
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 entity is a wise use of resources. To make that assessment,
the individual needs to know whether the entity uses its resources appropriately to achieve
stated goals. In this way, donors can decide which entity deserves to receive support and
how much will be donated. For this reason, the reported division between the amount
spent on program services and supporting services can be helpful.
If a user of financial statements is a creditor, that company or person is primarily interested
in whether the entity 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 entities: a statement of financial position, a statement of activities, and a
statement of cash flows. A voluntary health and welfare entity must also produce a
statement of functional expenses.
4. Temporarily restricted net 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 to a
charity that had to be spent to buy a bus 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 net assets have been restricted by an external donor and grantor.
That restriction is expected to last for as long as the entity continues to function. Normally,
any income generated by these assets can be used by the entity although its specific
usage may be restricted. For example, investments worth $3 million might be given to a
private not-for-profit entity 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 entitys officials for whatever
purpose they deemed necessary.
6. The two general types of expenses are (a) program service expenses and (b) supporting
service expenses. Program service expenses are those that relate to the goals and
objectives of the not-for-profit entity. Supporting service expenses encompass the costs of
operating the entity (general and administrative) and raising funds.
7. Not-for-profit entities (especially voluntary health and welfare entities) are frequently
evaluated based on the ratio of program service expenses to total expenses. This ratio tells
readers of the statements what portion of each dollar of expense can be attributed to
achieving the goals identified by the entity.
8. A statement of functional expense is produced by a voluntary health and welfare entity to
assist the reader of its financial statements in measuring the entitys efficiency in using
resources. The assumption is that an entity should use a greater portion of those resources
to meet stated goals and a smaller part for administrative costs and fundraising. This
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statement provides a simple way of evaluating one not-for-profit entity in comparison to

