Question 2 (b)

Change from diminishing balance to straight line with retrospective effect

8 marks

Time to write: About 16 minutes

From an older CBCS paper

Question

Question 2 (b) · 8 marks

A Company's Plant and Machinery Account shows a debit balance of Rs 1,76,868 on April 1, 2006. Incorporated in April 2003, the company has followed the practice of charging a full year's depreciation each year on the Diminishing Balance system @ 15% p.a. In 2006, however, it was decided to switch from the Diminishing Balance method to Straight Line, with retrospective effect from April 2003, giving effect to the change in the final accounts for the year ending 31st March, 2007, with the rate of depreciation staying the same as before. In 2006-07 new machinery was bought at a cost of 60,000. Every other machine was acquired in 2003-04. Show, from 2003-04 to 2006-07, the Plant and Machinery Account. 8

Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

16 minfor 8 marks

Read from the question

Show, … AccountProper formats (heading, date, both sides): post the plain items, then each adjustment, and balance last.

What the paper leaves open

The paper asks for the change from diminishing balance to straight line with retrospective effect, the treatment of its time. Under the current AS-10 a change in depreciation method is a change in estimate, applied prospectively; the answer shows the account as the question asks and states the current treatment alongside. The opening balance is the cost less three years' 15% diminishing-balance depreciation.

Write it in this order

Read the data; tick every adjustment as you plan it 1 min
1 Original cost and depreciation under each method 2 marks 4 min
2 Arrears and 2006-07 depreciation 2 marks 3 min
3 Plant and Machinery Account, four years 3 marks 5 min
4 Current AS-10 treatment 1 mark 2 min
Check: every adjustment used, both sides agree, dates in 1 min

1234

Try it first. About 16 minutes for 8 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Original cost. Three years of 15% diminishing-balance depreciation leave 0.85³ = 0.614125 of cost, so cost = 1,76,868 ÷ 0.614125 = ₹2,88,000 (paper note).

Effect of the change, as the question asks (retrospective). Under the treatment the question prescribes (the withdrawn AS-6), a change of method is applied from the date the asset was put to use, and the difference is charged in the year of change.

Year	Diminishing balance @ 15% (₹)	Straight line @ 15% of cost (₹)
2003-04	43,200	43,200
2004-05	36,720	43,200
2005-06	31,212	43,200
Total to 31.3.2006	1,11,132	1,29,600

Arrears of depreciation charged in 2006-07 = 1,29,600 − 1,11,132 = ₹18,468. Depreciation for 2006-07: old machinery 43,200 + new machinery 15% × 60,000 = 9,000 (a full year, the company's practice) = ₹52,200.

Plant and Machinery Account

Year	Dr	₹	Cr	₹
2003-04	To Bank	2,88,000	By Depreciation	43,200
			By Balance c/d	2,44,800
		2,88,000		2,88,000
2004-05	To Balance b/d	2,44,800	By Depreciation	36,720
			By Balance c/d	2,08,080
		2,44,800		2,44,800
2005-06	To Balance b/d	2,08,080	By Depreciation	31,212
			By Balance c/d	1,76,868
		2,08,080		2,08,080
2006-07	To Balance b/d	1,76,868	By Profit and Loss (arrears of depreciation on the change)	18,468
	To Bank (new machinery)	60,000	By Depreciation (43,200 + 9,000)	52,200
			By Balance c/d	1,66,200
		2,36,868		2,36,868

Check: closing balance = old machinery 2,88,000 − 4 × 43,200 = 1,15,200 + new machinery 60,000 − 9,000 = 51,000.

The current treatment (AS-10). Today the depreciation method must be reviewed at least at each year end and changed if the pattern of consumption of benefits changes; such a change is a change in accounting estimate, applied prospectively, with nothing restated. The ₹1,76,868 would then be written off straight line over the remaining 3⅔ years of the 6⅔-year life implied by 15%: ₹48,236.73 a year, leaving ₹1,28,631.27 for the old machinery (₹1,79,631.27 in all) at 31 March 2007, with no arrears charge.

Where the 8 marks sit

#	Component	Marks
1	Original cost and depreciation under each method	2
2	Arrears and 2006-07 depreciation	2
3	Plant and Machinery Account, four years	3
4	Current AS-10 treatment	1
	Total	8

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