| Posted: 27 May 2008 at 16:42 | IP Logged
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This question comes from Becker Final Exam #2, the second testlet, number 29. Why wouldn't it be answer choice 2, instead of 1?
Potterville Charities is staging its annual fund raising appeal. The organization views this as a major ongoing activity that serves to fund the mission of the organization. In exchange for a $500 donation, contributors receive a hand embossed flowerpot valued at $15. Pottersville Charities will recognize contributions for each such donation in the amount of:
1)$500
2)$485
3)$15
4)$0
ANSWER:
RULE: The Statement of Activities shall report gross amounts of revenues and expenses. The cost of premiums given to acknowledge donations is classified as a fund-raising expense.
Choice 1 is correct. Potterville Charities would display the contribution revenue of $500 gross and display the $15 as fund raising expense.
Not choice 2. Generally the difference between the fair value of dues or other purchases and the amount transferred is classified as a contribution. When, however, the contributions relate to a major ongoing portion of the operation of the organization, the contribution revenues are displayed gross and the cost of the premium is displayed as fund-raising expense.
Not choice 3. The cost of the premium is not recorded as the contribution revenue.
Not choice 4. The organization has earned contribution revenue that should be recorded as support. To not record contribution revenue would imply that the collections represent revenue from an exchange transaction. This is clearly incorrect from the fact pattern and the discrepancy between the amount of the donation and the nominal cost of the premium.
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Topic: Becker Final Exam #2, #29
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