Chapter 9: Other Accounting Standards - Test 2: answer key

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

Scenario. Zenith Healthcare Ltd., a charitable hospital operating in Pune, received a lump-sum government grant of ₹1,20,00,000 from the State Government on 1 April 2024 to support the salary expenses of doctors and nursing staff over the next four years. The annual salary expense of the hospital is ₹45,00,000, and this has remained constant. A condition attached to the grant required the hospital to reserve 20% of its beds for economically weaker patients free of cost. There was reasonable assurance that the hospital would comply with the conditions and that the grant would be received. The grant was presented separately as 'Other Income' in the Statement of Profit and Loss. For the years ended 31 March 2025 and 31 March 2026, the hospital duly recognised the grant income on a straight-line basis over four years. At the beginning of Year 3 (1 April 2026), the State Government conducted an inspection and found that the hospital had failed to comply with the free-bed condition. Consequently, the entire grant of ₹1,20,00,000 became refundable. The hospital refunded the amount to the Government on 10 April 2026. The management is now evaluating the correct accounting treatment, including the reversal of any deferred income and the impact on the Statement of Profit and Loss for the year ended 31 March 2027. The accountant has requested your guidance on the following independent issues. Additionally, the Finance Manager is concerned whether the refund should be disclosed as an extraordinary item as per AS 5, and whether the deferred income balance existing in the books should be reversed before charging any amount to the Statement of Profit and Loss.

What amount of the grant should have been recognised as income in the Statement of Profit and Loss for the year ended 31 March 2025?

1. ₹20,00,000
2. ₹30,00,000 (correct answer)
3. ₹36,00,000
4. ₹25,00,000

Answer: B — ₹30,00,000

Explanation. Under the revenue grant presentation, the grant of ₹1,20,00,000 is recognised as income on a straight-line basis over the four-year benefit period. Annual income = ₹1,20,00,000 / 4 = ₹30,00,000. The options ₹20,00,000 and ₹36,00,000 result from incorrect allocation periods (six years or ten-thirds years); ₹25,00,000 is an arbitrary figure.

Where it goes wrong. Recognising the entire grant in Year 1 or dividing by the wrong number of years.

Authority. AS 12 para 15

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

What is the balance of unamortised deferred income lying in the books of Zenith Healthcare Ltd. as on 31 March 2026?

1. ₹30,00,000
2. ₹45,00,000
3. ₹60,00,000 (correct answer)
4. ₹90,00,000

Answer: C — ₹60,00,000

Explanation. Total grant = ₹1,20,00,000. Income recognised in Year 1 (FY 2024-25) = ₹30,00,000 and in Year 2 (FY 2025-26) = ₹30,00,000. Cumulative income recognised = ₹60,00,000. Deferred income balance = ₹1,20,00,000 – ₹60,00,000 = ₹60,00,000 as on 31 March 2026. Option ₹90,00,000 ignores Year 1 amortisation; ₹30,00,000 ignores both years.

Where it goes wrong. Deducting only one year's amortisation instead of two.

Authority. AS 12 para 15

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

On refund of the entire grant on 10 April 2026, what amount is to be debited to the Statement of Profit and Loss for the year ended 31 March 2027?

1. ₹60,00,000 (correct answer)
2. ₹1,20,00,000
3. ₹90,00,000
4. ₹30,00,000

Answer: A — ₹60,00,000

Explanation. As per AS 12 para 18, the refund is first applied against any unamortised deferred credit remaining in respect of the grant. Deferred income balance = ₹60,00,000. The excess refund over the deferred credit = ₹1,20,00,000 – ₹60,00,000 = ₹60,00,000, which is charged to the Statement of Profit and Loss as an extraordinary item per AS 5. Hence ₹60,00,000 is debited to P&L and ₹60,00,000 to Deferred Income.

Where it goes wrong. Charging the full ₹1,20,00,000 to P&L without first exhausting the deferred income balance.

Authority. AS 12 para 18; AS 5

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

If the grant had been presented as a deduction from the related salary expense (instead of 'Other Income'), what would be the net salary expense shown in the Statement of Profit and Loss for the year ended 31 March 2025?

