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CHAPTER 15; GOVERNMENT GRANTS [ACCOUNTING STANDARD REFERENCE(S): IAS 20 = Accounting for Government Grants and Disclosure of Government] Assistance Chapter Outline: Nature of Government Grants Recognition Principles for Government Grants Accounting for Government Grants Classification of Government Grants Repayment of Government Grants Grant of Interest-Free Loan Government Assistance Disclosures on Government Grants Nature of Government Grants > Government grants are assistance by the government in the form of transfers of resources to an entity in retum for past or future compliance with certain conditions relating to the operating activities of the entity. nition Principl rnment Grant > Government grants, including non-monetary grants at fair value, shall not be recognized until there is reasonable assurance that: The entity will comply with the conditions attached to them; and The grants will be received. > Government grants shall be recognized on an accrual basis when received or receivable, Note: IAS 20 disallows the recognition of government grants on a cash basis as this is not in accordance with generally accepted accounting principles. Accounting for Government Grants > Government grants shall be recog profit or loss on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. > Rules: Grants in recognition of specific expenses + © Recognized in profit or loss in the same period as the related expenses. > Gre rele depreciable © Recognized iri profit or loss over the periods and in the proportions in which depreciation expense on those assets is recognized. Scanned with |\CamScannerComprekontive Aecauating Reaiewr Series otame 1: Focanctal Accounting anc Reporting Illustration 4: (Grant as immediate financial support) At the beginning of the current year, Sam Company received a grant of P7,000,000 from the British government to compensate for massive losses incurred because of a recent tsunami. The grant was made for the purpose of giving immediate financial support to the entity. It will take the entity two years to reconstruct the assets destroyed by the | tsunami. © Q: Prepare the journal entries during the current year. | eA | cash 7,000,000 Grant income 7,000,000 Comment: A government grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs shall be recognized in profit or loss of the period in which it becomes receivable. ernment Grants 1. Grants related to assets 2. Grants related to income Grants related to assets > Grants whose primary condition is that an entity qualifying for the grant shall purchase, construct, or acquire fixed assets. > Presentation: © Either by: (2) Setting up the grant as deferred income, or (b) Deducting the grant in arriving at the carrying amount of the asset. > If the grant is recognized as deferred income, it will be recognized in profit or loss on a'systematic basis over the useful life of the asset. > If the grant is deducted in arriving at the carrying amount of the asset, the grant is recognized in profit or loss over the life of a depreciable asset as 2 educed depreciation expense. > Journal entries: (a) Gash x Deferred grant income x (b) Cash x Property, plant, and equipment x Grants related to income > Grants other than those related to assets. 750 Scanned with |\CamScanner§ G —_——_TT tin 8: frcmient Gove > Presentation: Either by: (a) Using a separate income account or under other (or miscellaneous) income”, or (b) Deducting from the related expense, > Journal entries: (a) Cash x Income (or other/miscellaneous income) * (b) Cash ~ Expense x ayment of Governm: A goverment grant that becomes repayable due to non-compliance with conditions shall be accounted for 2s a change in accounting estimate. ‘Grants related to assets ¥- Repayment of a grant related to an asset shall be recognized by increasing the carrying amount of the asset or reducing the deferred grant income balance by the amount repayable. ¥ The cumulative additional depreciation that would have been recognized in profit or loss to date in the absence of the grant shall be recognized immediately in profit or loss. + Grants related to income Repayment of a grant related to income shall be applied first against any namortized deferred income in respect of