ATENEO DE DAVAO UNIVERSITY
SCHOOL OF BUSINESS AND GOVERNANCE
AI 1 – Accounting Integration
1st Semester, A.Y. 2019-2020
RM#8 – Government Grants
1. On January 1, 2019, Honduras Company
received a government grant of P60,000,000 to
compensate for costs to be incurred in planting
trees over a period of 5 years. The company will
incur such costs at P2,000,000 for 2019,
P4,000,000 for 2020, P6,000,000 for 2021,
P8,000,000 for 2022, and P10,000,000 for 2023.
What amount of income from the government
grant is recognized for 2019?
a. 12,000,000
b. 8,000,000
c. 6,000,000
d. 4,000,000
2. I Company received a government grant of
P15,000,000 to install and run a windmill in an
economically backward area. The entity has
estimated that such a windmill would cost
P25,000,000 to construct.
The secondary condition attached to the grant is
that the entity shall hire labor in the local market
from the economically backward area where the
windmill is located, instead of employing workers
from other parts of the country.
The entity shall maintain a ratio of 1:1 local
worker to workers from outside in its labor force
for the next 5 years. The construction was
completed at the beginning of current year. The
windmill is to be depreciated using the straight
line method over a period of 10 years.
What amount of income from the government
grant is recognized for the current year?
a. 1,500,000
b. 3,000,000
c. 2,500,000
d. 5,000,000
3. P Company purchased a varnishing machine for
P6,000,000 on January 1, 2019. The entity
received a government grant of P540,000 in
respect of this asset. The accounting policy is to
depreciate the asset over 4 years on a straight line
basis and to treat the grant as deferred income.
What should be the carrying amount of the
machine and the deferred income on December
31, 2020, respectively?
a. 3,000,000 and 270,000
b. 4,500,000 and 405,000
c. 3,270,000 and 270,000
d. 3,000,000 and 540,000
Q Company purchased a varnishing machine for
P3,000,000 on January 1, 2019. The entity
received a government grant of P500,000 in
respect of this asset. The accounting policy is to
depreciate the asset over 4 years on a straight line
basis and to treat the grant as deferred income.
4. What is the carrying amount of the asset on
December 31, 2019?
a. 3,000,000
b. 2,250,000
c. 2,500,000
d. 1,875,000
5. What amount of income from the government
grant is recognized for 2019?
a. 500,000
b. 125,000
c. 250,000
d. 0
6. F Company purchased a jewel polishing
machine for P3,600,000 on January 1, 2019 and
received a government grant of P500,000 in
relation to the asset. The accounting policy is to
treat the grant as a reduction in the cost of the
asset. The machine is to be depreciated on a
straight line basis over 8 years and estimated to
have a residual value of P50,000 at the end of this
period.
What is the depreciation expense of the machine
for the year ended December 31, 2019?
a. 387,500
b. 762,500
c. 443,750
d. 381,250
P Company purchased a machine for P6,600,000
on January 1, 2019 and received a government
grant of P600,000 toward the asset cost. The
policy is to treat the grant as a reduction in the cost
of the asset. The machine is to be depreciated on a
straight line basis over 10 years with a residual
value of P500,000.
On January 1, 2021, the grant became fully
repayable because of noncompliance with
conditions.
7. What is the depreciation for 2019?
a. 610,000
b. 600,000
c. 660,000
d. 550,000
8. What is the depreciation for 2021?
a. 610,000
b. 600,000
c. 780,000
d. 730,000
9. T Company received a government grant related
to depreciable asset five years ago on January 1,
2014 in the amount of P1,000,000. The grant was
deducted from the capital cost of the asset
purchased at a total amount of P6,000,000 on the
same date with a useful life of 10 years and no
residual value. On January 1, 2019, the entire
P1,000,000 became repayable due to lack of
compliance with the conditions attached to the
grant.
What total amount should be recognized as 15. What is the carrying amount of the note
depreciation expense for 2019? payable on December 31, 2020?
a. 1,000,000 a. 5,000,000
b. 1,100,000 b. 3,380,850
c. 700,000 c. 4,132,150
d. 600,000 d. 4,545,365

