Question

EX 12-3 Minor differences in the terms of a contribution may justify major differences in revenue recognition.

Upon meeting with the executive director of the Crime Victims Advocacy Group, the president of a private foundation agreed to contribute in the following year $100,000 in support of the group’s proposed program to provide legal assistance to victims of violent crimes.

Suppose that the foundation’s formal letter describing its pledge was worded in three different ways:

1. “We are pleased to pledge $100,000 in support of your group’s efforts to assist victims of violent crimes.”

2. “We are pleased to pledge $100,000 in support of your group’s efforts to develop a new program to provide legal assistance to victims of violent crimes.”

3. “We are pleased to pledge $100,000 upon your developing a new program to provide legal assistance to victims of violent crimes.” For each of the three options:

a. Prepare the journal entries that should be made on receipt of the letter from the foundation. Assume that it was unlikely that the pledge would be fulfilled in the same period as it was made.

b. Prepare the journal entries that should be made to record the expenditure of $100,000 on activities related to the legal assistance program.

c. Prepare the journal entries that should be made on receipt of the $100,000 check, assuming that it was received shortly after the legal assistance program was established and the group spent the $100,000 on program related activities.

d. Comment on why minor differences in wording might justify major differences in accounting. Be sure to indicate the type of fund in which your entries would be made.

Answer 1