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CA Intermediate · Advanced Accounting · AS 12 Accounting for Government Grants

Ganga Engineering Ltd. bought a machine for Rs 50,00,000 (10-year life, nil residual, SLM) on 1 April 2022 and received a Rs 10,00,000 grant, deducted from the asset's cost. On 31 March 2025, the grant became refundable in full. Book value of the asset was then Rs 28,00,000 (after three years of depreciation on Rs 40,00,000 cost, i.e. 4,00,000 yearly). The remaining life is 7 years. Per AS 12, the refund is recorded by increasing the asset's book value, and the cumulative extra depreciation on the increase that would have been charged is charged to profit and loss immediately. What is the extra depreciation charged immediately and the annual depreciation going forward?

Rs 3,00,000 is charged immediately and depreciation going forward is Rs 5,00,000 yearly. The refund raises book value to Rs 38,00,000, the three years' catch-up depreciation on Rs 10,00,000 is Rs 3,00,000, and the remaining Rs 35,00,000 is depreciated over 7 years.

  1. ARs 3,00,000 immediately; Rs 5,00,000 yearlyCorrect
  2. BRs 3,00,000 immediately; Rs 4,00,000 yearly
  3. CRs 10,00,000 immediately; Rs 5,00,000 yearly
  4. DRs 1,00,000 immediately; Rs 5,00,000 yearly

Explanation

Refund of Rs 10,00,000 increases book value to 38,00,000. Extra depreciation on the increase for 3 years = 10,00,000/10 x 3 = Rs 3,00,000, charged immediately. Remaining book value = 38,00,000 - 3,00,000 = 35,00,000; over 7 years = Rs 5,00,000 yearly. Charging the whole Rs 10,00,000 immediately is wrong since the asset still has remaining life.

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