Question

Longer Life is a not-for-profit organization that works to create cures for deadly diseases. It was created on December 30, 2014 from generous contributions. 

 

The balance sheet as of January 1, 2015 shows the following balances:

         Cash                                                                                             $1,400,000

         Deferred contributions                                                                     400,000

         Unrestricted net assets                                                                      800,000

         Net assets – Endowments                                                                 200,000

         

The deferred contributions relate to restricted donations that must be used for the purchase of equipment (20% of the amount) and for specific research expenses (80% of the amount). Also, 40 percent of any investment income from endowments must be used to cover the purchase of advertising services for the fund raising campaign and the rest is unrestricted.

 

During the year ended December 31, 2015, the organization completed the following transactions:

1. At the beginning of 2015, Longer Life received an unusual gift. A former member of the association transferred by a will a piece of land with a fair value of $165,000. The will stipulates that the land should be sold and that the amount should be maintained in permanence by the association. The investment income is however unrestricted.

2. Unrestricted contributions of $420,000 were received.

3. Research expenses of $346,000 were incurred, including $120,000 of specific research expenses related to restricted contributions. All expenses were paid, except an amount of $10,000 that is still owed at the end of 2015.

4. Equipment was purchased for an amount of $75,000 using restricted contributions. The related amortization expense is $8,000.

5. Additional equipment was purchased for an amount of $100,000 using unrestricted funds. The amortization expense for this equipment is $12,000.

6. A grant of $60,000 was received from United Way. This grant is unrestricted.

7. A donor gave $50,000 to the charity for specific purposes. The related expenses will be incurred in 2016.

8. Endowment funds were used to purchase investments for an amount of $180,000 that generated an investment income of $17,000 for 2015 (totally cashed).

9. Advertising expenses of $5,000 were paid using restricted funds.

10. Fund-raising expenses of $75,000 and administrative expenses of $155,000 were paid using unrestricted money.

11. An unrestricted pledge of $100,000 was received. The organization expects to collect the entire amount. 

12. In 2015, the association spent $50,000 cash to develop a web site that will be used to promote its activities and collect donations. The development is almost complete and the web site will be officially launched in January 2016. 

13. At the end of 2015, the association invested $800,000 in term deposits maturing in 30 to 90 days.

 

Required

 

A)   Prepare a statement of operations and a statement of changes in net assets for 2015 and a statement of financial position as of December 31, 2015 assuming that Longer Life adopts the deferral method of accounting for contributions and wishes to present net asset invested in capital assets separately. (Please provide the details of the figures included in the amounts reported to facilitate marking – i.e. journal entries, t-charts...). 

 

B)   If Longer Life was to adopt the restricted fund method of accounting for contributions, identify the funds that the organization should use for financial reporting purposes. (financial statements are not required)

 

Answer 1

Solution:-

A)

The account wise changes as per the Statement of Operations are as under:

• Cash - -$1,064,000;
• Equipment - $155,000;
• Investments - $180,000;
• Pledge - $100,000;
• Term Deposits - $800,000;
• Deferred Contributions - -$245,000;
• Net Assets - Unrestricted - $84,200;
• Net Assets - Endowments - $166,800;
• Net Assets - Capital Assets - $155,000;
• Outstanding Research Expenses - $10,000;

The Net Increase / (Decrease) of Net assets as per the Statement of Changes in Net Assets is as under:

• Deferred Contributions - -$245,000;
• Net Assets - Unrestricted - $84,200;
• Net Assets - Endowments - $166,800;
• Net Assets - Capital Assets - $155,000;

The Total of Assets and the Total of Liabilities and Net Assets as per the Statement of Financial Position as of Dec 31st, 2015 is $1,571,000.

B)

If the Restricted fund method for contributions is employed, then the Deferral contributions account is not required to be created in books of accounts as all the contributions received irrespective of whether related expenses are incurred or not would be recognized as income in the year of receipt of such contribution or grant. In such a case, the organization would use the Net Assets - Restricted and Net Assets - Unrestricted fund accounts in the financial statements.