the grant. © If the repayment exceeds any existing deferred grant income, or when no deferred grant income exists, the repayment shall be recognized immediately in profit or loss. ¥ Journal entry: Deferred grant income x Loss on repayment of grant XX Cash x Tilustration 5: White Company purchased a machine for P5,250,000 on January 1, 2023, and received ‘a government grant of P750,000 toward the capital cost. The machine is to be depreciated on a straight-line basis over 5 years and estimated to have a residual value of P375,000 at the end of its useful life. On January 1, 2025, the entity violated certain conditions attached to the grant and therefore had to repay fully such grant to the government. Case 1: The accounting policy is to treat the grant as deferred income. Q-1: Prepare the journal entries for the year 2023, S Q-2: Prepare the journal entries for the year 2025. 751 Scanned with |\CamScannerComprehensive Acsanting Reeiewer Series otame te Fenanelal Accounting and Reporting Case 2: The accounting policy Is to treat the grant as a reduction in the cost of the | asset. @ Q-1: Prepare the journal entries for the year 2023. repare the journal entries for the year 2025. Case 1 Oat: Machine 5,250,000 Cash 5,250,000 Cash 750,000 Deferred grant income 750,000 Depreciation expense [(5.25M-375T)/5] 975,000 Accumulated depreciation 975,000 Deferred grant income 150,000 Grant income (750T/5) 150,000 SA-2: Deferred grant income 450,000 Loss on repayment of grant 300,000 Cash 750,000 | Deferred grant income, 1/1/2023 750,000 Less: Grant income, 2023 - 2024 (150,000 x 2) (300,000) Deferred grant income, 12/31/2024 450,000 Depreciation expense 975,000 ‘Accumulated depreciation 975,000 Case 2 en Machine 5,250,000 Cash 5,250,000 Cash ‘750,000 Machine 750,000 Depreciation expense {(5.25M — 750T) - 375T/5} 825,000 Accumulated depreciation : 825,000 SA-2: Machine 750,000 Cash 750,000 Depreciation expense 1,275,000 ‘Accumulated depreciation 1,275,000 752 Scanned with |\CamScannerChapter 15: Goncrement Grants ‘Original depreciation ‘Add: Depreciation expense that would have been recognized had there been no grant [(750T/5] x3 years) 450,000 | Depreciation expense ~ 2025, a ~P4,275,000 825,000 Sr A forgivable loan from the government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for the forgiveness of the loan, The benefit of a government loan with no interest or below-market interest rate Is treated as a government grant. © The benefit is measured as the difference between the face amount and the present value of the loan. = The benefit is recognized as the discount on the note payable to be amortized over the term of the loan using the effective interest method, Note: The grant income per year is equal to the per year amortization of the discount ‘on note payable. i Ser Ge i > Anaction by the government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. > No value can be placed upon government assistance. > Examples: ¥ Free technical or marketing advice. ¥ Provision of guarantees. Government procurement policy that is responsible fora portion of the entity's sales. > Does not include indirect benefits or those benefits not specific to an entity such as: Infrastructure in development areas such as improvements to the general transport and communication network. Imposition of trading constraints on competitors. ¥ Improved facilities such as irrigation for the benefit of an entire local community. Disclosures on Government Grants > The accounting policy adopted for government grants, including the method of presentation adopted in the financial statements. > Thenature and extent of government grants recognized in the financial statements and an indication of other forms of government assistance from which the entity has directly benefited. > Unfutfiled congitions and other contingencies attached to government assistance that has been recognized. 