Trudel Drama Club is a drama club for people under the age of 30. It provides an opportunity for young people to learn about drama and perform in the theatre at levels consistent with their skills and commitment. The club has operated as a not-for-profit organization since its inception in 1994.
In an effort to enhance the club's image and to promote club members' careers in theatre, Trudel initiated a fund raising program in July 2012 to raise $1.5 million to build a theatre and to create an endowment fund for scholarships. The fundraising program was a huge success. By May 31, 2013, the club had received the following contributions:
• $1 million in cash contributions that were specifically designated for the construction of the theatre;
• $400,000 in cash contributions plus $100,000 in pledges that were specifically designated for the scholarship fund; and
• Sound system equipment valued at $200,000.
On June 15, 2013, at the closing ceremony for the major drama festival of the year, the director of the club, Edmund Bangura, thanked the parents, students, alumni, and staff for all of their support and officially closed the capital campaign. He provided the following details of the campaign:
• The construction of the theatre is nearing completion and will be ready for use in September 2013. The final construction cost for the theatre will be approximately $1.1 million.
• The sound system will adequately equip the theatre.
• The $400,000 of cash on hand plus the cash to be received when the pledges are collected will be invested and managed by a professional investment advisor. The income earned on the endowment fund will be used to provide scholarships of $5,000 to $10,000 for one to three students a year attending an arts college.
You are proud to be an alumnus of Trudel. You attended the closing ceremony. At the reception after the formal ceremonies, you accepted Edmund's request to help with the accounting for the capital campaign and related events. He was unsure whether the club should use the restricted fund or deferral method of accounting for contributions. You agreed to write a memo providing recommendations for accounting policies for the transactions described above. The memo should discuss policies to be applied for the year ended June 30, 2013, and for future years when the theatre is being used, and when the scholarships are disbursed.
Write the memo to the director, Edmund Bangura. Explain the rationale for your recommendations and state your assumptions. Your memo should be no more than 500 words.