Reference no: EM13343224

Problem 1

Should exchange transactions be accounted for differently than contributions? In December 2 01 4, the Consumer Association of America (CAA), a not-for-pro?t research organization, received notification of a $6 million grant from the Sporting Goods Manufacturers Association (SGMA) to develop a football helmet that will provide better protection against head injuries. The grant was intended to cover $4million of direct costs and $2 million of indirect (overhead) costs. The grant contract stipulated that the SGMA would make its payment to the CAA upon receiving invoices from CAA for the actual direct costs incurred. It further required that the research results be reported only to the SGMA and not be made publicly available. Each reimbursement payment for direct costs incurred would also include an appropriate proportion of indirect costs (i.e., an additional $0.50 for each $1 of direct costs). In 2015 the CAA carried out and completed the research for which it contracted. Direct costs were, as estimated, $4 million. It submitted the necessary invoices and received payment in full.

1. Prepare required journal entries for 2014 and 2015. Be sure to indicate whether each entry should be made to an unrestricted or temporarily restricted fund. You need not, however, record the indirect costs themselves (in as much as, by their very nature, they are not tied directly to the grant).

2. Assume instead that in December 2014, the CAA received a pledge of $6 million from the National Sports Association (NSA). The donation is for research relating to football helmets. The NSA is a not-for-pro?t agency, and the results of any research will be in the public domain. In January 2015, the CAA received the contribution. Throughout the remainder of 2015, it carried out its football-related research (incurring $4 million of direct costs). Prepare the required journal entries for 201 4 and 2015, and indicate whether each entry should be made to an unrestricted or a temporarily restricted fund.

3. Comment on any differences between the two awards that might justify differences in revenue recognition.

4. Suppose instead that the NSA promised to make its contribution only upon receiving a report that the research had actually been completed. Would your approach be different? Explain.

Problem 2

Contributions of?xed assets may affect more than one type of fund. Discovery Barn, a not-for-profit science center for children, received a contribution of $3 0,000 explicitly designated for the acquisition of computers. During the year, it acquired $21,000 of computers, which it estimated would have a useful life of three years. It is the policy of the organization to charge an entire year's depreciation in the year of acquisition. Prepare all required journal entries, being certain to indicate the type of fund in which each entry would be made.

Problem 3

For purposes of external reporting, not-for-profits (unlike governments in their governmental fund statements) do not distinguish between plant and other types of resources. In 201 3 , the Northwest Ballet Association (NBA), a not-for-profit performing arts organization, undertook a major capital campaign to fund a new theater, expected to cost $10 million. It was quickly able to raise $6 million, all of which was donor-restricted. It borrowed the balance, issuing a five-year, 8%, term note for $4million. During the year, the NBA broke ground on the project and incurred construction costs of $3.4million. It earned $0.52 million in interest on temporary investments. It incurred and paid $0.32 million in interest on the note. In addition, as required by the note, it placed $0.7 million in a reserve fund (a specially dedicated bank account) for the repayment of the debt.

1. To show how these transactions would be re?ected on the NBA's financial statements, prepare a December 31, 2013, statement of financial position and statement of activities.

Assume that these were the only transactions in which the organization engaged, and that all available cash, except that in the reserve fund, had been invested in short-term marketable securities. Be sure to properly classify all resources as either temporarily restricted or unrestricted.

2. Comment briefiy on whether the contributions from donors and the proceeds from the bonds should be reported as restricted or unrestricted.

3. Comment briefiy on whether the $0.7 million in the reserve fund should be reported as restricted or as unrestricted.

Problem 4

Investment losses need not impair the principal of not-for-pro?ts' endowment funds. In 2014, the Rubin Center for the Arts received a $2 million endowment, the income of which was to be used to support local artists. The center invested the proceeds in securities. In 2014, owing to interest, dividends, and changes in market prices, the value of the endowment increased by $120,000. Of this amount, the center spent $80,000 on programs that were consistent with the endowment's restrictions. In 2015, owing to a market downturn, the portfolio incurred net losses of $60,000.

In 2016, it had net gains of $70,000. In neither 2015 nor 2016 did the center use any endowment resources to support its programs. In the absence of donor speci?cations and applicable statutes, what would be the balances, at the end of 2014, 2015, and 2016, in the center's (1) permanently restricted endowment fund and (2) related temporarily restricted fund? Also indicate any impact on unrestricted funds.

Problem 5

Investment losses cannot be accounted for as the mirror image of investment gains. On December 31, 2013, the Child Crisis Center establishes an endowment fund with a $5 million gift of securities. Income from the endowment is to be used exclusively to support a nutrition program. Expendable income is de?ned in the indenture agreement so as to include all investment gains, both realized and unrealized. Investment gains and losses are to be accounted for as recommended by the FASB. During 201 4, the endowment earns $1 00,000 in interest and dividends and spends the entire amount on the nutrition program. The value of its securities portfolio increases by $500,000, from $5 million to $5.5 million. During 2015, the endowment again earns $100,000 in interest and dividends and spends the entire amount on the nutrition program. This year, however, the value of its securities portfolio decreases by $800,000, from $5.5 million to $4.7 million. During 2016, the endowment continues to earn and spend $100,000 in interest and dividends. This year the portfolio recovers $400,000 of its investment losses and at year-end is worth $5.1 million. At the start of 2014, the center had a cash balance of $600,000 in an unrestricted fund. Over the three-year period, this balance was unaffected by transactions other than those just described.

1. Prepare a schedule for each of the three years (2014-2016) in which you summarize the transactions as they affect permanently restricted, temporarily restricted, and unrestricted net assets.

2. At the beginning of 2015, the year of the loss, the total value of the security portfolio was $5.5 million. Ofthis amount, the initial $5 million was classi?ed as permanently restricted, and the balance as temporarily restricted. Assuming that you adhered to the FASB pronouncement, how much of the loss did you assign to the permanently restricted assets, and how much to the temporarily restricted assets? How can you justify this division of the loss?

Problem 6

University loan funds can readily be accounted for within the general framework applicable to not-for-profit organizations. Bronxville College, a not-for-profit institution, maintains a loan fund of approximately $1 million (including receivables). The funds are invested in stocks and bonds, and all investment income must be added to the balance in the fund. The fund, however, is unrestricted, in as much as it was established by the college itself, not by donors. Prepare journal entries to record the following events and transactions that took place during the year.

1. The college directed an additional $75,000 of donor contributions to the loan fund.

2. The fund made new student loans of$200,000. It estimated that approximately 10% would be uncollectible.

3. It earned interest and dividends of $6,000. In addition, the market value of its investments increased by $3,000.

4. It collected $140,000 in loan repayments, plus an additional $40,000 in interest.

5. It wrote off $20,000 of loans as uncollectible.

Problem 7

Is there a sound reason for accounting for contributions to a not-for-pro?t university differently from those to a government university? In January, 2013 Kirkland University receives a pledge of $200,000, to be used exclusively tosupport research in a specialized area of communication disorders. The university's fiscal year ends on July 31. In December 2013 (the following fiscal year), Kirkland receives the pledged contribution of $200,000 and spends $1 50,000 on qualifying research.

1. Prepare all required journal entries to reflect the transactions described. Indicate the type of fund in which the entries should be made.

a. Assume first that Kirkland is a private not-for-profit university.

b. Assume instead that Kirkland is a public university and that it elects to report as a special-purpose government that is engaged in only business-type activities.

2. On what grounds, if any, can you justify different accounting principles for the same transaction depending on the type of institution (public or private) or the assumption as to type of public institution?