Chat8 Ch 17 JE Illustrations

Chat8 Ch 17 JE Illustrations - Chapter 17 Accounting for...

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Unformatted text preview: Chapter 17 Accounting for Health Care Organizations 713 authorities without regard to their legal structure. Financing agreements often include requirements to set aside funds for repayment of the interest on and principal of the debt. These funds are reported as assets limited as to use (not—for—profit) or restricted (governmental). ILLUSTRATIVE CASE FOR A NOT-FOR-PROFIT HEALTH CARE ORGANIZATION The illustrative transactions provided in this section are for a hypothetical not—for- profit hospital, Sierra Regional Hospital. Hospitals continue to be the dominant form of health care organization and usually exhibit a greater range of operating activi— ties and transactions than other forms of health care organizations. Typical hospital transactions are illustrated for Sierra Regional Hospital following the post—closing trial balance as of September 30, 2010, the end of its fiscal year. SIERRA REGIONAL HOSPITAL (A Not-for-Profit Organization) Post-Closing Trial Balance As of September 30, 2010 Debits Credits Cash $ 233,000 Short-term Investments 1,480,000 Accrued Interest Receivable 36,000 Accounts and Notes Receivable 300,000 Allowance for Uncollectible Receivables $ 86,000 Pledges Receivable 960,000 Allowance for Uncollectible Pledges 73,000 Inventory 80,000 Prepaid Expenses 12,000 Assets Limited as to Use—Cash 6,500 Assets Limited as to Use—Investments 400,000 Long-term Investments ‘ 146,000 Land . 1,080,000 Buildings 11,050,000 Equipment 4,920,000 Accumulated Depreciation—Buildings 1,050,000 Accumulated Depreciation—Equipment 1,260,000 Accounts Payable 110,000 Accrued Expenses Payable 16,000 Mortgages Payable 6,400,000 Net Assets—Unrestricted, Undesignated 8,640,000 Net Assets—Unrestricted, Designated 406,500 Net Assets—Temporarily Restricted—Plant 2,508,000 Net Assets—Permanently Restricted 154,000 $20,703,500 $20,703,500 714 Part Three NoteforeProfit Organizations During fiscal year 2011, the gross revenues for patient services from all respon_ sibility centers totaled $9,261,000. It is the practice of Sierra Regional Hospital to debit receivable accounts for the gross charges for all services rendered to patients except for charity care patients. The following entry should be made: ..-—_.4. ~ 5 _,'Debit‘s , (refit; '_ ..3:. '_ Accounts and Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii 9,261,000 M - . Patient Service Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ' ' . 9,261,000“ ~¢. The preceding entry recorded the revenues the hospital would have earned if all services rendered to each patient (other than charity care patients) were to be col- lected from the patients or third-party payors as billed. Customers of profit—seeking businesses do not all pay their bills in full, and neither do hospital patients or patients’ insurance companies. The variety of third-party payment policies makes estimation of net patient service revenue difficult, but obviously, such estimation is necessary for sound financial management and proper financial reporting. For the FY 2011, it is assumed the estimated provision for bad debts is $180,000 and con— tractual adjustments from third-party payors is $100,000. The entry to record this information is: 2. Provision for Bad Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 1 Contractual Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 . ‘ Allowance for Uncollectible Receivables . . . . . . . . . . . . . . . . . . . 180,000 Accounts and Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 j Provision for Bad Debts is another name for Bad Debts Expense and is reported as an operating expense. Contractual Adjustments, however, is deducted from Patient Service Revenue and only the net amount is reported as revenues of the period. Examples of other revenues for hospitals include tuition from nursing students, interns, or residents; cafeteria and gift shop revenues; parking fees; fees for copies of medical records; and other activities related to the ongoing major or central oper— ations of the hospital. Similarly, um‘estricted gifts, grants, and endowment income restricted by donors to finance charity care wbuld appropriately be classified as other revenue of a hospital. Assuming a total of $48,800 was received in cash during FY 2011 from sources classified as other revenue, Entry 3 is apprOpriate: 3. Cash.» . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 0 48,800 ' ' Other Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ' 48,800 Apart from items previously described, hospitals may receive unrestricted dona- tions of money or services. Ordinarily, such donations should be classified as non— . operating gains rather than revenues. Hospitals often receive donated medicines and i other materials. If such medicines and materials would otherwise have to be pur— chased, it is appropriate to record these donations at fair value as other revenue. Hospitals also routinely receive benefits from the services of volunteer workers; Chapter 17 ' Accountingfor Health Care Organizations 715 however, the value of such services is recorded as a revenue or gain (and as an expense) only if the restrictive conditions required by the FASB standards for recog- nition are met. (See related discussions in Chapters 14 and 16.) Assume that total contributions were received in cash in the amount of $297,900 and unrestricted endowment income was $8,100. Debits Credits 4. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , 306,000 Contributions—Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . . . 297,900 Investment Income—Unrestricted . . . . . . . . . . . . . . . . . . . . . . . 3,100 One piece of capital equipment, which had a historical cost of $28,000 and a book value of $2,000 as of September 30, 2010, was sold early in the 2011 fiscal year for $500 cash. The entry to record the disposal of the asset at a loss is: 5. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 Loss on Disposal of Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 Accumulated Depreciation—Equipment . . . . . . . . . . . . . . . . . . . . 26,000 Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000 New capital equipment costing $400,000 was purchased during FY 201 1 by Sierra Regional Hospital, $100,000 with temporarily restricted net assets and $300,000 with unrestricted net assets. The entries should be: 6a. Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 6b. Net Assets Released from Restrictions—Temporarily Restricted—Plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 Net Assets Released from Restrictions—Unrestricted . . . . . . . . . 100,000 During the year, the following items were recorded as accounts payable: the $16,000 accrued expenses payable as of September 30, 2010; nursing services expenses, $4,026,000; other professional services expenses, $947,200; general ser- vices expenses, $1,650,000; fiscal and administrative services expenses, $1,124,000; and supplies added to inventory, $400,000. The following entry summarizes that activity: 7. Accrued Expenses Payable . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . 16,000 Nursing Services Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,026,000 Other Professional Services Expenses . . . . . . . . . . . . . . . . . . . . . . 947,200 General Services Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,650,000 Fiscal and Administrative Services Expenses . . . . . . . . . . . . . . . . . 1,124,000 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,163,200 716 Part Three Not» or—Profit Organizations Collections on accounts and notes receivable during the year amounted to $8,842,000; accounts and notes receivable totaling $131,000 were written off: Debits Credits 8. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,842,000 Allowance for Uncollectible Receivables . . . . . . . . . . . . . . . . . . . . . 131,000 Accounts and Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 8,973,000 The following cash disbursements were made during FY 2011: accounts payable, $8,014,200; a principal payment in the amount of $400,000 was made to reduce the mortgage liability; and interest amounting to $160,000 on mortgages was paid: 9. Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,014,200 Mortgages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,574,200 Supplies issued during the year cost $320,000 ($20,000 of the total was for use by fiscal and administrative services; $120,000 for use by general services; and the remainder for use by other professional services): ‘ 10. Other Professional Services Expenses . . . . . . . . . . . . . . . . . . . . . . . 180,000 General Services Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 Fiscal and Administrative Services Expenses . . . . . . . . . . . . . . . . . . 20,000 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320,000 Accrued expenses as of September 30, 2011, included $160,000 interest on mort- gages; fiscal and administrative services expenses, $8,700; and other professional services expenses, $4,800. Prepaid expenses, consisting of general services expense items, declined $4,000 during the year: 11. Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000 Fiscal and Administrative Services Expenses . . . . . . . . . . . . . . . . . . 8,700 Other Professional Services Expenses . . . . . . . . . . . . . . . . . . . . . . . 4,800 General Services Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 Accrued Expenses Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,500 Prepaid Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 Depreciation of plant and equipment for FY 2011 was in the amounts shown in the following journal entry: Chapter 17 Accounting for Health Care Organizations 717 Debits Credits 12. Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 783,000 Accumulated Depreciation—Buildings . . . . . . . . . . . . . . . . . . . . 315,000 Accumulated Depreciation—Equipment . . . . . . . . . . . . . . . . . . . 468,000 The hospital received cash of $28,000 for interest on investments held in the Assets Limited as to Use—Investments account. Entry 13 records the receipt of cash and the corresponding credit. 13. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000 Investment Income—Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . 28,000 The $28,000 received in cash for interest (see Entry 13) was reinvested in invest— ments to be held for eventual use for expansion of facilities; the hospital governing board decided to purchase an additional $350,000 of investments for the same pur- pose. Entries 1421 and 14b reflect the purchase of the investments and the increase in unrestricted designated net assets. 14a. Assets Limited as to Use—investments . . . , . . . . . . . . . . . . . . . . . 378,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _ . . . . . . . . . . 378,000 14b. Net Assets—Unrestricted, Undesignated . . . . . . . . . . . . . . . . . . . . 378,000 Net Assets—Unrestricted, Designated . . . . . . . . i . . . . . . . . . . . 378,000 Individual philanthropists and civic and charitable groups have donated money and securities to Sierra Regional Hospital subject to the restriction that the assets may be utilized only for plant replacement and expansion. Cash was received dur— ing FY 2011 from the following sources: interest on marketable securities (includ- ing the amount accrued at the end of the 2010 fiscal year), $69,000; and collections of pledges receivable, $292,000: ‘ 15. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361,000 Pledges Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292,000 Accrued Interest Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000 Investment Income—Temporarily Restricted—Plant . . . . . . . . . . 33,000 Marketable securities carried in the accounts at $85,000 were sold for $59,000. The proceeds were reinvested in marketable securities, and $300,000 additional mar— ketable securities were purchased from cash received during the year. The $26,000 loss on sale of investments reduces the amount available for acquisition of plant and will be closed at year—end to Net Assets—Temporarily Restricted—Plant. 718 Pa rt Th ree Notafor—Profit Organizations Debits Credits 16a. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . 59,000 Loss on Sale of Investments—Temporarily Restricted—Plant . . . . . . 26,000 Short-term Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000 16b. Short-term Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _ 359,000 A review of pledges receivable indicated pledges restricted for plant acquisition in the amount of $25,000 should be written off, and the allowance for uncollectible pledges should be increased by $66,300. 17a. Allowance for Uncollectible Pledges . . . . . . . . . . . . . . . . . . . . . . . . 25,000 Pledges Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 17b. Provision for Uncollectible Pledges . . . . . . . . . . . . . . . . . . . . . . . . . 66,300 Allowance for Uncollectible Pledges . . . . . . . . . . . . . . . . . . . . . . 66,300 The fair values of short—term investments and assets limited as to use have not changed during the year. At the end of FY 2011, the amount of interest accrued on marketable securities is $44,000. This amount is temporarily restricted for plant acquisition. 18. Accrued Interest Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,000 Investment Income—Temporarily Restricted—Plant . . . . . . . . . . . 44,000 Sierra Regional Hospital did not have any net assets temporarily restricted for pro- grams as of September 30, 2010. In September 2011, however, a civic organization donated $5,000 to the hospital to be used to augment the physician residency pro- gram. The organization pledged an additional sum of $20,000 to be paid in the com— ing year for the same purpose. 19. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .' . . . . . . . . . . . 5,000 Pledges Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . '. . . . . . . . . . . 20,000 Contributions—Temporarily Restricted—Programs . . . . . . . . . . . 