chapter 19-1. chapter 19-2 accounting for nongovernment nonbusiness organizations: colleges and...
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Chapter 19-1
Chapter 19-2
AccountingFor NongovernmentNonbusinessOrganizations: CollegesAnd Universities, HospitalsAnd Other Health CareOrganizations
Advanced Accounting, Fourth Edition
19191919
Chapter 19-3
Four Major Classifications of NNOs:
1. Nonprofit institutions of higher education.
2. Hospitals and other health care providers.
3. Voluntary health and welfare organizations
(VHWOs).
4. Other nongovernment nonbusiness organizations
(ONNOs).
Nongovernment Nonbusiness Nongovernment Nonbusiness Organizations (Organizations (NNOs)NNOs)
Nongovernment Nonbusiness Nongovernment Nonbusiness Organizations (Organizations (NNOs)NNOs)
Chapter 19-4
Most guidance for NNOs is found in Audit and Accounting Guides of the AICPA and in publications of industry:
Colleges and Universities Audits of Colleges and Universities, 2nd ed. (AICPA, 1975) Financial Accounting and Reporting Manual for Higher
Education
Hospitals and Other Health Care Providers Audits of Providers of Health Care Services (AICPA, 1989)
Voluntary Health and Welfare Organizations (VHWOs) Audits of Voluntary Health and Welfare Organizations (AICPA,
1988)
Other Nongovernment Nonbusiness Organizations Audits of Certain Nonprofit Organizations, second edition
(AICPA, 1987).
Hierarchy of Reporting Standards Hierarchy of Reporting Standards (NNOs)(NNOs)Hierarchy of Reporting Standards Hierarchy of Reporting Standards (NNOs)(NNOs)
Chapter 19-5
Most guidance for NNOs is found in Audit and Accounting Guides of the AICPA and in publications of industry:
Hierarchy of Reporting Standards Hierarchy of Reporting Standards (NNOs)(NNOs)Hierarchy of Reporting Standards Hierarchy of Reporting Standards (NNOs)(NNOs)
LINK to Audit and Accounting Guides
Chapter 19-6
Three Basic Financial Statements required:
1. Statement of financial position
Net Asset categories:
Unrestricted net assets
Temporarily restricted net assets
Permanently restricted net assets
2. Statement of activities
3. Statement of cash flows
Financial Reporting for Not-for-ProfitFinancial Reporting for Not-for-ProfitFinancial Reporting for Not-for-ProfitFinancial Reporting for Not-for-Profit
Chapter 19-7
Most NNOs use fund accounting for recordkeeping and reporting purposes.
Six funds commonly used:
1. Current Fund (restricted and unrestricted).
2. Plant Fund.
3. Endowment Fund.
4. Loan Fund.
5. Agency or Custodial Fund.
6. Annuity and Life Income Fund.
Fund AccountingFund AccountingFund AccountingFund Accounting
Chapter 19-8
Financial statements for NNOs (accrual basis)
Revenues are reported when earned and realized or
realizable, and
Expenditures are reported when materials or services
are received.
For external reporting purposes,
Revenues are classified by source, and
Expenses and expenditures are classified by function
or activity.
Accrual Basis of AccountingAccrual Basis of AccountingAccrual Basis of AccountingAccrual Basis of Accounting
Chapter 19-9
Current Unrestricted Funds
Accounting for Current FundsAccounting for Current FundsAccounting for Current FundsAccounting for Current Funds
Financial resources that may be expended at the discretion
of the governing board
Current Restricted Funds
Resources restricted because of legal, contractual, or
external restrictions on their use.
Chapter 19-10
Part of current unrestricted fund.
Resources designated by governing board for specific
purposes, projects, or investments.
To limit discretion of management.
Governing board can modify designations.
Hospitals = classified as assets whose use is limited.
Accounting for Current FundsAccounting for Current FundsAccounting for Current FundsAccounting for Current Funds
Accounting for Board Designated Funds
Chapter 19-11
Board designated funds for specific current operating
purposes are accounted for by footnote or by
reclassification of the Unrestricted Current Fund Balance.
Some board-restricted current resources can be
transferred to other funds.
Accounting for Current FundsAccounting for Current FundsAccounting for Current FundsAccounting for Current Funds
Colleges and Universities
Chapter 19-12
Unique to colleges and universities
Mandatory transfers
Transfers from current funds group to other fund groups
arising from
binding legal agreements
grant agreements
Nonmandatory transfers
Transfers from current funds group to other fund groups
at discretion of governing board.
Mandatory and Nonmandatory Transfers
Accounting for Current FundsAccounting for Current FundsAccounting for Current FundsAccounting for Current Funds
Chapter 19-13
SFAS No. 116, requires contributions to be recognized as
revenue in the period received.
