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The document discusses changes in methods of depreciation and inventory valuation. It states that changing the depreciation method is considered a change in accounting estimate that must be disclosed with justification and financial effects. Depreciation can be changed either without retrospective effect, only applying the new method going forward, or with retrospective effect by adjusting past depreciation. An example calculates depreciation for years 3 and 4 under the new reducing balance method both with and without retrospective effect. Regarding inventory valuation, the document notes that any significant change in accounting policy like switching from LIFO to FIFO must be disclosed in financial statements along with the potential effects.
The document discusses changes in methods of depreciation and inventory valuation. It states that changing the depreciation method is considered a change in accounting estimate that must be disclosed with justification and financial effects. Depreciation can be changed either without retrospective effect, only applying the new method going forward, or with retrospective effect by adjusting past depreciation. An example calculates depreciation for years 3 and 4 under the new reducing balance method both with and without retrospective effect. Regarding inventory valuation, the document notes that any significant change in accounting policy like switching from LIFO to FIFO must be disclosed in financial statements along with the potential effects.
The document discusses changes in methods of depreciation and inventory valuation. It states that changing the depreciation method is considered a change in accounting estimate that must be disclosed with justification and financial effects. Depreciation can be changed either without retrospective effect, only applying the new method going forward, or with retrospective effect by adjusting past depreciation. An example calculates depreciation for years 3 and 4 under the new reducing balance method both with and without retrospective effect. Regarding inventory valuation, the document notes that any significant change in accounting policy like switching from LIFO to FIFO must be disclosed in financial statements along with the potential effects.
to: Surbhi Kulshrestha Dr. Jk PGDM 1-B Batra Roll no-120 CHANGE IN METHOD OF DEPRECIATION • As per the Accounting Standard 1- Disclosure of Accounting Policies, the change in the method of depreciation is a change in the accounting estimate. Thus, it requires quantification and full disclosure in the footnotes. Also, the justification and financial effects of the change needs to be disclosed. WITH AND WITHOUT RETROSPECTIVE EFFECT • Method of depreciation can be changed without retrospective effect or with retrospective effect. Without retrospective effect means no adjustment will be made for past entries and only in the future depreciation shall be charged by the new method. While with retrospective effect implies that the amount of depreciation to be charged is adjusted from the date of purchase of the asset. EXAMPLE A COMPANY BOUGHT AN ASSET FOR 100,000 WITH AN EXPECTED USEFUL LIFE OF FIVE YEARS. AFTER TWO YEARS OF USE COMPANY DECIDED TO CHANGE THE DEPRECIATION METHOD FROM STRAIGHT-LINE BASIS TO REDUCING BALANCE METHOD AT THE RATE OF 15%. REQUIRED: CALCULATE THE DEPRECIATION FOR THE THIRD AND FOURTH YEAR. (Without Retrospective Method). Step 1: Find the carrying amount at the date of change Change in depreciation is made after two years so we will depreciate the asset for two years and it was on straight line basis. 100,000 / 5 = 20,000 per year For two years it will be 20,000 x 2 = 40,000 Thus, carrying amount of the asset at the end of second year was 100,000 – 40,000 = 60,000 Step 2: Depreciate the carrying amount on the new basis from the date of change Carrying amount at the date of change = 60,000 New basis of depreciate = Reducing balance method @ 15% Depreciation for the third year will be calculated as follows: 60,000 x 0.15 = 9,000 WITH RETROSPECTIVE EFFECT
• Depreciation will be charged on WDV basis from first year.
First year Dep = 100000 x .15= 15000 Second year Dep = (100000-15000) x .15 =12750. Third Year Dep = 100000-15000-12750 = 72250 Difference between SLM & WDV Dep= 40000-27750=12250 So Machine Value for third year Depreciation will be 60000+12250 = 72250 Dep for third year = 72250 x .15 =10837.5 CHANGE IN INVENTORY VALUATION
• Financial statements are required to disclose all significant
changes in accounting policies. This is done to comply with accounting’s full-disclosure principle. As a result, the business’s financial statements would need to inform prospective investors that there was a shift from LIFO to FIFO as well as detail what the effect of that shift could be. • Inventory change is the difference between the amount of last period's ending inventory and the amount of the current period's ending inventory. • Under the periodic inventory system, there may also be an income statement account with the title Inventory Change or with the title (Increase) Decrease in Inventory. This account is presented as an adjustment to purchases in determining the company's cost of goods sold. THANK YOU