Chapter:7

IAS 20 – GOVERNMENT GRANTS

BPP
Question 1
America Co prepares its financial statement to 31 st October each year. During the current year,
America Co secured and received a government grant totalling $720,000 to support the digital
upskilling of its workforce. $120,000 of the grant relates to investment in new IT equipment and
the remainder is to support training across a two-year period from 1st April 20X5 to 31st March
20X7. The grant was received on 30th June 20X5. America Co fully intends to comply with the
conditions of the grant. It purchased the new IT equipment on 1st April 20X5 as required and
commenced training with immediate effect. America Co deducts grants relating to assets from the
carrying amount of assets.
What amount should be included in non-current liabilities of America Co at the year-end 31st
October 20X5?
 $125,000
 $720,000
 $425,000
 $300,000

Question 2
Broom Co receives a government grant of $1,500,000 on 1st July 20X5 allowing it to purchase
machinery which also costs $1,500,000 on 1st July 20X5. The machinery is depreciated on a
straight-line basis over its ten-year useful life. As Broom Co has incurred the expenditure on the
asset, the accountant has recognised the full amount of the grant received as other income in the
year to 31st December 20X5. Company policy is to account for all grants received as deferred
income.

Identify the adjustment required to correctly account for the government grant at 31st December
20X5.

Account Amount

DEBIT 1) 2)
CREDIT
1) 2)
Pull down list 1

 Accured income
 Deferred income
 Machinery cost
 Other income

Pull down list 2

 $1,425,000
 $1,500,000
 $150,000
 $75,000
 $Nil

Question 3
Batty Co received a government grant of $400,000 on 1 st January 20X5 to cover 50% of the cost
of a new item of machinery. The grant was correctly recorded at that date.
The machinery will be depreciated over its useful life of five years and the residual value is
estimated to be $25,000. Batty Co is expecting to meet all the performance obligations of the
grant.
Using the drag and drop options below, select the double entries requird to record the subsequent
treatment of the grant in the financial statements of Batty Co during the year ended 31 st December
20X5 and the depreciation charge for the year in relation to the machinery. The options may be
used more than once.
DEBIT CREDIT

Other income

Deferred income

Depreciation expense

Accumulated depreciation

Pull down list

 $155,000
 $160,000
 $75,000
 $80,000

Question 4
Zayn Co spent $500,000 sending key staff on a one-day training course which took place on 1st
January 20X6. Zayn Co is expected to benefit from this training for the next two years.

This training course was partly funded by a government scheme and Zayn Co received $50,000
from the government before the training commenced. The remaining balance of $50,000 is due
to be received on 31st December 20X7. Current circumstances indicate that the receipt of the
second instalment is virtually certain.

Selecting your answer from the pull-down list below, what amount should be charged to Zayn
Co’s statement of profit or loss for the year ended 31st December 20X6 to reflect the above
transactions?

Pull down list

 $150,000
 $200,000
 $400,000
 $450,000

KAPLAN
Question 5
A manufacturing entity receives a grant of $1m towards the purchase of a machine on 1 st January
20X3. The grant will be repayable if the entity sells the asset within 4 years, which it does not
intend to do. The asset has a useful life of 5 years.
What is the deferred income liability balance at 30th June 20X3?
$_____________ ,000
Question 6
On 1st January 20X1 Sty received $1m from the local government on the condition that they
employ at least 100 staff each year for the next 4 years. Due to an economic downturn and
reduced consumer demand on 1st January 20X2, Sty no longer needed to employ any more staff
and the conditions of the grant required full repayment.

What should be recorded in the financial statements on 1st January 20X2?

A. Reduce deferred income balance by $750,000

B. Reduce deferred income by $750,000 and recognise a loss of $250,000
C. Reduce deferred income by $1,000,000
D. Reduce deferred income by $1,000,000 and recognise a gain of $250,000

Question 7
Pootle Co received a government grant of $60,000 on 1st September 20X4. The conditions of the
grant State that Pootle Co must employ a local worker on a full-time contract over a five-year
period. Pootle Co expects to meet the conditions of the grant.

The full grant has been recorded as other income for the year ended 31st December 20X4.

What is the adjustment required to account correctly for the grant as at 31st December
20X4?

Account Name Value

Debit
Credit

Select your answer from the following options:

Account Name
Bank
Other Income
Total accrued income
Total deferred income

Value
$4,000
$48,000
$56,000
$57,000

Question 8
Which TWO of the following statements about IAS 20 Accounting for Government Grants
and Disclosure of Government Assistance are true?

A. A government grant related to the purchase of an asset must be deducted from the carrying
amount of the asset in the statement of financial position.
B. A government grant related to the purchase of an asset should be recognised in profit or loss
over the life of the asset.
C. Free marketing advice provided by a government department is excluded from the definition
of government grants.
D. Any required repayment of a government grant received in an earlier reporting period is treated
as prior period adjustment.

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Question 9
In which of the following circumstances can a government grant be recognised as income?

A. The entity has received the grant and is considering the conditions attached to it
B. The entity has fulfilled the necessary conditions and applied for the grant
C. There is reasonable assurance that the entity will comply with the conditions and receive the
grant
D. The entity has received reasonable assurance that if the conditions are complied with, a grant
will be available

Question 10
Which of the following is an acceptable method of accounting for a government grant
relating to an asset?

A. Present the grant separately as deferred income

B. Credit the amount received to profit or loss
C. Add the grant to the carrying amount of the asset
D. Credit the grant to retained earnings

Question 11
A company receives a government grant of $800,000 on 1 January 20X4 in respect of an asset
purchased on the same day for $900,000. The asset is expected to have a useful life of five years
and is depreciated at 25% on a reducing balance basis. The grant is recognised as deferred
income.

