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:

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

“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.”

“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

Pledges :

A promise by a benefactor or a donor to make certain amount of contribution to a Non-Profit Organization is termed as Pledges. Since the contribution is not yet received by the organization, it is consider as an asset " Contribution Receivable" recorded against the credit of Revenue from contribution.

A) Journal entries framed on receipt of the letter from the foundation.

Options	Accounts & Explanation	Debit	Credit
Option 1	Pledges Receivable	$100,000
	Revenue from Contribution		$100,000
Option 2	Pledges Receivable	$100,000
	Revenue from Contribution		$100,000
Option 3	Since the donor has applied a condition to whether they will make the donation or not, the journal entry will not recorded yet.

B) Journal Entries to record the expenditure concerning the program.

Options	Accounts & Explanation	Debit	Credit
Option 1	Program Expenses	$100,000
	Cash		$100,000
Option 2	Program Expenses	$100,000
	Cash		$100,000
Option 3	Program Expenses	$100,000
	Cash		$100,000

C) Journal entries to record the receipt of check

Options	Accounts & Explanation	Debit	Credit
Option 1.	Cash	$100,0000
	Resources realized from Restriction		$100,000
	Resources realized from Restriction	$100,000
	Pledge Receivable		$100,000
Option 2.	Cash	$100,0000
	Resources realized from Restriction		$100,000
	Resources realized from Restriction	$100,000
	Pledge Receivable		$100,000
Option 3	Cash	$100,000
	Revenue From Contribution		$100,000