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1. For each of the
cases below state whether the contributed services would be recognized, how
much would be recognized, and how it would be recognized. Explain your answer in terms of the existing
standard. Also explain why, in your
opinion, the standard permits/prohibits recognition of this particular type of
contribution.
a. A church
votes to construct a new educational wing on its existing facility. The church will hire an architect to design the
new wing and a construction supervisor to oversee the construction. Church members will provide most of the labor
for the construction. Labor donated by
members who have construction experience or who are considered professional
craftsmen at the prevailing wage for their trade or craft is $500,000. Labor donated by persons possessing
non-building specialized skills (doctors, teachers, lawyers, etc.) at their
prevailing wage rates is $700,000. Labor
donated by non-professionals measured at the minimum wage is $300,000. The appraised value of the building when
completed is $3 million. The architect
was paid $700,000, the construction supervisor was paid $50,000 and the materials
purchased for use in the building cost $1 million.
b. An
investment advisor, a member of the Board of a not-for-profit entity, provides
pro bona investment advice to the NFP.
The NFP does not have a particularly large investment portfolio and
without the advice of the Board member the NFP would probably invest its idle
cash in certificates of deposits at an insured commercial bank to protect
itself against loss of its principal. If
the investment advisor had provided similar services to his customers he would
have charged $2,000.
c. Members
of a religious order provide professional nursing services for a healthcare
facility that is run by their order. The
members are not compensated but their order provides lodging, food, and other
necessities. The cost of the lodging,
food, etc., is paid by the healthcare entity and classified as Nursing Service
Expense. At the end of the year the
balance in the Nursing Service Expense account is $3 million. The value of the nursing services provided,
measured at the prevailing wage for nurses, is $5 million.
2. A
generous benefactor pledges $1 million to The R. J. Smith Foundation, a
not-for-profit entity that promotes the arts.
The gift is to be used to provide scholarships for talented musicians at
a music camp operated by the Foundation.
The gift was given in August 2006 to support the Summer 2007 music
program. The Foundation Director argues
that the gift is a conditional restricted gift and therefore cannot be
recognized as revenue in 2006. The accountant
argues that the gift is an unconditional restricted gift and must be recognized
in the current year. What is the basis
for the Director’s argument? What is the
basis for the accountant’s argument? In
your answer provide an explanation of the terms conditional, unconditional,
restricted and unrestricted.
3. Alpha
Hospital is a recipient of Hill-Burton funds and must provide some hospital
care for which it will not be compensated.
During the current year, Alpha Hospital provided $1 million in charity
care. What is the current financial
reporting requirement for charity care?
Do you agree or disagree with the current financial reporting
requirement? Why or why not? If you do not agree, how do you think charity
care should be reported? If you agree
with the current standards, what alternative reporting requirements do you
believe would be proposed by those who do not agree with the current standards?
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