Chapter 13: Accounting for Health Care Organizations
Multiple Choice
1. Which of the following statements is generally true about the basis of accounting used by
governmental and not-for-profit hospitals?
a. both use the full accrual basis of accounting
b. both use the modified accrual basis of accounting
c. governmental hospitals use the modified accrual basis of accounting and not-for-
profit hospitals use the full accrual basis of accounting
d. both use the full accrual basis of accounting; but governmental hospitals also prepare
a second modified accrual basis operating statement
2. Which three categories of net position are reported by governmental hospitals?
a. restricted, committed, and unassigned
b. net investment in capital assets, restricted , and unrestricted
c. temporarily restricted, permanently restricted, and unrestricted
d. permanently restricted, current, and noncurrent
3. In a governmental hospital’s operating statement, which of the following is true?
a. The last category reports other comprehensive income
b. Restricted revenues are distinguished from unrestricted revenues
c. Operating expenses are deducted from operating revenues to show operating income
d. Bad debt expense is reported to the extent that patients are not expected to pay their
bills.
4. The difference between a hospital’s established billing rate and the amount paid by a
third-party payer is referred to as:
a. a bad debt
b. a capitation agreement
c. a charity allowance
d. a contractual adjustment
5. How are hospitals paid when they enter into a capitation agreement?
a. based on predetermined rates for individual procedures performed by the hospital
b. based on interim rates for individual procedures performed by the hospital, subject to
retrospective adjustment after submission of actual costs
c. based on agreed-upon premiums per member per month, for agreeing to provide care
d. based on the total costs incurred by the hospital for actual care rendered to members
of a particular group
6. How do not-for-profit hospitals calculate “net patient service revenue,” on their operating
statements?
a. gross billings at established rates; minus contractual adjustments, charity care, and
similar items that the hospital does not expect to collect
b. gross billings at established rates; minus contractual adjustments, charity care, and
other items, such as bad debts expense
c. gross billings at established rates; minus any amounts that the hospital does not
expect to collect; plus revenue from capitation premiums
d. gross billings at established rates; revenue from capitation premiums; and any other
revenue directly attributable to patient services such as special charges for TV
7. A hospital had gross patient billings of $50 million, contractual adjustments of $20
million, and charity care of $5 million. How much is the hospital’s net patient service
revenue?
a. $50 million
b. $25 million
c. $30 million
d. $45 million
8 How do governmental hospitals calculate “net patient service revenue,” on their operating
statements?
a. gross billings at established rates; minus contractual adjustments, charity care, and
similar items that the hospital does not expect to collect
b. gross billings at established rates; minus contractual adjustments, charity care, and a
provision for uncollectible accounts
c. gross billings at established rates; minus any amounts that the hospital does not
expect to collect; plus revenue from capitation premiums
d. gross billings at established rates; revenue from capitation premiums; and any other
revenue directly attributable to patient services such as special charges for TV
9. A not-for-profit hospital had gross patient billings of $43 million, contractual adjustments
of $8 million, and charity care of $1,500,000. The hospital also made a provision for bad
debts in the amount of $1,000,000. How much should the hospital report as net patient
service revenue?
a. $43 million
b. $35 million
c. $33.5 million
d. $32.5 million
10. A hospital entered into a retrospective billing arrangement with a third-party payer,
calling for interim billing rates, subject to final settlement after the year’s end. Final
settlement was to be based on the hospital’s submission of costs and audit by the third-
party payer. During the year, the hospital provided services to patients covered by this
third party, billing for $4.8 million at the hospital’s established rates. However, the
hospital’s services at the interim billing rates were 25 percent less than the established
rates. Before issuing its financial statements for the year, the hospital analyzed its costs
and estimated that the rates charged to the third-party payer were $300,000 too high. For
this third party, how much was the total contractual adjustment for the year?
a. $300,000
b. $1,200,000
c. $1,500,000
d. $1,700,000
11. A not-for-profit hospital provided charity care. The value of the hospital’s service for the
year, at its normal billing rates, was $4 million. How should the hospital report the
charity care services in its financial statements?
a. include the $4 million as part of patient service revenue and report an operating
expense (labeled Charity care) of $4 million.
b. in the revenue section of the operating statement, include the $4 million as part of
patient service revenue, but also show a deduction (labeled Charity care) for $4
million.
c. report nothing for charity care, neither on the face of the operating statement nor in
the notes
d. report nothing on the face of the operating statement for charity care. In the notes,
describe the charity care policy, and disclose the level of charity care provided based
on the direct and indirect cost of providing the care.
