A. Analysis: Explain your responsibilities with respect to the kitchen

a. Analysis: Explain your responsibilities with respect to the kitchen fire.

b. Evaluation: Recommend how this event should be handled in the financial statements.

Goodfellow & Perkins gained a new client, Brookwood Pines Hospital (BPH), a private, not-for-profit hospital. The fiscal year-end for Brookwood Pines is June 30. You are the audit partner reviewing the working papers for the BPH audit for the fiscal year end June 30, 2023. Today is August 2, 2023, and it is expected that fieldwork will be completed in three weeks.

BPH provides medically necessary care to patients, regardless of their ability to pay. Both uninsured and underinsured patients are offered discounts of up to 100% of charges based on their income as a percentage of the federal poverty level guidelines. BPH does not pursue collection of these accounts; therefore, they are not reported in patient service revenue and accounts receivable. The cost of providing the charity care is included in operating expenses.

BPH’s investments consist of mutual funds, common equities, corporate and U.S. government debt issues, state and municipal government debt issues, and trusts. A majority of the investments are the result of charitable contributions to the hospital by generous donors. Earnings from the investments are used to cover the costs of the charity care. BPH is also eligible for certain government grants to help cover the costs of the charity care.

During your review, you note that during the third and fourth quarters the financial markets performed well and BPH recorded strong returns for its equity investments. However, beginning toward the end of the fourth quarter through today, the financial markets have taken a hit. Enacted future tax law changes, increasing interest rates, higher unemployment, and trade conflicts with other countries are negatively impacting the economy and the financial markets. Analysts are predicting a continued drop in the overall market performance and a bear market for some time. Since BPH relies on investment returns to cover the costs of charity care, you consider how smaller investment returns could impact BPH’s ability to operate. Also, in times of economic downturns, individuals may not be as charitable. Therefore, BPH could see a drop in donations.

Another situation that is on your mind is a kitchen fire that occurred at BPH last week. Thankfully no one was seriously injured, but BPH did not have full insurance coverage for the accident. The kitchen was badly damaged and had to be shut down along with the cafeteria seating area used for hospital visitors. Until the kitchen can be repaired, BPH is paying an outside catering service to deliver meals daily to patients and employees only. Visitors can no longer purchase items from the cafeteria. You are concerned that negative publicity from the kitchen fire incident could lead to decreased revenues if physicians decide to contract with a competing hospital.

You spoke with BPH’s controller yesterday about the fire incident. The controller said they do have the funds to repair the kitchen and are currently accepting bids from contractors for the repair work. They hope to have a contractor selected by next week so work can get started quickly. They are anticipating having the kitchen open in about six weeks. The controller did express concern over the added expense of the repairs and the high cost of having an outside service provide daily meals to patients and employees. He also said they have received concerned calls from many of the doctors who use BPH for their patient services. BPH administration is working very hard at “damage control” to assure the doctors that the hospital is safe and abiding by all codes required by the state department of health and hospitals.

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