Deck 14: Health-Care Providers

Question 1

The amount of nonrestricted revenue that should be recognized by Pelican in the year of the gift is

A) $2 million.
B) $1,472,000.
C) $200,000.
D) $0.

Answer 1

$0.

Question 2

The amount of restricted revenue that should be recognized by Pelican in the year of the gift is

A) $2 million.
B) $1,472,000.
C) $200,000.
D) $0.

Answer 2

$1,472,000.

Question 3

Charity care provided by a health care organization would be recorded in a contra-revenue account.

Answer 3

False

Question 4

The statement of financial position of a not-for-profit health care organization should distinguish among nonrestricted and donor restricted net assets.

Question 5

Not-for-profit health care entities must provide information on the two categories of net asset donor restrictiveness.

Question 6

The statement of activities must indicate net assets released from restriction and any transfers between funds.

Question 7

AICPA's current industry guide, Health Care Entities, supersedes FASB guidelines for government-owned hospitals

Question 8

Unlike businesses, not-for-profit health care providers often serve patients who they know will be unable to pay any portion of the amounts billed.

Question 9

In the long run, the health of a hospital depends mainly on the demand for its services and the ability to meet that demand at a reasonable cost.

Question 10

In 2016 St. Martin's Hospital received a $50,000 cash gift to be used to buy supplies and other items for the pediatric department of the hospital. In 2017, St. Martin's purchased puppets and other items to be used in explaining medical procedures to young children. The acquisition of the items causes a NET decrease in which class(es) of net assets?

A) Nonrestricted net assets only.
B) Donor restricted net assets.
C) Both nonrestricted and donor restricted net assets.
D) Neither nonrestricted nor donor restricted net assets.

Question 11

For a not-for-profit hospital, which of the following financial statements is NOT required?

A) Statement of financial position.
B) Statement of activities.
C) Statement of cash flows.
D) Statement of functional expenses.

Question 12

Medicaid is a federally sponsored and managed health care program for retirees.

Question 13

Capitation fees paid by HMOs to hospitals, physicians, and other medical groups generally are based on the number of persons covered and expected costs to be incurred rather than on actual services provided.

Question 14

The services of Health Maintenance Organizations are prepaid and fixed.

Question 15

Health care organizations provide uncompensated patient care as a matter of policy but not law.

Question 16

Prepaid health care plans that earn revenue from agreements to provide services record revenue when services are rendered.

Question 17

Not-for-profit hospitals are accounted for similarly to businesses but must adhere to the FASB's standards for not-for-profit entities.

Question 18

The services of Preferred Provider Organizations are prepaid and fixed.

Question 19

Intermountain Hospital, a not-for-profit health care provider, issued $70 million in term bonds to finance construction of a new wing at its main hospital. Terms of the bond issue require that $5 million of the proceeds of the bond issue be invested in U.S. government securities. The $5 million must be held until maturity of the bonds. The $5 million will increase which class of net assets?

A) Nonrestricted net assets.
B) Donor restricted net assets
C) General net assets.
D) Either (b) or (c).

Question 20

In a not-for-profit health care organization, the cost of malpractice must be accrued if it is either probable that impairment has occurred or if the amount of loss can be reasonably estimated.

Question 21

A hospital carried a 2-year malpractice insurance policy that allows for retroactive premium adjustments based on experience (claims actually incurred). The basic premium is $300,000, payable in advance. At the end of the first year the hospital estimates that it will have to pay an additional $80,000 in premiums as a result of claims filed in the current year and it estimates that it will incur additional premiums in the second year of $100,000 as a result of claims filed in the second year. The amount of insurance expense that should appear on the financial statements at the end of the first year should be

A) $150,000.
B) $230,000.
C) $300,000.
D) $480,000.

Question 22

In prior years, a not-for-profit hospital received funds from a donor who restricted the use of those funds to providing nursing scholarships. During the current year $8,000 of scholarships were awarded. These scholarships should be reported

A) As expenses in the nonrestricted fund.
B) As reductions in the revenue section in the nonrestricted fund.
C) As expenses in the donor restricted fund.
D) As expenses in the general fund.

