Describe the criteria for recognition of donated services, and comment on the auditor’s likely rationale for not recognizing them in the given case.
Explanation of Solution
Not-for-profit (NFP) entities: It is an individual or group of people who work together to attain the goals and mission that is something other than making profit for its shareholders or owners. Not-for-profit entities’ success is measured by how much the entity serves to the well-being of public or poor people with the available resource of the entity.
The following is the criteria for recognition of donated services:
To record the time of the volunteers as a contribution and related expenses of the activities done by the volunteers, it should fulfill any one the following criteria:
- 1. The activity requires special skill.
- 2. Someone who has the specialized skill would perform the activity.
- 3. If the volunteers had not contributed, the services or activity would be obtained from outside for cash.
In this case, the volunteers act as greeting visitors, sale of artwork, and handling security. These activities are not appears that special skill required to perform. This is the reason for the auditor to recommend not recording the volunteer services.
b)
Prepare the necessary
b)
Explanation of Solution
Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and
stockholders’ equities . - Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
Prepare the necessary journal entries to record the given transactions:
General Journal | ||||
Date | Description | Post Ref. | Debit (S) | Credit (S) |
1 | Cash | 60,730 | ||
Contributions-Without donor restrictions | 20,861 | |||
Grants receivable | 4,600 | |||
Membership dues | 16,285 | |||
Tuition and fees | 6,974 | |||
Commission revenue | 2,402 | |||
Payable to artists | 9,608 | |||
(To record cash receipts from various sources) | ||||
2 | Cash | 1,955 | ||
Investment income-without donor restrictions | 686 | |||
Investment income-with donor restrictions | 1,269 | |||
(To record cash receipt as investment income) | ||||
3 | Grants receivable | 5,020 | ||
Contributions—without donor restrictions | 3,120 | |||
Deferred revenue | 1,900 | |||
(To record grants receivable) | ||||
4 | Rent expense | 18,000 | ||
Continuations-without donor restrictions | 18,000 | |||
(To record rent expense) | ||||
5 | Salary and benefits Expense | 46,900 | ||
Utility Expense | 3,080 | |||
Printing and postage Expense | 1,310 | |||
Miscellaneous Expense | 640 | |||
Cash | 51,613 | |||
Prepaid Expenses | 220 | |||
Accounts payable and accrued expenses | 97 | |||
(To record contributions receivable) | ||||
6 | Cash | 2,900 | ||
Short-term investments | 2,900 | |||
(To record cash receipt in the form of short-term investment) | ||||
Equipment | 2,835 | |||
Cash | 2,835 | |||
(To record purchase of equipment) | ||||
Net assets released-satisfaction of purpose restriction-with donor restrictions | 2,825 | |||
Net assets released-satisfaction of purpose restriction-without donor restrictions | 2,825 | |||
(To record release the restricted net assets) | ||||
7 | Community art education | 825 | ||
Cash | 825 | |||
(To record community art education) | ||||
Net assets released-satisfaction of purpose restriction-with donor restrictions | 825 | |||
Net assets released-satisfaction of purpose restriction-without donor restrictions | 825 | |||
(To record release the restricted net assets) | ||||
8 | Depreciation expense | 1,642 | ||
Allowance for depreciation-equipment | 1,642 | |||
(To record depreciation expense) | ||||
9 | Exhibition program | 21,472 | ||
Community art education program | 21,472 | |||
Management & general | 17,893 | |||
Fund-raising | 10,735 | |||
Rent expense | 18,000 | |||
Salary expense | 46,900 | |||
Utility expense | 3,080 | |||
Postage & supplies expense | 1,310 | |||
Miscellaneous expense | 640 | |||
Depreciation expense | 1,642 | |||
(To record expenses to program expense) | ||||
10 | Payable to artists | 9,608 | ||
Cash | 9,608 | |||
(To record payable to artists) | ||||
11 | Continuations-without donor restrictions (Transaction 1, 3, and 4) | 41,981 | ||
Membership dues | 16,285 | |||
Tuition & fees | 6,974 | |||
Commission revenue | 2,402 | |||
Investment income-without donor restrictions | 686 | |||
Without donor restrictions net assets | 4,069 | |||
Exhibition program | 21,472 | |||
Community an education (Transaction 7 and 9) | 22,297 | |||
Management & general | 17,893 | |||
Fund-raising | 10,735 | |||
(To record the closing entry for revenues and expenses) | ||||
Investment income-with donor restrictions-programs | 1,269 | |||
Net assets - With donor restrictions -programs | 1,269 | |||
(To record the closing entry for investment income – with donor restriction) | ||||
Net assets-with donor restriction -programs | 3,660 | |||
Net assets released-satisfaction of purpose restriction-with donor restrictions-programs | 3,660 | |||
(To record the closing entry for with donor restrictions net assets) | ||||
Net assets released-satisfaction of purpose restriction-without donor restrictions | 3,660 | |||
Net assets- without donor restrictions | 3,660 | |||
(To record the closing entry for net assets without donor restrictions) |
Table (1)
c)
Prepare the statement of activity for the year ended June 30, 2020.
