ExpertMedium1 markMultiple Choice
CPA · Question 03 · Area I: Financial Reporting
A nongovernmental not-for-profit organization received a $500,000 pledge in Year 1 to be used for a specific building project in Year 2. The donor paid the pledge in Year 2, and the building was constructed in Year 2. How should this contribution be reported in the Statement of Activities for Year 1 and Year 2?
A nongovernmental not-for-profit organization received a $500,000 pledge in Year 1 to be used for a specific building project in Year 2. The donor paid the pledge in Year 2, and the building was constructed in Year 2. How should this contribution be reported in the Statement of Activities for Year 1 and Year 2?
Answer options:
A.
Year 1: Revenue without donor restrictions; Year 2: No revenue impact.
B.
Year 1: Revenue with donor restrictions; Year 2: Net assets released from restrictions.
C.
Year 1: No revenue; Year 2: Revenue with donor restrictions.
D.
Year 1: Revenue with donor restrictions; Year 2: Revenue without donor restrictions.
How to approach this question
Identify if the pledge is unconditional. If yes, recognize in the period made. Determine restrictions (time/purpose). If restricted, record as 'with donor restrictions'. When restrictions are met, record 'Net assets released from restrictions'.
Full Answer
B.Year 1: Revenue with donor restrictions; Year 2: Net assets released from restrictions.✓ Correct
Under ASC 958, an unconditional pledge is recognized as revenue in the year made (Year 1). Since it is for a future period/purpose, it is 'With Donor Restrictions'. In Year 2, when the purpose is met (building constructed) and time passes, the net assets are released from restrictions. This is shown as a reclassification in the Statement of Activities, not new revenue.
Common mistakes
Confusing conditional vs. unconditional pledges; thinking cash receipt determines revenue recognition; confusing reclassification with new revenue.
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