North Pole Ltd. is planning to enlarge its factory in northern Saskatchewan. an economically challenged area of Canada. The federal, provincial, and municipal governments are all keen to assist the firm in making this investment successful, and hopefully generate permanent and significant economic and social benefits for the region. Collaboratively the three levels of government and the company have made the following commitments: 1. North Pole Ltd will build a factory that will cost $180 million. 2. The federal government will provide North Pole Ltd with a full tax rebate on sales tax normally levied on materials used in the construction of its factory. This sales tax amounted to 5% of the materials cost of $100 million. 3. For the next five years, the provincial government will provide a training subsidy of $5,000,000 a year for the employment and skill development of local residents. 4. The municipal government will give North Pole Ltd a $800,000 grant immediately for having had a factory in the region for the past 10 years. Required: a. a Assumption 1- North Pole Ltd uses the Net Method to record grants. Prepare journal entries to record each of the items described above for the first year. Assume all estimates and expectations for the first year are correct and the factory is built and operational by December 31, Year 1. No depreciation will be recorded in the first year. b. Given that factory is expected to have a useful life of 30 years (you can make a simplifying assumption that this starts on January 1 of year 2) and a residual value of $200,000. What amount will be booked to depreciation expense related to the factory if the company uses straight-line depreciation. c. By how much was net income increased because of government assistance in the first year? For the second year, assume all continuing conditions to be eligible for the grants are met. How much was net income increased by in the second year? (You can ignore income taxes). a. Assumption 2 - North Pole Ltd uses the Gross Method to record grants. Prepare journal entries to record each of the items described above for the first year. Assume all estimates and expectations for the first year are correct and the factory is built and operational by December 31, Year 1. No depreciation will be recorded in the first year. b. Given that factory is expected to have a useful life of 30 years (you can make a simplifying assumption that this starts on January 1 of year 2) and a residual value of $200,000. What amount will be booked to depreciation expense related to the factory if the company uses straight-line depreciation. c. By how much was net income increased because of government assistance in the first year? For the second year, assume all continuing conditions to be eligible for the grants are met. How much was net income increased by in the second year? (You can ignore income taxes)
