Chapter 18

True or false: The Jones Corporation donates $30,000 in cash to a local private not-for-profit entity. Jones Corporation should record this gift as a reduction in contributed capital.

False

True or false: Board designated funds held by a private not-for-profit entity are not considered to be restricted net assets.

True

True or false: An entity receives an art work as a donation. It is valued at $25,000. It qualifies for optional accounting treatment. Whether the entity is a primary government or a private not-for-profit entity, the optional treatment is identical.

False

True or false: Central Museum pays $1 million in cash to acquire Stockdon Museum. Stockdon has one asset. It is a large building with a net book value of $670,000 today and a fair value of $900,000. Both museums are private not-for-profit entities. Stockdon Museum has historically operated using grants and has no significant source of revenues. In reporting this combination, the premium of $100,000 will be reported as goodwill.

False

True or false: Restricted net assets are properly spent on an operating expense. The operating expense is reported on the statement of activities as an operating expense within the restricted net assets.

False

True or false: The Healthy Heart Association is a private not-for-profit entity. It spends $55,000 to send out a brochure to raise funds. The brochure contains other information. All of this $55,000 must be reported as a supporting services cost.

False

A patient goes to a private not-for-profit hospital for health care and the charge is $50,000. The patient has few financial resources so the hospital charges the full amount but then writes the balance down to $2,000. Which of the following is true?

The $48,000 reduction is charity care and not an implicit concession.

A private not-for-profit health care entity charges a patient $77,000 for a minor operation. Because the patient has little money, the hospital reduces the public balance to $10,000 and then makes a real effort to collect that amount. Which of the following is true?

The revenue is recorded at $10,000 and no contract is made of the discount.

True or false: Reynolds Price made a $75 cash donation to a private not-for-profit entity that has been awarded Section 501 (c)(3) status by the Internal Revenue Service. Assuming that he itemizes his deductions for tax purposes and he is not over the income limits, Price can reduce his taxable income as a result of the $75 donation.

True

The Lost Love Organization has filed with the US Internal Revenue Service for recognition as a tax-exempt organization based on the guidelines of Section 501 (c)(3). Which of the following is true about that income tax status?

Unrelated business income continues to be subjected to income taxation.

Proctor and Jones School is a private not-for-profit entity. On its current statement of activities, $55,000 is reported as "net assets released from restrictions." What is the impact of that designation?

Unrestricted net assets increase by $55,000 and restricted net assets decrease by $55,000.

The San Lowsingso Hospital near Sacramento, California, charges a group of patients a total of $1 million. Historically, this group has only been charged 45 percent of the total because of explicit and implicit price concessions. After that, the hospital estimates that it has a 40 percent chance of collecting the entire amount but a 60 percent chance of collecting 70 percent. What amount of patient service revenues are recognized? Assume the most likely outcome approach is applied?

$315,000

The Denton Hospital near Austin, Texas, charges a group of patients a total of $1 million. Historically, this group has only been charged 45 percent of the total because of explicit and implicit price concessions. After that, the hospital estimates that it has a 40 percent chance of collecting the entire amount but a 60 percent chance of collecting 70 percent. What amount of patient service revenues are recognized? Assume the weighted-average approach is applied?

$369,000

Helping People United is a private not-for-profit organization that is currently preparing a statement of financial position. This NFP reports $3 million in assets and $2 million in liabilities so that its net assets total $1 million. Of that amount, $300,000 in cash and investments have donor restrictions. The money must be used for a particular purpose or at a specific point in time. In addition, another $100,000 has been set aside by the NFP's board for future expansion. How much should be identified as net assets without donor restrictions?

$700,000

Central Museum pays $1 million in cash to acquire Stockdon Museum. Stockdon has only one asset. It is a large building with an original cost of $810,000 but a net book value of $670,000 today. It currently has a fair value of $900,000. Both museums are private not-for-profit entities. In reporting this combination, at what amount will Central Museum record this building?

$900,000.

