St. Joseph’s Hospital follows FASB standards of accounting and reporting. On January 1, 2011, St. Joseph’s received $1,400,000, restricted to the purchase of cancer diagnostic equipment. On January 1, 2012, the equipment was purchased with the cash. The equipment is expected to last six years and have a salvage value of $200,000 at the end of its useful life. Straight-line depreciation is used by St. Joseph’s.
1. Record the journal entries on January 1, 2011, January 1, 2012, and December 31, 2012 (to record depreciation), assuming St. Joseph’s follows the policy of recording all fixed assets as unrestricted.
2. Record the journal entries on January 1, 2011, January 1, 2012, and December 31, 2012 (to record depreciation), assuming St. Joseph’s follows the policy of recording all fixed assets as temporarily restricted.
3. Compute the amount that would be included in net assets (after closing the books on December 31, 2012) for ( a ) unrestricted net assets and ( b ) temporarily restricted net assets under requirements (1) and (2). What incentives might exist for St. Joseph’s to choose either (1) or (2)?