Question

Stellar Enterprises purchased a new piece of equipment for its factory under a new government incentive program in exchange for cash. The equipment cost $140,000 and had an estimated useful life of 10 years. The program was intended to encourage companies to invest in new, innovative technologies. The new piece of equipment purchased by Stellar qualified for a government grant of $20,000. Stellar collected the grant after providing proof of the purchase.

Assuming that Stellar uses the cost reduction method, prepare the journal entries to record the purchase of the equipment and the receipt of the government grant.

Assuming that Stellar uses the deferral method, prepare the journal entries to record the purchase of the equipment, the receipt of the grant, and the adjusting entry required at the end of the first year (assuming the equipment was purchased on the first day of the fiscal year).

Answer 1

	Cost of Equipment	140000
	Grant Received	20000
	Useful Life	10	years
(a)	Cost Reduction Method
No.	Particulars	Debit	Credit
1	Equipment Dr	140000
	To cash		140000
	(Being purchase of equipment)
2	Cash Dr	20000
	To Equipment		20000
	(Being Government grant received.)
3	Depreciation Dr	12000
	To Equipment		12000
	(Being Depreciation charged as per SLM)
(b)	Deferral Method
No.	Particulars	Debit	Credit
1	Equipment Dr	140000
	To cash		140000
	(Being purchase of equipment)
2	Cash Dr	20000
	To Deferred Income		20000
	(Being Government grant received.)
3	Deferred Income Dr	2000
	To Income from Government Grant		2000
	(Being Deferred Income amortized over useful life of equipment.)
4	Depreciation Dr	14000
	To Equipment		14000
	(Being Depreciation charged as per SLM)

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