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

Sundaram Engineering Ltd purchased machinery for ₹80,00,000 and received a government grant of ₹20,00,000 related to it. The company chooses to show the grant as a deduction from the gross value of the asset. The machinery is depreciated on straight-line basis over 8 years with nil residual value. What is the depreciation charge for the first full year?

Depreciation is ₹7,50,000. When a grant is deducted from the asset's cost, the depreciable amount becomes ₹60,00,000 (₹80,00,000 less ₹20,00,000), and spreading it over 8 years gives ₹7,50,000 annually.

  1. A₹10,00,000
  2. B₹7,50,000Correct
  3. C₹2,50,000
  4. D₹12,50,000

Explanation

Where the grant is deducted from the asset, the book value is 80,00,000 - 20,00,000 = ₹60,00,000. Depreciation is 60,00,000 / 8 = ₹7,50,000. ₹10,00,000 is wrong because it uses the gross cost without deducting the grant.

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