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On 1st January 20X1, Sly received £2m from the local government
on the condition that they employ at least 100 staff each year for the
next 4 years. On this date, it was virtually certain that Sly would meet
these requirements. However, due to an economic downturn and
reduced consumer demand, after one year, Sly no longer needed to
employ anymore staff and the conditions of the grant required full
repayment.
What should be recorded in the financial statements?
A Reduce deferred income balance by $1,500,000
B Reduce deferred income by $1,500,000 and recognise a loss
in the financial statements of $500,000
C Reduce deferred income by $2,000,000
D Reduce deferred income by $2,000,000 and a gain in the
financial statements of $500,000I think the correct answer should be Option B because the repayment of $2m was in full but the expenses of year had already occurred so the losses should be accounted for.Please correct me if i am wrong.
I believe that actual dates are important here. Has Sly already credited the first year’s element to the first year’s profit or loss … and then decided that no more employees were necessary so would have to repay the full amount?
If that’s what you have in mind the, yes, it looks like option B
But if those first year’s figures are still in the preparation stage then it looks like option C would be the correct choice
Do we know the relevant facts?
@mikelittle said:
I believe that actual dates are important here. Has Sly already credited the first year’s element to the first year’s profit or loss … and then decided that no more employees were necessary so would have to repay the full amount?If that’s what you have in mind the, yes, it looks like option B
But if those first year’s figures are still in the preparation stage then it looks like option C would be the correct choice
Do we know the relevant facts?
I think when the examiner used the word “after one year” he meant the first year has been accounted for.Or else Kaplan published a vague question.
If it means “after the first year has been accounted for” then I would agree
But that cannot be correct if you re-consider the wording of the options and particularly option B
“A Reduce deferred income balance by $1,500,000
B Reduce deferred income by $1,500,000 and recognise a loss in the financial statements of $500,000
C Reduce deferred income by $2,000,000
D Reduce deferred income by $2,000,000 and a gain in the financial statements of $500,000”It cannot be option A because, if we have already recognised the first $500,000 as income, then we must now undo it
It cannot be option B because that would indicate that we are looking at the preparation of financial statements for the year ended 31 December, 20X2 but I didn’t get that impression from your post
It could be option C because, if we’re still in the process of preparing the financial statements for the year ended 31 December, 20X1, then we now have the knowledge that the grant is to be repaid in full so Dr Deferred Income $2,000,000 and Cr Grant Repayment Account $2,000,000
It cannot be option D because … well, because option D is stupid!
I’m looking seriously at option C – what does the Kaplan answer say?
Kaplan published a wrong answer for this question. I am sure that answer was for some other question the figures were irrelevant.Well god definitely knows what’s the right answer:)
You want me to post that wrong irrelevant answer for some other question here?
I would like to know what Kaplan has said for the answer – it could be just you that thinks that their answer is for a different question – please allow me to make up my own mind
Thanks
The answer is $40,000
$
Cost 1 April 20X6 50,000
20% depreciation (10,000)
–––––––
Carrying amount 31 March 20X7 40,000
20% depreciation (8,000)
–––––––
Carrying amount 31 March 20X8 32,000
Disposal carrying amount ($25,000 × 80% × 80%) (16,000)
–––––––
Carrying amount after disposal 16,000
Purchase 34,000
–––––––
50,000
20% depreciation (10,000)
–––––––
Carrying amount at 31 March 20X9 40,000
–––––––
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