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Hi Mike,
How should we account for a loan received from the government at a below market rate of interest in the financial statements?
For example,
A company received a $10 million loan from the government at an interest rate of 5% p.a. over a duration of 10 years. The current market interest rate is 10% p.a.SOPL:
Finance cost $1,000,000
Government grant income $500,000SOFP:
NCL:
5% loan= $10 million
Government grant= $4 million (savings in interest, to be released over the term of the loan)CL:
Government grant= $500,000Is the above correct? (It seems wrong)
What’s the matter with simply recording the receipt of the loan and expensing the interest on the loan?
The only other possibility that I can think of (I’ve never been asked this before) would be to:
Dr Cash $10,000,000
Cr Loan $6,927,717
Cr Deferred Grant Income $3,072,2831st year:
Dr Finance Costs $500,000
Cr Cash $500,000Dr Deferred Grant Income $192,772
Cr Grant Income (SoPorL) $192,772Dr Finance Costs $192,772
Cr Loan $192,772It works, but it looks clumsy!
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