Chapter 18

A voluntary health and welfare organization is preparing a statement of activities. How are expensed classified?

As either program services costs or supporting services costs.

The Ace Historical Society for Local Art (a private not-for-profit entity) acquires a sculpture by a resident of the community at a cost of $15,000. Because it has a life of only 20 years, it is recorded as an asset. Which of the following statements is true?

Depreciation expense must be recognized each year.

The Hanson Organization is a private not-for-profit entity. Officials are beginning to prepare financial statements. What group is in charge of the accounting principles that this organization must follow?

FASB

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: Income earned by permanently restricted net assets is also identified as permanently restricted net assets.

False

State University is a public school that prepares annual financial statements. What group is in charge of the accounting principles that State University will apply when creating those statements?

GASB

A private not-for-profit entity has income from selling some of its material. The income is not unrelated business income. Which of the following is true?

The income is not taxable whether it is a 501 (c)(3) organization or a 501 (c)(4) organization.

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

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.

The Hayden Artistic Society has been a private not-for-profit entity. At the beginning of the current year, that organization and Arts in Our World are brought together to form a new organization--Hayden Arts in Our World. Which of the following statements is correct?

A merger of the two entities has taken place.

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.

Bright Minds is a private not-for-profit school. This past week it paid its teachers a total salary of $130,000. How is this cost reported on the statement of activities?

A salary expense of $130,000 is reported within net assets without donor restrictions regardless of where the money originated.

Which of the following is true about the reporting of a statement of functional expenses by a private not-for-profit entity?

A statement of functional expenses is required of voluntary health and welfare organizations.

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.

What effect does the new revenue recognition rules have on the recording of bad debt expense by a private not-for-profit health care entity?

Bad debt expense is likely to be much smaller.

Wilma Pearson arrives at the local hospital unconscious because of a fall in her home. She is alone but the hospital provides necessary medical services. Which of the following is correct?

Before revenues can be recognized, a formal contract must be established in some way.

Which of the following is normally not disclosed by a tax-exempt organization that files a Form 990?

Description of future acquisition plans

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: Susannah Castelo donates 100 shares of Amazon common stock to a private not-for-profit organization. The organization's governing body has a policy whereby all such gifts are liquidated upon receipt. Because the resulting cash came from the sale of a nonoperational asset, this cash inflow is reported as an investing activity.

False

The Center for Wellness is a private not-for-profit entity. For internal purposes, the accounting system maintains several separate funds to monitor a variety of restricted gifts. For external reporting purposes, which of the following is true?

Financial statements focus on the not-for-profit entity as a whole.

Blue Bay Association is a private not-for-profit entity that supports communities around a local bay. It receives a $200,000 cash gift in Year One to buy equipment for a local park. The money must be spent for that purpose. There is a time restriction stipulated by the donor that will be reflected in the financial statements. The equipment must be maintained and used for its entire five year life. The money is spent at the start of Year Two and has no expected residual value. What is reported in Year Two on the statement of activities for this city?

First, unrestricted net assets go up $40,000 and restricted net assets go down $40,000. Second, depreciation reduces unrestricted net assets $40,000.

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

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

Good Health and Home is a private not-for-profit entity. On Monday, it receives a pledge of $1,000 as a conditional gift. On Tuesday, the cash is received. On Wednesday, the barrier that created the condition is achieved. What financial reporting is appropriate for Monday?

No entry is made on Monday

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

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.

A private not-for-profit school received a $60,000 cash gift in Year One that must be used (according to the donor) to pay for student lunches. In Year Two, $34,000 was spent on meals given to the students for free. On the statement of activities for Year Two, what is the impact reported on unrestricted net assets?

There is no net effect on unrestricted net assets.

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.

The Park Corporation donates $17,000 in cash to United Memphis (UM), a private not-for-profit entity. Park retains no rights to this money. UM collects money solely for the Memphis Symphony (MS). When the $17,000 is received, what recording does UM make?

UM records a $17,000 liability.

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.

Right Museum has a building with a net book value of $2 million and a fair value of $5 million. Downtown Museum has a building with a net book value of $1 million and a fair value of $2 million. They both qualify as private not-for-profit entities. Right Museum and Downtown Museum are merged to form DownRight Museum. What dollar amount is reported for the buildings if this is viewed as a merger?

$3 million.

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

On January 1, Year One, Mr. and Ms. Wilbur Swinstly gave a cash gift of $4 million to a private not-for-profit school. The money has to be held in perpetuity. All income earned from this money has to be spent to supplement the salary of the school's teachers. During Year One $180,000 in income was earned but none has been spent yet. How are these net assets reported?

