- 5 Marks
CR – Nov 2018 – L3 – Q2b – Financial instruments: Recognition and measurement Corporate reporting
Recommend the financial reporting treatment for an interest-free government loan received by Bole Bamboi Ltd, including suitable calculations.
Question
On 1 June 2017, Bole Bamboi Ltd (Bole Bamboi) purchased a factory building in a regional development area for GH¢4 million. It used the building to store some relocated equipment, but shortly after the purchase, the roof needed to be replaced. Bole Bamboi has been replacing the roof of the factory building with an environmentally friendly one, including insulation and integrated solar panels. The replacement of the roof will cost GH¢2 million. The cost of the replacement is to be incurred by Bole Bamboi; however, the Ministry of Trade and Industry advanced a 5-year, interest-free loan to Bole Bamboi on 1 July 2017 to finance the GH¢2 million cost. The loan has to be repaid in 5 equal annual instalments of GH¢400,000 beginning on 30 June 2018. An equivalent loan from Bole Bamboi’s bank with the same repayment terms would have been made at a fixed annual interest rate of 5% for the 5 years.
The present value of 5 annual payments of GH¢1 at 5% is GH¢4.32948.
Required:
In accordance with IFRS, recommend, with suitable calculations, the financial reporting treatment of the above items in the financial statements of Bole Bamboi for the year ended 31 December 2017.
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