Question

On January 1, the Voluntary Action Agency received a cash contribution of $325,000 restricted to the purchase of buses to be used in transporting senior citizens. On January 2 of that same year, buses were purchased with the $325,000 cash. The buses are expected to be used for five years and have no salvage value at the end of that time.

1. Record the journal entries on January 1, January 2, and December 31 for the receipt of cash, the purchase of buses, and one year’s depreciation, assuming that plant assets are recorded as unrestricted assets at the time of purchase.

2. Record the journal entries on January 1, January 2, and December 31 for the receipt of cash, the purchase of buses, and one year’s depreciation, assuming that plant assets purchased with restricted resources are recorded as temporarily restricted assets at the time of purchase and reclassified in accord with the depreciation schedule.

3. Compute the amount that would be included in net assets (after closing the books on December 31) for (a) unrestricted net assets and (b) temporarily restricted net assets under requirements 1 and 2. What incentives might exist for the Voluntary Action Agency to choose either alternative?

Answer 1