753 Scanned with |\CamScannerComprhensoe Aecounting Reviewer Seis otume ts Fexancial Accounting aad Reperting Noter IAS 20 does not require the disclosure of the name of the government agency that gave the grant along with the date of sanction of the grant by such government agency and the date when cash was received in case of monetary grant. -000- Scanned with |CamScanner™Chapter 15 Grants EXERCISES FINANCIAL ACCOUNTING AND REPORTING THEORIES 1, These are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity, A. Government grants B. Government assistance . Government guidance D. Government forgivable loan 2 Government grants shall not be recognized until there Is reasonable assurance ‘A. The entity will comply with the conditions attaching to them. B, The grants will be received, C. Both Aand B, D. AorB. E. Neither A nor B. 3. Non-monetary government grants shall be recognized at: A. Cost, B, Carrying amount. C. Fair value. D. Nominal value. 4. Which of the following shall be allowed to be used by entities in accounting for government grants? A. Accrual basis. B. Cash basis. C. Both Aand B, D._ Neither A nor B. Accounting for Government Grants. 5. Which of the following statements is correct about the accounting for government grants? ‘A. Government grants shall be recognized in profit or loss on a systematic basis, ‘over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate, B. Government grants shall be recognized in other comprehensive income on a systematic basis over the periods in which the entity recognizes as expenses the related costs for which the grants are intended to compensate. Government grants shall be recognized in profit or loss when received or receivable, D. Government grants shall be recognized in other comprehensive income when received or receivable. 6. The grant in recognition of specific expenses shall be: ‘A. Recognized as income over the period of the related expenses. B. Recognized as income when received or receivable. Recognized as income when all the costs or expenses are incurred. 755 Scanned with |\CamScannerConprcheasioe Arcounting Reoewrr Series tolume |: Fnsncial Acaurting and — 7. D. Not be recognized as income. Which of the following statements regarding government grant refated purchase of a depreciable asset is correct? A. Income from grant is recognized immediately when the grant is rer" B. Income is recognized immediately when the asset is purchased. C._ Income Is recognized proportionate to the amount of depreciation rerrea" D, E. . Income is recognized over the useful life of the depreciable asset. No income shall be recognized in any case. SRP University received a government grant of P240 million, Three fourths of © grant is to be utilized for the purchase of a college building for students (~"" underdeveloped countries. The balance of the grant is for subsidizing the tr costs of those students for four years from the date of the grant. Vhich of following statements are correct? ‘A’ The grant related to asset is P180 million while the grant related to income P60 milion, B, The grant related to assets would be recognized in income over the useful Of the college building using a systematic and rational basis. C. The grant related to income would be recognized over a period of four years D. All statements are correct in accordance with IAS 20. Good Person Farm Inc. received a grant of P30 milion to install and run a winds in an economically backward area. Good Person Farm Inc. has estimated that such a windmill would cost P50 million to construct. The secondary condition attaches to the grant is that the entity should hire labor in the local market (i.e., from te economically backward area where the windmill is located) instead of employirg workers from other parts of the country. It should maintain a ratio of 1:1 loca worker to workers from outside in its labor force for the next five years. The windmill is to be depreciated using the straight-ine method over a period of ten years. What is the appropriate treatment of this grant in accordance with IAS 20? ‘A. The grant received by Good Person Farm Corp. will be recognized as income ‘over a period of ten years. B. Ineach of the five years, the grant will be recognized as income in proportion to the annual depreciation on the windmill, CC. P5 milion will be recognized as income in each of the ten years, D. All statements are in accordance with IAS 20. ). Government grant related to a non-depreciable asset that requires fulfillment of certain conditions: A. Shall be recognized as income immediately. 