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Lee Company received an HK$1,800,000 subsidy from the government to purchase manufacturing equipment on January, 2, 2011.The equipment has a cost of HK$3,000,000, a useful life a six years, and no salvage value.Lee depreciates the equipment on a straight-line basis.
-Whether Lee chooses to account for the grant as deferred revenue or as an adjustment to the asset, the combined impact of deferred grant revenue recognition and\ or depreciation expense recorded per year will be:

Question

Quizplus · Accepted Answer

The subsidy reduces the cost of the equipment, which in turn reduces depreciation expense. The deferred grant revenue is recognized as income over the life of the equipment, which increases net income. The combined impact of these two factors is a decrease to net income of HK$200,000.

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