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.

Required:

a. Prepare a statement of activities for this not-for-profit entity for the current year.

Answer 1

a. Preparation of a statement of activities for this not-for-profit entity for the current year:

Explanation of Balances

1- Contribution revenue. The two balances here are the unrestricted gifts ($210,000 from a.) plus present value of the pledge ($78,000 from h.). Pledge is included in net assets with donor restrictions because the NFP will not collect the money for three years.

2- Contribution-Interest. The NFP records the pledge (from h.) at its present value of $78,000. The entity then recognizes interest to begin raising the asset balance to the pledge amount by the time of collection. An NFP recognizes the interest on a pledge as a contribution.

3- Membership dues. The NFP reports the amount received in d. as revenue and not as a contribution because the members receive rights equal in value to the amount collected. To date, the NFP has only earned 1/12 of the $30,000 so the revenue is $2,500.

4- Investment income. Because the NFP earns this income ($13,000 in f.) on its permanently restricted net assets, 70 percent ($9,100) is classified as net assets with donor restrictions. The donor specified (according to the introductory information) that this portion be for advertising. The NFP reports the remaining 30 percent as net assets without donor restrictions.

5- Net assets released from restriction. The NFP spent three restricted amounts properly during the period: $20,000 for salaries (in b.), $50,000 for equipment (in c.), and $2,000 for advertising (in g.) for a total of $72,000. The statement shows a reduction in the total for net assets with donor restrictions and an increase in the net assets without donor restrictions.

6- Salaries. During the period, $24,000 in salaries were paid (30 percent of $80,000 was assigned here according to b.) and another $2,500 was owed at the end of the year (50 percent of year-end accrual according to k.).

7- Depreciation. Of the total expense ($20,000) for the period (according to i.), 80 percent was allocated to program service expenses because that amount of the equipment was used for that purpose (according to c.)

8- Supplies. The NFP acquired and used a total of $93,000 during the year (according to j.).

9- Salaries. Administrative salaries amounted to $32,000 for the year (40 percent of overall total according to b.).

10- Depreciation. Of the total for the period (in i.), 10 percent was allocated to general and administrative expenses (according to c.).

11- Salaries. During the period, the NFP assigned $24,000 of the salaries here (30 percent of $80,000 paid according to b.) and another $2,500 was owed at the end of the year (50 percent of year-end accrual at k.).

12- Advertising. The NFP incurred only $2,000 in advertising costs during the period (according to g.)

13- Depreciation. Of the total for the period ($20,000 from i.), the NFP assigns 10 percent to fundraising expenses (according to c.).

---Because the painting at l. qualifies as a museum piece, formal reporting is optional. Officials do not want to report the painting, and they are not required to do so.

---The NFP must convey the $10,000 gift in e. to an outside beneficiary so it is shown as a liability.