Question

Hannon University, a private, nonprofit university, receives a letter from an alumnus who pledges $4,400,000 for the establishment of a center for public service. The donor expresses the wish that the amount be used in the next fiscal year, but the donor's letter does not identify any barriers to be overcome or identify a right of release. Based on history, Hannon University expects to collect 95% of the pledged amount. 1. Record the journal entry that would be recorded upon receipt of the letter. Enter accounts in order of magnitude (largest to smallest amounts), debits first. 2. How would the pledge have been recorded if Hannon University were a public university?

Answer 1

1. Debit Cash $4,180,000, Credit Pledge Receivable $4,180,000, Credit Unrestricted Net Assets $220,000. 2. The accounting treatment would be the same for a public university.

Step-by-step explanation:

Journal Entry for Nonprofit University

Upon receiving the pledge letter from the alumnus, Hannon University should record the following journal entry:

• Debit Pledges Receivable $4,400,000
• Credit Contributions - Pledge $4,400,000

Since Hannon University expects to collect 95% of the pledged amount, an allowance for doubtful accounts should be recorded:

• Debit Allowance for Doubtful Accounts $220,000 (which is 5% of $4,400,000)
• Credit Pledges Receivable $220,000

After the allowance entry, the net receivable amount is $4,180,000 (which is 95% of the pledged amount).

Recording Pledge for Public University

If Hannon University were a public university, the pledge would be recorded as revenue in accordance with the financial accounting rules for government entities, which differ from private, nonprofit accounting practices. The entry would be:

• Debit Pledges Receivable $4,400,000
• Credit Revenue from Contributions $4,400,000

Answer 2

Hannon University records the pledge as support and revenue by debiting Pledges Receivable for $4,180,000 and crediting Contributions for the same amount. If it were a public university, the pledge would also likely be recognized as revenue because it is available and measurable for the next fiscal year, lacking donor-imposed conditions.

Step-by-step explanation:

Recording the Pledge at Hannon University

Upon receipt of the pledge letter from the alumnus, Hannon University, a private, nonprofit university, should recognize the pledge as both support and revenue since there is no donor-imposed condition requiring additional action to be taken before the university is entitled to the amount. Based on the university's expectation of collecting 95% of the pledged amount, the following journal entry would be recorded:

• 
  
• Debit Pledges Receivable for $4,180,000 (95% of $4,400,000)
• 
  
• Credit Contributions - Support – Public Service Center for $4,180,000

If Hannon University were a public university, the pledge might be recorded differently depending on governmental accounting standards, which might require recognizing revenue when it is available and measurable. Since the donor did not specify any conditions and the funds are expected to be available in the next fiscal year, it is likely that a public university would also recognize the pledge as revenue.