Bosco Aluworks Ltd, a manufacturer and supplier of aluminium utensils for households, has recently established a new facility in Kumasi. To help in this new operation, Bosco Aluworks Ltd have secured a number of grants from the Government of Ghana and are unsure how the grants are to be accounted for in the financial statements. The company has a year end of 30 April 2017 and all the following transactions took place at 1 May 2016.
i) Bosco Aluworks Ltd has been awarded a grant for GH¢80,000, to be received over three years, in respect of providing employment to fresh graduates in the area.
ii) Bosco Aluworks Ltd received a GH¢5,000 grant from the Ministry of Business Development for the initial training of the new employees.
iii) The company also received a grant of GH¢120,000 from the Ministry of Special Development Initiative towards the acquisition of a GH¢600,000 machine. The machine has a useful economic life of 8 years and an estimated residual value of GH¢60,000. Depreciation is on the straight line basis.
Required:
Explain how each of the above should be accounted for in the financial statements of Bosco Aluworks Ltd for the year ended 31 April 2017, in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. (5 marks)
View Solution for (i)
Credit to the Income Statement in the year in which the expenditure relates.
As this relates to the cost of employment it will be allotted to each year as an offset to the salaries or presented as a separate line item in statement of profit or loss.
GH¢80,000/3 years = GH¢26,667 in year 1 and 2 and the balance in year 3
View Solution for (ii)
Revenue based grant which will be credited in the year the related expenditure is incurred, i.e. the current year
View Solution for (iii)
The grant will be credited to the deferred income account and released over the 8 year economic life of the asset. On the balance sheet the unamortized balance of the grant will be treated as deferred income. GH¢120,000/8 years.
GH¢
Opening balance 120,000
Income statement 15,000
Closing balance 105,000
The asset will be depreciated over 8 years straight line. (GH¢600,000 – GH¢60,000) / 8 years.
Income Statement charge GH¢67,500.*
* Alternative method acceptable.