978-1259917059 Chapter 14 Solution Manual Part 1

Chapter 14 – Accounting for Not-for-Profit Organizations

CHAPTER 14: ACCOUNTING FOR NOT-FOR-PROFIT

Chapter 14 – Accounting for Not-for-Profit Organizations

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CHAPTER 14: ACCOUNTING FOR NOT-FOR-PROFIT

ORGANIZATIONS

14-1 The Financial Accounting Standards Board (FASB) has primary responsibility for

providing guidance on generally accepted accounting principles for nongovernmental

not-for-profit entities. The Governmental Accounting Standards Board (GASB) is

responsible for government organizations including governmental not-for-profit

ASC 958. In addition, the Single Audit Act and Uniform Guidance prescribe auditing

guidance that applies to government and nongovernmental NFPs expending $750,000 or

more in federal awards.

14-2 The operating statements for nongovernment NFPs and government NFPs reporting as

Chapter 14 – Accounting for Not-for-Profit Organizations

14-3

Ch. 14, Answers, Question 14-2 (Cont’d)

For example:

Nongovernment Not-for-profits

Government Not-for-profits

Generally titles the statement the

statement of activities

Titles the statement the statement of

revenues, expenses, and changes in net

position

Considerable flexibility in formatting the

statement

Must provide a format that identifies

operating and nonoperating activities

Reports changes in the two net asset

categories for the reporting period

Reports the changes in total net position

for the reporting period

Identifies expenses by their functional

classification (e.g., program or supporting)

and natural classification (e.g., salaries,

rent, interest expense, and depreciation)

either in the statement of activities, in the

notes to the financial statements, or as a

separate financial statement

No similar requirement

General Problem Information: Operating statement differences

Learning Objective: 14-2

Topic: Financial Reporting

Bloom’s Taxonomy: Understand

Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting

Level of Difficulty: Medium

14-3. FASB ASC 958-205-45 requires not-for-profit organizations to separate net assets into

the two classifications of net assets: net assets without donor restrictions, and net assets

with donor restrictions.

Contributions received without restrictions on their use by donors are classified as

Chapter 14 – Accounting for Not-for-Profit Organizations

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Ch. 14, Answers, Question 14-3 (Cont’d)

Board designated net assets is a subset of net assets without donor restrictions. Dollars

14-4. Reporting expenses by function and nature provides an analysis of the costs associated

with each of the program services and supporting services. It allows the ratio of program

expenses to total expenses and support expenses to total expenses to be computed and

compared to other entities. In addition, readers of the financial statements can see the

natural, line-item or object of expense; such as, salaries, supplies, rent or occupancy

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Ch. 14, Answers (Cont’d)

14-5. An unconditional pledge requires only the passage of time or performance on the part of

the not-for-profit entity. As a result, unconditional pledges are generally recognized in the

year the pledge is made. A conditional pledge, however, depends on the occurrence of a

future and uncertain event. Since it is unknown whether the conditions imposed on the

14-6. Expenses in a not-for-profit organization are divided into functional categories: (1)

program services, and (2) supporting services expenses. Program service expenses are

those that relate to the programs the NFP offers to the public; for example, the

Community Family Service Agency (see Illustration 14-7) reports adoption, counseling,

foster home care, and special outreach project as its programs.

Supporting services expenses are those that are necessary to make program services

possible. These expenses are typically classified into management and general expenses

and fund-raising expenses. The time that an executive director spends in overall

administration of the organization, with the board of directors, in budgeting and strategic

planning meetings, and oversight of accounting and financial reporting is considered

general and administrative, and, consequently, is classified as support expenses.

However, many executive directors will also spend considerable time in fund-raising,

and, particularly in smaller NFPs, on delivering the programs. It is proper, then, to

allocate a portion of the executive director’s salary and fringe benefits to the functional

categories of fund-raising expenses and program expenses, using an appropriate

allocation method.

Functional reporting of expenses in this manner is important since oversight bodies and

donors place importance on the ratio of program services expenses to total expenses. In

other words, they ask, “For every dollar the organization spends, how many cents go to

the organization’s programs, rather than to management and general and fund–raising?”

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Ch. 14, Answers (Cont’d)

14-7 To be recorded as contribution revenue and either an expense or asset, a donated service

must (1) create or enhance nonfinancial assets or (2) require specialized skills, that are

provided by individuals possessing those skills, and typically would have to be purchased

if not provided by donation. A good example of a donated service that meets the first

14-8. (Revised July 2019) FASB standards provide an option for reporting collections which

include historical treasures and works of art. Assuming the museum has met the criteria

for recognizing its porcelain collection as an asset, the museum has the option of

1. Hold the collection for public exhibition, education, or research in furtherance of

public service rather than financial gain.

3. Subject to an organization policy that requires that the use of proceeds from items

that are sold to be for the acquisitions of new collection items, the direct care of

existing collections, or both.

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Ch. 14, Answers (Cont’d)

14-9 Joint costs are the expenses incurred when the activities of a not-for-profit organization

include a fund-raising appeal with either a program or a management and general

function. If it is determined that a bona fide program or management and general function

has occurred in conjunction with the fund-raising appeal the joint costs would be

14-10 A merger occurs when two or more NFPs combine to create a new NFP. At the date of

the merger, the new NFP recognizes the assets and liabilities of the merging NFP

organizations at the amounts reported on the GAAP prepared financial statements of the

merging NFPs. An acquisition occurs when an NFP obtains control of one or more NFP

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Solutions to Cases

14-11 a. An example of an evaluation memo would be as follows.

