CHAPTER 19 NOT-FOR-PROFIT ENTITIES ANSWERS TO QUESTIONS Q19-1 Initially, tuition scholarships are included in revenue for the period

in order to measure fully the revenue obtainable. If the university requires an employment-type work for the tuition scholarship, then they are also shown as an expenditure. However, if no employment-type work is required of the recipient, then the university also records the tuition scholarship as a revenue-reduction item. Q19-2 In the statement of financial position for private colleges, the net assets are designated as (1) unrestricted, (2) temporarily restricted, or (3) permanently restricted. Permanently restricted assets result from contributions that the donors have specified must be retained into perpetuity. Earnings from the principal are then used in accordance with the wishes of the donor. Temporarily restricted assets are those which the donor has contributed for specific use or which have been contributed for use in a future period. All other assets are classified as unrestricted. Q19-3 The accounting and reporting for public universities is specified by the GASB, and GASB 35 provides specific guidance that public universities should be accounted for as special-purpose governments in accordance with GASB 34. Private universities have their accounting and financial reporting specified by the FASB. FASB 117 provides the format and requirements for financial reporting for private universities. Q19-4 The accrual basis of accounting is used in a hospital's general and restricted funds. Donor restricted contributions are held in the restricted fund until the conditions are met and then are transferred to the general fund. Q19-5 Donated services are included as a revenue and a corresponding expense at their fair value if the services are significant and would otherwise be performed by salaried personnel. The criteria for recognition require that the services either (a) create or enhance the nonfinancial assets of the hospital or (b) the services provided require specialized skills, are provided by individuals possessing those skills, and would need to be purchased if not provided by donation. Donated equipment is accounted for as a contribution in a temporarily restricted fund until placed into service, at which time it is transferred to the general fund. Donated medical supplies are recorded as revenue and charged to expenditures as used.

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Q19-6 The $15,000 is accounted for as a contribution to a specific purpose restricted fund. When the $15,000 is expended by the general fund, the specific purpose restricted fund transfers the resources to the general fund to reimburse the general fund or pay for the intensive care operating expenditures. The expenditure is reported as an expense of the general fund and the reimbursement from the restricted fund is reported as net assets released from the restricted fund. Q19-7 Net patient service revenue of a hospital contractual adjustments from total billings for services provided. Charity care is excluded. is computed by deducting inpatient and outpatient

Q19-8 The general fund records a gain on the sale of hospital properties. The gain is reported in the hospital's statement of activities. Q19-9 Depreciation is recorded on an accrual basis by hospitals. It must be accounted for because depreciable assets constitute a significant part of the total cost of providing medical services. Q19-10 The accrual basis of accounting is used for the unrestricted current fund of a VHWO. The accrual basis of accounting is also used for all other funds, including the restricted current fund, the land, building, and equipment fund (plant fund), and the endowment fund. Q19-11 If separate funds are maintained, fixed assets are recorded in the land, building, and equipment fund (plant fund) in a VHWO. If separate funds are not maintained, fixed assets would be recorded in the unrestricted fund along with all other assets. Q19-12 The $10,000 contribution is accounted for as contribution revenue in a temporarily restricted (specific purpose) fund when it is received. The expenditure of the $10,000 for public health education service is accounted for as a program services expense of the unrestricted fund and as a net asset released from the temporarily restricted fund. Q19-13 Pledges from donors that are unconditional promises to give are recognized as contribution revenue in the period in which the pledge is received. Although the total amount of the pledge is recorded as a contribution receivable, an adequate allowance for uncollectibles must be recognized. The estimated amount that actually will be collected is recognized as contribution revenue. Pledges applicable to future periods or restricted in use by the donor should be recorded in the temporarily restricted or permanently restricted fund, as appropriate. Q19-14 It would not be appropriate to report funds whose use is restricted as revenue in the unrestricted fund prior to the time the restriction was met. Contributions that must be permanently retained are included as contribution revenue in the permanently restricted fund. Those received with restriction as to use or that be used in a future time period are recorded as contribution revenue in the temporarily restricted fund(s).

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Q19-15 Many VHWOs are heavily dependent upon donated services. However, such services typically are not recorded and included for financial reporting purposes. For example, neighborhood solicitations are an integral part of the fund raising activities of many charitable organizations but no accounting recognition is given for these efforts. To be recognized, donated services must (a) create or enhance nonfinancial assets or (b) require specialized skills, be provided by individuals possessing those skills, and typically be purchased if not provided by donation. If these conditions are satisfied, the value of the donated services received should be reported as part of revenue and public support and the cost of the services recognized as an expense item of the period. Q19-16 The statement of functional expenses details the items reported in the expense section of the statement of activities. The individual expense categories generally are assigned to each major programmatic activity and to general management and fund raising efforts. As a result, much greater insight can be gained into the way in which funds are spent. Voluntary health and welfare organizations are required to prepare a statement of functional expenses. Q19-17 The contribution of $12,000 is accounted for as a contribution of a temporarily restricted net asset at the time of receipt. When the expenditure of $12,000 is made for a community service activity, the amount used is recognized as funds released from program use restrictions in the statement of activities. Q19-18 All organizations subject to FASB jurisdiction must meet the qualifications for recognition of contributed services set forth in FASB 116. Thus, most hospitals and ONPO will be expected to account for donated services in the same manner. Both hospitals and ONPOs must demonstrate that the services received either (a) created or enhanced nonfinancial assets or (b) required specialized skills, were provided by individuals possessing those skills, and would have been purchased if the services had not been contributed. ONPOs also have been required to demonstrate that the services of the ONPO were not principally intended for the benefit of the organization's members in the past. As a result, ONPOs seldom have recorded donated services. If donated services are recognized, an ONPO records them as public support; hospitals recognize donated services as revenue. Q19-19 The market value unit method of accounting for investments may be used for pooled investments. Under this method, a fund is assigned a number of units based on the fund's contribution to the pool and the total market value of all investments in the pool at the time of the contribution. Income distributions are allocated to the various funds by dividing the total income by the number of units in the pool. Q19-20 As an ONPO, a Rotary Club should record depreciation expense because the omission of depreciation would result in an understatement of the costs of providing the organization's services.