another.
9. When a donor conveys a gift to a private not-for-profit entity (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. Under normal circumstances, the original donor records an
expense at the time of the conveyance 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 an increase in net assets because action has been taken
that will lead to the receipt of this gift. In this way, the entity that initially collected and then
conveyed the gift recorded neither expense nor an increase in net assets because the
resources cannot really be used. They simply pass through to the beneficiary.
Other possibilities do exist if the donor has given the initial charity variance powers that
allow for a possible 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 transferred 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, the balance is directed back 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 revenue and,
eventually, an expense for the contribution even though it was not the original donor.
12. The value of donated services is recognized by a private not-for-profit entity 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.
If the service is donated by an affiliated entity, recognition is still necessary based usually
on the cost paid to those workers.
13. Except in specified situations, the costs of a direct mailing that contains a solicitation for
funds is classified entirely as a fundraising (supporting services) expense. However, within
certain guidelines, these costs can be allocated in a logical manner between supporting
services and program services. Allocation becomes necessary when the mailing has a
specific call for action that would have been made even without the fundraising solicitation.
This call for action must further the mission of the entity and the appeal cannot be made
purely to potential donors.
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For example, assume a mailing was sent out by a private not-for-profit blood service asking
all previous blood donors to donate blood during the next six weeks. Assume further that
this call for action was accompanied by a request for monetary donations. All of 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
entity at present value (if not to be received within the next year) and net of an allowance
for uncollectible amounts. An unconditional promise is one that requires no future service
or action by the charity.
15. An unconditional promise to give is recorded immediately by the private not-for-profit entity
that anticipates receiving the gift. Conversely, an intention to give is not 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 entities collect dues from 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 provided
by the entity. However, if nothing of value is really being given to the member, the dues are
considered to be merely donations. Often, an allocation must be made between the
portion of the membership dues that qualifies as revenue and the part that is viewed as a
contribution.
17. If a not-for-profit entity gains control over another entity, combined financial statements
should be prepared. This type of transaction is viewed as an acquisition.
If two not-for-profit entities 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.
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. The same handling is often true for combined statements
created when a not-for-profit entity gains control over another. However, if the 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. In that situation, the amount is not capitalized as goodwill.
19. If Helping Hand acquires Fancy Fingers, then the reported value of the equipment on
consolidated statements is $2.3 million. That figure is the net carrying value reported by
Helping Hand ($1.1 million) plus the fair value of the property held by Fancy Fingers ($1.2
million).
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If Fancy Fingers acquires Helping Hand, then the reported value for the equipment will be
$2.4 million. That figure is the net carrying 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 is reported at $2.1 million. This transaction is a merger and the
carryover method is used. The reported figure is the combination of the net carrying value
of these assets from both sets of financial statements ($1.1 million plus $1.0 million).
20. A third-party payor is any outside entity who assumes responsibility for a portion or even all
of a patient's medical charges. The most commonly encountered third-party payors include
insurance companies, Medicare, and the like. Because third parties bear a significant
portion of the medical costs in this country, they are able to demand extensive as well as
accurate financial information. Health care entities have long been required, therefore, to
develop and maintain accounting systems that provide this needed data.
21. A contractual adjustment refers to a portion of a patient's charged fee that a health care
entity 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 $272,000 for a specific service but the third-party
payor responsible for payment remits only $195,000 (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 $77,000 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 entity so that they can be
recorded at the time that the original invoice is submitted.
22. Charity care is not recorded by a not-for-profit health care entity because the service was
performed for patients with no real ability to pay. However, the financial impact of that
decision needs to be disclosed. Therefore, the cost of such charity care must be reported
in a disclosure note to the financial statements.
Answers to Problems
1. D (Amounts charged to patients less contractual adjustments and the
provision for bad debts)
2. A
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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 the gift is conveyed to Charity Two. As a result of this
uncertainty, Charity Two reports nothing until the money is actually
received.)
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, all of the cost is assigned to
supporting services.)
9. A (In its original standards for not-for-profit entities, FASB wanted to get away
from financial reporting based on fund accounting. The statements were
designed to provide information about the private not-for-profit entity 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. C (Although an investment was sold to generate this cash, that asset was
received from a donor and was liquidated almost immediately upon receipt.
FASB has held that this is an operating activity cash inflow.
12. C (Because the accountant has a specialized skill that would otherwise have
to be acquired, the donated service is reported. The amount paid by the
affiliated entity is used for recording purpose since it mirrors fair value
here.)
13. A (Patient service revenue is reduced by any charity care services. That
amount is not recorded because the entity does not expect to be paid. In
addition, a direct reduction is shown for the provision for doubtful
accounts. Thus, net patient service revenue is $1 million less $94,000 and
$200,000 or $706,000.)
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14. C (Charity care is not recorded by a not-for-profit health care entity because
the entity provided services for individuals with no ability to pay. The
financial impact of that decision must be disclosed in a note to the financial
statements that provides information about the direct and indirect costs of
these services.)
15. 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 donation represents a liability to the Jones family. The gift
is simply being passed through the charity [in the form of furniture] to the
ultimate beneficiary.)
16. B (In this way, no financial benefit accrues to the charity from the sale of the
artifact.)
17. 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 current year so that no
depreciation was recorded and no reclassification was made. The $80,000
was properly spent on the salaries for the teachers and must be reclassified
from temporarily restricted net assets to unrestricted net assets when the
expense is recognized.)
18. A (The key factor here is that YZ 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, this $300,000 is charged off against
unrestricted net assets on the statement of activities. No goodwill is
recognized.)
19. A (When two not-for-profit entities come together to form a new not-for-profit
entity with a new governing board, a merger has occurred. In reporting a
merger, the carryover method is used. Thus, book value of individual
assets and liabilities is retained. The $300,000 book value for BCs land
plus the $500,000 book value for OPs land gives a reported land account of
$800,000.)
20. B (This transaction is an acquisition and the acquired entity is not supported
predominantly 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
goodwill.)
21. D
22. C
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23. C
24. C (The charity care work should not be recorded in any way because the
entity has no expectation of collection. That reduction drops the reported
amount for patient service revenue to $600,000. The contractual
adjustment is reported as a contra balance to the revenue reducing it to a
net amount of $400,000. Likewise, the provision for bad debts reduces the
net patient service revenue another $100,000 to $300,000.)
25. B (Use of the money is limited to the donors specified purpose.)
26. B (This donated service meets the rules for recognition. The expense and the
contributed support are both reported.)
27. A (Form 990 is the annual informational form that most tax-exempt
organizations are required to file by the IRS.)
28. A (As an educational institution, Belwood University will qualify as a 501(c)(3)
tax-exempt organization.)
29. D (These volunteer services, although important, do not meet the criteria for
recognition. They do not require a specialized skill that would be otherwise
purchased. They do not enhance a nonfinancial asset.)
30. B (The gift was not specifically designated for this particular family so the
entity recognizes both the revenue and expense.)
31. A (The work performed requires a specialized skill that would otherwise have
to be acquired by the not-for-profit entity.)
32. B
33. A (The fundraising costs and administrative salaries are supporting service
expenses.)
34. B
35. D
36. (10 minutes) (Reporting of various account balances by a not-for-profit health
care entity)
Donated medicines = an asset is reported as well as an increase in
unrestricted net assets because of the contribution
Donated services (replacing salaried workers) = the fair value of the services
contributed causes an increase in unrestricted net assets along with an
accompanying decrease in unrestricted net assets because the expense is
also recognized
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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 entity has no intention of seeking collection;
if an amount has been recorded, it must be removed from the receivable
and the revenue.
Provision for bad debts = amount is anticipated and this provision for bad
debts is reported as a direct reduction in patient service revenues to arrive
at net patient service revenues.
37. (15 Minutes) (Series of questions about the reporting of health care entities)
a. A third-party payor is an entity (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 extremely high cost of medical care. Because of their need for
accurate financial information, such third party payors have exerted pressure
on health care entities over the decades 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 but
is still 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
entity because the amount that eventually will be collected is not always
known. Thus, the entity recognizes the full amount of the invoice as patient
service revenue at the time the service is performed. The 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 entity), the asset is recorded at fair value. Because of the
donation, the contribution is recognized as an increase in unrestricted net
assets. If the asset has a finite life, officials can assume a time restriction on
the use of the asset so that the contribution is reported initially as an increase
in temporarily restricted net assets. An amount is also reclassified to
unrestricted net assets each period equal to depreciation expense.
Donated services are recorded as a contribution increasing unrestricted net
assets and as salary expense also within unrestricted net assets. FASB
requires private not-for-profit entities 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
18-12
Education.
nonfinancial asset, an increase in the assets reported balance is recognized

