On January 1, 20x1, MACABRE HORRIBLE Co. received cash of ?16,000,000 from a local government to be used to defray safety and other hazard-related costs over a five-year period. It was estimated that such costs will total ?32,000,000 over the next five years. In 20x1 and 20x2, actual costs of safety and other hazard-related costs amounted to ?4,000,000 and ?4,800,000, respectively. 

1.  If MACABRE Co. uses the gross presentation of government grants, how much is the carrying amount of the deferred income from the government grant on December 31, 20x1? 
2.  If MACABRE Co. uses the net presentation of government grants, how much is the carrying amount of the deferred income from the government grant on December 31, 20x1? 
3. If MACABRE Co. uses the gross presentation of government grants, how much safety expense is recognized in 20x1?
4.  If MACABRE Co. uses the net presentation of government grants, how much is safety expense is recognized in 20x1? 

Answer:

1. 12,800,000
2. 0
3. 4,000,000
4. 3,200,000

Step-by-step explanation

1.

If the government grant is presented using gross method, then the grant income and the expenses will be recorded separately, computed as follows:

16,000,000/5= 3,200,000 recognized income every year.

* the deferred grant income of 16,000,000 is amortized over the period in which the cost will be incurred. The yearly amortization of the deferred income is 3,200,000

To solve for the carrying amount of the deferred income during 20x1, we'll just deduct the amortization, computed as follows:

Deferred Income 16,000,000

Earned Inc., 20x1 (3,200,000)

CA of Def. Inc. 20x1 12,800,000

3..

* The safety expenses will be recorded as it is incurred, for the actual amount of 4,000,000 during 20x1

On the other hand, if the government grant is presented using net method, then the grant income will be deducted to the total expenses, computed as follows:

Expenditures 32,000,000

Gov't Grant (16,000,000)

Expenditures 16,000,000

*The income has been offset against the expenditure, using the net method. Therefore, the government grant will be recognized in full during 20x1 for the amount of 16,000,000, and the deferred grant income will be zero.

4.

To get the annual safety expense we'll just divide the net amount of expenses by five years

Expenses = 16,000,000/5= 3,200,000 annual safety expenses.