Required information

For a number of years, a private not-for-profit entity has been preparing financial statements that do not necessarily conform to U.S. generally accepted accounting principles. At the end of the most recent year (Year 2), those financial statements show total assets of $900,000, total liabilities of $100,000, net assets without donor restriction of $400,000, and net assets with donor restrictions of $400,000. This last category is composed of $300,000 in net assets with purpose restrictions and $100,000 in net assets that must be permanently held. At the end of Year 1, financial statements show total assets of $700,000, total liabilities of $60,000, net assets without donor restriction of $340,000, and net assets with donor restrictions of $300,000. This last category is composed of $220,000 in net assets with purpose restrictions and $80,000 in net assets that must be permanently held. Total expenses for Year 2 were $500,000 and reported under net assets without donor restrictions. Each part that follows should be viewed as an independent situation.

Assume that the entity is a private not-for-profit hospital. During Year 2, the hospital has two portfolios: patients with insurance and patients without insurance. Work with a standard charge of $2 million is done for the first group and work with a standard charge of $1 million is done for the second group. Insurance companies have contracts that create explicit price concessions. The hospital believes it has a 60 percent chance of collecting $1.5 million and a 40 percent chance of collecting $1.3 million. Because of the high cost of health care, uninsured patients receive a variety of implicit price concessions. The hospital believes it has a 70 percent chance of collecting $300,000 and a 30 percent chance of collecting $200,000. The hospital reported exchange revenue of $3 million and a provision for bad debt (a contra revenue account) of $1.2 million to drop the reported balance to the expected collection amount. Assume the hospital wants to use the most likely amount where possible even though the hospital historically collects 5 percent less than that figure.

Required:

a. What was the appropriate amount of net assets without donor restrictions at the end of Year 2? (Enter your answers in dollars not in millions of dollars.)

b. How much should total revenue for Year 2 be increased or decreased to arrive at the appropriate balance? (Enter your answer in millions rounded to 1 decimal place.)