ABC Ltd. has received the following grants from the Government of Delhi for its newly started pharmaceutical business: 20 lakhs received for…

Calculation of cost for closing inventory Particulars ₹ Cost of Purchase (10,200 x 10) 1,02,000 Direct Labour 76,500 Fixed Overhead 75,000 x 10,200 15,000 51,000 Cost of Production 2,29,500 Cost of closing inventory per unit (2,29,500/10,200) 22.50 Net Realisable Value per unit 20.00 Since net realisable value is less than cost, closing inventory will be valued at 20. As NRV of the finished goods is less than its cost, relevant raw materials will be valued at replacement cost i.e.9.50. Therefore, value of closing inventory: Finished Goods (1,200x20) 24,000 Raw Materials (900 x 9.50) 8,550 32,550 ABC Ltd. should recognise the grants in the following manner: 20 lakhs have been received for immediate start-up of business. This should be recognised in Statement of Profit and Loss immediately as there are no further conditions attached to the grant. 50 lakhs should be recognised in profit or loss on a systematic basis over the periods which the entity recognises as expense the related costs for which the grants are intended to compensate provided that there is reasonable assurance that ABC Ltd. will comply with the conditions attached to the grant.Land should be recognised at fair value of 10lakhs and government grant should be presented in the balance sheet by setting up the grant as deferred income. Alternatively, deduct the amount of grant from the cost of the asset. In the given case, the land is granted at no cost. It will be presented in the books at nominal value. 2 lakhs should be recognised as deferred income and will be transferred to profit and loss over the useful life of the asset. In this case,40,000 [2lakhs/5] should be credited to profit and loss each year over a period of 5 years. Alternatively,2,00,000 will be deducted from the cost of the asset and depreciation will be charged at reduced amount of 8,00,000 (₹ 10,00,000 - 2,00,000) every year.