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

Narmada Pharma Ltd received a ₹24,00,000 grant on 1 April 2024 towards a factory building costing ₹80,00,000 with a useful life of 20 years and nil residual value. The company treats the grant as deferred income. Depreciation is on straight-line basis. What amount of grant income is credited to profit and loss for the year ended 31 March 2025, and what is the depreciation charged?

Grant income of ₹1,20,000 is credited and depreciation of ₹4,00,000 is charged. With the deferred income method, depreciation is on the full cost of ₹80,00,000 over 20 years, and the ₹24,00,000 grant is recognised over the same 20 years, giving ₹1,20,000 each year.

  1. AGrant income ₹1,20,000; depreciation ₹4,00,000Correct
  2. BGrant income ₹1,20,000; depreciation ₹2,80,000
  3. CGrant income ₹4,00,000; depreciation ₹1,20,000
  4. DGrant income ₹24,00,000; depreciation ₹4,00,000

Explanation

Under the deferred income approach, depreciation is on the full cost: 80,00,000/20 = ₹4,00,000. The grant is allocated over the depreciation periods in proportion to depreciation: 24,00,000/20 = ₹1,20,000 per year. Option 2 wrongly reduces depreciation as if the grant were deducted from cost, which is the other method.

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