Chapter 9: Other Accounting Standards - Test 1: answer key

Question 1 · 2 marks · Chapter 9: Other Accounting Standards · medium

Scenario. Sterling Chemicals Ltd. purchased a pollution control plant on 1 April 2024 for ₹120 lakh. The estimated useful life of the plant is 10 years with a residual value of ₹20 lakh. The company received a government grant of ₹40 lakh on 1 May 2024 specifically for this plant. The grant is related to a depreciable fixed asset. Sterling Chemicals Ltd. follows Method 1 as per AS 12, i.e., the grant is deducted from the gross value of the asset. Depreciation is charged on a straight-line basis. On 31 March 2027, after three years of operation, due to non-compliance with certain conditions attached to the grant, the grant became refundable to the extent of ₹30 lakh. The company paid the refund on 1 April 2027.

What is the annual depreciation charge on the pollution control plant for the year ended 31 March 2025 under Method 1?

1. ₹8 lakh
2. ₹6 lakh (correct answer)
3. ₹10 lakh
4. ₹12 lakh

Answer: B — ₹6 lakh

Explanation. Under Method 1, the grant is deducted from the gross value of the asset. Net cost = ₹120 lakh – ₹40 lakh = ₹80 lakh. Depreciable amount = Net cost – Residual value = ₹80 lakh – ₹20 lakh = ₹60 lakh. Annual depreciation = ₹60 lakh / 10 years = ₹6 lakh. The trap option ₹8 lakh arises if residual value is ignored or if grant is not deducted.

Where it goes wrong. Forgetting to deduct the grant or including residual value in the depreciable base.

Authority. AS 12 para 13

Question 2 · 2 marks · Chapter 9: Other Accounting Standards · medium

What is the carrying amount of the pollution control plant as on 31 March 2027 before accounting for the refund?

1. ₹80 lakh
2. ₹62 lakh (correct answer)
3. ₹54 lakh
4. ₹72 lakh

Answer: B — ₹62 lakh

Explanation. Initial carrying amount after grant = ₹120 lakh – ₹40 lakh = ₹80 lakh. Depreciation per year = ₹6 lakh. For three years, accumulated depreciation = ₹18 lakh. Carrying amount = ₹80 lakh – ₹18 lakh = ₹62 lakh. Option ₹54 lakh ignores residual value; ₹72 lakh deducts only one year’s depreciation.

Where it goes wrong. Using gross cost or not deducting all three years’ depreciation.

Authority. AS 12 para 13

Question 3 · 2 marks · Chapter 9: Other Accounting Standards · hard

How should the refund of ₹30 lakh be accounted on 1 April 2027 as per AS 12?

1. Debit Profit & Loss Account and credit Bank Account
2. Debit Deferred Government Grant and credit Bank Account
3. Debit Plant Account and credit Bank Account (correct answer)
4. Debit Capital Reserve and credit Bank Account

Answer: C — Debit Plant Account and credit Bank Account

Explanation. As per AS 12 para 21, the amount refundable in respect of a grant related to a specific fixed asset is recorded by increasing the book value of the asset. Therefore, the entry is: Plant A/c Dr. ₹30 lakh; To Bank A/c ₹30 lakh. The depreciation on the revised book value is then provided prospectively over the residual useful life.

Where it goes wrong. Charging the refund directly to P&L or reducing deferred income when Method 1 is followed.

Authority. AS 12 para 21

Question 4 · 2 marks · Chapter 9: Other Accounting Standards · hard

What is the revised annual depreciation charge for the year ended 31 March 2028 after the refund?

1. ₹12 lakh
2. ₹8.57 lakh
3. ₹6 lakh
4. ₹10.29 lakh (correct answer)

Answer: D — ₹10.29 lakh

Explanation. After refund, revised carrying amount = ₹62 lakh + ₹30 lakh = ₹92 lakh. Residual value remains ₹20 lakh. Remaining useful life = 7 years (10 – 3). Depreciable amount = ₹92 lakh – ₹20 lakh = ₹72 lakh. Revised annual depreciation = ₹72 lakh / 7 = ₹10.29 lakh (approx). Option ₹8.57 lakh arises if residual value is omitted; ₹6 lakh ignores refund effect.

