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CS Executive · Corporate Accounting and Financial Management · Introduction to Accounting

Meera Textiles bought a machine on 1 April for Rs 10,00,000 and expects a residual value of Rs 1,00,000 over 9 years. At the end of year 3 it revises the remaining useful life to 4 more years (total 7 years) with the same residual value. Using straight line, what is the depreciation charge for year 4 onward, treating the change as a change in accounting estimate?

The charge is Rs 1,50,000 per year. After three years of Rs 1,00,000 depreciation, the carrying amount is Rs 7,00,000. Deducting the Rs 1,00,000 residual leaves Rs 6,00,000, spread over the remaining four years prospectively, because a change in useful life is a change in estimate.

  1. ARs 1,00,000 per year
  2. BRs 1,50,000 per yearCorrect
  3. CRs 1,12,500 per year
  4. DRs 1,42,857 per year

Explanation

Annual depreciation initially = (10,00,000 - 1,00,000)/9 = 1,00,000. After 3 years accumulated depreciation is 3,00,000, so carrying amount is 7,00,000. Revised depreciable amount = 7,00,000 - 1,00,000 = 6,00,000 over 4 years = 1,50,000 per year, applied prospectively. Rs 1,00,000 ignores the revision, and Rs 1,42,857 wrongly spreads over 7 years restating the past.

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