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

Sagar Foods Ltd received a grant of ₹40,00,000 on 1 April 2023 related to a non-depreciable land parcel costing ₹1,00,00,000, with the condition that the company must construct a factory costing ₹60,00,000 on the land within 4 years. The factory is to be depreciated over 20 years straight-line with nil residual value. Factory completed and put to use on 1 April 2024. As per AS 12, what is the amount credited to profit and loss for the year ended 31 March 2025 in respect of this grant?

₹2,00,000 is credited to profit and loss. Because the grant on land carries an obligation to build a factory, it is recognised over the factory's 20-year life, in proportion to the depreciation charged. The ₹40,00,000 grant divided by 20 years gives ₹2,00,000 for the year ended 31 March 2025.

  1. A₹2,00,000Correct
  2. B₹10,00,000
  3. CNil
  4. D₹40,00,000

Explanation

A grant for non-depreciable land with an obligation to build a structure is credited to income over the periods that bear the cost of meeting the obligation. The obligation is the factory costing ₹60,00,000, so the grant is allocated in proportion to its depreciation over 20 years: 40,00,000 / 20 = ₹2,00,000 for the first year of use. Crediting capital reserve (nil to P&L) would apply only if there were no such obligation.

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