Government Grants

GOVERNMENT GRANTS
DISCUSSION EXERCISES
STRAIGHT PROBLEMS
1. During the current year, 2021, ARGENTINA. received four government grants in relation to
its operating activities:
FIRST GRANT:
On January 1, 2021, ARGENTINA received cash of P2,000,000 from a foreign government to
be used in helping the company's clean-up drive project on manila bay over a five-year
period. It was estimated that the total cleaning cost is P5,000,000. During the year, the
actual cleaning costs amounted to P1,500,000.
SECOND GRANT:
On April 1, 2021, ARGENTINA received P5,000,000 cash from the local government to be
used in purchasing a production equipment. The equipment was purchased on the same day
with a total cost of P10,000,000 to be depreciated using the straight-line method over 10
years with a residual value of P1,000,000.
THIRD GRANT:
On May 1, 2021, ARGENTINA received a land from the government with a condition that a
factory building should be constructed on it. On that date, the land has a fair value of
P3,000,000. The construction of the factory building was completed on October 1, 2021 with
a total cost of P8,000,000. The building is to be depreciated using SYD method over its
useful life of 15 years.
FOURTH GRANT:
On November 30, 2021, various properties of ARGENTINA were destroyed due to flood the
estimated amount of which is P1,500,000. On December 15, 2021, the company received
P500,000 from government as a financial aid. REQUIREMENTS: (a) Determine the total
income from government grant for the year 2021; (b) Determine the balance of deferred
income from government grant as of December 31, 2021 (c) The net amount presented in
profit or loss for the year 2021 under gross and net presentation.
2. On January 1, 2021, BOLIVIA CORP. was granted by the local government a 4-year, zero-
interest loan of P1,500,000 payable on December 31, 2024. On that date, the prevailing
market rate of interest for this type of loan is 8%. REQUIREMENT: Prepare the necessary
journal entrie's on January 1, 2021 and December 31, 2021 using the gross and net
presentation.
3. BRAZIL CORP: purchased a machine for P6,000,000 on January 1, 2021 and received a
government grant of P500,000 towards the capital cost. The machine is to be depreciated
on a straight line basis over 10 years with a residual value of P500,000. On January 1, 2023,
the grant became fully repayable because of noncompliance with conditions.
REQUIREMENT: What is the depreciation expense for the year 2021 and 2023 using gross
and net presentation?
MULTIPLE CHOICE (THEORIES)

1. According to PAS 20, Accounting for Government Grants and Disclosures of Government
Assistance, which of the following is a government grant?
A. Tax benefits
B. Free technical or marketing advice
C. Public improvements that benefit the entire community
D. Provision of guarantee
E. Non-interest bearing loan from the government
2. Which of the following statements is true relating to a government grant?

I. Receipt of a grant does not of itself provide conclusive evidence that the conditions
attaching to the grant have been or will be fulfilled.
II. Government grant shall not be recognized on a cash basis as this is not consistent with
GAAP.
A. I only C. Both I and II
B. II only D. Neither I nor II
3. S1: Free marketing assistance by the government are accounted for and disclosed in
accordance with PAS 20, Government Grants
S2: Government grants shall be recognized in profit or loss on a systematic basis over the
periods in which the entity recognizes as expenses the related costs for which the grants are
intended to compensate.
S3: The name of the government agency must be disclosed in the notes to financial
statements to maintain transparency on the entity's transactions.
S4: Regardless of method of presentation employed in accounting for government grants,
the net amount to be presented in profit or loss will be the same.
Which of the above statements is correct regarding government grants?
A. S1 only D. S2 and S4 only
B. S1 and S4 only E. S2 only
C. S2 and S3 only
4. Which of the following statements is incorrect when a government provides an interest-free

loan to an entity?
A. No interest expense is recognized.
B. The loan payable is initially reported at the present value.
C. The deferred grant income is amortized over the term of the loan using the straight line
method.
D. The interest element is amortized over the term of the loan using the effective interest
method.
5. Which of the following statements is incorrect in relation to PAS 20, Government Grants?
I. Repayment of grants is treated as a change in accounting policy to be accounted for
currently and prospectively.
II. If the entity opted to present the grant by setting up a deferred income account,
repayment of grant shall be recognized by first increasing the carrying amount of
asset and recognizing additional depreciation that would have been recognized in
profit or loss in the absence of grant.
A. I only C. Both I and II
B. II only D. Neither I nor II
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Government Grants

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GOVERNMENT GRANTS

MULTIPLE CHOICE (THEORIES)

2. Which of the following statements is true relating to a government grant?

4. Which of the following statements is incorrect when a government provides an interest-free

---END OF HANDOUTS ---

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