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as the grant was the netted off the cost of the equipment, depreciation for one year would be 10000((90000-30000)/6) and its carrying value on 1 January 2007 would be 50000. since the grant was not repaid by 31 December 2007, this means that another depreciation charge of 10000 was charged and its carrying value by 31 December 2007 would be 40000. however, if there was no grant, depreciation of the equipment for the 2 years would be 30000( 15000*2) and its carrying value by 31 December 2007 would be 60000. if the grant is repaid at that date, therefore the cost of the equipment needs to be increased by 20000 to reach 60000 and depreciation needs to be increased by 10000 to reach 30000. why is the answer then not D? May you please explain?
Tackle this problem one step at a time.
Let’s deal first with the reversal of the entry that has been recorded for the year to 31 December, 2006
With the grant we have asset 90, grant (30), depreciation (10) and net book value of 50
Without the grant we have asset 90, depreciation (15), net book value 75
So let’s get to this situation of the position without the grant:
Dr Depreciation 5, Dr Asset 25, Cr Grant liability 30
Now we need to move forward to 31 December , 2007
Dr Depreciation 15, Cr Asset 15
and that leaves us with asset 60 and depreciation 30 (10 + 5 + 15)
Now, combine those 2 journal entries and arrive at:
Dr Depreciation 20 (5 + 15) Dr Asset 10 (25 – 15) Cr Liability 30
Is that better?
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