Question

c) Asaaba Ltd receives a 20% grant towards the cost of a new item of machinery, which cost GH¢ 100,000. The machinery has an expected life of four years and a nil residual value. The expected profits of the company, before accounting for depreciation on the new machine or the grant, amount to GH¢ 50,000 per annum in each year of the machinery's life.

Required Show how Asaaba Ltd should account for this grant in the financial statements over the life of the machinery in accordance with IAS 20 using the i. Netting of method ii. Deferred Income method                                                                   [12 marks]

Answer 1

netting method
                                                 Year 1         Year 2         Year 3           Year 4         Total
Profit before dep.                    _50,000____50,000____50,000_____50,000____200,000
Dep.                                       (20,000)___(20,000)___(20,000)___ (20,000)___(80,000)
Profit                                          30,000____30,000_____30,000_____30,000___ 120,000

The depreciation charge on a straight line basis, for each year, is 1/4 of (100,000 -20,000) = 20,000

Statement of financial position
                                                Year 1_____Year 2____Year 3_____Year 4
Non-current asset    80,000____80,000____80,000_____80,000
Dep.____________________(20,000)____(40,000)___(60,000)___(80,000)
Carrying amount___________ 60,000_____40,000____20,000____

Deferred income

                                                    Year 1_____Year 2_____Year 3_____Year 4_____Total
Profit before dep.___________50,000____50,000_____50,000_____50,000___ 200,000
Dep.*____________________(25,000)___(25,000)___(25,000)____(25,000)__(100,000)
Grant____________________5,000______5,000______5,000______5,000____20,000
Profit____________________30,000_____30,000_____30,000_____30,000_____30,000

Statement of financial position

Non-current asset (cost)______Year 1_____Year 2_____Year 3_____Year 4
Profit before dep.___________100,000___100,000___100,000____100,000
Dep.____________________(25,000)___(50,000)___(75,000)____(100,000)
Carrying amount____________75,000____50,000____25,000______ –

Deferred income___________15,000_____10,000_____5,000_______ –

Entry

Debit Cash, credit Deferred Income