Contributions include gifts of cash, pledges, donated services,
and gifts of noncash assets.
Conditional promises to give are recognized when they
become unconditional.
Pledges are recorded as revenues when a promise to give is
nonrevocable and unconditional, at present value of expected
receipts.
ContributionsContributionsContributionsContributions
Chapter 19-14
Exercise 19-6: A well-known celebrity sponsored a telethon for
the Help for the Blind Foundation on November 1, 2008. Pledges
in the amount of $1,000,000 were called in. Using similar telethon
campaigns as a basis, it is estimated that 25% of the pledges will
be uncollectible. During 2009, $700,000 of contributions from
these pledges were collected. The remainder were uncollectible.
Required: Identify the appropriate fund(s) and prepare the
journal entries necessary in 2008 and 2009 to record these
transactions.
ContributionsContributionsContributionsContributions
Chapter 19-15
Exercise 19-6: Prepare the journal entries necessary in 2008.
ContributionsContributionsContributionsContributions
Pledges Receivable 1,000,000
Revenue - Contributions 1,000,000
Provision for Uncollectible Pledges 250,000
Allowance for Uncollectible Pledges 250,000
Chapter 19-16
Exercise 19-6: Prepare the journal entries necessary in 2009.
ContributionsContributionsContributionsContributions
Cash 700,000
Pledges Receivable 700,000
Provision for Uncollectible Pledges 50,000
Allowance for Uncollectible Pledges 250,000
Pledges Receivable 300,000
Chapter 19-17
Recognized only if the services received:
1. Create or enhance nonfinancial assets, or
2. a. Require specialized skills,
b. Are provided by individuals possessing those skills, and
c. Would need to be purchased if not provided by donation.
Donated Services
ContributionsContributionsContributionsContributions
Recorded as revenue or support with an amount equal to the revenue recognized as an expense in the appropriate expense account.
Chapter 19-18
Exercise 19-2: During 2008 volunteer pinstripers donated their services to General Hospital at no cost. The staff at General Hospital was in control of the pinstripers’ duties. If regular employees had provided the services rendered by the volunteers, their salaries would have totaled $6,000. While working for the hospital, the pinstripers received complimentary meals from the cafeteria, which normally would have cost $500. Required: Prepare the journal entry necessary in the General Fund to record the donated services on the books of General Hospital.
ContributionsContributionsContributionsContributions
General Services Expense 5,500
Donated Services (Nonoperating Revenue) 5,500
Chapter 19-19
Recorded as contribution revenues in period received,
thus increasing either temporarily or permanently
restricted net assets.
When expenditures are made, or restriction expires, net
assets are reported as unrestricted net assets on the
Statement of Activities.
Donor-imposed Restricted Contributions
ContributionsContributionsContributionsContributions
Chapter 19-20
Exercise 19-3: The Franklin Public Library received a
restricted contribution of $300,000 in 2008. The donor specified
that the money must be used to acquire books of poetry written in
the sixteenth century. As of December 31, 2008, only $100,000
of the restricted resources had been expended.
Required: Prepare the journal entries necessary to record these
events during 2008. Indicate the fund in which each journal entry
is recorded.
ContributionsContributionsContributionsContributions
Chapter 19-21
Exercise 19-3: Prepare the journal entries necessary to record
these events during 2008.
ContributionsContributionsContributionsContributions
Restricted Current FundCash 300,000 Contribution Revenue – Poetry Collection 300,000
Net Assets Released from Restrictions 100,000 Cash 100,000
Unrestricted Current FundCash 100,000 Net Assets Released from Restrictions 100,000
Expenses – Poetry Collection 100,000 Cash 100,000
Chapter 19-22
The plant fund is used to account for
1) property, plant and equipment (PP&E) owned by the
organization and the net investment,
2) accumulation of financial resources for acquisition or
replacement of PP&E,
3) acquisition and disposal of PP&E,
4) liabilities relating to acquisition of PP&E, and
5) depreciation expense and accumulated depreciation.
Accounting for Plant FundsAccounting for Plant FundsAccounting for Plant FundsAccounting for Plant Funds
Chapter 19-23
Divided into four separate self-balancing subgroups:
1. Unexpended Plant Fund
2. Funds for Renewals and Replacements
3. Funds for Retirement of Indebtedness
4. Investment in Plant
College and Universities
Accounting for Plant FundsAccounting for Plant FundsAccounting for Plant FundsAccounting for Plant Funds
Both board-designated funds and externally restricted funds are accounted for in the plant fund; therefore, a distinction is made between restricted and unrestricted fund balances.
Chapter 19-24
Exercise 19-8: After the election of a prominent political figure,
the principal from a term endowment fund was expendable by
Crandall University. The official was elected this year. The fund
was restricted to the construction of a Political Science building
annex. The following transactions occurred because of this event.