$4 million is an increase in permanently restricted net assets and $180,000 is an increase in temporarily restricted net assets.

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 informational form that a tax-exempt organization must submit each year with the Internal Revenue Service is Form .

990

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

The Austin Health Society and the Texas Society for the Prevention for Illness have combined in some manner. After this event, goodwill of $343,000 is reported. Which of the following is correct?

An acquisition has apparently taken place.

Plan 9 is a theater company in Haynes, Virginia. It is a private not-for-profit entity. Square Marx is a much larger theater company that is affiliated with Plan 9. One of the employees for Square Marx is a makeup artist. When Plan 9 puts on a play, Square Marx has its makeup artist provide those services to Plan 9 for free. What is the most likely method for Plan 9 to report these donated services?

An expense is recognized based on the amount earned by the employee during this time along with contributed revenue.

Which of the following not-for-profit entities does not qualify as a voluntary health and welfare organization?

An organization that promotes the protection of wild life.

Cincinnati Art and Health League is a private not-for-profit entity. D'angelo Stanford donates 1,000 shares of stock to this organization near the end of Year Two. The organization has a policy whereby donated stocks and bonds are liquidated upon receipt so that they money can be put to use. These shares are sold for $28,000. How is this cash inflow reported on a statement of cash flows?

As an operating activity

A private not-for-profit entity works with refugees and furnishes them with clothing and other needed items. James Clothing contributes 1,000 pairs of shoes to the entity. The pairs of shoes cost James $20 each but have a fair value of $30 each. How is this contribution reported by the private not-for-profit entity in its statement of activities?

As contribution revenue of $30,000 within its unrestricted net assets.

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.

A private not-for-profit organization incurs costs that relate directly to its mission. How are these costs identified?

As program service costs.

The Ace Organization is a private not-for-profit entity. In the current year, Ace incurs a cost of $90,000 for administrative expenses. How are those costs classified on a statement of activities?

As supporting services costs

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

Emily Watson supports a local private charity by donating 1,000 new beds that cost her $40 each but were worth $70 each. She stipulates that these beds must be given to 1,000 people living in poverty over the next 8 months or returned to her. What entry does the charity make when they receive the beds?

Furniture to distribute is recorded for $70,000 as is a liability for $70,000.

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.

The Left Bank Museum is a private not-for-profit entity that combines with Uptown Art Museum. The accountants for the two entities indicate that this combination is an acquisition because Left Bank has gained control over Uptown. How was this control most likely established?

Left Bank has obtained the ability to determine the direction of management and policies for both museums.

The Chesterfield Corporation (CC) donates $21,000 in cash to United Memphis (UM), a private not-for-profit entity. UM collects the money for the Memphis Symphony (MS). The money is conveyed within one year to MS. At what point does MS record this donation as contribution revenue?

MS records the contribution revenue at the point in time when neither CC nor UM have the ability to alter the recipient.

Stempleton Association is a private not-for-profit entity that supports local communities. It receives a $200,000 gift in Year One to buy equipment for a city park. The money must be spent for that purpose but no time restriction is made on the use of the equipment. The money is spent at the start of Year Two on equipment with a five-year life and no expected residual value. What is reported in Year Two on the statement of activities for this city?

Net assets released from restrictions is $200,000: increase net assets without donor restriction and decrease net assets with donor restrictions.

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.

The Left Bank Museum is a private not-for-profit entity that combines with Uptown Art Museum. The accountants for the two entities indicate that this combination qualifies as an acquisition. How was that determined?

One of the two organizations gains control over the other.

A private not-for-profit health care entity provides 10 patients with services. Each patient is charged $10,000. However, because of the mission of the health care entity, no amount is expected to be collected from nine of these patients because their income levels are low. How is this reported by the health care entity?

Only patient service revenue of $10,000 is reported.

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 events is most likely to be judged to be a merger in accounting for private not-for-profit entities?

Right Museum and Downtown Museum are brought together to form a third museum (DownRight Museum).

Better Aging is a private not-for-profit entity that has received tax-exempt status as an advocacy group. What section of the Internal Revenue Code permits advocacy groups to be granted tax-exempt status?

Section 501 (c)(4)

The Elderly Watchers is an advocacy group that workers for the benefit of senior citizens. It has filed for tax-exempt status. What tax-exempt status is The Elderly Watchers most likely to use for its application?

