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.
- 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).
- 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.
- 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.
- 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.
- 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.
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.
- What was the amount of the loan subsidy?
- How and when should the agency recognize the value of the subsidy? Explain.
- Journal entry to record the loan and recognize the subsidy.