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The change is necessitated by the Statue or a Standard.
The change should result in more appropriate preparation or presentation of the Financial Statement.
Example : When the method is changed from SLM to WDV or vice versa then,
i) The amount to be charged to revenue is to be recomputed on a
Retrospective basis from the date the asset was put in use.
ii) Deficiency or surplus arising must be Adjusted in the year in
which method is changed.
iii) Deficiency should be charged & surplus to be credited to P&L .
iv) Change in method of depreciation amounts to change in
accounting policy hence to be quantified & disclosed.
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Depreciation Accounting: …..cont - 9 - Depreciation Rates: Accounting Standard – 6 does not specify any rate of depreciation. But it enables by implication , an entity to adopt the rates stipulated in Schedule XIV of the Companies Act. The rates provided in Schedule XIV of the Companied Act are bare minimum that requires to be provided. For the purpose of calculation of tax, depreciation has to be calculated according to the rates specified under the Income Tax Act.
Depreciation Accounting: …..cont Straight line method Vs Written Down Value method - 10 - Method Formula Effect on FS Straight line (SLM) Cost (-) ERV Useful life Charge equally spread over useful life. Reducing balance (WDV) Net carrying amount of fixed assets X % charge Front end loading of cost on revenue (later years reduced)
ABC Ltd charges depreciation on its assets on SLM basis. A machinery costing Rs.10 Lakhss has useful life of 5 years. After the end of 5 years, its scrap value would be Rs. 1 Lakh. Calculate the amount of depreciation to be charged I the books of the Company.
Cost of the Machinery purchased for mining – Rs 350000
Estimated tonnes of products that can be produced – 80 Lacs tonnes
Scrap Value – Rs20000
Total tonnes produced during first year – 6 Lacs tonnes
Calculate the depreciation to be charged in the first year.
A machinery was purchased on 01-01-2009 which was delivered on 01-04-2009. The installation was completed on 30-09-2009 but was available for use on 01-10-2009. The actual utilization started from 01-12-2009. What is the effective period for calculation of its depreciation for the year 2009