Not - For - Profit Organizations

Chapter
19-1
19
Accounting
For Nongovernment
Nonbusiness
Organizations: Colleges
And Universities, Hospitals
And Other Health Care
Organizations
Advanced Accounting, Fifth Edition

Chapter
19-2
Learning Objectives
1. Describe the source of accounting standards for

nongovernment nonbusiness organizations (NNOs).
2. Identify the three basic statements for NNOs.
3. Describe the basic funds used by nongovernment
nonbusiness organizations.
4. Distinguish between a current restricted fund and an
unrestricted fund.
5. Explain the term “assets whose use is limited.”
6. Distinguish between a mandatory and a nonmandatory
transfer.
7. Explain how contributions are recorded by NNOs.
Chapter
19-3
Learning Objectives
8. Understand how donated services are recorded.

9. Describe the funds used to account for property, plant and
equipment.
10. Explain the basic accounting used by endowment funds.
11. Indicate how equity investments are reported in the
financial statements.
12. Explain the change in accounting for loan funds brought
about by new standards.
13. Understand the use of an annuity or life income fund.
14. Discuss the special reporting issues of hospitals.
Chapter
19-4
Nongovernment Nonbusiness Organizations (NNOs)
Four Major Classifications of NNOs:

1. Nonprofit institutions of higher education.
2. Hospitals and other health care providers.
3. Voluntary health and welfare organizations (VHWOs).
4. Other nongovernment nonbusiness organizations

(ONNOs).
Chapter
19-5
Hierarchy of Reporting Standards (NNOs)
 The hierarchy used to establish generally accepted

reporting standards for NNOs other than government-
owned special entities
 is the same as that for profit oriented business

organizations
 and included in the FASB Codification.

 FASB standards for nonprofits are
found in FASB ASC Topic 958, Not-for-
Profit Entities.
Chapter
LO 1 Source of accounting standards for NNOs.
19-6
Financial Reporting for Not-for-Profit
Three Basic Financial Statements required:

1. Statement of financial position (balance sheet)
Net Asset categories:
 Unrestricted net assets
 Temporarily restricted net assets
 Permanently restricted net assets
2. Statement of activities
3. Statement of cash flows
Chapter
19-7 LO 2 Basic statements for NNOs.
Fund Accounting
Most NNOs use fund accounting for recordkeeping

and reporting purposes.
Six funds commonly used:
1. Current Fund (restricted and unrestricted).
2. Plant Fund.
3. Endowment Fund.
4. Loan Fund.
5. Agency or Custodial Fund.
6. Annuity and Life Income Fund.
Chapter
19-8 LO 3 Basic funds used by NNOs.
Accrual Basis of Accounting
Financial statements for NNOs (accrual basis)

Revenues are reported when earned and realized or
realizable, and
Expenditures are reported when materials or
services are received.
For external reporting purposes,

Revenues are classified by source, and
Expenses and expenditures are classified by
function or activity.
Chapter
19-9
Accounting for Current Funds
Current Unrestricted Funds

Financial resources that may be expended at the
discretion of the governing board
Current Restricted Funds

Resources restricted because of legal, contractual, or
external restrictions on their use.
Current unrestricted resources may be expended at the

discretion of the governing board, whereas current restricted
resources may be expended only in accordance with externally
imposed restrictions.
Chapter
19-10 LO 4 Current restricted vs. unrestricted funds.
Accounting for Board Designated Funds

Part of current unrestricted fund.
Resources designated by governing board for specific

purposes, projects, or investments.
Aid in planning and control of expenditures and limit

discretion of management.
Governing board can modify designations.
Chapter
19-11 LO 5 Assets whose use is limited.
Assets Whose Use is Limited

Hospitals = classified as assets whose use is limited.
Assets set aside by the governing board of a hospital

for board-designated purposes.
Assets whose use is limited under terms of debt

indentures, trust agreements, third-party
reimbursement arrangements, or similar arrangements
are also presented as assets whose use is limited.
Chapter
19-12 LO 5 Assets whose use is limited.
Colleges and Universities

