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Hi my Dear Tutor,I have a question.
The question has been taken from 6 september past exam.paper.
On 1 january 20×6, gardenbugs co received a $30000 government grant relating to equipment which cost 90000 and had a useful life of 6 years.the grant was netted off against the cost of the equipment .on 1 january 20×7, when the equipment had a carrying amount of 50000,its use was changed so that it was no longer being used in accordance with the grant.this meant that the grant needed to be repaid in full but by 3q december 20×7 this has not yet been done.
Which journal entry is required on 31 december 20×7
1st case grant related to asset
Debit cash 30000
Credit asset 30000
Depreciation
60000/6*2=20000Grant related to deffered income
Debit cash 30000
Credit deferred income 30000
Asset depreciation
90000/6*2=30000
As we know that deferred incime recognised periodically so in this case
30000/6*2=10000
Depreciation 30000-10000=20000
Debit depr
Credit asset
In the answer
Debit depr-20000 understood
Debir assset 10000 understood
Credit liability-30000 not understood:)
Why liability?could u explain it please?“Credit liability-30000 not understood:)
Why liability?could u explain it please?”The liability to repay the $30,000 to the council / grantor / government … whoever it was that gave the money
You can’t have this as part of double entry!
Debit depr-20000 understood ie you can’t have a negative debit! If that’s what you wanted to achieve the correct description would be Credit depreciation 20,000
I believe that we need to arrive at the figures that would have been apparent if we had never received the grant
The asset would have been recorded as $90,000 Cost and $30,000 Accumulated Depreciation leaving us with a book value of $60,000
As it is we have brought forward details: asset at $60,000, Accumulated Depreciation at $10,000 and a net book value of $50,000
and the depreciation entry for this current year still has to be recorded
We are trying to finish the year with an asset at $90,000, Accumulated Depreciation of $30,000 and a carry forward amount of $60,000
So the correcting journals, in my opinion, will be:
Dr Asset $30,000
Cr Liability (government or whoever) $30,000and
Dr Statement of profit or loss $20,000 (that’s a $5,000 correction and $15,000 for this year)
Cr Accumulated Depreciation $20,000The combination of Dr Asset $30,000 with Cr Accumulated Depreciation $20,000 is the same as the solution that you have posted Dr Asset $10,000
My $30,000 credit Liability is as above in your post
The one entry missing from your post is the debit of $20,000 expense to take to the statement of profit or loss ($5,000 relating to the adjustment caused by the need to repay the grant and $15,000 depreciation for this year 1/6 x $90,000)
OK?
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