10. On January 1, 2019, D Company received a 16. On January 1, 2019, G Company received
grant of P1,500,000 from the government to P12,000,000 as government grant to compensate
subsidize tuition fees for a period of 5 years. On for costs incurred in planting 100 trees every year
January 1, 2021, the entity violated certain in a reforestation area over a period of 3 years. On
conditions attached to the grant and therefore had January 1, 2020, the entire amount of the
to repay P1,200,000 to the government. government grant became repayable because the
entity has never planted trees in 2019 which is a
What amount should be recognized as loss clear noncompliance of the conditions of the grant.
resulting from the repayment of the grant in 2021? What amount of loss on repayment of grant should
a. 1,200,000 be recorded on January 1, 2020?
b. 900,000 a. 8,000,000
c. 600,000 b. 12,000,000
d. 300,000 c. 4,000,000
d. none because the period of the grant is 3 years.
11. On January 1, 2019, G Company purchased a
plating machine for P5,400,000. The entity On January 1, 2019, H Company received
received a government grant of P400,000 toward P10,000,000 as government grant related to a
the asset cost. The machine is to be depreciated on building that in purchased on same date at a cost
a 20 % reducing balance basis over 10 years. The of P50,000,000. The useful life of the building is
estimated residual value is P200,000. The 10 years with no residual value.
accounting policy is to treat the government grant
as a reduction in the cost of the asset. On January 1, 2021, the entire amount of the
government grant became repayable due to lack of
What is the carrying amount of the machine on compliance with the conditions attached to the
December 31, 2020? government grant.
a. 4,000,000
b. 4,040,000 17. Under the deferred income approach, what is
c. 3,456,000 the loss on repayment of grant on January 1, 2021?
d. 3,200,000 a. none
b. 2,000,000
On January 1, 2019, the city government agreed c. 8,000,000
to provide P Company with a P5,000,000 three- d. 10,000,000
year, zero-interest loan evidenced by promissory
note. The prevailing rate of interest for a loan of 18. Under the deferred income approach, what is
this type is 10% and the present value of 1 at 10% the carrying amount of the building on December
is 0.7513. 31, 2021?
a. 50,000,000
12. What is included in the journal entry to record b. 35,000,000
the loan and grant? c. 30,000,000
a. Debit discount on note payable d. 25,000,000
P1,243,500
b. Credit deferred grant income 19. Under the deduction from asset approach, what
P1,243,500 is the loss on repayment of grant on January 1,
c. Credit note payable P5,000,000 2021?
d. All of these are included in the journal a. none
entry. b. 2,000,000
c. 8,000,000
13. What is the interest expense for 2019? d. 10,000,000
a. 500,000
b. 375,650 20. Under the deduction from asset approach, what
c. 124,350 is the carrying amount of the building on
d. 338,085 December 31, 2021?
a. 50,000,000
14. What is the deferred grant income on b. 35,000,000
December 31, 2019? c. 30,000,000
a. 1,243,500 d. 25,000,000
b. 867,850
c. 829,000 On January 1, 2019, an entity received an interest-
d. 375,650 free loan from the national government for
P10,000,000 for a period of 3 years evidenced by a
promissory note. The market rate of interest for
similar loan is 5%. The PV of 1 at 5% for 3
periods is 0.8638.
21. What is the deferred grant income on
December 31, 2019?
a. 0
b. 1,362,000
c. 930,100
d. 476,604
22. What is the discount on notes payable on
December 31, 2020?
a. 0
b. 1,362,000
c. 930,100
d. 476,604
23. What is the interest expense in 2021?
a. 0
b. 476,404
c. 930,100
d. 500,000
PART 2 THEORIES
1. This represents assistance by government
in the form transfer of resources to an
entity in return for past or future
compliance with certain conditions
relating to the operating activities of the
entity.
a. Government Grant
b. Government Assistance
c. Government donation
d. Government Aid
2. Government grant shall be recognized
when there is reasonable assurance that
a. The entity will comply with the
conditions of the grant.
b. The grant will be received
c. The entity will comply with the
conditions of the grant and the grant
will be received.
d. The grant must have been received
3. This is government grant whose primary
condition is that and entity qualifying for
the grant shall purchase, construct or
otherwise acquire long-term asset.
a. Grant related to asset
b. Grant related to income
c. Government gift
d. Government appropriation
4. Government grant in recognition of
specific costs is recognized as income.
a. Over the same period as the relevant
expense
b. Immediately
c. Over a maximum of 5 years using
straight line.
d. Over a maximum of 5 years using sum
of digits.
5. Government grant related to depreciable
asset is recognized as income
a. Immediately
b. Over the useful life of the asset using
straight line.
c. Over the useful life of the asset using
sum of years’ digits
d. Over the useful life of the asset and in
proportion to the depreciation of the
asset.
6. Government grant related to
nondepreciable asset that requires
fulfilment of certain conditions.
a. Should not be recognized as income.
b. Should be recognized as income
immediately.
c. Should be recognized as income over
40 years.
d. Should be recognized as income over
the periods which bear the cost of
meeting the conditions.
7. A government grant that becomes
receivable as compensation for expenses
or losses already incurred or for the
purpose of giving immediate financial
support to the entity with no future related
costs should be recognized as income.
a. When received.
b. Of the period in which it becomes
receivable.
c. Over a maximum of 5 years using
straight line
d. Over a maximum of 10 years using
straight line.
8. A government grant that becomes
repayable shall be accounted for as
a. Change in accounting estimate
b. Change in accounting policy
c. Both change in accounting estimate
