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How should we account for a loan received from the government at a below market rate of interest in the financial statements?
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.
Finance cost $1,000,000
Government grant income $500,000
5% loan= $10 million
Government grant= $4 million (savings in interest, to be released over the term of the loan)
Government grant= $500,000
Is 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 $3,072,283
Dr Finance Costs $500,000
Cr Cash $500,000
Dr Deferred Grant Income $192,772
Cr Grant Income (SoPorL) $192,772
Dr Finance Costs $192,772
Cr Loan $192,772
It works, but it looks clumsy!
Alright, thank you 🙂 guess I have overthink too much