8B. Shall be recognized as income over the periods which bear the cost of meeting the conditions. CC. Shall be recognized as income over a fixed period of 25 years, D. Shall not be recognized as income. ‘Scanned with @camscanneree Chapter 18: Goocramint Grants 11, A government grant that becomes receivable as compensation for expenses oF losses already incurred oF for the purpose of giving immediate financial support to the entity with no future related costs: ‘A. is recognized in profit or loss of the period in which it becomes receivable, Bis recognized In the equity of the period in which It becomes receivable. C._Is recognized in other comprehensive income of the perlod in which it becomes receivable. D. {is recognized directly In the retained earnings of the period in which It becomes receivable. 12, In the case of grant related to an asset, which of folowing accounting treatment 's prescribed by IAS 207 ‘A. Record the grant at @ nominal value in the first year and write it off inthe subsequent year. B, Record the grant at fair value in the first year and take It to income in the subsequent year. C. Bither set up the grant as deferred income or deduct it in arriving at the ‘earrying amount of the asset. 'D. Present the grant in the income statement as other income or as a separate line item or deduct it from the related expense. 13. Inthe case of grant related to income, which ofthe following accounting treatment is prescribed by IAS 20? A. Either set up the grant as deferred income or deduct it in arriving at the carrying amount of the asset, B, Present the grant in the income statement as other income or as a separate line item or deduct it from the related expense. C. Credit the grant to OCI. D. Record the grant at fair value in the first year and take it to income in the subsequent year. f 14. A government grant that becomes repayable due to non-compliance with conditions shall be accounted for as a: ‘A. Change in accounting cycie. B. Change in accounting policy. CC. Change in accounting estimate, D. Change in reporting entity. 15, Repayment of grant related to an asset: A. Shall be recognized by decreasing the carrying value of the asset or by increasing the deferred income by the amount repayable. B. Shall be recognized by increasing the carrying value of the asset or by reducing the deferred income by the amount repayable. . Shall be applied first against any unamortized deferred income in respect of the grant. D. Either A or C. E. Either B or C. 757 Scanned with |\CamScannerComprelension Accounting Reoicwcs Sees Aolume |: Feaamcial Accounting and Reperting 16. 7. 19, Repayment of grant related to an asset shall be recorded by’ ‘A. Increasing the carrying amount of the asset if the cast reduction age ret method is employed. B. Recognizing as expense the cumulative additional depreciation tat reatt" have been recorded to date in the absence of the grant if the net merrcr’ employed. Reducing the deferred income balance to zero if the deferred income ager * or gross method is employed. 1. Allof these are correct about repayment of grant related to asset. Repayment of grant related to income shall be: ‘A. Recognized by increasing the carrying value of the asset or by reducing deferred income by the amount repayable. B. Applied first against the deferred Income balance and any exce: recognized immediately as an expense. Recognized as component of other comprehensive income. D. 1. Expensed immediately. 155 shall be ‘According to IAS 20, a forgivable loan from governments treated as a government grant when: ‘A. there is reasonable assurance that the entity will meet the terms for forgiveness of the loan. B, there is absolute assurance that the entity will meet the terms for forgiveness of the loan. the government grants the forgiveness of the loan. D. the loan is a noninterest-bearing type. ‘The benefit of a government loan with no interest or below market interest rete is: ‘A. measured as the face amount of the loan. B. measured as the present value of the loan. C. measured as the difference between the face amount and the present value of the loan. D. Zero. ‘The benefit of a government loan with no interest or below market interest rate is: ‘A. recognized as the discount to be amortized over the term of the loan using the effective interest method. B, recognized as the discount to be amortized over the term of the loan using the straight-line method C. recognized as grant income in the period the loan is received from the government, D. recognized as grant income on a straight-line basis over the term of the loan. Scanned with |CamScanner™Gi 21. 