Contributions with Donor Restrictions

Lesson: Contributions with Donor Restrictions

In this lesson, Nick Palazzolo, CPA, breaks down the accounting for contributions with donor restrictions. He carefully walks through the process of recognizing a contribution, estimating uncollectible amounts, and accounting for the pledge as receivable until the funds are collected and the restriction is met, such as funding for an extra soup kitchen. Nick also clarifies how to handle the reclassification of net assets when donor restrictions are satisfied, both on the receiving end and when these contributions are put to use. The practical aspects of handling in-kind donations, such as debt relief instead of cash, and the nuances of recording these transactions are explained in a manner that demystifies the complexity of donor-restricted contributions.

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Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Well, part of it might not be collectible based on your estimate, right, based on your 15% like we just saw on that past sample. And then we're going to credit donor restricted support. So if there's a million dollars, maybe 2% of it is uncollectible. So we're going to put that 2% here. And the remaining balance for donor restricted support is going to go here after the pledge receivables collected and when the money is spent on its restricted purpose, which is the additional soup kitchen, net assets with donor restrictions will be reduced.

And our journal entry here reclassification satisfaction of donor restriction. We credit cash with donor restrictions. Contributions may be restricted by the donor. As we know, donor imposed restrictions limit use of contributed assets recognized as revenues, gains, other support in period received and as assets. These are going to be decreases of liabilities, expenses depending on the form of benefit that's received.

Maybe you don't really see this, but they could also say we're not going to give you a million in cash, we're going to pay down a million of your debt. That's a valid contribution, right? You might see that. You might see that in real life or on the test, but again, probably less on the test. But just to point out that is what you could also see here that's totally valid net assets without donor restrictions are simultaneously increased and decreased.

So here if we've got contributions, right, net assets without donor restrictions. So if at the same time we receive 500,000 and we use up 500,000, well, cash without donor restrictions is going to go up by 500 and maybe we use some of it, right? So immediately as we get it, we use it. So we receive a million

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