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Hello Sir,
For the following qusetion why they multiply the grant by 20% .
But why the grant itself is more than the cost of the asset?
What I usually know that the grant is to be divided by the asset life so 1500000/10=150000 and this to be recognized as income and debiting the deferred income for the same amount.
I dont why they used the depreciation percentage here.
Thanks
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QBroom Co successfully receives a government grant of $1,500,000 on 1 January 20X5 allowing it to
purchase an asset which costs $500,000, also on 1 January 20X5. The asset has a ten-year useful life and is
depreciated on a 20% reducing balance basis. Company policy is to account for all grants received as
deferred income.
What amount of income will be recognised in respect of the grant in the year to 31 December 20X5?
A $1,500,000
B $500,000
C $300,000
D $150,000Answer
81 C $300,000
$
Grant received 1.1.X5 1,500,000
Recognised year to 31.12.X5(1,500,000 u 20%) (300,000)
Balance 31.12.X5 1,200,00Hi, I came accross this when studying today:
“A Government Grant is initially recognised as a liability (deferred income) which is brought into the P&L over the useful life of the asset, to offset depreciation.”
So you use the depreciation % here as the deferred income is calculated to offset the asset depreciation.
Hi
Thanks for reply.
But still I am confused you said deferred income will offset the depreciatin .
That means no depreciation will go to P&L or what.
can you show in more details through journal entry possibly.
Thanks,
Hi,
The question is trying to trick you by telling you the useful life of the asset. Ignore it!
We are told that they depreciate the asset 20% reducing balance, therefore we use this to release the grant income to profit or loss to match up to the depreciation charged.
Thanks
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