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Q19-21 The statement of activities for both an ONPO and VHWO reports the support, revenue, expenses, net assets released from restriction, and changes in net assets during the fiscal period. The particular items reported and the size of the various revenue and expense categories may vary rather substantially between such entities, however, due to differences in the overall missions and types of activities the organizations are involved in on a routine basis. Q19-22 Temporarily restricted contributions of ONPOs would include funds for specific programs such as sponsoring a child to summer camp, purchasing reading materials for vacation church school, or acquiring manuscripts for a research library. Permanently restricted funds require the creation of an endowment with the principal to be held intact. Examples would be the creation of an endowment with the earnings to be used to help underwrite the cost of bringing in one or more large symphonies each year to perform at a local concert hall, to provide for landscaping and lawn service at a local cemetery, or to assist in recruiting and training new girl scout leaders.

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SOLUTIONS TO CASES C19-1 Accounting for Donations

a. Donated services are a vital element of many not-for-profit entities, including hospitals, voluntary health and welfare organizations and other notfor-profit organizations. The criteria established in FASB 116 for recognition of donated services require: 1. 2. The services performed create or enhance nonfinancial assets or, The services (a) require specialized skills, (b) are provided by individuals possessing those skills, and (c) the services would be purchased if not donated.

In general, donated services are not recognized unless they represent an important contribution to the operations of the organization. For example, in the hospital setting, a volunteer who staffs a nursing station on a regular shift but accepts no compensation clearly provides services which meet the criteria for recognition. The hospital would need to hire another nurse if these services were not volunteered. Moreover, the hospital has the ability to supervise and directly control the activities of the volunteer in the same manner as a paid employee. On the other hand, a group of high school youth who visit patients and attempt to make their stay in the hospital more pleasant would not qualify for recognition. If the services were not provided it is unlikely the hospital would use its resources to hire staff to perform this function. Voluntary health and welfare organizations often receive donated services for concentrated fund-raising efforts and for supplementary programs. Because of the difficulty in determining the value of these services and the absence of controls over the persons providing the services, VHWOs normally do not account for donated services unless the first three criteria are met. Even when these are met, it may be appropriate to recognize the donated services only if the amount of time donated is significant and represents an integral part of the activities provided by the organization. Other not-for-profit organizations often rely heavily on donated services as well. However, many of these are for the benefit of other members rather than for some general public purpose and there has been reluctance to recognize donated services in the financial statements. In many cases the services are not under the direct control of the organization and are very difficult to value. b. Donations of capital assets are recorded as a contribution in a restricted fund and carried in the fund until the asset is placed into service, at which time it is transferred to the general fund. The donation is recorded at its fair value. Once the asset is placed in service, depreciation is recorded for the use of the asset in order to measure fully the cost of providing the hospital's services.

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C19-1

(continued)

c. As in all not-for-profit organizations, the accounting for cash contributions to a hospital depends on whether or not the donor places a restriction on the use of the cash. If the gift is unrestricted, it is accounted for as a contribution revenue in the general fund. If the gift is restricted, it is recorded as a contribution of temporarily restricted or permanently restricted net assets. In the period in which the restriction is met, the appropriate amount is reported in the general fund as released from use or passage of time restriction. Cash contributions to a voluntary health and welfare organization or an other not-for-profit organization are accounted for as public support in the period the contribution is received as an addition to unrestricted or restricted net assets. If the contribution is restricted by its donor, the gift is treated as a contribution of a temporarily restricted or permanently restricted net asset at the time of receipt and then reported as released from restriction in the period in which the restriction is met.

C19-2

Public Support to an Other Not-for-Profit Organization

a. The $25,000 of unrestricted contributions should be accounted for as public support revenue in the statement of activities for the current period. b. The $15,000 of restricted contributions should be accounted for as a temporarily restricted asset in the restricted fund if one is used, or in the general fund if a separate restricted fund is not maintained. The $15,000 should be recorded as a contribution in the period of receipt. The expenditure of $6,000 for public health advertisements triggers recognition of $6,000 as funds released from a use restriction with both the expenditure and release of funds included in the statement of activities for the period. If a separate temporarily restricted fund is maintained and the $6,000 expenditure is made from the unrestricted operating fund, the restricted fund would then reimburse the unrestricted fund for its expenditures. It does not matter that unrestricted assets were used for the actual expenditure. The remaining $9,000 of restricted resources should be reported as a part of its temporarily restricted net assets on the ONPO's balance sheet.

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SOLUTIONS TO EXERCISES E19-1 1. 2. 3. 4. 5. 6. a c a c $7,500,000 assets - $4,500,000 liabilities d $550,000 unrestricted + $330,000 of restricted b $200,000 for fair value of donated services Multiple-Choice Questions on Colleges and Universities [AICPA Adapted]

E19-2 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. a c d a d a d c d a b d

Multiple-Choice Questions on Hospital Accounting [AICPA Adapted] Net patient service revenue represents total billings less contractual adjustments.

