Smile Ltd. purchased machinery for 80 lakhs (useful life 4 years and residual value 8 lakhs). Government grant received was 32 lakhs. The grant had…

As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is allocated to Profit and Loss account usually over the periods and in the proportions in which depreciation on related assets is charged. Accordingly, in the first two years (32lakhs /4 years) = 8 lakhs x 2 years= 16 lakhs will be credited to Profit and Loss Account and 16 lakhs will be the balance of Deferred Grant Account after two years. Therefore, on refund of grant, following entry will be passed: Dr. ₹ ₹ Deferred Grant A/c 16 lakhs Profit & Loss A/c 16 lakhs To Bank A/c 32 lakhs (Being Government grant refunded) 1. Value of Fixed Assets after two years but before refund of grant Fixed assets initially recorded in the books = 80 lakhs Depreciation for each year = (80lakhs – 8lakhs)/4 years = 18 lakhs per year Book value of fixed assets after two years = 80 lakhs – (18lakhs x 2 years) = 44 lakhs 2. Value of Fixed Assets after refund of grant On refund of grant the balance of deferred grant account will become nil. The fixed assets will continue to be shown in the books at 44 lakhs. 3. Amount of depreciation for remaining two years Depreciation will continue to be charged at 18 lakhs per annum for the remaining two years.