Question 23

The community hospital of Briarwood normally includes proceeds from sales of meals in its cafeteria as

A) Ancillary service revenues
B) Other revenues
C) Deductions from dietary meal service expenses
D) Patient service revenues

Question 24

A consortium of physicians agrees to provide services to the employees of a large county government. The agreement calls for monthly payments from the county to the consortium in the amount of $200,000 per month. County employees are not billed for services rendered by the consortium. All county employees are required to use the consortium under their health care program (any services rendered to county employees by other physicians are not covered under the health plan). During the month the consortium performed services for county employees for which it would have billed $170,000. The consortium referred patients to other health care providers for services they could not perform. The consortium estimates that patients will be billed $10,000 for those services. The amount of revenue that should be recognized for the month by the consortium is

A) $200,000.
B) $190,000.
C) $170,000.
D) $160,000.

Question 25

Sponsors of not-for-profit health care organizations generally include:

A) Universities
B) Community Organizations
C) Religious Organizations
D) Any of the above

Question 26

Based upon St. Thomas Hospital's established billing rate structure, the hospital would have earned patient service revenue of $5,100,000 for the year. However, the hospital does not expect to collect this amount because of charity care provided in the amount of $600,000 and contractual allowances to third-party payers of $450,000. How much should the hospital record as patient service revenue for the year?

A) $5,100,000
B) $4,650,000
C) $4,500,000
D) $4,050,000

Question 27

A not-for-profit hospital signs a contract with an insurance company in which the company agrees to pay the hospital $9 million in capitation fees for the year July 1, 2017, through June 30, 2018. Between July 1, 2017 and December 31, 2017, the hospital provides services that, at its standard rates, would bill at $5.1 million. Between January 1, 2017, and June 30, 2018, it provides services that it would bill at $4.2 million. For the year ending December 31, 2017, the hospital should recognize capitation revenue of

A) $0
B) $4.5 million
C) $5.1 million
D) $9 million

Question 28

Hospital revenue usually includes which of the following?

A)
B)
C)
D)

Question 29

In the process of general purpose external financial reporting, a health care organization is required to present

A) A separate statement of changes in equity, net assets, or fund balances
B) A statement of activities or operations
C) Performance indicators (required only of for-profit entities)
D) Fund group information (required only of not-for-profit organizations)

Question 30

During the current year, St. Louise's Hospital (a not-for-profit entity) earned, based on its normal billing rate, $1 million in patient service revenues. Many of these patients belong to a health plan that has an established pay schedule. Based on the specific services rendered to members of the plan, the hospital estimates that $0.05 million will not be collectible from the plan or the patient. Some of the patients are hospital employees. These employees are given a 50 percent discount on the services rendered. Employee discounts for the current year total $0.01 million. Some of the patients are uninsured and the hospital estimates that, of the amount billed to the uninsured patients, $0.2 million will not be collectible (bad debts). The amount of net patient service revenues for St. Louise's Hospital for the current year is

A) $1 million.
B) $0.94 million.
C) $0.87 million.
D) $0.74 million.

Question 31

An accountant has encountered a perplexing financial reporting issue related to the hospital for which she is preparing financial statements. The issue is not specifically addressed by FASB statements. To which of the following sources would the accountant probably look first for industry-specific guidance?

A) GASB Statements.
B) AICPA accounting and auditing guide, Not-for-Profit Organizations.
C) AICPA accounting and auditing guide, Health Care Organizations.
D) Pronouncements of the HFMA or AHA.

Question 32

A specialized health care facility normally purchases its medicines. However, this month a wealthy philanthropist donates the medicines. The donated medicines should be recorded at fair market value and should be credited to:

A) Deferred revenue
B) Nonrestricted net assets
C) Non-operating gains
D) Other revenues

Question 33

The LRF Healthcare Foundation donated 1,800,000 as a permanent endowment to a senior citizen health and welfare organization during the year. The foundation stipulated that the income and investment appreciation be used to maintain its preventive care center for the elderly. The endowment principal had an investment appreciation of $120,000 and investment income of $160,000. The organization spent $140,000 to maintain its preventive care center during the year. What is the amount of change in nonrestricted net assets that the organization should report?

A) $140,000
B) $160,000
C) $280,000
D) $1,940,000

Question 34

The Medical Arts Clinic, a well-established health care organization, received a $1,500,000 pledge in fiscal year 2018 that was restricted to cover operating expenses. The gift was received over two years; $600,000 in the first year and $900,000 in the second year. The following table reflects the funds received as well as the amounts spent on operating the clinic. What should the clinic report as Net Assets Released from Restrictions on the statement of activities for the fiscal year ended June 30, 2019?