1. ₹45,00,000
2. ₹30,00,000
3. ₹20,00,000
4. ₹15,00,000 (correct answer)

Answer: D — ₹15,00,000

Explanation. AS 12 para 15 permits revenue grants to be presented either as Other Income or as a deduction from the related expense. Salary expense for Year 1 = ₹45,00,000. Grant income for Year 1 = ₹30,00,000. If deducted from expense, net salary expense = ₹45,00,000 – ₹30,00,000 = ₹15,00,000. Option ₹30,00,000 ignores the salary expense; ₹45,00,000 is the gross expense without deduction.

Where it goes wrong. Showing the gross expense even when the grant is deducted, or confusing grant income with net expense.

Authority. AS 12 para 15

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

Scenario. Vardhan Steel Ltd. set up a new manufacturing unit in a notified backward area of Chhattisgarh. The company received several government grants and incentives during the past two financial years: (i) On 1 May 2024, a Central Investment Subsidy of ₹80,00,000 was received. The subsidy is in the nature of promoters' contribution; it is given with reference to the total investment in the undertaking, no repayment is ordinarily expected, and no specific assets are required to be purchased for this subsidy. (ii) On 1 October 2025, a revenue grant of ₹30,00,000 was received to compensate for employee training costs incurred during the year. The company recognised this as 'Other Income' in FY 2025-26. (iii) On 1 April 2024, the company purchased a machine for ₹60,00,000 with a useful life of 5 years and nil residual value, for which a grant of ₹15,00,000 was received. The company followed Method 1 of AS 12, deducting the grant from the gross value of the machine, and charged depreciation on the straight-line basis. On 1 April 2026, the grant became fully refundable due to non-compliance with certain conditions. (iv) During FY 2025-26, the company was also required to refund ₹10,00,000 of a revenue grant that had been recognised as income in FY 2024-25. No deferred income existed in respect of this grant at the time of refund. The management seeks your guidance on the accounting treatment of the above transactions for the year ended 31 March 2026 and the year ended 31 March 2027, in accordance with AS 12, and on the appropriate financial statement presentation.

How should the Central Investment Subsidy of ₹80,00,000 received on 1 May 2024 be accounted?

1. Deduct from the cost of fixed assets
2. Credit to Capital Reserve (correct answer)
3. Recognise as deferred income and amortise over five years
4. Recognise as 'Other Income' in the Statement of Profit and Loss

Answer: B — Credit to Capital Reserve

Explanation. As per AS 12 para 17, grants in the nature of promoters' contribution — given with reference to total investment, no repayment ordinarily expected, and not linked to specific assets — are credited to Capital Reserve. This reserve cannot be distributed as dividend or treated as deferred income. Options (a), (c) and (d) apply to asset-related or revenue grants, not promoters' contribution.

Where it goes wrong. Treating the promoters' contribution as a revenue grant or asset-related grant.

Authority. AS 12 para 17

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

What is the carrying amount of the machine as on 31 March 2026, before accounting for the refund?

1. ₹36,00,000
2. ₹45,00,000
3. ₹30,00,000
4. ₹27,00,000 (correct answer)

Answer: D — ₹27,00,000

Explanation. Under Method 1, grant is deducted from gross asset value. Net cost = ₹60,00,000 – ₹15,00,000 = ₹45,00,000. Annual depreciation (SLM, nil residual) = ₹45,00,000 / 5 = ₹9,00,000. Two years' depreciation = ₹18,00,000. Carrying amount = ₹45,00,000 – ₹18,00,000 = ₹27,00,000. Option ₹45,00,000 ignores depreciation; ₹36,00,000 ignores grant deduction.

Where it goes wrong. Ignoring the grant deduction, or applying depreciation to gross cost.

Authority. AS 12 para 13

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

What is the revised annual depreciation charge on the machine for the year ended 31 March 2027, after the refund is recorded on 1 April 2026?

1. ₹9,00,000
2. ₹12,00,000
3. ₹14,00,000 (correct answer)
4. ₹15,00,000

Answer: C — ₹14,00,000

Explanation. Under Method 1, the refund of ₹15,00,000 is added back to the carrying amount. Revised book value = ₹27,00,000 + ₹15,00,000 = ₹42,00,000. Remaining useful life = 5 – 2 = 3 years. Depreciation is provided prospectively over the residual life: ₹42,00,000 / 3 = ₹14,00,000. Option ₹9,00,000 ignores the refund; ₹15,00,000 uses original remaining life after full cost.