The D'Angelo Health Care Clinic is a private not-for-profit health care entity. The clinic does work for a patient and charges $65,000. Later, a contractual adjustment of $4,000 is made to reduce the amount to $61,000. What is a contractual adjustment?

A contractual adjustment is a reduction in charges made by a third-party payor so the amount is reasonable for that area.

Students at West Coast University (a private not-for-profit entity) receive considerable financial aid because tuition costs are high. This past year, students were charged $50 million for student tuition and fees but were also given $40 million in financial aid. Which of the following is true about the financial reporting?

A direct reduction of $40 million is reported to the student tuition and fees revenue.

Which of the following is not a barrier that must be overcome before a conditional pledge can be recognized by a private not-for-profit entity?

A requirement that the charity provide aid for the homeless members of the local community.

On a set of financial statements for private not-for-profit entities, what basis of accounting is used to time the recognition of revenues and expenses?

Accrual accounting

Central Museum pays $1 million in cash to acquire Stockdon Museum. Stockdon has only one asset. It is a large building with an original cost of $810,000 but a net book value of $670,000 and a fair value today of $900,000. Both museums are private not-for-profit entities. Stockdon Museum has historically used the building as a significant source of revenues. In reporting this combination, how will the premium of $100,000 paid in excess of the value of the net assets be reflected?

As goodwill.

Mr. Abraham donates $1 million in cash to a private not-for-profit entity. The money must be used to cover a major part of the construction costs of a new science laboratory. How does the organization report this amount on a statement of financial position?

As net assets with donor restrictions because the money has to eventually be spent for a specifically designated purpose.

In Year One, Ms. Bailey donates $1 million in cash to a private not-for-profit entity. The money must be held until Year Five and can then be spent in any way that the governing board decides. In reporting this gift, how is this amount designated?

As net assets with donor restrictions.

The Sydney Charitable Organization is a private not-for-provide entity. It reports a statement of financial position. What are the major inclusions on this statement?

Assets and liabilities

A rich patron makes a pledge of $100,000 to a local private not-for-profit entity. This donation is judged to be conditional. The money has not yet been transferred. What recording does the organization make?

Because the donation is conditional on some specific future event, it is not recorded.

The Ames Health Care Clinic charges a patient $76,000 for a medical procedure. Subsequently, the patient's insurance company demands that the health care clinic accept $60,000 as payment in full. What term is applied to the $16,000 difference?

Contractual adjustment

True or false: The Healthy Lungs Association is a private not-for-profit entity. It spends $55,000 to send out a brochure to raise funds. The brochure is not distributed solely to potential donors but does contain a call for action that is consistent with the mission of the organization. Consequently, all of this $55,000 must be reported as a program services cost.

False

True or false: When two not-for=profit entities come together to form a single not-for-profit entity, the event is always accounted for as an acquisition in much the same way as in for-profit accounting.

False

Tyrone Weatherly is a carpenter. He spent 50 hours building a small patio behind the office of a private not-for-profit entity. Weatherly normally charges $30 per hour but did this work for free. How should the private not-for-profit entity record this?

Increase assets and contribution revenue by $1,500.

The Waynesboro Art Museum is a private not-for-profit organization. A donor conveys title to a painting by Picasso. It is worth $230,000. It will be exhibited by the museum and carefully guarded. If the painting is ever sold, the proceeds must be used to buy a new addition to the museum's collection. Which of the following is true about this work of art?

It can be reported at $230,000 or not reported at all.

Jerry Chambers makes a pledge of $20,000 to a private not-for-profit entity but specified that no money will be conveyed until the charity feeds free meals to more than 5,000 children per month. At the time of the pledge, what recording does the charity make?

It is not recorded. It is a conditional gift because the 5,000 meals represents a measurable performance-related barrier.

Which of the following is a common characteristic of not-for-profit entities?

Many, but not all, receive significant amounts of contributions.

Jim Jones mows the grass for free each week for a private not-for-profit entity in his home town. How should the entity report this contribution?

