Folly Construction Limited received a grant of $10,000,000 from the Chinese Government to purchase equipment for use in the road maintenance project on Marcus Garvey Drive. The financial year end for Jamaica Works Agency is December 31. On January 4, 2015 Folly Construction Limited purchased equipment costing $30,000,000. The Chinese grant was used to facilitate the acquisition of the equipment. A direct transfer of $10,000,000 was made to the Agency's bank account. Clause 55 of the contract awarding the grant, forbid the company from using the grant to purchase any other type of equipment, other than road maintenance equipment. The grant must be repaid in full if this clause is violated. The company credited the grant to the equipment account. The equipment is being depreciated over a five year period with $0 residual value. A full month's depreciation should be charged in the month of acquisition. On November 4, 2016 a newspaper report revealed that the company had used part of the grant to purchase computers for their directors. On November 10, 2016 a letter was received by the company requesting repayment of the $10,000,000 by December 15, 2016, citing the breach. The grant was repaid on December 14, 2016. All payments were made by cheque. Required: Prepare the relevant accounting entries for the financial years 2015 and 2016 (10 marks) a. Give an explanation for the 2016 depreciation charge. Support your explanation with the relevant IFRS(s). (5 marks) b. Assume that the Chinese grant was credited to a deferred income account instead of being credited to the equipment account. Prepare the relevant accounting entries for the financial years 2015 and 2016. c. (10 marks) Folly Construction Limited received a grant of $10,000,000 from the Chinese Government to purchase equipment for use in the road maintenance project on Marcus Garvey Drive. The financial year end for Jamaica Works Agency is December 31. On January 4, 2015 Folly Construction Limited purchased equipment costing $30,000,000. The Chinese grant was used to facilitate the acquisition of the equipment. A direct transfer of $10,000,000 was made to the Agency's bank account. Clause 55 of the contract awarding the grant, forbid the company from using the grant to purchase any other type of equipment, other than road maintenance equipment. The grant must be repaid in full if this clause is violated. The company credited the grant to the equipment account. The equipment is being depreciated over a five year period with $0 residual value. A full month's depreciation should be charged in the month of acquisition. On November 4, 2016 a newspaper report revealed that the company had used part of the grant to purchase computers for their directors. On November 10, 2016 a letter was received by the company requesting repayment of the $10,000,000 by December 15, 2016, citing the breach. The grant was repaid on December 14, 2016. All payments were made by cheque. Required: Prepare the relevant accounting entries for the financial years 2015 and 2016 (10 marks) a. Give an explanation for the 2016 depreciation charge. Support your explanation with the relevant IFRS(s). (5 marks) b. Assume that the Chinese grant was credited to a deferred income account instead of being credited to the equipment account. Prepare the relevant accounting entries for the financial years 2015 and 2016. c. (10 marks)