12. A hospital had capitation agreements with several health maintenance organizations to
provide services. The hospital received $12 million of capitation fees for the year. The
hospital also calculated that: (a) its costs to provide these services were $11.8 million;
and (b) the value of these services at established billing rates were $16 million. How
should the hospital report this information on the face of its financial statements?
a. report $200,000 as a separate item of revenue, labeled net premium revenue.
b. add $16 million to Net patient service revenue, and deduct $4 million in a separate
item labeled Adjustment for capitation premiums.
c. report Premium revenue of $12 million as a separate item of revenue, and report cost
of serving HMO patients of $11.8 million as a separate item of expense.
d. report premium revenue of $12 million as a separate item of revenue, if significant.
13. A hospital invested $780,000 in equity securities in March, 2012. When it prepared its
financial statements at year-end, the securities had a fair value of $802,000. How should
the hospital report the securities in its balance sheet at year end?
a. report the securities at cost ($780,000).
b. report the securities at cost ($780,000) and show the fair value ($802,000)
parenthetically next to the caption “Investments.”
c. report the securities at cost ($780,000) and show the fair value ($802,000) in the
notes to he financial statements.
d. report the securities at the fair value ($802,000)
14. A not-for-profit hospital purchased an equity security for $150,000 on September,
2012. When it prepared its 2012 financial statements, the security had a fair value
of $145,000. It sold the security for $160,000 in 2013. What was the net effect of
the sale of the security on the hospital’s net assets in the year 2013?
a. no effect
b. an increase of $10,000
c. an increase of $15,000
d. an increase of $160,000
15. A not-for-profit hospital purchased stock for $11,000 in March but by December
31, its fair value had dropped to $8,000. Assuming the hospital didn’t sell the
stock at December 31, how should the unrealized loss be reported in the hospital’s
operating statement?
a. it should report the loss below Excess of revenues over expenses
b. it should report the loss as a direct addition to net assets
c. it should report the loss before Excess of revenues over expenses
d. it should not report the loss. The stock should be reported at cost.
16. Several high school seniors donate some time to a not-for-profit hospital. They perform
services the hospital would not otherwise provide, such as reading to patients and
wheeling them around hospital grounds. The hospital estimates the value of these
services at $6,500 if they had paid the students the minimum wage and at $8,800 if they
had paid at fair value. How should the hospital report these donated services on the face
of its operating statement?
a. report donated revenue and expenses of $6,500.
b. report neither donated revenue nor expenses.
c. report donated revenue and expenses of $8,800.
d. report donated revenue of $8,800 but do not report any expenses.
17. Catlett County Hospital, a governmental hospital, has its financial statement audit done
by a local CPA firm. In 2012, the CPA firm announced that it would no longer charge
for the audit. How is the County Hospital required to report the donated audit in 2013,
assuming that it would have been billed $20,000 for the audit and that the cost incurred
by the CPA firm is estimated at $11,000?
a. Report contribution revenue of $20,000 and audit fees of $11,000
b. Report contribution revenue of $0 and audit fees of $0
c. Report contribution revenue of $20,000 and audit fees of $20,000
d. Report contribution revenue of $11,000 and audit fees of $11,000.
18. Shults Labs donates an item of prescription medications worth $100,000 to a local not-
for-profit hospital. How should the hospital report the donation in its financial
statements?
a. Report an other revenue (or gain) and an expense of $100,000.
b. Report an other revenue (or gain) and an asset (inventory) of $100,000
c. Report an asset and an other revenue (or gain) at the manufacturer’s direct cost to
produce the equipment, which is estimated at $70,000
d. Report nothing on the face of the financial statements, but describe the donation in
the notes to the statements.
