CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesEasy
A not-for-profit organization received a restricted contribution of $50,000 to be used for the purchase of new medical equipment. The equipment was purchased for $50,000 in the same fiscal year. How should this transaction be reported on the Statement of Activities?
- AIncrease in net assets without donor restrictions and increase in net assets with donor restrictions.
- BIncrease in net assets with donor restrictions and a reclassification from net assets with donor restrictions to net assets without donor restrictions.
- CDecrease in net assets with donor restrictions and increase in net assets without donor restrictions.
- DIncrease in net assets without donor restrictions only.
Show answer & explanationAnswer & explanation
Correct answer: B. Increase in net assets with donor restrictions and a reclassification from net assets with donor restrictions to net assets without donor restrictions.
When a restricted contribution is received, it increases net assets with donor restrictions. When the restriction is met (by purchasing the equipment), a reclassification is made from net assets with donor restrictions to net assets without donor restrictions.
Why the other options are wrong
- A. This option incorrectly suggests an increase in both categories without a reclassification event.
- C. This incorrectly suggests a decrease in restricted net assets without an initial increase, and does not fully capture the initial receipt.
- D. This is incorrect as the initial contribution has a donor restriction.
Release of Restriction
The process of reclassifying net assets with donor restrictions to net assets without donor restrictions when donor-imposed conditions or time restrictions have been met.
- Occurs when donor stipulations are satisfied.
- Impacts the Statement of Activities.
- Results in an increase in net assets without donor restrictions and a decrease in net assets with donor restrictions.
Memory trick: First it's locked, then it's used, then it's free.