Deck 10: Financial Reporting for Not-For-Profit Organizations

Question 1

Which of the following reporting objectives for not-for-profit organizations allows the users to determine whether restricted funds were spent in accordance with the intended purpose?

A)Cash flow prediction
B)Performance evaluation
C)Stewardship
D)Measuring the cost of services rendered

Answer 1

C

Question 2

Under the deferral method of NFP accounting for unrestricted contributions, ________.

A)revenues are recognized first and then matched to the expenses
B)revenues are recognized first and then matched to the expenditures
C)expenses are recognized first and then matched to the revenues
D)expenditures are recognized first and then matched to the revenues

Answer 2

A

Question 3

A not-for-profit organization is not required to capitalize and amortize its capital assets if the organization ________.

A)has assets that total less than $500,000
B)has a two-year average annual gross consolidated revenue of less than $500,000
C)has an annual change to net assets of less than $500,000
D)has less than 10 full-time employees

Answer 3

B

Question 4

The Wellness Society, a not-for-profit organization, owns 30% of Walk for Canada, also a not-for-profit organization. The two organizations operate independently and have no board members in common. How should the Wellness Society account for its investment in Walk for Canada?

A)Cost method
B)Equity method
C)Equity method with supplemental disclosure
D)Note disclosure with a description of the relationship and nature and extent of its economic interest

Question 5

The CICA Handbook requires large not-for-profit organizations to ________.

A)immediately write-off the capital assets
B)capitalize, but not amortize the capital assets
C)capitalize and amortize the capital assets
D)only disclose the capital assets in the notes to the financial statements

Question 6

During the year, a not-for-profit art gallery acquired a number of pieces for its collection. Which of the following choices for reporting the acquisitions is not in accordance with the CICA Handbook?

A)Capitalize, but do not depreciate
B)Capitalize and depreciate
C)Immediate write-off
D)Note disclosure only

Question 7

Help Yourself, a not-for-profit organization, has a 5% economic interest in the Furnishing Bank, another not-for-profit organization. The organizations operate independently, have no directors in common, and have no transactions with each other. For financial reporting purposes, how should Help Yourself account for its interest in the Furnishing Bank?

A)Consolidation
B)The equity method
C)The cost method
D)Note disclosure only

Question 8

The Wellness Society, a not-for-profit organization, owns 5% of the shares of the Fitness Factory, a for-profit organization. The two organizations operate independently and have no board members in common. How should the Wellness Society account for its investment in the Fitness Factory?

A)Consolidation
B)The equity method
C)The cost method
D)Note disclosure only

Question 9

In Canada, what is the most common way for a museum to report its collection on its financial statements?

A)Capitalize without depreciating
B)Capitalize and depreciate
C)Note disclosure that includes the value of the collection
D)Note disclosure as to the existence of the collection only

Question 10

The Smith family contributed $200,000 to a local college to establish a scholarship fund in the name of their late father. Scholarships will be provided from the fund earnings. This is best described as which kind of contribution?

A)Internally restricted contribution
B)Externally restricted contribution
C)Endowment contribution
D)Unrestricted contribution

Question 11

One of the programs that the Tyger Society operates is a drug and alcohol awareness program for junior high school students across Canada. This is an example of _________.

A)business goods and services
B)private goods and services
C)collective goods and services
D)government goods and services

Question 12

The disbursement basis for recognizing resource outflows uses which of the following bases?

A)The full accrual basis
B)The accrual basis only as applied to liabilities
C)The accrual basis only as applied to expenses
D)The cash basis

Question 13

For NFPs with a GAAP constraint, the CICA Handbook ________.

A)permits disbursement basis accounting
B)permits disbursement or expense basis accounting
C)requires expenditure basis accounting
D)requires expense basis accounting

Question 14

Which of the following statements about incorporated not-for-profit (NFP)organizations is true?