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E19-3 a.

Entries for a Hospitals Unrestricted (General) Fund

Journal entries for the general fund. 1. 2. Accounts Receivable Patient Services Revenue Nursing Services Expense Other Professional Services Fiscal Services Expense General Services Expense Bad Debts Expense Administration Expense Depreciation Expense Cash Allowance for Uncollectibles Accumulated Depreciation Accounts Payable Inventory Donated Services Contractual Adjustments Accounts Receivable Cash Net Assets Released from Program Use Restrictions 5. Cash Net Assets Released from Equipment Acquisition Restriction 6. 7. Cash Contributions - Unrestricted Cash Allowance for Uncollectibles Accounts Receivable Other than Trading Securities Unrealized Holding Gain on Other than Trading Securities 5,905,000 75,000 5,980,000 70,000 70,000 155,000 155,000 200,000 200,000 6,200,000 6,200,000 2,070,000 1,250,000 225,000 1,510,000 125,000 260,000 500,000 4,785,000 125,000 500,000 210,000 240,000 80,000 220,000 220,000 180,000 180,000

3. 4.

8.

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E19-3

(continued) b.Sycamore Hospital Statement of Operations For the Year Ended December 31, 20X6

Revenues, gains, and other support: Net patient services revenue Contributions Net assets released from program use restriction Total revenues, gains, and other support Expenses and losses: Nursing services Other professional services Fiscal services General services Bad debts Administration Depreciation Total operating expenses Operating income Other income Excess of revenues over expenses Change in net unrealized gains in other than trading securities Net assets released from restrictions used for purchase of equipment Increase in unrestricted net assets $2,070,000 1,250,000 225,000 1,510,000 125,000 260,000 500,000

$5,980,000 155,000 180,000 $6,315,000

5,940,000 $ 375,000 -0$ 375,000 70,000 200,000 $ 645,000

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E19-4 1.

Entries for Other Hospital Funds 270,000 150,000 120,000

Endowment Fund Cash Contributions - Permanent Endowments Contributions - Term Endowments Plant Replacement and Expansion Fund Pledges Receivable Allowance for Uncollectibles Contributions - Plant Replacement and Expansion Specific-Purpose Fund Cash Contributions - Research Contributions - Education Endowment Fund Cash Investment Income - Permanent Endowment Plant Replacement and Expansion Fund Cash Investment Income Specific-Purpose Fund Cash Investment Income - Research

2.

1,500,000 150,000 1,350,000

3.

80,000 50,000 30,000

4.

110,000 110,000 45,000 45,000 31,000 31,000

5.

Specific-Purpose Fund Net Assets Released from Program Use Restriction - Research Net Assets Released from Program Use Restriction - Education Cash Due to General Fund Endowment Fund Investments Cash Plant Replacement and Expansion Fund Investments Cash Specific-Purpose Fund Investments Cash

55,000 32,000 70,000 17,000 270,000 270,000 160,000 160,000 75,000 75,000
McGraw-Hill/ Irwin The McGraw-Hill Companies, Inc., 2002

6.

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E19-5 1. 2. c b

Multiple-Choice Questions on Voluntary Health and Welfare Organization Accounting [AICPA Adapted]

$800,000 x .50 = $400,000 x .10 =

$400,000 $(40,000) $360,000

3. 4. 5. 6. 7. 8. 9.

d c b d c a c $275,000 = $240,000 + $35,000

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E19-6 a. 1.

Entries for Voluntary Health and Welfare Organizations

Journal entries. Pledges Receivable Allowance for Uncollectible Pledges Contributions - Unrestricted Contributions - Temporarily Restricted Grants Receivable Contributions - Temporarily Restricted Cash__Unrestricted Pledges Receivable Allowance for Uncollectible Pledges Pledges Receivable Contributions - Unrestricted $520,000 pledges collected 506,000 recorded as contributions $ 14,000 Adjustment to contributions 700,000 56,000 506,000 138,000 150,000 150,000 520,000 520,000 44,000 30,000 14,000

2.

3.

4.

Land, Buildings, and Equipment Cash - Unrestricted Mortgage Payable Cash - Unrestricted Cash - Unrestricted Cash - Temporarily Restricted Investment Income - Unrestricted Investment Income - Temporarily Restricted Cash - Permanently Restricted Endowment Investments Gain on Sale of Investment

15,000 15,000 3,000 3,000 27,200 5,400 27,200 5,400 6,000 5,000 1,000 12,000 7,000 10,000 15,000 9,000 53,000

5.

6.

7.

Community Services Expense Public Health Education Expense Research Expense Fund Raising Expense General and Administrative Expense Accumulated Depreciation

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E19-6 8.

(continued) 250,600 100,000 81,000 39,000 61,000 531,600 2,400 2,400

Community Services Expense Public Health Education Expense Research Expense Fund Raising Expense General and Administrative Expense Cash - Unrestricted Fund Raising Expense Donated Services

9.

b. Midwest Heart Association Statement of Activities For the Year Ended December 31, 20X2 Unrestricted Revenues, gains, and other support: Contributions, net of estimated uncollectible pledges Grants Investment income Gain on investments Donated services Total revenues, gains and other support Program services and support: Program services: Community services Public health education Research Total program services Supporting services: General and administrative Fund-raising Total supporting services Total expenses Temporarily Restricted Permanently Restricted Total

$520,000 27,200 2,400 $549,600

$138,000 150,000 5,400 $ $293,400 $ 1,000 1,000

$658,000 150,000 32,600 1,000 2,400 $844,000

$262,600 107,000 91,000 $460,600 $ 70,000 54,000 $124,000 $584,600

$262,600 107,000 91,000 $460,600 70,000 54,000 $124,000 $584,600 $259,400 587,000 $846,400

-0-

$ $

-0-

Change in net assets $(35,000) Net assets at beginning of year 281,000 Net assets at end of year $246,000

$293,400 87,000 $380,400

1,000 219,000 $220,000

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E19-7 a. 1. 2.

