CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesMedium
A not-for-profit (NFP) entity received a cash contribution of $50,000 for a specific program. The NFP incurred $15,000 of expenses for this program during the current year. How should the NFP report the release of donor restrictions related to this program for the current year?
- ABy decreasing temporarily restricted net assets and increasing unrestricted net assets by $15,000.
- BBy increasing both temporarily restricted net assets and unrestricted net assets by $15,000.
- CBy decreasing unrestricted net assets and increasing temporarily restricted net assets by $15,000.
- DBy decreasing temporarily restricted net assets and increasing program expense by $15,000.
Show answer & explanationAnswer & explanation
Correct answer: A. By decreasing temporarily restricted net assets and increasing unrestricted net assets by $15,000.
When donor-imposed restrictions are met, the NFP recognizes a 'release from restriction.' This is recorded by decreasing temporarily restricted net assets and simultaneously increasing unrestricted net assets by the amount of the restriction satisfied.
Why the other options are wrong
- B. This entry would incorrectly increase both categories, not reflect the transfer of resources.
- C. This entry would incorrectly increase temporarily restricted net assets, implying a new restriction.
- D. Releasing restrictions affects net asset classifications, not directly an expense account.
Release of Purpose Restriction
The reclassification of net assets from temporarily restricted to unrestricted when the NFP expends resources for the donor-specified purpose.
- Occurs when the purpose restriction is satisfied.
- Increases unrestricted net assets and decreases temporarily restricted net assets.
- Reported as 'net assets released from restriction' on the Statement of Activities.
Memory trick: Restriction fulfilled, freedom found, assets unbound.