CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesMedium
A not-for-profit community arts center received a cash contribution of $250,000 from a local foundation. The terms of the grant stipulate that the funds must be used to establish a new educational outreach program for underserved youth. The arts center expects to use these funds over the next three years. How should this contribution be reported in the Statement of Activities in the year of receipt?
- AAs an increase in net assets without donor restrictions of $250,000.
- BAs an increase in permanently restricted net assets of $250,000.
- CAs an increase in net assets with donor restrictions of $250,000.
- DAs a deferred revenue liability of $250,000.
Show answer & explanationAnswer & explanation
Correct answer: C. As an increase in net assets with donor restrictions of $250,000.
This contribution has a donor-imposed purpose restriction (educational outreach program) and an implicit time restriction (to be used over the next three years). Both types of restrictions classify the net assets as with donor restrictions.
Why the other options are wrong
- A. Incorrect, as there is a donor-imposed purpose restriction.
- B. Incorrect, as the restriction is temporary (will be satisfied by spending), not permanent.
- D. Incorrect; this is an unconditional contribution, not a conditional one or an exchange transaction.
Purpose-Restricted Contribution
A contribution where the donor specifies a particular use for the funds or assets, limiting the NFP's discretion over how they are spent. These are classified as net assets with donor restrictions.
- Donor specifies how funds must be used.
- Limits NFP's flexibility in spending.
- Classified as net assets with donor restrictions.
- Released when the specified purpose is fulfilled.
Memory trick: Purposeful funds mean temporary bounds.