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Hi John,
I have an issue regarding following question. ( Kaplan Study Book, Chp 2 Test your understanding 11.7)
A manufacturing entity is entitled to a grant of $3 million for
creating 50 jobs and maintaining them for three years. $1.5m is
received when the jobs are created and the remaining $1.5m is
receivable after three years, provided that the 50 jobs are still in
existence. The entity creates 50 jobs at the beginning of year one
and there is reasonable assurance that this level of employment
will be maintained.What is the deferred income balance at the end of the first
year?Answer is : $500,000. The total grant income is $3m, to be recognised over a
three-year period. Annual income is therefore $1m. At the end of
the first year the entity has received $1.5m of which $1m has been
recognised in the statement of profit or loss, leaving $500,000
deferred into future periods.When we get 1.5 mln as a cash and 1.5 mln is our receivable, shouldn’t we note is as Dr Cash 1.5 mln Dr Rec 1.5 mln and Cr Deferred Inc 3 mln?
So, at the end of Year 1, we deduct 1mln from Deferred Inc account and remained balance is 2mln now. How we can deduct 1mln from only 1.5 mln and maintaining $500,000 balance. If we do like this as a Kaplan book states, what about the next year? How can we deduct next 1mln from 500,000? I would be glad if u help me to solve this..Thanks in advance !
Hi,
There is nor receivable balance that enters the calculations initially. When we receive the cash we Dr Bank CR Deferred income for the 1.5m
We then release the amount for the current year of 1m by DR Deferred income CR SPL. This leaves the deferred income balance at 0.5m.
In year two we need to recognise 1m in the SPL, so we would release the 0.5m from deferred income and then recognise the 0.5 m due to be received. DR Deferred income 0.5 DR Other receivable 0.5 CR SPL 1m
Hope that helps you clear it up.
Thanks,
Hello sir.
A question.
Grant is recognised when there is a reasonable assurance that that it will be received and the conditions will be fulfilled.
So by your solution above, it is not allowed to recognise a receivable and a grant liability until time had actually passed and you have fulfilled the conditions partly?
Am I right?
And, supposed nothing was received from the government at start, no entries would have had to be made until after a lapse of one year?
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