19. A governmental hospital has about 30 outstanding medical malpractice claims when it
prepares its 2012 financial statements. It does not carry third-party insurance. The total
amount claimed on these claims is $2,000,000. Historically, most of these claims are
settled out-of-court for about 20 percent of the amount claimed. Some of claims were
filed before 2012 and some were filed in 2012. It takes an average of three years to settle
them. What is the appropriate method of handling this situation on the financial
statements?
a. do not report anything either on the face or in the notes to the statements
b. do not report anything on the face of the statements; but in the notes, state that claims
were received, insurance is not carried, and it takes about three years to settle claims;
say nothing about the amount of the claims or the potential loss
c. develop a best estimate of the probable loss (about $400,000), based on past
experience, and report a liability for that amount on the balance sheet
d. report a liability of $2,000,000 on the balance sheet; and state in the notes that the
liability may be lower if the hospital is successful in defending itself
20. A hospital that carries no malpractice insurance has several outstanding malpractice
claims, including one for $1.5 million. Hospital attorneys believe the claim can be settled
in the range of $200,000 to $340,000, but negotiations have not reached the point where
they can estimate where within that range they can reach agreement. How should the
hospital handle this claim in its financial statements?
a. report nothing on the face of the statements; in the notes, state that there are claims
against the hospital, and that historically it wins some cases and loses others.
b. report an expense and a liability of $270,000, the mid-point of the range.
c. report an expense and a liability of $340,000, the upper end of the range.
d. report an expense and a liability of $200,000, the lower end of the range, and disclose
the potential for additional loss in the notes to the statements.
21. After it prepares its financial statements, a hospital has historically received malpractice
claims for events occurring before the balance sheet date. How should the hospital handle
these incurred but not reported (IBNR) claims its financial statements?
a. take no action until it actually receives claims.
b. disclose, in the notes to its financial statements, that it historically receives IBNR
claims; state that no estimate can be made of probable loss because no claims have
been filed
c. estimate, based on past experience, the amount of probable loss on IBNR claims;
report this amount in the notes
d. estimate, based on past experience, the amount of probable loss on IBNR claims;
report this amount as an expense and a liability
22. A not-for-profit hospital’s trustees designate $600,000 of the hospital’s unrestricted
resources for the future acquisition of equipment. The trustees tell the hospital
comptroller to purchase a separate certificate of deposit for it. How should the hospital
record and report this investment?
a. as an investment, the resources of which will be designated as restricted in the net
assets section of the balance sheet
b. report the investment as “assets limited as to use,” and report $600,000 of net assets
as restricted net assets
c. report the investment as “assets limited as to use,” and report $600,000 of net assets
as unrestricted net assets
d. report the investment as “restricted” investments and report $600,000 of net assets as
restricted net assets
23. A not-for-profit hospital receives a $150,000 donation that must be used for a specific
research project. The hospital anticipates that it will undertake the project next year. How
should the hospital report the donation?
a. as unrestricted support
b. as temporarily restricted support
c. as assets limited as to use
d. as permanently restricted support
24. A not-for-profit hospital receives a $25,000 donation that must be used for a special
training program for nurses. When the donated resources are used for the intended
purpose, in which net asset classification should the hospital report the expense?
a. assets limited as to use
b. temporarily restricted net assets
c. unrestricted net assets
d. permanently restricted net assets
25. A governmental hospital receives notice of a $100,000 grant from the federal government
to conduct breast cancer research. The grant contains an eligibility requirement; that is,
the hospital must incur costs and submit quarterly reports of allowable costs incurred.
