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Question

Difficulty: HardTreatment of Entrance Fees, Donations, and Legacies

Match each non-profit receipt transaction of Apex Health & Educational Foundation with its appropriate accounting treatment in the financial statements.

  • Endowment legacy received with a mandate to preserve the principal sum permanentlyCredited directly to the Endowment Fund account in the Statement of Financial Position
  • Entrance fees received under a policy requiring three-quarters capitalization75% credited to Capital Fund in Statement of Financial Position and 25% to Income and Expenditure Account
  • Donation received specifically towards constructing a medical laboratoryCredited to a Special Purpose Building Reserve in the Statement of Financial Position
  • General un-earmarked legacy received from a deceased life memberCredited in full as revenue income in the Income and Expenditure Account

Answer

Endowment legacy with permanent mandate matches Credited directly to Endowment Fund; Entrance fees with three-quarters capitalization policy matches 75% credited to Capital Fund and 25% to Income and Expenditure Account; Donation for medical laboratory matches Credited to Special Purpose Building Reserve; General un-earmarked legacy matches Credited in full as revenue income in Income and Expenditure Account.
Receipts in non-profit accounting are classified as capital receipts or revenue receipts depending on donor stipulations and organization policy. Endowment legacies and specific-purpose donations are capital receipts recorded in the Statement of Financial Position under dedicated funds. Entrance fees split according to policy must be apportioned between Capital Fund and Income and Expenditure Account. Unrestricted legacies are recognized as revenue income in the Income and Expenditure Account.

Step-by-Step Solution

1
Analyze the nature of each receipt regarding donor restrictions and constitutional rules.
Identified capital mandates for the endowment legacy and building donation, a fractional rule for entrance fees, and no restrictions for the general legacy.
Proper accounting treatment depends on whether a receipt is capital or revenue in nature.
2
Determine accounting treatment for Endowment Legacy and Specific Donation.
Endowment legacy goes to Endowment Fund in Statement of Financial Position; Specific laboratory donation goes to Special Purpose Building Reserve.
Capital receipts intended for long-term fund preservation or specific asset creation cannot be recognized as current operational revenue.
3
Apportion entrance fees according to the 75% capitalization rule.
75% is capitalized to Capital Fund in Statement of Financial Position and 25% is credited to Income and Expenditure Account.
Where non-profit bye-laws dictate explicit split percentages, entrance fees must be divided between capital reserves and revenue income.
4
Classify the general un-earmarked legacy.
Recognized in full as revenue income in the Income and Expenditure Account.
Unrestricted legacies without specific capital stipulations or policy constraints are treated as revenue income in the period received.

Key Concept

Accounting Treatment of Capital vs. Revenue Receipts in Non-Profit Organizations
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Topics

Treatment of Entrance Fees, Donations, and Legacies