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

Narmada Pharma Ltd received on 1 April 2024 a grant of ₹30,00,000 for setting up a plant costing ₹1,20,00,000. It shows the grant as deferred income. The plant has a useful life of 8 years, straight-line depreciation, nil scrap. What amount is credited to the statement of profit and loss as grant income and what is the depreciation charged for the year ended 31 March 2025?

Grant income is ₹3,75,000 and depreciation is ₹15,00,000. With the deferred income method the plant remains at its full cost of ₹1,20,00,000, so depreciation is ₹15,00,000 for 8 years, and the ₹30,00,000 grant is released to profit over the same 8 years at ₹3,75,000 a year.

  1. AGrant income ₹3,75,000; depreciation ₹15,00,000Correct
  2. BGrant income ₹3,75,000; depreciation ₹11,25,000
  3. CGrant income ₹30,00,000; depreciation ₹15,00,000
  4. DGrant income ₹15,00,000; depreciation ₹11,25,000

Explanation

Under the deferred income approach, the asset stays at gross cost: 1,20,00,000 / 8 = ₹15,00,000 depreciation. The grant is recognised over the life in proportion to depreciation: 30,00,000 / 8 = ₹3,75,000. Option B wrongly reduces depreciation as if the grant were deducted from cost.

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