Question 1 - Nonexchange, as opposed to exchange, revenues present the more difficult issues of accounting recognition.
The federal government, through its various government agencies, engaged in the following transactions involving revenues.
1. It rented land to a tenant; it signed a three-year lease requiring monthly payments of $2,000. In the year in which the lease was signed, the tenant occupied the land for six months but paid an entire year's rent (i.e., $24,000).
2. It signed two contracts to provide engineering services to a foreign government; each contract was for $50 million. During the year, the federal agency completed 100 percent of one contract and 60 percent of the other. It collected the entire $100 million in cash.
3. It assessed fines of $100,000 each on two firms for polluting waterways. One offender paid the fine; the other notified the government that it would contest the fine in court.
4. It accepted from a private foundation a pledge of $120,000 to fund an exhibit in a government museum. During the year the foundation paid $40,000 of its pledge, promising to pay the balance in the following year. The pledge does not constitute an enforceable legal agreement.
5. As the result of an audit, it assessed a company $250,000 in income taxes for a previous year, the entire amount of which was certain to be collected. In their audit report, the auditors estimated that audits of subsequent years would yield an additional $150,000.
Prepare journal entries to record the transactions. For each entry comment briefly on the amount of revenue recognized.
Question 2 - Low-interest loans constitute a subsidy and hence an expense.
Business Development Corporation (BDC), a federal agency (fictitious), makes loans to high-tech companies that satisfy specified criteria. The loans are intended to encourage research The and development and are made at rates substantially below market.
The BDC made a loan of $100,000 to Interface Networks, Inc. The interest rate was 6 percent, and the loan was payable over a three-year period in equal installments of $37,411. At the time of the loan, prevailing Treasury interest rates for loans of comparable maturities were 10 percent.
1. What was the amount of the loan subsidy?
2. How and when should the agency recognize the value of the subsidy? Explain.
3. Journal entry to record the loan and recognize the subsidy.