A)Incorporated NFP organizations can only issue preferred share capital.
B)Incorporated NFP organizations do not have share capital.
C)Incorporated NFP organizations can only be government-owned.
D)NFP organizations cannot be incorporated.

Question 15

Jordan made a $100,000 contribution to the Appo Society, a not-for-profit organization. Jordan stipulated that his contribution be used for the organization's breakfast program in the next year. How should Appo record the contribution at the time of contribution?

A)As contribution revenue
B)As a deferred contribution
C)As a prepaid expense
D)No entry is required

Question 16

A university needs to know the cost of delivering each of its programs. Which basis would be the most appropriate for the university to use on its statement of operations?

A)Disbursement basis
B)Expense basis
C)Expenditure basis
D)Cash basis

Question 17

The Wellness Society, a not-for-profit organization, owns 25% of the shares of the Fitness Factory, a for-profit organization. Three of the 10-person board of directors of the Fitness Factory are also directors of the Wellness Society. How should the Wellness Society account for its investment in the Fitness Factory?

A)Consolidation
B)The equity method
C)The cost method
D)Note disclosure only

Question 18

For a not-for-profit organization, an expenditure is ________.

A)any payment for expenses or to settle a liability
B)a payment, a liability incurred, or a transfer of property to obtain goods or services
C)any cost associated with the consumption of goods or services
D)a capital acquisition only

Question 19

Under the deferral method, how should contributions received in the current year, but restricted for operating expenses for one or more future periods, be reported in the current year?

A)As deferred revenue on the balance sheet
B)As revenue in the statement of operations
C)As a direct increase to net assets
D)As a reduction of operating expenses on the statement of operations

Question 20

A not-for-profit organization provides language training and homework assistance to immigrants. Most of the services are provided by volunteers and all the funds come from public donations. The primary objective in preparing financial statements for this organization is ________.

A)stewardship
B)measuring the cost of services rendered
C)predicting cash flow
D)management evaluation

Question 21

On January 2, 20X6, the Exeter Golf and Country Club was formed and registered as a non-profit organization. In May 20X6, the club purchased a golf course near Exeter for $5,000,000. The purchase price was financed with an 8% mortgage loan of $4,500,000 and $500,000 contributed by the founding members. The mortgage was repayable over 25 years. The $500,000 contribution from the founding members was an interest-free loan repayable over five years.
The club and vendor of the golf course agreed that the $5,000,000 purchase price would be split as follows:
The land improvement costs include the costs of developing the golf course. Experts in the field estimate that major costs are incurred approximately every 25 years to redevelop a golf course.
During 20X6, the membership fees were established for the club as follows:
The initiation fee entitles the member to lifetime membership in the club and to a vote at the annual general meeting. The club hopes to sell 400 of these lifetime memberships over the next two years in order to pay off the existing loans and provide $3,000,000 for development of a clubhouse. The annual course fee is due by April 1 of each year. It entitles the member to golf at the club throughout the year. If the member pays the annual course fee prior to January 31, the fee is reduced to $950. It is expected that 60% of the members will take advantage of the early payment discount.
The club's president has approached you asking for assistance in establishing the accounting policies for the club for its yearly financial statements.
Required:
Assume that the club has decided to amortize the land improvement costs over 25 years and the clubhouse over 40 years, and to use the deferral method of accounting for contributions. Provide recommendations with supporting arguments for the accounting treatment of the initiation fees and annual fees.

Question 22

Contributions received by NFPs may be restricted. Funds can be received in the form of endowment contributions and contributions that are externally restricted by the donor or internally restricted by the board.
Required:
Explain the differences between endowment contributions and contributions that are externally restricted by the donor or internally restricted by the board. Discuss the accounting treatment for each type of restricted contribution if the NFP uses the deferral method of reporting.

Question 23

The transportation fleet department for a provincial government uses an encumbrance system. On October 15, 20X1, the department manager issued a purchase order for $4,000 for snow tires. The tires were delivered on October 31, 20X1, with an invoice for $3,800. What should be recorded on October 15, 20X1?