Where it goes wrong. Ignoring the change in carrying amount or using the original remaining life incorrectly.

Authority. AS 12 para 21

Question 5 · 2 marks · Chapter 9: Other Accounting Standards · medium

Scenario. Vardhan Textiles Ltd. received the following government grants during the year ended 31 March 2026: (i) ₹25 lakh for purchase of a new machinery costing ₹80 lakh on 1 April 2025. The machinery has a useful life of 5 years and nil residual value. Depreciation is on straight-line basis. The company wants to treat the grant as deferred income (Method 2). (ii) ₹10 lakh as compensation for expenses incurred in the previous year (revenue grant). The company recognised it as income in the year of receipt. (iii) Land received free of cost from the state government on 1 July 2025. The market value of the land is ₹50 lakh. The company did not record the land at all in its books. (iv) ₹15 lakh received as promoters' contribution (central investment subsidy) with no repayment expected. Additionally, on 31 March 2026, a grant of ₹5 lakh related to revenue became refundable due to non-fulfilment of conditions. The company had already recognised this grant as income in the previous year. The company follows AS 12.

For the machinery grant under Method 2, what is the amount of deferred income to be recognised in the Statement of Profit and Loss for the year ended 31 March 2026?

1. ₹5 lakh (correct answer)
2. ₹16 lakh
3. ₹25 lakh
4. ₹4 lakh

Answer: A — ₹5 lakh

Explanation. Under Method 2, the grant related to a depreciable asset is treated as deferred income and recognised in P&L over the useful life of the asset in proportion to depreciation. Grant = ₹25 lakh; Useful life = 5 years. Annual amortisation = ₹25 lakh / 5 = ₹5 lakh. Depreciation on machinery = ₹80 lakh / 5 = ₹16 lakh, but that is separate from grant income.

Where it goes wrong. Recognising the entire grant immediately or using the asset’s depreciation amount as grant income.

Authority. AS 12 para 14

Question 6 · 2 marks · Chapter 9: Other Accounting Standards · medium

How should the land received free of cost be accounted in the books of Vardhan Textiles Ltd.?

1. Record at market value ₹50 lakh
2. Record at nominal value (correct answer)
3. Do not record at all
4. Record at ₹50 lakh and credit Capital Reserve

Answer: B — Record at nominal value

Explanation. AS 12 para 11 states that non-monetary assets given free of cost are recorded at a nominal value. The company’s treatment of not recording the land at all is incorrect. Market value is not used for free-of-cost non-monetary grants.

Where it goes wrong. Using market value or omitting the asset entirely.

Authority. AS 12 para 11

Question 7 · 2 marks · Chapter 9: Other Accounting Standards · hard

What is the correct accounting treatment for the ₹10 lakh revenue grant received as compensation for expenses incurred in the previous year?

1. Recognise as income in the year of receipt (correct answer)
2. Restate the previous year’s financial statements
3. Deduct from the related expense of the previous year
4. Credit to Capital Reserve

Answer: A — Recognise as income in the year of receipt

Explanation. As per AS 12 para 4.4, a government grant receivable as compensation for expenses or losses already incurred, or for immediate financial support with no further related costs, is recognised as income of the period in which it becomes receivable. It is not adjusted retrospectively. The company’s treatment is correct.

Where it goes wrong. Retrospective recognition or netting against prior year expenses.

Authority. AS 12 para 4.4

Question 8 · 2 marks · Chapter 9: Other Accounting Standards · hard

What is the treatment of the ₹5 lakh revenue grant that became refundable on 31 March 2026, assuming it had already been recognised as income in the previous year?

1. Debit Profit & Loss Account ₹5 lakh (correct answer)
2. Debit Deferred Government Grant ₹5 lakh
3. Debit Capital Reserve ₹5 lakh
4. Adjust against current year grant income

Answer: A — Debit Profit & Loss Account ₹5 lakh

Explanation. As per AS 12 para 18, the amount refundable in respect of a revenue grant is first applied against any unamortised deferred credit. If no deferred credit exists, it is charged immediately to the Statement of Profit and Loss. Here, the grant was already recognised as income, so there is no deferred credit; hence ₹5 lakh is debited to P&L.

