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Hello,
In the context of accounting for grants related to assets: treating the grant as deferred income.
I can’t seem to understand why the last year of the asset useful life profits are spread all over the preceeding years in the statement of financial position as Gov grant deferred income.
I’m not sure to know what deferred income means in this context.
Would appreciate your help.
Many thanks,SP
“I can’t seem to understand why the last year of the asset useful life profits are spread all over the preceeding years in the statement of financial position as Gov grant deferred income.”
I’m not sure exactly what you mean here Stefano – is this really what you meant to type?
(Because it doesn’t make sense to me either)
Hi
The example I am looking at says that the useful life of the asset is 4 years and the profit generated by using the asset are 30k each year for the four years calculated as follow
50k profit before depreciation
(25) depreciation
5k. Grant
30k profit
On the financial statement this is accounted as deferred income in the following way
15k on the first year, 10k on the second year and 5k on the third year with 0 on the last year.
And the full price of asset is depreciated in 4 years. The company received 20% grant towards the cost of new machinery (100k) that is 20k.
I don’t understand the rule for deferred income if any…hope I explained myself better this time
Thank youStefano
On receipt of a grant for an asset, we need to spread the grant over the years that that asset will be contributing to our operations.
Thus it would be wrong to Debit Cash and Credit Government Grant on the statement of profit of loss with 20 in the year in which we receive the grant. Instead we should set up a deferred credit account
So our double entry becomes Dr Cash 20, Cr Deferred Income 20. Then, at the end of year 1 we can release a quarter of this grant into our statement of profit or loss (Dr Deferred Income, Cr statement of profit or loss) effectively reducing the depreciation expense of 25 down to 20
That now leaves a balance of 20 – 5 = 15 on the deferred income account
Next year, same again, release 5 into statement of profit or loss and leave 10 on deferred income account
And again
And again
So for each of the 4 years affected by this grant, there will be a figure on the statement of financial position in liabilities “Deferred Income 15” (followed next year by 10, then 5 then zero)
Does that explain it?
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