A)An accounts payable for $3,800
B)An encumbrance for $3,800
C)An accounts payable $4,000
D)An encumbrance for $4,000

Question 24

Which of the following statements is true?

A)The deferral method of accounting generally results in a lower level of revenue than the restricted fund method.
B)The deferral method of accounting generally results in a higher level of revenue than the restricted fund method.
C)The deferral method of accounting generally results in a higher level of revenue than the restricted fund method only if capital asset amortization is involved.
D)The deferral method of accounting results in the same amount of revenue as the restricted fund method.

Question 25

Big Research Foundation is a large not-for-profit organization that funds research into a variety of diseases. Annual revenues are in excess of $10 million. It has an endowment fund, a general fund, and a capital fund. You have just been appointed treasurer on its board and the accountant has come to you with a variety of questions.
Required:
Address each of the following questions, making sure that your advice complies with GAAP for not-for -profit organizations.
1. Big received a large endowment of $2 million on January 31, 20X9. During the year ended 20X9, there was interest earned of $60,000.
Prepare the journal entries required to record the receipt of the endowment and the interest earned.
2. During the year, 1,500 volunteer hours were provided. The accountant has estimated that the value of this time is $37,500. The accountant stated that without the volunteers, Big would have had to hire employees to perform the work.
Determine how the volunteer hours should be reported.
3. A large piece of research equipment was donated to the laboratory. The value of the equipment is $250,000 and it estimated to last about 10 years.
Prepare the journal entries related to this donated equipment for the year.

Question 26

For the 20X6 fiscal year, KU Care, a not-for-profit organization, received $300,000 in unrestricted donations and $175,000 in donations designated specifically for cancer research. $200,000 of the unrestricted donations and $100,000 of the restricted donations were expended in 20X6 for current operations and cancer research, respectively. KU did not set up a separate fund for the restricted donation. Under the deferral method, how much of the donations should be reported as revenue in the statement of operations for the 20X6 fiscal year?

A)$300,000
B)$375,000
C)$400,000
D)$475,000

Question 27

In a not-for-profit organization, donated capital assets are recorded at what value?

A)The donor's net book value
B)Replacement or reproduction cost
C)Fair market value
D)Estimated net realizable value

Question 28

Sydney won a lottery and made a $500,000 endowment contribution to his alma mater to provide scholarships. Under the deferral method, in the year of contribution, the university should recognize the contribution as which of the following?

A)Unrestricted revenue
B)Restricted revenue
C)Deferred revenue
D)An increase to net assets

Question 29

When is an obligation recorded under an encumbrance system?

A)When a purchase requisition is issued
B)When a purchase order is issued
C)When goods or services are received
D)When payment is made

Question 30

What type of not-for-profit (NFP)organization may be allowed to use the restricted fund method?

A)Any NFP organization
B)Any NFP that has a general fund for unrestricted contributions
C)Any NFP that has at least one internally restricted fund
D)Any NFP that has at least one externally restricted fund

Question 31

Mr. Generous donated $100,000 to Excel Private School and specified that the principal amount not be spent but be maintained permanently. Interest on the invested funds can be used to award scholarships to those who excel in drama. How should the $100,000 contribution be presented on Excel Private School's financial statements?

A)As a direct increase in net assets of the endowment fund
B)As revenue of the operating fund
C)As revenue of the endowment fund
D)As deferred revenue of the operating fund

Question 32

Quick Care, a not-for-profit organization, received an externally restricted contribution. Quick Care does not have a separate restricted fund for the contribution. Under the restricted fund method, the contribution will be recognized as which of the following?