c)
Explanation of Solution
Statement of activity: It is one of the important financial statements used by the not-for-profit entities. Statement of activities of the nonprofit entities prepared instead of income statement, which is used by a for-profit business entities.
Prepare the statement of activity for the year ended June 30, 2020:
Entity AL | |||
Statement of Activities | |||
For the year ended June 30, 2020 | |||
Particulars | Without donor restrictions | With donor restrictions | Total |
Revenue and other Support: | |||
Contributions | $41,981 | $41981 | |
Membership dues | $16,285 | $16,285 | |
Tuition and fees | S6,974 | $6,974 | |
Commission revenue | $2,402 | $2,402 | |
Investment income | 686 | $1,269 | $1,955 |
Net assets released from restriction satisfaction of purpose | 3,660 | ($ 3,660) | |
Total revenue and other support | $ 71,988 | ($ 2,391) | $ 69,597 |
Expenses: | |||
Exhibition program | $21,472 | $21,472 | |
Community art education | $22,297 | $22,297 | |
Management and general | $17,893 | $17,893 | |
Fund-raising | $10,735 | $10,735 | |
Total expenses | $ 72,397 | $ 72,397 | |
Increase (Decrease) in net assets | ($ 409) | ($ 2,391) | ($2,800) |
Beginning net assets | $9,011 | $ 19,012 | $ 28,023 |
Ending net assets | $ 8,602 | $ 16,621 | $ 25,223 |
Table (2)
d)
Prepare a
d)
Explanation of Solution
Statement of financial position: It is an itemized list of total assets and “liabilities and net assets.” The assets are classified into current and noncurrent assets. The liabilities are also classified into current and noncurrent liabilities. The assets should be equal to the liabilities and net assets.
Prepare a statement of financial position for the year ended June 30, 2020:
Entity AL | |
Statement of Financial Position | |
For the year ended June 30, 2020 | |
Assets: | Amount ($) |
Cash (beginning balance and transactions 1, 2, 5, 6, 7, and 10) | $3,719 |
Short-term investments (beginning balance and transaction 6) | $9,211 |
Grants receivable (beginning balance, transactions 1 and 3) | $5,020 |
Prepaid expense (transaction 5) | $840 |
Assets restricted for endowment: | |
Investments | $5,767 |
Equipment (less allowance for | $8,112 |
Total assets | $32,669 |
Liabilities: | |
Accounts payable & accrued expenses (transaction 5) | $2,746 |
Deferred revenue (beginning balance, transaction 3) | $4,700 |
Total liabilities (A) | $ 7,446 |
Net assets: | |
Without donor restrictions | $8,602 |
With donor restrictions-programs | $10,854 |
With donor restrictions-permanent endowment | $ 5,767 |
Total net assets (B) | $ 25,223 |
Total liabilities and net assets | $ 32,669 |
Table (3)
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