House of Joy (HJ) provides shelter, nutrition, safety, health care and long-term education to disadvantaged youth. HJ is incorporated under the Companies Act of New Brunswick as a not-for- profit organization and is a registered charity under the Income Tax Act. As a registered charity, HJ is not subject to income taxes. On January 1, 20X6, the beginning of its fiscal year, HJ organized a campaign to raise funds for its new building and general operations. During the first quarter, HJ received the following: 1. $1.5 million from one of its former recipients who is now a CPA The donor specified that his donation shall be used as follows: a. $500,000 to be used for the purchase and maintenance of the new building b. $600,000 to be used for general operations at $80,000 per year over the next five years, starting in 20X6 The donor expects that unused operating funds will be invested and any accumulated interest eamed for the current year will be used for next year's general operations c. $400,000 to be used exclusively for scholarships for university or vocational training for the youth The donor expects that the fund will be continually reinvested and that accumulated investment income will be used for the same purpose. The donor further suggested that the maximum funding allowed each year should be limited to $100,000 - A $300,000 grant from the local govenment $200,000 was received during the year, with the balance to be paid in the first quarter of 20X7 3. 2. $50,000 from several donors for the purchase of equipment HJ immediately invested the $400,000 designated donation in mutual funds to fulfil this portion of the grant. During the year, the investment eamed income of $20,000, which was reinvested in the mutual fund balance. HJ also invested its deferred operating contributions in mutual funds, and in 20X6 the investment earmed $30,000, which was reinvested in the mutual fund balance. The organization's other source of revenue is unrestricted donations from its "Friends of House of Joy Annual Appeal in the amount of $300,000 On June 30, 20X6, HJ purchased the following: $400,000 Land Building (estimated life of 50 years) 300,000 Equipment (estimated life of five years) 50.000 $750,000 This purchase was financed using the restricted contributions of $550,000 and mortgage financing of $200,000 for the building (S500,000 for a new building and $50,000 for equipment). The mortgage has a simple interest rate of 3.5% per year and is repayable over the next 25 years at $1,000 per month (including interest and principal). By 20x6, a total of $6,000 from the Unrestricted Fund has been paid on the mortgage. The building is pledged as collateral for the mortgage. During the year, HJ withdrew a total of $85,000 from its investments to fund the $85,000 expenses in scholarships. In addition, $20,000 was spent during the year on maintenance costs for the building and $15,000 was spent on utilities, property taxes and insurance, of which $10,000 remains unpaid as of year end. It is HJ's policy to record the property maintenance expenses and mortgage interest expense in the Capital Fund. The board is optimistic that it will be able to raise enough funds in the future to cover the maintenance and mortgage of the property. For 20X6, it is likely that the board will transfer unrestricted funds to cover the Capital Fund expenses. It is now early 20X7. Naresh, HJ's new treasurer, would like to set up accounting policies that comply with generally accepted accounting principles. He believes that appropriate financial statements will encourage more donors to support the organization You have worked in many other not-for-profit organizations, and you have just been tasked by your supervisor, a CPA, to prepare the financial statements of HJ. Naresh would like to ensure that you are familiar with how to apply the CPA Canada Handbook - Accounting standards. He has provided you with a copy of the financial statements drafted by HJ's previous accountant. He has also given you the minutes for the meeting in which the Board of Trustees passed the following motion, based on the recommendation of HJ's previous treasurer, a CPA, who resigned prior to reviewing the draft financial statements. Moved/seconded/carried that HJ shall carry out the following actions: Adopt ASNPO as its basis for accounting. Adopt the restricted fund method of revenue recognition. Carry two major funds for financial reporting purposes: Unrestricted Fund, and Restricted Funds which shall comprise the Education Fund and the Capital Assets Fund Of the total unrestricted investments, the board restricted $50,000 for the Education Fund, and $30,000 for the maintenance of its property Balance Sheet DRAFT At December 31, 20X6 ASSETS Cash 254,000 Grant receivable 100,000 Investments 965,000 400,000 300,000 Land Building (estimated life 50 years) Equipment (estimated life five years) Accumulated amortization 50,000 (16,000) $2.053.000 LIABILITIES AND NETASSETS Accounts payable $10,000 197,500 Mortgage payable Unrestricted netassets 1,845,500 $2,053,000 House of Joy Income statement & retained earnings For the year ended December 31, 20x6 Revenues $1,850,000 Contributions Grant local government 300,000 50,000 Investment income $2.200.000 Expenses Administration S 95,000 85,000 Education Feeding program Shelter program Repairs and maintenance 80.000 40,000 20,000 Amortization 16,000 Utilities 15.000 Mortgage interest 3,500 $ 354,500 Excess of revenues over expenses $1.845,500 Required: a. (61 marks) Using the draft financial statements provided, prepare the following using the restricted fund method of revenue recognition: i Statement of financial position as at December 31, 20X6 (22 marks) Statement of operations and changes in fund balances for the year ended December 31, 20X6 (17 marks) ii To earm full marks, provide supporting calculations for the following: Investments (9 marks) Interfund transfers (5 marks) Fund balance invested in capital assets (3 marks) Donations (5 marks) iv. V. vi b. (18 marks) Using the ACAF scenario analysis model, write a memo to Naresh to help him understand the following: Why the former treasurer recommended ASNPO over IFRS as HJ's basis of accounting (3 marks) How contributions will be reported using the restricted fund method (5 marks) What information is conveyed to the users of the financial statements prepared using the restricted fund method of revenue recognition (5 marks) iv. V. 5 marks will be awarded for style and communication. House