Question

When an asset acquired through government grants is recorded using the capital approach,

a. assets and equity increase by the fair value of the asset.
b. assets and liabilities increase by the fair value of the asset.
c. assets and equity increase by the cost of the asset.
d. assets and liabilities increase by the cost of the asset.

Answer 1

a. assets and equity increase by the fair value of the asset.

The correct treatment for recording an asset acquired through government grants using the capital approach is that both assets and equity increase by the fair value of the asset.

Step-by-step explanation:

When an asset acquired through government grants is recorded using the capital approach, the correct treatment is that assets and equity increase by the fair value of the asset.

This is because the grant is recognized as a contribution to the entity, which in turn increases the equity, rather than creating a liability to be repaid.

Therefore, option (a), 'assets and equity increase by the fair value of the asset', is the correct answer to this accounting question.