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CA Intermediate · Advanced Accounting · AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

Ganga Pumps Ltd. bought machinery for Rs 10,00,000 on 1 April 2023, with a useful life of 10 years and nil residual value, using straight-line depreciation. On 1 April 2025 (after two years' depreciation), the company revised the remaining useful life to 4 years from that date. Residual value stays nil. What depreciation will be charged for 2025-26 and how is the revision treated under AS 5?

Depreciation for 2025-26 is Rs 2,00,000, being the Rs 8,00,000 book value divided by the revised remaining life of 4 years. A revision of useful life is a change in estimate, applied prospectively and not treated as a prior period item.

  1. ARs 1,00,000, because the revision is applied only from 2026-27
  2. BRs 2,00,000, and the revision is an effect of a change in estimate included in the current and future periodsCorrect
  3. CRs 2,50,000, with the prior years' depreciation recomputed as a prior period item
  4. DRs 2,00,000, and the excess prior depreciation is shown as a prior period item

Explanation

Book value on 1 April 2025 = 10,00,000 - 2 x 1,00,000 = Rs 8,00,000. Remaining life 4 years gives 8,00,000 / 4 = Rs 2,00,000 per year. Change in accounting estimate is recognised prospectively in the period of change and later periods, not as a prior period item. Rs 2,50,000 wrongly restarts from the original cost less one year.

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