Grant problem

Hi Mike!

I have done the problem below on the BPP Revision kit…. and I’ve written their answer as well…

My question is…. Why are we treating the balance of the grant as a liability… and in current liabilities and non current liabilities? I can’t see the logic of this. In my mind

Thanks.

Ismael
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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.

74 What amount will be presented under non-current liabilities at 31 March 20X3 in respect of the grant?

This is the BPP answer below. Correct answer: $204,000.

Deferred income

Grant received ($800,000 x 30%) 240,000
Release for this year ($240,000 x 10% x 6/12) (12,000)
Total balance at year-end 228,000

Presentation
Current liability ($240,000 x 10%) 24,000
Non-current liability (balance) 204,000
228,000

Correct answer: $204,000