Question

4. Darby Co successfully receives a government grant of $1,600,000 on 1 January 20X5 allowing it to purchase an asset which costs $400,000, also in 1 January 20X5. The asset has a ten-year useful life and is depreciated on a 20% reducing balance basis. Company policy is to account for all grants received as deferred income. What amount of income will be recognized in respect of the grant in the year to 31 December 20X5? A. $1,600,000 B. $240,000 C. $320,000 D. $150,000

Answer 1

Answer: A

The whole amount of grant should be considered as income during the year.

As per revenue recognition principle, an amount would be considered as revenue or income if its required performance obligation is complete. The grant is received for purchasing as asset, which is done in the year; therefore, $1,600,000 is an income.

The use of asset and its depreciation are not parts of identifying an income; these are not to be considered.