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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 net amount that will be charged to operating expenses in respect of the server for the year ended 31 March 20X3?
A $10,000
B $28,000
C $22,000
D $34.000Answer in the BPP KIT book is below
Operating expenses
Depreciation charge (800,000 × 85% × 10% × 6/12)) =34,000
Release of grant (240,000 × 10% × 6/12) = (12,000)
34,000 -12,000 = 22,000I wonder that why the grant is shown under Expenses, why we don’t reflect it under “Other Income”?
In the condition of the question is stated that “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”.
And in the F7 BPP Study Book There are two choices here for how government grants related to assets (including non-monetary grants at fair value) should be shown in the statement of financial position: (a) Set up the grant as deferred income. (b) Deduct the grant in arriving at the carrying amount of the asset.
Then when Treating the grant as deferred income , the Grant will be shown as grant income.I suggest you use the ask the tutor forum for technical questions.
The grant is not revenue (income) but a reduction in expense and the question clearly states “NET amount that will be charged to operating expenses”.
“Release them to (i.e. recognised in) income” should read “recognised in profit or loss” (this was an amendment to the terminology in IAS 20 in 2008.
I agree that “deferred income” is a misleading term – IAS 20 is very old and still uses this term. It is better to think of it as a “deferred credit” (a term which is also used in IAS 20). Basically it is recognising a potential liability to repay (if the conditions of the grant are not met) and it’s “holding back” the reduction in expense that will be recognised in future years.
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