Where it goes wrong. Continuing with the original depreciation of ₹9,00,000, or retrospectively restating past depreciation.

Authority. AS 12 para 21

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

How should the refund of ₹10,00,000 of a revenue grant (already recognised as income, with no deferred income balance) be treated?

1. Charge to the Statement of Profit and Loss as an extraordinary item per AS 5 (correct answer)
2. Debit Capital Reserve
3. Debit Deferred Government Grant Account
4. Adjust against current year grant income

Answer: A — Charge to the Statement of Profit and Loss as an extraordinary item per AS 5

Explanation. As per AS 12 para 18, where no unamortised deferred credit exists, the entire refundable amount is charged immediately to the Statement of Profit and Loss and disclosed as an extraordinary item per AS 5. Since the grant was already recognised as income, there is no deferred income to reverse. Options (b), (c) and (d) apply where deferred income exists or the grant was in the nature of promoters' contribution.

Where it goes wrong. Debiting deferred grant despite no deferred balance, or netting against current year grant income.

Authority. AS 12 para 18; AS 5

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

Scenario. Zenith Traders Ltd. received a revenue grant of ₹60,00,000 on 1 April 2025 to meet marketing expenses of ₹40,00,000 per year for three years. If the company presents the grant as a deduction from the related expense, what is the net amount of marketing expense to be shown in the Statement of Profit and Loss for the year ended 31 March 2026?

Zenith Traders Ltd. received a revenue grant of ₹60,00,000 on 1 April 2025 to meet marketing expenses of ₹40,00,000 per year for three years. If the company presents the grant as a deduction from the related expense, what is the net amount of marketing expense to be shown in the Statement of Profit and Loss for the year ended 31 March 2026?

1. ₹40,00,000
2. ₹20,00,000 (correct answer)
3. ₹60,00,000
4. ₹30,00,000

Answer: B — ₹20,00,000

Explanation. Grant amortised per year = ₹60,00,000 / 3 = ₹20,00,000. Marketing expense for the year = ₹40,00,000. If the grant is deducted from the related expense, net marketing expense = ₹40,00,000 – ₹20,00,000 = ₹20,00,000. Option ₹40,00,000 shows gross expense without deduction; ₹30,00,000 uses wrong amortisation.

Where it goes wrong. Showing the gross expense or deducting the full grant from a single year.

Authority. AS 12 para 15

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

Scenario. A company received a government grant of ₹50,00,000 in FY 2023-24 in the nature of promoters' contribution and credited it to Capital Reserve. In FY 2025-26, ₹20,00,000 of the grant became refundable to the government due to non-fulfilment of specified conditions. What is the correct accounting treatment?

A company received a government grant of ₹50,00,000 in FY 2023-24 in the nature of promoters' contribution and credited it to Capital Reserve. In FY 2025-26, ₹20,00,000 of the grant became refundable to the government due to non-fulfilment of specified conditions. What is the correct accounting treatment?

1. Debit the Statement of Profit and Loss with ₹20,00,000
2. Debit Deferred Government Grant Account with ₹20,00,000
3. Debit Capital Reserve with ₹20,00,000 (correct answer)
4. Debit the related Fixed Asset Account with ₹20,00,000

Answer: C — Debit Capital Reserve with ₹20,00,000

Explanation. As per AS 12 para 20, where a grant in the nature of promoters' contribution becomes refundable in part or in full due to non-fulfilment of specified conditions, the relevant amount recoverable is reduced from the Capital Reserve. Options (a), (b) and (d) apply to revenue or asset-related grants, not promoters' contribution.

Where it goes wrong. Charging the refund to P&L instead of reducing Capital Reserve.

Authority. AS 12 para 20

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

Scenario. A company received a government grant of ₹25,00,000 in May 2025 as compensation for losses suffered due to a fire in the previous year. There are no further related costs. How should the grant be recognised?

A company received a government grant of ₹25,00,000 in May 2025 as compensation for losses suffered due to a fire in the previous year. There are no further related costs. How should the grant be recognised?