rather than as salary expense.
38. (6 Minutes) (Reporting of various accounts by a not-for-profit entity)
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 $800,000 contractual adjustment 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 increase in
unrestricted net assets as a result of the contribution. As the supplies are
used, the $4,000 asset will be reclassified as an expense.
39. a). (8 Minutes) (Recording donations by a voluntary health and welfare
entity)
Pledges ............................................................................
Anticipated Amount Deemed to be Uncollectible (15%)
Net Pledge Balance.....................................................
$600,000
(90,000)
$510,000
Increase in Unrestricted Net Assets in 2015

Contributed Support (60% of above)........................
$306,000
Increase in Temporarily Restricted Net Assets in

2015Contributed Support (40% of above).............
$204,000
b). Both contributed support and salary expense are recognized as $12,000
($20 per hour times 600 hours) within unrestricted net assets. No overall
effect is created on net assets but impact of the donation is reflected.
40. (65 Minutes) (Preparation of statements for a private not-for-profit entity)
a.
Statement of Activities
Public Support
a. Contributions
b. Contribution
Interest
Revenue
c. Membership dues
d. Investment income
Unrestricted
Net Assets
Temporarily Restricted
Net Assets
$210,000
$78,000
3,000
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
18-13
Education.

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)
Fundraising
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-
Net Assets - Beginning

of Year
400,000
200,000
$100,000
Net Assets - End of Year
$515,900
$218,100
$100,000
18-14
Education.
40. (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 is recognized to raise the balance to the pledge amount is
reported as a contribution.
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 collected.
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. 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 in salaries were paid (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
of 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
fundraising expenses.
---Because it qualifies as a museum piece, recording of the painting is optional.
Officials do not want to report the painting, and they are not required to do so.
---The $10,000 gift must be conveyed to an outside beneficiary and is reported by
the not-for-profit entity as a liability.
18-15
Education.
40. (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
g. Donated Amount Due to Separate
Entity
$1,099,000
$5,000
250,000
Net Assets (see Statement of Activities)

Unrestricted
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 a separate entity, 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 recognized for the
period).
c. Equipment. Entity 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 to employees as of the end of the year.
f. Notes Payable. The liability incurred in acquiring equipment.
g. Donated Amount Due to Separate Entity. 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 entity here had variance powers
that would allow it to change the beneficiary.
18-16
Education.
41. (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.................................................
ReclassificationUnrestricted
Net Assets.........................................................
160,000
80,000
25,000
25,000
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. Provision for Bad Debts...................................................

