Clear Energy is a builder of wind turbines that are used in electricity generation. To encourage the installation of wind turbines and the development of wind power technology, the provincial government has several programs in place that support the industry. In 2012, Clear Energy incurred the following costs that were potentially’ eligible for government subsidies:
i. The company spent $5 million on research and development (R&D); these costs are eligible for a 15% tax credit. The $5 million had been previously expensed.
ii. For each megawatt of wind power generating capacity installed, the government provides a subsidy of $200,000 to the utility. In 2012, Clear Energy installed 20 megawatts for its customers (utility companies).
iii. Clear Energy is eligible for a hill tax rebate on sales tax normally levied on materials used in the construction of its turbine factory. This sales tax amounted to 7% of the materials cost of $20 million.
Required:
a. Record the journal entries for the above transactions using the gross method for government grants.
b. Record the journal entries for the above transactions using the net method for government grants.