Society is a nongovernmental not-for-profit organization. Recently, Food Company made an oral conditional promise to donate $20,000 to Society contingent upon its recognition as "best foundation of the year" by local government. The $20,000 is restricted to construction of a children’s library. In Year 2, Society is recognized as "best foundation of the year" by local government. However, due to financial difficulties, Food Company can offer only $5,000 in Year 2 but cannot fulfill its promise until Year 3. How should the event be reported on Society’s statement of financial position for Year 2?

The $20000 must be recognized as expense of which $5000 would be paid in cash and the rest $15000 would be increase in liability.

Explanation:

The reason is that the liability has arised as the conditions are met in the year 2 which means the food company now owes money $20,000 to Not for profit organization. So the company must recognize an increase in the cost and liability expense.

The entry would be:

Dr Donation Expense $20000

Cr Cash                                       $5000

Cr Donation Payables                $15000

Dr Cash with donor restrictions 5,000

Dr Pledges receivable 15,000

    Cr Contributions 20,000

Explanation:

Nonprofits can record promised donations (when the donor is expected to fulfill his/her promise), and this will increase pledges receivable account which has a debit balance. The $5,000 received in cash were received with a usage restriction since they must be used in the construction of a children's library. That is the reason why they are recorded as an asset with restrictions.