Board designated funds for specific current operating
purposes are accounted for by footnote or by
reclassification of the Unrestricted Current Fund
Balance.
Some board-restricted current resources can be

transferred to other funds.
Chapter
19-13 LO 4 Current restricted vs. unrestricted funds.
Mandatory and Nonmandatory Transfers

Unique to colleges and universities
Mandatory transfers
 Transfers from current funds group to other fund
groups arising from
binding legal agreements
grant agreements
Nonmandatory transfers
 Transfers from current funds group to other fund
groups at discretion of governing board.
Chapter
19-14
LO 6 Mandatory vs. nonmandatory transfers.
Contributions
All NNOs under FASB jurisdiction are required to

recognize contributions as revenue in the period received.
This includes unconditional promises to give.
The standard does not apply to tax exemptions, abatements
or incentives, or to transfers of assets from a government
to a business enterprise.
Contributions include gifts of cash, pledges, donated

services, and gifts of noncash assets.
Conditional promises to give are recognized when they
become unconditional.
Chapter
19-15 LO 7 Explain how contributions are recorded by NNOs.
Contributions
Pledges are recorded as revenues when a promise to give is

nonrevocable and unconditional, at present value of
expected receipts.
Pledges are signed commitments to contribute specific
amounts of money to an organization on a future date or in
installments.
Although resembling promissory notes, pledges generally are
not enforceable contracts.
All NNOs should establish an allowance for uncollectible
pledges.
Chapter
19-16 LO 7 Explain how contributions are recorded by NNOs.
Contributions
Exercise 19-6: A well-known celebrity sponsored a

telethon for the Help for the Blind Foundation on November
1, 2012. Pledges in the amount of $1,000,000 were called in.
Using similar telethon campaigns as a basis, it is estimated
that 25% of the pledges will be uncollectible. During 2013,
$700,000 of contributions from these pledges were
collected. The remainder were uncollectible.
Required: Identify the appropriate fund(s) and prepare the
journal entries necessary in 2012 and 2013 to record these
transactions.
Chapter
19-17
Contributions
Exercise 19-6: Prepare the journal entries necessary in

2012.
Pledges Receivable 1,000,000

Revenue - Contributions 1,000,000
Provision for Uncollectible Pledges 250,000

Allowance for Uncollectible Pledges 250,000
Chapter
19-18
Contributions
Exercise 19-6: Prepare the journal entries necessary in

2013.
Cash 700,000
Pledges Receivable 700,000
Provision for Uncollectible Pledges 50,000

Allowance for Uncollectible Pledges 250,000
Pledges Receivable 300,000
Chapter
19-19
Contributions
Donated Services
Recognized only if the services received:
1. Create or enhance nonfinancial assets, or
2. a. Require specialized skills,
b. Are provided by individuals possessing those
skills, and
c. Would need to be purchased if not provided
by donation.
Recorded as revenue or support with an amount equal to the revenue
recognized as an expense in the appropriate expense account.
Chapter
19-20 LO 8 Recording donated services.
Contributions
Exercise 19-2: During 2012 volunteer pinstripers donated

their services to General Hospital at no cost. The staff at
General Hospital was in control of the pinstripers’ duties. If
regular employees had provided the services rendered by the
volunteers, their salaries would have totaled $6,000. While
working for the hospital, the pinstripers received
complimentary meals from the cafeteria, which normally
would have cost $500. Required: Prepare the journal entry
necessary in the General Fund to record the donated services
on the books of General Hospital.
General Services Expense 5,500

Donated Services (Nonoperating Revenue) 5,500
Chapter
19-21
Contributions
Donor-imposed Restricted Contributions