The reports are subject to audit. When should the hospital recognize revenues under the
grant?
a. upon receiving notice of the grant
b. each quarter, when it submits quarterly reports
c. as it incurs allowable costs
d. after the all cost reports have been audited
26. In the statement of operations of a not-for-profit hospital, which of the following
increases in net assets is not likely to appear as part of Excess of revenues over expenses?
a. net patient service revenue
b. premium revenue under capitation agreements
c. investment income
d. net assets released from restrictions used for purchase of equipment
27. In the statement of operations of a not-for-profit hospital, which of the following is not
likely to be a factor in determining Excess of revenues over expenses?
a. net patient service revenue
b. change in unrealized gains and losses on investments
c. investment income
d. provision for bad debts
28. Which of the following is a major difference between a not-for-profit hospital’s statement
of operations and statement of changes in net assets?
a. contributions are not reported in the statement of operations, but are reported in the
statement of changes in net assets.
b. net assets released from restrictions are not reported in the statement of operations,
but are reported in the statement of changes in net assets.
c. the statement of operations does not cover changes in both unrestricted and restricted
net assets, but the statement of changes in net assets does cover changes in both
unrestricted and restricted net assets.
d. the statement of operations is not prepared on the cash basis of accounting, but the
statement of changes in net assets is prepared on the cash basis of accounting.
29. A group of retired registered nurses decide to volunteer their services to a not-for-profit
hospital. They perform a variety of tasks, including: (a) filling in for regular nurses when
they are out sick; (b) helping out in food preparation; and (c) selling in the hospital gift
shop. For which of the three tasks must donated revenues and expenses be recognized?
a. only task (a)
b. only tasks (a) and (b)
c. all three tasks
d. none of the three tasks
30. Which of the following statements about the form and content of a governmental
hospital’s statement of revenues, expenses, and changes in net position is false?
a. nonoperating revenues and expenses are shown separately from operating revenues
and expenses
b. capital contributions and endowment contributions are shown separately from
operating revenues
c. the statement covers both unrestricted and restricted funds
d. the provision for bad debts is reported as an operating expense
31. Differences between a hospital’s established rates and amounts negotiated with
third-party payers are referred to as:
a. contractual adjustments
b. unrecovered costs
c. equity adjustments
d. restricted revenues
32. Which of the following is reported as an expense by not-for-profit hospitals?
a. charity care
b. bad debts
c. contractual adjustments
d. volunteer and employee discounts
33. The accounting and financial reporting procedures for which fund category apply to
governmental hospitals?
a. governmental type funds
b. proprietary type funds
c. fiduciary type funds
d. restricted type funds
34 A not-for-profit hospital, the Ruth Clark Hospital established a fund-raising Foundation
at the beginning of its calendar year. By the end of the year, the Foundation had raised
$750,000 in cash—$600,000 of which was restricted by donors to acquire a new building
and $150,000 of which was unrestricted. How should the Ruth Clark Hospital report its
interest in the Hospital Foundation and the contributions it received at the end of the first
year?
a. as cash of $900,000, other revenues (or gains) – unrestricted of $150,000, and other
revenues (or gains) – temporarily restricted of $750,000
b. as interest in hospital foundation of $900,000, other revenues (or gains) – unrestricted
of $150,000, and other revenues (or gains) – temporarily restricted of $750,000
c. it should not report the contributions: the Hospital Foundation is a separate entity
d. as cash of $900,00, unrestricted net assets of $150,000, and temporarily restricted net
assets of $600,000
35. What if Ruth Clark Hospital (Question 34) is a governmental hospital. How would the
Ruth Clark Hospital report its interest in the Hospital Foundation and the contributions it
received at the end of the first year?
a. there is no difference in reporting fund-raising foundations between not-for-profit and
governmental hospitals
b. as cash of $900,000, unrestricted net position of $150,000, and restricted net position
of $600,000
c. it should present the Foundation as a discretely presented component unit (in a
separate column) if the GASB standards for reporting it are met
d. as interest in hospital foundation of $900,000 and contributions of $900,000, with net
position separately displaying unrestricted from restricted contributions
(Use of funds)
36. When a not-for-profit hospital uses funds for internal record-keeping purposes, what
types of resources are accounted for in the General Funds?