Where it goes wrong. Debiting deferred grant even when no deferred income exists, or adjusting capital reserve.

Authority. AS 12 para 18

Question 9 · 2 marks · Chapter 9: Other Accounting Standards · medium

Scenario. A company received a government grant of ₹20 lakh for the purchase of a non-depreciable asset (land). The grant requires the company to construct a factory building on the land within three years. As at the balance sheet date, the company has not yet constructed the building. How should the grant be treated?

A company received a government grant of ₹20 lakh for the purchase of a non-depreciable asset (land). The grant requires the company to construct a factory building on the land within three years. As at the balance sheet date, the company has not yet constructed the building. How should the grant be treated?

1. Treat as deferred income (correct answer)
2. Credit to Capital Reserve
3. Deduct from the cost of land
4. Recognise immediately in profit or loss

Answer: A — Treat as deferred income

Explanation. As per AS 12 para 14, grants related to non-depreciable assets that require fulfilment of certain obligations are credited to income over the same period over which the cost of meeting such obligations is charged to income. Until the obligation is fulfilled, the grant is treated as deferred income. Therefore, the grant should not be recognised immediately nor credited to capital reserve.

Where it goes wrong. Recognising immediately or crediting to capital reserve despite pending obligations.

Authority. AS 12 para 14

Question 10 · 2 marks · Chapter 9: Other Accounting Standards · medium

Scenario. Which of the following is NOT a condition for recognition of a government grant as per AS 12?

Which of the following is NOT a condition for recognition of a government grant as per AS 12?

1. Reasonable assurance that the enterprise will comply with the conditions attached to the grant
2. Reasonable assurance that the grant will be received
3. The grant must be received in cash (correct answer)
4. The grant may be received in cash or kind

Answer: C — The grant must be received in cash

Explanation. AS 12 para 4 requires reasonable assurance of compliance with conditions and receipt of the grant. It does not require the grant to be in cash; non-monetary grants are also covered. Hence, the condition that the grant must be received in cash is not required.

Where it goes wrong. Assuming only cash grants qualify; non-monetary grants are permitted.

Authority. AS 12 para 4

Question 11 · 2 marks · Chapter 9: Other Accounting Standards · medium

Scenario. A company receives a grant of ₹15 lakh related to a depreciable asset costing ₹60 lakh. The useful life is 5 years and residual value is ₹5 lakh. Under Method 1, what is the depreciation charge for the first year?

A company receives a grant of ₹15 lakh related to a depreciable asset costing ₹60 lakh. The useful life is 5 years and residual value is ₹5 lakh. Under Method 1, what is the depreciation charge for the first year?

1. ₹8 lakh (correct answer)
2. ₹12 lakh
3. ₹9 lakh
4. ₹11 lakh

Answer: A — ₹8 lakh

Explanation. Under Method 1, grant is deducted from the asset cost. Net cost = ₹60 lakh – ₹15 lakh = ₹45 lakh. Depreciable amount = ₹45 lakh – ₹5 lakh = ₹40 lakh. Annual depreciation = ₹40 lakh / 5 = ₹8 lakh. Option ₹12 lakh ignores the grant; ₹9 lakh ignores residual value.

Where it goes wrong. Not deducting the grant or not deducting residual value correctly.

Authority. AS 12 para 13

Question 12 · 2 marks · Chapter 9: Other Accounting Standards · hard

Scenario. Under Method 2, how is a government grant related to a depreciable asset presented in the balance sheet?

Under Method 2, how is a government grant related to a depreciable asset presented in the balance sheet?

1. As a deduction from the gross value of the asset
2. As part of Capital Reserve
3. As part of General Reserve
4. As deferred income (a liability) (correct answer)

Answer: D — As deferred income (a liability)

Explanation. Under Method 2, grants related to depreciable assets are treated as deferred income and recognised in P&L over the useful life of the asset. The deferred income is shown on the liability side of the balance sheet. Deduction from asset is Method 1.

