In the current year, the not-for-profit organization How to Read Government Financial Reports received both cash of $1,250 and pledges of $2,000 to be used for teaching citizens how to read government financial reports. During the year the organization spent $1,750 teaching citizens to read financial statements. Assuming the NFP has a policy of spending its restricted resources first, in the current year what amount of contributions can be reclassified as without donor restrictions?

• A. $0.
• B. $500.
• C. $1,250.
• D. $1,750.

Answer: (C)

The key idea is that amounts are moved from net assets with donor restrictions to net assets without donor restrictions only as the restricted resources are used to meet the donor-imposed restrictions. Spending restricted resources first means you dip into those restricted funds for the program and then release the restriction as those funds are expended.

Here, the organization has restricted resources: cash of 1,250 and pledges of 2,000, all restricted for teaching citizens how to read government financial reports. It spent 1,750 on the program during the year. The crucial point is that only the portion funded by resources actually available and used in the current year can be reclassified. The cash on hand that can be released in this year is 1,250. The pledges, though designated for the program, represent promises and may not all be realized as cash in the current year; those amounts would remain restricted until they are actually collected and used. Therefore, the amount that can be reclassified as without donor restrictions in the current year is 1,250.