Determination of Contribution Revenue

Journal entries Property, Plant and Equipment Contributions - Property, Plant and Equipment Pledges Receivable - Unrestricted Pledges Receivable - Restricted for Passage of Time Pledges Receivable - Restricted for Program Use Pledges Receivable - Restricted for Construction Contributions - Unrestricted Contributions - Restricted for Passage of Time Contributions - Restricted for Program Use Contributions - Restricted for Construction $ 50,000 present value of initial payment 260,318 present value of 7 payments of $50,000 each discounted at 8 percent $310,318 present value of construction pledge Cash - Restricted for Construction Pledges Receivable - Restricted for Construction 42,000 42,000 120,000 70,000 90,000 310,318 120,000 70,000 90,000 310,318

50,000 50,000 45,000 45,000 38,000 38,000 38,000 38,000 20,825 20,825 50,000 50,000

3.

Vision Testing Expense Cash - Unrestricted Cash - Unrestricted Reclassification from Temporarily Restricted Contributions to Unrestricted Reclassification of Temporarily Restricted Contributions from Temporarily Restricted Cash - Restricted for Program Use

b.

Pledges Receivable - Restricted for Construction Contributions - Restricted for Construction $20,825 = $260,318 x .08 Cash - Restricted for Construction Pledges Receivable - Restricted for Construction

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E19-8 1. 2. 3. 4. 5. 6. 7. 8. a a b d c d c d

Multiple-Choice Questions on Other Nonprofit Organizations [AICPA Adapted]

Note: Gains on endowment investments are considered principal unless otherwise stated.

Note: Annual report has program and service intent.

Note: Board designations are internal; therefore, not restricted. $830,000 = $680,000 + $90,000 + $60,000 Note: Nonexpendable gifts for loan purposes are classified as temporarily restricted ($30,000) and permanently restricted ($25,000). Note: All other expenses are for supporting services.

9. 10.

a c

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E19-9

Statement of Activities for an Other Nonprofit Organization Pleasant School Statement of Activities Year Ended June 30, 20X2 Operating Funds Unrestricted Support and revenue: Tuition and fees Contributions Auxiliary activities Investments income Other revenue Net assets released from restriction: Temporarily restricted net assets Permanently restricted assets Total support and revenue Expenses: Program services: Instruction Auxiliary activities Supporting services: Administration Fund raising Total program and support services expenses Increase in net assets Fund balance, July 1, 20X1 Fund balance, June 30, 20X2 $1,200,000 165,000 40,000 32,000 38,000 130,000 12,000 $1,617,000

$1,050,000 37,000 250,000 28,000 $1,365,000 $ $ 252,000 420,000 672,000

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SOLUTIONS TO PROBLEMS P19-10 a. Friendly College Statement of Financial Position June 30, 20X3 and 20X2 Item Cash Accounts receivable (student tuition and fees, less allowance for uncollectibles of $11,000 and $9,000, respectively) State appropriations receivable Investments Total assets Accounts payable Deferred revenue Net assets Unrestricted Temporarily restricted by donors Permanently restricted by donors Total liabilities and net assets b. Friendly College Statement of Activities For Year Ended June 30, 20X3 Unrestricted Revenues, gains, and other Support Tuition and fees $1,900,000 State appropriation 50,000 Interest income 6,000 Contributions 25,000 Gain on sale of investments Investment income Net assets released from temporary restriction* 13,000 Total revenue, gains, and other support $1,994,000 Expenditures and other deductions 1,793,000 Change in net assets $ 201,000 Net assets at beginning of year 515,000 Net assets at end of year $ 716,000 Temporarily Restricted Permanently Restricted Total $1,900,000 50,000 13,000 125,000 5,000 1,900 ___ ____ $ 20X3 824,900 $ 20X2 217,000 341,000 75,000 60,000 693,000 45,000 66,000 515,000 67,000 -0693,000 Financial Statements for a Private College

137,000 50,000 89,000 $1,100,900 $ 59,000 158,000

$ $

716,000 117,900 50,000 $1,100,900

7,000 50,000 5,000 1,900 (13,000)

$ 50,000

___

___

$ 50,900

$ 50,000

$2,094,900 1,793,000 301,900 582,000 $ 883,900 $

$ 50,900 67,000 $117,900

$ 50,000 $ 50,000

*Expenditures of temporarily restricted resources are reported as Net Assets. Released from Temporary Restriction and included in unrestricted expenditures. - 217 McGraw-Hill/ Irwin The McGraw-Hill Companies, Inc., 2002

P19-11

Balance Sheet for a Hospital Brookdale Hospital Balance Sheet December 31, 20X4

Current Assets Cash Contributions receivable Investments in marketable securities Interest receivable Accounts receivable Inventory Total current assets Long-term assets Buildings and equipment Less: Accumulated depreciation Net investment in buildings and equipment Land Investment in marketable securities Total long-term assets Total assets Liabilities Accounts payable Mortgage payable Total liabilities Net assets Unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets

$100,000 100,000 200,000 15,000 55,000 35,000 $ $750,000 (325,000) $425,000 95,000 300,000 820,000 $1,325,000 $ 40,000 320,000 $ $555,000 80,000 330,000 965,000 $1,325,000 360,000 505,000

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P19-12 a.