22. 23. Chapter 15: Goocrmment Grants Which of the following statements is/are correct regarding government assistance? ‘A. Anassistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity, B. Anaction by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. C. No value can be placed upon a government assistance. D. AandC. E. BandC. Which of the following is/are not considered government assistance? 1, Free technical or marketing advice. Il, Infrastructure in development areas. IIL. Imposition of trading constraints on competitors. IV. Improved facilities. Tonly. Mand 111, 11, TH, and Iv. 1, 1, II, and WV. poser Which of the following are the disclosures required by IAS 20? I. The accounting policy adopted for government grant, including the method of presentation adopted in the financial statements. Il, The nature and extent of government grant recognized in the financial statements and an indication of other forms of government assistance from which the entity has directly benefited. III. Unfulfilled conditions and other contingencies attaching to government assistance that has been recognized. IV. The name of the government agency that gave the grant along with the date of sanction of the grant by such government agency. 1, 11, and IV only. J, II, and III only 11, TH, and IV only. 1, 11, II, and WV. pOe>P -000- Scanned with |CamScanner™Comprbersioe Acaunting Reviewer Sees Volume |: Penamcial Accounting and Reporting SUGGESTED KEY ANSWERS AND EXPLANATIONS nee elap pple Ttem: Key Explanation: 2 c ‘Government grants, including non-monetary grants at fair value, | shall not be recognized until there is reasonable assurance that: ¥ The entity will comply with the conditions attaching to them; and ¥ The grants will be received. 4 ‘A | Government grants shall be recognized on an accrual basis when | received or receivable. IAS 20 disallows the recognition of | government grants on cash basis as this is not in accordance | with generally accepted accounting principles. | 14 “A government grant that becomes repayable due to non- | compliance with conditions shall be accounted for as a change in accounting estimate. | a E | Choice A pertains to government grant. | | -000- Scanned with |\CamScannerChapter 15: Gascrament Grants FINANCIAL ACCOUNTING AND REPORTING PROBLEMS PROBLEM 15-1 Grant in Recognition of Specific Expen Bt the beginning of the year 2023, Bass Company received a grant of P562,500 from the ‘Malaysian government to defray safety and environmental costs within the area where the entity is located. : The safety and environmental costs are expected to be incurred over four years as follows: Year = Amount 2023 45,000 2024 90,000 2025 © 135,000 2026 __180,000_ 450,000 1, How much is the grant income to be recognized in 20247 A P28,125 C. p112,500 B. P90,000 D. P140,625 2. What Is the balance of the deferred grant income on December 31, 2025? A. 112,500 C.P180,000 B. P140,625 D. 225,000 PROBLEM 15-1 Answers & Solutions Guide 1. ANSWER: C 562,500 x 901/450T = P112,500 2. ANSWER: D : Deferred grant income, 1/1/2023 562,500 Less: Grant income 2023 (P562,500 x 457/450T) (56,250) 2024 (P562,500 x 90T/450T) (112,500) 2025 (P562,500 x 135T/450T) (168,750) Deferred grant income, 12/31/2023 ~ 225,000 PROBLEM 15-2 Grants related to depreciable assets, ‘Atthe beginning of the current year, Jean Co. received a'grant of 5,000,000 from the US. government for the development of a laboratory and research facility with a cost of 6,250,000 and useful life of 20 years. How much shall be recognized as grant income for the current year? A P125,000 Cc. P375,000 B. 250,000 D. —P625,000 PROBLEM 15-2 Answers & Solutions Guide ‘ANSWER: B P5,000,000/20 years = P250,000 Comment: Grants related to depreciable assets shall be recognized as Income over the periods and in proportion to the depreciation of the related asset. 