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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

Himalaya Engineering Ltd. depreciated machinery costing Rs 20,00,000 on straight-line basis over 10 years with no residual value. At the start of year 5 (after 4 full years of depreciation), the remaining useful life is reassessed as 8 more years. What depreciation should be charged for year 5, and how is the change treated under AS 5?

Depreciation for year 5 is Rs 1,50,000, being the written-down value of Rs 12,00,000 divided by the revised remaining life of 8 years. A useful life revision is a change in accounting estimate, applied prospectively without restating earlier years.

  1. ARs 2,00,000; no change is made
  2. BRs 1,50,000 charged prospectively as a change in estimateCorrect
  3. CRs 1,20,000 charged prospectively as a change in estimate
  4. DRs 1,50,000 charged and Rs 50,000 adjusted as a prior period item

Explanation

Depreciation for 4 years = 2,00,000 x 4 = 8,00,000, so book value = 12,00,000. Spread over the revised 8 years: 12,00,000 / 8 = 1,50,000. A change in useful life is a change in estimate, applied prospectively in the current and future periods. Rs 1,20,000 wrongly spreads over 10 years.

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