ExpertMedium2 marksMultiple Choice
ACCA · Question 14 · Government Grants
Section A
GreenEnergy Co received a $200,000 government grant on 1 January 20X3 to purchase a solar array costing $1,000,000 with a 10-year useful life. GreenEnergy accounts for grants as deferred income. On 1 January 20X5, due to a breach of conditions, the entire grant had to be repaid. What is the immediate impact on profit or loss on 1 January 20X5 upon repayment?
Section A
GreenEnergy Co received a $200,000 government grant on 1 January 20X3 to purchase a solar array costing $1,000,000 with a 10-year useful life. GreenEnergy accounts for grants as deferred income. On 1 January 20X5, due to a breach of conditions, the entire grant had to be repaid. What is the immediate impact on profit or loss on 1 January 20X5 upon repayment?
Answer options:
A.
An expense of $200,000
B.
An expense of $40,000
C.
An expense of $160,000
D.
No impact, it is capitalized into the asset cost
How to approach this question
Calculate the remaining balance of the deferred income account. Compare this to the amount being repaid. Any excess repayment goes to P&L.
Full Answer
B.An expense of $40,000✓ Correct
The grant is amortized over 10 years ($20,000 per year). By 1 Jan 20X5 (2 years later), $40,000 has been recognized in P&L, leaving a deferred income balance of $160,000. When the $200,000 is repaid, it first clears the $160,000 deferred income balance. The remaining $40,000 is recognized immediately as an expense in profit or loss.
Common mistakes
Expensing the full $200,000, forgetting that a liability (deferred income) exists to absorb most of the repayment.
Practice the full ACCA FR — Financial Reporting Practice Exam 2
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