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

Kaveri Engineering Ltd bought machinery on 1 April 2025 for Rs 50,00,000. The government granted Rs 10,00,000 towards it, and the company chose to show the grant as a deduction from the asset's book value. The machinery has a useful life of 5 years, nil residual value, and straight-line depreciation. What is the depreciation charge for 2025-26 as per AS 12?

The depreciation is Rs 8,00,000. Under the deduction method the grant reduces the asset's book value to Rs 40,00,000, and depreciation is charged on this reduced amount over 5 years straight-line. Charging Rs 10,00,000 would ignore the grant.

  1. ARs 10,00,000
  2. BRs 8,00,000Correct
  3. CRs 12,00,000
  4. DRs 9,00,000

Explanation

When the grant is deducted from the asset, the depreciable amount is the reduced book value: 50,00,000 - 10,00,000 = 40,00,000. Depreciation = 40,00,000 / 5 = Rs 8,00,000. Rs 10,00,000 ignores the grant, and it is wrong because the asset is shown net of the grant.

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