Products

Holooly Rewards

We are determined to provide the latest solutions related to all subjects FREE of charge!

Please sign up to our reward program to support us in return and take advantage of the incredible listed offers.

Enjoy Limited offers, deals & Discounts by signing up to Holooly Rewards Program

Holooly Ads. Manager

Advertise your business, and reach millions of students around the world.

Holooly Tables

All the data tables that you may search for.

Holooly Arabia

For Arabic Users, find a teacher/tutor in your City or country in the Middle East.

Holooly Sources

Find the Source, Textbook, Solution Manual that you are looking for in 1 click.

Holooly Help Desk

Need Help? We got you covered.

Chapter 6

Q. 6.24

As provided in the pre-accession strategy, one of the ways in which the European Union supports the development of Candidate States is by co-financing projects for small and medium sized enterprises. Assume that on December 5th, 20X3, Construct SRL is awarded a grant of 5000 euros through the EU programme for the purchase of a micro rolling mill for small steel structures. Construct SRL orders the equipment the same day. The grant is received in the company’s bank account on December 20th, 20X3. Acquisition and installation costs of the rolling mill amount to 10,000 euros as shown in the manufacturer’s invoice dated December 20th 20X3. The invoice is paid immediately.

The rolling mill is ready for use in January, 20X4. How should
Construct SRL account for the grant and the related transactions?

Step-by-Step

Verified Solution

a) The company intends to use the grant for the purpose it has been awarded and there is reasonable assurance that the grant will be received (all previously awarded grants have reached their recipients).
Upon issue by the EU authority, the company recognises the investment grant at the exchange rate on December 5th, 20X3:
5000 euros * 3.6 lei/euro = 18,000 lei


18,000 lei                Investment grants receivable        =         Investment grants (Deferred revenue)                      18,000 lei


 

b) On December 20th, the amount of the grant is transferred to the company’s bank account. In the company’s Cash in Foreign Currency account the amount is exchanged for lei (exchange rate 3.63 lei/euro):


18,150 lei Bank account in foreign currency      =      %                                                            18,150lei

Investment grants receivable            18,000 lei
Exchange gain                                       150 lei


 

c) The company receives the micro rolling mill and the invoice from its manufacturer, ElectricWerk NV, on December 20th (exchange rate 3.63 lei/euro). The amount payable is translated in lei at the spot exchange rate:
10,000 euros * 3.63 lei/euro = 36,300 lei


36,300 lei       Equipment       =      Current asset suppliers           36,300 lei


 

d) The equipment is exempted from customs tax, but not from VAT, which must be paid on imported goods at the rate of 19% (36,300 lei * 19%).


6897 lei            VAT deductible          =        Cash            6897 lei


 

e) Construct SRL immediately pays 10,000 euros to the manufacturer of the equipment.
10,000 euros * 3.63 lei/euro = 36,300 lei


36,300 lei            Non-current asset suppliers       =           Cash in foreign currency              36,300 lei


 

Extract from the Profit and Loss Account for the year 20X3
Exchange gain               150 lei
Extract from the Balance Sheet as of December 31st, 20X3

Non-current assets Cost Accumulated depreciation Carrying amount
Equipment 36,300 lei 36,300 lei
Deferred revenues
Investment grants 18,000 lei

 

f) and g) Construct SRL estimates a useful life of 10 years and a straight-line depreciation pattern. As the rolling mill is ready for use in January 20X4, parallel to accounting for the depreciation of the  rolling mill, the company amortises the investment grant. The Profit and Loss Account of the year 20X4 will thus only show the company’s  contribution towards the cost of the equipment spread over the useful life, that is:

36,300/10–18,000/10 = 1830 lei


3630 lei             Depreciation expense        =         Accumulated depreciation of equipment                 3630 lei


 


1800 lei                Investment grants (deferred revenue)         =           Revenue from investment grants                1800 lei


 

Extract from the Profit and Loss Account for the year 20X4 (lei)
Revenue from investment grants                   1800 lei
Depreciation expense                                      (3630) lei

Extract from the Balance Sheet as of December 31st, 20X4 (lei)

Non-current assets Cost Accumulated depreciation Carrying amount
Equipment 36,300 lei 3630 lei 32,670 lei
Deferred revenues
Investment grants 16,200 lei

 

Alternatively, under the second option provided by IAS 20, the company could have deducted the grant from the acquisition cost of the asset. Entries a) through e) remain unchanged.
f) A different carrying amount of the asset emerges:


18,000 lei            Investment grants           =          Equipment                    18,000 lei


 

Extract from the Profit and Loss Account for the year 20X3 (lei)
Exchange gain                                    150 lei
Extract from the Balance Sheet as of December 31st, 20X3 (lei)

Non-current assets Cost Investment grant Carrying amount
Equipment 36,300 lei (18,000) lei 18,300 lei

 

g) As the equipment is ready to use in January 20X4, the carrying amount of 18,300 lei (36,300 − 18,000) will be depreciated  from the estimated useful life, resulting in an annual depreciation charge of:
(36,300 − 18,000)/10 = 1830 lei


1830 lei                      Depreciation expense          =          Accumulated depreciation of equipment                         1830 lei


 

Extract from the Profit and Loss Account for the year 20X4 (lei)
Depreciation expense            (1830) lei
Extract from the Balance Sheet as of December 31st, 20X4 (lei)

Non-current assets Cost Accumulated depreciation Carrying amount
Equipment 36,300 lei 3630 lei 32,670 lei