Question

Oriental Hotel Bhd owned a few hotels in Malaysia. Their hotel in Melaka is set against a picturesque vista of Melaka’s most famous historical landmarks pf Melaka Raya. The location is close to Melaka City Centre with cheerful nightlife and mere minutes from the acclaimed UNESCO World Heritage site. The office management operates in the same hotel building as the hotel services provided to its guest. The company itself manages the hotel except for the laundry services which was transferred to its tenant, Cuci-Cuci Services Sdn. BHd.

Oriental Hotel Bhd take another step forward in its expansion plan with the opening a new hotel in the southern region in Malaysia. On 1 January 20X5, the company acquired a land for RM3,200,000 to construct a 4-star hotel building in Pangerang, Johor. Construction of the hotel building commenced on 1 March 20X5 and it was completed on 31 January 20X7, but was only used on 1 March 20X7.Total construction cost incurred excluding borrowing costs were RM34,000,000. The construction cost also includes the rectification of RM200,000. In order to finance the construction, the company took an 8%, 3 year-term loan of RM30,000,000 on 1 February 20X5. The company received a government grant of RM1,400,000 on 1 February 20X7 for the newly constructed hotel building. It is the company’s policy to use deferred income method for the government grant received.

Required:
Explain the accounting treatment for government grant received and how will it differ from the alternative method.

Answer 1

Here is my Answer for the above question

Government grants including ,non monetory grants at fair value,shall be recognised when there is a reasonable assurance that

1. The entity will comply with the conditions attached to them

2. The grant will be received

here in this case the company received a grant of RM 1,400,000 on 01.feb.20x7,so grant has met the criteria of recognition.

Here Grant received related to the newly constructed building,i.e grant related to assets, it shall be presented in the statement of financial position either by setting up the grant as deffered Income or by deducting the grant amount from the value of the asset.

1. Accounting treatment of Government grants under deffered Income method

In this method The grant is recognised in profit or loss on a systematic basis over the useful life of the asset.

here Grant Amount will be RM 1400000,

Accounting entry when grant received

Cash A/c Dr 1400000

To Deffered government grant 1400000

When the Asset is used

Total cost of consturction excluding borrowing cost = RM 3400000

Borrowing cost calculation

Loan amount =RM 3000000

Interest rate= 8%

Loan date= 01.02.20x5

construction completed on 31.01.20x7

Construction started on 01.03.20x5

So boorowing cost will be calculated from the expenditure started date to the completion of construction date.

3000000*8%/12*23=460000

and rectification cost is not not capitalised it should be shown in profit and loss Account,so

The capitalisation of building is

Construction cost- Rectification cost= 3200000

Borrowing cost = 460000

Total will be 3660000

Accounting when asset is used:

Depreciation A/c Dr 366000

To Fixed Asset A/c 366000

Deffered Government grant A/c Dr 140000

To Profit &loss A/c 140000

2. Accounting treatment for Goverment grant under reduction in carrying Amount method

When grant received

Cash/bank A/c Dr 1400000

To Fixed Asset A/c 1400000

Entry when Asset is used, COst of building=3660000-1400000=2260000

Depreciation Expenses A/c Dr 226000

To Fixed Asset A/c 226000