Workings/Explanation:

A)

The Journal Entries for the following transaction for the year 2015 are as under:

A C D 1 Journal Entries for the year 2015 Accounts and Explanation Debit ($) 2. Sl. No Credit (S) 4 1 $165,000 5 Cash a/c Dr To Contributions alc (To record the sale proceeds of the land) $165,000 6 7 8 2 $420,000 9 Cash a/c Dr To Contributions alc (To record the unrestricted contributions received) $420,000 10 11 12 3 $346,000 1a Research expenses alc Dr To Cash ac To Research Expense payable a/c (To record the Research expenditure incurred and paid) $336,000 $10,000 14 15 16 17 4 $75,000 19 Equipment a/c Dr To Cash ac (To record the purchase of Equipment) $75,000 19 20 21 5 $100,000 22 $100,000 Equipment a/c Dr To Cash ac (To record the purchase of Additinal Equipment) 22 24 25 6 $20,000 26 Depreciation a/c DI To Equipment a/c (To record the depreciation expense on the Equipment) $20,000 27 29 29 7 $60,000 20 Cash a/c Dr To Contributions a/c (To record the grant received form United way) $60,000 81

A C D 33 8 $50,000 34 $50,000 Cash a/c Dr To Deferred Contributions a/c (To record the grant received for specific purpose) 25 26 27 9 $180,000 ae Investments a/c Dr To Cash alc (To record the purchase of Investments) $180,000 29 40 41 10 $17,000 42 Cash a/c Dr To Income from Investments ac (To record the income received from Investments) $17,000 43 44 45 11 $5,000 46 Advertisement expense alc Dr To Cash alc (To record the advertisement expenses incurred) $5,000 47 48 49 12 $75,000 $155.000 50 51 Fund rising expense a/c Dr Administrative expense a'c Dr To Cash ac (To record the fund rising and administrative expenses incurred) $230,000 52 54 $100,000 55 13 Pledge Receivable a/c Dr To Income from Pledge a/c (To record the receipt of pledge received) $100,000 56 57 58 14 $50,000 59 Website expense a/c Dr To Cash alc (To record the Website cost paid) $50,000 60 61 62 15 $800,000 63 Term Deposits a/c Dr To Cash alc (To record the investment made in term deposits) $800,000 64

Formula Sheet:

A C D 1 Journal Entries for the year 2015 Accounts and Explanation Debit ($) 2 Sl. No Credit (S) 3 4 1 5 Cash a/c Dr =165000 To Contributions alc (To record the sale proceeds of the land) =C4 6 7 8 2 9 -C8 Cash a/c Dr =420000 To Contributions alc (To record the unrestricted contributions received) 10 11 12 3 =346000 1a Research expenses alc Dr To Cash ac To Research Expense payable a/c (To record the Research expenditure incurred and paid) =336000 =C12-D13 14 15 16 17 4 =75000 19 Equipment a/c Dr To Cash ac (To record the purchase of Equipment) =C17 19 20 21 5 =100000 22 =C21 Equipment a/c Dr To Cash ac (To record the purchase of Additinal Equipment) 22 24 25 6 =8000+12000 26 =C25 Depreciation a/c DI To Equipment a/c (To record the depreciation expense on the Equipment) 27 29 7 =60000 30 =C29 Cash a/c Dr To Contributions a/c (To record the grant received form United way) 81

A B D 38 8 34 =C33 Cash a/c Dr =50000 To Deferred Contributions a/c (To record the grant received for specific purpose) 25 26 27 9 =180000 28 Investments a/c Dr To Cash alc (To record the purchase of Investments) =C37 29 40 41 10 =17000 42 =C41 Cash a/c Dr To Income from Investments a/c (To record the income received from Investments) 42 44 45 11 =5000 46 =C45 Advertisement expense a/c Dr To Cash alc (To record the advertisement expenses incurred) 47 48 49 12 =75000 =155000 50 51 Fund rising expense a c Dr Administrative expense a/c Dr To Cash alc (To record the fund rising and administrative expenses incurred) =C49-C50 52 52 54 $100,000 =C54 55 13 Pledge Receivable a/c Dr To Income from Pledge a/c (To record the receipt of pledge received) 56 57 5e 14 =50000 Website expense alc Di To Cash alc (To record the Website cost paid) =C58 8 8 8 8 8 9 60 61 62 15 =800000 =C62 Term Deposits a/c Dr To Cash ac (To record the investment made in term deposits) 64

The Statement of Change in Net Assets for the year 2015 is as under:

