(Multiple choice)

1. A governmental hospital has not transferred risk on malpractice claims to a third-party insurer. Which of the following statements best expresses the general rule regarding the reporting of liabilities for malpractice claims on the face of the balance sheet (or statement of net assets)?

a. They should be reported only to the extent that judgments and settlements are due and payable.

b. Outstanding claims should be described in the notes to the statements; adjudicated and settled claims should be reported if they have not been paid.

c. They should be reported if it is highly likely that the disputes ultimately will be resolved in favor of the claimants.

d. They should be reported if it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated.
2. Historical experience shows that a hospital sometimes receives malpractice claims in the year after the incident occurs. Which of the following statements best expresses the general rule for reporting liabilities for such claims, if risk of loss has not been transferred to a third-party insurer?

a. No mention is required to be made of these claims anywhere in the financial statements.

b. A note should be prepared discussing the likelihood that claims will be received after the balance sheet date, but no estimate needs to be made of the possibility of loss.

c. Liabilities should be recognized in the statements if it is probable that claims will be asserted for incidents occurring before the balance sheet date and the losses can be reasonably estimated.

d. Liabilities should be recognized in the statements if claims have been received before the statements are issued; a note should be prepared discussing the likelihood of receiving additional claims after the statements have been issued.
3. A not-for-profit hospital receives a gift from a donor who specifies that the gift must be used only to further its research into the treatment of Lyme disease. When the hospital incurs expenses on this program, in which classification of net assets should the expenses be reported?

a. Unrestricted net assets

b. Temporarily restricted net assets

c. Permanently restricted net assets

d. Assets limited as to use 4. A not-for-profit hospital sells long-term bonds in the amount of $\$ 25$ million to finance the construction of a new hospital wing. The bond agreement requires the hospital to pay $\$ 1$ million of this amount to a trustee as security until the debt is fully repaid. How should this payment be reported in the financial statements?

a. As an expense, to be amortized over the life of the debt

b. As assets limited as to use

c. As non-current assets, with all other long-term investments

d. As construction in progress 5. The balance sheet of a governmental hospital shows capital assets ( $\$ 20$ million), accumulated depreciation ( $\$ 12$ million), current maturities of long-term debt $(\$ 500,000)$, and long-term debt net of current maturities ( $\$ 5.5$ million). The long-term debt was issued to acquire capital assets. How much should the hospital report as invested in capital assets, net of related debt?

a. $\$ 14$ million

b. $\$ 8$ million

c. $\$ 2.5$ million

d. $\$ 2$ million 6. During the year ended December 31, 2004, a not-for-profit hospital had both unrealized and realized gains on investments made with its unrestricted net assets. How should these gains be reported in the hospital's statement of operations for the year 2004 ?

a. Both the realized and the unrealized gains should be reported.

b. Neither the realized nor the unrealized gains should be reported.

c. Realized gains should be reported, but unrealized gains should not.

d. Unrealized gains should be reported, but realized gains should not.
7. Under which of these circumstances would a not-for-profit hospital account for resources in restricted funds?

a. Whenever there are external limitations on using the resources

b. When a donor places limitations on using the resources

c. When the hospital's board of directors sets resources aside for plant expansion

d. When a bond agreement requires the hospital to set resources aside