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CMA Intermediate · Financial Accounting · Accounting for Government Grants (AS 12)

Kaveri Engineering Ltd acquired equipment for Rs 12,00,000 on 1 April and received a related grant of Rs 3,00,000 for the specific asset. It treats the grant as deferred income, recognised in the profit and loss statement in proportion to depreciation. Equipment life is 6 years, nil residual value, straight-line depreciation. What deferred income balance remains at the end of year 2?

The deferred income balance is Rs 2,00,000. The grant of Rs 3,00,000 is released in proportion to depreciation, at Rs 50,000 per year over six years. After two years Rs 1,00,000 has been credited to profit and loss, leaving Rs 2,00,000.

  1. ARs 2,50,000
  2. BRs 2,00,000Correct
  3. CRs 1,00,000
  4. DRs 3,00,000

Explanation

Depreciation is charged on the gross cost of Rs 12,00,000, i.e. Rs 2,00,000 a year. The grant is recognised in the same proportion over 6 years: 3,00,000 / 6 = Rs 50,000 a year. After 2 years Rs 1,00,000 is recognised, leaving Rs 2,00,000. Rs 2,50,000 is wrong because it reflects only one year.

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