Recorded as contribution revenues in period received,
thus increasing either temporarily or permanently
restricted net assets.
When expenditures are made, or restriction expires,

net assets are released from temporarily (or
permanently) restricted net assets and are reported
as unrestricted net assets on the Statement of
Activities.
Chapter LO 7 Explain how contributions are recorded by NNOs.
19-22
Contributions
Exercise 19-3: The Franklin Public Library received a

restricted contribution of $300,000 in 2012. The donor
specified that the money must be used to acquire books of
poetry written in the sixteenth century. As of December 31,
2008, only $100,000 of the restricted resources had been
expended.
Required: Prepare the journal entries necessary to record

these events during 2012. Indicate the fund in which each
journal entry is recorded.
Chapter
19-23
Contributions
Exercise 19-3: Prepare the journal entries necessary to

record these events during 2012.
Restricted Current Fund

Cash 300,000
Contribution Revenue – Poetry Collection 300,000
Net Assets Released from Restrictions 100,000
Cash 100,000
Unrestricted Current Fund

Cash 100,000
Net Assets Released from Restrictions 100,000
Expenses – Poetry Collection 100,000
Cash 100,000
Chapter
19-24
Accounting for Plant Funds
The plant fund is used to account for

1. property, plant and equipment (PP&E) owned by the
organization and the net investment,
2. accumulation of financial resources for acquisition or

replacement of PP&E,
3. acquisition and disposal of PP&E,
4. liabilities relating to acquisition of PP&E, and
5. depreciation expense and accumulated depreciation.
Chapter
19-25
LO 9 Funds used to account for PP&E.
College and Universities

Divided into four separate self-balancing subgroups:
1. Unexpended Plant Fund
2. Funds for Renewals and Replacements
3. Funds for Retirement of Indebtedness
4. Investment in Plant
Both board-designated funds and externally restricted funds are

accounted for in the plant fund; therefore, a distinction is made
between restricted and unrestricted fund balances.
Chapter
19-26
Exercise 19-8: After the election of a prominent political

figure, the principal from a term endowment fund was
expendable by Crandall University. The official was elected
this year. The fund was restricted to the construction of a
Political Science building annex. The following transactions
occurred because of this event.
Required: For each of the following transactions, record the

journal entries and identify the fund or fund subgroup in
which each entry is recorded.
Chapter
19-27
Exercise 19-8:
1. A transfer of $3,000,000 is made from the Endowment
Fund (Term) to the Unexpended Plant Fund.
Endowment Fund
Endowment fund balance 3,000,000
Cash 3,000,000
Unexpended Plant Fund

Cash 3,000,000
Fund Balance - Restricted 3,000,000
Chapter
19-28
Exercise 19-8:
2. Construction is begun on the Political Science annex. Costs
of construction during the year amounted to $1,000,000, of
which $30,000 remained unpaid at the end of the year. (The
financial controller does not record transfers to the
Investment in Plant subgroup until a project has been
completed.)

Construction in process 1,000,000
Cash 970,000
Accounts payable 30,000
Chapter
19-29
Exercise 19-8:
3. By the end of the following year, the annex is completed
at an additional cost of $2,100,000. All costs have been paid.

Construction in process 2,100,000
Accounts payable 30,000
Cash 2,130,000
Building 3,100,000
Work in process 3,100,000
Chapter
19-30
Exercise 19-8:
4. The completed building is recorded in the Investment in
Plant subgroup.
Net Investment in Plant Fund

Building 3,100,000
Net investment in plant 3,100,000
Chapter
19-31
Hospitals
Property, plant and equipment (PP&E) transactions
are accounted for in the General Fund.
Contributed resources restricted to acquire PP&E
are accounted for in a plant replacement and
expansion (restricted) fund.
Upon expenditure, the assets acquired and the related
fund balance are transferred to the General Fund.
Chapter
19-32
Voluntary Health and Welfare and ONNOs

