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 $950,000, total liabilities of $110,000, total unrestricted net assets of $420,000, total temporarily restricted net assets of $310,000, and total permanently restricted net assets of $110,000. In addition, total expenses for the year were $520,000 (shown in unrestricted net assets).

At the beginning of Year 1, the entity above received $51,000 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 $51,000 for the bus, an asset that will last for 10 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 10 years. In Year 2, it reported $5,100 as depreciation expense in unrestricted net assets. In addition, the organization made a $51,000 reduction in permanently restricted net assets and a $51,000 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

Requirement 1:-

Beacause a time restriction has been assumed, only $5,100 ($51,000/10years) should have been reclassified from Temporarily Restricted Net Assets into Unrestricted Net Assets. However, the organizattion increased Unrestricted net assets by $51,000. The final balance being reported, therefore, is $45,900 ($51,000 - $5,100) too high. Removing this $45,900 infaltion reduces the final Unrestricted net asset figure from $420,000 to $374,100 ($420,000 - $45,900). So the correct amount of unrestricted net assets at the end of Year 2 will be $374,100

Requirement 2:-

Depreciation Expense of $5,100 ($51,000/10years) was recorded within the Unrestricted net assets. That handling is appropriate so that the $520,000 expense figure that is reported is correct

Requirement 3:-

The Question says that the correct entry was made in year 1. Thus a $51,000 balance resides in Temporarily restricted net assets as a result of the gift. Because a time restriction was assumed, only an amount ($5,100) equal to the depreciation recorded should have been reclassified to Unrestricted net assets. The $5,100 amount was never removed. Reclassifying the $5,100 reduces Temporarily restricted net assets from the reported $310,000 to $304,900 ($310,000 - $5,100). The $51,000 reclassification error does not effect this category. Permanently restricted net assets should not have been reduced by $51,000 but that is not relevant to this particular question.

Correct amount of temporarily restricted net assets at the end of Year 2 will be $304,900.

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