Allowance for Uncollectible
Accounts...........................................................
20,000
Contractual Adjustment...................................................
Allowance for Reduced Charges.........................
30,000
18-17
480,000
600,000
38,000
15,000
20,000
30,000
Education.
41. (continued)
h. Supplies Expense ............................................................
Inventory of Medicines..........................................
25,000
i. Cash ..................................................................................
InvestmentsInternally Restricted......................
Gain on Sale of InvestmentsUnrestricted
Net Assets.........................................................
172,000
Equipment.........................................................................
Cash ($172,000 + $15,000 + $25,000)...................
212,000
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......................................
18-18
25,000
160,000
12,000
212,000
25,000
25,000
12,600
98,000
9,000
12,600
89,000
Education.
41. (continued)
a. No change
Unrestricted
Net Assets
Calculation of Changes in 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
g. Bad Debts
Contractual
Adjustment
h. Supplies
Expense
i. Gain on
Investments
Stipulation
MetReclassification
j. Pledges
Increase
(Decrease)
In Net
Assets
(25,000)
15,000
(20,000)
(30,000)
(25,000)
12,000
25,000
(25,000)
12,600
89,000
576,600
39,000
18-19
80,000
Education.
42. (70 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 Net Assets
300,000
c. Cash
ContributionsTemporarily
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 Support
Unrestricted Net Assets
80,000
80,000
g. Equipment
Cash
200,000
200,000
Temporarily Restricted Net Assets

Reclassification
Unrestricted Net Assets
Reclassification
h. Investments
Unrealized Gain on Investments
Permanently Restricted Net Assets
i. Cash
Dividend RevenueUnrestricted
Net Assets
j. Depreciation Expense
Accumulated Depreciation
200,000
200,000
30,000
30,000
9,000
9,000
32,000
32,000
k. CashInternally Restricted
Cash
42. (continued)
100,000
100,000
l. Pledge Receivable
7,000
18-20
Education.
ContributionTemporarily
7,000
m. 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.
18-21
Education.
42. (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
1,100,000
30,000
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
1,189,000
Net Assets Released

From Restriction
200,000
Totals
Total Expenses
Total
9,000
Contributions
-Cash and Other
Assets
-Services
Operating Expenses
-Salaries
-Depreciation
-Utilities and Other
Expenses
Temporarily Permanently
Restricted
Restricted
Net Assets Net Assets
1,389,000
707,000
(200,000)
507,000
330,000
2,226,000
390,000
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
1,592,000
100,000
430,000
700,000
2,292,000
43. (30 Minutes) (Series of questions about private not-for-profit entities)

a. Many private non-for-profit entities depend heavily on gifts and grants from
outside parties. An earning process is not present in connection with such
conveyances. Asset inflows are simply created by donations. Such amounts
are reported as public (or contributed) support. These same entities, 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 that
18-22
Education.
have value are conveyed to the members. A not-for-profit entity might also
gain assets from sources such as interest or dividend income. Money derived
in this fashion is not a donation and is, thus, recorded as earned revenue.
b. A statement of functional expenses is required to be included in the financial
statements of voluntary health or welfare entities and is permitted for all other
private not-for-profits. This statement enables readers to determine the
ultimate usage of the money that has been raised. Expenses are separated
according to program service expenses (directed towards activities that relate
to the entitys goals and mission) and supporting service expenses (dealing
with the cost of running the entity and raising funds). This statement permits
interested parties such as potential donors to see the utilization made of the
not-for-profit entitys resources.
c. Some charities (Goodwill Industries and the Salvation Army, for example)
receive a large amount of 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 entity 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 free use of these assets, they are included within
"Temporarily Restricted Net Assets." At the time that the stipulation is met or
the designated time period arrives, the asset is reclassified into the
Unrestricted Net Asset category.
Other gifts may be given where the donor specifies that only subsequent
income can be expended (frequently for a designated purpose). Because the
assets received in the original gift cannot be expended, they are included
within the Permanently Restricted Net Assets."
e. Donated services are extremely common in the operation of many not-forprofit entities. Literally thousands of individuals solicit funds for entities such
as the Heart Fund, Salvation Army, and March of Dimes. In addition,
individuals often voluntarily fill positions of responsibility throughout many of
these not-for-profits. 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
entity 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 entities as fundraising 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
18-23
Education.
educational expenses (a program service cost) and fundraising (a supporting