Single Plant Fund and report the fund balance in two
classifications:
Expended Fund Balance is equal to the organization’s

net investment in PP&E.
Net Investment = Gross assets less related liabilities and
accumulated depreciation.
Unexpended Fund Balance represents the amount of

resources available to replace or acquire additional
PP&E.
Chapter
19-33 LO 9 Funds used to account for PP&E.
Accounting for Endowment Funds
Pure Endowment Fund - donated funds have been given

in perpetuity.
Term Endowment Fund - donor has specified a

particular date or event after which the principal of the
endowment fund may be expended.
Income from endowment funds generally may be

expended as earned either for specified purposes or at
the discretion of the governing board.
Chapter
19-34
LO 10 Endowment Funds.
Exercise 19-7 (partial): Jefferson Hospital received

money from a donor to set up an endowment fund. The
following information pertains to this contribution. Prepare
the journal entries necessary to record the events in the
endowment fund.
Chapter
19-35
Exercise 19-7 (partial): During 2012

1. $2,000,000 was received to establish the fund. The
requirements were (a) $100,000 of the endowment fund’s
income must be used for research grants each year. (b) The
remainder of income is under the discretion of the governing
board. (c) The principal is expendable after the donor’s
death. It shall be used to purchase equipment.
Cash 2,000,000
Revenue Contribution - Restricted 2,000,000
Chapter
19-36

2. The cash received was invested in a number of
securities.
Investment 2,000,000
Cash 2,000,000
Chapter
19-37

3. Dividends of $100,000 and interest of $300,000 were
received.
Cash 400,000
Due to General Fund 300,000
Due to Specific Purpose Fund 100,000
Chapter
19-38

4. The income was transferred to the appropriate funds.
Due to General Fund 300,000

Due to Specific Purpose Fund 100,000
Cash 400,000
Chapter
19-39

8. The hospital was notified of the donor death.
Transfer to Plant Replacement

and Expansion Fund 2,000,000
Cash 2,000,000
Chapter
19-40
Accounting for Investments
FASB ASC paragraph 958-320-35-1 requires NPOs

to report investments in equity securities with readily
determinable fair values and all debt securities at fair value
in unrestricted, temporarily restricted, or permanently
restricted net assets.
Unrealized and realized gains and losses are to be

recognized in the Statement of Activities.
To improve effectiveness and flexibility, NNOs often

pool investments of different funds into a single
portfolio.
Chapter
19-41 LO 11 Accounting for Equity Investments.
Accounting for Loan Funds
Loans to:
Students and staff of colleges and universities,
Employees of hospitals, and
Beneficiaries of the interests of certain ONNOs.

(for example, loans to music students by symphony
orchestra societies).
Chapter LO 12 Accounting for loan funds.

19-42
Exercise 19-4: The following events relate to Grearson

University Loan Fund:
1. $100,000 is received from an estate to establish a faculty and
student loan fund. Annual interest rates range from 8% for
students to 10% for faculty.
2. Loans to students totaled $60,000, and $40,000 was disbursed
to faculty members (of the total loans made, 10% are estimated to
be uncollectible).
3. Grearson wrote off a $1,000 student loan as uncollectible.
4. The following loans were repaid.
Principal Interest
Faculty $ 5,000 $500
Student 10,000 800
Chapter
19-43

record these transactions.
1. $100,000 is received from an estate to establish a faculty
and student loan fund. Annual interest rates range from 8%
for students to 10% for faculty.
Cash 100,000
Revenue – Contributions Restricted 100,000
Chapter
19-44

2. Loans to students totaled $60,000, and $40,000 was
disbursed to faculty members (of the total loans made, 10%
are estimated to be uncollectible).
Loans Receivable – Students 60,000

Loans Receivable – Faculty 40,000
Cash 100,000
Bad Debt Expense 10,000

Allowance for Uncollectible–Students 6,000
Allowance for Uncollectible–Faculty 4,000
Chapter
19-45