1. Recognise as deferred income and amortise over five years
2. Restate the previous year's financial statements
3. Credit directly to Capital Reserve
4. Recognise as income in FY 2025-26, as an extraordinary item if appropriate per AS 5 (correct answer)

Answer: D — Recognise as income in FY 2025-26, as an extraordinary item if appropriate per AS 5

Explanation. Where a grant is receivable as compensation for expenses or losses already incurred, or for immediate financial support with no further related costs, it is recognised and disclosed in the Statement of Profit and Loss of the period in which it becomes receivable, as an extraordinary item if appropriate per AS 5. It is not deferred, restated or credited to Capital Reserve.

Where it goes wrong. Deferring the grant across future periods or retrospectively restating prior years.

Authority. AS 12 read with AS 5

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

Scenario. A charitable trust received a grant of ₹90,00,000 on 1 April 2023 to meet salary expenses of ₹30,00,000 per year for 5 years. At the start of Year 4 (1 April 2026), the entire grant became refundable. At the time of refund, what amount is to be debited to the Statement of Profit and Loss?

A charitable trust received a grant of ₹90,00,000 on 1 April 2023 to meet salary expenses of ₹30,00,000 per year for 5 years. At the start of Year 4 (1 April 2026), the entire grant became refundable. At the time of refund, what amount is to be debited to the Statement of Profit and Loss?

1. ₹54,00,000 (correct answer)
2. ₹36,00,000
3. ₹90,00,000
4. ₹18,00,000

Answer: A — ₹54,00,000

Explanation. Grant income recognised over 3 years = ₹30,00,000 × 3 = ₹90,00,000? No — annual amortisation = ₹90,00,000 / 5 = ₹18,00,000 per year. Income recognised = ₹18,00,000 × 3 = ₹54,00,000. Deferred income balance = ₹90,00,000 – ₹54,00,000 = ₹36,00,000. On refund, Deferred Income is debited by ₹36,00,000 and P&L by ₹54,00,000; hence P&L debit = ₹54,00,000. Option ₹36,00,000 is the deferred balance, not the P&L charge.

Where it goes wrong. Charging the entire refund to P&L, or confusing the deferred income balance with the P&L charge.

Authority. AS 12 para 18

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

Scenario. Ganga Ltd. purchased a machine on 1 April 2024 for ₹1,00,00,000 with a useful life of 5 years and nil residual value. A grant of ₹30,00,000 was received and treated as deferred income (Method 2). On 31 March 2026, the grant became refundable to the extent of ₹20,00,000. What is the amount to be charged to the Statement of Profit and Loss in excess of the deferred income balance?

Ganga Ltd. purchased a machine on 1 April 2024 for ₹1,00,00,000 with a useful life of 5 years and nil residual value. A grant of ₹30,00,000 was received and treated as deferred income (Method 2). On 31 March 2026, the grant became refundable to the extent of ₹20,00,000. What is the amount to be charged to the Statement of Profit and Loss in excess of the deferred income balance?

1. ₹18,00,000
2. ₹2,00,000 (correct answer)
3. ₹20,00,000
4. Nil

Answer: B — ₹2,00,000

Explanation. Under Method 2, deferred income is amortised over 5 years at ₹6,00,000 per year. After 2 years, deferred income = ₹30,00,000 – ₹12,00,000 = ₹18,00,000. On refund of ₹20,00,000, the deferred income balance of ₹18,00,000 is first reversed, and the excess ₹2,00,000 is charged to P&L (as illustrated in the study material's refund-of-grant example). Option ₹18,00,000 is the deferred balance, not the excess.

Where it goes wrong. Charging the full refund to P&L or not applying the deferred income balance first.

Authority. AS 12 para 21 read with para 18

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

Scenario. Which of the following statements is correct regarding grants in the nature of promoters' contribution?

Which of the following statements is correct regarding grants in the nature of promoters' contribution?

1. They are treated as deferred income and amortised over the useful life of the business
2. They can be distributed as dividend to shareholders
3. They are credited to Capital Reserve and cannot be distributed as dividend (correct answer)
4. They are deducted from the cost of the related fixed asset

Answer: C — They are credited to Capital Reserve and cannot be distributed as dividend

Explanation. AS 12 para 17 provides that promoters' contribution grants are treated as Capital Reserve, which can be neither distributed as dividend nor considered as deferred income. They are not deducted from any specific asset. Option (b) directly contradicts the standard; (a) and (d) confuse with other grant types.

Where it goes wrong. Assuming promoters' contribution follows the revenue or asset-related grant treatment.