service cost). Some entities took advantage of this rule. They included
educational materials with their fundraising appeals because they could
allocate part of the mailing and other distribution costs to program services
which made their statements look like these entities 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 fundraising costs unless a
specific call for action was being included that was not limited to potential
donors. This call for action had to be one that would further the mission of the
not-for-profit. If these requirements were met, a logical portion of the direct
mailing costs could be assigned to program service expenses. Otherwise, the
entire cost is included within fundraising.
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, museum pieces, and
the like 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 all met, no recording is required
(although recording is allowed).
44. (25 Minutes) (Determine impact of various transactions on a private college.)
(1)---False. The January 1, Year 1, 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 earned during 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 the composition.
18-24
Education.
(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 released from restriction.
(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 answer is the same 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 service support as well as a salary expense are recognized for
the $14,000 value.
(10)---False. Based on the information given, both the contributed support 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. This answer is the same as in (10). Both the contributed support
and the expense must be reported. Unrestricted net assets both go up (for the
contribution support) 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 a contribution of that same amount.
However, if the painting qualifies as a work of art, the school can either make this
entry or simply make no entry. Therefore, under one set of circumstances,
recognition of a contribution 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 donated gift is $30,000, no
situation can exist where the school is not allowed to recognize revenue.
45. (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 as designated, 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
on Unrestricted Net Assets.
18-25
Education.
--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 increases 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.
--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.
46. (65 Minutes) (Prepare financial statements for a private not-for-profit entity.)
a. Entries for this not-for-profit entity are presented below. The numbers in
parenthesis indicate account totals at that point in time. This method is used
as an easy way to monitor account balances.
Contributions receivable............................ 20,000
Contributed supportinterest--unrestricted
net assets...........................................
Cash ............................................................ 100,000
Allowance for uncollectible pledges........
4,000
Contributions receivable........................
18-26
(220,000)
20,000
( 20,000)
(200,000)
104,000
(net of 120,000)
Education.
Cash ............................................................ 180,000

Contributed supportunrestricted
net assets.............................................
Salary expense............................................
Cash ......................................................
Reclassification - temporarily restricted
net assets..................................................
Reclassification - unrestricted net
assets.....................................................
180,000
(180,000)
90,000
( 90,000)
(290,000)
90,000
15,000
Cash ............................................................ 12,000

Contributed supporttemporarily restricted
(To record gift to go to a specified beneficiary.
Entity records this contribution because it
holds 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.)
(380,000)
( 15,000)
15,000
( 15,000)
12,000
(302,000)
( 12,000)
450,000
50,000
(700,000)
(450,000)
(252,000)
50,000
( 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)
46. (continued)
Cash ............................................................. 30,000
Membership revenueunrestricted net assets
(Membership dues are listed as revenues
and not as contributions because members
receive substantial benefits.)
Cash.............................................................. 30,000
Investment revenueunrestricted net assets
(Income is earned on permanently restricted
net assets but use of the income is unrestricted.)
Rent expense...............................................
Advertising expense ..................................
Utilities expense .........................................
Cash ......................................................
18-27
12,000
15,000
16,000
Education.
Contributions receivable............................ 149,000

Contributed supporttemporarily restricted
net assets ...........................................
(Although pledge is unrestricted, it will not
be collected for five years and, therefore,
the proceeds are viewed as temporarily
restricted.)
Contributions receivable............................
6,000
Contributed supportinterest--temporarily
restricted net assets .........................
Depreciation expense ................................
Land, buildings, and equipment .........
40,000
Interest expense..........................................
Cash ......................................................
15,000
18-28
(269,000)
149,000
(161,000)
(275,000)
6,000
6,000)
40,000
( 40,000)
(660,000)
15,000
( 15,000)
(254,000)
Education.
46. (continued)
Based on the final balances computed above, the following statements can be
prepared.
WATSON FOUNDATION
STATEMENT OF ACTIVITIES
For Year Ending December 31, 2015
Contributed support
Contributions -- interest
Investment revenue
Membership revenue
Total support and revenues
Net assets released from
restriction
Unrestricted
Net Assets
$ 180,000
20,000
30,000
30,000
$ 260,000
65,000
Total support, 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)
Total expenses
$(188,000)
Excess of total support, revenues

and net assets released from
restriction over expenses
$137,000
Net assets at beginning of year
Net assets at end of year
Temporarily
Restricted
Net Assets
$ 161,000
6,000
_______
$ 167,000
( 65,000)
$ 102,000
$102,000
Permanently
Restricted
Net Assets
________
________
________
-0-
400,000
100,000
$300,000
$537,000
$202,000
$300,000
46. (continued)
b.
18-29
Education.
WATSON FOUNDATION
STATEMENT OF FINANCIAL POSITION
December 31, 2015
ASSETS
Cash
Contributions receivable (net)
Investments
Land, buildings, and equipment (net)
Total assets
$ 254,000
275,000
300,000
660,000
1,489,000
LIABILITIES
Notes payable
NET ASSETS
- Unrestricted
- Temporarily restricted
- Permanently restricted
450,000
$537,000
202,000
300,000
$1,039,000
47. (40 minutes) (Accounting for mergers and acquisitions)

