Instead of making cash grants to their constituencies, some not-for-profits (NFPs) provide benefits in the form of financial instruments. These investments have as their primary purpose the achievement of their programmatic tax exempt mission (in other words, a long-term low interest note to a foundation for the purpose of building a community center). This case discusses the three most common types of PI — loans, equity interests, and guarantees — and the appropriate accounting and reporting treatment.
PI benefit the recipients with access to capital (typically at better terms than the market) while allowing the NFP to achieve its mission.
NFPs must assess the transaction when the initial investment transaction occurs to ensure the investment furthers the NFP’s missions and offers financial returns. Most PIs include an element of a contribution because the main purpose is enhancing the mission. Therefore, the expectation of income is not expected to be significant. However, the investments are subject to the accounting standards for financial instruments (clearly excluding the contributions element). Guarantees are subject to FASB Accounting Standards Codification 460, Guarantees.
Loans may be reported as a loan receivable, contribution, or combination of both depending on the interest rate of loan compared to market, the expectation regarding collectibility of the loan and if the terms include partial forgiveness of loan.
If the investment bears a market rate and collection is expected the NFP would record a loan receivable. Often, interest rates on PIs are lower than the market would normally charge for the same loan. If the investment bears no interest or an interest rate below market and the loan is expected to be fully repaid, then the NFP will impute the interest on the loan and recognize contribution expense for the difference between the amount loaned and the net present value of the investment. The calculation of the interest rate may be impacted my multiple factors like the time value of money, borrowers credit standing, collateral, loan maturity, covenants, and liquidity. There are two methods to record the loan receivable when interest is below market—record a discount OR record the loan at the initial present value without a discount.
Collectibility also greatly impacts the accounting. If no future repayment is anticipated, the NFP should record contribution expense and not record a loan receivable. However, if partial repayment is expected, the NFP should recognize a loan receivable at the present value of future cash flows. The difference between the principal of the loan and the present value of the future cash flows is considered a contribution. No provision for loan allowance should be recorded.
Use the table as follows and answer the following questions
n/i | 1.0% | 1.5% | 2.0% | 2.5% | 3.0% | 3.5% | 4.0% | 4.5% | 5.0% | 5.5% | 6.0% | 7.0% | S.0% | 9.0% | 10.0% | 11.0% | 12.0% | 20.0% |
1 | 0.99010 | 0.98522 | 0.98039 | 0.97561 | 0.97087 | 0.96618 | 0.96154 | 0.95694 | 0.95238 | 0.94787 | 0.94340 | 0.93458 | 0.92593 | 0.91743 | 0.90909 | 0.90090 | 0 89286 | 0.83333 |
2 | 1.97040 | 1.95588 | 1.94156 | 1.92742 | 1.91347 | 1.89969 | 1.88609 | 1.87267 | 1.85941 | 1.84632 | 1.83339 | 1.80802 | 1.78326 | 1.75911 | 1.73554 | 1.71252 | 1.69005 | 1.52778 |
3 | 2.94099 | 2.91220 | 2.88388 | 2.85602 | 2.82861 | 2.80164 | 2.77509 | 2.74896 | 2.72325 | 2.69793 | 2.67301 | 2.62432 | 2.57710 | 2.53129 | 2.48685 | 2.44371 | 2.40183 | 2.10643 |
4 | 3.90197 | 3.85438 | 3.80773 | 3.76197 | 3.71710 | 3.67308 | 3.62990 | 3.58753 | 3.54595 | 3.50515 | 3.46511 | 3.38721 | 3.31213 | 3.23972 | 3.16987 | 3.10245 | 3.03735 | 2.58873 |
5 | 4.85343 | 4.78264 | 4.71346 | 4.64583 | 4.57971 | 4.51505 | 4.45182 | 4.38998 | 4.32948 | 4.27028 | 4.21236 | 4.10020 | 3.99271 | 3.88965 | 3.79079 | 3.69590 | 3.60478 | 2.99061 |
6 | 5.79548 | 5.69719 | 5.60143 | 5.50813 | 5.41719 | 5.32855 | 5.24214 | 5.15787 | 5.07569 | 4.99553 | 4.91732 | 4.76654 | 4.62288 | 4.48592 | 4.35526 | 4.23054 | 4.11141 | 3.32551 |
7 | 6.72819 | 6.59821 | 6.47199 | 6.34939 | 6.23028 | 6.11454 | 6.00205 | 5.89270 | 5.78637 | 5.68297 | 5.58238 | 5.38929 | 5.20637 | 5.03295 | 4.86842 | 4.71220 | 4.56376 | 3.60459 |
8 | 7.65168 | 7.48593 | 7.32548 | 7.17014 | 7.01969 | 6.87396 | 6.73274 | 6.59589 | 6.46321 | 6.33457 | 6.20979 | 5.97130 | 5.74664 | 5.53482 | 5.33493 | 5.14612 | 4.96764 | 3.83716 |
9 | 8.56602 | 8.36052 | 8.16224 | 7.97087 | 7.78611 | 7.60769 | 7.43533 | 7.26879 | 7.10782 | 6.95220 | 6.80169 | 6.51523 | 6.24689 | 5.99525 | 5.75902 | 5.53705 | 5.32825 | 4.03097 |
10 | 9.47130 | 9.22218 | 8.98259 | 8.75206 | 8.53020 | 8.31661 | 8.11090 | 7.91272 | 7.72173 | 7.53763 | 7.36009 | 7.02358 | 6.71008 | 6.41766 | 6.14457 | 5.88923 | 5.65022 | 4.19247 |
What is the initial journal entry upon issuance of the loan? Round to the nearest dollar.
What is the initial journal entry for this loan? Round to the nearest dollar.
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