FAR MCQ – Please explain

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  • #190573
    Anonymous
    Inactive

    I can’t figure out how to arrive at the correct answer for this problem (grrrrr…..) Can someone with a little better understanding of NFP accounting please explain it to me?

    XYZ, a not-for-profit organization dedicated to animal welfare, received a $70,000 contribution at the start of 20X1 with donor instructions to maintain the original principal as a permanent endowment and use income and net gains for wildlife rehabilitation. The endowment principal was invested in a number of equity securities and mutual funds using an investment management firm. Investment performance and transactions were as follows in 20X1 and 20X2:

    Year/ … /Dividends/ … /Sec. Sold/ … /Rehab Exp/ … /YE Value

    20X1/ … /$3,000/ … /$1,000/ … /$3,500/ … /$72,000

    20X2/ … /2,500/ … /0/ … /3,500/ … /69,000

    XYZ believes that the donor intended for the endowment to remain at least at the original contributed value. What net asset values would be reported on the statement of financial affairs for 20X2 in relation to this endowment?

    The correct answer is: Unrestricted $(500), Temp $0, Perm $70,000

    I keep coming up with Unrestr $(2000), Temp $0, Perm $70,000 – going crazy here trying to figure this out. Any help would be greatly appreciated. Thank you.

    V/R

Viewing 5 replies - 1 through 5 (of 5 total)
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  • #625235
    Determined CPA
    Participant

    The 70,000 is the original principal that was donated that must permanently be restricted. So your answer choice must have 70,000 as temp and you can eliminate any answers that do not have that amount. The income from the perm restricted asset is temp restricted for wildlife. This question is asking for 2002, which is KEY! This is how I I think of it:

    In 2001 there was 3,000 in temp restricted assets (dividend income) and $3,500 in expenses that qualify to consume those temp restricted assets. 3,000 temp – 3,500 expenses (remember, expenses can ONLY can out of unrestricted accounts) = a negative 500$ in unrestricted assets, which is basically saying that there needs to be MORE income to cover these expenses so in the meantime, they will just chill in this unrestricted acct. So for 2001, there is 0 left in temp restricted (bc we wiped it out to pay the expenses) and ($500) in unrestricted. Negative because you don't have enough dividend income to cover the expenses.

    Then, in 2002 there was 2,500 in temp restricted assets (div income) and 3,500 in expenses, which goes to unrestricted (remember tho, that there is already (500) in unrestricted). 3,500 – 500 = 3,000 in unrestricted with only 2,500 in temp restricted to use to pay those expenses. therefore, there is still (500) in unrestricted that is waiting for temp income to cover it.

    Does that make any sense? its so hard to explain these things.

    A - 75
    B - 78 God is good.
    F - 77 Answered prayers.
    R - 84! Done!!

    Paperwork sent - waiting for license!!
    Still on a cloud and in shock. Through God, all things will happen.

    #625236
    Troblin
    Participant

    @Determined that was an awesome explanation. Thanks!

    FAR: 85(11/22/2014) - Becker(full)/Ninja MCQ (5 day cram)
    AUD: 79 (2/1/2015) -Becker/Ninja MCQ/Ninja Notes
    REG: 84(4/19/2015) -Becker/Ninja MCQ/Ninja Notes
    BEC: 83 (7/13/2015) -Becker/Ninja MCQ/Ninja Notes

    Date I Got My Life Back!: 8/4/2015 🙂

    #625237
    Anonymous
    Inactive

    @Determined thanks. But wouldn't the 3,500 expenses in 20×2 be an outflow to Unrestricted – resulting in a beginning balance of $(500) and another outflow of $(3500) – leaving $(4000) Unrestricted, with only $2500 in Temp to offset? leaving $(1500) in Unrest., 0 in Temp, and 70000 in Perm?

    Sorry if I'm being a blockhead here – clearly there is too much blood in my caffeine system.

    Thanks.

    #625238
    Determined CPA
    Participant

    The $3,500 is the amount of the expense for 2002, so in my mind, I consider that a positive amount. However, the 500 from 2001 is negative in the sense that it never had income to allow the expense to be taken. Once 2002 comes around, they can take 500 of the 3500 to wipe out all of 2001 expenses and now have 3,000 for the 2002 expenses. Then if you compare that to the 2,500 in temp restricted, that's where I get the (500).

    I could be wrong but I think that makes sense??

    A - 75
    B - 78 God is good.
    F - 77 Answered prayers.
    R - 84! Done!!

    Paperwork sent - waiting for license!!
    Still on a cloud and in shock. Through God, all things will happen.

    #1317299
    youness naim
    Participant

    I think what you are leaving out is the securities sold, which is an additional 1000$ unrestricted for 2001. so, the balance of total unrestricted in 2001 is (3000+1000-3500=500). taking that 500$ unrestricted into 2002, we have a deficit of unrestricted of 2500+500-3500=(500).

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