What is the deferred income balance as at 31 December 20X5?

A. $600,000
B. $450,000
C. $400,000
D. $200,000

Question 12
Which of the following is an acceptable method of accounting for a government grant
related to income?

A. Credit to “other income”

B. Credit to retained earnings
C. Add to related expense
D. Debit to deferred income

Question 13
Which of the following would NOT be treated as a government grant in accordance with
IAS 20?

A. A new school opens and the local authority makes funds available for equipment
B. The relevant government department provides free advice to a company on doing business in
a foreign country
C. A local employer receives a financial incentive to take on apprentices
D. Following a flood, businesses in the affected area are given grants to enable them to repair
and reopen

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Question 14
Which of the following accounting policies for grants related to assets is allowed under
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance?
 1. Deduct from the cost of related asset in the statement of financial position
2. Include in liabilities in the statement of financial position
3. Credit profit and loss immediately with cash received
A. 1, 2 and 3
B. 1 and 2 only
C. 1 and 3 only
D. 2 and 3 only

Question 15
Under IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance, what is the correct term for a loan which the lender undertakes to waive
repayment of under certain conditions?

A. A forgivable loan
B. A non-payable loan
C. A non-recourse loan
D. A recourse loan

Question 16
Under IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance, how is a government grant related to depreciable assets treated in the
statement of profit or loss?

A. It is recognised over the period and in the proportions in which depreciation expense on
those assets is recognised
B. It must be recognised in the year in which the depreciable asset is received and the following
year only
C. It must be recognised over a period of five years
D. It must be recognised over a period of no more than 10 years

Question 17
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance defines
government assistance as an action by government designed to provide an economic benefit
specific to an entity qualifying under certain criteria.

Which TWO the following are examples of government assistance?

A. Free technical or marketing advice

B. Provision of infrastructure by improvement to the general transportation network
C. Supply of improved facilities such as irrigation
D. A cash grant to buy a new item of plant
E. Provision of a guarantee if external party defaults on a contract

Question 18
On 1st January 20X1, Emex received a government grant of $100,000 to assist in the purchase
of new machinery costing $1,000,000 with a useful life of five years.

The accounting policy is to offset the grant against the cost of the asset.

Match the amounts to be recognised for depreciation expense for the year ended 31st
December 20X2 and the provision for the repayment of the grant as at 31st December 20X2.

Depreciation expense Select one

$0 $60,000 $100,000 $180,000 $200,000

Provision Select one

$0 $60,000 $100,000 $180,000 $200,000

Question 19
On 1st August 20X4, Flash Co received a $12m training grant from the government on condition
that it employed ten graduates from local universities in each of the next three years. If the
condition were to be broken, the full amount of the grant would be repayable. On the date the
grant was received it was considered virtually certain that the condition would be met.

However, during August 20X6, it became apparent that the economy was entering a severe
recession. In that month Flash Co decided it would not employ any further graduates for the
foreseeable future.

By how much will Flash Co's profit for the year ended 31 July 20X7 be reduced as a
result of the repayment of the grant?

A. It would not be reduced

B. $4m
C. $8m
D. $12m

Question 20
Zayn Co spent $500,000 on 1 January 20X6 sending its key staff on a one-day training course
which took place at the beginning of the current financial year. Zayn Co is expected to benefit
from this training for the next two years.

This training course was partly funded by a government scheme and Zayn Co received $50,000
from the government before the training commenced. The remaining balance of $50,000 is due
to be received on 31 December 20X7. Current circumstances indicate that the receipt of the
second instalment is virtually certain.

What amount should be expensed to Zayn Co’s statement of profit or loss for the year
ended 31 December 20X6 in respect of the above transactions?

Question 21
Millhouse Co received a government grant on 1 October 20X8. The grant was to help fund
rental costs of a factory in an urban regeneration area. The conditions of the grant were that the
factory must be rented and used for at least one year. Millhouse Co rented a factory from 1 July
20X9 and was confident that the conditions of the grant would be met. Millhouse Co owns other
factories in different areas.

Which TWO of the following correctly reflect the accounting treatment for the
government grant that could be adopted by Millhouse Co in its financial statements for
the year to 30 September 20X9?

A. Recognise the grant in full as other income in the statement of profit or loss
B. Deduct the full amount of the grant from the cost of factories in the statement of financial
position
C. Recognise three months of grant income as other income in the statement of profit or loss
D. Deduct three months of grant income from the factory rental expense in the statement of
profit or loss
E. Deduct the full amount of the grant from the factory rental expense in the statement of profit
or loss
Question 22
Pootle Co received a government grant of $60,000 on 1st September 20X4. The conditions of
the grant state that Pootle Co must employ a local worker on a full-time contract over a five-year
period. Pootle Co expects to meet the conditions of the grant.

The full grant has been recorded as Other Income for the year ended 31st December 20X4.

What is the adjustment required to account correctly for the grant as at 31 st December
20X4?

Debit: Account name Select one

Total accrued Total deferred Other income Bank
income income

Credit:
Total accrued Total deferred Other income Bank
income income

Account name Select one

Value Select one
$4,000 $48,000 $56,000 $57,000

Question 23
Theo Co acquired new plant on 1 January 20X3 for $6m. This was partly funded by the receipt
of a $2m government grant on the same date. The plant has a useful life of 10 years. Theo Co
is unsure whether to deduct the grant to calculate the carrying amount of the plant or to use the
deferred income method.

Based on the different ways to account for government grants, which TWO of the
following options can be recognised in the statement of financial position for the year
ended 31 December 20X3?

A. Non-current liability of $1.8m

B. Non-current liability of $1.6m
C. Non-current asset of $4m
D. Non-current asset of $3.6m