Do-Good Inc. is a not-for-profit organization that was formed on January 1, 2020. Do-Good has a December 31 year end. It has an accounting policy of capitalizing and amortizing its capital assets. On April 1, 2020, Do-Good purchased equipment costing $8,000. The equipment is estimated to have a useful life of 4 years, with no residual value at that time. This transaction was the only transaction that took place to date. The equipment was purchased from an unrestricted contribution of $8,000.
What would be the balance in the Capital Fund on December 31, 2020?

Question

Quizplus · Accepted Answer

The equipment cost of $8,000 is capitalized as a capital asset, but since it was only purchased on April 1, 2020, only 9 months of depreciation will be recorded in 2020 (since Do-Good has a December 31 year end). Using the straight-line method, the annual depreciation expense would be $2,000 ($8,000/4 years) and therefore, the depreciation expense for 2020 would be $1,500 ($2,000 x 9/12).

Thus, the equipment's net book value at December 31, 2020 would be $6,500 ($8,000 cost - $1,500 accumulated depreciation). Since the equipment was purchased from an unrestricted contribution of $8,000, that amount is included in the Capital Fund. Therefore, the balance in the Capital Fund at December 31, 2020 would be $6,500.