Question

In: Accounting

1.) If a donor endows a professorial chair at a school, he or she gives a...

1.) If a donor endows a professorial chair at a school, he or she gives a gift and indicates that the earnings from the gift must be used by a specific professor. Would the initial gift be recorded in a fund with donor restrictions or a fund without donor restrictions? Would the earnings be recorded in a fund with donor restrictions or a fund without donor restrictions?

2.) A board sets aside resources to earn investment income to support general operations. Would the resources set aside be recorded in a fund with donor restrictions or a fund without donor restrictions? Would the earnings be recorded in a fund with donor restrictions or a fund without donor restrictions?

3.)The Abby Arboretum (AA) is a not-for-profit organization that has several programs, including gardening, grade-school education, environmental efforts, and a reforestation program. It draws many volunteers for its efforts. Indicate which, if any, of the following activities should be recorded as donated services.

An architect drew up blueprints for a new greenhouse free of charge. AA would have hired an architect otherwise.

The architect makes phone calls to past clients and investors to raise contributions on behalf of AA for a capital campaign to finance the greenhouse.

After the greenhouse is built, the architect spends several days planting vegetables and flowers.

4.) Indicate whether each of the following actions would result in a change in net assets without donor restrictions or net assets with donor restrictions this year:

A donor gives the organization a cash contribution to be used for expanding the organization’s food pantry program.

The organization earns an unrealized gain on its permanent endowment. A donor pledges money to the organization but has not paid it yet.

The donor does not indicate how the money is to be used.

The organization sells goods from its online bookstore.

A donor gives the organization cash and specifies that the money is to be used in 4 years.

A donor gives 1,000 shares of Apple stock and stipulates the proceeds of the stock are not to be spent but held in perpetuity.

Solutions

Expert Solution

1 ) Usually, endowments are considered to fall in the category of restricted funds.

Here, the donor endows the professional chair as a gift and mentions that the earnings from the gift be used by a specific professor. Thus, if such restrictions are made, then the organization must abide by it legally. This indicates that both the gift as well as the earnings be recorded in fund with donor restrictions.

2 ) Most of the endowed funds are not restricted, provided the funds are used to create more funds. In simple terms, when the money is used to earn investment income for which resources are set aside, the income can be utilized for operational purpose of the firm. Hence, in this case, the resources as well as the earnings can be recorded in fund without donor restrictions (Without restrictions, as it can be used for any operations related purpose of the firm, and not just for a particular purpose).

3 ) Donated Services : Many Non profit organization involve in donated services with a mission and these are accounted for, depending upon its effect of enhancing or creating a non financial asset. The work is done by people who possess the required skills.

a)  An architect drew up blueprints for a new greenhouse free of charge. AA would have hired an architect otherwise : Donated Service as it involves the work of someone who possess the required skills, the Architect, that too free of charge.

b) The architect makes phone calls to past clients and investors to raise contributions on behalf of AA for a capital campaign to finance the greenhouse : Since the fundraising is done to finance the project (Greenhouse) of AA (a non profit organization), any voluntary donations received for capital campaign, from past clients or investors would be considered as a donated service.

c) After the greenhouse is built, the architect spends several days planting vegetables and flowers : Donated Service as it is vital upon construction of the greenhouse and the purpose is to grow flowers and vegetables. Thus, any task related to the project will be termed as a donated service.

4 ) A change in net assets with donor restrictions means that the donor has specified the amount of money that should be utilized in a given period and for what purpose, the money be utilized for.

a) A donor gives the organization a cash contribution to be used for expanding the organization’s food pantry program - Change in net assets WITH donor restriction, since the manner of cash utilization is mentioned by the donor.

b) The organization earns an unrealized gain on its permanent endowment. A donor pledges money to the organization but has not paid it yet - Change in net assets WITHOUT donor restriction. Here, the donor pledges money but he hasn't paid it yet. The time period or any other conditions are not mentioned with respect to the pledging. Failure to repay for the pledge will create a personal liability for the donor.

c) The donor does not indicate how the money is to be used - Change in net assets WITHOUT donor restrictions as the donor hasn't specified how the money is to be us

d) The organization sells goods from its online bookstore - Change in net assets WITHOUT donor restrictions, since no other condition is attached to the process. If an organization deals in book selling, its purpose is to make money from selling the books, be it offline or online.

e) A donor gives the organization cash and specifies that the money is to be used in 4 years - Change in net assets WITH donor restrictions, as the donor has mentioned the duration within which the money is to be utilized.

f) A donor gives 1,000 shares of Apple stock and stipulates the proceeds of the stock are not to be spent but held in perpetuity - Change in net assets WITH donor restrictions because the donor has mentioned that the share proceeds should be held in perpetuity and that, they should not be spent.


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