You have recently received an accounting designation and, to celebrate, you are out for dinner with a long-time friend, Jamie. Jamie feels that “the key to success is networking, because getting to know influential people can help your career.” However, Jamie may be taking this a little too far.

Jamie recently joined the board of directors for two not-for-profit organizations (NFPs). United Rays (“Rays”) has annual revenues of $1,700,000, 40 paid employees, and separate funds for its key activities (a capital fund, an endowment fund, and a general fund). Shining Foundation (“Shining”) has average annual revenues of $150,000 and only one paid employee. It uses the deferral method of accounting. Jamie has been appointed as the treasurer at both organizations. “A great way to network!” says Jamie. Unfortunately, Jamie barely passed her high school accounting course and has not taken any accounting courses since that time. She knows that the boards of directors of both organizations want to comply with GAAP to ensure key donors will be confident about the NFP’s financial statements. However, Jamie is not sure what the specific guidelines are for NFPs under GAAP.

Required

Address each of Jamie’s concerns, making sure your advice complies with GAAP.

1. Jamie stated that “Shining received a piece of equipment on January 1, 20X8, valued at $64,000, which was donated by a friend of the charity. We want to record the $64,000 as contribution revenue and amortize the equipment on a straight-line basis over four years.” Prepare the journal entries required for the contribution and amortization for the year ended December 31, 20X8.

2. “Shining also received its first pledge ever, and it is a big one,” said Jamie. “A local high-technology company has promised to pay us $60,000 per year for the next three years, starting July 1, 20X9. It put no restrictions on how we use the donation.”

Explain how the not-for-profit organizations should account for pledges. In particular, would the accounting for pledges differ for Shining because this is its “first pledge ever”?
3. “Rays received a $1,200,000 endowment donation on January 1, 20X8, to be used as follows: The principal is to remain intact but any interest earned can be used for charity for whatever purpose it chooses.”

Prepare the journal entries for the $1,200,000 and $60,000 interest earned and received in 20X8 on the endowment donation.
4. “I convinced the board of directors of Rays to hold a vote next week to change our accounting for our head office building. It was acquired for $4,000,000 on January 1, 20X1, and was amortized over 25 years at $160,000 per year. However, buildings similar to ours are selling for close to $10,000,000 now. Therefore, I want to stop amortizing the building. Since we are an NFP, this is acceptable, isn’t it?” asks Jamie.

State whether this would be acceptable and briefly explain.