Kalinga Engineering Works: switching from straight line to WDV mid-life
Kalinga Engineering Works, a sole proprietorship, bought a lathe on 1 April 2021 for ₹12,00,000. It estimated a useful life of eight years and a residual value of ₹1,20,000, and has charged straight-line depreciation on that basis for three years. The owner now feels straight line overstates early profits and wants to switch to the written-down-value method at 20% per annum from 1 April 2024. On 1 October 2024 the firm bought a second machine for ₹3,00,000; the owner's son, who keeps the books, proposes to charge a full year's depreciation on it 'because it is in the name of the firm for the whole year'. In January 2025 a ₹80,000 repair to the old lathe's foundation was debited to the Machinery account, and no depreciation has been charged on that amount. The accountant asks you, before the 2024-25 accounts are finalised, to quantify the depreciation charge, to say what to do about the three years already closed, and to settle the treatment of the new machine and the repair.
1. Compute the depreciation charge for 2024-25 on the retrospective basis, showing the working for the three earlier years.
Read the worked answer
Straight-line charge actually made: (12,00,000 − 1,20,000) ÷ 8 = ₹1,35,000 a year. Charged for three years = ₹4,05,000. WDV on 1 April 2024 = ₹7,95,000.
Recomputing the past three years on the 20% WDV basis:
| Year | Opening WDV | Depreciation @20% | Closing WDV |
|---|---|---|---|
| 2021-22 | 12,00,000 | 2,40,000 | 9,60,000 |
| 2022-23 | 9,60,000 | 1,92,000 | 7,68,000 |
| 2023-24 | 7,68,000 | 1,53,600 | 6,14,400 |
| Total | 5,85,600 |
Deficiency to be charged in 2024-25: ₹5,85,600 − ₹4,05,000 = ₹1,80,600.
Depreciation for 2024-25:
- Old lathe: 20% × ₹6,14,400 = ₹1,22,880
- New machine: 20% × ₹3,00,000 × 6/12 = ₹30,000
- Total current depreciation = ₹1,52,880
Total charge to the Profit & Loss Account for 2024-25 = ₹1,80,600 + ₹1,52,880 = ₹3,33,480, disclosed in two lines (depreciation for the year, and the deficiency on change of method) so the reader can see what is normal and what is one-off.
Closing WDV at 31 March 2025 = (6,14,400 − 1,22,880) + (3,00,000 − 30,000) = ₹4,91,520 + ₹2,70,000 = ₹7,61,520.
2. Was the retrospective catch-up of ₹1,80,600 the right call, and how would the answer differ under a prospective-only approach? Give your recommendation with reasons.
Read the worked answer
The classic +2 treatment (from the erstwhile AS 6, still the framework followed by non-corporate entities) is that a change in the method of depreciation is permitted only where required by statute, by an accounting standard, or because the new method gives a more appropriate presentation - and the depreciation for past years is recomputed on the new method, the deficiency or surplus being charged or credited to profit or loss in the year of change. That is the basis of the ₹1,80,600 above, and it is defensible here: the owner's reason (better matching on an asset whose service potential falls faster early on) is a legitimate 'more appropriate presentation' argument.
If the entity instead applied Ind AS 8 / Schedule II logic, a change in method is a change in accounting estimate: no restatement of earlier years, and the unamortised ₹7,95,000 is simply written off at 20% WDV from 2024-25, giving a charge of ₹1,59,000 on the lathe instead of ₹1,22,880 + ₹1,80,600.
Recommendation: adopt the retrospective basis, but do three things: (i) state the change and its reason in a note; (ii) quantify the effect (₹1,80,600 extra charge, ₹1,44,480 lower closing WDV than under the prospective route); (iii) check the basis is applied consistently to all assets of the same class, not just the lathe - cherry-picking methods asset by asset is the real error here.
Finally, warn the owner that income-tax depreciation follows the block-of-assets WDV rules, so the book charge and the tax charge are different figures and must be computed separately.
3. Settle the two related issues: depreciation on the machine bought on 1 October 2024, and the ₹80,000 foundation repair.
Read the worked answer
The new machine. Depreciation begins when the asset is available for use, not when it is paid for and certainly not because it belongs to the firm for part of the year. A machine purchased on 1 October 2024 is used for six months, so the charge is 20% × ₹3,00,000 × 6/12 = ₹30,000, not ₹60,000. Charging a full year would understate profit by ₹30,000 and would also be inconsistent with the half-year convention already used when the lathe was bought on 1 April. The son's reasoning confuses legal ownership with depreciation, which follows usage.
The ₹80,000 foundation repair. The test is whether the spending restores the asset to its earlier condition or enhances it. Repairing a foundation to stop settlement restores; it does not add capacity, extend useful life or improve output. Therefore:
- Reverse the capitalisation - Machinery A/c Cr ₹80,000, Repairs A/c Dr ₹80,000, charged to Profit & Loss.
- No depreciation is chargeable on it, so the ₹80,000 must be removed from the depreciation base as well; check that no depreciation was in fact charged on it (the question says none was, so no further adjustment is needed).
- If the work genuinely extended the lathe's remaining life - say from five to eight years - it should be capitalised and the carrying amount depreciated over the revised remaining life, with the change disclosed. The evidence (an invoice, the engineer's report, whether output improved) decides, and the auditor should ask for it.
Net effect on 2024-25 profit: ₹30,000 less depreciation plus ₹80,000 of expenses that had been wrongly capitalised.