a. In an acquisition, the assets and liabilities of the acquired entity 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. Goodwill is reported because Swim For Safety is
primarily supported by contributions and investment income.
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)
--Contributions 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)
47. (continued)
--Goodwill - $80,000 (above)
--Total assets - $3,360,000 (summation)
--Accounts payable and accrued liabilities - $180,000 ($110,000 plus $70,000)
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Education.
--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 entity 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 reported as an immediate reduction in unrestricted net assets
with no accompanying increase in goodwill.
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.
--Cash - $1,110,000 ($1,600,000 less $990,000 plus $500,000)
47. (continued)
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Education.
--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)
c. This transaction is a merger: two not-for-profit entities 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 new balances to be reported. No cash was spent and no
adjustments to fair value are made.
--Cash - $2,100,000 ($1,600,000 plus $500,000)
--Unrestricted net assets - $1,520,000 ($1,100,000 plus $420,000)
48. (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 a separate 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
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Education.
recognized amount of expenses reduces that total from $500,000 to

$360,000.
49. (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, this entity recorded the 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 initially
increased Temporarily Restricted Net Assets and then been removed
through a reclassification leaving no net effect. Because nothing was ever
recorded by the entity in Temporarily Restricted Net Assets, the total of
$300,000 is correct.
50. (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 entity 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 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. Permanently Restricted Net Assets should not
have been reduced by $50,000 but that is not relevant to this particular
question.
18-33
Education.
51. (5 minutes) (Incorrect reporting of membership dues)

In this case, because nothing was received in exchange for the members
dues, these collections should have been recorded as contributed support
which would increase Unrestricted Net Assets. Instead, the dues were
recorded as membership (or earned) revenue which is incorrect but it
does increase Unrestricted Net Assets by the correct amount. Although
the source is wrongly reported, the total Unrestricted Net Assets is
correctly stated at $400,000.
52. (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, this asset should have been depreciated at the rate of
$7,000 per year. For this reason, at the end of Year 2 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 entity should report $463,000.
b. The entity reported no assets as a result of the contributed garage. The
entity should report a $70,000 garage less $7,000 in accumulated
depreciation. If the net balance of $63,000 is added to the reported total
for assets of $900,000, a corrected figure of $963,000 is determined.
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.
53. (10 minutes) (Reporting a gift that must be transferred to another party)
a. Because the donor can take the money back, the gift is still under the
control of the donor. Consequently, the not-for-profit entity should have
recorded a liability to the donor until a final resolution takes place.
Instead, the charity recorded contributed support 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 contributed service or a
liability should be reported by the entity. The total amount reported as
assets is not in question and is, thus, correctly stated at $900,000.
54. (15 minutes) (Handling of various events by two different charities)
a. Charity A debits repair expense and credits contributed support. These
two changes offset so that unrestricted net assets are not impacted.
18-34
Education.
Charity B makes no entry at all so that unrestricted net assets are not
impacted. After this reporting, the two charities report the same amount
of unrestricted net assets.
b. Charity A will report the investment income as an increase in unrestricted
net assets and then report salary expense for the same amount. These
two changes offset so that unrestricted net assets are not impacted.
Charity B records the salary expense and then records an increase in
unrestricted net assets because the restricted balance has been released.
These two changes cancel out so that unrestricted net assets are not
impacted. After this reporting, the two charities report the same amount
of unrestricted net assets.
c. The only difference here between Charity A and Charity B is in the
handling of the excess $20,000 acquisition value. Charity A records this
amount as goodwill because the acquired charity gains a significant
amount of its support from exchange transactions. Charity B records this
excess as a reduction in net assets because the acquired charity gets
most of its resources from donations. Because of this reduction, total
unrestricted net assets will be $20,000 lower for Charity B.
d. Charity A records the $100,000 as patient service revenue and then writes
the amount off as uncollectible. The provision for bad debts is a direct
reduction in patient service revenues and not an expense. Charity B
simply records the $100,000 from the beginning because of a lack of any
intention to collect. In either approach, patient service revenue is
reduced by $100,000. The new entities have the same amount of net
patient service revenues.
e. Charity A reports the entire $50 per cake as earned revenue. Charity B
reports $30 per cake as earned revenue and $20 per cake as contributed
support. In both cases, unrestricted net assets are increased by $50 per
cake. The two entities will report the same amount of unrestricted net
assets.
Develop Your Skills
Research Case 1
This assignment is an excellent way to demonstrate the wealth of information
available on the Internet about charities and other not-for-profit entities. Many
individuals want to be generous and help entities that deserve assistance.
Determining whether a specific entity is truly worthy of support is not necessarily
easy. Every charity will claim that it is effectively helping to improve some
element of society that is in need.
18-35
Education.
Obviously, the information that a student finds at this website depends on the
specific charities that are examined. However, some of the information that is
normally available includes:
the entitys stated purpose,
year it was started,
website address,
the existence of any affiliated organizations,
whether this entity has met all of the standards of the group that created
the website and, if not, what was the problem,
a discussion of the charitys 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 entity,
methods used for fundraising,
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 not-for-profit entity and its operations and finances.
Research Case 2
Charity Navigator provides a wealth of information about its methodology that
should help students understand how a charity can be evaluated.
The following outline of information was listed on this website at June 23, 2013,
under methodology:
Charity Navigator works to guide intelligent giving. Our goal is to help people
give to charity with confidence. At the same time, we aim to help charities by
shining lights on truly effective entities. In doing so, we believe we can help
ensure that charitable giving keeps pace with the growing need for charitable
programs.
Our approach to rating charities is driven by those two objectives: helping
givers and celebrating the work of charities. The pages listed below describe how
we select charities to evaluate, how we classify and rate them, and what givers
can conclude based on our ratings.
What Kind of Charities Do We Evaluate?
How Do We Classify Charities?
How Do We Rate Charities?
How Do We Rate Charities' Financial Health?
18-36
Education.
Financial Ratings Tables

