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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 2000
I thought as it is a revenue grant it should be recorded initially as
Dr Cash 4000
Cr Deferred income 4000
After 1 year
Cr credited to Income statement 2000
Dr deferred income 2000
So 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 SOFP
Now 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 SOFP
Netting 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.
Dr 2000 exp ( so that only 2000 left included as income )
Cr 2000 liability
Please correct me if my concept is still wrong.
Thank you and best regards.
You are correct on your second post.
Thank you so much.
God Bless you
Have a lovely day