Pledges Must Be Distinguished By The Extent To Which They Ac

Pledges Must Be Distinguished By The Extent To Which They Are Res

Identify the categories of net assets (unrestricted, temporarily restricted, or permanently restricted) in which each pledge or contribution should be recorded at the time the pledge is made, and determine the amount of revenue to recognize. Provide brief explanations for each, considering restrictions and conditions associated with the pledges or contributions.

Also, prepare journal entries for a series of transactions involving the receipt and use of an endowed stock contribution, including establishing restrictions, receipt of assets, receipt of dividends, and purchase and depreciation of equipment. Indicate the type of fund affected by each transaction.

Paper For Above instruction

The categorization of net assets and recognition of revenue at the time of pledges or contributions are fundamental aspects of accounting for not-for-profit entities. Proper classification influences how donors' intentions are honored and how financial statements reflect the organization's financial position and activities. This paper discusses various pledge scenarios distinguishing between unrestricted, temporarily restricted, and permanently restricted funds, with brief justifications based on restrictions or conditions attached to each pledge. Additionally, it examines the accounting treatment for a complex contribution involving endowment assets, dividends, and expenditure, illustrating journal entries and fund classifications.

Recognition and Classification of Pledges and Contributions

1. Pledges to private colleges often come with restrictions that determine their classification. For example, a pledge of $8 million from alumni and friends, with an estimated 15% uncollectibility, generally is recognized as revenue when legally enforceable, but the restriction—whether restricted or unrestricted—depends on the purpose or donor stipulations. If the pledge designates funds for a specific purpose, it typically is classified as temporarily restricted until the purpose is fulfilled. Otherwise, if no restrictions are specified, it may be unrestricted.

2. A $500,000 pledge to establish an endowed chair, with the stipulation that investments generate income to support the chair, is considered a permanently restricted fund. The principal ($500,000) is permanently restricted by donor intent—used only for investment. The income generated ($e.g., dividends or interest) is classified as temporarily restricted until used according to donor stipulations or temporarily restricted, depending on the organization's policies.

3. The donation of $100,000 to support curriculum revision is typically categorized as temporarily restricted if the funds are designated for specific development efforts. Once the curricular changes are implemented, the restriction is released, and the funds move to unrestricted net assets.

4. A pledge of $25,000 to the college’s loan fund, used to make loans to financially needy students, is usually classified as temporarily restricted since the funds are restricted for loan purposes. When the loans are made, the pledge is recognized as revenue, and the fund’s assets increase accordingly.

5. The donation of land valued at $1 million contingent on fundraising success is a promise that creates a permanently restricted asset. The land’s value is recorded as a permanently restricted net asset upon receipt once conditional restrictions are satisfied, or when the land is transferred if the restriction was conditional upon future fundraising success.

Accounting for the Impact of Single Contributions on Multiple Funds

The contribution involving stocks, dividends, and equipment purchases illustrates how one event can affect multiple funds. Initial pledge and establishment of restrictions affect the classifications: the stock received is recorded as a permanently restricted endowment, with dividends recognized as either temporarily restricted or unrestricted depending on donor stipulations. When the stock generates dividends, the money is credited to an appropriate fund—often temporarily restricted if subject to donor-imposed restrictions. Purchase of equipment is an expense item that may be charged to unrestricted funds if no restrictions apply, or temporarily restricted if restricted by donation. Depreciation allocates the cost over the useful life, impacting net assets accordingly.

Sample Journal Entries

  1. Receiving the stock contribution and establishing restrictions:
    • DR Investment in Stocks $1,000,000
    • CR Permanently Restricted Net Assets—Endowment $1,000,000
  2. Receiving dividends and recognizing revenue:
    • DR Cash $30,000
    • CR Temporarily Restricted Net Assets / Investment Income $30,000
  3. Purchasing computer equipment with restricted funds:
    • DR Computer Equipment $20,000
    • CR Temporarily Restricted / Unrestricted Cash $20,000
  4. Charging depreciation for the computer equipment:
    • DR Depreciation Expense $5,000 (assuming straight-line over four years)
    • CR Accumulated Depreciation $5,000

In conclusion, accurately classifying pledges and contributions according to donor stipulations and organizational policies ensures transparent financial reporting and proper stewardship of donor assets. The treatment of endowment assets, dividends, and expenditures illustrates the complexity and necessity of detailed accounting records to maintain compliance with financial standards and donor restrictions.

References

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  • FASB Accounting Standards Codification (ASC) 958, Not-for-Profit Entities.
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  • Moore, T., & Shaw, R. (2018). Fund Accounting and Financial Reporting in Nonprofit Organizations. Wiley.
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  • Walker, W. C. (2017). Endowment and Fund Accounting. Harvard Business School Publishing.
  • Weil, R. L., Schipper, K., & Vincent, L. (2019). Financial Reporting & Analysis. Cengage Learning.
  • Williams, J., & Smith, L. (2020). Nonprofit Financial Management. Routledge.

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