Chapter 22

ACCOUNTING FOR NOT-FOR-PROFIT ORGANIZATIONS

Questions

1 The not-for-profit (NFP) organization has several characteristics:

a. Receives contributions from significant amount of resources who do not expect any sort
of monetary returns.
b. Operates without generating profit as its purpose.
c. Does not possess any ownership interests.

2 There are four categories of NFP: (1) voluntary health and welfare organizations (VHMO), (2) health
care entities, (3) colleges and universities, and (4) other NFP, such as museum and or religious
organizations. The accounting and financial reporting methods for each of each type vary; however,
first they have to determine whether the NFP is governmental or non-governmental. The governmental
NFP should follow the GASB or any other governmental accounting standards or principles while the
non-governmental NFP should follow the FASB or IFRS.

3 Net assets, revenues, expenses, gains, and losses are classified based on the existence or absence of
donor restrictions. There are three classes of net assets:
a. Permanently restricted net assets, which is a portion of net assets that never expire and cannot be
removed by the NFP entity due to donor imposed restriction of usage.
b. Temporarily restricted net assets, which is a portion of net assets that can be expire and removed
by the NFP entity if the purpose has been reached.
c. Unrestricted net assets, which is a portion of net assets that do not have any donor imposed
restriction of usage.

Revenues, gains, and losses are reported in each class of the net assets above, but expenses is only reported
at the unrestricted net assets class.

4 A conditional promise to give depends on the occurrence of a specified future and uncertain event to bind
the promisor. An unconditional promise to give depends only on the passage of time or demand by the
promisee for performance.

Organizations recognize conditional promises to give as contribution revenue and receivables when the
conditions are substantially met (in other words, when the conditional promise to give becomes
unconditional); however, they account for a conditional gift of cash or other asset that may have to be
returned to the donor if the condition is not met as a refundable advance (liability). Organizations
recognize unconditional promises to give as restricted or unrestricted contribution revenue and receivables
in the period in which the promise is received.

5 A donor-imposed condition provides that the donor will have his resources returned (or will be released
from the promise to give) if the condition is not met. A donor-imposed restriction only limits the purpose or
timing of use of the contributed assets.

6 Unconditional promises to give with payments due in the next period are reported as restricted support (net
of an appropriate allowance for uncollectible accounts) that increase temporarily restricted net assets, even
if the resources are not restricted for specific purposes.

7 When a time restriction is met, temporarily restricted net assets are reclassified as unrestricted net assets.
The entry includes a debit to temporarily restricted net assets—reclassifications out and a credit to
unrestricted net assets—reclassifications in. (Different account titles, such as amounts released from
restrictions, are permitted as well.)
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 22-2 Accounting for Not-for-Profit Organizations

8 Gifts in kind are reported as unrestricted support that increases unrestricted net assets if the not-for-profit
entity has discretion over the disposition of the resources and a fair value can be reasonably determined. If
fair value cannot be determined, the items are recorded as sales revenue when they are sold. If the not-for-
profit entity has little or no discretion over disposition of the items, the gifts in kind should be accounted
for as agency transactions.

9 Program services of voluntary health and welfare organizations are expenses incurred in meeting the social
service objectives of the organization. Examples are research, public education, community services, and
patient services. Supporting services consist of the organization’s administrative and fund-raising costs, and
expenses for these items are so classified in the statement of activities.

10 The statement of functional expenses for voluntary health and welfare organizations is intended to reconcile
the functional classification of expenses (which results in highly aggregated data) with basic object-of-
expense classifications that are less aggregated and easier for many users to understand.

11 Contributed services are recognized only if the services (a) create or enhance nonfinancial assets of the
organization or (b) require specialized skills, are provided by individuals possessing those skills, and would
typically need to be purchased if not provided by donation.

12 Charity care is excluded from both gross patient service revenue and from expense. The hospital’s policy
for providing charity care and the level of charity care provided are disclosed in notes to the financial
statements.

