Question

Siya-So Ltd erected a number of buildings at a cost of $1 000 000 which was settled on 1 January 2007 in cash. These buildings have a useful life of 10 years and were completed and put into use on 1 January 2007.Siya-So Ltd received a government grant of $100 000 on 1 January 2007, which the national government regards it as a priority to provide houses to all citizens.Assume a profit before tax prior to the above transactions of $500 000.

     Required

1. Prepare the journal entries for the year ended 31 December 2007 in respect of the above transactions if it is assumed that the government grant is reflected in the Statement of Financial Position as deferred income.                                 [8]
2. Prepare the journal entries for the year ended 31 December 2007 in respect of the above transactions if it is assumed that the government grant is reflected in the Statement of Financial Position by deducting it from the carrying amount of the asset.                                                                                                               [7]

Answer 1

Buildings A/c Dr. $1000000
To Cash A/c $1000000
(being settled by paying cash)

a. Cash/Bank A/c Dr. $100000
To Deffered Income A/c 100000
(Being Grant received recorded as deffered income)

Deffered Income A/c Dr. $10000
To Profit & Loss $10000
(being amt transfered to p&l, =100000/10) (calculated using useful life of building)

Depreciation A/c Dr.$100000
To Accumulated Depreciation A/c $100000
(Being Depreciation Charged on reduced value .i.e. =(1000000)/10)

Profit & loss Dr. $100000
To Depreciation A/c $100000
(Being Depreciation t/f to p&l A/c)   

b.Cash/Bank A/c Dr. $100000
To Building A/c 100000
(Being grant received recorded as dedction from Asset)

Depreciation A/c Dr.$90000
To Accumulated Depreciation A/c $90000
(Being Depreciation Charged on reduced value .i.e. =(1000000-100000)/10)

Profit & loss Dr. $90000
To Depreciation A/c $90000
(Being expense t/f to p&l)