1.

Uranus Company received a government grant under the following independent situations:
Prepare journal entries for the first year to record each independent government grant.
1) Received a grant of P30,000,000 from the Japanese government in order to defray safety
and environmental costs within the area where the entity is located. The safety and
environmental costs are expected to be incurred over four years, respectively, P2,000,000, P
4,000,000, P6,000,000 and P8,000,000.
Grant in recognition of SPECIFIC EXPENSES shall be recognized as INCOME over the period
of the related expense.

If the problem is silent, use the Deferred income approach.

Note that the grant received may be more than (or less than) the expected expenses to be
incurred.

Cash 30,000,000
Deferred grant income 30,000,000

Environmental expenses 2,000,000

Cash 2,000,000

Year-end :
Deferred grant income 3,000,000
Grant income 3,000,000

2M + 4M + 6M + 8M = 20 M
2/20 x 30 M = 3 M

What is the balance of Deferred grant income (noncurrent liability) at the end of 1 st year?

DGI beginning 30,000,000

Less Grant income ( 3,000,000)
DGI ending 27,000,000
 2) Received a grant of P40,000,000 from the Canadian government for the construction of
laboratory and research facility with an estimated cost of P50,000,000 and useful life of 20
years.
Grant related to DEPRECIABLE ASSET shall be recognized as INCOME over the periods and
in proportion to the depreciation of the related asset.

Note that the amount of grant may be less than (or more than) the cost of the plant to be
constructed.

Cash 40,000,000
Deferred grant income 40,000,000

Building 50,000,000
Cash 50,000,000

Year-end :

Depreciation expense 2,500,000

Accumulated depreciation 2,500,000
50 M – 0 / 20 yrs

Deferred grant income 2,000,000

Grant income 2,000,000
40 M / 20 = 2 M

What is the balance of the DGI at the end of 1st year?

40 M – 2 M = 38 M

What is the carrying amount of the building at the end of 1 st year?

50 M – 2.5 M = 47.5 M

3) It was granted a large tract of land in Cordillera by the Philippine government. The fair value
of the land is P50,000,000. The grant requires that the entity shall construct a factory and
employ only personnel residing in the Cordillera region. The cost of the factory is P80,000,000
with useful life of 25 years.
4) Received a grant of P10,000,000 from the Australian government to compensate for massive
losses incurred because of a recent earthquake.

Grant that becomes receivable as COMPENSATION FOR EXPENSES OR LOSSES ALREADY

INCURRED or for the purpose of giving IMMEDIATE FINANCIAL SUPPORT to the entity with
NO FURTHER RELATED COSTS shall be recognized as INCOME of the period in which it
becomes receivable.

Cash 10,000,000
Grant income 10,000,000

*There is no Deferred grant income (liability) in this case.

2. On January 1, 2020, Polaris Company was granted by a local government authority 5,000
hectares of land located near the slums outside the city limits. The condition attached to this
grant was that entity shall clean up this land and lay roads by employing laborers from the
village where the land is located. The government has fixed the minimum wage payable to the
workers. The entire operation will take 3 years and is estimated to cost P10,000,000.
This amount will be spent P2,000,000 for 2020, P2,000,000 for 2021, and P6,000,000 for 2022.
The fair value of the land is P12,000,000.
Prepare journal entries for the current year in connection with the grant.

Land 12,000,000
Deferred grant income 12,000,000
Land improvement 2,000,000
Cash 2,000,000

Year-end :
Deferred grant income 2,400,000
Grant income 2,400,000
2M + 2M + 6 M = 10 M
2/10 x 12M = 2.4 M

*Land improvement should be depreciated over its useful life; however in this problem,
No useful life is given, thus, depreciation cannot be computed.

What is the balance of DGI at the end of 1st year? 12M – 2.4M = 9.6M

3. At the beginning of current year, Solaris Company received a consolidated grant of

P12,000,000. Three-fourths of the grant will be utilized to purchase a college building for
students from underdeveloped or developing countries. The balance of the grant is for
subsidizing the tuition cost of those students for four years from the date of grant. The building
was purchased in early part of January and is to be depreciated using straight line over 10
years. The tuition costs paid in the current year amounted to P600,000.

Prepare journal entries for the current year.

4. At the beginning of current year, Apollo Company purchased a machine for P7,000,000 and
received a government grant of P1,000,000 toward the capital cost. The machine is to be
depreciated on a straight-line basis over 5 years and estimated to have a residual value of
P500,000 at the end of this period.

