Question

For a number of years, a private not-for-profit entity has been preparing financial statements that do not necessarily follow generally accepted accounting principles. At the end of the most recent year (Year 2), those financial statements show total assets of $900,000, total liabilities of $100,000, total unrestricted net assets of $400,000, total temporarily restricted net assets of $300,000, and total permanently restricted net assets of $100,000. In addition, total expenses for the year were $500,000 (shown in unrestricted net assets).

During Year 1, the entity above received a gift of $80,000. The donor specified that this money be invested in government bonds with the interest to be used to pay the salaries of the entity’s employees. The gift was recorded as an increase in permanently restricted net assets. It earned interest income of $5,000 during Year 1 and $7,000 during Year 2. The entity reported this interest on the statement of activities as an increase in unrestricted net assets. In both cases, the money was immediately expended for salaries, amounts that were recorded as expenses within unrestricted net assets. No other entries were made in connection with these funds.

a. What was the correct amount of unrestricted net assets at the end of Year 2?

b. What was the correct amount of expenses in unrestricted net assets for Year 2?

c. What was the correct amount of temporarily restricted net assets at the end of Year 2?

Answer 1

a. Unrestricted net assets $ 400,000

b. Expenses in unrestricted net assets $ 500,000

c. Temporarily restricted net assets $ 300,000

Explanation:

a. Because the use of the interest was specified by the donor, both interest balances should have been recorded initially as increases within Temporarily Restricted Net Assets. Later, when properly spent, these amounts would have been reclassified into Unrestricted Net Assets. Instead, this entity recorded the amounts immediately in Unrestricted Net Assets. Since the amounts have now been properly spent, they did wind up in the category where they were supposed to be reported. The $400,000 shown as unrestricted net assets is correct.

b. Each amount was reported as expenses in unrestricted net assets and that handling was correct. No change is needed so that the $500,000 reported as expenses is shown properly.

c. As indicated in (a), the $5,000 and the $7,000 should have initially increased Temporarily Restricted Net Assets and then been removed through a reclassification leaving no net effect. Because nothing was ever recorded by the organization in Temporarily Restricted Net Assets, the total of $300,000 is correct.