Entries and Statement of Activities for an Other Nonprofit Organization [AICPA Adapted] Community Sports Club Transactions For the Year Ended March 31, 20X3

1. 2.

Cash Revenue - Annual Dues Cash Revenue - Snack Bar and Soda Fountain

20,000 20,000 28,000 28,000 6,000 Investment Income 6,000 17,000 26,000 11,000 54,000 55,000 55,000 10,000 10,000 5,000 Support - Bequest (unrestricted) 5,000

3. 4.

Cash Expense - House Expense - Snack Bar and Soda Fountain Expense - General and Administrative Accounts Payable Accounts Payable Cash Assessments Receivable Deferred Capital Support Cash

5. 6. 7.

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P19-12

(continued) Adjustments March 31, 20X3

1.

Investments Unrealized Gain on Investment Note: ONPOs may value investments at full market values Depreciation Expense - House Depreciation Expense - Snack Bar and Fountain Depreciation Expense - General and Administrative Accumulated Depreciation - Building Accumulated Depreciation - Furniture and Equipment Expense - Snack Bar and Soda Fountain Inventories

7,000 7,000

2&3.

9,000 2,000 1,000 4,000 8,000 4,000 4,000

4.

b.

Community Sports Club Statement of Activities For the Year Ended March 31, 20X3 Revenues, gains and other support Snack bar and soda fountain sales Dues Investment income Bequest Total revenue, gains and other support Expenses Snack bar and soda fountain House General and administrative Total expenses Change in net assets before unrealized gain on investments Unrealized gain on investments Change in net assets Net assets on April 1, 20X2 Net assets on March 31, 20X3 $32,000 26,000 12,000 70,000 $(11,000) 7,000 $ (4,000) 12,000 $ 8,000 $ 28,000 20,000 6,000 5,000 $ 59,000

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P19-13

Balance Sheet and Entries for a Hospital [AICPA Adapted]

a. Restated balance sheet: Grace Hospital Adjusted Balance Sheet December 31, 20X1 Current Assets Cash Accounts receivable Less: Allowance for uncollectible accounts Inventory of supplies Total current assets Investments Plant assets Land Buildings Less: Accumulated depreciation Equipment Less: Accumulated depreciation Total assets Current liabilities Accounts payable Accrued expenses Total current liabilities Long-term liabilities Mortgage bonds payable Total liabilities Net assets Unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets $ $ 37,000 (7,000) $ 79,800 30,000 14,000 123,800 331,200 400,000 $1,750,000 (430,000) $ 680,000 (134,000) 1,320,000 546,000 $2,721,000

16,000 6,000 $ $ 22,000 150,000 172,000

$2,158,000 125,000 266,000 2,549,000 $2,721,000

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P19-13 b.

(continued)

Journal entries for 20X2: 1. General Fund Accounts Receivable Patient Services Revenue General Fund Contractual Adjustments Accounts Receivable General Fund Mortgage Bond Payable Cash General Fund Cash Contributions - Unrestricted Net Assets Released from Endowment Fund Earnings Endowment Fund Cash Investment Income Net Assets Released from Endowment Fund Earnings Cash 5. General Fund Cash Accumulated Depreciation - Equipment Loss on Sale of Equipment Equipment Equipment Cash Cash Net Assets Released from Equipment Acquisition Restriction Plant Replacement and Expansion Fund Net Assets Released from Equipment Acquisition Restriction Cash 1,101,000 1,101,000

2.

15,000 15,000

3.

18,000 18,000

4.

56,500 50,000 6,500 6,500 6,500 6,500 6,500

500 21,600 1,900 24,000 26,000 26,000 26,000 26,000

26,000 26,000

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P19-13 6.

(continued) General Fund Administrative Service Expense Fiscal Service Expense General Service Expense Nursing Service Expense Other Professional Service Expense Inventory of Supplies Accrued Expenses Vouchers Payable General Fund Provision for Bad Debts Allowance for Uncollectible Accounts Cash Allowance for Uncollectible Accounts Accounts Receivable 120,000 95,000 225,000 520,000 165,000 60,000 6,000 1,191,000

7.

30,000 30,000 985,000 11,000 996,000

8.

General Fund Vouchers Payable Cash General Fund Nursing Service Expense Inventory of Supplies Plant Replacement and Expansion Fund Interest Receivable Investment Income General Fund Depreciation Expense Accumulated Depreciation - Buildings Accumulated Depreciation - Equipment General Fund Administrative Service Expense Interest Payable

825,000 825,000

9.

37,000 37,000

10.

800 800 117,000 44,000 73,000

11.

12.

6,100 6,100

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P19-14 a.

Entries and Statements for General Fund of a Hospital

Journal entries: 1. 2. 3. Accounts Receivable Patient Services Revenue Contractual Adjustments Accounts Receivable 6,160,000 6,160,000 330,000 330,000

Nursing Services 1,800,000 Other Professional Services 1,200,000 Fiscal Services 250,000 General Services 1,550,000 Bad Debts 120,000 Administration 280,000 Depreciation Expense 400,000 Cash Allowance for Uncollectibles Accumulated Depreciation Accounts Payable Accrued Expense Inventories Prepaid Expenses Nonoperating Gain - Donated Services Cash Due from Specific-Purpose Fund Net Assets Released from Program Use Restriction Inventories Prepaid Expenses Cash Cash Net Assets Released from Endowment Fund Earnings 75,000 25,000

4,580,000 120,000 400,000 170,000 35,000 195,000 30,000 70,000

4.

