Confidence Private is a high school in the historic city of Jeanville. It engages students in a dynamic learning environment and inspires them to become intellectually vibrant, compassionate, and responsible citizens. The private school has been run as an NFPO since its inception 20 years ago.
In an effort to attract sports-minded students from a variety of economic backgrounds, Confidence initiated a fundraising program in July Year 8, to raise
$5 million to build a new gymnasium, swimming pool, and fitness centre and to create an endowment fund for scholarships. The fundraising campaign was a huge success. By May 31, Year 9, the school had received the following contributions:
1. $2.0 million in cash contributions specifically designated for construction and maintenance of the facilities.
2. $3.1 million in cash contributions specifically designated for the scholarship fund.
3. Fitness equipment valued at $0.2 million.
On June 15, Year 9, at the graduation ceremony, the headmaster thanked the parents, students, alumni, and staff for all their support, and officially closed the capital campaign. He provided the following details of the campaign:
• The construction of the facility was nearing completion and would be ready for classes in September Year 9. The final cost for the facility would be approximately $1.9 million.
• The contribution of fitness equipment would more than adequately equip the fitness centre.
• $3.1 million in cash would be invested and managed by a professional investment adviser.
The income earned on the endowment fund would be used to provide scholarships to students. Five students would receive full or partial scholarships in the fall of Year 10. Each year thereafter, it was expected that 25 to 30 students would receive full or partial scholarships to offset the annual tuition fee of $15,000.
You are proud to be an alumnus of Confidence. You attended the graduation ceremony. At the garden reception after the ceremony, you accepted the headmaster's request to help out with the accounting for the capital campaign and related events. He was unsure of whether the school should use the restricted fund or deferral method of accounting for contributions. You agreed to provide a memo in which you would provide recommendations for accounting policies to be applied for the year ended June 30, Year 9, and for future years when the facilities are being used and the scholarships are disbursed.
Required:
Prepare a memo for the headmaster. Explain the rationale for your recommendations and state your assumptions.