A)A direct increase to net assets
B)Revenue in the endowment fund
C)Revenue in the general fund using the deferral method
D)Revenue in the general fund for unrestricted contributions

Question 33

Bright School is a private school operating as a NFP with a fiscal year end of December 31, 20X8. Bright School has an endowment fund and an operating fund. Earnings of the endowment fund can only be used to provide scholarships to students in need during the year. In any year that the full earnings are not paid out in scholarships, they may be carried forward and used in future years. Scholarships are paid from the operating fund. During the year, the following transactions occurred:
1. The endowment fund earned interest income of $40,000. Only $30,000 was paid out in scholarships in the current year.
2. An additional endowment contribution was received of $750,000 at the end of the year. In this case, earnings on this endowment can only be used to purchase equipment for the science labs in the school.
3. A pledge for an endowment for $350,000 was received in October, 20X8. This arose on the death of a long-time donor who made provisions in their will to leave to the school this endowment contribution. The lawyer handling the estate stated that the funds would be released in early February 20X9 once all of the legal requirements pertaining to the estate had been completed.
Required:
Prepare the journal entries to record the above transactions for the fiscal year-end December 31, 20X8. Bright School uses the deferral method of reporting.

Question 34

When budgetary control accounts are first set up, ________.

A)budgeted revenues are credited and budgeted expenditures are debited
B)actual revenues are credited and actual expenditures are debited
C)budgeted revenues are debited and budgeted expenditures are credited
D)actual revenues are debited and actual expenditures are credited

Question 35

A local ice cream shop pledged 10% of its sales on July 1 to the Children's Clubhouse, a not-for-profit organization. How should the Children's Clubhouse treat this pledge?

A)Accrue the pledge when it is made
B)Accrue the pledge only if the amount can be reasonably estimated
C)Accrue the pledge only if there is reasonable assurance that the ice cream shop will pay
D)Recognize the pledge when it is collected

Question 36

With respect to the endowment fund, which of the following statements is true?

A)Endowment contributions are treated the same way under both the deferral method and the restricted fund method.
B)Endowment contributions are recognized as revenue under the deferral method and as revenue in a restricted fund under the restricted fund method.
C)Endowment contributions are recognized as a direct increase to net assets under the deferral method and as revenue to the endowment fund under the restricted fund method.
D)Endowment contributions are recognized as revenue under the deferral method and as a direct increase to net assets under the restricted fund method.

Question 37

When is it not appropriate to use an encumbrance system?

A)When there is a significant lag between purchase orders and the receipt of goods
B)When reporting is done on an expenditure basis
C)When only a small part of expenditures for goods and services are discretionary
D)When commitments and expenditures are made on a decentralized basis

Question 38

On December 1, 20X1, Wilson contributed $25,000 to The Women's Shelter, stipulating that his contribution be used to buy a commercial refrigerator and freezer system. The system was purchased on January 2, 20X3. The shelter will depreciate the refrigerator over five years using the straight-line method, with no residual value. The shelter has a December 31 year-end and uses the deferral method. At December 31, 20X3, the shelter made a journal entry to record depreciation. What other journal entry, if any, should the shelter make?

A) $$\begin{array} { | l | l | l | } \hline \text { DR Capital asset } & 5,000 & \\\hline \text { CR Deferred contribution revenue (restricted) } & & 5,000 \\\hline\end{array}$$
B) $$\begin{array} { | l | l | l | } \hline \text { DR Deferred contribution revenue (restricted) } & 5,000 & \\\hline \text { CR Accumulated depreciation } & & 5,000 \\\hline\end{array}$$
C) $$\begin{array} { | l | l | l | } \hline \text { DR Deferred contribution revenue (restricted) } & 5,000 & \\\hline \text { CR Contribution revenue } & & 5,000 \\\hline\end{array}$$
D)No other entry is required.

Question 39

Which of the following statements related to accounting for donated goods and services for a not-for-profit (NFP)organization is true?

A)Recording the value of donated goods and services could be useful in evaluating management performance.
B)Recording the value of donated goods and services could result in inflated earnings.
C)Recording the value of donated goods and services enhances stewardship reporting.
D)Recording the value of donated goods and services is required by the CICA Handbook.