13 Net patient service revenues of hospitals are measured by deducting courtesy allowances and contractual
adjustments from gross patient revenues. Uncollectible accounts expenses are not deducted in computing
net patient service revenues. Net patient service revenues are reported in the statement of activities.

14 The three major revenue groupings used by hospitals are patient service revenues, other operating revenue,
and nonoperating gains. Examples are:
Patient service revenues—routine care, emergency room, recovery room, pharmacy
Other operating revenues—tuition from educational programs, research grants for specific purposes, gift
shop sales
Nonoperating gains—unrestricted gifts, unrestricted endowment income, gain on sale of plant assets, rents
from property not used in hospital operations
(Premium fees also are significant for many hospitals today. They would be reported as a separate line item
under operating revenues.)

15 Both the provision for bad debts (other than for charity care, which is not recorded as revenue) and
depreciation are expenses of a hospital. Hospitals use full accrual accounting procedures.

16 FASB Statement No. 117 (now codified in FASB ASC 958) requires private not-for-profit universities to
provide a set of financial statements that includes a statement of financial position, statement of activities,
statement of cash flows, and accompanying notes. Governmental universities are considered special-
purpose governments under GASB Statements No. 34 and 35. Special-purpose governments with more
than one governmental program or both governmental and business-type activities present both
government-wide and fund financial statements, as well as the MD&A, notes, and required supplementary
information. Special-purpose governments with only one governmental program may combine fund and
government-wide statements, whereas those with only business-type activities should report only the
financial statements required for enterprise funds, as well as the MD&A, notes, and required supplementary
information.

17 Government colleges and universities no longer have the option of using the AICPA college guide;
however, many organizations may have retained AICPA model features for internal accounting and control
purposes.
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 Chapter 22 22-3

18 Much guidance comes from the Financial Accounting and Reporting Manual, an accounting manual
prepared by the National Association of College and University Business Officers (NACUBO) which is
available as an online subscription service.

19 GASB Statements No. 34 and 35 require special-purpose government with more than one governmental
program or both governmental and business-type activities to present both government-wide and fund
financial statements, as well as the MD&A, notes, and required supplementary information. Special-
purpose governments with only one governmental program may combine fund and government-wide
statements, whereas those with only business-type activities should report only the financial statements
required for enterprise funds, as well as the MD&A, notes and required supplementary information.

20 Functional classifications include the following:

 Instruction. Expenses for the educational programs

 Resource. Expenses to produce research outcome
 Public Service. Expenses for activities to provide noninstructional services to external groups
 Academic support. Expenses to provide support for instruction, research, and publications
 Student Services. Amounts expended for admissions and registrar, and amounts expended for
students’ emotional, social, and physical well-being
 Institutional support. Amounts expended for administration and the long-range planning of the
university
 Operation and maintenance of plant. Expenses for operating and maintaining the physical plant
(net of amounts to auxiliary enterprises and university hospitals)
 Student aid. Expenses from restricted or unrestricted funds in the form of grants, scholarships, or
fellowships to students.

21 Property, plant, and equipment acquired by a not-for-profit organization with unrestricted or restricted
resources may be recorded at acquisition as unrestricted or temporarily restricted. If temporarily restricted,
the assets are reclassified when depreciation is recognized.

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22-4 Accounting for Not-for-Profit Organizations

SOLUTIONS TO EXERCISES

Solution E22-1 Solution E22-2 Solution E22-3

1 d 1 b 1 b
2 a 2 a 2 b
3 d 3 d 3 c
4 c 4 b 4 d
5 b 5 c 5 a

Solution E22-4 Solution E22-5 Solution E22-6

1 a 1 b 1 b
2 b 2 b 2 a
3 a 3 c 3 a
4 a 4 c 4 c
5 c 5 d 5 b

Solution E22-7

1 Donations by its members Unrestricted net

assets
2 Donations from the government to repair Temporarily
organization’s building restricted net assets
3 Donations from some CSR to repair Temporarily
organization’s building and any excess is restricted net assets
for operations
4 Car as a gift from a deceased member Unrestricted net
assets
5 Land donated by its member which to be Permanently
inherited to his family when he died restricted net assets

