Kennedy Limited prepares its financial statements to 31 December each year and the following has to be resolved before the financial statements for the year ended 31 December 2017 can be finalised.

Issue:

During the year ended 31 December 2017, Kennedy Limited received a government grant to partially finance the purchase of plant and machinery that was required for an expansion of its manufacturing activities. Total expenditure of up to €1,500,000 on plant and machinery was approved by the relevant government department, with the grant being 60% of the total expenditure. The full amount of the grant was received by Kennedy Limited in 2017.

The conditions on which the grant was approved were that the expenditure would relate to the purchase of specific items of plant and machinery and that an additional 10 members of staff would be hired by Kennedy Limited. At 31 December 2017, Kennedy Limited had hired 12 additional staff and had purchased €1,200,000 of the specified plant and machinery. It is the intention of the directors, if cash flow permits, to purchase a further

€600,000 worth of plant and machinery during the year ended 31 December 2018. It is company policy to depreciate plant and machinery at 8% per annum on a straight-line basis, and to provide a full year’s depreciation in the year of purchase and none in the year of disposal.

The directors of Kennedy Limited believe that it is important to separately disclose grant assistance received in the financial statements. At 31 December 2017, the only accounting entry in relation to the grant received has been to record it as a separate item within deferred income in the company’s draft financial statements for the year ended 31 December 2017.

Requirement Explain the correct accounting treatment and show any relevant journal entries for the government grant received by Kennedy Limited during the year ended 31 December 2017.