A not-for-profit (NFP) organization received a pledge of $100,000 from a donor. The pledge is unconditional, but the donor specified that the funds are to be used to renovate the NFP's administrative building, which is expected to occur in the next fiscal year. How should this unconditional pledge be initially recognized by the NFP organization?
- ADebit Contributions Receivable, Credit Deferred Revenue
- BDebit Contributions Receivable, Credit Revenue without Donor Restrictions
- CDebit Cash, Credit Revenue with Donor Restrictions
- DDebit Contributions Receivable, Credit Revenue with Donor Restrictions
Show answer & explanationAnswer & explanation
Correct answer: D. Debit Contributions Receivable, Credit Revenue with Donor Restrictions
Unconditional pledges are recognized as revenue when pledged. Since the pledge is for a specific purpose (renovating the building), it is considered a contribution 'with donor restrictions.' The fact that the renovation will occur in the next fiscal year makes it a time-restricted contribution, which is also categorized as 'with donor restrictions.' Cash is not debited as it is a pledge, not immediate cash.
Why the other options are wrong
- A. NFP accounting typically recognizes unconditional pledges as revenue immediately, classifying based on restrictions, rather than deferring revenue.
- B. Incorrect as the pledge has a donor restriction for purpose and time.
- C. Incorrect because it's a pledge, not cash, and cash would only be debited upon receipt.
NFP Unconditional Pledge with Restriction
An unconditional promise to give (pledge) to a not-for-profit organization that includes a donor-imposed purpose or time restriction. It is recognized as revenue with donor restrictions when the pledge is made.
- Recognized as a receivable and revenue immediately.
- Classified as 'Revenue with Donor Restrictions'.
- Distinct from conditional pledges, which are not recognized until conditions are met.
Memory trick: Pledge: If unconditional, it's revenue, but check for donor's rules.