of Joy (HJ) provides shelter, nutrition, safety, health care and long-term education to disadvantaged youth. HJ is incorporated under the Companies Act of New Brunswick as a not-for- profit organization and is a registered charity under the Income Tax Act. As a registered charity, HJ is not subject to income taxes. On January 1, 20X6, the beginning of its fiscal year, HJ organized a campaign to raise funds for its new building and general operations. During the first quarter, HJ received the following: 1. $1.5 million from one of its former recipients who is now a CPA The donor specified that his donation shall be used as follows: a. $500,000 to be used for the purchase and maintenance of the new building b. $600,000 to be used for general operations at $80,000 per year over the next five years, starting in 20X6 The donor expects that unused operating funds will be invested and any accumulated interest eamed for the current year will be used for next year's general operations c. $400,000 to be used exclusively for scholarships for university or vocational training for the youth The donor expects that the fund will be continually reinvested and that accumulated investment income will be used for the same purpose. The donor further suggested that the maximum funding allowed each year should be limited to $100,000 - A $300,000 grant from the local govenment $200,000 was received during the year, with the balance to be paid in the first quarter of 20X7 3. 2. $50,000 from several donors for the purchase of equipment HJ immediately invested the $400,000 designated donation in mutual funds to fulfil this portion of the grant. During the year, the investment eamed income of $20,000, which was reinvested in the mutual fund balance. HJ also invested its deferred operating contributions in mutual funds, and in 20X6 the investment earmed $30,000, which was reinvested in the mutual fund balance. The organization's other source of revenue is unrestricted donations from its "Friends of House of Joy Annual Appeal in the amount of $300,000 On June 30, 20X6, HJ purchased the following: $400,000 Land Building (estimated life of 50 years) 300,000 Equipment (estimated life of five years) 50.000 $750,000 This purchase was financed using the restricted contributions of $550,000 and mortgage financing of $200,000 for the building (S500,000 for a new building and $50,000 for equipment). The mortgage has a simple interest rate of 3.5% per year and is repayable over the next 25 years at $1,000 per month (including interest and principal). By 20x6, a total of $6,000 from the Unrestricted Fund has been paid on the mortgage. The building is pledged as collateral for the mortgage. During the year, HJ withdrew a total of $85,000 from its investments to fund the $85,000 expenses in scholarships. In addition, $20,000 was spent during the year on maintenance costs for the building and $15,000 was spent on utilities, property taxes and insurance, of which $10,000 remains unpaid as of year end. It is HJ's policy to record the property maintenance expenses and mortgage interest expense in the Capital Fund. The board is optimistic that it will be able to raise enough funds in the future to cover the maintenance and mortgage of the property. For 20X6, it is likely that the board will transfer unrestricted funds to cover the Capital Fund expenses. It is now early 20X7. Naresh, HJ's new treasurer, would like to set up accounting policies that comply with generally accepted accounting principles. He believes that appropriate financial statements will encourage more donors to support the organization You have worked in many other not-for-profit organizations, and you have just been tasked by your supervisor, a CPA, to prepare the financial statements of HJ. Naresh would like to ensure that you are familiar with how to apply the CPA Canada Handbook - Accounting standards. He has provided you with a copy of the financial statements drafted by HJ's previous accountant. He has also given you the minutes for the meeting in which the Board of Trustees passed the following motion, based on the recommendation of HJ's previous treasurer, a CPA, who resigned prior to reviewing the draft financial statements. Moved/seconded/carried that HJ shall carry out the following actions: Adopt ASNPO as its basis for accounting. Adopt the restricted fund method of revenue recognition. Carry two major funds for financial reporting purposes: Unrestricted Fund, and Restricted Funds which shall comprise the Education Fund and the Capital Assets Fund Of the total unrestricted investments, the board restricted $50,000 for the Education Fund, and $30,000 for the maintenance of its property Balance Sheet DRAFT At December 31, 20X6 ASSETS Cash 254,000 Grant receivable 100,000 Investments 965,000 400,000 300,000 Land Building (estimated life 50 years) Equipment (estimated life five years) Accumulated amortization 50,000 (16,000) $2.053.000 LIABILITIES AND NETASSETS Accounts payable $10,000 197,500 Mortgage payable Unrestricted netassets 1,845,500 $2,053,000 House of Joy Income statement & retained earnings For the year ended December 31, 20x6 Revenues $1,850,000 Contributions Grant local government 300,000 50,000 Investment income $2.200.000 Expenses Administration S 95,000 85,000 Education Feeding program Shelter program Repairs and maintenance 80.000 40,000 20,000 Amortization 16,000 Utilities 15.000 Mortgage interest 3,500 $ 354,500 Excess of revenues over expenses $1.845,500 Required: a. (61 marks) Using the draft financial statements provided, prepare the following using the restricted fund method of revenue recognition: i Statement of financial position as at December 31, 20X6 (22 marks) Statement of operations and changes in fund balances for the year ended December 31, 20X6 (17 marks) ii To earm full marks, provide supporting calculations for the following: Investments (9 marks) Interfund transfers (5 marks) Fund balance invested in capital assets (3 marks) Donations (5 marks) iv. V. vi b. (18 marks) Using the ACAF scenario analysis model, write a memo to Naresh to help him understand the following: Why the former treasurer recommended ASNPO over IFRS as HJ's basis of accounting (3 marks) How contributions will be reported using the restricted fund method (5 marks) What information is conveyed to the users of the financial statements prepared using the restricted fund method of revenue recognition (5 marks) iv. V. 5 marks will be awarded for style and communication