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CA Foundation · Accounting · Depreciation and Amortisation

A company changes its depreciation method retrospectively, and recomputation shows that depreciation charged in earlier years was excessive. Which treatment is correct in the year of change?

When recomputed depreciation shows earlier charges were excessive, the surplus is written back by crediting the Statement of Profit and Loss in the year of change. It is not transferred to reserves and not ignored. A deficiency would instead be charged to Profit and Loss.

  1. ACredit the excess to the Statement of Profit and Loss as a write-back in that yearCorrect
  2. BDebit the excess to the asset account to raise its book value
  3. CIgnore the excess as the change is only an estimate
  4. DTransfer the excess to General Reserve directly

Explanation

On a retrospective change in method, the excess depreciation is written back by crediting the Profit and Loss account in the year of change, and the asset's book value is restated through accumulated depreciation, not by direct reserve transfer. A deficiency is charged to Profit and Loss. Hence transferring to General Reserve is wrong.

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