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America Co prepares its financial statement to 31 October each year. During the current year, America Co secured and received a government grant totaling $720,000 to support the digital upskilling of its workforce . $120,000 of the grant relates to investment in new IT equipment and the remainder is to support training across a two-year period from 1 April 20X5 to 31 March 20X7. The grant was received on 30 June 20X5. America Co fully intends to comply with the conditions of the grant. It purchased the new IT equipment on 1 April 20X5 as required and commenced training with immediate effect. America Co deducts grants relating to assets from the carrying amounts of assets.
What amount should be included in non-current liabilities of America Co at the year end 31 October 20X5?
The answer says that we recognise $120,000 as income immediately as terms of that portion of the grant have already been satisfied. However, the question says that we purchase the equipment on 1 April 20X5 while we received the grant on 30 June 20X5 so how are we recognising revenue for it when we receive the grant later? And I also do not understand as to why is it revenue that has to be recognised?
Similar for the remaining $60,000, I understand the calculation for current and non-current liabilities but I do not understand as to how we can ‘assume’ that the conditions of the grant are being satisfied from 1 April 20X5 when it was received on 30 June 20X5?
And if we were asked about the income recorded at the year end 31 October 20X5, would we record ($600,000/2)*7/12 = $175,000, debit deferred income and credit other income?
Hi,
We need to split the 720,000 received and treat each element differently as they are received for different purposes.
120,000 is related to the purchase of the IT equipment. Whatever amount this has been purchased for it is reduced by the 120,000 and the net cost depreciated over the useful life of the asset. I think where the answer refers to recognising it immediately then it is referring to deducting it against the cost immediately as we’ve met the terms of the grant having bought the equipment already.
600,000 is recognised as deferred income and then released over the two year period to profit or loss. As 7 months have passed since 1 April then 175,000 will be released (600,000/24 x 4) with the double entries you state above, thus leaving 425,000 as the total liability at the end of the reporting period. This then needs to be split between current and non-current.
Current = (600,000/24 x 12) = 300,000
Non-current = 425,000 – 300,000 = 125,000The question explicitly says that the training commences immediately from 1 April hence why we begin to recognise the release of the grant from that date.
Hope that all helps.
Thanks,
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