Sunshine Incorporated provides solar energy services to Toronto. Sunshine needed to buy additional solar energy panels to meet the demand for its energy product. The government of Ontario offered an interest-free forgivable loan to Sunshine in the amount of $500,000. The loan will be forgiven if Sunshine is able to produce a stated number of kilowatts of energy per year for the next five years. If these conditions are not met, the amount is due to the government in full in five years. Sunshine believes it will be able to meet the conditions. Sunshine recently obtained a similar loan from the bank with an annual interest rate of 12%.
Instructions
(a) Discuss the financial reporting issues related to obtaining the interest-free loan from the government of Ontario.
(b) Using time value of money tables, a financial calculator, and computer spreadsheet functions, calculate the value of the loan and prepare an amortization table for the loan using the effective interest method. Present the first three years of the loan.
(c) Prepare the entry on December 31, 2017 to record the interest-free loan.
(d) Prepare any adjusting journal entry that is necessary at December 31, 2018, the company's fiscal year end.