Question

Grand County received a notice from the State that it has been awarded a $175,000 grant to purchase vans used to transport physically challenged individuals. Although the county did not receive any cash from the State related to the grant funds during the current year, the county purchased a bus for $70,000 and issued a purchase order in the amount of $65,000 for a 12-passenger van. What amount of grant revenue should the county recognize in its Government-Wide financial statements for the current year?

1. $-0-.
2. $ 70,000.
3. $135,000.
4. $175,000.

Answer 1

This is the grant received for purchase of a specific fixed asset (van). Their are two ways to recognize this government grant in the books of Grand country.

Method 1:-

The grant revenue will be reduced from the cost of the asset to arrive at the book value. Hence, grant will be recognized in the profit and loss account as reduced charge of depreciation.

Bus	$70,000
Less: Grant received	$70,000
Book value	$0

Passenger van	$65,000
Less: Grant received	$65,000
Book value	$0

Total grant will be $70000+$65000=$135000

Method 2:-

The whole amount of $135000 will be treated as Deferred government grant in the balance sheet. Depreciation will be charged on this amount over the useful life of the asset.

Hence, option c is correct.