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

Kaveri Pharma Ltd received a grant of Rs 30,00,000 from the State Government towards a plant costing Rs 1,20,00,000. The grant is shown as deferred income. The plant is depreciated on straight-line basis over 8 years with nil residual value. How much grant income should be recognised in the profit and loss statement for the first year?

The grant income recognised in year one is Rs 3,75,000. Deferred grant income is taken to profit and loss in proportion to depreciation, so Rs 30,00,000 spread over 8 years gives Rs 3,75,000 a year.

  1. ARs 3,75,000Correct
  2. BRs 15,00,000
  3. CRs 7,50,000
  4. DRs 30,00,000

Explanation

Deferred income is recognised in profit and loss over the periods and in proportion to depreciation on the asset. Annual depreciation = 1,20,00,000/8 = 15,00,000. Grant share = 30,00,000/1,20,00,000 = 25%, so income = 25% x 15,00,000 = Rs 3,75,000 (also 30,00,000/8). Rs 7,50,000 wrongly halves the depreciation.

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