ExpertMedium1 markMultiple Choice
CPA · Question 07 · Area III: Select Transactions
Community Helpers, a nongovernmental NFP, received a pledge of $50,000 in Year 1 to be paid in Year 3. The pledge is unconditional. The appropriate discount rate is 5%. How should this pledge be recognized in Year 1?
Community Helpers, a nongovernmental NFP, received a pledge of $50,000 in Year 1 to be paid in Year 3. The pledge is unconditional. The appropriate discount rate is 5%. How should this pledge be recognized in Year 1?
Answer options:
A.
As contribution revenue with donor restrictions at present value
B.
As contribution revenue without donor restrictions at face value
C.
As a deferred revenue liability until received
D.
No recognition until cash is received
How to approach this question
1. Is it conditional? No -> Recognize Revenue. 2. Is there a restriction? Yes, time restriction (Year 3) -> With Donor Restrictions. 3. Is it more than 1 year? Yes -> Present Value.
Full Answer
A.As contribution revenue with donor restrictions at present value✓ Correct
A
Unconditional promises to give (pledges) are recognized as revenue in the period the promise is made. Because the cash will not be received until Year 3, there is an inherent time restriction, classifying it as 'with donor restrictions'. Multi-year pledges should be recorded at the present value of estimated future cash flows.
Common mistakes
Confusing unconditional pledges (revenue) with conditional pledges (no revenue until condition met). Ignoring the time value of money for multi-year pledges.
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