For a number of years, a private not-for-profit entity has been preparing financ

Question

For a number of years, a private not-for-profit entity has been preparing financial statements that do not necessarily follow generally accepted accounting principles. At the end of the most recent year (Year 2), those financial statements show total assets of $2,000,000, total liabilities of $320,000, total unrestricted net assets of $840,000, total temporarily restricted net assets of $520,000, and total permanently restricted net assets of $320,000. In addition, total expenses for the year were $940,000 (shown in unrestricted net assets). At the beginning of Year 1, the entity above received $72,000 in cash as a gift with the stipulation that the money be used to buy a bus. The accountant made the appropriate entry at that time. On the first day of Year 2, the entity spent the $72,000 for the bus, an asset that will last for 20 years and will have no salvage value. Because the money came from an outside donor, the entity decided that a time restriction on the bus should be assumed for 20 years. In Year 2, it reported $3,600 as depreciation expense in unrestricted net assets. In addition, the organization made a $72,000 reduction in permanently restricted net assets and a $72,000 increase in unrestricted net assets.

a. What was the correct amount of unrestricted net assets at the end of Year 2?

What was the correct amount of expenses for Year 2?

What was the correct amount of temporarily restricted net assets at the end of Year 2?

a. What was the correct amount of unrestricted net assets at the end of Year 2?

What was the correct amount of expenses for Year 2?

What was the correct amount of temporarily restricted net assets at the end of Year 2?

Explanation / Answer

Solution:

There is a difference in accounting system for a non-profit making organization and profit making organization. The non profits organization calls their financial statements in different names. The Balance Sheet is called as The Statement of Financial Position and the Income Statement is called as The Statement of Activities. The Shareholders equity is replaced with Net Assets.

Net Assets is the net difference between the non-profit’s assets and its liabilities.

Total Assets includes three parts:

Unrestricted Net Assets:

When the donor doesn’t specify exactly where or how the organization to use the given donation amount, the that contribution is considered as unrestricted Net assets. This amount can be used by the organization for whatever purpose it sees fit to.

Entry would be: The donation will appear on the Statement of Activities (as Unrestricted Contribution Revenue) and on the Statement of Financial Position it will appear under Asset (as unrestricted Net Assets)

Temporarily restricted Net Assets:

When the donor make a contribution earmarked for a specific purpose. That donation amount has to be used only for that purpose. Example it could be for purchase of a vehicle,or specific project or program.

Entry would be: The donation will appear on the Statement of Activities (as Temporarily restricted Contribution Revenue) and on the Statement of Financial Position it will appear under Asset (as Temporarily restricted Net Assets)

Permanently restricted Net Assets:

In case the donor make a donation in perpetuity. Example if the donor makes a contribution in the form of say stock, stipulating that only the dividends from the stock to be used by the organization and not to sell of the stock. So that the stock can grow and provide good dividends for long time. In this case the

Entry would be: The donation will appear on the Statement of Activities (as Permanently restricted Contribution Revenue) and on the Statement of Financial Position it will appear under Asset (as Permanently restricted Net Assets)

Again if the dividends are used for specific purpose then those dividends would be treated as a temporarily restricted assets as they are received and if there is no such stipulation it would be considered as unrestricted net assets.

So,

a) the correct amount of unrestricted Net Assets at the end of year 2 would be $771,600 ($840,000-72,000+3600)

b) the correct amount of Temporarily restricted Net Assets would be $516,4000 ($520,000-$3,600)

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