Prepare journal entries for the current year assuming the grant is accounted for as a) deferred
income and b) deduction from asset.

Deferred income approach Deduction from asset approach

Machinery 7,000,000 Machinery 7,000,000

Cash 7,000,000 Cash 7,000,000
Cash 1,000,000 Cash 1,000,000
Deferred grant income 1,000,000 Machinery 1,000,000

Year-end: Year-end :
Deferred grant income 200,000
Grant income 200,000 No entry
1M / 5 yrs
Depreciation 1,300,000 Depreciation 1,100,000
Accumulated depreciation 1,300,000 Accumulated depreciation 1,100,000
7M – 500 T /5 yrs = 1.3M 7M – 1M = 6 M
6M – 500T / 5 yrs = 1.1 M
Balance of DGI end of 1st year
1M – 200T = 800 T Balance of DGI : none
There’s no DGI and grant income under this
Approach

CA of Machinery end of 1st year CA of machinery end of 1st year

7M – 1.3M = 5.7M 6M – 1.1 = 4.9 M
5. At the beginning of current year, Milkyway Company purchased a plating machine for
P5,400,000. The entity received a government grant of P400,000 toward this capital cost.
The machine is to be depreciated on a 20% reducing balance basis over 10 years. The
estimated residual value is P200,000.

Prepare journal entries for the year, assuming the grant is accounted for as a) deferred income
and b) deduction from asset.
7. Lunar Company purchased a machine for P3,000,000 on January 1,2020. The entity received
a government grant of P500,000 in respect of this asset. The policy is to depreciate the asset
over 5 years on a straight-line basis and to treat the grant as deferred income. On January 1,
2020, the grant became fully repayable because of noncompliance with conditions.

Prepare journal entries for 2020,2021 and 2022.

8. Solar Company received a government grant of P2,000,000 related to a factory building that
it purchased in January 2020 from an industrialist identified by the government. If the entity
did not purchase the building, which was located in the slums of the city, it would have been
repossessed by the government agency. The entity purchased the building for P12,000,000.
The useful life of the building is 5 years with no residual value.

On January 1, 2021, the entire amount of the government grant became repayable by reason
of noncompliance with conditions attached to the grant.

Prepare journal entries assuming the government grant is accounted for using:
1. Deferred income approach
2. Deduction from asset approach
9. On January 1, 2020, Saturn Company purchased a plating machine for P5,400,000. The entity
received a government grant of P400,000 toward the asset cost. The machine is to be
depreciated on a 20% reducing balance basis over 10 years with residual value of P200,000.
The accounting policy is to treat the government grant as a reduction in the cost of the asset.

What is the carrying amount of the machine on December 31, 2021?

Deduction from asset approach

5.4 M – 400 T = 5M

1.1.20 5,000,000
Depn 20 ( 1,000,000) 20% x 5M
12.31.20 4,000,000
Depn 21 ( 800,000) 20% x 4M
12.31.21 3,200,000

Under the reducing or double declining balance method, residual value is ignored.

10. Mars Company purchased a machine for P6,600,000 on January 1,2020 and received a
government grant of P600,000 toward the asset cost. The accounting policy is to treat the
grant as a reduction in the cost of the asset. The machine is to be depreciated on a straight line
basis over 10 years with a residual value of P500,000.

On January 1, 2022, the grant became fully repayable because of noncompliance with
conditions.
1. What is the depreciation for 2020?
6.6 M – 600 T = 6M
6M – 500T / 10 = 550,000
11. On January 1, 2020, the city government agreed to provide Earth Company with a
P5,000,000 three-year, zero-interest loan evidenced by promissory note. The prevailing rate of
interest for a loan of this type is 10%.

1. What is the journal entry to record the loan and grant?

Face of the note 5,000,000
PV of the note 5M x 0.751 3,755,000
Discount on NP 1,245,000  this is also the Deferred Grant Income
Entry
Cash 5,000,000
Discount on note payable 1,245,000
Note payable 5,000,000
Deferred grant income 1,245,000
2. What is the interest expense for 2020?
3. What is the deferred grant income on December 31,2020?
4. What is the carrying amount of the note payable on December 31,2021?

Date Amortization DNP ; DGI PV

Int exp; Grant income
1.31.20 1,245,000 3,755,000
12.31.20 375,500 869,500 4,130,500
12.31.21 413,050 456,450 4,543,550
#2 #3 #4
Entries on 12.31.21

Interest expense 413,050

Discount on note payable 413,050

Deferred grant income 413,050

Grant income 413,050