Authority. AS 12 para 17

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

Scenario. Prakash Ltd. received a revenue grant of ₹15,00,000 for employee welfare expenses of ₹40,00,000 for the year ended 31 March 2026. If the grant is presented as a deduction from the related expense, what amounts should appear in the Statement of Profit and Loss?

Prakash Ltd. received a revenue grant of ₹15,00,000 for employee welfare expenses of ₹40,00,000 for the year ended 31 March 2026. If the grant is presented as a deduction from the related expense, what amounts should appear in the Statement of Profit and Loss?

1. Employee welfare expense ₹40,00,000; Other Income ₹15,00,000
2. Employee welfare expense ₹25,00,000; Other Income Nil (correct answer)
3. Employee welfare expense ₹40,00,000; Other Income Nil
4. Employee welfare expense ₹25,00,000; Other Income ₹15,00,000

Answer: B — Employee welfare expense ₹25,00,000; Other Income Nil

Explanation. AS 12 para 15 permits revenue grants to be presented either as Other Income or as a deduction from the related expense. If deducted, the Statement of Profit and Loss shows employee welfare expense of ₹40,00,000 – ₹15,00,000 = ₹25,00,000 and no separate grant income. Options (a) and (c) show the gross expense without deduction; (d) shows both deduction and separate income (double counting).

Where it goes wrong. Recognising the grant as Other Income and simultaneously deducting it from the expense.

Authority. AS 12 para 15

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

Scenario. Bharat Ltd. received a revenue grant of ₹80,00,000 on 1 April 2025 to compensate expenses over 4 years. At the start of Year 2 (1 April 2026), the entire grant became refundable. The company had recognised ₹20,00,000 as income in Year 1, and had unamortised deferred income of ₹60,00,000 from the same grant. What amount is to be debited to the Statement of Profit and Loss on refund?

Bharat Ltd. received a revenue grant of ₹80,00,000 on 1 April 2025 to compensate expenses over 4 years. At the start of Year 2 (1 April 2026), the entire grant became refundable. The company had recognised ₹20,00,000 as income in Year 1, and had unamortised deferred income of ₹60,00,000 from the same grant. What amount is to be debited to the Statement of Profit and Loss on refund?

1. ₹20,00,000 (correct answer)
2. ₹60,00,000
3. ₹80,00,000
4. Nil

Answer: A — ₹20,00,000

Explanation. AS 12 para 18 requires the refund to be applied first against the unamortised deferred credit of the same grant. Deferred income balance = ₹60,00,000; refund = ₹80,00,000. Debit Deferred Government Grant ₹60,00,000 and P&L ₹20,00,000, credit Bank ₹80,00,000. Hence the P&L debit is ₹20,00,000. Option ₹60,00,000 is the deferred income balance; ₹80,00,000 ignores the deferred credit.

Where it goes wrong. Charging the whole refund to P&L or using deferred income of a different grant.

Authority. AS 12 para 18

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

Scenario. Surya Ltd. received a grant of ₹40,00,000 in FY 2023-24 as promoters' contribution and credited it to Capital Reserve. In FY 2025-26, due to non-compliance, ₹15,00,000 of the grant became refundable. The company also has an unrelated deferred income balance of ₹5,00,000 from a revenue grant. What is the correct debit entry for the refund?

Surya Ltd. received a grant of ₹40,00,000 in FY 2023-24 as promoters' contribution and credited it to Capital Reserve. In FY 2025-26, due to non-compliance, ₹15,00,000 of the grant became refundable. The company also has an unrelated deferred income balance of ₹5,00,000 from a revenue grant. What is the correct debit entry for the refund?

1. Debit Deferred Government Grant ₹5,00,000 and P&L ₹10,00,000
2. Debit Capital Reserve ₹15,00,000 (correct answer)
3. Debit Statement of Profit and Loss ₹15,00,000
4. Debit Capital Reserve ₹10,00,000 and Deferred Government Grant ₹5,00,000

Answer: B — Debit Capital Reserve ₹15,00,000

Explanation. As per AS 12 para 20, refund of promoters' contribution is reduced from Capital Reserve. The unrelated deferred income from a different revenue grant cannot be netted against it — para 18's deferred-credit adjustment applies only to the same grant. Option (a) improperly mixes an unrelated grant's deferred income; (c) charges P&L ignoring the Capital Reserve route.

