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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

Sundaram Auto Ltd. had been depreciating machinery costing Rs 10,00,000 at 10% on straight line basis. At the start of the fourth year (accumulated depreciation Rs 3,00,000), a technical review reduced the remaining useful life to 4 years with nil residual value. Under AS 5, what is the depreciation charge for the fourth year and its treatment?

Depreciation for the fourth year is Rs 1,75,000, being the written down value of Rs 7,00,000 spread over the remaining four years. A revised useful life is a change in accounting estimate, so it applies prospectively without restating earlier years.

  1. ARs 1,75,000, as a change in accounting estimate applied prospectivelyCorrect
  2. BRs 1,00,000, as the original rate must continue
  3. CRs 1,75,000, as a change in policy with retrospective restatement
  4. DRs 2,50,000, as a change in estimate with catch-up adjustment of earlier years

Explanation

Revising useful life is a change in accounting estimate, applied prospectively. Book value is 10,00,000 - 3,00,000 = Rs 7,00,000, spread over 4 years gives Rs 1,75,000 per year. Retrospective restatement applies to neither estimate changes nor this case, so the policy-change option is wrong.

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