The Financial Director of Multinational Ltd phoned you in your capacity as company auditor, requesting a meeting to discuss the impact that the repayment of a government grant will have on the financial statements for the year ended 31 December 2016. He also informed you that the financial statements should be ready for approval on 20 February 2017, the date of the directors’ meeting.
He furnished you with the following information in order to prepare for the meeting:
i. On 1April 2014 Multinational Ltd received a $500 000 government grant base on a plant that was erected at a cost of $2 500 000 and that was ready for use and brought into production on 1 January 2014. The company became entitled to the grant on the date the plant was brought into use.
ii. The conditions of the grant was that Multinational Ltd should maintain a production level of 2 500 units per financial year for a period five years Should production drop below this level, Multinational Ltd would have to repay the grant on a pro-rata basis, based on the outstanding years over the total years
iii. On 20 January 2017 a revised production report was issued, with actual production units for the financial year ended 31 December 2016 being 1 500 not 2 500 units as originally reported. Consequently, Multinational Ltd paid the pro-rate grant of $200 000 (2/5 years x $500 000) back to the government on 3 February 2016.
iv. The grant was initially deducted from the cost of the plant.
v. The plant is written-off over five years for accounting and taxation purposes (straight-line method)
vi. The grant was not taxable.
a. Discuss the effect that the repayment of the grant will have on the financial statements for the year ended 31 December 2016.
b. Give journal entries in connection with the repayment of the grant for the year ended 31 December 2016 (6)