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Govn contracts

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Govn contracts

  • This topic has 5 replies, 2 voices, and was last updated 7 years ago by MikeLittle.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • December 4, 2015 at 4:13 am #287395
    rustamrakhmatov27
    Member
    • Topics: 156
    • Replies: 127
    • ☆☆☆

    Sir, what’s the purpose of deducting the grant from the NBV of an asset?

    December 4, 2015 at 8:58 am #287456
    MikeLittle
    Keymaster
    • Topics: 26
    • Replies: 22702
    • ☆☆☆☆☆

    To spread the benefit of the grant over the estimated useful life of the asset. By crediting the grant to the asset account, this reduces the base upon which depreciation is calculated.

    Thus the annual depreciation figure is reduced and, as a result, the profit for the year is not charged with as great an expense as otherwise.

    In this way the results for the company are seen to benefit annually as a result of the grant being spread over the appropriate period of time

    December 5, 2015 at 12:13 am #287694
    rustamrakhmatov27
    Member
    • Topics: 156
    • Replies: 127
    • ☆☆☆

    So the grant stays as deferred income in PL and deferred liability in Sofp and reduced every year by depreciation special for the grant? Right?

    What’s the another way? If any..

    December 5, 2015 at 8:15 am #287733
    MikeLittle
    Keymaster
    • Topics: 26
    • Replies: 22702
    • ☆☆☆☆☆

    What you have just written IS the other way!

    Method 1 is credit the amount of the grant to the asset account

    Dr Cash
    Cr Asset

    Method 2 is leave the grant in a deferred income account. So charge depreciation on the cost price of the asset as shown in the asset account and calculate each year the amount of the grant to be matched against the depreciation

    If the asset is being depreciated at 20% straight line, then each year you’ll credit 1/5 of the grant to the statement of profit or loss

    Dr Cash
    Cr Deferred Income

    and then, each year:

    Dr Deferred Income
    Cr (probably) Cost of Sales

    December 6, 2015 at 5:29 am #288086
    rustamrakhmatov27
    Member
    • Topics: 156
    • Replies: 127
    • ☆☆☆

    Got everything but Why first year cash and then income debits??!

    December 6, 2015 at 8:52 am #288130
    MikeLittle
    Keymaster
    • Topics: 26
    • Replies: 22702
    • ☆☆☆☆☆

    Because cash is received in the first year and because we are using up the deferred income in subsequent years

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