Question

In December 2020, the Consumer Association of America (CAA), a not-for-profit research organization, received a $6 million grant from the Sporting Goods Manufacturers Association (SGMA) to develop a football helmet that will provide better protection against head injuries. The grant was intended to cover $4 million of direct costs and $2 million of overhead costs. The grant contract stipulated that the SGMA would make its payment to the CAA upon receiving invoices from CAA for the actual direct costs incurred. It further required that the research results be reported only to the SGMA and not be made publicly available. Each reimbursement payment for direct costs incurred would also include an appropriate proportion of indirect costs (i.e., an additional $0.50 for each $1 of direct costs).

In 2021 the CAA carried out and completed the research for which it contracted. Direct costs were, as estimated, $4 million. It submitted the necessary invoices and received payment in full.

1. Prepare required journal entries for 2020 and 2021. Be sure to indicate whether each entry should be made to an restricted by donor fund or not restricted by donor fund. You need not, however, record the indirect costs themselves (inasmuch as, by their very nature, they are not tied directly to the grant).

2. Assume instead that in December 2020 the CAA received from the National Sports Association (NSA) a pledge of $6 million. The donation is for research relating to football helmets. The NSA is a not-for-profit agency, and the results of any research will be in the public domain. In January 2021, the CAA received the contribution. Throughout the remainder of 2021 it carried out its football-related research (incurring $4 million of direct costs). Prepare the required journal entries for 2020 and 2021 and indicate whether each entry should be made to a fund that is restricted by a donor or not.

3. Comment on any differences between the two awards that might justify differences in revenue recognition.

4. Suppose instead that the NSA promised to make its contribution only on receiving a report that the research had actually been completed. Would your approach have been different? Explain.

Answer 1

Refer the below images for the above asked questions in a detailed way of solution.
Answer: Requirement : Research grant (contractual agreement): This grant has the features of an exchange than a contribution. It is not donor therefore would be reported in an unrestricted. transaction restricted rather and 2020 : No entry would be required when the grant is received the contract signed). In essence, the grant is a contract, At the time the grant is received, the research association has not yet performed its promised research Sertices the manufacturer's association has not yet made any payments - 2021: unrestricted fund particulars DY 4 Research expense ale or To cash (or accounts payable) (Being to record research expenses) $6 Grants and contracts receivable the or To Revenue from Sponsored research (Being to recognize revenue from the Sponsored research) $6 พ cash the TO Grants & contracts receivable (Being to record collection of cash)

Revoirement : Restricted contribution : This contributions restricted by the donor for a Specific purpose. 16 2020 : Temporarily restricted fund particolars pledges receivable (from NSA) Al Dr To Revenues from contributions (Being to record the restricted pledge from the NSA). $6 2021 : un restricted fond Dr particolars $4 $ 4 Research expenses Alc. or Cdirect) TO Cash for accounts payable) (Being to record research expenses) 6 $6 Due from restricted fond Ale or To Net assets released from restrictions (Being to record anticipated reimbursement from restricted fond). Cash Ak To Due from restricted fond (Being to record collection of cash from restricted fond).

Temporarily restricted fund : particolars $6 cash To (Bring Ale OV pledges receitable (from NSA) to record fulfillment of pledge by NSA). $6 Net assets released from restrictions Alc or To cash to record (Bling payment to unrestricted fond) Note lead would also to the of point : other combinations same end resulte entries recognized Requirement (3 : The grant (contract) revenue from the SGMA was. recognized only as the research was carried out. It is an ordinary commerccal "cost plos" contract. The restricted contribution from the NSA was recognized when the pledge was made. It is not conditioned in any Speatic activities on the part of the Cad. cost plos" control the pledge Requirement 4: FASB statement No. 116 stipulates that revenue from conditional contributions should not be recognized until the Conditions are satisfied. Therefore, CAA would not recognize revenue from NSA'S contribution until it had completed the research.