А B E 1 N 3 4 5 6 Statement of Change in Net Assets for the year 2015 Net Assets Particulars Deferred Unrestricted Endowments Capital Assets Amount (S) Amount (S) Amount (3) Amount (3) Revenue: Receipt of Sale proceeds of Land $165,000 Contributions received $420,000 Grant received from united way $60,000 Charity for specific purpose $50,000 Income from Invetsments $10.200 $6,800 Pledge Receivable $100,000 Total $50,000 $590,200 $171,800 SO 7 8 9 10 11 12 13 14 15 $120,000 $226,000 16 Expenses: Research expenses Amortization of Equipment Amortization of Additional Equipment Advertisement Expenses Fund Raising & Adminstration Expenses Website Cost Total $8,000 $12,000 17 18 $5,000 19 20 $230,000 $50,000 $506,000 21 $120,000 $5,000 $20,000 22 23 Capital Items: Purchase of Equipment 24 -$175,000 $175.000 25 26 Increase / (Decrease) in Net Assets -$245,000 $84,200 $166,800 $155,000 27 28 Opening Net Assets $400,000 $800,000 $200.000 SO 29 30 Closing Net Assets $155.000 $884.2001 $366,800 $155,000

Formula Sheet:

А B E 1 N 3 4 5 6 Statement of Change in Net Assets for the year 2015 Net Assets Particulars Deferred Unrestricted Endowments Capital Assets Amount ($) Amount ($) Amount ($) Amount (S) Revenue: Receipt of Sale proceeds of Land =165000 Contributions received =420000 Grant received from united way $60,000 Charity for specific purpose =50000 Income from Invetsments =17000*60% =17000*40% Pledge Receivable =100000 Total =SUM(C6:c11) SUM(D6:D11) =SUM(E6:E11) =SUM(F6:F11) 7 8 9 10 11 12 13 14 15 16 17 Expenses: Research expenses Amortization of Equipment Amortization of Additional Equipment Advertisement Expenses Fund Raising & Adminstration Expenses Website Cost Total 18 =120000 =346000-15 =8000 =12000 =5000 =75000+155000 =50000 =SUM(C15 C20) =SUM(D15:D20) =SUM(E15:E20) =SUM(F15 F20) 19 20 21 22 23 Capital Items: Purchase of Equipment 24 =-175000 =175000 25 26 Increase / (Decrease) in Net Assets =C24-C12-C21 =D24+D12-D21 =E24+E12-E21 =F24+F12-F21 27 28 Opening Net Assets =400000 =800000 =200000 $0 29 30 Closing Net Assets =C26+C28 =D26-28 =E26+E28 =F26+F28

Thus the Increase / (Decrease) of Net assets as per the Statement of Changes in Net Assets is as under:

Deferred Contributions - -$245,000;

Net Assets - Unrestricted - $84,200;

Net Assets - Endowments - $166,800;

Net Assets - Capital Assets - $155,000;

The Statement of all the Operations and the changes in various accounts are as under:

А B D E 33 34 Closing Balance 35 36 37 38 39 40 Statement showing Account wise Operations for the year 2015 Particulars Opening Changes Balance Cash $1,400.000 Receipt of Sale proceeds of Land $165.000 Contributions received $420.000 Research Expenses paid -$336,000 Purchase of Equipment -$75,000 Purchase of Additional Equipment -$100.000 Grant received from united way $60,000 Charity for specific purpose $50,000 Purchase of Investments -$180,000 Income from Investments $17,000 Advertisement Expenses paid -$5,000 Fund Raising & Adminstration Expenses -$230,000 Website Cost paid -$50,000 Term Deposits Placed at the end of the year -$800,000 -$1,064,000 41 42 43 44 45 46 47 48 49 $336,000 50 51 $0 52 Equipment Purchase of Equipment Purchase of Additional Equipment 53 $67,000 $88,000 $155,000 54 $155,000 55 56 $0 Investments Purchase of Investments 57 $180,0001 $180,000

А B с D E 59 $0 Pledge Pledge Receivable 8 $100,000 $100,000 61 62 $0 Term Deposits Term Deposits Placed at the end of the year 63 $800,000 $800,000 64 65 $400,000 Deferred Contributions Increase / Decrease) in Net Assets 66 -$245,000 $155,000 67 68 $800,000 Net Assets - Unrestricted Increase / (Decrease) in Net Assets 69 $84.2001 $884,200 70 71 $200.000 Net Assets - Endowments Increase / (Decrease) in Net Assets 72 $166,8001 $366,800 73 74 $0 Net Assets - Capital Assets Increase / (Decrease) in Net Assets 75 $155,000 $155.000 76 77 $0 Outstanding Research Expenses Payable at the end of the year 78 $10,000 $10,000

