Question 1 (18 marks)

You have recently joined the board of directors of Leonardo Art Gallery (LAG), a not-for- profit organization (NFPO), that prides itself on showcasing new artists in the local community.

LAG relies on its annual spring fundraising drive to cover its general expenses for the year. The drive starts in early April and has raised an average of $400,000 in pledges each year for the past 5 years. Approximately 90% of the pledges are collected by May 31 each year and the remainder are uncollectible. Pledges for the 2022 fundraiser totalled $420,000, of which $397,000 were collected by May 31, when the fundraising efforts for officially closed.

LAG charges a nominal admission fee from visitors and also sublets space to a small souvenir shop. During 2022, a total of $16,750 was collected as admission fee. The rent for the souvenir shop is $1,250 per month.

In January 2022, LAG applied for government funding for the first time. It received a commitment from the government to provide a grant of $300,000 every 12 months starting on April 1, 2022, which will more than double the number of artists whose work can be shown throughout the year. The terms of the grant require that LAG spend $25,000 of the grant on art lessons for children each month.

LAG received 75% of the grant money on April 1, 2022. It must provide audited financial statements, in accordance with Part III of the CPA Handbook, to the government within 60 days of LAGs year-end date in order to qualify for the subsequent April 1 grant and to receive the remainder of the 2022 grant.

On July 1, 2022, a donor contributed new lighting (industrial-grade) with a fair market value of $30,000. The lighting is expected to last 10 years. LAG also has a patent with a remaining useful life of 5 years that it acquired on October 31, 2022 for $50,000 (related to a line of art restoration chemicals). LAG capitalizes and amortizes its long- lived assets on a straight-line basis.

LAG has never prepared audited financial statements before, but every year its bookkeeper, Oliver, provides the board members with a statement of cash receipts and cash disbursements for the year ended March 31.

The board members of LAG are prominent business people in the community and have accounting knowledge for profit-oriented businesses but not for NFPOs.

2

Required:

Prepare a memo for the directors of LAG explaining the effect of adopting Part III of the CPA Canada Accounting Handbook for its annual financial statements. Assuming LAG will adopt the deferral method, include in your memo an overview of reporting requirements for not-for-profit organizations under Part III of the CPA Canada Accounting Handbook, including a brief description of the financial statements to be presented for the year ended March 31, 2023 and how revenue is recorded under the deferral method (7 marks)

Prepare journal entries for the following transactions. Where no journal entry is required, briefly explain why.

The admission fees and souvenir shop rent (2 marks)

The government grant(2marks)

Pledges receivable (2 marks)

Donated equipment(3marks)

Intangible asset(2marks)