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CA Intermediate · Advanced Accounting · Introduction to Accounting Standards

Mehta Auto Ltd. purchased a machine on 1 April for Rs 12,00,000. Its useful life was assessed at 10 years with nil residual value, and it uses straight line depreciation. At the start of the fourth year, the company revised the remaining life to 4 years (total life 7 years) with no change in residual value. What is the depreciation for the fourth year, treated as a change in accounting estimate?

The fourth-year depreciation is Rs 2,10,000. After three years of Rs 1,20,000 each, the book value is Rs 8,40,000. A change in estimate is applied prospectively, so this amount is spread over the revised remaining life of four years.

  1. ARs 1,20,000
  2. BRs 2,10,000Correct
  3. CRs 2,40,000
  4. DRs 3,00,000

Explanation

Depreciation for 3 years = 1,20,000 x 3 = 3,60,000. Book value = 12,00,000 - 3,60,000 = 8,40,000. Revised remaining life is 4 years, so 8,40,000 / 4 = 2,10,000 prospectively. Rs 2,40,000 wrongly divides the cost by 5, and Rs 3,00,000 wrongly divides the cost by 4 and ignores earlier depreciation.

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