a. all resources used in normal daily operations except for plant resources
b. all resources except for those in funds that are classified as restricted
c. all resources except for assets whose use is limited
d. all resources except for those in funds that are classified as restricted and assets
whose use is limited
(Use of funds)
37. When a hospital uses funds for internal record-keeping purposes, Specific Purpose Funds
are those that are:
a. limited as to use by hospital trustees to specific purposes
b. restricted by donors or grantors to specific operating purposes
c. restricted by donors or grantors to specific operating or capital purposes
d. restricted by any legal agreement, such as a bond agreement or a trust arrangement
38. When a hospital uses funds for internal record-keeping purposes, Plant Replacement and
Expansion Funds are used to report:
a. resources contributed by outsiders that can only be used to replace or expand the
hospital’s existing physical plant
b. resources contributed by outsiders and those designated by the hospital’s governing
board that can only be used to replace or expand the hospital’s existing physical plant
c. capital asset expenditures
d. resources restricted by any legal agreement, such as a bond agreement or a trust
arrangement
39. The Monks Veterinary Hospital receives $1.5 million from the Clementine Foundation.
Only the earnings from investing the contribution may be used by the Hospital to conduct
research on feline leukemia. Assuming the Hospital uses fund accounting for internal
purposes, which funds should be used to report (1) the assets and (2) any investment
earnings?
original investment
contribution earnings
a. endowment fund endowment fund
b. general fund specific purpose fund
c. specific purpose fund general fund
d. endowment fund specific purpose fund
40. A not-for-profit hospital will prepare a statement of operations pertaining to the
hospital’s
unrestricted restricted
net assets net assets
a. yes yes
b. no no
c. no yes
d. yes no
Problems
41. (Journal entries for patient service revenues; computation of net patient service revenue)
Prepare journal entries to account for the following transactions for Cort
Hospital. Also, compute the net service revenue to be reported in the Hospital’s
statement of operations.
a. Cort provided services to patients during the year, billing a total of $59,500,000 at
its established rates.
b. Included in the services provided in transaction a. were the following: (1) charity
cases amounting to $2,100,000; and (2) adjustments amounting to $17,500,000 for
differences between established billing rates and amounts allowed by third-party
payers under prospective billing arrangements.
c. Cort collected $36,000,000 from direct-pay and third-party payers.
d. Cort established an allowance for bad debts in an amount equal to 10% of the
accounts receivable outstanding after considering the effects of transactions a., b.,
and c., above.
e. The accounts of patients who owed $33,000 were written off as uncollectible.
f. At year-end, Cort analyzed the costs incurred under its arrangements
with a third-party payer, and estimated that it would need to refund
$250,000 to that third-party after submission and audit of its cost report
to the third party.
42. (Journal entries for a hospital’s General Fund)
Lucas Community Hospital is a not-for-profit hospital. Prepare journal entries to
record the following transactions and events in the Hospital’s General Fund.
a. Third-parties and direct-pay patients were billed $4,200,000 at the hospital’s
established billing rates.
b. The billings in transaction a. included the following:
(1) Services provided to charity care patients totaled $170,000; and
(2) Services were provided to patients covered by third-party payors
with whom prospective reimbursement rates had been negotiated.
The difference between the hospital’s established rates and the
reimbursement rates was $1,000,000.
c. The hospital collected $2,200,000 from its billings for patient services.
d. The hospital received $800,000 in fees under capitation arrangements with HMOs.
e. Salaries paid in cash during the period were as follows:
Professional care of patients 800,000
Dietary services 45,000
General and administrative services 55,000
f. The hospital used $100,000 of its idle cash to purchase equity securities.
g. During the period, the hospital received the following contributions:
(1) Richard & Pryor, a local pharmaceutical manufacturer, donated
$40,000 of drugs to the hospital. The hospital placed the drugs in
its inventory.
(2) Several high students voluntarily carried food to hospital patients
during weekends. If the hospital had to pay for these services, it
would have cost the hospital $5,000.
h. In providing care to its patients, the hospital used drugs amounting to
$25,000.
i. The hospital received parking lot fees in the amount of $20,000.
j. Before preparing its quarterly financial statements, the hospital considered
the following:
(1) The hospital estimated that $90,000 of its direct-pay billings would
not be collected.
(2) The hospital recorded depreciation expenses of $100,000.
(3) The fair value of the securities purchased in f., above, was $98,000.
