A not-for-profit (NFP) organization received a $200,000 cash contribution with a donor restriction that the funds be used to purchase a specific piece of medical equipment. The NFP purchased the equipment for $180,000 during the same fiscal year. How should this transaction affect the NFP's net assets?
- AIncrease in Net Assets Without Donor Restrictions by $200,000.
- BIncrease in Net Assets With Donor Restrictions by $20,000.
- CIncrease in Net Assets Without Donor Restrictions by $180,000, and an increase in Net Assets With Donor Restrictions by $20,000.
- DIncrease in Net Assets With Donor Restrictions by $200,000, and a reclassification to Net Assets Without Donor Restrictions of $180,000.
Show answer & explanationAnswer & explanation
Correct answer: D. Increase in Net Assets With Donor Restrictions by $200,000, and a reclassification to Net Assets Without Donor Restrictions of $180,000.
Initially, the entire $200,000 contribution increases Net Assets With Donor Restrictions. Upon satisfaction of the restriction (purchasing the equipment), $180,000 is reclassified from Net Assets With Donor Restrictions to Net Assets Without Donor Restrictions. The remaining restricted balance of $20,000 stays in Net Assets With Donor Restrictions.
Why the other options are wrong
- A. The initial contribution is restricted, so it does not directly increase Net Assets Without Donor Restrictions.
- B. This only accounts for the remaining restricted balance, not the initial contribution or the reclassification.
- C. This incorrectly records the initial contribution and the reclassification amounts.
Restricted Contributions (NFP - Asset Acquisition)
When an NFP receives a contribution restricted for the acquisition of a long-lived asset, the contribution initially increases Net Assets With Donor Restrictions. Once the asset is acquired, the amount expended is reclassified to Net Assets Without Donor Restrictions.
- Initially increases Net Assets With Donor Restrictions
- Reclassified upon asset acquisition
- Amount reclassified equals expenditure
Memory trick: Restricted gifts are initially locked, then unlocked when spent.