Youth Opportunities Unlimited (YOU) is a not-for-profit organization that provides sporting equipment for inner-city children who cannot otherwise afford it. YOU has been in operation since 20X1 and operated on a break-even basis from 20X1 to 20X4. In 20X5, YOU spent $240,000 on sporting equipment, similar to previous years. However, donations were reduced and YOU ended up with cash disbursements exceeding cash receipts by $60,000. In 20X6, YOU decided it needed to make some changes. You have recently obtained your professional accounting designation and have volunteered to provide advice on the following matters related to the December 31, 20X6, year-end financial statements.

Required
a. The directors of YOU have heard of encumbrance accounting, but are not sure how it works.

i) Briefly explain the difference between encumbrance accounting and a budgetary accounting system.

ii) Briefly explain the difference between an encumbrance and a liability.

iii) If an encumbrance system is used, what journal entries would be made to record purchase orders issued for $260,000 for goods and services and the subsequent invoices of $259,200 received that related to those purchase orders?

b. You has decided to follow Canadian GAAP in 20X6 for the first time. The directors have heard about the deferral method of accounting for contributions, but are not sure how to implement it. Provide journal entries to record the following transactions under the deferral method for the December 31, 20X6, financial statements.

i) A former teacher donated $20,000 on July 1, 20X6, with the condition that 50% of it be spent on supplies to be provided to children by December 31, 20X6, and 50% to be spent on supplies to be provided to children in 20X7.

ii) Another donor donated land to YOU for a future warehouse site in 20X6. The land originally cost $100,000 in 20X1, but had a fair value of $200,000 in 20X6.

c. As a small not-for-profit organization, YOU would like to simplify its accounting for capital assets.

i) Briefly explain under what circumstances YOU would not have to capitalize and amortize its capital assets.

ii) How would capital assets be reflected on YOU’s financial statements and notes to financial statements if YOU chose not to capitalize and amortize?

iii) One benefit of not capitalizing would be to simplify the preparation of YOU’s financial statements. List three other arguments that support the adoption of a policy of not capitalizing and amortizing capital assets.