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“A manufacturing entity receives a grant of $3m when it creates 50 jobs. 1.5m is payable when the figure is reached with the remaining 1.5m payable at the end of 4 years should the 50 jobs still be in existence. At the end of year one, 50 jobs have been created and there is reasonable assurance that the employment levels will be maintained when reached.”
what is the deferred income balance at the end of the second year?I have the above question with given answer 1.5m.
However i am unsure why is that so as I have gotten $750k as the answer.
Since the we satisfied 1 of the condition, entitling us the first 1.5m, the remaining 1.5m is entitled to us if we still have 50 jobs by end of year 4, so according to accrual concept, shouldn’t we used 1.5m/4 years = 0.375m/year?By the end of year 1, we would have earned 1.5m + 0.375m, leaving us with 1.125m as deferred income.
By the end of year 2, we would have earned another 0.375m, leaving us with 0.75m as deferred income.
So shouldn’t the answer be $750,000 instead?
Please help. Thank you.
This is,I think, because grants have to be recognised as income over relevant periods to match with related costs to which grant is meant to alleviate.In this case the nature of grant is that two conditions are fundamentally linked to employment of fifty on project.This means that,just as if grant had been linked to machinery,initial 1.5mn should also be recognised over four years.Hope this helps.
@heliousack said:
“A manufacturing entity receives a grant of $3m when it creates 50 jobs. 1.5m is payable when the figure is reached with the remaining 1.5m payable at the end of 4 years should the 50 jobs still be in existence. At the end of year one, 50 jobs have been created and there is reasonable assurance that the employment levels will be maintained when reached.”
what is the deferred income balance at the end of the second year?I have the above question with given answer 1.5m.
However i am unsure why is that so as I have gotten $750k as the answer.
Since the we satisfied 1 of the condition, entitling us the first 1.5m, the remaining 1.5m is entitled to us if we still have 50 jobs by end of year 4, so according to accrual concept, shouldn’t we used 1.5m/4 years = 0.375m/year?By the end of year 1, we would have earned 1.5m + 0.375m, leaving us with 1.125m as deferred income.
By the end of year 2, we would have earned another 0.375m, leaving us with 0.75m as deferred income.
So shouldn’t the answer be $750,000 instead?
Please help. Thank you.
This is because no deferred income will be recognized until the second condition is met.If the second condition was dependent on individual years 2,3 and 4 in that case may be you are right but it,s combined and that means there is deferred income from year 2-4.
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