Question

A flood damaged several vans belonging to a nongovernmental, not-for-profit organization. A professional mechanic repaired the vans at no charge, restoring them to the condition they were in just prior to the flood. How should the van repairs be recognized in the financial statements?a. Only a note disclosure would be required. b. As both an increase in the equipment account and an increase in contributions from donated services.c. As a decrease in accumulated depreciation- equipment, and an increase in contributions from donated services.d. As an increase in expenses and an increase in contributions from donated services.

Answer 1

In this scenario, the free repair services provided by a mechanic should be recognized as an increase in the equipment account and an increase in contributions from donated services by the not-for-profit organization.

Step-by-step explanation:

When a nongovernmental, not-for-profit organization receives free services that enhance or maintain the value of their assets, it should be recognized as a contribution if it meets certain criteria. Specifically, the services should either create or enhance nonfinancial assets, or require specialized skills, be provided by entities that possess those skills, and typically need to be purchased if not provided by donation. In this case, the mechanic's services meet these criteria as they enhance the value of the vans and require specialized skills.

Therefore, the correct way to recognize the van repairs in the financial statements would be option b, as both an increase in the equipment account and an increase in contributions from donated services. The increase in the equipment account reflects the enhanced value of the vans, while the increase in contributions reflects the value of the services donated by the mechanic.