Question: 1. A hospital has not transferred risk on malpractice claims to a third-party insurer. Which of the following statements best expresses the general rule regarding the reporting of liabilities for malpractice claims on the face of the balance sheet (or statement of net position)?
a. They should be reported only to the extent that judgments and settlements are due and payable.
b. Outstanding claims should be described in the notes to the statements; adjudicated and settled claims should be reported if they have not been paid.
c. They should be reported if it is highly likely that the disputes ultimately will be resolved in favor of the claimants.
d. They should be reported if it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated.
2. Historical experience shows that a hospital sometimes receives malpractice claims in the year after the incidents occur. Which of the following statements best expresses the general rule for reporting liabilities for such claims, if risk of loss has not been transferred to a third-party insurer?
a. No mention is required to be made of these claims anywhere in the financial statements.
b. A note should be prepared discussing the likelihood that claims will be received after the balance sheet date, but no estimate needs to be made of the possibility of loss.
c. Liabilities should be recognized in the statements if it is probable that claims will be asserted for incidents occurring before the balance sheet date and the losses can be reasonably estimated.
d. Liabilities should be recognized in the statements if claims have been received before the statements are issued; a note should be prepared discussing the likelihood of receiving additional claims after the statements have been issued.
3. A not-for-profit hospital receives a gift from a donor who specifies that the gift must be used only to further its research into the treatment of Parkinson's disease. When the hospital incurs expenses in this program, in which classification of net assets should the expenses be reported?
a. Unrestricted net assets
b. Temporarily restricted net assets
c. Permanently restricted net assets
d. Assets limited as to use
4. A not-for-profit hospital sells long-term bonds in the amount of $25 million to finance the construction of a new wing. The bond agreement requires the hospital to pay $1 million of this amount to a trustee as security until the debt is fully repaid. How should the $1 million payment be reported in the financial statements?
a. As an expense, to be amortized over the life of the debt
b. As assets limited as to use
c. As noncurrent assets, with all other long-term investments
d. As temporarily restricted net assets
5. A not-for-profit hospital creates a foundation whose sole purpose is to raise funds on behalf of the hospital. The hospital appoints all members of the foundation's governing board and directs its activities. The foundation raises $200,000 in unrestricted cash gifts during the year. The hospital does not need the cash, so the foundation continues to hold the cash at year-end. How should the hospital report on the foundation's activities in its financial statements?
a. Report an asset in its balance sheet and a "change in interest in the foundation" in its statement of operations
b. Report an asset in its balance sheet and a "change in interest in the foundation" in the temporarily restricted net asset section of its statement of changes in net assets
c. Report nothing on the face of its financial statements but disclose the foundation's activities in a note to its financial statements
d. Report the foundation in a separate column to the right of the hospital balances on the face of the hospital's financial statements
6. During the year ended December 31, 2012, a not-for-profit hospital had both unrealized and realized gains on investments made with its unrestricted net assets. How should these gains be reported in the hospital's statement of operations for the year 2012?
a. Both the realized and the unrealized gains should be reported.
b. Neither the realized nor the unrealized gains should be reported.
c. Realized gains should be reported, but unrealized gains should not.
d. Unrealized gains should be reported, but realized gains should not.
7. Under which of these circumstances would a not-for-profit hospital report restricted net assets?
a. Whenever there are external limitations on using the resources
b. When a donor places limitations on using the resources
c. When the hospital's board of directors sets resources aside for plant expansion
d. When a bond agreement requires the hospital to set resources aside