Where it goes wrong. Adjusting an unrelated deferred income balance or routing the refund through P&L.

Authority. AS 12 para 20

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

Scenario. Ashoka Ltd. received a grant of ₹45,00,000 on 1 April 2024 related to a specific machinery with a useful life of 5 years, treated as deferred income. On 31 March 2026, the grant became refundable in full. What is the correct journal entry for the refund?

Ashoka Ltd. received a grant of ₹45,00,000 on 1 April 2024 related to a specific machinery with a useful life of 5 years, treated as deferred income. On 31 March 2026, the grant became refundable in full. What is the correct journal entry for the refund?

1. Deferred Government Grant A/c Dr. ₹18,00,000; P&L A/c Dr. ₹27,00,000; To Bank A/c ₹45,00,000
2. P&L A/c Dr. ₹45,00,000; To Bank A/c ₹45,00,000
3. Deferred Government Grant A/c Dr. ₹27,00,000; P&L A/c Dr. ₹18,00,000; To Bank A/c ₹45,00,000 (correct answer)
4. Deferred Government Grant A/c Dr. ₹45,00,000; To Bank A/c ₹45,00,000

Answer: C — Deferred Government Grant A/c Dr. ₹27,00,000; P&L A/c Dr. ₹18,00,000; To Bank A/c ₹45,00,000

Explanation. Deferred income amortisation = ₹45,00,000 / 5 = ₹9,00,000 per year. After 2 years, deferred income balance = ₹45,00,000 – ₹18,00,000 = ₹27,00,000. On full refund, the deferred balance of ₹27,00,000 is first reversed; the balance ₹18,00,000 (already recognised as income) is charged to P&L. Option (a) reverses the amounts; (b) charges the whole refund to P&L; (d) debits more than the deferred balance exists.

Where it goes wrong. Reversing the deferred balance amount and P&L amount (₹27 lakh vs ₹18 lakh) or charging the entire refund to P&L.

Authority. AS 12 para 21 read with para 18

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

Scenario. According to AS 12, which of the following disclosures is mandatory in the financial statements?

According to AS 12, which of the following disclosures is mandatory in the financial statements?

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

Answer: D — Both the accounting policy adopted 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 the methods of presentation in the financial statements; and (ii) the nature and extent of government grants recognised, including non-monetary grants at concessional rate or free of cost. Options (a) and (b) mention only one of the two required disclosures.

Where it goes wrong. Assuming only the accounting policy or only the extent of grants needs to be disclosed.

Authority. AS 12 para 22

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

Scenario. Meera Ltd. received a grant of ₹20,00,000 for the purchase of land (a non-depreciable asset with no obligations attached) and a grant of ₹15,00,000 for a machine with a useful life of 5 years and nil residual value. Both grants are treated under Method 2 as per AS 12. What is the amount credited to Capital Reserve and the deferred income balance at the end of Year 1?

Meera Ltd. received a grant of ₹20,00,000 for the purchase of land (a non-depreciable asset with no obligations attached) and a grant of ₹15,00,000 for a machine with a useful life of 5 years and nil residual value. Both grants are treated under Method 2 as per AS 12. What is the amount credited to Capital Reserve and the deferred income balance at the end of Year 1?

1. Capital Reserve ₹20,00,000; Deferred income ₹12,00,000 (correct answer)
2. Capital Reserve ₹15,00,000; Deferred income ₹20,00,000
3. Capital Reserve ₹20,00,000; Deferred income ₹15,00,000
4. Capital Reserve ₹35,00,000; Deferred income Nil

Answer: A — Capital Reserve ₹20,00,000; Deferred income ₹12,00,000

Explanation. Under Method 2, grants related to non-depreciable assets with no obligations are credited to Capital Reserve: ₹20,00,000. For the depreciable machine, the grant is deferred and amortised: ₹15,00,000 / 5 = ₹3,00,000 per year. After Year 1, deferred income balance = ₹15,00,000 – ₹3,00,000 = ₹12,00,000. Option (c) ignores amortisation; (d) wrongly treats the machine grant as Capital Reserve too.

Where it goes wrong. Crediting the asset-related grant for machinery to Capital Reserve instead of treating it as deferred income.

Authority. AS 12 para 14