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ACCT 410 W4Di4 Capital Assets Debt Service
Capital Assets
Debt Service
Investment Marketable Securities
Long-Term Obligations
After reviewing the reading materials for week 4 that included
Graham Vol. 2: chapters 28 and 29. Please use the reading
material provided to complete your responses, any outside
resources should be annotated on your References page.
1. A not-for-profit organization receives a restricted gift. When, and in which type of fund,
should it recognize the revenue? When, and in which type of fund, should it recognize the
related expense? What is the reason for the apparent inconsistency between the fund
types in which the revenues and expenses are reported?
The gift would be recognized at the time it was received and the type of fund would
depend on the reasons why it was restricted. Gifts with purpose or designated time span
will be recognize as temporarily restricted fund until the time of restriction has been
fulfilled. Revenues derived from a restricted gift are recognized when received and
recorded as debit to cash and credit to revenues from contributions which is classified as
restricted fund. The related expense is recorded as debit to net assets released from
restriction and credit to cash. Expenses are reported in statement of activities as negative
revenue. The reason for the inconsistency between the fund types is due to the restricted
nature of the gift, and that the expenditure of the resource is often not recognized in the
same accounting period.
2. A foundation promises to donate $1 million to a local public broadcasting station (a notfor-profit organization) in one year. When, and in what amount, should the station
recognize revenue? The station applies a discount rate of 10 percent to all pledges. Would
your response be the same if the foundation pledged to donate the funds only if and when
the station agreed to carry a particular program? Why do many not-for-profits object to
the standards pertaining to revenue recognition of pledges?
ACCT 410 W4Di4 Capital Assets Debt Service
Upon receipt of pledges, it should be recognized in a restricted fund and should be
measured at the present value of estimated future cash flows using a risk free rate. Hence
the station should recognize revenue amounting to $909,091 (the present value of $1
million discounted for one year at 10 percent) upon receiving the pledge. If the pledged
amount is conditional upon the station’s agreement to carry a particular program, then it
should be recognized as revenue only when the station satisfied the stipulated condition
— that is, by carrying a particular program. Many not-for-profit organizations argue to
the requirement that pledges be recognized as revenue because only upon the receipt of
donation it will be available for expenditure. Therefore, they oppose that the entity’s
financial statements leave the impression that these organizations have greater resources
than they actually do.
3. Members of the National Accounting Association, a not-for-profit organization, are
charged annual dues of $150. Of this amount, $50 is restricted, per association policy, to
covering the cost of the association’s journal, which every member receives. In what
category of restrictiveness should the association report the portion of revenues
associated with the journal? Explain.
It appears that the portion of the dues restricted to cover the cost of the journal is a result
of an exchange transaction rather than a contribution. Hence, it should be classified as
unrestricted since it is not donor restricted.