Where it goes wrong. Confusing Method 1 and Method 2 presentation.

Authority. AS 12 para 14

Question 13 · 2 marks · Chapter 9: Other Accounting Standards · medium

Scenario. A company received a grant of ₹10 lakh for the purchase of machinery costing ₹40 lakh. The grant is in the nature of promoters' contribution. How should it be treated?

A company received a grant of ₹10 lakh for the purchase of machinery costing ₹40 lakh. The grant is in the nature of promoters' contribution. How should it be treated?

1. Deduct from the cost of machinery
2. Treat as deferred income
3. Credit to Capital Reserve (correct answer)
4. Recognise as revenue income

Answer: C — Credit to Capital Reserve

Explanation. As per AS 12 para 17, grants in the nature of promoters' contribution are treated as capital reserve, which can be neither distributed as dividend nor considered as deferred income. It is not deducted from the asset nor recognised as revenue.

Where it goes wrong. Treating promoters' contribution like a normal asset-related grant.

Authority. AS 12 para 17

Question 14 · 2 marks · Chapter 9: Other Accounting Standards · hard

Scenario. A government grant of ₹5 lakh becomes refundable. The grant was related to revenue and had been fully recognised as income in the previous year. What is the accounting treatment?

A government grant of ₹5 lakh becomes refundable. The grant was related to revenue and had been fully recognised as income in the previous year. What is the accounting treatment?

1. Debit Deferred Government Grant
2. Debit Capital Reserve
3. Debit Profit & Loss Account (correct answer)
4. Adjust against current year grant income

Answer: C — Debit Profit & Loss Account

Explanation. As per AS 12 para 18, a refund of a revenue grant is first applied against any unamortised deferred credit. If none exists, it is charged immediately to the Statement of Profit and Loss. Since the grant was already recognised as income, there is no deferred credit; hence debit P&L.

Where it goes wrong. Debiting deferred grant or capital reserve even when no deferred income exists.

Authority. AS 12 para 18

Question 15 · 2 marks · Chapter 9: Other Accounting Standards · medium

Scenario. Which of the following disclosures is required under AS 12 for government grants?

Which of the following disclosures is required under AS 12 for government grants?

1. Only the accounting policy adopted for government grants
2. Only the nature and extent of government grants recognised
3. Both the accounting policy and the nature and extent of government grants recognised (correct answer)
4. Only the amount of grants received during the year

Answer: C — Both the accounting policy and the nature and extent of government grants recognised

Explanation. AS 12 para 22 requires disclosure of (i) the accounting policy adopted for government grants, including methods of presentation; and (ii) the nature and extent of government grants recognised, including non-monetary grants at concessional rate or free of cost. Both are required.

Where it goes wrong. Assuming only one of the two disclosures is required.

Authority. AS 12 para 22

Question 16 · 2 marks · Chapter 9: Other Accounting Standards · hard

Scenario. A company received a non-monetary grant of land at a concessional rate. The market value of the land is ₹50 lakh, but the company paid ₹10 lakh. At what value should the land be recorded?

A company received a non-monetary grant of land at a concessional rate. The market value of the land is ₹50 lakh, but the company paid ₹10 lakh. At what value should the land be recorded?

1. ₹50 lakh
2. ₹40 lakh
3. Nominal value
4. ₹10 lakh (correct answer)

Answer: D — ₹10 lakh

Explanation. AS 12 para 11 states that non-monetary government grants may take the form of assets given at concessional rates. In such cases, the asset is recorded at its acquisition cost, which is the amount paid by the company (₹10 lakh). Free-of-cost assets are recorded at nominal value.

Where it goes wrong. Using market value for concessional-rate assets or recording at nominal value when consideration is paid.

Authority. AS 12 para 11

Question 17 · 2 marks · Chapter 9: Other Accounting Standards · hard

Scenario. A company has a grant of ₹20 lakh related to a non-depreciable asset that requires fulfilment of certain obligations. The cost of meeting these obligations is estimated at ₹5 lakh per year for four years. How should the grant be recognised?