3. Grearson wrote off a $1,000 student loan as uncollectible.
Allowance for Uncollectible–Students 1,000

Chapter
19-46

4. The following loans were repaid.
Principal Interest
Faculty $ 5,000 $500
Student 10,000 800
Cash 16,300
Loans Receivable – Faculty 5,000
Interest Income 1,300
Chapter
19-47
Accounting for Agency (Custodial) Funds
Account for assets held by NNO as custodian for

others.
Unless significant amounts are involved, resources held

by an NNO as an agent for others are often accounted
for as assets and liabilities in the unrestricted or
general fund rather than in a separate agency fund.
Chapter
19-48
Accounting for Annuity and Life Income Funds
Contribution to the organization on the condition that the

organization make annuity payments to a specified recipient
for a specified period of time (annuity fund) or that the
organization pay the income earned on the contributed
assets to a specified recipient during his or her lifetime
(life income fund).
At the end of the annuity or on the death of the life income

beneficiary, the unexpended assets of the fund are
transferred to the unrestricted fund or to an endowment
fund, loan fund, plant fund, or other fund specified by the
donor.
Chapter
19-49 LO 13 Annuity or life income fund.
Issues Relating to Colleges and Universities
Recognition of Service Fee Revenue

Operating versus Nonoperating Income
Issues Relating to Hospitals
Charity care
Contractual allowances
Capitation revenues
Malpractice
Chapter
19-50 LO 14 Special reporting issues.
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Chapter
19-51

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Chapter

Advanced Accounting, Fifth Edition

1. Describe the source of accounting standards for

8. Understand how donated services are recorded.

Four Major Classifications of NNOs:

2. Hospitals and other health care providers.

3. Voluntary health and welfare organizations (VHWOs).

4. Other nongovernment nonbusiness organizations

 The hierarchy used to establish generally accepted

 is the same as that for profit oriented business

 and included in the FASB Codification.

Three Basic Financial Statements required:

 Permanently restricted net assets

Most NNOs use fund accounting for recordkeeping

Financial statements for NNOs (accrual basis)

For external reporting purposes,

Current Unrestricted Funds

Current Restricted Funds

Current unrestricted resources may be expended at the

Accounting for Board Designated Funds

Resources designated by governing board for specific

Aid in planning and control of expenditures and limit

Governing board can modify designations.

Assets Whose Use is Limited

Assets set aside by the governing board of a hospital

Assets whose use is limited under terms of debt

Colleges and Universities

Some board-restricted current resources can be

Mandatory and Nonmandatory Transfers

All NNOs under FASB jurisdiction are required to

Contributions include gifts of cash, pledges, donated

Pledges are recorded as revenues when a promise to give is

Exercise 19-6: A well-known celebrity sponsored a

Exercise 19-6: Prepare the journal entries necessary in

Pledges Receivable 1,000,000

Provision for Uncollectible Pledges 250,000

Exercise 19-6: Prepare the journal entries necessary in

Provision for Uncollectible Pledges 50,000

Exercise 19-2: During 2012 volunteer pinstripers donated

General Services Expense 5,500

Donor-imposed Restricted Contributions

When expenditures are made, or restriction expires,

Exercise 19-3: The Franklin Public Library received a

Required: Prepare the journal entries necessary to record

Exercise 19-3: Prepare the journal entries necessary to

Restricted Current Fund

Unrestricted Current Fund

The plant fund is used to account for

2. accumulation of financial resources for acquisition or

3. acquisition and disposal of PP&E,

4. liabilities relating to acquisition of PP&E, and

5. depreciation expense and accumulated depreciation.

College and Universities

Both board-designated funds and externally restricted funds are

Exercise 19-8: After the election of a prominent political

Required: For each of the following transactions, record the

Unexpended Plant Fund

Unexpended Plant Fund

Unexpended Plant Fund

Net Investment in Plant Fund

Voluntary Health and Welfare and ONNOs

Expended Fund Balance is equal to the organization’s

Unexpended Fund Balance represents the amount of