Date:

To: Chair, Baytown Area United Way Allocation Panel

From: [Your Name], Financial Advisor

Re: Analysis of Baytown Rehabilitative Camp for Disabled Children’s financial

the United Way Board ultimately approved. During last year’s meeting, the camp’s

director and chairman of its board promised to take immediate action to improve the

camp’s financial condition, including such actions as more fund-raising activity and,

if necessary, cutting support staff at the camp.

When I first looked at the FY 2021 budget request and FY 2020 financial statements

When I noted the apparent funds transfer, I contacted the camp’s director who

informed me that the original donor, who had contributed $100,000 several years ago

for future building expansion, was no longer living. Further, after an exhaustive

search she was unable to locate a written agreement regarding the contribution. Upon

reporting these facts to the board of directors, a resolution was passed authorizing the

Chapter 14 – Accounting for Not-for-Profit Organizations

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over 2.0 and quick ratio over 1.0 are considered reasonable. Three months or more of

financial reserves would be considered reasonable. As you can see, the camp’s

financial improvement without the $37,500 is minimal. In short, the organization

would still be financially distressed without the questionable $37,500 transfer.

FY 2020

Chapter 14 – Accounting for Not-for-Profit Organizations

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Ch. 14, Solutions, Case 14-11 (Cont’d)

b. The answer to part b will depend on the individual students. Students should be

concerned with funding given the camp’s use of donor-restricted funds. Students

depending on state regulatory rules and policies, the state could revoke the

organization’s charter and force it to liquidate. One possible solution would be for the

camp to seek remedy from the courts, perhaps using the argument that they no longer

intend to expand the building (although there is no indication that such a policy

decision has been made).

14-12 a. The answer to this question will depend in part on the status of the project at the time

the assignment is made. As of June 14th, 2017 Phase Two has not yet been

redeliberated.

Chapter 14 – Accounting for Not-for-Profit Organizations

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Ch. 14, Solutions, Case 14-12 (Cont’d)

14-13 Issue: Is the Native American Heritage Center and Museum a government not-for-profit

entity or nongovernmental not-for-profit entity? This is an essential determination

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Ch. 14, Solutions, (Cont’d)

Solutions to Exercises and Problems

14-14. 1. c. 6. d. 11. c.

3. b. 8. b. 13. c.

5. c. 10. a.

General Problem Information: Various

14-15.

1. a 5. d (no indication contributions

2. d (conditional

promises are 6. c (endowment and earnings

4. c 8. b

General Problem Information: Classification of revenues and contributions

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Ch. 14, Solutions (Cont’d)

14-16.

2. Y 6. Y

4. N 8. Y

General Problem Information: Donated services

14–17.

1. The facts suggest the Center for Nonprofit Excellence should report

the gross revenues and expenses of the quarterly lunches. The

gross revenues from the lunches represent 3.3% of the total

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Ch. 14, Solutions, Exercise 14-17 (Cont’d)

2. Based on the information provided, it appears that direct benefit

expenses of the flower sale can be netted against the gross

revenues. The gross sales of the flower sale represent 2.2% of the

3. The special event revenue should be reported gross of the direct

benefit costs. For net reporting to be applicable, the events would

4. The music concert revenues should be presented gross along with

the direct expenses. The fact that 50% of the total revenue for the

year comes from the concert makes the event a major event.

Although the music concert is only carried on once a year, the

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Ch. 14, Solutions (Cont’d)

1. Based on the information provided, it appears that the purpose,

audience, and content criteria are met for this activity to be considered

a bona fide activity. The joint costs should be allocated between the

2. This activity fails all three criteria to be considered a bona fide activity

under FASB ASC 958–720–45. All the costs of the activity should

therefore be allocated to fund-raising expenses. The purpose of the

3. Based on the information provided, it appears that the purpose,

audience, and content criteria are met for this activity to be considered

Chapter 14 – Accounting for Not-for-Profit Organizations

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Ch. 14, Solutions, Exercise 14-18 (Cont’d)

The purpose of the lecture is to help accomplish the NFP’s

4. This activity would seemingly pass the three criteria; however, it

must be classified as a fund-raising event. It would appear that the

purpose of the campaign aligns with the NFP’s mission, which is to

support the city’s firefighters. An objective of all firefighters is to

Chapter 14 – Accounting for Not-for-Profit Organizations

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Ch. 14, Solutions, Exercise 14-18 (Cont’d)

14-19.

a. It appears there are several modifications that should be made to the ECE

14-2 for an example of how to report). It is not apparent from the

statement presentation just what the direct expenses related to the

special event were.

• Program fees are reported as with donor restrictions. Program fees

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Ch. 14, Solutions, Exercise 14-19 (Cont’d)

• Depreciation should be allocated to the functional areas.

14-20.

a. No. The presented statement is not in proper form for a statement of

1. Were there no fund-raising expenses related to the solicitation of

$111,400 in contributions?

2. Were the contributions of $50,000 for the Abstract Exhibit restricted by

the donor, such that the $4,000 excess of revenues over expenses will

have to be returned or spent on the program?

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Ch. 14, Solutions, Exercise 14-20 (Cont’d)

3. Should the $5,000 of equipment for the Public Exhibits program be

capitalized and depreciated? What is the capitalization policy of the

organization?

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14-21. THE SHANNON COMMUNITY KITCHEN

1. CASH 28,000

CONTRIBUTIONS—

2. PROGRAM EXPENSES 100

3. NO TRANSACTION IS RECORDED – MEAL SERVICE AND PREPARATION

DOES NOT REQUIRE A SPECIALIZED SKILL

4. CASH 5,000

5. PROGRAM EXPENSES 4,100

CASH 4,100