100,000 176,000 24,000 200,000 85,000 85,000 17,000 20,000 30,000 7,000 5,800,000 132,000 5,932,000 60,000 60,000

5.

6.

7.

Cash Accumulated Depreciation Property, Plant, and Equipment Gain on Sale of Equipment Cash Allowance for Uncollectibles Accounts Receivable Investments Cash

8.

9.

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P19-14 10.

(continued) Cash Investment Income from Board - Designated Investments 72,000 72,000 150,000 55,000 205,000 20,000 Deferred Revenue - Reimbursement 20,000 140,000 Net Assets Released from Fixed Asset Acquisition Restriction 140,000 63,000 Other Operating Revenue - Cafeteria and Gift Shop Sales 63,000

11.

Accounts Payable Accrued Expenses Cash Cash Cash

12. 13.

14.

Cash

b. Comparative balance sheets: Serene Hospital Balance Sheet - General Fund For Years Ended December 31, 20X2 and 20X1 20X2 Assets Cash Accounts receivable Less: Allowance for uncollectibles Due from specific-purpose fund Inventories Prepaid expenses Investments Property, plant, and equipment Less: Accumulated depreciation Total Liabilities and Fund Balance Accounts payable Accrued expenses Deferred revenue - reimbursements Bonds payable Unrestricted net assets Total $ 170,000 35,000 95,000 3,000,000 3,617,000 $6,917,000 $ 150,000 55,000 75,000 3,000,000 2,850,000 $6,130,000 $1,352,000 298,000 (38,000) 65,000 76,000 14,000 960,000 6,070,000 (1,880,000) $6,917,000 $ 125,000 400,000 (50,000) 40,000 95,000 20,000 900,000 6,100,000 (1,500,000) $6,130,000 20X1

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P19-14 c.

(continued)

Statement of operations for the unrestricted general fund: Serene Hospital Statement of Operations for the Unrestricted General Fund For the Year Ended December 31, 20X2 Unrestricted revenues, gains, and other support Net patient services revenue Gain on sale of equipment Cafeteria and gift shop sales Investment income Donated services Net assets released from: Program use restriction Endowment fund earnings Fixed asset acquisition restriction Total revenues, gains and other support Operating expenses: Nursing services Other professional services Fiscal services General services Bad debts Administration Depreciation Total expenses Excess of revenues over expenses

$5,830,000 $ 7,000 63,000 72,000 70,000 100,000 85,000 140,000

537,000 $6,367,000

$1,800,000 1,200,000 250,000 1,550,000 120,000 280,000 400,000 (5,600,000) $ 767,000

Statement of changes in net assets (not required) Serene Hospital Statement of Changes in Net Assets For the Year Ended December 31, 20X2 Operating Income Net Assets at Beginning of Year Net Assets at End of Year $ 767,000 2,850,000 $3,617,000

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McGraw-Hill/ Irwin The McGraw-Hill Companies, Inc., 2002

P19-14 d.

(continued)

Statement of cash flows for the general fund (indirect method):

Serene Hospital Statement of Cash Flows for the General Fund For the Year Ended December 31, 20X2 Cash flows from operating activities: Change in net assets Adjustments to reconcile changes in net assets to net cash provided by operating activities: Depreciation Gain on sale of property, plant, and equipment Decrease in net patient accounts receivable Increase in due from specific-purpose fund Decrease in inventories Decrease in prepaid expenses Net change in accounts payable and accrued expenses Increase in deferred revenue - reimbursements Net cash provided by operating activities and gains and losses Cash flows from investing activities: Sale of property, plant, and equipment Transfer in from restricted plant fund Purchase of investments Net cash provided by investing activities Cash flows from financing activities Net increase in cash Cash at beginning of year Cash at end of year $ 627,000 400,000 (7,000) 90,000 (25,000) 19,000 6,000 -020,000 $1,130,000 $ $ $ 17,000 140,000 (60,000) 97,000 -0-

$1,227,000 125,000 $1,352,000

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P19-14

(continued) Statement of cash flows for the general fund (direct method):*

Optional d.

Serene Hospital Statement of Cash Flows for the General Fund For the Year Ended December 31, 20X2 Cash flows from operating activities and gains and losses: Cash received from patients and third-party payors Cash paid to employees and suppliers Other receipts from operations Earnings on endowment Income on investments Net cash provided by operating activities and gains and losses Cash flows from investing activities: Sale of property, plant, and equipment Transfer in from restricted plant fund Purchase of investments Net cash provided by investing activities Cash flows from financing activities Net increase in cash Cash at beginning of year Cash at end of year $5,883,000 (4,985,000) 75,000 85,000 72,000 $1,130,000 $ $ $ 17,000 140,000 (60,000) 97,000 -0-

$1,227,000 125,000 $1,352,000

* If the direct method is used, a supplementary schedule is required to reconcile "revenue and gains in excess of expenses and losses to net cash provided by operating activities and gains and losses." This required supplementary schedule is similar to the cash flows from operating activities section under the indirect method of presenting cash flows as presented for part d above.

