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

Kaveri Engineering Ltd purchased machinery on 1 April 2024 for ₹50,00,000 with a useful life of 10 years and no residual value (straight-line depreciation). It received a government grant of ₹10,00,000 specifically for this machinery. The company follows the method of deducting the grant from the asset's cost. What is the depreciation charge for the year ended 31 March 2025?

Depreciation is ₹4,00,000. When the grant is deducted from the asset's cost, the depreciable amount becomes ₹40,00,000 (₹50,00,000 less ₹10,00,000), and spreading it over 10 years gives ₹4,00,000 a year. Using the gross cost would give ₹5,00,000, which is wrong.

  1. A₹5,00,000
  2. B₹4,00,000Correct
  3. C₹6,00,000
  4. D₹4,50,000

Explanation

On deducting the grant, the book value of the asset is 50,00,000 − 10,00,000 = ₹40,00,000. Depreciation is 40,00,000 ÷ 10 = ₹4,00,000. Charging depreciation on the gross cost of ₹5,00,000 ignores the grant deduction and is incorrect under this method.

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