During 2005, Margaret Billingsley, a prominent art collector, donated several items in her collection to the Darrwin Museum, a private, not-for-profit organization. Ms. Billingsley stipulated that her contribution be shown to the public, that it should be preserved, and not be sold. Darrwin’s accounting policy is to capitalize all donations of art, historical treasures, and similar items. On the date of donation, what was the effect of Ms. Billingsley’s donation on Darrwin’s financial statements?

  1. Temporarily restricted net assets increased.
  2. Reclassifications caused a simultaneous increase in permanently restricted net assets and a decrease in temporarily restricted net assets.
  3. There was no effect on any class of Darrwin’s net assets.
  4. Permanently restricted net assets increased.