Question

For a number of years, a private not-for-profit entity has been preparing financial statements that do not necessarily follow generally accepted accounting principles. At the end of the most recent year (Year 2), those financial statements show total assets of $1,100,000, total liabilities of $140,000, total unrestricted net assets of $480,000, total temporarily restricted net assets of $340,000, and total permanently restricted net assets of $140,000. In addition, total expenses for the year were $580,000 (shown in unrestricted net assets).

At the beginning of Year 1, the entity above received $54,000 in cash as a gift with the stipulation that the money be used to buy a bus. The accountant made the appropriate entry at that time. On the first day of Year 2, the entity spent the $54,000 for the bus, an asset that will last for 20 years and will have no salvage value. Because the money came from an outside donor, entity officials decided that a time restriction on the bus should be assumed for 20 years. In Year 2, it reported $2,700 as depreciation expense in unrestricted net assets. In addition, the organization made a $54,000 reduction in permanently restricted net assets and a $54,000 increase in unrestricted net assets.

1. What was the correct amount of unrestricted net assets at the end of Year 2?

2. What was the correct amount of expenses for Year 2?

3. What was the correct amount of temporarily restricted net assets at the end of Year 2?

Answer 1

ANSWER:

Required 1) What was the correct amount of unrestricted net assets at the end of Year 2?

Because a time restriction as been assumed, $2,700 (54,000 / 20) should have been reclassified from Temporarily Restricted Net Assets into Unrestricted Net Assets.

However, as given in the question, the organization increased the Unrestricted Net Asset by $54,000.

The final balance reported, is therefore high by $51,300 (54,000 - 2,700).

So, the correct amount of unrestricted net assets at the end of Year 2 = $480,000 - $51,300 = $428,700

Required 2) What was the correct amount of expenses for Year 2?

Depreciation Expense of $2,700 (54,000 / 20) was recorded within the Unrestricted Net Assets, which entry is handled appropriately.

Therefore, $580,000 total expense figure that is reported, is correct.

Required 3) What was the correct amount of temporarily restricted net assets at the end of Year 2?

According to the facts given in the question, correct entry was made in Year 1.

Thus, a balance of $54,000 resides in Temporarily Restricted Net Assets as a result of the gift.

As, a time restriction was assumed,

Depreciation = 54,000 / 20 = $2,700 should have been reclassified to Unrestricted Net Assets.

Therefore, after reclassifying the $2,700, the Temporarily Restricted Net Assets is reduced.

The correct amount of temporarily restricted net assets at the end of Year 2 = $340,000 - $2,700 = $337,300