A) $900,000
B) $960,000
C) $1,020,000
D) $1,500,000

Question 35

The Gulf Coast bank is holding a $750,000 donation in an independent permanent trust with the investment income dedicated for use by Coastal Hospital for operating purposes. The $750,000 principal should be:

A) Disclosed in notes to the financial statements of the hospital
B) Reported as a permanently restricted net asset of the hospital
C) Reported as non-operating revenue of the hospital
D) Reported as an asset limited as to use by the hospital

Question 36

A hospital estimates that, based on past experience, it will incur $5 million in malpractice claims as a result of services rendered in the current period. The hospital carries a malpractice insurance policy with a yearly $2 million deductible clause. The amount that should appear on its year-end financial statement as Claims Expense (Loss) should be

A) $0.
B) $2 million.
C) $3 million.
D) $5 million.

Question 37

Which of the following would normally be considered ongoing or central transactions for a not-for-profit hospital?

A) Recovery room fees for surgical patients
B) Room and board fees from patients
C) Both of the above
D) Neither of the above

Question 38

During the current year, a voluntary health and welfare organization receives $800,000 in nonrestricted pledges. Of this amount, $300,000 has been designated by donors for use next year to support operations in the pharmacy. If 20 percent of the nonrestricted pledges are expected to be uncollectible, what amount of nonrestricted support should the organizations recognize in its current-year financial statements?

A) $800,000
B) $700,000
C) $500,000
D) $400,000

Question 39

Daniel, an auditor, is performing a routine review of a not-for-profit hospital and notes the following account balances in the statement of activities for the fiscal year ending September 30, 2017: What amount should the hospital report as net patient service revenue in its statement of activities for the fiscal year ending September 30, 2017?

A) $4,080,000
B) $4,140,000
C) $4,030,000
D) $4,410,000

Question 40

In accounting for health care organizations, restricted net assets are:

A) Not available for current operating use; however, the income generated is available for current operating use.
B) Not available unless the directors remove the restrictions.
C) Restricted as to use only for board-designated purposes.
D) Restricted as to use by the donor, grantor, or other source of the resources.

Question 41

Problem 3
a. Patient billings To patient revenues, and contractual discounts (38% of $550,000)
b. Capitation payments To recognize revenue from capitation fees
c. Charity care - No entry necessary; should not be recognized as revenue.
d. Billing and retrospective adjustment Patient accounts receivable-allowance To recognize billings and estimated contractual adjustments To recognize collections
Patient accounts receivable-allowance To recognize refund due to Lowen, Inc.

Question 42

Problem 1

Question 43

Nonrestricted revenues of a not-for-profit health care organization generally are subdivided into "patient care revenue" and "other revenue." Which of the following revenues would NOT be considered patient care revenue?

A) Fees for providing medical records.
B) Charges for room and board.
C) Charges for operating room services.
D) Laboratory and pharmacy fees. ANSWERS TO MULTIPLE CHOICE (CHAPTER 14)

Question 44

Problem 2 To record contribution revenue (in a nonrestricted fund) (The portion of the contribution that was spent in the same year as it was received may be recorded as nonrestricted revenue.) To record the remaining balance of the contribution (in a donor restricted fund).
d. Endowment earnings To record investment income (in a nonrestricted fund). The entire amount is nonrestricted in as much as the spending restriction was imposed by the board, rather than by outside donors.
e. Increase in market value of investments To record the increase in market value of investments (in a nonrestricted fund). As indicated in the problem, income from endowments is nonrestricted.
f. Depreciation To record depreciation expense (in a nonrestricted fund)
g. Others operating expenses To record the other operating expenses (in a nonrestricted fund)
.
h. Building fund pledge

