Examkin

Question

Difficulty: EasyTreatment of Entrance Fees, Donations, and Legacies

Highland Community Club received a legacy of ��300,000��300,000 from a deceased member with explicit instructions that the money must be used solely to construct a new sports pavilion. How should this legacy be recorded in the club's financial statements?

  1. Credited as a capital receipt to a special pavilion fund in the Statement of Financial PositionAnswer
  2. B
    Credited as revenue income in the Income and Expenditure Account
  3. C
    Debited as an operational expense in the Income and Expenditure Account
  4. D
    Deducted directly from the Accumulated Fund in the Statement of Financial Position

Answer

The legacy should be credited as a capital receipt to a special pavilion fund in the Statement of Financial Position.
When a non-profit organization receives a legacy or donation with a specific restriction (such as erecting a building), it is classified as a capital receipt. It is credited directly to a special purpose fund account presented under liabilities/capital funds in the Statement of Financial Position.

Step-by-Step Solution

1
Identify the nature of the receipt
The legacy of ₦300,000₦300,000 has a specific condition attached (construction of a sports pavilion).
Legacies with specific stipulations are restricted capital receipts rather than general revenue income.
2
Determine the appropriate accounting entry
Debit Cash/Bank with ₦300,000₦300,000 and credit Special Pavilion Fund with ₦300,000₦300,000.
Specific capital receipts are held in special fund accounts in the Statement of Financial Position until utilized for the designated project.

Key Concept

Accounting treatment of specific legacies and donations in non-profit organizations
Rate this question

Topics

Treatment of Entrance Fees, Donations, and Legacies