Asked by Felicia Thompson on Jun 11, 2024
Verified
A capital asset (equipment) with a fair value of $1,500,000 and land with a fair value of $2,000,000 is donated to a not-for-profit organization on January 1, 2020. The equipment has a ten year useful life. The organization will use the equipment in its operations. The NFPO has a December 31 year end.
Prepare the journal entries (including amortization) if the organization uses the:
a) the deferral method for contributions.
b) the restricted fund method with a capital fund.
Deferral Method
An accounting practice that involves postponing the recognition of revenue or expenses until a future date.
Restricted Fund Method
An accounting practice for nonprofit organizations, segregating funds according to restrictions imposed by donors.
- Adopt accounting guidelines in factual cases related to financial management and reporting within not-for-profit organizations.
- Analyze the effects of transactions on the financial statements of not-for-profit organizations.
Verified Answer
WN
Wan Nisa Batrisyia Wan ZamzuriJun 13, 2024
Final Answer :
a) If the deferral method is being used and the asset is subject to amortization, the journal entry recording the donation of the equipment is:
Equipment $1,500,000 Deferred contributions-capital assets $1,500,000\begin{array}{|l|l|l|}\hline \text { Equipment } & \$ 1,500,000 & \\\hline \begin{array}{l}\text { Deferred contributions-capital } \\\text { assets }\end{array} & & \$ 1,500,000 \\\hline\end{array} Equipment Deferred contributions-capital assets $1,500,000$1,500,000 The following entries will be prepared each year to record the annual amortization and recognition of the deferred contribution:
Amortization expense $150,000 Accumulated amortization $150,000 Deferred contributions-capital assets $150,000 Contribution revenue $150,000\begin{array}{|c|c|c|}\hline \text { Amortization expense } & \$ 150,000 \\\hline \text { Accumulated amortization } & & \$ 150,000 \\\hline \text { Deferred contributions-capital assets } & \$ 150,000 & \\\hline \text { Contribution revenue } & & \$ 150,000 \\\hline\end{array} Amortization expense Accumulated amortization Deferred contributions-capital assets Contribution revenue $150,000$150,000$150,000$150,000 No deferral of land as no expenses associated with it. Reflected in the statement of net assets as follows:
Land $2,000,000 Net assets-donated land $2,000,000\begin{array}{|l|r|r|}\hline \text { Land } & \$ 2,000,000 & \\\hline \text { Net assets-donated land } & & \$ 2,000,000 \\\hline\end{array} Land Net assets-donated land $2,000,000$2,000,000 b) If the restricted fund method is being used, the fair value of the donated capital asset is recorded as revenue in the capital fund:
Capital Fund Equipment $1,500,000 Contribution revenue-donated equipment $1,500,000 Land $2,000,000 Contribution revenue-donated land $2,000,000\begin{array}{|l|r|r|}\hline \text { Capital Fund } & & \\\hline \text { Equipment } & \$ 1,500,000 & \\\hline \begin{array}{c}\text { Contribution revenue-donated } \\\text { equipment }\end{array} & & \$ 1,500,000 \\\hline \text { Land } & \$ 2,000,000 & \\\hline \text { Contribution revenue-donated land } & & \$ 2,000,000 \\\hline\end{array} Capital Fund Equipment Contribution revenue-donated equipment Land Contribution revenue-donated land $1,500,000$2,000,000$1,500,000$2,000,000 The following entry will be prepared each year to record the annual amortization in the capital fund.
Amortization expense $150,000 Accurnulated arnortization $150,000\begin{array} { | c | r | r | } \hline\text { Amortization expense } & \$ 150,000 & \\\hline \text { Accurnulated arnortization } & & \$ 150,000 \\\hline\end{array} Amortization expense Accurnulated arnortization $150,000$150,000
Equipment $1,500,000 Deferred contributions-capital assets $1,500,000\begin{array}{|l|l|l|}\hline \text { Equipment } & \$ 1,500,000 & \\\hline \begin{array}{l}\text { Deferred contributions-capital } \\\text { assets }\end{array} & & \$ 1,500,000 \\\hline\end{array} Equipment Deferred contributions-capital assets $1,500,000$1,500,000 The following entries will be prepared each year to record the annual amortization and recognition of the deferred contribution:
Amortization expense $150,000 Accumulated amortization $150,000 Deferred contributions-capital assets $150,000 Contribution revenue $150,000\begin{array}{|c|c|c|}\hline \text { Amortization expense } & \$ 150,000 \\\hline \text { Accumulated amortization } & & \$ 150,000 \\\hline \text { Deferred contributions-capital assets } & \$ 150,000 & \\\hline \text { Contribution revenue } & & \$ 150,000 \\\hline\end{array} Amortization expense Accumulated amortization Deferred contributions-capital assets Contribution revenue $150,000$150,000$150,000$150,000 No deferral of land as no expenses associated with it. Reflected in the statement of net assets as follows:
Land $2,000,000 Net assets-donated land $2,000,000\begin{array}{|l|r|r|}\hline \text { Land } & \$ 2,000,000 & \\\hline \text { Net assets-donated land } & & \$ 2,000,000 \\\hline\end{array} Land Net assets-donated land $2,000,000$2,000,000 b) If the restricted fund method is being used, the fair value of the donated capital asset is recorded as revenue in the capital fund:
Capital Fund Equipment $1,500,000 Contribution revenue-donated equipment $1,500,000 Land $2,000,000 Contribution revenue-donated land $2,000,000\begin{array}{|l|r|r|}\hline \text { Capital Fund } & & \\\hline \text { Equipment } & \$ 1,500,000 & \\\hline \begin{array}{c}\text { Contribution revenue-donated } \\\text { equipment }\end{array} & & \$ 1,500,000 \\\hline \text { Land } & \$ 2,000,000 & \\\hline \text { Contribution revenue-donated land } & & \$ 2,000,000 \\\hline\end{array} Capital Fund Equipment Contribution revenue-donated equipment Land Contribution revenue-donated land $1,500,000$2,000,000$1,500,000$2,000,000 The following entry will be prepared each year to record the annual amortization in the capital fund.
Amortization expense $150,000 Accurnulated arnortization $150,000\begin{array} { | c | r | r | } \hline\text { Amortization expense } & \$ 150,000 & \\\hline \text { Accurnulated arnortization } & & \$ 150,000 \\\hline\end{array} Amortization expense Accurnulated arnortization $150,000$150,000
Learning Objectives
- Adopt accounting guidelines in factual cases related to financial management and reporting within not-for-profit organizations.
- Analyze the effects of transactions on the financial statements of not-for-profit organizations.
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