You have been hired as a consultant to provide accounting advice for a not-for-profit organization that wishes to improve its accounting system. In particular, the organization, Stop Global Warming (SGW), is considering changing its method for contributions and implementing a new budgeting and encumbrance accounting system. SGW has a December 31 year-end.
Required
a. In November 20X4, SGW issued a $3,000 purchase order for key chains to be provided as an incentive to donors who contribute to its Spring 20X5 fundraising drive. In December 20X4, the key chains were shipped to SGW with an invoice price of $3,285. Prepare the journal entries for November 20X4 and December 20X4 using encumbrance accounting.
b. Briefly explain the difference between an encumbrance and a liability.
c. SGW has always used the restricted-fund method of accounting for contributions, but other similar organizations have been using the deferral method. Briefly explain how SGW would account for the following restricted contributions using the deferral method:
i) Restricted contributions for expenses of future periods;
ii) Restricted contributions for the acquisition of amortizable capital assets; and
iii) Restricted contributions for expenses of the current period.
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