Zak Organization is an NFPO set up for famine relief. It uses the restricted fund method of accounting and has three funds: a general fund, a capital fund (through which it is raising cash to support the purchase of a new administrative building), and an endowment fund. Zak has been operating for 25 years and has a December 31 year-end. Zak's policy with respect to capital assets is to capitalize and amortize the capital assets over their expected useful lives.
On June 30, Year 5, Zak received three donations from a former director:
• $30,000 cash for general famine relief efforts
• $50,000 to be used solely for construction of the new administrative building; of the $50,000, 70% was received in cash, with the remainder promised in
February Year 6 (construction is expected to commence in October Year 6)
• $600,000 cash, which was invested on July 1, Year 5, in long-term Government of Canada bonds, with 10% interest to be paid semi-annually on December 31 and June 30; the $600,000 donation was given with the stipulation that it be invested in interest-bearing securities, with the principal to be maintained by Zak, although interest earned on the securities is not restricted
Required:
(a) Briefly explain how each of the three donations should be accounted for using the restricted fund method of accounting. In particular, should each of the donations be recognized as revenue for the year ended December 31, Year 5? If yes, in which fund(s) would the revenue be recognized (including interest earned in fiscal Year 5 on the bonds purchased with the $600,000 donation)? Note: Do not prepare journal entries.
(b) If Zak used the deferral method of accounting instead of the restricted fund method, how would this change the requirements for accounting for the $50,000 and $600,000 donations?
(c) Despite the recent donations from its former director, Zak is increasingly faced with severe budgetary constraints. Zak is considering implementing encumbrance accounting in the coming year.
(i) Briefly describe the process of encumbrance accounting.
(ii) Briefly describe how encumbrance accounting might serve as a device to help control spending when it is used in conjunction with a formal budgeting system.