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CA Intermediate · Advanced Accounting · Introduction to Accounting Standards

Sundaram Foods Ltd. bought a machine on 1 April for ₹12,00,000. At 31 March the machine's carrying amount stands at ₹9,60,000 after depreciation of ₹2,40,000 charged under SLM. The management decides to follow a revised useful life; the remaining life is now estimated as 6 years from 1 April next year with nil residue, and the carrying amount is to be written off over the remaining life. What is the depreciation for the next year, and how is this change treated?

Depreciation is ₹1,60,000, being the carrying amount of ₹9,60,000 spread over the remaining six years. Revising useful life is a change in accounting estimate, so it is applied prospectively rather than adjusting past periods.

  1. A₹1,60,000; change in accounting estimate, effect applied prospectivelyCorrect
  2. B₹2,40,000; change in accounting policy, applied retrospectively
  3. C₹1,60,000; prior period item, adjusted to opening reserves
  4. D₹2,00,000; change in accounting estimate, applied prospectively

Explanation

Carrying amount ₹9,60,000 divided by remaining life 6 years gives ₹1,60,000. A revision of useful life is a change in accounting estimate, applied prospectively in current and future periods. Retaining the old ₹2,40,000 ignores the revision, and ₹12,00,000/6 = ₹2,00,000 wrongly uses original cost.

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