761 ‘Scanned with |CamScanner—_—_—_—e_—_—_—_—_" PROBLEM 15-3 Gront os immediate financlal support At the beginning of the current year, Sam Company received a grant of PAY,LEP top British government to compensate for massive lasses incurred because of 2 re¢ er The grant was made for the purpose of giving immediate financial support to the eer y will take the entity two years to reconstruct the assets destroyed by the tsuna’r+ How much Is the grant income to be recognized for the current year? A Zero C. P294,000 B, —-P245,000 D. — P490,000 PROBLEM 15-3 Answers & Solutions Guide _ ANSWER: D Comment: A government grant that becomes receivable as compensation for expenses cr losses already incurred or for the purpose of giving immediate financial support to thie en with no future related costs shall be recognized in profit or loss of the period in which + becomes receivable, PROBLEM 15-4 Accounting for Government Gronts Deferred income approach vz. Deduction from Asset approaeh Crown Company purchased a machine for P700,000 on January 1, 2023, and received « government grant of P280,000 toward the capital cost. The machine is to be depreciates on a straight-line basis over 8 years and estimated to have a residual value of P70,000 a the end of its useful life. Case 1: The entity's policy is to treat. the grant as deferred income. 1. How much is the grant income to be reported in 2023? A Zero, C. — P43,750 B. — P35,000 D. — 280,000 2. How much is the depreciation expense to be reported in 2023? A P43,750 C— P78,750 B. 52,500 D. — P87,500 3. What is the deferred grant income balance on December 31, 2024? A mn. C. — P245,000 B. — P35,000 D. —P210,000 Case 2: The entity's policy is to treat the grant as a deduction from the cost of the asset. “1. How much is the grant income to be reported in 2023? A Zero. Cc. P43,750 B, P35,000 D. — P280,000 2. How much is the depreciation expense to be reported in 2023? AL P43,750 C-P78,750 B. P52,500 D. 87,500 Scanned with |\CamScannerChapter 15: Gomes Grants PROBLEM 15-4 Answers & Solutions Guide Case 1 1. ANSWER: P280,000/8 = P35,000 2, ANSWER: C (P700,000 ~ 70,000)/8 = P78,750 3. ANSWER: D Deferred grant income, 1/1/2023 280,000 Less: Grant income ~ 2023 and 2024 (P35,000 x2) __(70,000)_ Deferred grant income, 12/31/2024 210,000 Case 2 1, ANSWER: A ‘Comment: No grant income will be recognized under the deduction from asset approach. 2. ANSWER: A . {(P700,000 ~ 280,000) - 70,0008 = p43,750 PROBLEM 15-5 Repayment of Government Grant ‘On January 1, 2023, A Company received a grant of P900,000 from the government to subsidize tuition fees for a period of 5 years. (On January 1, 2025, the entity violated certain conditions attached to the grant, and therefore had to repay fully such grant to the government. 1, Whatis the grant income for 20237 A Zero. C. —P360,000 B, —P180,000 D. — P900,000 2. What amount should be recognized as loss resulting from the repayment of the grant in 20257 A. Zero. C. — P540,000 B. 360,000 D. 900,000 PROBLEM 15-5 Answers & Solutions Guide 1. ANSWER: B 900,000/5 = 2,000 2. ANSWER: B ‘Amount of repayment 900,000 Less: Deferred grant income, 12/31/2024 (P180,000x3) _ (540,000) Loss on repayment P360,000 PROBLEM 15-6 Repayment of Government Gront Widow Company received a government grant of P800,000 related to a factory that it bought in January 2023, The entity purchased the factory for P4,800,000. The useful life of the factory is 10 years with no residual value. (On January 1, 2025, the entire amount of the government grant became repayable by reason of noncompliance with conditions attached to the grant. 763 ‘Scanned with |CamScanner‘case 4: The ents policy i to treat the grant as deferred income. 'L._ What Is the depreciation of the factory for 20237 A 780,000 .400,000 B P160,000 D. — P480,000 2. What is the grant Income for 20237 ‘A, 0,000, c.P400,000 8, P160,000 D. P4g0,000 3, What Is the loss to be recognized resulting from the repayment 2s. grant in 2025? " ‘A P80,000 c.P640,000 B, P160,000 0. P800,000 Case 2: The entity pole isto treat the grant 35 a deduction from the costo xe 1. What is the depreciation of the bullding for 20237 ‘A. 80,000 cc. p400,000 8. p160,000 D. — p480,000 2, What is the depreciation of the bullding for 20257, ‘A. 400,000 c._ p560,000 8. P480,000 D. — p640,000 PROBLEM 15-6 Answers & Solutions Gulde Cased 1. ANSWER: D 4,800,000/10 years = P480,000 2. ANSWER: A 800,000/10 years = P80,000 3. ANSWER: