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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

Rao Pharma Ltd. bought a machine for Rs 12,00,000 on 1 April 2023, with a 10-year life and nil residual value, depreciated on straight line basis. On 1 April 2025 it revised the remaining useful life from 8 years to 5 years, a change in estimate. Residual value stays nil. What is the depreciation charge for 2025-26, and how is the change treated?

Depreciation for 2025-26 is Rs 1,92,000. Written down value on 1 April 2025 is Rs 9,60,000, spread over the revised remaining life of 5 years. A change in estimate is applied prospectively, not through restatement, with material effect disclosed.

  1. ARs 1,20,000, with no effect from the revision
  2. BRs 2,40,000 charged by restating 2023-24 and 2024-25
  3. CRs 1,92,000 charged prospectively, effect disclosed if materialCorrect
  4. DRs 1,92,000 charged as a prior period item

Explanation

Annual depreciation was 12,00,000/10 = 1,20,000, so two years give 2,40,000 (wait: written down value on 1 April 2025 = 12,00,000 - 2,40,000 = 9,60,000)... but the revision gives remaining life 5 years: 9,60,000/5 = Rs 1,92,000. A change in estimate is applied prospectively in the current and future periods, not as a prior period item or restatement. Material effect is disclosed.

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