What are the accounting effects of a $100 government bailout that is an equity investment?

What are the accounting effects of a $100 government bailout that is an equity investment?

• A. Income Statement: No changes; Cash Flow from Financing increases by $100; Net Change in Cash increases by $100; Balance Sheet shows Cash +$100, Assets +$100, and Shareholders' Equity +$100.
• B. Income Statement: Net Income increases by $100; Cash Flow from Financing increases by $100; Net Change in Cash increases by $60; Balance Sheet shows Cash +$100, Liabilities +$100.
• C. Income Statement: Revenue increases by $100; Cash Flow from Financing decreases by $100; Net Change in Cash decreases by $100; Balance Sheet shows Cash -$100, Shareholders' Equity -$100.
• D. Income Statement: No change; Cash Flow from Financing increases by $100; Net Change in Cash increases by $100; Balance Sheet shows Cash +$100, Assets +$100, and Shareholders' Equity +$100.

Answer: (D)

An equity investment from the government is a capital contribution, not earnings, so it doesn’t hit the income statement. The cash received increases assets, and the same amount is added to shareholders’ equity to record the contributed capital. On the cash flow statement, this shows up as a financing activity inflow, so cash flow from financing rises by the amount and the net change in cash increases accordingly. On the balance sheet, assets go up by the cash received and shareholders’ equity goes up by the same amount, with no change to liabilities. So this treatment reflects a financing, not operating, activity and results in a $100 increase in cash, assets, and shareholders’ equity.

An equity investment from the government is a capital contribution, not earnings, so it doesn’t hit the income statement. The cash received increases assets, and the same amount is added to shareholders’ equity to record the contributed capital. On the cash flow statement, this shows up as a financing activity inflow, so cash flow from financing rises by the amount and the net change in cash increases accordingly. On the balance sheet, assets go up by the cash received and shareholders’ equity goes up by the same amount, with no change to liabilities. So this treatment reflects a financing, not operating, activity and results in a $100 increase in cash, assets, and shareholders’ equity.