Pei Properties recently purchased a vacant office condo where it plans to operate an employment-training centre. The total purchase price of the condo was $625,000 with an expected useful life of 30 years with no residual value. The local government in this municipality was very interested in this project, providing a grant of $90,000 for the purchase of the condo. The only condition of the grant was that the employment-training centre be operated for a period of at least five years. Pei Properties believes that this target can be achieved with the business plan it has prepared.
a. Prepare the journal entry to record the purchase of the condo, assuming the company uses the deferral method to record the government grant.
b. Repeat part (a) assuming the company uses the offset method to record the government grant.
c. Determine the annual effect on the income statement for each of the above methods.