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Hi Sir,
I was doing Consolidation questions from Kaplan book and got confused with one grant transaction.
Its written :-1. On 1 July 20X1, saint recieved a government grant for $4000. This grant was provided as a contribution towards the costs of training employees over the next two years.
Saint has reduced its administrative expense by the full $4000.
Correct Ans is
This is a revenue grant.it should be recognized in profit or loss in a systematic basis over two years.
Saint should increase it expense by 2000 and record the balance aa deferred income on SOFP.Dr Administration expenses/R.E 2000
Cr current liabilities 2000I thought as it is a revenue grant it should be recorded initially as
Dr Cash 4000
Cr Deferred income 4000After 1 year
Cr credited to Income statement 2000
Dr deferred income 2000So on that basis
Saint should rectify his mistake like this below
Cr 4000 eliminating all exp 4000 in I/S
Cr 2000 again in I/S to recognise as income
Dr 2000 deferred income in SOFPNow i really think I still have weak concept regarding this standard.
Thank you in advance and best regards.
Ok i think after submitting this Question, I kind of understand now.
I am sorry if i bothered you because due to exam, I am panicking and thats why it took so long to understand this particular transaction that I gave up and needed ur help here.
I thought they added as an administrative expense but actually they wrote it reduced the Administrative expense.
Which means saint
Cr 4000 income I/S
Dr 4000 liability SOFPNetting off with expense.
So now we reverse it
Instead of recognising full income.
We should recognise only 1 year income.But saint already recognized it in full.
So we
Dr 2000 exp ( so that only 2000 left included as income )
Cr 2000 liabilityPlease correct me if my concept is still wrong.
Thank you and best regards.
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