Section 501(c)(4)

Susanna Young-Hays makes a cash donation of $120 to a Section 501 (c)(3) organization and a $90 cash donation to a Section 501 (c)(4) organization. Ms. Young-Hays itemizes deductions for tax purposes. Her income is not above any limitations for itemized deductions. Which of the following is true?

She can include the gift to a Section 501(c)(3) organization in her itemized deductions but she cannot use the gift to the Section 501(c)(4) entity.

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.

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 provides 10 patients with services. Each patient is charged $10,000. However, because of the mission of the health care entity, nothing is expected to be collected from nine of these patients because their income levels are low. How is the $90,000 amount reported?

The $90,000 must be reported in footnote disclosure.

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.

The Tennessee Corporation (TC) donates $19,000 in cash to United Memphis (UM), a private not-for-profit entity. UM collects money for the Memphis Symphony (MS). However, TC has retained the right to (a) ask for return of the money or (b) change the final recipient. This decision can be made up to the date of the actual conveyance to MS. When UM receives the money, what recording does the entity make?

The gift is recorded as a liability to TC since the money might have to be returned.

The Village Museum, a private not-for-profit entity, buys a large art work on January 1, Year One. At the end of Year One, no depreciation is recognized in connection with this property. Which of the following is most likely to be true?

The museum plans to preserve the art work so that it will have an extraordinarily long life.

Several large donors give $40,000 in cash to a private not-for-profit organization with instructions to convey the money to the best charity in the state for treatment of childhood diseases. The organization has not yet made its selection. Which of the following statements is true?

The not-for-profit entity recognizes an increase in net assets with donor restrictions because it chooses the recipient of the money.

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

James Imhoff stays in a private not-for-profit hospital for two days because a head injury. What problem might the hospital have in reported the resulting revenue?

The patient might be unable to establish a contract for services because of the injury.

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.

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.

The Winston Homeless Shelter spends $40,000 for supplies used in the current period. $10,000 of this money came from a donor and the other $30,000 came from unrestricted funds. How would this expense be reported on the organization's statement of activities?

This operating expense would be entirely reported within net assets without donor restrictions.

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.

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

True

The Wisteria Hospital of Kansas is a private not-for-profit health care entity. It is applying new revenue recognition principles and reports over $14 million in patient service revenue. Which of the following is most likely to be correct?

Under normal circumstances, bad debt expense will be quite small.

Which of the following is true about the financial reporting of a private not-for-profit entity?

Financial reporting is similar to for-profit reporting unless differences exist in the nature of the transaction or the needs of the users.

Recent updates in accounting rules for private not-for-profit entities created which of the following changes for the statement of cash flows?

Eliminated the need to reconcile the direct method of reporting operating activity cash flows to the indirect method if direct method is used.

Good Health and Home is a private not-for-profit entity. On Monday, it receives a pledge of $1,000 as a conditional gift. On Tuesday, the cash is received. On Wednesday, the barrier that created the condition is achieved. That concludes the handling of this gift. What financial reporting is appropriate for Wednesday?

A liability is reduced and net assets without any donor restrictions is increased.

The JK Company is a for-profit business organization. Wayside Care is a private not-for-profit entity. They both prepare a statement of cash flows. They both use the direct method to present operating activities. Which of the following is a difference between these two statements?

A reconciliation between operating activity cash flows and net income is required of JK Company but not Wayside Care.

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

The Boston Health Care Association is a private not-for-profit entity. It just filed Form 1023 with the US Internal Revenue Service. What was the purpose of this filing?

Form 1023 is an application by a private not-for-profit for recognition as a tax-exempt entity based on the guidelines of Section 501 (c)(3)

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.

Body Healthy is a private not-for-profit entity. The entity's bookkeeper works 40 hours per week and is paid $30 per hour. During three weeks in September, the bookkeeper worked 5 of those hours each week to help solve a reporting problem for Fine Feet, an affiliated group. Fine Feet was not charged for the person's time. What reporting should Fine Feet make for the time the bookkeeper worked on its problem?

Bookkeeping expense and contribution revenue should both be recognized as $450.

Good Health and Home is a private not-for-profit entity. On Monday, it receives a pledge of $1,000 as a conditional gift. On Tuesday, the cash is received. On Wednesday, the barrier that created the condition is achieved. What financial reporting is appropriate for Tuesday?

Cash and a liability are both 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

Dr. Laura Kaye is a dentist who occasionally donates her time to a private not-for-profit entity that furnishes dental care for children living in poverty. She recently spent 20 hours working with children at the not-for-profit entity's clinic. Her normal billing rate is $90 per hour. How does the organization record this contribution?

Dental services expense of $1,800 and contribution revenue of $1,800.