Required: For each of the following transactions, record the
journal entries and identify the fund or fund subgroup in which
each entry is recorded.
Accounting for Plant FundsAccounting for Plant FundsAccounting for Plant FundsAccounting for Plant Funds
Chapter 19-25
Exercise 19-8:
Endowment Fund
Endowment fund balance 3,000,000Cash 3,000,000
Unexpended Plant Fund
Cash 3,000,000Fund Balance - Restricted 3,000,000
1. A transfer of $3,000,000 is made from the Endowment Fund (Term) to the Unexpended Plant Fund.
Accounting for Plant FundsAccounting for Plant FundsAccounting for Plant FundsAccounting for Plant Funds
Chapter 19-26
Exercise 19-8:
2. Construction is begun on the Political Science annex. Costs of
construction during the year amounted to $1,000,000, of which
$30,000 remained unpaid at the end of the year. (The financial
controller does not record transfers to the Investment in Plant
subgroup until a project has been completed.)
Unexpended Plant Fund
Construction in process 1,000,000Cash 970,000Accounts payable 30,000
Accounting for Plant FundsAccounting for Plant FundsAccounting for Plant FundsAccounting for Plant Funds
Chapter 19-27
Exercise 19-8:
3. By the end of the following year, the annex is completed at an additional cost of $2,100,000. All costs have been paid.
Unexpended Plant Fund
Construction in process 2,100,000Accounts payable 30,000
Cash 2,130,000
Building 3,100,000Work in process 3,100,000
Accounting for Plant FundsAccounting for Plant FundsAccounting for Plant FundsAccounting for Plant Funds
Chapter 19-28
Exercise 19-8:
4. The completed building is recorded in the Investment in Plant subgroup.
Net Investment in Plant Fund
Building 3,100,000Net investment in plant 3,100,000
Accounting for Plant FundsAccounting for Plant FundsAccounting for Plant FundsAccounting for Plant Funds
Chapter 19-29
Property, plant and equipment (PP&E) transactions are
accounted for in the General Fund.
Contributed resources restricted to acquire PP&E are
accounted for in a plant replacement and expansion
(restricted) fund.
Upon expenditure, the assets acquired and the related
fund balance are transferred to the General Fund.
Hospitals
Accounting for Plant FundsAccounting for Plant FundsAccounting for Plant FundsAccounting for Plant Funds
Chapter 19-30
Single Plant Fund and report the fund balance in two
classifications:
Expended Fund Balance is equal to the organization’s
net investment in PP&E.
Unexpended Fund Balance represents the amount of
resources available to replace or acquire additional
PP&E.
Voluntary Health and Welfare and ONNOs
Accounting for Plant FundsAccounting for Plant FundsAccounting for Plant FundsAccounting for Plant Funds
Chapter 19-31
Accounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment Funds
Pure Endowment Fund - donated funds have been given
in perpetuity.
Term Endowment Fund - donor has specified a particular
date or event after which the principal of the endowment
fund may be expended.
Income from endowment funds generally may be expended
as earned either for specified purposes or at the discretion
of the governing board.
Chapter 19-32
Exercise 19-7 (partial): Jefferson Hospital received money
from a donor to set up an endowment fund. The following
information pertains to this contribution. Prepare the journal
entries necessary to record the events in the endowment fund.
Accounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment Funds
Chapter 19-33
Exercise 19-7 (partial): During 2008
1. $2,000,000 was received to establish the fund. The requirements were (a) $100,000 of the endowment fund’s income must be used for research grants each year. (b) The remainder of income is under the discretion of the governing board. (c) The principal is expendable after the donor’s death. It shall be used to purchase equipment.
Accounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment Funds
Cash 2,000,000
Revenue Contribution - Restricted 2,000,000
Chapter 19-34
Exercise 19-7 (partial): During 2008
2. The cash received was invested in a number of securities.
Accounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment Funds
Investment 2,000,000
Cash 2,000,000
Chapter 19-35
Exercise 19-7 (partial): During 2009
3. Dividends of $100,000 and interest of $300,000 were received.
Accounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment Funds
Cash 400,000
Due to General Fund 300,000
Due to Specific Purpose Fund 100,000
Chapter 19-36
Exercise 19-7 (partial): During 2009
4. The income was transferred to the appropriate funds.
Accounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment Funds
Cash 400,000
Due to General Fund 300,000
Due to Specific Purpose Fund 100,000
Chapter 19-37
Exercise 19-7 (partial): During 2010
8. The was notified of the donor death.
Accounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment FundsAccounting for Endowment Funds
Cash 2,000,000
Transfer to Plant Replacement and Expansion Fund 2,000,000
Chapter 19-38
Accounting for InvestmentsAccounting for InvestmentsAccounting for InvestmentsAccounting for Investments
SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,”
Requires NPOs to report investments in equity securities with readily determinable fair values and all debt securities at fair value in unrestricted, temporarily restricted, or permanently restricted net assets.
