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A company receives a government grant of $500,000 on 1 April 20X7 to facilitate purchase on the same day of an asset which costs $750,000. The asset has a five year useful life and is depreciated on a 30% 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 March 20X9?1. The answer is $105,000
2. “The asset has a five year useful life and is depreciated on a 30% reducing balance basis.” I am bit confused here. If the asset has a useful life of 5 years, then the depreciation should be 20% (100/5). How come it be 30%?3. How to obtain the answer.
(2) Because it’s not straight line depreciation – the question tells you that it’s on the reducing balance basis
(3) In the year to 31 March, 20X8 credit will be taken for 30% x $500,000 = $150,000 leaving $350,000 as a deferred credit
In the year to 31 March, 20X9 credit will be taken for 30% x $350,000 = $105,000 leaving $245,000 as a deferred credit
In the year to 31 March, 20Y0 credit will be taken for 30% x $245,000 = $73,500 leaving $171,500 as a deferred credit
and so on
OK?
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