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On 1 January 20X6, Gardenbugs Co received a $30,000 government grant relating to equipment which cost $90,000 and had a useful life of six years. The grant was netted off against the cost of the equipment.
On 1 January 20X7, when the equipment had a carrying amount of $50,000, 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 31 December 20X7, this had not yet been done.
Which journal entry is required to reflect the correct accounting treatment of the government grant and the equipment in the financial statements of Gardenbugs Co for the year ended 31 December 20X7?
Dr Property, plant and equipment $10,000
Dr Depreciation expense $20,000
Cr Liability $30,000Dr Property, plant and equipment $15,000
Dr Depreciation expense $15,000
Cr Liability $30,000Dr Property, plant and equipment $10,000
Dr Depreciation expense $15,000
Dr Retained earnings $5,000
Cr Liability $30,000Dr Property, plant and equipment $20,000
Dr Depreciation expense $10,000
Cr Liability $30,000Hi,
This is very similar to your last post. I’m not just here to answer a question from a revision kit somewhere. Please let me know what you do not understand and then I can help.
Thanks
Chris
Hello Chris,
Thanks for the response, I promise to change my approach.
I think it is option D. This is because the loan has to be repaid fully.
The depreciation for each of the remaining 5 years is 10,000 and the 20,000 is the balancing figure. Is that a genuine basis?
I was also confused by the fact that the carrying amount is 50,000 after 1 year instead of 75,000.
Thanks.
Hi,
IAS 20 says that the repayment is dealt with under IAS 8 as a change in accounting estimate and that the repayment is treated as an increase in the carrying amount of the asset, with any cumulative depreciation recognised through profit or loss.
The carrying value is 50 (60 cost – 10 depreciation (=60/6)) and this needs to be 75 (90 cost – 15 depreciation (=90/6)), so an increase of 25.
To do this then I would DR Cost 30 CR Liability (repayment) 30, and then charge the additional deprecation of 5 by DR Depreciation expense 5 CR Accumulated depreciation 5.
In their answer they will have DR PPE 25 (30 cost – 5 acc depn) DR Depreciation 5 CR Liability 30. This would then leave the PPE at 75 and the liability at 30 as required.
We then need to charge the depreciation for the y/e Dec X7 of 15. DR Depn exp 15 CR Acc depn/PPE 15.
The total depreciation is now 20 (5 + 15) and the PPE is reduced by a further 15. So therefore, overall the DR to PPE is 10 (25 – 15), the DR to depreciation expense is 20 (5 + 15) and the CR to the liability is 30. Therefore the answer is A.
If you got a question like this in the exam then I’d recommend that you guess the answer and move on, as you’re better off spending time on the easier questions.
Thanks
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