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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

Meera Engineering Ltd. depreciated machinery costing Rs 10,00,000 at 10% on written down value. Its useful life estimate was revised at the start of 2025-26 by the management after technical review, so that the remaining depreciation for the year was based on straight-line over 5 remaining years on the book value of Rs 6,56,100 (after three years of WDV depreciation). What is the 2025-26 depreciation, and how is the change treated under AS 5?

Depreciation is Rs 1,31,220, being Rs 6,56,100 spread over five remaining years. A revision of useful life is a change in accounting estimate, so its effect is included in the current and subsequent periods without restating earlier years.

  1. ARs 1,31,220; change in accounting estimate, effect included in current and future periodsCorrect
  2. BRs 1,31,220; change in accounting policy, retrospectively restated
  3. CRs 65,610; change in accounting estimate
  4. DRs 1,31,220; prior period item

Explanation

Check: 10,00,000 x 0.9^3 = 7,29,000, not 6,56,100; 0.9^4 = 6,56,100, so four years of WDV preceded. The given book value is 6,56,100, so straight-line over 5 years gives 6,56,100/5 = 1,31,220. Revising useful life is a change in accounting estimate, with the effect recognised in the period of change and future periods, not restated.

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