How Do We Rate Charities' Accountability and Transparency?
Accountability and Transparency Ratings Tables
How Do We Calculate the Overall Score and Star Rating?
What Do Our Ratings Mean?
What Other Information Do We Present on the Charities We Evaluate?
How Current are Our Ratings?
How Do We Decide To Post A Donor Advisory?
How Do We Decide To Remove A Donor Advisory?
How Do We Plan To Evaluate Results Reporting?
Glossary of Terms
**
Each of these links provides an extensive amount of information. For example,
the link How Do We Rate Charities' Financial Health? provides a description of
seven different performance metrics.
1 Program expenses
2 Administrative expenses
3 Fundraising expenses
4 Fundraising efficiency
5 Primary revenue growth
6 Program expenses growth
7 Working capital ratio
Based on all of the available information, students should be able to write a
memo on how this organization rates various charities.
Research Case 3
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. Some of
this information can be found in the entitys financial statements but much of it
goes beyond what is otherwise available. The filing of Form 990 ensures that
such information is made public.
18-37
Education.
Because of the sheer number and visibility, most not-for-profit entities that
students might research are likely to qualify as Section 501(c)(3) charities.
The available salary information will give students the opportunity to discuss
whether officials of these entities are paid too much or too little. Do the amounts
seem reasonable in comparison to the amount of revenues generated or the
quantity of assets managed? What, for example, would the president of a
comparable-sized 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 entity 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 in the Form 990. What data seems
most important and why include each of these items?
Research Case 4
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 might list.
--The influence of government accounting in 1987 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 entity.
--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.
Analysis Case 1
18-38
Education.
Many times a potential donor might be interested in an array of information that

can best be found by studying the actual financial statements of a not-for-profit
entity. The purpose of financial statements is to provide a complete picture of
the financial operations and position of the entity 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 entitys 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 charities are listed. By clicking on a specific organization, the student
can get considerable information including the website address.
The exact information that is found will, obviously, depend on the not-for-profit
entity that is studied. As just one example, the following information comes from
recent financial statements for the American Heart Association for June 30, 2012,
and the year then ended:
1--This not-for-profit entity has four program services listed in its financial
statements: research, public health education, professional
education/training, and community services.
2--The charity reported total expenses for the year ended June 30, 2012, in
excess of $617 million. Of that total, nearly $130 million was reported in
connection with supporting services. Thus, approximately 21 percent of
each dollar of expense was incurred in connection with supporting
services (management and general and fundraising).
3--In the statement of activities, the American Heart Association recognized
$54.3 million in contributed services and materials for the year ended June
30, 2012. The biggest single source of contributed materials was $44.2
million for public health education. The biggest single source of
contributed services was $6.1 million for research. Note 1, section j, spells
out additional information about these donations as well as other donated
services that were not recognized.
4--A question that is raised in connection with virtually any charity has to
do with the amount of financial resources that are expended to raise more
resources. In the year ended June 30, 2012, the American Heart
Association, incurred $80.9 million in fundraising expenses. That amount
makes up approximately 13 percent of the total expenses for the period.
5As of June 30, 2012, the financial statements show that the American
Heart Association held $284.3 million in unrestricted net assets, $224.5
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Education.
million in temporarily restricted net assets, and $165.2 million in

