Chapter 14, Problem 23EP

To determine

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. 1. The activity requires special skill.
2. 2. Someone who has the specialized skill would perform the activity.
3. 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)

To determine

Prepare the necessary journal entries to record the given transactions.

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)

To determine

Prepare the statement of activity for the year ended June 30, 2020.

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)

To determine

Prepare a statement of financial position for the year ended June 30, 2020.

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 accumulated depreciation of $4,068) (Transaction 8)	$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 $\left[\left(\text{A}\right)\text{+}\left(\text{B}\right)\right]$	$ 32,669

Table (3)