(4) A hospital patient filed a malpractice claim against the hospital for
$50,000, claiming the hospital food made him sick. Hospital
attorneys believe the claim was without merit and that the hospital
would prevail if the claim went to trial.
43. (Accounting for donations and donor-restricted and board-designated resources)
A not-for-profit hospital uses the following funds to account internally for its
resources: General Fund (GF); Specific Purpose Funds (SPF); Plant Replacement
and Expansion Funds (PREF); and Endowment Funds (EF). The hospital is
establishing a special trauma unit for brain-related injuries, and is soliciting
contributions for this purpose. It reports donations as revenues, rather than gains,
because fund-raising is a significant part of its ongoing activities. Record the
following transactions, stating the fund or funds used, and whether unrestricted,
temporarily restricted, or permanently restricted net assets are affected.
a. Hospital trustees set aside $100,000 for the purpose of training its nurses to deal with
patients in the hospital’s trauma unit.
b. National Products donated trauma equipment having a fair value of $325,000. Also,
Stay-Cool Chemical donated drugs having a fair value of $44,000.
c. The hospital received cash contributions from local donors, who stipulated that the
donations must be used for the following purposes involving the trauma unit:
(1) $10,000, to help pay the salary of Dr. Harlan Elliot, noted brain
surgeon; and
(2) $200,000, to be used solely for the purpose of equipping the trauma
unit.
d. Dr. Cheryl Fusco was hired. His first month’s salary was $25,000. The hospital used
the donation received in transaction c(1) to pay part of Dr. Fusco’s salary.
e. The hospital purchased $80,000 of special equipment for the trauma unit.
Its policy is to use donated funds to acquire equipment before it uses
internally-generated funds.
44. (Use of funds)
Andy Kelly Hospital uses the following types of funds for internal purposes:
General Fund; Specific Purpose Funds; Plant Replacement and Expansion Fund;
and Endowment Fund. State which fund (or funds) would be used to account for
each of these transactions or events.
a. Ms. Shaw makes a gift of $50,000 to be used exclusively for arthritis research.
b. Hospital trustees designate $25,000 of the General Fund balance to be used for a
special training program for the hospital’s nurses.
c. Nurses salaries for the week, amounting to $100,000, are paid.
d. Mr. Beynon makes a gift to the hospital of $1 million, to be used exclusively for
adding new wing housing the brain injury unit.
e. The hospital uses $100,000 from accumulated operating resources to acquire
equipment.
f. The entire amount of Mr. Beynon’s $1 million gift is used to construct a
new wing to the hospital for the brain injury unit.
45. (Distinguishing among the three net asset classifications)
Assume that Andy Kelly Hospital (Problem 44) is a not-for-profit hospital. For
each of the six transactions or events shown in that problem, state which of the
three net asset classifications are affected: unrestricted; temporarily restricted; or
permanently restricted.
46. (Preparing a not-for-profit hospital operating statement)
Whitt Valley Hospital is a not-for-profit initial care facility. Prepare a Statement
of Operations for Whitt Hospital using the following information for its calendar
year ending December 31, 2012:
a. Third-parties and direct-pay patients were billed $6,500,000 at the hospital’s
established billing rates
b. The hospital determined that certain of its patients qualified for charity care and that it
would not seek to collect $950,000 at established billing rates from direct-pay
patients
c. The hospital estimated contractual adjustments for the year, including year-end
adjustments of $1,600,000
d. The hospital estimated uncollectible amounts from direct-pay patients to be $250,000
e. The hospital received capitation premiums of $2,500,000. It estimated that the cost of
providing this care was $1,800,000
f. The hospital reported salaries and wages of $4,500,000 for the year
g. The fair value of investments held by the hospital increased by $25,000
h. The hospital reported interest and dividend income of $100,000
i. The hospital used $375,000 of temporarily restricted resources to purchase capital
assets, consistent with the restrictions imposed by the donor
j. The hospital reported depreciation expense of $475,000
k. The hospital used supplies inventories of 365,000
l. The hospital incurred other operating expenses of $275,000
