Question

Prepare the journal entry(ies)

Note receivable

Doyle Games is a local game company that needed some new computers and virtual

reality studio equipment. In January, All Starr entered into an agreement with Doyle

Games, selling it $80,000 in equipment but agreeing not to collect for three years. Doyle

Games is expecting a grant from the government that will be paid in three years’ time.

All Starr would normally charge interest of 8%, but has agreed to waive interest for this

contract. The controller included the balance in accounts receivable at $80,000.

Answer 1

Solution:

If an entity receives the grant for acquisition of some assets, there are 2 options to present such grant in the financial statements:

1. To present it as deferred income; or
2. To deduct the grant from the carrying amount of an asset acquired.

In the given case, the entity (Doyle Games) is expecting grant in three year's time, therefore it will be appropriate to recognize the grant over a period of three years as and when it is received from the government (Following Option 1 - To present it as deferred income).

Hence, the treatment done by the controller of including in the account receivable $80,000 is INCORRECT.

Following are the Journal Entries:

Sr. No.	Particulars	Debit Amount	Credit Amount
1	Equipment/Asset account	$80,000
	All Starr account		$80,000
2	Cash/Bank account	$26,667
	P/L - Income from Grants account		$26,667

Notes:

(i) The second journal entry will be repeated in year 2 and 3 on the receipt of grant.

(ii) Receipt of grant over three years is assumed as receipt of an equal amount each year ($26,667 * 3 years)

(iii) Interest @ 8 % will not be accounted for separately as it is already waived and has no impact on the entity's financial statements. Hence, ignored.