CMA Intermediate · Financial Accounting · Accounting for Government Grants (AS 12)
Sundaram Textiles Ltd bought machinery for Rs 10,00,000 and received a government grant of Rs 2,00,000 related to this specific fixed asset. The company deducts the grant from the asset's book value. The machine has a 5-year life, nil residual value and is depreciated on the straight-line method. What is the annual depreciation?
Annual depreciation is Rs 1,60,000. Where the grant is deducted from the asset, depreciation is charged on the reduced amount of Rs 8,00,000 (Rs 10,00,000 less Rs 2,00,000) over five years. Charging Rs 2,00,000 would wrongly use the gross cost.
- ARs 2,00,000
- BRs 1,60,000Correct
- CRs 1,20,000
- DRs 40,000
Explanation
When the grant is deducted from the asset, the depreciable amount is Rs 10,00,000 - Rs 2,00,000 = Rs 8,00,000. Annual depreciation = 8,00,000 / 5 = Rs 1,60,000. Rs 2,00,000 is wrong because it ignores the grant and depreciates on the gross cost.
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