CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesEasy
A not-for-profit hospital received a cash donation of $1,000,000 with a donor-imposed restriction that the funds be used to establish an endowment, the income from which is expendable for general operating purposes. How should this contribution be classified in the hospital's net assets?
- AIncrease in net assets without donor restrictions and net assets with donor restrictions.
- BIncrease in net assets restricted by board designation.
- CIncrease in net assets with donor restrictions.
- DIncrease in net assets without donor restrictions.
Show answer & explanationAnswer & explanation
Correct answer: C. Increase in net assets with donor restrictions.
A donor-imposed restriction, even if the income is expendable for general operations, means the principal of the endowment is permanently restricted by the donor. Therefore, it increases net assets with donor restrictions.
Why the other options are wrong
- A. This is incorrect as the entire principal amount is donor-restricted.
- B. Board-designated funds are not donor-restricted; this is an incorrect classification.
- D. This is incorrect because the principal is donor-restricted, not unrestricted.
Endowment Contribution
A contribution where the donor stipulates that the principal must be maintained permanently or for a specified period, with only the income available for spending.
- Always increases net assets with donor restrictions.
- The restriction applies to the principal, not necessarily the income.
- Can be permanent or term endowments.
Memory trick: Endowment's main trunk is always locked by the donor.