Question

If a government entity provides an interest free loan to a company and the company accounts for the grant using the deferred revenue approach,

a. no interest expense will be recorded.
b. the interest element is initially recorded as Discount on Notes Payable.
c. the interest element is amortized to Deferred Grant Revenue over the term of the loan.
d. All of these answer choices are correct.

Answer 1

If a government entity provides an interest-free loan to a company and the company accounts for the grant using the deferred revenue approach, all of these answer choices are correct.

Step-by-step explanation:

If a government entity provides an interest-free loan to a company and the company accounts for the grant using the deferred revenue approach, all of these answer choices are correct. No interest expense will be recorded (option a), the interest element is initially recorded as Discount on Notes Payable (option b), and the interest element is amortized to Deferred Grant Revenue over the term of the loan (option c).

The company records the interest-free loan as deferred revenue because it represents a liability that will be repaid in the future. The interest element is initially recorded as a discount on the notes payable because the company is not paying interest to the government. Over the term of the loan, the discount is gradually amortized to deferred grant revenue, which represents the recognition of the interest expense.