25,000 The governing board and administration of Sierra Regional Hospital expect the civic organization to honor its pledge; therefore, no Allowance for Uncollectible Pledges is created. Because the gift was received shortly before the end of FY2011, no expenses for the program were incurred during the year. The hospital endowment consists of donated assets, the principal of which must be retained intact. The income from hospital endowment assets is expendable as the donor directed either for general operating purposes or for named items or projects. The discussion in Chapters 8 ,and 16 concerning problems involved in distinguish— ing between principal and income are relevant also to hospital endowments. In order to be able to show that the terms of each endowment have been met, it is desirable Chapter 17 Accounting for Health Care Organizations 719 to keep records for each separate endowment. As of September 30, 2010, Sierra Regional Hospital is assumed to have only one endowment. During FY 2011, the hospital received marketable securities with a market value of $24,000 at the date of the gift. The securities are to be held for the production of income; the income from these securities is for unrestricted use. The endowment may be recorded as shown in the following entry: Debits Credits 20. Short-term Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000 Contributions—Permanently Restricted . . . . . . . . . . . . . . . . . . . . 24,000 Natural expenses of depreciation, interest, and provision for bad debts were a110— cated to the functional expenses based on an allocation basis established by the hospital. 21. Nursing Services Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 641,500 Other Professional Services Expenses . . . . . . . . . . . . . . . . . . . . . . . . 179,620 General Services Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282,260 Fiscal and Administrative Services Expenses . . . . . . . . . . . . . . . . . . . 179,620 Provision for Bad Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . 783,000 Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320,000 The pre—closing trial balance for Sierra Regional Hospital as of September 30, 2011, is shown here. Financial statements reflecting the preceding transactions for Sierra Regional Hospital were shown earlier in this chapter as Illustrations 17—3, 17—4, and l7~5. SIERRA REGIONAL HOSPITAL Pre-CIosing Trial Balance As of September 30, 2011 Debits Credits Cash ', $ 172,100 Short-term Investments 1,778,000 Accrued Interest Receivable 44,000 Accounts and Notes Receivable 488,000 Allowance for Uncollectible Receivables $ 135,000 Pledges Receivable 663,000 Allowance for UncoIIectibIe Pledges 114,300 Inventory 160,000 Prepaid Expenses 8,000 Assets Limited as to Use—Cash 6,500 Assets Limited as to Use—Investments 778,000 Long-term Investments 146,000 Land 1,080,000 Buildings 11,050,000 — i “n ,, V \ V 720 Part Three Notrfor»Profit Organizations Debits Credits Equipment 5,292,000 Accumulated Depreciation—Buildings 1,365,000 Accumulated Depreciation—Equipment 1,702,000 Accounts Payable 259,000 Accrued Expenses Payable 173,500 Mortgages Payable 6,000,000 Net Assets—Unrestricted, Undesignated ' 8,262,000 Net Assets—Unrestricted, Designated 784,500 Net Assets—Temporarily Restricted—Plant 2,508,000 Net Assets—Permanently Restricted 154,000 Patient Service Revenue ‘ 9,261,000 Contractual Adjustments 100,000 ’ Other Revenue 48,800 Contributions—Unrestricted 297,900 Contributions—Temporarily Restricted—Programs 25,000 Contributions—Permanently Restricted 24,000 Investment Income—Unrestricted 36,100 Investment Income—Temporarily Restricted—Plant 77,000 Net Assets Released from Restrictions—Unrestricted 100,000 Net Assets Released from Restrictions—Temporarin Restricted 100,000 Nursing Services Expenses 4,667,500 Other Professional Services Expenses 1,311,620 General Services Expenses 2,056,260 Fiscal and Administrative Services Expenses 1,332,320 Loss on Disposal of Equipment 1,500 Provision for Uncollectible Pledges 66,300 Loss on Sale of Investments—Temporarily Restricted—Plant 26,000 $31,327,100 $31,327,100 End-0f-Year" Closing Journal Entries Unrestricted revenues and expenses that pertain to FY 2011 are closed to the Net AssetsrUm‘estri'cted, Undesignated accopnt as follows: ‘ Debits Credits 22. Patient Service Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,261,000 i Other Revenue . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,800 j Contributions—Unrestricted , . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297,900 Investment Income—Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . 36,100 Contractual Adjustments . . , . . . , . . . . . . . . . . . . . . . . . . . . . . 100,000 Nursing Services Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,667,500 Other Professional Services Expenses . . . . . . . . . . . . . . . . . . . . 1,311,620 General Services Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,056,260 Fiscal and Administrative Services Expenses . . . . . . . . . . . . . . . 1,332,320 Loss on Disposal of Equipment . . . . . . . . . . . . . I . . . . . . . . . . 1,500 Net Assets—Unrestricted, Undesignated . . . . . . . . I . . . . . . . 4 174,600 ...
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This note was uploaded on 08/01/2011 for the course ACCT 434 taught by Professor Mcclellan during the Spring '11 term at National.

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Chat8 Ch 17 JE Illustrations - Chapter 17 Accounting for...

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