Discuss the accounting and financial reporting principles in the following scenarios:
1. A governmental hospital does not carry insurance. Several patients have filed malpractice claims against the hospital, but the claims have not yet been adjudicated. Hospital attorneys think the hospital will probably lose one of the cases and have started settlement negotiations with the other patients. The hospital is preparing its financial statements at year- end.
2. A billing arrangement with a third- party payer provides for a retrospective adjustment. The hospital estimates it will need to refund $ 45,000 to the third party, but it has not started settlement negotiations on the amount of the adjustment. The hospital is preparing its year- end financial statements.
3. A not- for- profit hospital has just opened a gift shop. The merchandise for the gift shop is bought by a hospital employee, but all the selling is done by volunteers. The hospital comptroller estimates that, if she had to pay the volunteers for their services, it would cost the hospital $ 25,000 a year. She wants to know how to handle the donated services in the financial statements.
4. A not- for- profit hospital provides services to Medicare patients amounting to $ 40 million at its established billing rates. But the billing arrangement with Medicare provides for a contractual adjustment of 40 percent from the established rates. The hospital also provides charity care that has a value of $ 5 million at its established billing rates. A hospital board member wants to report the lost revenues as bad debt expenses.
5. A governmental hospital provides $ 20,000 of services at established rates to a patient. The patient does not meet the hospital’s criteria for charity care. When the patient tells the hospital that he will not be able to pay the bill, how should the lost revenues be reported?