Solution E22-8

Operation and
1 Computer laboratory maintenance maintenance of plant
expenses
Faculty staff’s salary Institutional support
2
expenses
Student consultation Student services
3
expenses
4 Research grants for faculty staff Research expenses
Operation and
5 Gardening maintenance of plant
expenses
6 Scholarships Student aid
Tutorial modules Academic support
7
expenses

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Chapter 22 22-5

Solution E22-9

Accounts receivable $1,250,000

Unrestricted revenues-tuition and fees
$1,250,000
To record tuition and fees.

Tuition reduction: unrestricted – student aid $62,500

Accounts receivable
$62,500
To record tuition fees reductions.

Expenses – educational and general – institutional support $31,250

Allowance for uncollectible accounts
$31,250
To record allowance for uncollectible accounts.

Cash $100,000
Grant funds held for students
$100,000
To record the receipts of third party grant funds.

PROBLEMS

Solution P22-1

1. Journal entries for $10,000 Johnny’s cash donation received and

distributed by local nongovernmental hospital.

Cash $10,000
Temporarily restricted support
$10,000
To record local nongovernmental hospital receipt of Johnny’s fund
donation.

Expenses –unrestricted hospital fund donation $10,000

Cash $10,000
To record payment of fund donation.

Temporarily restricted support – reclassification out $10,000

Unrestricted support – reclassification in
$10,000
To record reclassification of net assets for which the temporary
restrictions is satisfied

2. Journal entries for Johnny’s donations to college for research

purposes.

Cash $50,000
Temporarily restricted support
$50,000

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22-6 Accounting for Not-for-Profit Organizations

To record Johnny’s donation to college for research purposes.

Expenses: unrestricted – research donation $20,000

Cash $20,000
To record distribution of research donations.

Temporarily restricted support – reclassification out $20,000

Unrestricted support – reclassification in
$20,000
To record reclassification of net assets for which the temporary
restrictions is satisfied.

3. Each journal entries for Johnny’s garden donations either for

Buddhist temple or mosque.

Cash $5,000
Permanently restricted revenues –
Endowment contribution $5,000
To record receipt of endowment from Johnny.

Cash $250
Temporarily restricted revenues - endowment income $250
To record endowment income.

Solution P22-2 [In Thousands]

Cave College
Statement of Cash flows – Indirect Method
For the year ended December 31, 2014

Cash flows from operating activities

Change in net assets $100
Adjustments to reconcile change in net
assets to net cash provided by operating
activities
Depreciation $20
Increase in investment (50)
Increase in net accounts (20)
receivable
Increase in net contributions (15)
receivable
Increase in inventories (10)
Increase in accounts payable 30 (45)
Net cash provided by operating 55
activities

Cash flows from investing activities

Increase in loans to students (15)
Net cash used by investing (15)
activities

Cash flows from financing activities

Payment on bonds payable (10)
Net cash used by financing (10)
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Chapter 22 22-7

activities
Increase in cash and cash equivalent 30
Cash and cash equivalent at beginning 50
of year
Cash and cash equivalent at end of year $ 80

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 22-8 Accounting for Not-for-Profit Organizations

Solution P22-3

Hometown Memorial Hospital

Statement of Operations
For the year ended December 31, 2011

Unrestricted revenues, gains, and other support:

Net patient service revenues
($2,500,000 - $400,000 - $100,000) $2,000,000
Other operating revenues ($300,000 + $50,000) 350,000
Income from investment in affiliate 80,000
Investment income 270,000
Unrestricted contributions 200,000
Net assets released from restrictions for operating purposes 80,000
Total operating revenues, gains, and net assets
released from restrictions for operations 2,980,000

Expenses and Losses:

Nursing services 1,000,000
Other professional services 500,000
General services 290,000
Administrative services 310,000
Uncollectible accounts 150,000
Loss on sale of fixed assets 50,000
Depreciation 200,000
Total expenses and losses 2,500,000

Excess of revenues, gains, and other support over

expenses and losses 480,000

Net assets released from restrictions for acquisitions of

fixed assets 97,000
Increase in unrestricted net assets $ 577,000

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 Chapter 22 22-9

Solution P22-4

Accounts receivable 2,000,000

Unrestricted revenues — tuition and fees 2,000,000
To record tuition and fees.

