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ch12 - Chapter 12 Revenues and Expenditures in Other...

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Chapter 12 Revenues and Expenditures in Other Not-for-Profit Organizations Questions for Review and Discussion 1. (a) Resources restricted as to purpose: must be used for research; conferences; acquisition of plant and equipment; (b) Resources restricted as to time: a term endowment — the principal must remain intact for a specified period of time; thereafter it is available for expenditure; pledges receivable that will not be fulfilled in the same period (since the resources are unavailable for expenditure until the pledge is fulfilled). (c) Resources restricted until the occurrence of a specific event: a life annuity — the principal and income must be used to provide income for the donor until the donor’s death. Thereafter it can be expended. Resources permanently restricted: An endowment — the principal of which must be kept intact permanently; only the income is available for expenditure. 2. Restricted contributions should be recognized as revenue in a restricted fund when the contribution (even if only a pledge) is received. Expenses should be recognized in an unrestricted fund when the funds are used. As the contributions are used, the restrictions are met, and the resources are released from the restricted to the unrestricted categories. The FASB reasoned that donors control only how contributed resources may be used. They do not control the timing of expenses or the specific activities in which the organization engages. 3. Pledges should be recognized in a restricted fund upon receipt and should be measured at the present value of estimated future cash flows using a risk free rate. Hence the university should recognize revenue of $909,091 (the present value of $1 million discounted for one year at 10 percent) upon receiving the pledge. If the pledge were conditional upon the daughter’s graduation, then it should be recognized as revenue only when the daughter satisfied the stipulated condition — that is, by being graduated. Many not-for-profits object to the requirement that pledges be recognized as revenue because until the donation has been received, it is not available for expenditure. Hence, they contend, the entity’s financial statements leave the impression that the organization has command of greater resources than it actually does. 12-1
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4. The portion of the dues restricted to covering the cost of the journal appears to be more the result of an exchange transaction than a contribution. Therefore, since it is not donor restricted, it should be classified as unrestricted. 5. Unlike businesses, not-for-profits are not required to divide their securities portfolios into the three categories — trading securities, available for sale and held- to-maturity. Not-for-profits “mark” all of these securities to market value.
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