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Hi,
My book doesn’t seem to contain the solution for the following question:“A manufacturing entity receives a grant of $3m when it creates 50 jobs. 1.5m is payable when the figure is reached with the remaining 1.5m payable at the end of 4 years should the 50 jobs still be in existence. At the end of year one, 50 jobs have been created and there is reasonable assurance that the employment levels will be maintained when reached.”
what is the deferred income balance at the end of the second year?Would the 1.5m be realized in the income statement at the end of the first year because it meets the criteria of reaching 50 jobs?
Then in the end of second year 1.5m/4 = 0.375m is recognized in Income statement, so the deferred income in financial position reduced by 0.375 (i.e 1.5-0.375m) = 1.125m.
Is 1.125m the correct answer?Thank you.
Bikky.“Would the 1.5m be realized in the income statement at the end of the first year because it meets the criteria of reaching 50 jobs?”
Yes … unless there is some penalty clause involving repayment in the event that those 50 jobs fall below that level
The other $1.5 million is a bit more tricky
For one thing, I believe that the denominator (if we’re going to spread the remaining $1.5 million) should be 3 giving us $1.5 in year 1, and then $500,000 in each of years 2, 3 and 4
However, I’m not convinced about the spreading of the remaining $1.5
This only becomes receivable upon the completion of the fourth year – it’s not 1/3 complete at the end of year 2, 2/3 complete at the end of year 3 and fully complete at the end of year 4
Therefore, it’s only earned on the expiration of those remaining 3 years and should not therefore be anticipated as revenue in the intervening years
It is a contingency and the occurrence is probable so it would be the subject of a full disclosure note
But unless it could be classed as virtually certain, the disclosure note is as far as I would be prepared to go by way of acknowledging the probability
OK?
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