Question

2. Hi Tech University is going to receive a $2 million grant from the National Hockey Association in December of 2020 to develop an effective neck brace to prevent injuries in its non-goalie hockey players. The terms of the NHA grant covers $1.5 million of direct costs and $0.5 million of overhead costs. In addition, the grant stipulates that the NHA will be the sole beneficiary of the research. The university plans to carry out the required research during 2021 and anticipates that it will incur direct costs totaling $1.5 million.

You are the Accounting Supervisor at the University. The Chief Fiscal Officer, knowing that you recently took a class in Government and Not-for-Profit Accounting, comes to you for advice. The CFO asks you to brief him on the following items…

a. What accounting entries, if any, should Hi Tech make, now that it has been notified of the grant?

b. What accounting entries, if any, should Hi Tech make in 2021?

c. In to which funds would the entries be recorded?

d. What if we make the results of the research available to the general public and not just the NHA? How will that change things?

e. What if the NHA indicates that, instead of providing the funds at the beginning of the grant, it will not make any payments on the research until delivery of the final research product. What effect will that have, if any, on the accounting entries that we plan to make in parts a) and b)?

Answer 1

a. Hi Tech University will pass journal entry for receipt of the grant.

Bank Account Dr. $2 million

To Deferred Grant Income Account $2 million

b. When Hi Tech incur required expenses then it will transfer deferred grant income to capital reserve account.

Deferred Grant Income Account Dr. $2 million

To Capital Reserve Account $2 million

c. Grant received shall be recorded in capital reserve fund since NHA will be the sole beneficiary of the research.

d. If results of the research available to the general public and not just the NHA, then grant income shall be recognise in proft and loss account.

e. If the NHA indicates that, instead of providing the funds at the beginning of the grant, it will not make any payments on the research until delivery of the final research product, then grant income shall be recorded as receivable when Hi Tech becomes entitled to receive grant income i.e. after meeting expenses. Hence no entry shall be passed in 2020 and in 2021 Hi tech will pass journal entry for grant receivable.