permanently restricted net assets.
6For the year ended June 30, 2012, $147.9 million of temporarily
restricted net assets were reclassified as unrestricted. Either the related
purpose restriction had been satisfied ($93.4 million) or a time restriction
expired ($54.5 million).
Analysis Case 2
Most private colleges and universities now place their latest audited financial
statements on their Website. 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 Baylor University as of May 31, 2012, and the year then
ended (http://www.baylor.edu/content/services/document.php/185324.pdf)
1--Tuition and fee revenue for the period totaled $463.5 while the total for
the schools scholarships was $184.8 million. Hence, this financial aid
covered approximately 39.9 percent of the tuition and fees charged to
students. To put this information another way, the average student paid
60.1 percent of the schools tuition and fee charges.
2-- Note five to the financial statements provides the following information
about contributions receivable as of May 31, 2012 (all numbers in
thousands):
Restricted current funds
$
63
Endowment funds
1,000
Plant Projects:
Due in 1 year
6,570
Due in 2 to 5 years
27,780
Due in 6 to 10 years
12,070
Split interest agreements
21,355
Less: Present value adjustments
(10,561)
Total contributions receivable
$ 58,277
In addition, the footnote states that another $26,246,000 has been deemed
an intent to give and not yet reported because they are not viewed as
unconditional promise.
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, academic support, student services &
activities, institutional support, and the like. So, no exact comparison
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Education.
between educational costs and research costs is possible here. However,

considerable information can be determined about the schools priorities
simply by comparing instruction expenses ($209.6 million) and research
and public service expenses ($14.5 million).
4--For the year ended May 31, 2012, Baylor University shows gifts of
$16.5 million under unrestricted net assets, $56.6 million under temporarily
restricted net assets, and $29.2 million under permanently restricted net
assets.
5As of May 31, 2012, Baylor University reported $450.1 million in
unrestricted net assets, $298.6 million in temporarily restricted net assets,
and $624.7 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).
6Footnote 4 indicates a single figure (a loss of $45.1 million) as the net
realized and unrealized gains (and losses).
7--The problem with this computation is determining exactly what is meant
by education expenses. One way to compute that figure for the Baylor
University for the year ended May 31, 2012 is as follows:
Net Tuition and Fees
Education Expenses (one way that term can be defined)
Instruction
$209,565,000
Academic Support
48,520,000
Student Services and Activities
96,634,000
Institutional Support
65,732,000
Net Loss on Educating Students
$278,721,000
(420,451,000)
$(141,730,000)
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.
Communication Case
Under each principle listed for Strong Financial Oversight, the Core Concepts will
include a considerable amount of practical guidance for the accountant of a
private not-for-profit entity. Students will already expect some of these
recommendations based on their education and experiences but much of it may
be new to them. What they focus on will depend on their personal interests.
Here are the Core Concepts for financial records:
18-41
Education.
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
entity 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 balance.
The auditor reports to the board, not to the staff.
18-42
Education.

Accounting and Reporting For Private Not-For-Profit Entities

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

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

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

Answers to Discussion Questions

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

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

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

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

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

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

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

3. B (Private NFPs report depreciation expense. A public university is normally

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

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

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

Donated services (not replacing salaried workers) = not recorded

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

nonfinancial asset, an increase in the assets reported balance is recognized

Increase in Unrestricted Net Assets in 2015

Increase in Temporarily Restricted Net Assets in

Total Public Support and

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

Supporting service expenses

Change in Net Assets

Net Assets - Beginning

Net Assets - End of Year

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

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

Net Assets (see Statement of Activities)

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

g. Provision for Bad Debts...................................................

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

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

Calculation of Changes in Net Assets

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

Temporarily Restricted Net Assets

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

m. No entry because of choice made by officials

o. No entrydoes not require a specialized skill.

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

Total Revenues, Gains,

Net Assets Released

Increase in Net Assets

43. (30 Minutes) (Series of questions about private not-for-profit entities)

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

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

educational expenses (a program service cost) and fundraising (a supporting

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

(5)---False. Depreciation expense is appropriate for all long-lived assets with a

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

--Temporarily Restricted Net Assets Category increases by $9,000. The

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

Cash ............................................................ 180,000

Cash ............................................................ 12,000

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

Contributions receivable............................ 149,000

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

Total support, revenues, and net

Excess of total support, revenues

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

47. (40 minutes) (Accounting for mergers and acquisitions)

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