Question 45

A not-for-profit residential assisted-living center engaged in the following transactions during the year. Prepare appropriate journal entries.
a. The center billed residents for $4,100,000. Of this amount it estimates that $2,000,000 will be paid by third-party providers at a rate of only 80 percent. Of the remaining balance, it estimates that 2 percent will be uncollectible.
b. The center collected $3,400,000.
c. The center received a cash contribution of $70,000 to be used exclusively for residents' educational and cultural programs. Of this amount, the center spent $55,000 on qualified activities during the year.
d. The center earned interest and dividends of $25,000 (cash) on its endowment of $500,000. Income from the endowment is nonrestricted. However, it is the policy of the center's board of trustees that only income greater than 2 percent of the principal balance will be available for expenditures. The balance will be retained in the endowment to compensate for inflation. Thus, only $15,000 of the income was made available for expenditure.
e. The market value of the endowment's investments increased by $10,000.
f. The center recognized $170,000 of depreciation on the building and $55,000 on equipment.
g. The center incurred other operating expenses of $3,500,000, of which $3,300,000 was paid in cash.
h. At year-end the center received a pledge of $4,200,000 toward the center's new building campaign. It will be paid at the rate of $1,400,000 at the end of each of the following three years. The center uses a discount rate of 3 percent to value noncurrent pledges. Based on that rate, the present value of the annuity is $3,960,040.

Question 46

Prepare journal entries for the following transactions of St. Mary's Hospital, a not-for-profit health care entity.
a. St. Mary's hospital billed the state Medicaid program $550,000 for services provided at its standard billing rate. The prospective payment system gives Medicaid a 38 percent discount from these rates.
b. The hospital has an arrangement with an HMO to provide hospital care to the HMO's members at a specific rate per member, per month. In April the HMO paid the hospital $640,000 per agreement for patients treated in March. Based on pre-established billing rates, the hospital would have billed the HMO $735,000.
c. The hospital provided services to patients under "charity care" which amounted to $1,915,000 for the year.
d. At its standard billing rates St. Mary's hospital provided services to Lowen, Inc., a third-party payor, for $3,580,000. The retrospective billing arrangement with Lowen, Inc. stipulates that the hospital would receive payment at an interim rate of 85 percent of its established rates, subject to retrospective adjustment based upon agreed-upon allowable costs. By the end of the fiscal year, Lowen, Inc. had paid all the billings. Before issuing its financial statements, the hospital estimated that it would need to refund $290,000 to Lowen, Inc., based on allowable costs.

Question 47

A "term endowment" is a gift with donor specifications whereby

A) The principal is available for expenditure after a specific period of time.
B) The principal must be returned to the donor after a specific period of time.
C) The income generated must be added to the principal after a specific period of time.
D) The income generated must be expended within a specified period of time.

Question 48

St. Anthony's Hospital is a private not-for-profit entity that provides health care services to citizens of the small rural community in which the hospital is located. The most recent construction at the hospital was financed using Hill-Burton funds. During the current month, St. Anthony's engaged in the following transactions. Make the appropriate journal entries for St. Anthony's for the current month.
a. Based on the hospital's established billing rate, services rendered to patients amounted to $1.5 million. Of this amount $1,000,000 will be billed to Delta Medical Group; a third-party payor that insures many state employees; $190,000 will be billed to uninsured patients; $250,000 is provided to indigents and will be considered charity care; and $60,000 was for services rendered to hospital employees.
b. Delta Medical Group pays for services rendered to its insurees on a rate schedule based on types of procedures rendered. For the services rendered during the current month to Delta insurees, Delta will reimburse the hospital $975,000. Part of the agreement between St. Anthony's and Delta is that Delta insurees will not be billed for the difference between the amount that the hospital bills and the amount that Delta pays.
c. Based on prior experience with uninsured patients, the Hospital estimates that $75,000 of the $190,000 will be uncollectible.
d. The hospital provides a 50 percent discount for services rendered to its employees.
e. The hospital recognizes the value of charity services rendered.
f. The hospital is the defendant in a malpractice suit. Attorneys for the hospital are reasonably sure the hospital will be found liable and that the best estimate of the amount of the loss is $1,500,000. The hospital carries medical malpractice insurance with a $500,000 deductible clause.
g. The hospital has numerous capital assets on its books. Straight-line depreciation on the assets is $150,000 for the current period.

Question 49

During a particular year, a not-for-profit hospital provides services that at standard rates would be billed at $400 million. This amount includes $20 million of charity care. Of the remaining $380 million, the hospital estimates that $240 million will be billed to third-party providers which, per contractual agreements, will pay only 75 percent of the standard rate (i.e., $180 million). Of the $140 million to be billed to individuals, the hospital estimates that $80 million will have to be written off as bad debts. The hospital should recognized net patient care revenue of

A) $240 million
B) $320 million
C) $380 million
D) $400 million