- 7 Marks
Question
Pampaso Ltd is a fruit processing company listed on the Ghana Stock Exchange with a financial year-end of 31 December. The trial balance for the year ended 31 December 2021 showed a credit balance for government grant of GH¢1,800.
As part of the Local government’s initiative to stimulate employment of fresh graduates from Tertiary institutions in the locality, Pampaso Ltd received a grant of GH¢3 million towards the purchase of additional production machinery on 1 January 2019. The company, accordingly, acquired additional production machinery costing GH¢3 million on that date. The condition attached to the grant was for Pampaso Ltd to employ at least three fresh graduates every year over the estimated five-year useful life of the production machinery. Since January 2019, the company has only recruited one fresh graduate annually.
The non-compliance of the company with the conditions attached to the grant has come to the attention of the Local government, and as a result, the company was instructed on 1 January 2021 to repay 50% of the grant received within eighteen months. Pampaso Ltd uses the deferred income method in accounting for government grants.
Required:
Advise Management of Pampaso Ltd on the accounting treatment of the grant in accordance with IAS 20: Accounting for Government Grants and Disclosure of Government Assistance for the year ended 31 December 2021.
(Total: 7 marks)
Answer
Repayment of government grant of 50% was required due to non-compliance. The company received GH¢3 million on 1 January 2019 and adopted the deferred income method for accounting. Under the deferred income method, the grant is spread over the useful life of the machinery (5 years), so amortization per year = GH¢3,000,000 / 5 = GH¢600,000 annually.
At the start of the repayment period (1 January 2021), the deferred income balance would have been GH¢1,800,000 (3 years x GH¢600,000). Pampaso Ltd was instructed to repay 50% of the grant, equating to GH¢1,500,000.
The accounting treatment should be as follows:
- Repayment Entry (as of 1 January 2021):
Debit: Government grant (deferred income) GH¢1,500,000
Credit: Bank GH¢1,500,000 - The remaining deferred income after the repayment would be GH¢300,000 (GH¢1,800,000 – GH¢1,500,000).
Since Pampaso Ltd had already incorrectly debited administrative expenses with the repayment amount, the wrong entry should be reversed:
Debit: Government grant (deferred income) GH¢1,500,000
Credit: Administrative expenses GH¢1,500,000
The final balance of the government grant at year-end is GH¢300,000, and the company will continue to amortize the remaining grant over the remaining useful life of the machinery.
- Tags: Deferred Income, Government Grants, IAS 20, Repayment
- Level: Level 2
- Topic: IAS 20: Government Grants
- Series: JULY 2023
- Uploader: Uploader1