Question

The board of directors of Mason Counseling Services, a not-for-profit organization, approved the earmarking of $200,000 to upgrade facilities over the next three years. The $200,000 of assets set aside for this purpose should be reported in which category of net assets?

A) Unrestricted net assets.
B) Temporarily restricted net assets.
C) Permanently restricted net assets.
D) Either A or B, depending on whether the board requires the $200,000 to be invested separately from other investments.

Answer 1

The $200,000 earmarked by Mason Counseling Services for facility upgrades is classified as Temporarily restricted net assets as they have been designated by the board for a specific future use within a defined period of time. so, option B is the correct answer.

Step-by-step explanation:

The $200,000 of assets set aside by the Mason Counseling Services for facility upgrades should be reported as Temporarily restricted net assets. This category is used for assets that have been restricted for a specific purpose by the organization's board of directors or by a donor, but that will become available for general use upon the completion of the specified purpose or after a certain period of time.

Since the board has earmarked these funds for facility upgrades over the next three years, they are not considered Unrestricted net assets, which are available for any purpose, nor are they Permanently restricted net assets, which must be maintained intact in perpetuity. The stipulation by the board to use the funds specifically for facility upgrades within a stated timeframe qualifies them as temporarily restricted.

The additional condition, about whether the board requires the $200,000 to be invested separately, does not change the categorization of the net assets as it relates to the nature of the restriction; it rather relates to the manner of accounting and investing those funds.