Tuition reduction: unrestricted—student aid 120,000

Accounts receivable 120,000
To record tuition reductions.

Cash 1,100,000
Unrestricted revenues — state appropriation 800,000
Unrestricted revenues — local appropriation 300,000
To record governmental appropriations.

Cash 500,000
Revenue – auxiliary operations 500,000
To record auxiliary revenues.

Expenses – auxiliary operations 480,000

Cash 480,000
To record auxiliary expenses.

Cash 90,000
Unrestricted revenues—endowment income 20,000
Temporarily restricted revenues— endowment income 70,000
To record contributions received.

Cash 380,000
Unrestricted revenues—gifts and grants 80,000
Temporarily restricted revenues—gifts and grants 300,000
To record gifts and grants received.

Expenses – educational and general - instruction 2,100,000

Expenses – educational and general - research 100,000
Expenses – educational and general – student services 120,000
Expenses – educational and general – operation of plant 180,000
Expenses – educational and general – student aid 200,000
Cash (or payables) 2,700,000
To record educational and general expenses.

Temporarily restricted net assets — reclassifications out 300,000

Unrestricted net assets — reclassifications in 300,000
To reclassify temporarily restricted assets (assumes all scholarships and
research were from temporarily restricted assets).

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22-10 Accounting for Not-for-Profit Organizations

Solution P22-4 (continued)

Nongovernmental NFP College
Statement of Activities
for the year 2014

Revenues
Tuition and fees (net) $1,880,000
State and local appropriations 1,100,000
Private grants and gifts 80,000
Endowment income 20,000
Sales and services of auxiliary enterprises 500,000
Total revenues $3,580,000
Total net assets released from
restrictions for operations 300,000
Total revenues and reclassifications $ 3,880,000

Expenses
Educational and general
Instruction 2,100,000
Research 100,000
Student services 120,000
Operation and maintenance
of plant 180,000
Student aid 200,000
Auxiliary operations 480,000
Total operating expenses 3,180,000

Net increase in unrestricted net assets 700,000

Changes in temporarily restricted net assets:

Private grants and gifts 300,000
Endowment income 70,000
Net assets released from restrictions* (300,000)
Increase in temporarily restricted net assets 70,000

Change in net assets 770,000

Net assets, beginning 0
Net assets, ending $770,000

*assumes all scholarships and research were from temporarily restricted funds

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 Chapter 22 22-11

Solution P22-5

Community Society
Statement of Activities
For the Year Ended December 31, 2011

Changes in Unrestricted Net Assets

Revenues and gains

Contributions $3,000,000
Membership dues 400,000
Investment income 83,000
Total revenue and gains 3,483,000
Net assets released from restrictions:
For research $ 500,000
For fixed assets 3,789,000 4,289,000
Total unrestricted revenues, gains and other support 7,772,000

Expenses:
Program Services:
Research 2,300,000
Education 300,000
Total Program Services 2,600,000
Supporting Services:
Management and general 117,000
Fund raising 223,000
Total Supporting Services 340,000
Total expenses 2,940,000
Increase in unrestricted net assets 4,832,000

Changes in Temporarily Restricted Net Assets

Contributions ($438,000 + $425,000 - $16,000) 847,000

Investment income 22,500
Gain on sale of investments 5,000
Net assets released from restrictions (4,289,000)
Decrease in temporarily restricted net assets (3,414,500)

Changes in Permanently Restricted Net Assets

Contributions 37,000
Increase in permanently restricted net assets 37,000

Increase in net assets 1,454,500

Net assets, beginning 5,475,000
Net assets, ending $6,929,500

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22-12 Accounting for Not-for-Profit Organizations

Solution P22-6
1 Tuition and fees receivable 6,000,000
Unrestricted Revenues — tuition and fees 6,000,000
To record tuition revenues.