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P19-15

Statements for Current Funds of a Voluntary Health and Welfare Organization [AICPA Adapted] Community Association for Handicapped Children Statement of Activities Year Ended June 30, 20X4 Unrestricted Temporarily Restricted

Public support and revenue: Public support: Contributions (net of estimated uncollectible pledges of $2,000) Revenue: Membership dues Program service fees Investment income Net assets released from: Permanent endowment Temporary restriction Total support and revenue Expenses: Program services: Deaf children Blind children Total program services Supporting services: Management and general Fund raising Total supporting services Total expenses Change in net assets Fund balances, July 1, 20X3 Fund balances, June 30, 20X4

$298,000 25,000 30,000 10,000 20,000 5,000 $388,000

$ 15,000

(5,000) _______ $ 10,000

$120,000 150,000 $270,000 $ 49,000 9,000 $ 58,000 $328,000 $ 60,000 38,000 $ 98,000

$ $ $ $

_______ -0-0-0-0-0-

$ 10,000 3,000 $ 13,000

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McGraw-Hill/ Irwin The McGraw-Hill Companies, Inc., 2002

P19-15

(continued) Community Association for Handicapped Children Statement of Financial Position June 30, 20X4

Cash Investments (at cost, which approximates market value) Pledges receivable (less $3,000 allowance for uncollectibles) Interest receivable Assets whose use is restricted Total assets Accounts payable Deferred revenue Total liabilities Net assets: Unrestricted Temporarily restricted Total net assets Total liabilities and net assets

$ 40,000 100,000 9,000 1,000 13,000 $163,000 $ 50,000 2,000 $ 52,000 $98,000 13,000 111,000 $163,000

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P19-16

Workpaper for Transactions of a Voluntary Health and Welfare Organization Helping Hand Journal Entries For the Year Ended June 30, 20X7 Unrestricted Debit Credit Temporarily Restricted Debit Credit 330,000 400,000 280,000 280,000 180,000 85,000 47,000 30,000 18,000 141,000 44,000 52,000 69,000 12,000 318,000 141,000 141,000 141,000 141,000 40,000 40,000 6,000 4,000 2,000 3,000 15,000 275,000 275,000 125,000 90,000 35,000 330,000 Permanently Restricted Debit Credit 250,000 250,000

1. Pledges Receivable Contributions 2. Cash Pledges Receivable Contributions 3. Cash Special Events Support Legacies and Bequests Membership Dues Investment Income 4. Medical Services Program Community Information Fund Raising Costs General Administration Training Costs Vouchers Payable Cash Net Assets Released Net Assets Released Cash 5. Equipment Cash Medical Services Program Community Information Fund Raising Costs General Administration Accumulated Depreciation 6. Vouchers Payable Cash

400,000

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P19-17

Comparative Journal Entries for a Government Entity and a Voluntary Health and Welfare Organization [AICPA Adapted] Local Government Unit

1.

General Fund Expenditures - Purchase of Equipment Cash General Fund (or any other fund) Cash Revenue - Donations Permanent Trust Fund Cash Investments Fund Balance - Gain on Sale of Investments Capital Projects Fund Cash Other Financing Sources Bond Issue Proceeds Capital Projects Fund Construction Expenditures Cash

25,000 25,000 100,000 100,000 55,000 50,000 5,000 1,000,000 1,000,000 1,000,000 1,000,000

2.

3.

4.

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P19-17

(continued) Voluntary Health and Welfare Organization

1.

Unrestricted Fund Equipment Cash Cash Net Assets Released from Fixed Asset Acquisition Restriction Temporarily Restricted Fund - Plant and Equipment Net Assets Released from Fixed Asset Acquisition Restriction Cash

25,000 25,000 25,000 25,000

25,000 25,000

2.

Unrestricted Fund Cash Contributions - Unrestricted Permanently Restricted Fund - Endowments Cash Investments - Common Stocks Gain on Sale of Investments Unrestricted Fund Cash Bonds Payable Buildings Cash

100,000 100,000

3.

55,000 50,000 5,000

4.

1,000,000 1,000,000 1,000,000 1,000,000

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P19-18 1. E 2. A

Effects of Transactions on a Hospitals Financial Statements [AICPA Adapted] The designation of intent is not a transaction. When the actual purchase is made, the transaction will be recorded. After the investment is actually made, the income from resources under the control of the governing board is recorded as an unrestricted revenue. Resources contributed for capital expansion serve a specific purpose for which the resources should be used. This contribution is accounted for in a temporarily restricted fund, and reported as an increase in temporarily restricted net assets. The use of temporarily restricted resources in accordance with the donors specification results in a reclassification (transfer) of the resources from temporarily restricted to unrestricted. The following entries would be made in the case of the hospital maintaining a separate Plant Fund: Plant Fund: Net Assets Released - Plant Acquisition Cash Unrestricted Fund: Cash Net Assets Released from Capital Acquisition Restriction Property, Plant, and Equipment Cash XXXX XXXX XXXX XXXX XXXX XXXX

3. C

4. A

5. A

Donated services to a hospital are accounted for in accordance with FASB 116 under which donated services are recognized if the services (a) create or enhance nonfinancial assets, or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donations. In the case of specialized accounting services, the hospital would recognize the estimated value of the donated services as an expense and a corresponding amount is reported as an increase in unrestricted revenues, gains, and other support. Given the five choices of A through E, A is the answer. D The contribution of permanently restricted investments would normally be accounted for in an endowment fund which would be an increase in permanently restricted net assets. The income from the investments would be available for the unrestricted fund, but the investments themselves would be restricted in accordance with the donors specification.

6.