and change in accounting policy
d. Neither change in accounting estimate
nor change in accounting policy
9. Repayment of grant related to income
shall be
a. Recognized as component of other
comprehensive income
b. Charged to retained earnings
c. Expensed immediately
d. Applied first against the deferred
income balance and any excess shall
be recognized immediately as an
expense.
10. Repayment of grant related to an asset
shall be recorded by
a. Increasing the carrying amount of the
asset if the deduction approach is
used.
b. Recognition as expense the
cumulative additional depreciation
that would have been recorded to date
in the absence of the grant if the
deduction approach is used.
c. Reducing the deferred income balance
to zero if the deferred income
approach is used.
 d. All of these.
11. It is an action by a government designed to
provide an economic benefit specific to an
entity and for which the government cannot
reasonably place a value.
a. Government grant
b. Government assistance
c. Government takeover
d. Subvention
12. Government assistance includes all the
following except
a. Free technical advice
b. Provision of guarantee
c. Government procurement policy.
d. Improved irrigation water system for
the benefit of an entire local
community
13. Which is included in government
assistance?
a. The provision of infrastructure in
developing areas
b. The imposition of trading constraints
on competition
c. Improvement to the general transport
and communication network
d. None of these can be included
14. A forgivable loan from a government or
the benefit of a government loan at NIL or
below market interest rate is accounted for as
a. Government grant
b. Government assistance
c. Both government grant and
government assistance
d. None of these can be included
15. The amount of benefit in a zero-interest
government loan is measured as the difference
between
a. Face amount and present value of loan
b. Face amount and fair value of loan
c. Fair value and present value of loan
d. Face amount of loan and implied
interest
16. In the case of nonmonetary grant, which of
the following accounting treatment is
prescribed?
a. Record the asset at replacement cost
and the grant at a nominal value.
b. Record the grant at a value estimated
by management.
c. Record both the grant and the asset at
fair value of the nonmonetary asset.
d. Record only the asset at fair value and
not recognize the fair value of the
grant.
17. In the case of grant related to an asset,
which of following accounting treatment is
prescribed?
a. Record the grant at a nominal value in
the first year and write it off in the
subsequent year.
b. Either set up the grant as deferred
income or deduct it in arriving at the
carrying amount of the asset.
c. Record the grant at fair value in the
first year and take it to income in the
subsequent year.
d. Take it to the income statement and
disclose it as an extraordinary gain.
18. Which disclosure is not required for
government grant?
a. The accounting policy adopted for
government grant including method of
presentation.
b. Unfulfilled conditions and other
contingencies attaching to government
assistance.
c. The name of the government agency
that have gave the grant along with the
date of sanction of the grant by the
received in case of monetary grant.
d. The nature and extent of government
grant recognized and an indication of
other form of government assistance
from which the entity has directly
benefited.
19. In the case of grant related to income,
which of the following accounting treatment is
prescribed?
a. Credit the grant to general reserve
under shareholders’ equity.
b. Present the grant in the income
statement as other income or as a
separate line item, or deduct it from
the related expense.
c. Credit the grant to retained earnings.
d. Credit the grant to sale or other
revenue from operations in the income
statement.
20. At the beginning of the current year, an
entity received Grant One to give financial
assistance to the entity for start-up costs
already incurred, and Grant Two to subsidize
the cost of purchasing computer software over
a 5-year period.
Which of the following statements
concerning recognition of income from
two grants is true?
a. Income from Grant One and Grant
Two should be recognized
immediately in the current year
b. Income from Grant One and Grant
Two should be recognized over 5
years.
c. Income from Grant One should be
recognized over 5 years and income
from Grant Two should be
recognized immediately in the current
year.
d. Income from Grant One should be
recognized immediately in the current
year and income from Grant Two
should be recognized over 5 years.
21. The deferred grant income is classified as
 a. Separate component of shareholders’
equity
b. Noncurrent liability
c. Current liability
d. Partly current liability and partly
noncurrent liability.

22. If the cost of the asset is recorded net of

the government grant
a. Equity is overstated
b. Liability is overstated
c. Asset is understated
d. Net income is understated

23. Which of the following statements is

incorrect when a government provides an
interest-free loan to an entity?
a. No interest expense is recognized
b. The loan payable is initially reported
at the present value
c. The interest element is amortized over
the term of the loan using the effective
interest methods.
d. The deferred grant income is
amortized over the term of the loan
using the straight line method.

24. Which of the following statements is true

regarding the accounting for government grant
related to an asset?
a. Depreciation is higher and net income
lover if the grant is recorded as
deferred income
b. Depreciation is higher and net income
lower if the grant is accounted for as
an adjustment to the asset.
c. Depreciation is higher if the grant is
recorded as deferred income but net
income will be the same under the
deferred income approach and
deduction from asset approach.
d. Depreciation is higher if the grant is
recorded as an adjustment to the asset.