You have been appointed to the board of directors for a local not-for-profit organization called “Friendship Corner” (FC). This organization has been in operation for 12 months and has never prepared a set of financial statements. Operations started on July 1, 20X3, and FC’s first set of financial statements is now being prepared for the year just ended (at June 30, 20X4). A volunteer bookkeeper has done his best to keep track of the organization’s financial affairs. Although he has taken an introductory accounting course, he has limited knowledge of reporting requirements for not-for-profit organizations. You have tried to explain the accounting for NFPs to him, but he still needs your help.

Required
Prepare the journal entries in response to each of the following questions from the bookkeeper:

a. On January 1, 20X4, a local business donated a van to FC. This saved us from having to rent a van twice per week. The van has a fair market value of $40,000, but we obtained it for $1. It is expected to last four years. I want to record it and amortize it on a straightline basis, if this is acceptable.

i) What journal entries would I make for the year ended June 30, 20X4, related to this van, using the deferral method?

ii) What journal entries would I make for the year ended June 30, 20X4, related to this van, using the restricted-fund method of accounting and assuming we have a separate capital fund?

b. In September 20X3, one of our “friends” won $20 million in a lottery. She was so grateful to have been helped in her time of need that she provided us with a $4 million endowment on September 30, 20X3, with the requirement that the purchasing power of the endowment be maintained. We invested it in a government bond on October 1, 20X3 (at par). The bond pays 5% interest annually, with the first payment to be received on September 30, 20X4. We are happy with this investment as it is quite secure and it protects us against inflation, which has been steady at 2% for years.

i) What journal entries would I make for the year ended June 30, 20X4, for these transactions using the deferral method of accounting?

ii) What journal entries would I make for the year ended June 30, 20X4, for these transactions using the restricted-fund method, assuming FC has both a general fund and a separate endowment fund?