You have been recruited to act as the treasurer on the board of directors of an NFPO that has had difficulty in recent years controlling its expenditures. The board of directors has very limited accounting experience. The organization, Protect Purple Plants (PPP), is considering implementing an encumbrance accounting system to assist in expenditure control. PPP receives an estimated $800,000 per year in regular contributions from the federal government.
Required:
(a) State two advantages and two disadvantages of implementing an encumbrance accounting system.
(b) PPP uses the deferral method of accounting for contributions and has no separate fund for restricted contributions. On January 1, Year 6, PPP received its first restricted cash contribution-$120,000 for the purchase and maintenance of land and a greenhouse building for its rare purple plant collection.
On July 1, Year 6, PPP acquired land and a building for $22,000 and $80,000 cash, respectively. The building has an estimated useful life of 20 years and zero residual value. On December 31, Year 6, the remaining $18,000 cash was paid to KJ Maintenance Ltd. for a three-year maintenance contract that requires KJ personnel to provide maintenance services four days per month until December 31, Year 9. Assuming that encumbrance accounting will not be implemented until Year 7, prepare the journal entries for the following dates:
(i) January 1, Year 6
(ii) July 1, Year 6
(iii) December 31, Year 6