Grant – Operating Expenses

Good day,

I need some help with the Depn. Charge from the question below:

Derringdo is a broadband provider which receives government assistance to provide broadband to remote areas. Derringdo invested in a new server at a gross cost of $800,000 on 1 October 20X2. The server has an estimated life of ten years with a residual value equal to 15% of its gross cost. Derringdo uses straight-line depreciation on a time apportioned basis.

The company received a government grant of 30% of its cost price of the server at the time of purchase. The terms of the grant are that if the company retains the asset for four years or more, then no repayment liability will be incurred. Derringdo has no intention of disposing of the server within the first four years. Derringdo’s accounting policy for capital-based government grants is to treat them as deferred credits and release them to income over the life of the asset to which they relate.

What is the new amount that will be charged to operating expenses in respect of the server for the year ended 31 March 20×3?

Ans: $22 000

Solution:

Depn. charge ($800 000 x 85% x 10% x 6/12) 34 000
Release of grant ($240 000 x 10% x 6/12) (12 000)
Operating Expenses 22 000

I problem with the above question is that I can’t understand where that 10% is from.