B Deferred grant income, 1/1/2023 800,000 Less: Grant income ~ 2023 (80,000) Less: Grant income ~ 2024 _-(80,000)_ Deferred grant income, 12/31/2024 640,000 ‘Amount of repayment 800,000 Deferred grant income, 12/31/2024 __{640,000)_ Loss on repayment of grant 160,000 Case 2 1. ANSWER: C (P4,800,000 ~ P800,000)/10 years = P400,000 2. ANSWER: D Original annual depreciation : 400,000 ‘Add: Depreciation that had not been recognized to date asa result of the arent [(P800,000/10) x 3 years] 20,0, Depreciation expense - 2025 1p640,000 764 Scanned with |CamScanner™Afemmative solution: ‘Accumulated depreciation, 12/31/2025 wit yout grant (P480,000 x 3 years) 1,440,000 Less: Accumulated depreciation, 12/31/2025 with grant (P400,000 x 2 years) (800,000) _ Depreciation expense ~ 2025 'P640,000 PROBLEM 15-7 Repayment of Government Grant _ (On January 2, 2023, Ross Corporation received a grant of 7,000,000 to bulld and run 2 power plant. ‘The power plant Is to be depreciated using the straight-line method over a period of 10 years, The power plant was completed at the end of year 2023 ata total cost of P17,500,000 and started producing and distributing power to the surrounding area. On July 1, 2025, the government demanded from Ross Company the repayment of the grant due to the nonfulfilment ofthe conditions. ase 1: The entity policy is to treat the grant as deferred income. 1. How much is the grant incor me to be recognized in 2023? A Zero .Pt,050,000 8. P700,000 D. 1,750,000 2. How much Is the grant income to be recognized in 20247 A Zero C. P1,050,000 8. 700,000 D. 1,750,000 3. How much is the depreciation expense to be recognized in 2024? A Zero C.P1,050,000 8. P700,000 D. 1,750,000 4, How much is the loss on repayment of the grant to be’recognized in 2025? A. Zero 1,050,000 B. — P700,000 D. —P5,950,000 he entity's policy is to treat the grant as a deduction from the cost of the asset, 1. How much is the depreciation expense to be recognized in 2024? ‘A, P350,000 C. _P1,050,000 B. 700,000 D, P'1,750,000 2. How much is the depreciation expense to be recognized in 2025? A. P4,050,000 C. 2,100,000 B. 1,750,000 D. 2,450,000 PROBLEM I5-7 Answers & Solutions Guide Case1 1. ANSWER: A Zero, The power plant was completed only at the end of year 2023. The company will recognize grant income starting year 2024. 2. ANSWER: B P7,000,000/10 years = P700,000 765 ‘Scanned with |CamScannerComprehensive Aeesnting Zones Sees Abang Ls Fen Heating tok Renny 3, ANSWER: D P17,500,000/10 years = P4,750,000 |. ANSWER: C bated gant icone, 12/2023 7,000,000 tess; 2073 grant income : ‘Less: 2024 grant income (700,000) tess: 2025 grant income (P700,000 x 6/12) (350,000) Deferred grant income, 7/1/2025 5,950,000 Repayment of grant 7,000,000, Deferred grant income, 7/1/2025 5,950,000 Loss on repayment of grant 1,050,000 case2 1, ANSWER: C Net cost ofthe plant (P17.5M~P7H) 10,500,000 Divided by: Useful fe 10 ‘Annual depreciation P1,050,000 2. ANSWER: D Original depreciation 1,050,000 ‘Add: Depreciation that would have been recognized had there been no grant ((P7M/10) x 2 years*) 1,400,000 Depreciation - 2025 2,450,000 12024 and 2025 PROBLEM 15-8 Gront of Interest-Free L On January 1, 2023, Vigan company received an interest tree loan from the Ph» ‘government fr P1,000,000 fo a period ofthe years evidenced by a promissory cs government granted ths oan provided the entity shall employ at eas half ofits wot >. from the area where the enity is located over the next three years, ‘The market rate of interest for similar loan is 5%. The present value of 1-at Sth fer Periods is 0.86. How much should be recognized as income from grant for 20237 A Zero, C.P860,000 B. P43,000 D. 1,000,000 PROBLEM 15-8 Answers & Solutions Guide ANSWER: Present value ofthe loan, 1/1/2023 (PIM x 0.86) = P860,000 Date Interest income Carrying value 43/2023, 860,000 12/31/2023 43,000 903,000 12/31/2004 45,150 948,150 12/31/2025 51,850 1,000,000 766 Scanned with |\CamScannerChapter 15: Government rants Journal entries: 1/1/2023 Cash 1,000,000 Discount on note payable 140,000 Note payable Deferred grant income 12/31/2023 Interest expense 43,000 Discount on note payable Deferred grant income 43,000 Grant income -End of Chapter- 1,000,000 140,000 43,000 43,000 Scanned with |CamScanner™