Kitchigami Limited was attracted to the Town of Mornington by the towns municipal industry commission. Mornington donated

Question:

Kitchigami Limited was attracted to the Town of Mornington by the town’s municipal industry commission. Mornington donated a plant site to Kitchigami, and the provincial government provided $180,000 toward the cost of the new manufacturing facility. The total cost of plant construction came to $380,000, and it was ready for use in early October 2020. Kitchigami expects the plant to have a useful life of 15 years before it becomes obsolete and is demolished. The company uses the straight line method of depreciation for buildings and is required to include the plant in Class 6 (10% rate) for tax purposes.


Instructions

a. Prepare the entry(ies) that are required in 2020 to record the payment to the contractor for the building and the receipt of the provincial government assistance. Assume that the company treats the assistance as a reduction of the asset’s cost. Also prepare any adjusting entries that are needed at the company’s year ends, December 31, 2020 and 2021, and round all amounts to the nearest dollar.

b. Repeat part (a), but assume instead that the company treats the government assistance as a deferred credit.

c. If Kitchigami reports 2021 income of $79,000 before depreciation on the plant and government assistance, what income before tax will the company report assuming part (a) above? Assuming part (b) above? d. What is the building’s tax value at December 31, 2021?

e. Digging Deeper Which method of accounting for government assistance would better represent Kitchigami Limited to a lender? Also, which method would result in higher net income?

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Related Book For  book-img-for-question

Intermediate Accounting Volume 1

ISBN: 978-1119496496

12th Canadian edition

Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Irene M. Wiecek, Bruce J. McConomy

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