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IAI Actuarial Core Principles · Business Finance · Construction and features of company accounts and reports

Aarav Ltd bought a machine for Rs 10,00,000 with a 5-year life and no residual value, depreciating it straight-line. After 2 years it reassessed the remaining life as 6 more years (total 8). Following the rule for a change in accounting estimate, what is the depreciation charge for year 3?

The year 3 charge is Rs 1,00,000. After two years the carrying amount is Rs 6,00,000, and a change in estimate is applied prospectively, so this is spread over the revised remaining life of six years with no restatement of earlier years.

  1. ARs 1,25,000
  2. BRs 1,33,333Correct
  3. CRs 2,00,000
  4. DRs 1,00,000
  5. Rs 1,50,000

Explanation

Annual depreciation was 2,00,000, so the carrying amount after two years is 10,00,000 - 4,00,000 = 6,00,000. A change in estimate is applied prospectively over the remaining life of 6 years: 6,00,000/6 = 1,00,000. Hence the key is Rs 1,00,000, not the others. The Rs 1,25,000 figure spreads the original cost over 8 years, and Rs 1,33,333 wrongly spreads the net amount over 4.5 years.

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