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P19-19

Balance Sheet for a Hospital Havencrest Hospital Balance Sheet June 30, 20X8

Assets Current: Cash Accounts Receivable (net of the allowance of $5,000) Inventories Prepaid Expenses Total Current Assets Assets Limited as to Use: By Donors for Specific Purpose - Research By Donors for Plant Replacement and Expansion By Donors for Permanent Investment Investments Property, Plant, and Equipment (net of accumulated depreciation of $140,000) Total Assets Liabilities and Net Assets Current: Accounts Payable Accrued Expenses Deferred Revenues Current Portion of Long-term Debt Total Current Liabilities Long-term Debt: Mortgage Payable Total Liabilities Net Assets: Unrestricted Temporarily Restricted Permanently Restricted Total Net Assets Total Liabilities and Net Assets

$ $

30,000 20,000 50,000 10,000 110,000 32,000 200,000 520,000 100,000

160,000 $1,122,000

$ $ $

45,000 17,000 11,000 24,000 97,000 125,000 222,000

148,000 232,000 520,000 $ 900,000 $1,122,000

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McGraw-Hill/ Irwin The McGraw-Hill Companies, Inc., 2002

P19-20 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. P19-21 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. C B B G E C A E B G C C

Matching of Transactions to Effects on Statement of Changes in Net Assets for a Hospital

A and D A D E G A Matching of Transactions to Effects on Statement of Activities for a Voluntary Health and Welfare Organization (A and B offset)

A and C A A C A D
McGraw-Hill/ Irwin The McGraw-Hill Companies, Inc., 2002

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P19-22 1. 2. 3. 4. 5. 6. 7.

Net Asset Identification for Transactions Involving a Private University

Unrestricted net assets increased $2,000,000. Temporarily restricted net assets increased $1,000,000. Unrestricted net assets decreased $200,000. Temporarily restricted net assets increased $1,500,000. Temporarily restricted net assets increased $150,000. Temporarily restricted net assets increased $75,000. Temporarily restricted net assets decreased $60,000, the result of a reclassification of $60,000 to unrestricted net assets. There is no effect on unrestricted net assets because the increase of $60,000 due to the reclassification is offset by a $60,000 increase in expenses. Expenses are decreases in unrestricted net assets. There is no effect on unrestricted net assets as a result of this board designation. Net assets under the control of the governing board are unrestricted. The board of BU took cash that was unrestricted and designated that it be used for a specific purpose. This designation does not change the net asset classification of the cash. Permanently restricted net assets increased $3,750,000.

8.

9.

10. There is no effect on unrestricted net assets as a result of the acquisition of debt securities by the board. The board took cash that was unrestricted and used it to acquire debt securities. 11. Unrestricted net assets increased $6,000. The interest revenue of $18,000 from the investments is an increase in unrestricted net assets, while the $12,000 used to fund summer research grants represents a $12,000 decrease in unrestricted net assets.

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McGraw-Hill/ Irwin The McGraw-Hill Companies, Inc., 2002

P19-23

Questions on Voluntary Health and Welfare Organization [AICPA Adapted] List A Effect B B A G D G List B Effect N H H K N L

Transaction 1. 2. 3. 4. 5. 6.

P19-24 1. U

Questions on Transactions of Not-for-Profit Organizations [AICPA Adapted] Contributions should be $28,000 received from the unrestricted promise to contribute cash in 20X1 plus the $12,000 of written promises uncollected to contribute cash for community college scholarships. Net assets released from use restrictions would include the $37,000 expended for the bus and the $30,000 expended for scholarships, for a total of $67,000 released from use restrictions. Unrestricted written promises to contribute cash are restricted by time. Net assets released from time restrictions would be only the unrestricted written promises of $22,000 in 20X0 promises that were collected in 20X1. ($88,000) The only permanently restricted contribution is the principal of the debt security endowment that would be recorded at its fair market value at the date of the contribution. ($5,000) The only fee revenue is the $5,000 from the admission fee for the music festival. ($99,000) Program expenses include the $8,000 for the reading materials donated and distributed, the $26,000 of instructor salaries, the $50,000 salary of the director of community activities, and the $15,000 space rental for community activities. The expenses for the music festival are fund-raising expenses. The other operating expenses are general, management, and fund-raising.

2.

3.

4.

5. 6.

D O

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P19-24 7. B

(continued) ($2,000) The general fund-raising expenses are the costs of printing and mailing the pledge cards. The expenses for the music festival are for a special event. ($0) The only long-term investment income is from the debt security endowment, but the $9,000 is restricted. ($0) To be accounted for, the services provided must create or enhance nonfinancial assets, or require specialized skills that would have been purchased; therefore, no service contributions are recorded. Unrestricted promises are an operating activity. This is an operating activity. The purchase of a bus is an investing activity. Paying part of the principal of a loan is a financing activity. Purchasing equity securities is an investing activity. Income earned on investments is an operating activity. Payment of interest is an operating activity. Interest income from an endowment is an operating activity.

8. 9.

A A

10. O 11. O 12. I 13. F 14. I 15. O 16. O 17. O

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McGraw-Hill/ Irwin The McGraw-Hill Companies, Inc., 2002

P19-25 1. 2. 3. 4. E A C A

Contributions to a Hospital [AICPA Adapted] The boards designation is not a required reportable event. The investments are under the boards discretion; therefore, the income is recorded as unrestricted revenue. Funds provided specifically for a building expansion are temporarily restricted until the construction takes place. At the time the temporarily restricted resources are expended for the program specified by the donor, the funds are reclassified as unrestricted. Professional services contributed to the not-for-profit organization are valued at their fair market value and recorded as an unrestricted revenues, gains, and other support. The principal is permanently restricted by the donor. The income from the investments, when the income is earned, would be classified as temporarily restricted, to be used for the specific purpose specified by the donor.

5.

6.

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