Question

Help & Save is a private not-for-profit entity that operates in Kansas. Swim For Safety is a private not-for- profit entity that operates in Missouri. The leaders of these two organizations have decided to combine forces on January 1, 2015, in order to have a bigger impact from their work. They are currently discussing ways by which this combination can be created. Statements of financial position for both charities at that date appear below. HELP & SAVE Statement of Financial Position January 1, 2015 Assets Cash $1,650,000 Contributions Receivable (net) 120,000 Investments 350,000 Buildings & Equipment (net) 750,000 Total Assets $ 2,870,000 Liabilities Accounts Payable and Accrued Liabilities Notes Payable Total Liabilities $ 115,000 1,150,000 $ 1,265,000 Net Assets Unrestricted Temporarily Restricted Permanently Restricted $1,150,000 340,000 115,000 Total Net Assets $1,605,000 Total Liabilities and Net Assets $ 2,870,000

Answer 1

Help & Save Requirement a Balances To Be Reported Cash Contributions receivable (net) Investments Buildings & equipment Goodwill Total assets Accounts payable and accrued liabilities Notes payable Total liabilities Unrestricted net assets Temporarily restricted net assets Permanently restricted net assets Total net assets Total liabilities and net assets 1145000 380000 570000 1535000 30000 3660000 235000 1820000 2055000 735000 535000 335000 1605000 3660000 In an acquisition, the assets and liabilities of the acquired organization are included at fair value. Thus, the buildings and equipment reported by Swim For Safety must be increased by $145,000 from $640,000 to $785,000. Because the acquisition value ($1.06 million) exceeds the total fair value recognized for the individual assets and liabilities ($1,675,000 plus $145,000 less $790,000 or $1,030,000), the excess ($30,000 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 $1.06 million payment as must the balance shown for its unrestricted net assets. The increases in the buildings & equipment ($145,000) 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 - $1,145,000 ($1,650,000 less $1,060,000 plus $555,000) Contributions receivable (net) - $380,000 ($120,000 plus $260,000) Investments - $570,000 ($350,000 plus $220,000) Buildings & equipment - $1,535,000 ($750,000 plus $785,000) Goodwill - $30,000 (above) Total assets - $3,660,000 (summation) Accounts payable and accrued liabilities - $235,000 ($115,000 plus $120,000) Notes payable - $1,820,000 ($1,150,000 plus $670,000) Total liabilities - $2,055,000 (summation) Unrestricted net assets - $735,000 ($1,150,000 less $1,060,000 payment plus $145,000 increase in buildings and equipment plus $30,000 in goodwill plus $470,000 from Swim for Safety) Temporarily restricted net assets - $535,000 ($340,000 plus $195,000) Permanently restricted net assets - $335,000 ($115,000 plus $220,000) Total net assets - $1,605,000 (summation) Total liabilities and net assets - $3,660,000 ($2,055,000 plus $1,605,000)

Requirement b Balances To Be Reported Cash Contributions receivable (net) Investments Buildings & equipment Total assets Accounts payable and accrued liabilities Notes payable Total liabilities Unrestricted net assets Temporarily restricted net assets Permanently restricted net assets Total net assets Total liabilities and net assets 1155000 380000 570000 1535000 3640000 235000 1820000 2055000 715000 535000 335000 1585000 3640000 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 $145,000 from $640,000 to $785,000. Because the acquisition value ($1,050,000) exceeds the total fair value recognized for the individual assets and liabilities ($1,675,000 plus $145,000 less $790,000 or $1,030,000), the excess ($20,000 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 $20,000 is not recognized as an asset. Instead, the excess $20,000 within the $1,050,000 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 $1,050,000 payment as must the balance shown for its unrestricted net assets. The increase in the buildings & equipment ($145,000) 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. Balances To Be Reported: Cash - $1,155,000 ($1,650,000 less $1,050,000 plus $555,000) Contributions receivable (net) - $380,000 ($120,000 plus $260,000) Investments - $570,000 ($350,000 plus $220,000) Buildings & equipment - $1,535,000 ($750,000 plus $785,000) Total assets - $3,640,000 (summation) Accounts payable and accrued liabilities - $235,000 ($115,000 plus $120,000) Notes payable - $1,820,000 ($1,150,000 plus $670,000) Total liabilities - $2,055,000 (summation) Unrestricted net assets - $715,000 ($1,150,000 less $1,050,000 payment plus $145,000 increase in and equipment plus $470,000 balance for Swim for Safety) Temporarily restricted net assets - $535,000 ($340,000 plus $195,000) Permanently restricted net assets - $335,000 ($115,000 plus $220,000) Total net assets - $1,585,000 (summation) Total liabilities and net assets - $3,640,000 ($2,055,000 plus $1,585,000)

Requirement 2205000 Balances To Be Reported Cash Contributions receivable (net) Investments Buildings & equipment Total assets Accounts payable and accrued liabilities Notes payable Total liabilities Unrestricted net assets Temporarily restricted net assets Permanently restricted net assets Total net assets Total liabilities and net assets 380000 570000 1390000 4545000 235000 1820000 2055000 1620000 535000 335000 2490000 4545000 0 This transaction is a merger: two not-for-profit organizations 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 the new balances to be reported. No cash was spent and no adjustments to fair value are made. Balances To Be Reported: Cash - $2,205,000 ($1,650,000 plus $555,000) Contributions receivable (net) - $380,000 ($120,000 plus $260,000) Investments - $570,000 ($350,000 plus $220,000) Buildings & equipment - $1,390,000 ($750,000 plus $640,000) Total assets - $4,545,000 (summation) Accounts payable and accrued liabilities - $235,000 ($115,000 plus $120,000) Notes payable - $1,820,000 ($1,150,000 plus $670,000) Total liabilities - $2,055,000 (summation) Unrestricted net assets - $1,630,000 ($1,150,000 plus $470,000) Temporarily restricted net assets - $535,000 ($340,000 plus $195,000) Permanently restricted net assets - $335,000 ($115,000 plus $220,000) Total net assets - $2,490,000 (summation) Total liabilities and net assets - $4,545,000 ($2,055,000 plus $2,490,000)