Formula Sheet:

A B c D E 33 34 35 36 37 38 39 40 Statement showing Account wise Operations for the year 2015 Opening Closing Particulars Changes Balance Balance Cash $1,400,000 Receipt of Sale proceeds of Land =E6 Contributions received =D7 Research Expenses paid =-(C15+D15-D78) Purchase of Equipment =-75000 Purchase of Additional Equipment =-100000 Grant received from united way =D8 Charity for specific purpose =C9 Purchase of Investments =-180000 Income from Investments 1=17000 Advertisement Expenses paid =-E18 Fund Raising & Adminstration Expenses =-D19 Website Cost paid =-D20 Term Deposits Placed at the end of the year =-800000 =SUM(D36:D48) =C35+D49 41 42 43 44 45 46 47 48 49 50 51 52 Equipment Purchase of Equipment Purchase of Additional Equipment $0 =-D39-F16 =-D40-F17 =sum(D52:D53) 53 54 =C51+D54 55 56 Investments Purchase of Investments $0 =-D43 57 =C56+D57

A B c D E 59 Pledge Pledge Receivable $0 =D11 60 =C59+D60 61 62 $0 Term Deposits Term Deposits Placed at the end of the year 63 =-D48 =C62+D63 64 65 Deferred Contributions Increase / Decrease) in Net Assets $400,000 =C26 66 =C65+D66 67 68 Net Assets - Unrestricted Increase / Decrease) in Net Assets $800,000 =D26 =C68+D69 70 71 8 RN RN Net Assets - Endowments Increase / (Decrease) in Net Assets $200,000 =E26 72 =C71+D72 73 74 Net Assets - Capital Assets Increase / Decrease) in Net Assets $0 =F26 75 =C74+D75 76 77 $0 Outstanding Research Expenses Payable at the end of the year 78 =10000 =C77+D78

Thus the account wise changes as per the Statement of Operations are as under:

Cash - -$1,064,000;

Equipment - $155,000;

Investments - $180,000;

Pledge - $100,000;

Term Deposits - $800,000;

Deferred Contributions - -$245,000;

Net Assets - Unrestricted - $84,200;

Net Assets - Endowments - $166,800;

Net Assets - Capital Assets - $155,000;

Outstanding Research Expenses - $10,000;

The Statement of Financial Position as of December 31st 2015 is as under:

A B C 81 82 83 84 Statement showing the Financial Position as on December 31st 2015 Particulars Amount (S) Assets: Cash $336,000 Equipment $155,000 Investments $180,000 Pledge Receivable $100,000 Term Deposits $800,000 Total Assets $1,571,000 85 86 87 88 89 90 91 92 93 94 Liabilities and Net Assets: Deferred Contributions Net Assets - Unrestricted Net Assets - Endowments Net Assets - Capital Assets Outstanding Research Expenses Total Liabilities and Net Assets $155,000 $884,200 $366,800 $155,000 $10,000 $1.571.000 95 96 97

Formula Sheet:

A B 81 82 83 84 Statement showing the Financial Position as on December 31st 2015 Particulars Amount (S) Assets: Cash =E49 Equipment =E54 Investments =E57 Pledge Receivable =E60 Term Deposits =E63 Total Assets =sum(C84:C88) 85 86 87 88 89 90 91 92 93 94 Liabilities and Net Assets: Deferred Contributions Net Assets - Unrestricted Net Assets - Endowments Net Assets - Capital Assets Outstanding Research Expenses Total Liabilities and Net Assets =E66 =E69 =E72 =E75 =E78 =sum(C92:C96) 95 96 97

B)

If the Restricted fund method for contributions is employed by the organization, then the Deferral contributions account is not required to be created in books of accounts. This is because in this method all the contributions whenever received irrespective of whether related expenses are incurred or not in that year, would be recognized as income in the year of receipt of such contribution or grant. Hence, the concept of income deferral need not arise. However, the split of the contributions received as per the restrictions of usage needs to be maintained in the normal course. Hence, the organization would use the Net Assets - Restricted and Net Assets - Unrestricted fund accounts in the financial statements.