[Ralphie Dos Nachos]

Gave answer as Permanent. I’ve had 5 other questions just like this and they were all temporarily restricted.

Alpha Hospital, a large not-for-profit entity, has adopted an accounting policy that does not imply a time restriction on gifts of long-lived assets. Alpha received investments subject to the donor’s requirement that investment income be used to pay for outpatient services. Indicate the manner in which this transaction affects Alpha’s financial statements.

A.Increase in unrestricted revenues, gains, and other support

B.Increase in temporarily restricted net assets

C.Increase in permanently restricted net assets

D.No required reportable event

You answered B. The correct answer is C.

When investments are donated and the principal of those funds cannot be expended, those investments are permanently restricted. Therefore, Alpha must record an increase in its permanently restricted net assets.

[Mike J]

Think principal is permanent = permanent.

[Mike J]

I realize that I should explain this further.

Whatever topic youre dealing with, think about what is being asked of you. Remember the emphasis of NFP reporting isn't profit but to show external users that you are achieving mission objectives. This is why NFP has three main types of revenue, while for profit entities have one Net Income figure.

The donation is permanent since the original amount is not allowed to be spent elsewhere (donor restriction). You CAN spend the interest as that is not the actual donation amount. The testmakers put that detail in the question to throw you–you can spend the INTEREST so therefore it can't be permanent.

I used to get caught in that. Then I figured out that they were asking about the donation itself. It's a scope shift.

Further, there is no chance it could be temporarily restricted. The NFP isn't waiting for either time to expire or for the opportunity to incur an expense. If there was such a restriction (time or earmark) then the NFP would debit the Temporarily Restricted entry for the amount when said restriction was reached.

Unrestricted revenue is used to pay for expenses to run the day-to-day operations of the NFP. Once the restriction(s) have been met, it becomes freed up to be used by the NFP. Thus, you balance the debit to Temp (previous paragraph) with a credit to Unrestricted.

I hope that better clarifies things.

[Author]

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