Journal entry to release restricted funds

Not-For-Profit Accounting

Reviewing Net Asset Classifications
Accounting for Contributions
Accounting for donated services
Accounting for Pledges
Conclusion
You are believer that new employees should practice their accounting skills before "throwing them into the fire." Therefore, you have listed a series of transactions that require journal entries and updating of T-Accounts. You know that preparing nonprofit journal entries are easy, so you ask the new employee to
prepare, side by side, the correct journal entry for the identical transaction:
once for a nonprofit entity
once for a for-profit company
include notes for each transaction
Transaction 1: Assume a nonprofit has a restricted fund for capital asset purchases. Compare the journal entries for the cash purchase of a $10,000 computer by the nonprofit, to how the journal entry would look for this for-profit.

Transaction 2: Assume that a nonprofit has a need for $80,000 for a particular new marketing expenditure, and a for-profit entity needs to raise an additional $80,000 to pay for some unanticipated marketing expenses. How would the journal entities look at the acquisition of the funds and the subsequent spending of the funds?

Transaction 3: The for-profit entity sells $120,000 with net 30-day terms, while the nonprofit entity has a fund raising drive for which they receive pledges of $120,000. How do the two journal entries look?
Grading Criteria
30% 0-30 pts For Transaction 1, prepare, side by side, the correct journal entry for a nonprofit entity and a for-profit company.
30% 0-30 pts For Transaction 2, prepare, side by side, the correct journal entry for a nonprofit entity and a for-profit company 1.
30% 0-30 pts For Transaction 3, prepare, side by side, the correct journal entry for a nonprofit entity and a for-profit company.
10% 0-10 pts All Notes in the journal entries are correct.
Unrestricted funds
Used for general operations of the organization or may be designated by the Board for a special purpose
Temporarily restricted funds
restricted through donor imposed criteria that will be satisfied either by a specific action or through the passage of time
Permanently restricted funds
The donor stipulates that the principal (corpus) being donated must remain intact and only the proceeds that result from the investment (i.e., interest income and/or dividends) can be used for a specific purpose
Example of temporarily restricted: An example would be a group of donors funding a memorial bench in the memory of a colleague. The specific action would be the purchase of the bench. Finally there are permanently restricted funds.

Example of permanently restricted: Perhaps the example most of us are familiar with would be that of an individual endowing $1 million to set up a scholarship fund. The intent is to retain the $1 million in perpetuity, using only the interest income generated by the $1 million for the actual scholarships. In times of recession, the number scholarships awarded in a year can be significantly impacted.

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Net Asset Class Permanently Restricted Temporarily Restricted Unrestricted
Types of Restrictions Donor-imposed Permanent in nature Not removable by organization Donor-imposed or implied Met by 1. Passage of time 2. Use of resources for restricted purpose No donor-imposed restriction
Examples Permanent endowments Required preservation of assets (art, land) Assets restricted to use (research, capital assets) Assets restricted for use for time certain Pledges receivable in future All other net assets Board-designated resources not donor-restricted
A donor contributes $50,000 to a NPO to sponsor an event scheduled for next year. Should the event not occur, the donation will be forfeited and given back to the donor. Since there is an condition (the holding of the event) the NPO would record the cash received as an asset with a corresponding temporarily restricted support. When the condition is met, FAS No. 117 requires a 2 step process

This purpose type restriction is known as a temporary restriction. The donor could have also placed a time restrictions on the use of resources, such as the building must be built within the next two years otherwise the donation reverts to the donor.

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Record the release the funds from the restriction

Record the actual use of the released funds

T Pharmacy donated $10,000 to host a dinner at the Physicials Annual Meeting.

The Church of the Holy General Ledger (a religious NFP) had a restricted fund (generated from a fund raising event) specifically created to purchase a RV (a capital asset) which will drive to bring the mass to shut aged accountants. Create the JE to purchase the RV $350,000.
Nonprofit
1/1/2010 Resources released from Restricted Capital Fund $350,000
Cash $350,000
Note: Release restricted fund for purchase of RV
1/1/2010 RV – capital asset $350,000
Resources released from Restricted Capital fund $350,000
Note: Record the expenditure to purchase the RV
When people volunteer their time (services), this is usually not recorded.
Volunteer services (FASB 116) can be recorded only if they are professional in nature & the NPO would have to pay for the service otherwise. Assume an accountant donates his/her services to audit a NPO, valued at $10,000. This would be recorded (unrestricted) as:
Expense-Professional Services10,000

Revenue-Contributed Services 10,000

Jeff, an electrician, donates his time to rewire the church which has old knob and tube wiring. Jeff usually charges $25,000 to rewire a building of the church’s size. He also helped serve dinner for 2 hours in the Church’s homeless shelter. What is the journal entry?
Pledges are unconditional promises to contribute cash or other assets or services in the future.
Based on FASB 116, unrestricted pledges are reported as revenue in the period received, based on present value (estimated future cash flows discounted for relative risk). Pledges expected to be collected within one year need not be discounted.
Pledges of $100,000 are received. We will record in the pledge in the year it is made. It also happens that $60,000 will be collected this year:
Unrestricted Fund

Pledges Receivable 60,000 Revenue from Contributions 60,000

Cash 60,000 Pledges Receivable 60,000

$40,000 of the pledges will not be collected this year, of which $10,000 is expected to be uncollectible:
Temporarily Restricted Fund

Pledges Receivable 40,000 Allowance for Uncollectible Pledges 10,000 Revenues from Contributions 30,000

How would a NFP calculate an allowance for uncollectible pledges?
Do you think a NFP should be able to record revenue when a pledge is made even though the cash may be received much later or throughout the year, why?
Depreciation on capital assets must be recognized as expense for NPs (FASB 93). The expense is unrestricted, even if the capital assets are restricted.
Assume a foundation records annual depreciation of $5,000. The entry is (unrestricted):
Depreciation Expense 5,000 Accumulated Depreciation 5,000

Would a NFP ever have intangible assets? What form would those intangible assets take?
Net Asset Classifications – 3 different funds
Accounting for Contributions – No restrictions vs. restrictions (2 step process)
Accounting for donated services - Volunteer services (FASB 116) can be recorded only if they are professional in nature & the NPO would have to pay for the service otherwise
Accounting for Pledges - unrestricted pledges are reported as revenue in the period received
Conclusion
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Example of temporarily restricted: An example would be a group of donors funding a memorial bench in the memory of a colleague. The specific action would be the purchase of the bench. Finally there are permanently restricted funds.

Example of permanently restricted: Perhaps the example most of us are familiar with would be that of an individual endowing $1 million to set up a scholarship fund. The intent is to retain the $1 million in perpetuity, using only the interest income generated by the $1 million for the actual scholarships. In times of recession, the number scholarships awarded in a year can be significantly impacted.

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This purpose type restriction is known as a temporary restriction. The donor could have also placed a time restrictions on the use of resources, such as the building must be built within the next two years otherwise the donation reverts to the donor.

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Step 1: Record the release of the fund from restriction

06/01/XXResources released from temporarily restricted account50,000$

Cash50,000$

To record the use of the cash per the restricted fund requirements

Step 2: Record the actual use of the released funds

06/01/XXExpenses related to annual conference event50,000$

Resources released from restriction50,000$

To show annual conference event expense from a restricted fund

Step 1: Record the release of the fund from restriction

What account10,000.00$

What account10,000.00$

To record the release of the cash restricted for dinner at the Annual Mtg

Step 2: Record the actual use of the released funds

What account10,000.00$

What account10,000.00$

To show the dinner expense form a restricted fund