Expenses—unrestricted—student aid 200,000

Expenses—educational and general—institutional support 100,000
Tuition and fees receivable 200,000
Allowance for uncollectible accounts 100,000
To record scholarships and estimated bad debts.

Cash 4,800,000
Tuition and fees receivable 4,800,000
To record collections of receivables.

2 Cash 800,000
Revenues — sales and services of auxiliary enterprises 800,000
To record sales of bookstore.

3 Expenses — educational and general 2,430,000

Expenses — auxiliary enterprises 170,000
Cash 2,600,000
To record payroll.

4 Mortgage payable 1,000,000

Cash 1,000,000
To record mortgage payment.

5 Mortgage payable 360,000

Interest expense 600,000
Cash 960,000
To record debt service payment.

6 Cash 440,000
Temporarily restricted revenues— contributions 440,000
To record restricted gift.

7 Expenses—educational and general — instruction 237,000

Cash 237,000
To record expenditures for program.

Temporarily restricted net assets— reclassifications out 237,000

Unrestricted net assets—reclassifications in 237,000
To reclassify revenues equal to qualifying expenditures.

8 Temporarily restricted net assets— reclassifications out 44,000

Unrestricted net assets—reclassifications in 44,000
To reclassify revenues equal to qualifying expenditures.

Equipment 44,000
Cash 44,000
To record equipment purchased.
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Chapter 22 22-13

Solution P22-7

1 Expenses 20,000
Cash 20,000
To record use of restricted cash for expenses.

1 Temporarily restricted net assets — reclassifications out 20,000

Unrestricted net assets — reclassifications in 20,000
To record satisfaction of time restriction.

2 Contributions receivable 65,000

Cash 35,000
Allowance for uncollectible contributions 3,250
Unrestricted support — contributions* 96,750
To record contributions.

* To the extent that pledges are not collected by year end a time restriction will be implied. An adjusting
entry reducing unrestricted support and recording temporarily restricted support for the net realizable
value of the uncollected pledges will be required.

3 Inventory of materials 150,000

Unrestricted support — donated materials 150,000
To record donations of food.

Expenses — Program services 151,200

Inventory of materials 151,200
To record expenses for food used.

4 Inventory of supplies 27,000

Cash 27,000
To record purchases of supplies.

Expenses — management and general 10,000

Expenses — Program services* 100,000
Inventory of supplies 22,000
Cash 88,000
To record expenses incurred.
* ($8,000 + 70,000 + [27,000 – 5,000 account increase])

5 Contributions receivable 300,000

Allowance for uncollectible contributions 15,000
Temporarily restricted support — contributions 285,000
To record restricted pledges.

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22-14 Accounting for Not-for-Profit Organizations

Solution P22-8

1 Patient accounts receivable 102,300

Patient service revenues—unrestricted 102,300
To record patient service charges at established rates.

Contractual adjustments 30,000

Patient accounts receivable 30,000
To record contractual adjustments.

Bad debt expense 2,046

Allowance for uncollectible patient accounts receivable 2,046
To establish an allowance for uncollectible receivables.

2 Cash 54,000
Premium revenue — unrestricted 54,000
To record premium revenue from capitation agreements

3 Cash 16,000
Other operating revenue - unrestricted 16,000
To record pharmacy revenue.

4 Nursing services expense 35,000

Other professional services expense 11,000
General services expense 10,000
Fiscal services expense 2,000
Administrative services expense 20,000
Cash 78,000
To record salaries and wages.

5 Cash 12,000
Grant revenue - restricted 12,000
To record receipt of restricted grant funds.

6 Supplies inventory 13,000

Cash (or accounts payable) 13,000
To record the purchase of nursing supplies.

Nursing services expense 6,700

Supplies inventory 6,700
To record the use of nursing supplies.

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