A company has a grant of ₹20 lakh related to a non-depreciable asset that requires fulfilment of certain obligations. The cost of meeting these obligations is estimated at ₹5 lakh per year for four years. How should the grant be recognised?

1. Recognise the full ₹20 lakh immediately
2. Credit to Capital Reserve
3. Defer indefinitely until obligations are fully met
4. Recognise ₹5 lakh per year for four years (correct answer)

Answer: D — Recognise ₹5 lakh per year for four years

Explanation. As per AS 12 para 14, if a grant related to a non-depreciable asset requires fulfilment of certain obligations, the grant is credited to income over the same period over which the cost of meeting such obligations is charged to income. Here, obligations cost ₹5 lakh per year for four years, so the grant is recognised at ₹5 lakh per year.

Where it goes wrong. Immediate recognition or indefinite deferral despite a clear obligation period.

Authority. AS 12 para 14

Question 18 · 2 marks · Chapter 9: Other Accounting Standards · medium

Scenario. A company received a grant of ₹8 lakh for purchase of a depreciable asset costing ₹32 lakh. Useful life is 4 years with no residual value. Under Method 1, what is the carrying amount of the asset at the end of year 2?

A company received a grant of ₹8 lakh for purchase of a depreciable asset costing ₹32 lakh. Useful life is 4 years with no residual value. Under Method 1, what is the carrying amount of the asset at the end of year 2?

1. ₹12 lakh (correct answer)
2. ₹16 lakh
3. ₹20 lakh
4. ₹24 lakh

Answer: A — ₹12 lakh

Explanation. Net cost = ₹32 lakh – ₹8 lakh = ₹24 lakh. Annual depreciation = ₹24 lakh / 4 = ₹6 lakh. Accumulated depreciation for two years = ₹12 lakh. Carrying amount = ₹24 lakh – ₹12 lakh = ₹12 lakh. Option ₹16 lakh ignores grant deduction; ₹20 lakh ignores two years’ depreciation.

Where it goes wrong. Not deducting grant or miscalculating accumulated depreciation.

Authority. AS 12 para 13

Question 19 · 2 marks · Chapter 9: Other Accounting Standards · hard

Scenario. Under Method 2, the grant related to a depreciable asset is recognised in the Statement of Profit and Loss:

Under Method 2, the grant related to a depreciable asset is recognised in the Statement of Profit and Loss:

1. Immediately in the year of receipt
2. Over a fixed period of 5 years regardless of useful life
3. When the related asset is sold
4. Over the useful life of the asset on a systematic and rational basis (correct answer)

Answer: D — Over the useful life of the asset on a systematic and rational basis

Explanation. AS 12 para 14 states that grants related to depreciable assets are treated as deferred income and recognised in the Statement of Profit and Loss on a systematic and rational basis over the useful life of the asset. Immediate recognition or recognition on sale is not permitted.

Where it goes wrong. Recognising immediately or using an arbitrary period instead of useful life.

Authority. AS 12 para 14

Question 20 · 2 marks · Chapter 9: Other Accounting Standards · hard

Scenario. A company received a grant of ₹12 lakh for purchase of machinery costing ₹50 lakh. The grant was credited to the asset account. After 2 years, the grant becomes refundable to the extent of ₹8 lakh. The carrying amount of the asset before refund was ₹30 lakh. What is the revised carrying amount after refund?

A company received a grant of ₹12 lakh for purchase of machinery costing ₹50 lakh. The grant was credited to the asset account. After 2 years, the grant becomes refundable to the extent of ₹8 lakh. The carrying amount of the asset before refund was ₹30 lakh. What is the revised carrying amount after refund?

1. ₹38 lakh (correct answer)
2. ₹30 lakh
3. ₹22 lakh
4. ₹42 lakh

Answer: A — ₹38 lakh

Explanation. As per AS 12 para 21, for a grant related to a specific fixed asset, the refund is recorded by increasing the book value of the asset. Revised carrying amount = ₹30 lakh + ₹8 lakh = ₹38 lakh. Depreciation on the revised book value is provided prospectively over the residual useful life.

Where it goes wrong. Reducing the asset instead of increasing it, or charging the refund to P&L.

Authority. AS 12 para 21