No recording should be made of this contributed service.

Mr. Armstrong agrees to donate $100,000 to Wells College once land has been acquired for a new football field. Mr. Armstrong gives $12,000 of this money immediately to show that he is sincere. The land has not yet been bought. How is this donation reported by the school assuming it qualifies as a private not-for-profit organization?

Only the $12,000 is reported and it is shown as a liability.

Which of the following is the most popular federal income tax tax-exempt status?

Section 501 (c)(3)

A private not-for-profit entity reports its revenues and expenses on which of the following financial statements?

Statement of activities

Holding Helping Hands is a private not-for-profit entity that is currently producing financial statements. On which statement will the charity report it assets and liabilities?

Statement of financial position

The Redstone Club is a private not-for-profit entity that charges its members a $100 per month fee. After this fee is paid, members receive considerable benefits in return such as access to a swimming pool and exercise machinery. What reporting does the private not-for-profit entity make?

The $100 per month is reported as earned revenue.

The Barclay Club is a private not-for-profit entity that charges its members a $100 per month fee. Members receive virtually no benefits in return for the fee which is used to support designated charity work. When these fees are received, what reporting does the private not-for-profit entity make?

The Barclay Club should report the fee as contributed revenue and not as earned revenue.

The Shenandoah Art Museum is a private not-for-profit organization. A donor conveys title to a painting by Picasso. It is worth $230,000. It will be exhibited by the museum and carefully guarded. If the painting is ever sold, the proceeds can be used to cover operating costs of the museum. Which of the following is true about this work of art?

The art work should be reported as an asset at $230,000.

The Health Wonder Organization is a private not-for-profit entity. This organization receives money as payments for contributions and also as exchange transactions. The organization receives $60,000 for revenue to be earned over the next year but reported it as a general contribution. Which of the following is not true?

The balance for net assets without donor restrictions does not need to be adjusted for fair presentation.

The Healthy Liver Association is a private not-for-profit entity. It spends $55,000 in cash to distribute a brochure to raise funds. Officials want to report a portion of this cost as a program services cost rather than solely as supporting services costs. Which of the following is not a necessary requirement for reporting a portion of this type cost as a program services cost?

The brochure must be limited to people who have had a direct relationship with the organization previously.

Eliminate Poverty is a private not-for-profit entity. Assist the Poor is another private not-for-profit entity that operates in the same city. These two groups decide to combine to better meet the mission of the two groups. How is the accounting for this combination handled?

The combination could be reported as either a merger or an acquisition.

The Ridge Corporation donates $18,000 in cash to United Memphis (UM), a private not-for-profit entity. UM normally collects money for the Memphis Symphony (MS) but has the right to give the money to a different symphony if one is found with specific financial needs. When UM receives the $18,000, what recording does it make?

The gift is recorded as contribution revenue under restricted net assets.

A patient goes to a private not-for-profit health care provider to have emergency surgery. Which of the following is not deemed a third party payor?

The patient

Wilson Animal Care is a private not-for-profit entity. On the last day of the current fiscal year, Wilson receives cash of $12,000 in an exchange transaction that will require Wilson to provide specified services over the following year. Which of the following is true about the reporting on the day of the collection?

The reported net assets neither increases nor decreases.

Which of the following is true about board designated net assets reported by a private not-for-profit entity?

They are considered net assets without donor restrictions because their use has not been stipulated by an external donor.

Which of the following is not a general characteristic of a not-for-profit entity?

They must receive all funding through donations.

Why are third-party payors so important in the financial reporting of health care entities?

Third-party payors pay a large portion of health care costs and demand reliable financial information to verify the validity of the charges.

Eastern Southern University is a private not-for-profit entity. Student tuition and fees for this past year was $100 million. The school also awarded $18 million in financial aid to the students. This $18 million was reported by the school as a program expense because it related to education. Which of the following is correct?

Total revenues and support will be overstated by $18 million.