Unrealized and realized gains and losses are to be recognized in the Statement of Activities.
To improve effectiveness and flexibility, NNOs often pool investments of different funds into a single portfolio.
Chapter 19-39
Accounting for Loan FundsAccounting for Loan FundsAccounting for Loan FundsAccounting for Loan Funds
Loans to:
Students and staff of colleges and universities,
Employees of hospitals, and
Beneficiaries of the interests of certain ONNOs. (for
example, loans to music students by symphony
orchestra societies).
Chapter 19-40
Exercise 19-4: The following events relate to Grearson University Loan Fund:
1. $100,000 is received from an estate to establish a faculty and student loan fund. Annual interest rates range from 8% for students to 10% for faculty.
2. Loans to students totaled $60,000, and $40,000 was disbursed to faculty members (of the total loans made, 10% are estimated to be uncollectible).
3. Grearson wrote off a $1,000 student loan as uncollectible.
4. The following loans were repaid.
Principal InterestFaculty $ 5,000 $500
Student 10,000 800
Accounting for Loan FundsAccounting for Loan FundsAccounting for Loan FundsAccounting for Loan Funds
Chapter 19-41
Exercise 19-4: Prepare the journal entries necessary to record these transactions.
1. $100,000 is received from an estate to establish a faculty and student loan fund. Annual interest rates range from 8% for students to 10% for faculty.
Accounting for Loan FundsAccounting for Loan FundsAccounting for Loan FundsAccounting for Loan Funds
Cash 100,000
Revenue – Contributions Restricted 100,000
Chapter 19-42
Exercise 19-4: Prepare the journal entries necessary to record these transactions.
2. Loans to students totaled $60,000, and $40,000 was disbursed to faculty members (of the total loans made, 10% are estimated to be uncollectible).
Accounting for Loan FundsAccounting for Loan FundsAccounting for Loan FundsAccounting for Loan Funds
Loans Receivable – Students 60,000Loans Receivable – Faculty 40,000
Cash 100,000
Bad Debt Expense 10,000Allowance for Uncollectible–Students 6,000Allowance for Uncollectible–Faculty 4,000
Chapter 19-43
Exercise 19-4: Prepare the journal entries necessary to record these transactions.
3. Grearson wrote off a $1,000 student loan as uncollectible.
Accounting for Loan FundsAccounting for Loan FundsAccounting for Loan FundsAccounting for Loan Funds
Allowance for Uncollectible–Students 100,000
Loans Receivable – Students 100,000
Chapter 19-44
Exercise 19-4: Prepare the journal entries necessary to record these transactions.
4. The following loans were repaid.Principal Interest
Faculty $ 5,000 $500Student 10,000 800
Accounting for Loan FundsAccounting for Loan FundsAccounting for Loan FundsAccounting for Loan Funds
Cash 16,300
Loans Receivable – Students 10,000
Loans Receivable – Faculty 5,000
Interest Income 1,300
Chapter 19-45
Accounting for Agency (Custodial) FundsAccounting for Agency (Custodial) FundsAccounting for Agency (Custodial) FundsAccounting for Agency (Custodial) Funds
Account for assets held by NNO as custodian for others.
Unless significant amounts are involved, resources held by an NNO as an agent for others are often accounted for as assets and liabilities in the unrestricted or general fund rather than in a separate agency fund.
Chapter 19-46
Accounting for Annuity and Life Income FundsAccounting for Annuity and Life Income FundsAccounting for Annuity and Life Income FundsAccounting for Annuity and Life Income Funds
Annuity Fund - Annuity payments made to a specified recipient for a specified period of time.
Life Income Fund - Income earned on contributed assets is paid to a specified recipient during his or her lifetime.
At the end of the annuity or on the death of the life income beneficiary, the unexpended assets of the fund are transferred to the unrestricted fund or to an endowment fund, loan fund, plant fund, or other fund specified by the donor.
Chapter 19-47
Recognition of Service Fee Revenue
Operating versus Nonoperating Income
Issues Relating to Colleges and UniversitiesIssues Relating to Colleges and UniversitiesIssues Relating to Colleges and UniversitiesIssues Relating to Colleges and Universities
Charity care
Contractual allowances
Capitation revenues
Malpractice
Issues Relating to HospitalsIssues Relating to HospitalsIssues Relating to HospitalsIssues Relating to Hospitals
Chapter 19-48
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