Question

In order to get a good rating, please explain how you arrived at each answer. Thank you.

EX. 12-4

Some, but not all, contributions of goods and services are given accounting recognition.

In each of the following scenarios, an organization receives a contribution in kind. Prepare journal entries, as necessary, to give them accounting recognition. For each, tell why you made an entry or why you did not.

1. A local not-for-profit art museum receives advertising for its yearly benefit from radio station WLOU. The airtime would have cost the museum $1,000.
2. Volunteers for “Breakfast on Bikes,” a voluntary health and welfare organization, deliver hot meals to the elderly three times a week. Each of the ten volunteers works about six hours per week. All of the volunteers have permanent jobs with pay averaging $16.10 an hour.
3. Lynn Simms, a local CPA, maintains the books and records of her church. Although her normal billing rate is $60 per hour, she accepts no payment from the church. She works on church matters approximately four hours a week.
4. A construction company allows a not-for-profit community association to use its bulldozer at no cost to clear land for a new baseball park. If the association had to rent the bulldozer it would have incurred costs of $1,400.

Answer 1

First of all, it needs to be understood that what accounting exactly is. The definition of accounting is - "It is a systematic process of identifying, recording, measuring financial information". If we look at the definition, it is talking about the financial information i.e. there must be some money involved to record a journal entry of a transaction. If there is no money involved or something is done for free there will not be any journal entry passed for that particular transaction.

Keeping the above in mind -

1. A local not for profit museum receives advertising and that would cost $1,000. It is very clear that the advertising will cost the Museum $1,000 i.e. this is a financial transaction and hence a journal entry will be parked for the same. Please see below entry ( it has been assumed that the expense are not paid yet and only accrued)

2.Volunteers deliver hot meals. Mere delivery does not constitute a financial transaction. however, the boys are getting paid for the delivery. So, there might be two cases here - one is to calculate the amount per delivery and then book the same at the time of delivery. or second, is to book the expenses weekly. If first option is chosen, then the per delivery expense would be - $16.10 per hour x number of hours per week i.e. 6 hrs = $96.60. The delivery is done three times hence per delivery expense would be - 96.60/3 = $32.20

In the second option, a weekly entry will booked for $96.60.

3. Lynn maintains the books of the Church for free. As we have seen in the definition, this is not a financial transaction and hence no entry will be parked for this transaction.

4.In the last one, the bulldozer has been given for free to use which is again a non financial transaction hence no entry will be parked.

Hope you have understood the logics here. Thank you.