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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

Rohan Pharma Ltd. had been depreciating a plant of cost ₹10,00,000 (residual value nil, 10-year life) on straight line basis. At the start of year 5, after four years' depreciation, the remaining useful life was reassessed as 3 years instead of 6 years. What depreciation should be charged for year 5, and how is the change treated under AS 5?

Depreciation for year 5 is ₹2,00,000, because the book value of ₹6,00,000 after four years is spread over the revised three remaining years. Revising useful life is a change in accounting estimate, applied prospectively, not a policy change or prior period item.

  1. A₹2,00,000, as a change in accounting estimate affecting current and future periodsCorrect
  2. B₹1,00,000, as a change in accounting policy with retrospective restatement
  3. C₹2,00,000, as a prior period item
  4. D₹3,00,000, as an extraordinary item

Explanation

Accumulated depreciation after 4 years is 4 x 1,00,000 = ₹4,00,000, so book value is ₹6,00,000. Spread over the revised 3 years, depreciation is ₹2,00,000 a year. A revision of useful life is a change in estimate, recognised prospectively in the current and future periods.

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