Question

A private not-for-profit entity is working to create a cure for a disease. The charity starts the year with one asset, cash of $700,000. Net assets without donor restrictions are $400,000. Net assets with donor restrictions are $300,000. Of the restricted net assets, $160,000 is to be held and used to buy equipment, $40,000 is to be used for salaries, and the remaining $100,000 must be held permanently. The permanently held amount must be invested with 70 percent of any subsequent income used to cover advertising for fundraising purposes. The rest of the income is unrestricted.

During the current year, this health care entity has the following transactions:

1. Receives unrestricted cash gifts of $210,000.
2. Pays salaries of $80,000, with $20,000 of that amount coming from purpose-restricted donated funds. Of the total salaries, 40 percent is for administrative personnel. The remainder is divided evenly among individuals working on research to cure the disease and individuals employed for fundraising purposes.
3. Buys equipment for $300,000 by signing a long-term note for $250,000 and using restricted funds for the remainder. Of this equipment, 80 percent is used in research. The remainder is split evenly between administrative activities and fundraising. The donor of the restricted funds made no stipulation about the reporting of the equipment purchase.
4. Collects membership dues of $30,000 in cash. Members receive a reasonable amount of value in exchange for these dues including a monthly newsletter that describes research activities. By the end of the year, 112/112 of this money had been earned.
5. Receives $10,000 in cash from a donor. The money must be conveyed to a separate charity doing work on a related disease.
6. Receives investment income of $13,000 from the permanently restricted net assets.
7. Pays $2,000 for advertising. The money comes from the income earned in (f).
8. Receives an unrestricted pledge of $100,000 that will be collected in three years. The entity expects to collect the entire amount. The pledge has a present value of $78,000. Related interest (considered contribution revenue) of $5,000 is earned prior to the end of the year.
9. Computes depreciation on the equipment bought in (c) as $20,000.
10. Spends $93,000 on research supplies that are used up during the year.
11. Owes salaries of $5,000 at the end of the year. None of this amount will be paid from restricted net assets. Half of the salaries are for individuals doing fundraising, and half for individuals doing research.
12. Receives a donated painting that qualifies as a museum piece being added to the entity’s collection of art work that is being preserved and displayed to the public. The entity has a policy that the proceeds from any sold piece will be used to buy replacement art. Officials do not want to record this gift if possible..
13. B.Prepare a statement of financial position for this not-for-profit entity for the end of the current year.

Answer 1

B.

Statement of Financial Position

Explanation of Balances:

1- Cash. The reported 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.

2- Pledges receivable. The reported amount is the present value as of the end of the year (the original $78,000 plus the $5,000 interest recognized for the period).

3- Equipment. Entity acquired equipment at a cost of $300,000 during the year.

4- Accumulated Depreciation. The $20,000 balance is the amount of depreciation recorded for this initial year of ownership.

5- Salaries Payable. The balance is the amount owed to employees as of the end of the year.

6- Notes Payable. This balance is the liability incurred in acquiring equipment.

7- Deferred Revenue. Membership dues of $30,000 were exchange transactions but the NFP has only earned 1/12 of the total to date ($2,500). The entity will earn the remaining $27,500 in the future.

9- Donated Amount Due to Separate Entity. A donor gave this money and stipulated that the NFP convey it to a separate beneficiary. The amount is a liability because there is no mention that the NFP holds variance powers that would allow it to change the beneficiary.