Zachary’ Limited is planning to enlarge its factory in an economically challenged area of Canada. The federal, provincial, and municipal governments are all keen to assist the firm in making this investment successful, and hopefully generate permanent and significant economic and social benefits for the region. Collaboratively the three levels of government and the company have made the following commitments:
i. The company will build a factory’ that will cost $100 million.
ii. The city will donate the land for the factory, which has a fair market value of $5,000,000. Upon completing construction, the legal title of the land will be transferred to the company.
iii. For the next five years, the city will reduce the property7 and municipal taxes the company has to pay on the new factory by 25%. It is estimated that these taxes would be $1,600,000 per year before the discount.
iv. The federal government will provide a forgivable loan to assist in the financing of the factory of SI 5,000,000. The loan will be forgiven over five years if the company employs at least 300 workers per year in the new factory'.
v. For the next five years, the provincial government will provide a training subsidy of $4,000,000/year to the company for the employment and skill development of local residents.
vi. The federal government will give the company immediately a $2,000,000 grant for having had a factory' in the region for the past 10 years.
vii. The federal government will give the company $10,000,000 in five years if it maintains an average workforce of 700 workers employed at the new factory. During the first year an average of 313 workers were employed as the factory was in the start-up stage.
Required:
a. Prepare journal entries to record each of the seven items described above for the first year. Assume all estimates and expectations for the first year are correct and the factor) is built and operational in the first year. Zachary Company uses the net method to record grants. No depreciation will be accrued in the first year.
b. What will be the annual depreciation expense for the factory starting in year two? Zachary Company uses the net method to record grants. The factory is expected to have a useful life of 30 years (excluding the first year in the start-up phase) and no material residual value. The company uses the straight-line method for depreciation.
c. By how much was net income increased because of government assistance in the first year? For the second year, assume all continuing conditions to be eligible for the grants are met. How much was net income increased by in the second year? Ignore income taxes.