Activity 6 Government Grant (Answer Key) PDF

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Government GrantLet’s Check (ULO m)Activity 1. Now that you know the most essential knowledge in the study of government grant , let us try to check your understanding of the topic. In each of the questions, choose the letter of your choice._True 1. Government grant shall be recognized when there is...

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Government Grant Let’s Check (ULO m) Activity 1. Now that you know the most essential knowledge in the study of government grant , let us try to check your understanding of the topic. In each of the questions, choose the letter of your choice. __True_1. Government grant shall be recognized when there is reasonable assurance that the entity will comply with the conditions of the grant. __False 2. Government grant in recognition of specific costs is recognized as income immediately. ___True_3. Government grant related to non depreciable asset that requires fulfilment of certain conditions should be recognized as income over the periods which bear the cost of meeting the conditions. False__ 4. A government grant that becomes repayable shall be accounted for as change in accounting policy. _False__5. Repayment of grant related to an asset shall be recorded by reducing the deferred income balance to zero if the deduction from asset approach is used. False_ Government assistance includes all of the following: a. Free technical advice b. Provision of guarantee c. Government procurement policy d. Improve irrigation water system for the benefit of an entire local community. False_ 6. A forgivable loan from the government or the benefit of a government loan at NIL or below market interest rate is accounted for as neither government grant nor assistance _False 7. In the case of grant related to income, the accounting treatment prescribed is credit the grant to retained earnings. True__ 8. Capitalization of borrowing cost is suspended during temporary period of delay. False_ 9. The period of time during which interest must be capitalized ends when the asset is sold, abandoned or fully depreciated. True_10. Interest earned on specific borrowing must be credited to interest income.

Let’s Analyze Activity 1. Getting acquainted with the essential knowledge in the study of government grant is not enough, what also matters is you should also be able to solve and prepare entries transactions affecting government grant. Now, I will require you to answer the following problems. Problem 1. Galendez Company received the following grants on January 1, 201Q: 1. A grant of 48,000,000 to compensate for costs to be incurred in planting trees over a period of 5 years whereby the entity will incur such costs at 1,600,000 for 2017; 3,200,000 for 2018; 4,800,000 for 2019; 6,400,000 for 2020 and 8,000,000 for 2021. 1

Answer: Year 1 1,600,000 Year 2 3,200,000 Year 3 4,800,000 Year 4 6,400,000 Year 5 8,000,000 24,000,000 Cash

1.6/24 3.2/24 4.8/24 6.4/24 8/24

* 48,000,000

48,000,000 Deferred Grant income

= = = = =

3,200,000 6,400,000 9,600,000 12,800,000 16,000,000

48,000,000

Environmental costs 1,600,000 Cash 1,600,000 Deferred Grant income Grant income

3,200,000 3,200,000

Environmental costs 3,200,000 Cash 3,200,000 Deferred grant income Grant Income

6,400,000 6,400,000

2. A tract of land in Mindanao with a fair value of 21,600,000 by the national government. The grant requires Galendez company to construct a refinery on the site estimated at a cost of 36,000,000, the useful life of which is 20 years. Answer: Year 1 Land 21,600,000 Deferred Grant income 21,600,000 Refinery 36,000,000 Cash

36,000,000

Depreciation expense 1,800,000 Accumulated depreciation Deferred grant income Grant Income

1,080,000 1,080,000

Year 2: Depreciation expense 1,800,000 Accumulated depreciation Deferred grant income Grant income

1,800,000

1,800,000

1,080,000 1,080,000

2

3. Galendez Company purchased a machine for 6,750,000 on January 1, 20Q. The entity received a government grant of 1,125,000 in respect of this asset. The policy is to depreciate the asset over 5 years on a straight line basis and to treat the grant as deferred income. On Jan. 1, 20S, the grant became fully repayable because of non compliance with conditions. Answer: Deferred income approach Machine

6,750,000

Cash

6,750,000

6,750,000

(2,700,000) 4,050,000

Cash 1,125,000 Deferred grant income

1,125,000

Depreciation expense 1,350,000 Accumulated depreciation

Deferred grant income

1,350,000

225,000

Grant income

225,000

December 31, 20R Depreciation expense 1,350,000 Accumulated depreciation

Deferred grant income

1,350,000

225,000

Grant income

225,000

3

January 1, 20S Deferred Grant income

675,000

Loss on GG

450,000

Cash

1,125,000

Deduction from asset approach Machine

6,750,000

Cash

6,750,000

Cash 1,125,000 Machine

1,125,000

Depreciation expense 1,125,000 Accumulated depreciation

1,125,000

December 31, 20R Depreciation expense 1,125,000 Accumulated depreciation

1,125,000

January 1, 20S

Machinery Cash

1,125,000 1,125,000 4

Depreciation expense

1,800,000

Accumulated depreciation

6,750,000/5

=

1,800,000

1,350,000 1,125,000

225,000 X 2

=450,000 + 1,350,000 = 1,800,0000

Required: Prepare the entries in connection with the grants received above for 2 years. Show the necessary solution. In case 3, present you answer for the two approaches. Problem 2. On January 1, 20Q, the city government agreed to provide Probity Company with a 5,000,000 three-year, zero-interest loan evidenced by promissory note. The prevailing rate of interest for a loan of this type is 10% and the present value of 1 at 10% for three years is .75. a. What is the journal entry to record the transaction on Jan. 1, 20Q? b. What is the interest expense for 20Q? c. What is the deferred grant income on December 31, 20Q? d. What is the carrying amount of the note payable on December 31, 20R? Answer: Cash 5,000,000 Discount on N/P 1,250,000 N/P 5,000,000 Deferred grant income 1,250,000 Interest

PV 3,750,000 4,125,000 4,537,500 5,000,000

375,000 412,500 462,500

Interest expense 375,000 Discount on N/P

375,000

Deferred grant income 375,000 Grant income 375,000 Year 2

Interest expense

412,500

5

Disc. On N/P

412,500

Deferred Grant income Grant income Year 3 Interest expense

412,500 412,500

462,500

Disc. On N/P

462,500

Deferred grant income 462,500 Grant income

462,500

5,000,000 *.75=3,750,000 375,000 412,500 462,500

1,250,000 875,000 462,500 -

3,750,000 4,125,000 4,537,500 5,000,000

In a Nutshell (ULO m and n) With the happenings in the world in this year 2019 and 2020, give an example of government grant received by the Philippines from other countries and or an individual/company receiving government grant from the Philippine Government. Explain its accounting treatment. Be able to explain in not less than 50 words.

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