Question 40

The primary objective of using an encumbrance system is to keep track of an organization's ________.

A)purchase of goods and services
B)commitments made for the acquisition of goods and services
C)purchase of capital assets
D)expenditures

Question 41

Describe the four fundamental ways in which not-for-profit organizations differ from business enterprises. What are the reporting objectives of NFPs?

Question 42

Baseball for All (BFA)is a not-for-profit organization that runs baseball tournaments and clinics for all ages. It also buys equipment needed at the tournaments. It receives government funding from the municipality, and tournament and clinic fees are paid by participants. Generally, annual revenues have been $350,000. This year, BFA received a special grant of $150,000 to buy new equipment. Equipment in the amount of $180,000 was purchased. The equipment is expected to last five years.
Required:
Discuss the various methods that BFA can use to record the purchase of the equipment allowed under the CICA Handbook-Part III and prepare the appropriate journal entries. As part of your explanation, explain the differences between the expenditure basis and expense basis of reporting.

Question 43

Food for All (FFA)is a not-for-profit organization that has grown to be quite large. FFA operates 25 food banks in multiple locations throughout the province and has moved to a decentralized organizational structure. All of the funding is received by the head office and then each location is allocated a fixed amount of funds that can be used over the year for local expenses. Local expenses are at the discretion of the local managers. The board has decided to change its method of accounting to keep better track of costs at these various locations and to better manage the budget. The board has decided to implement a new budgeting and encumbrance accounting system.
Required:
1. In October 20X9, FFA issued a purchase order for $35,000 to have 100,000 pamphlets printed to be distributed to households over the next six months. In December 20X9, the pamphlets were received along with an invoice for $33,900. Prepare the journal entries for October and December 20X9 using encumbrance accounting.
2. Identify when encumbrance reporting would be appropriate. Comment as to whether or not encumbrance reporting is appropriate for FFA.

Question 44

A museum has invested substantial funds for its collection in the past. During the year, the museum hired a new accountant, who decided that the collection should have been capitalized and amortized to operations. The accountant needs the approval of the treasurer to prepare the journal entries required to correct the previous financial statements.
Required:
You are the treasurer of this museum. Outline your response to the accountant.

Question 45

World Doctors (WD)is a not-for-profit organization that provides medical expertise and equipment in areas of the world that cannot afford this type of service or have been struck with a disaster and need additional medical expertise. It is organized with numerous affiliated organizations. Recently, you have been appointed treasurer and the accountant has come to you with the following questions:
1. WD set up a new NFP, which it will use specifically for fundraising purposes. The board of directors of this agency is a separate board, but any funds raised will be paid to WD at the end of each year, after all related costs have been deducted.
2. WD purchased shares in a profit-seeking enterprise that manufactures and distributes medical equipment. The rational for this decision was to be able to get a seat on the board and influence the level of donated equipment made to WD each year. WD purchased 25% in this company.
3. Two directors of WD's board sit on a board (of a total of six members)of an NFP involved in providing relief when disaster strikes around the world.
Required:
Determine the accounting and reporting treatment of the affiliates described above.

Question 46

Kind to Animals (KTA)is an NFP that operates an animal shelter and commenced operations in 20X9. KTA has a December 31 year-end. In 20X9, the organization received $1.5 million to build a new shelter, which was completed in October 20X9. The shelter is expected to have a useful life of 40 years. This was financed with $800,000 of private donations and $700,000 of government grants. In addition, $150,000 was provided in government grants on October 1, 20X9, to fund two veterinarians for the next 12 months. Two veterinarians were hired October 1, 20X9, at an annual salary of $120,000 each. The organization is expected to generate $1,250,000 in annual revenues. During the period October 1 to December 31, KIA received donations of $275,000 and paid out operating expenses of $235,000.
Required:
Prepare a partial statement of financial position to capture the above transactions occurring during 20X9. KIA uses the deferral method and does not have a separate capital fund.