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CA Foundation · Accounting · Depreciation and Amortisation

Rao Enterprises bought equipment on 1 April 2021 for ₹5,00,000 and used straight-line depreciation at 20% on cost. On 31 March 2023 it changed to the WDV method at 20% with retrospective effect from purchase. How should the effect of the change be recorded in 2022-23, besides the normal charge for the year?

Excess depreciation of ₹20,000 is written back to the profit and loss account. Straight-line charged ₹2,00,000 over two years, whereas WDV would have charged only ₹1,80,000 (1,00,000 plus 80,000), so the surplus of ₹20,000 is credited in the year of change.

  1. AExcess depreciation of ₹20,000 is written back (credited to the P&L account)Correct
  2. BAdditional depreciation of ₹20,000 is charged to the P&L account
  3. CExcess depreciation of ₹36,000 is written back
  4. DNo entry, because the new method applies only from the next year

Explanation

Under SLM two years = 1,00,000 x 2 = 2,00,000. Under WDV: year 1 = 1,00,000; year 2 = 20% of 4,00,000 = 80,000; total 1,80,000. SLM charged more than WDV, so the excess of 20,000 is written back. Charging 20,000 additional would reverse the direction of the adjustment.

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